<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No.: 0-27388
HFNC FINANCIAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1937349
--------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
139 SOUTH TRYON STREET
CHARLOTTE, NORTH CAROLINA 28202
------------------------- ----------------------
(Address) (Zip Code)
Registrant's telephone number, including area code: (704) 373-0400
Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Par III of this Form 10-K or any amendment to this
Form 10-K. {X }
Based upon the $10.50 closing price of the Registrant's common stock as of
September 30, 1998*, the aggregate market value of the 15,077,629 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was: $158,315,105 million. Although directors and executive officers of the
Registrant and certain of its employee benefit plans were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of September 30, 1998:
17,192,500
* The Registrant was merged into First Charter Corporation, a North Carolina
Corporation (FCC), on September 30, 1998 pursuant to the terms and conditions of
that certain Amended and Restated Agreement and Plan of Merger by and between
the Registrant and FCC dated as of May 17, 1998 and amended and restated as of
July 29, 1998.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I) (1) (A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM UNDER THE REDUCED
DISCLOSURE FORMAT.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
HFNC Financial Corp. (the "Company") is a North Carolina corporation
organized in August 1995 by Home Federal Savings and Loan Association ("Home
Federal" or the "Association") for the purpose of becoming a unitary holding
company of the Association. The Association's conversion to stock form and the
concurrent offer and sale of the Company's common stock was consummated on
December 28, 1995 (the "Conversion"). The only significant assets of the Company
are the capital stock of the Association and the capital stock of HFNC
Investment Corp., a Delaware chartered finance subsidiary ("Investment Corp.").
The business and management of the Company consists of the business and
management of the Association and Investment Corp. At June 30, 1998, the Company
had $1.01 billion in total assets, $836.4 million in total liabilities and
$170.9 million in total equity.
Home Federal conducts business from its main office and eight branch
offices and a loan origination office, all located in Mecklenburg County, North
Carolina. All but one of the Association's offices are located in Charlotte. The
region has become a major center for financial services, distribution and
transportation. Home Federal's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), to the maximum extent permitted by law.
The Association is a community oriented savings institution which has
traditionally offered a wide variety of savings products to its retail customers
while concentrating its lending activities on the origination of loans secured
by one- to four-family residential dwellings, including an emphasis on loans for
construction of residential dwellings. To a significantly lesser extent, the
Association's activities have also included origination of commercial real
estate, land and consumer loans. In addition, the Company maintains a
significant portfolio of investment securities, which amounted to $134.7 million
or 13.4% of total assets at June 30, 1998, approximately 30% of which have
maturities of under five years. In addition to interest income on loans and
investments, the Company receives other income primarily from loan fees and
various service charges.
The Company entered into a definitive agreement and plan of merger (the
"Merger Agreement") with First Charter Corporation ("First Charter") dated as of
May 17, 1998, as amended and restated as of July 29, 1998, for the merger of the
Company with and into First Charter (the "Merger"). On September 30, 1998 the
Merger was completed and was accounted for as a pooling-of-interests. In the
Merger, First Charter exchanged 0.57 of a share of common stock, no par value
per share, for each outstanding share of HFNC Financial Corp. common stock, $.01
par value per share. During 1999 Home Federal will be merged into First Charter
National Bank, a subsidiary of First Charter Corporation, at which time Home
Federal's offices will become branch locations of First Charter National Bank.
The Association is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), which is the Association's chartering
authority and primary regulator. The Association is also regulated by the FDIC,
the administrator of the SAIF. The Association is also subject to certain
reserve requirements established by the Federal Reserve Board and is a member of
the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
banks comprising the FHLB System.
<PAGE> 4
ITEM 2. PROPERTIES.
At June 30, 1998, the Company conducted its business from its executive
office in Charlotte, North Carolina, eight full service offices and one mortgage
loan office. The following table sets forth the net book value (including
leasehold improvements and equipment) and certain other information with respect
to the offices and other properties of the Company at June 30, 1998.
<TABLE>
<CAPTION>
Net Book Value Amount of
Description/Address Leased/Owned of Property Deposits
------------------- ------------ ----------- ---------
<S> <C> <C> <C>
MAIN OFFICE:
139 South Tryon Street
Charlotte, North Carolina Owned $1,379 $150,569
BRANCH OFFICES:
6342 Carmel Road
Charlotte, North Carolina 28226 Owned 371 20,348
4400 Randolph Road
Charlotte, North Carolina 28211 Owned 226 52,667
5601 Reddman Road
Charlotte, North Carolina 28212 Owned 529 57,140
I-77 and Route 73
Cornelius, North Carolina 28031 Owned 318 22,342
4323 Park Road
Charlotte, North Carolina 28209 Leased(1) -- 64,015
4519 Sharon Road
Charlotte, North Carolina 28211 Leased(2) 147 38,499
8601 John Maynard Keynes Drive
Charlotte, North Carolina 28262 Owned 1,466 18,687
Mortgage Loan Office:
6310 Fairview Road
Charlotte, North Carolina 28211(3) Owned 4,374 6,234
- -----------------------------------
</TABLE>
(1) This property is subject to a lease that expires in 1999.
(2) This property is subject to a lease that expires in 2002 and the
Association has an option to renew the lease for one additional period of
five years.
(3) This property is also used as a branch office.
<PAGE> 5
ITEM 3. LEGAL PROCEEDINGS.
In June 1995, a lawsuit was initiated against Home Federal by a borrower's
affiliated companies in which the plaintiffs alleged that Home Federal
wrongfully set-off certain funds in an account being held and maintained by Home
Federal. In addition, the plaintiffs alleged that as a result of the wrongful
set-off, Home Federal wrongfully dishonored a check in the amount of $270,000.
Plaintiffs further alleged that the actions on behalf of Home Federal
constituted unfair and deceptive trade practices, thereby entitling plaintiffs
to recover treble damages and attorneys' fees. Home Federal 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 Judgement, recommending the dismissal of all claims asserted against
Home Federal. In October 1997, the United States District Court entered an order
granting summary judgment in favor of Home Federal. The plaintiff has appealed
the order of summary judgment and the case is presently pending in the Fourth
Circuit Court of Appeals.
In December 1996, Home Federal 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 Home Federal prior to
litigation. The borrower's wife filed a counterclaim against Home Federal
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 Home Federal for application on a debt owed by one of her husband's
corporations, claiming that officers of Home Federal promised to resume making
loans to her husband's corporation after the payment. Home Federal and its
officers vigorously deny all of her allegations. Home Federal filed a motion for
summary judgment and dismissal of the counterclaim. The motion for summary
judgment was heard in the Superior Court division of the Mecklenburg County
General Court of Justice in April 1998; however, an order has not been entered.
In June 1998, Home Federal removed this case to the United States Bankruptcy
Court for the Western District of North Carolina, Charlotte Division, due to the
fact that the defendant was the debtor in a pending bankruptcy case. Home
Federal believes it has strong defenses to the defendant's 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 Home Federal 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 of Mecklenburg County, North Carolina against the two executive officers
of Home Federal 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 Home Federal. Plaintiffs claim actual damages,
treble damages, and punitive damages together with interest, attorneys' fees,
and other costs. 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. The action pending in the
bankruptcy court has been stayed. All defendants filed motions for summary
judgment in the state court action which were granted, and the lawsuits were
dismissed in January 1998 by the Superior Court of Mecklenburg County. The
plaintiff appealed the order granting summary judgment to the North Carolina
Court of Appeals. In July 1998, the defendants removed the state court case to
the United States Bankruptcy Court for the Western District of North Carolina,
Charlotte Division, due to the fact that the plaintiff was a debtor in a pending
bankruptcy case. As a result of the removal, the North Carolina Court of Appeals
entered an order staying further proceedings in the North Carolina Court of
Appeals in August 1998. Home Federal 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, Home Federal, 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 Fourth Circuit Court of Appeals. The plaintiffs are
seeking to have the judgments set aside on that basis. All defendants filed
motions for summary judgment and dismissal which were granted, and the lawsuit
was dismissed on September 24, 1998. The borrower, individually, has appealed
the Order dismissing the lawsuit to the Fourth Circuit Court of Appeals. That
appeal is pending.
Management continues to deny any liability in the above-described cases and
continue to vigorously defend against the claims. However, there can be no
assurance of the ultimate outcome of the litigation, or the range of potential
loss, if any.
<PAGE> 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
This item is omitted pursuant to general instruction I of Form 10-K.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of HFNC Financial Corp. common stock were traded nationally under
the symbol "HFNC" on the Nasdaq National Market System, until consummation of
the Merger on September 30, 1998. At September 30, 1998, the Company had
17,192,500 shares of common stock outstanding and had approximately 2,425
shareholders of record. Such holdings do not reflect the number of beneficial
owners of common stock. The following table sets forth the reported high and low
sale prices of a share of the Company's common stock as reported by Nasdaq.
<TABLE>
<CAPTION>
QUARTER ENDED: Fiscal Year Ended June 30, 1998 Fiscal Year Ended June 30, 1997
--------------------------------- ---------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
<S> <C> <C> <C> <C> <C> <C>
September 30 $17.13 $14.88 $0.07 $18.38 $15.75 $0.05
December 31 16.63 13.94 0.07 18.13 17.00 0.07
March 31 15.38 13.13 0.08 22.25 16.63 5.07
June 30 13.81 11.25 0.08 19.88 15.88 0.07
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
This item is omitted pursuant to general instruction I of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earning assets, which consist principally of loans and investment
securities, and interest expense on interest-bearing liabilities, which consist
principally of deposits and other borrowed funds. The Company's net income also
is affected by its provision for loan losses, as well as the level of its other
operating income, including loan fees and service charges, its other operating
expenses, including personnel expenses, occupancy expense, federal deposit
insurance premiums, net cost of real estate operations and miscellaneous other
expenses, and its income taxes.
The following discussion provides an overview of the results of operations
of the Company, and should be read in conjunction with the Company's
consolidated financial statements presented elsewhere herein.
RESULTS OF OPERATIONS
NET INCOME. The Company reported net income of $13.5 million for the fiscal
year ended June 30, 1998, compared to $7.4 million for the fiscal year ended
June 30, 1997, an increase of $6.1 million, or 82.9%. This increase was
attributable to an increase in other operating income of $6.5 million and a
decrease in other operating expenses of $4.6 million. These were partially
offset by a decrease in net interest income of $883,000 and an increase in the
provision for income taxes of $4.0 million. The other operating expenses for
fiscal year ended June 30, 1997 included a $3.1 million one-time special
assessment by the FDIC to recapitalize the SAIF. Due to this recapitalization of
the SAIF, annual insurance premiums for savings and loan associations were
reduced from $0.23 per $100 of deposits to approximately $0.064 per $100, a
level more comparable to that of commercial banks. The reduced premiums took
effect in January of 1997 and therefore benefited one-half of fiscal 1997 and
all of fiscal 1998.
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 $883,000, or 2.9%, to
$29.8 million for the year ended June 30, 1998, compared to $30.7 million
<PAGE> 7
for the prior year. This resulted from a $6.6 million, or 19.1%, increase in
interest expense, offset somewhat by $5.7 million, or 8.8%, increase in interest
income.
During fiscal 1998, the Company's net interest margin decreased to 3.32%
from 3.70% during the prior year, while the net interest rate spread increased
slightly to 2.37% from 2.35%. The lack of significant change in the spread was
due to relatively consistent overall yields and costs on interest-earning assets
and interest-bearing liabilities. The net interest margin declined compared to
the prior year due to the payment of the special distribution to shareholders in
March 1997, which reduced interest-earning assets without a corresponding
decline in interest-bearing liabilities. Due to this distribution to the
Company's shareholders, the ratio of average interest-earning assets to average
interest-bearing liabilities declined to 1.2 during the year ended June 30,
1998, compared to 1.3 during the prior fiscal year.
INTEREST INCOME. During fiscal 1998, interest income increased $5.7
million, or 8.8%, compared to fiscal 1997, primarily due to continued growth in
interest-earning assets to leverage the Company's capital. Average loans
receivable increased $150.4 million to a current year average balance of $734.8
million. This growth more than offset a decrease in the average yield on the
loan portfolio to 8.16% from 8.40% in the prior year, which was due to an
overall decline in market rates. The increase in interest income from loans was
offset somewhat by a decline in interest income from securities, which was
caused by an $82.4 million reduction in the average balance of such securities
to $163.6 million for the year ended June 30, 1998. This decline was due to two
factors. One factor was the liquidation of securities (primarily mortgage-backed
securities) in the third quarter of fiscal 1997 to partially fund the special
distribution to shareholders paid in March 1997. These securities were therefore
outstanding for nearly three quarters of fiscal 1997. In the current year,
additional securities were sold as part of a balance sheet restructuring in
which securities yielding less than current market rates were sold to reinvest
the proceeds into higher yielding assets, primarily loans, and to partially
repay borrowed funds. This restructuring resulted in an overall gain, however,
because a portion of these securities were equity securities that had
appreciated significantly in value and were sold at a significant gain. Because
of this sale of low yielding securities, the overall yield on the securities
portfolio increased during fiscal 1998 to 6.76%, compared to 6.59% during fiscal
1997.
INTEREST EXPENSE. During fiscal 1998, interest expense increased $6.6
million, or 19.1%, compared to the prior year. This increase was primarily due
to an increase in the amount of other borrowed funds, though the average rate
paid for these borrowings declined somewhat. Average balances of other
borrowings increased to $313.6 million in the current year from $186.7 million
in the prior year in order to fund asset growth to leverage the Company's
capital. Average rates paid on these borrowings decreased to 5.80% during the
current year, compared to 5.92% in fiscal 1997. Interest on deposits remained
relatively consistent due to a small decline in average deposit balances to
$431.6 million in the current year, compared to $440.9 million in fiscal 1997.
Average rates paid on deposits remained essentially unchanged from the prior
year.
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate by the Company
considering industry standards, past due loans, economic conditions in its
market area, and other factors related to the collectibility of the loan
portfolio. The Company recorded a $31,000 recovery of allowance during the year
ended June 30, 1998 and a $59,000 recovery of allowance during the year ended
June 30, 1997. These recoveries of the allowance were due to improvements in the
level and nature of the Company's non-performing loans, particularly related to
one large borrower who has been involved in a legal dispute with the Company
since 1991. Recoveries related to these improvements have offset additional loan
loss provisions by the Company for new loans originated as part of the
previously mentioned capital leveraging strategy. Overall, non-performing loans
declined $3.5 million during the current fiscal year, to $3.5 million at June
30, 1998 from $7.0 million at the prior year end. The allowance for loan losses
amounted to $7.0 million at June 30, 1998, or 202.5% of nonperforming loans.
OTHER OPERATING INCOME. Total other operating income amounted to $7.7
million during the fiscal year ended June 30, 1998, compared to $1.2 million in
the prior year, an increase of $6.5 million. This increase was due primarily to
the $6.6 million gain on the sale of securities in fiscal 1998 discussed at
"Results of Operations -- Interest Income".
OTHER OPERATING EXPENSES. Total other operating expenses during the current
year decreased $4.6 million, or 22.9%, as compared to the 1997 fiscal year. This
decrease resulted largely from a $3.1 million one-time assessment to
recapitalize the SAIF in the prior year (discussed previously at "Results of
Operations --Net Income"), with no corresponding cost in the current year.
Additional areas of reduction in operating expenses were a $355,000 reduction in
personnel expenses, a $386,000 reduction in federal deposit insurance premiums,
a $349,000 decrease in the cost of real estate operations, and a $446,000
decline in the "other expenses" category.
<PAGE> 8
The current year reduction in personnel expenses resulted from a
nonrecurring level of prior year costs associated with the Company's Management
Recognition and Retention Plan (MRRP) approved by shareholders in December 1996.
One-fifth of the shares granted under the plan vested immediately, while the
remaining shares were scheduled to vest over the next four years. Fiscal 1997
therefore included six quarters of cost associated with the plan, as the shares
for the first year were charged to expense immediately, while the Company also
accrued two quarters' cost for the shares to vest the following year. The 1998
fiscal year included four quarters' cost for the plan. The reduction in federal
deposit insurance premiums resulted from the reduced premium rates following
payment of the above noted one-time SAIF assessment. The cost of real estate
operations during the year declined due to profits on the sale of foreclosed
properties during the year. Such profits amounted to $512,000 in the current
year, compared to $149,000 in the prior year, an increase of $363,000. The
decrease in "other expenses" is primarily attributable to a $317,000 decline in
legal and professional expenses. The Company experienced an unusually high level
of legal and professional expenses in fiscal year ended June 30, 1997 to
determine the nature, tax treatment, and other implications of the special
distribution to shareholders paid in March 1997 and for legal costs associated
with the ongoing lawsuit by a former borrower.
PROVISION FOR INCOME TAXES. The Company recorded a provision for income
taxes of $8.7 million in fiscal year ended June 30, 1998, compared to a
provision of $4.6 million in fiscal year ended June 30, 1997. The Company's
effective tax rate for fiscal 1998 was 39.1%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
SELECTED QUARTERLY FINANCIAL DATA
(Dollars in thousands, except income per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal year ended June 30, 1998 Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total interest income $16,912 $17,070 $18,161 $18,888 $71,031
Total interest expense 9,886 9,790 10,339 11,202 41,217
Net interest income 7,026 7,280 7,822 7,686 29,814
Provision for loan losses (recovery) (63) 65 (48) 14 (31)
Total noninterest income 3,614 1,689 1,171 1,208 7,683
Total noninterest expense 4,011 4,318 3,852 3,223 15,404
Net income before income taxes 6,692 4,586 5,189 5,657 22,124
Income taxes 2,618 1,794 2,030 2,213 8,655
Net income 4,074 2,792 3,159 3,444 13,469
Per share data:
Basis income per share 0.26 0.18 0.20 0.22 0.86
Diluted income per share 0.26 0.17 0.20 0.21 0.82
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal year ended June 30, 1997 Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total interest income $15,640 $16,544 $16,616 $16,514 $65,316
Total interest expense 7,729 8,489 8,707 9,692 34,619
Net interest income 7,911 8,055 7,909 6,822 30,697
Provision for loan losses (recovery) 374 (414) 239 (259) (59)
Total noninterest income 312 320 313 256 1,202
Total noninterest expense 6,586 4,424 4,944 4,032 19,984
Net income before income taxes 1,263 4,365 3,039 3,305 11,974
Income taxes 486 1,681 1,170 1,272 4,610
Net Income 777 2,684 1,869 2,033 7,364
Per share data:
Basis income per share 0.05 0.16 0.12 0.13 0.46
Diluted income per share 0.05 0.16 .011 0.12 0.45
</TABLE>
See "Index to Financial Statements and Schedules" (following) for other
information required under this Item 8.
<PAGE> 9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This item is omitted pursuant to general instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
This item is omitted pursuant to general instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This item is omitted pursuant to general instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This item is omitted pursuant to general instruction I of Form 10-K.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The financial statements are listed in the "Index to Financial
Statements and Schedules" included in this filing.
(2) All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the
consolidated financial statements and related notes thereto.
<PAGE> 10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HFNC FINANCIAL CORP.
By: /s/ H. Joe King, Jr.
---------------------
H. Joe King, Jr.
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/H. Joe King, Jr. President, Chief Executive Officer September 30, 1998
- ------------------------- and Chairman of the Board
H. Joe King, Jr.
/s/J. Harold Barnes, Jr. Executive Vice President and September 30, 1998
- ------------------------- Director
J. Harold Barnes, Jr.
/s/Ray W. Bradley, Jr. Director September 30, 1998
- -------------------------
Ray W. Bradley, Jr.
/s/Joe M. Logan Director September 30, 1998
- -------------------------
Joe M. Logan
/s/John M. McCaskill Director September 30, 1998
- -------------------------
John M. McCaskill
/s/Lewis H. Parham, Jr. Director September 30, 1998
- -------------------------
Lewis H. Parham, Jr.
/s/Willie E. Royal Director September 30, 1998
- -------------------------
Willie E. Royal
/s/ A. Burton Mackey (principal financial officer) September 30, 1998
- -------------------------
A. Burton Mackey
</TABLE>
<PAGE> 11
ITEM 14. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Position, June 30, 1998 and 1997 2
Consolidated Statements of Income for the Years Ended June 30, 1998, 1997 and 1996 3-4
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended June 30, 1998, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 6-7
Notes to Consolidated Financial Statements 8-32
</TABLE>
<PAGE> 12
INDEPENDENT AUDITORS' REPORT
The Board of Directors
HFNC Financial Corp.
Charlotte, North Carolina
We have audited the consolidated statements of financial position of HFNC
Financial Corp. and its subsidiaries (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 11 to the consolidated financial statements, the Company is
a defendant in certain litigation in which the ultimate outcome cannot presently
be determined. Accordingly, no provision for any loss that may result upon
resolution of these matters has been made in the accompanying financial
statements.
As discussed in Note 1 to the consolidated financial statements, effective July
1, 1995, the Company changed its method of accounting for postretirement
benefits to conform with the provisions of Statement of Financial Accounting
Standards No. 106.
/s/ Deloitte & Touche, LLP
August 7, 1998
Charlotte, NC
- 1 -
<PAGE> 13
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash $ 7,403,344 $ 9,934,359
Federal funds sold 19,119,000 21,436,000
--------------- -------------
Total cash and cash equivalents 26,522,344 31,370,359
--------------- -------------
SECURITIES - Available for sale, at fair value (amortized
cost: $132,601,853 and $169,285,103, at June 30, 1998 and 1997,
respectively) 134,668,931 175,710,104
LOANS RECEIVABLE, NET (allowance for loan losses:
$7,033,185 and $7,611,675, at June 30, 1998 and 1997,
respectively) 806,389,714 658,323,320
REAL ESTATE, NET 1,864,118 867,876
OFFICE PROPERTIES AND EQUIPMENT, NET 9,832,227 10,099,107
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA -
At cost 14,900,000 6,450,000
NET DEFERRED INCOME TAX ASSET 4,431,333 3,390,125
OTHER ASSETS 8,667,333 6,709,218
--------------- -------------
TOTAL $ 1,007,276,000 $ 892,920,109
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS $ 430,500,987 $ 443,839,542
FEDERAL HOME LOAN BANK ADVANCES 298,000,000 129,000,000
SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE 95,800,000 120,000,000
OTHER LIABILITIES 12,080,376 39,020,650
--------------- -------------
Total liabilities 836,381,363 731,860,192
--------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
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 89,990,396 89,967,883
Unearned ESOP and unvested restricted shares (19,415,543) (23,137,490)
Retained income 98,876,564 90,106,224
Unrealized gain on securities available for sale (net of
deferred taxes: $795,783 and $2,473,626 at June 30, 1998
and 1997, respectively) 1,271,295 3,951,375
--------------- -------------
Total shareholders' equity 170,894,637 161,059,917
--------------- -------------
TOTAL $ 1,007,276,000 $ 892,920,109
=============== =============
</TABLE>
-2-
<PAGE> 14
HFNC FINANCIAL CORP. and subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 59,974,826 $ 49,101,206 $ 39,995,122
Interest on securities 11,056,556 16,214,450 12,146,926
------------ ------------ ------------
Total 71,031,382 65,315,656 52,142,048
------------ ------------ ------------
INTEREST EXPENSE:
Interest on customer deposits 23,016,271 23,564,888 27,218,333
Interest on other borrowed funds 18,200,881 11,053,822 790,224
------------ ------------ ------------
Total 41,217,152 34,618,710 28,008,557
------------ ------------ ------------
NET INTEREST INCOME 29,814,230 30,696,946 24,133,491
PROVISION FOR LOAN LOSSES (RECOVERY
OF ALLOWANCE) (30,795) (59,286) 336,957
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES (RECOVERY OF
ALLOWANCE) 29,845,025 30,756,232 23,796,534
------------ ------------ ------------
OTHER OPERATING INCOME:
Service charges and fees 716,109 715,265 735,362
Gain on sale of office properties and equipment -- -- 657,616
Gain on sale of securities 6,619,556 19,379 15,157
Other income 346,873 467,209 408,462
------------ ------------ ------------
Total 7,682,538 1,201,853 1,816,597
------------ ------------ ------------
OTHER OPERATING EXPENSES:
Personnel expenses 10,074,433 10,429,710 6,046,919
Federal deposit insurance premiums 279,190 664,860 1,113,602
Special SAIF recapitalization assessment -- 3,077,275 --
Occupancy 1,895,755 1,817,445 1,937,129
Net (gain from) cost of real estate operations (278,903) 70,249 341,800
Advertising 732,379 841,896 797,040
Data processing 484,067 420,862 406,429
Other expenses 2,216,802 2,662,324 1,780,266
------------ ------------ ------------
Total 15,403,723 19,984,621 12,423,185
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 22,123,840 11,973,464 13,189,946
PROVISION FOR INCOME TAXES 8,654,846 4,609,783 4,565,844
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 13,468,994 7,363,681 8,624,102
CUMULATIVE EFFECT ON PRIOR YEARS
OF A CHANGE IN ACCOUNTING PRINCIPLE -- -- (1,050,000)
------------ ------------ ------------
NET INCOME $ 13,468,994 $ 7,363,681 $ 7,574,102
============ ============ ============
</TABLE>
- 3 -
<PAGE> 15
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE $ 0.86 $ 0.46 N/A
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 15,693,070 15,995,345 N/A
========== ==========
DILUTED NET INCOME PER SHARE
AND POTENTIAL SHARE $ 0.82 $ 0.45 N/A
========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 16,338,995 16,405,509 N/A
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 16
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNEARNED NET UNREALIZED
ESOP AND GAIN (LOSS) ON
ADDITIONAL UNVESTER SECURITIES
COMMON PAID-IN RETAINED RESTRICTED AVAILABLE FOR
STOCK CAPITAL INCOME SHARES SALE (1) Total
-------- --------- ------------ ---------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JUNE 30, 1995 $ -- $ -- $ 79,321,993 $ -- $ 2,490,118 $ 81,812,111
Net income -- -- 7,574,102 -- -- 7,574,102
Net proceeds of
common stock issued 171,925 168,266,013 -- (9,000,000) -- 159,437,938
Shares released from
ESOP -- 124,558 -- 300,000 -- 424,558
Net unrealized gain on
securities transferred
to available for sale
portfolio -- -- -- -- 248,231 248,231
Change in net unrealized
gain on securities
available for sale -- -- -- -- (2,992,484) (2,992,484)
-------- ------------- ------------ ------------ ----------- -------------
BALANCE,
JUNE 30, 1996 171,925 168,390,571 86,896,095 (8,700,000) (254,135) 246,504,456
Net income -- -- 7,363,681 -- -- 7,363,681
Shares released from
ESOP and restricted
stock trusts -- 494,810 -- 3,269,211 -- 3,764,021
Dividends paid -- (78,917,498) (4,153,552) -- -- (83,071,050)
Purchase of ESOP and
restricted stock -- -- -- (17,706,701) -- (17,706,701)
Change in net unrealized
loss on securities
available for sale -- -- -- -- 4,205,510 4,205,510
-------- ------------- ------------ ------------ ----------- -------------
BALANCE,
JUNE 30, 1997 171,925 89,967,883 90,106,224 (23,137,490) 3,951,375 161,059,917
Net income -- -- 13,468,994 -- -- 13,468,994
Shares released from
ESOP and restricted
stock trusts -- 22,513 -- 3,721,947 -- 3,744,460
Dividends paid -- -- (4,698,654) -- -- (4,698,654)
Change in net unrealized
gain on securities
available for sale -- -- -- -- (2,680,080) (2,680,080)
-------- ------------- ------------ ------------ ----------- -------------
BALANCE,
JUNE 30, 1998 $171,925 $ 89,990,396 $ 98,876,564 $(19,415,543) $ 1,271,295 $ 170,894,637
======== ============= ============ ============ =========== =============
</TABLE>
(1) Net of deferred income taxes.
See notes to consolidated financial statements.
<PAGE> 17
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,468,994 $ 7,363,681 $ 7,574,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of a change in accounting principle - - 1,050,000
Depreciation and amortization 847,345 901,982 533,049
Amortization of net deferred loan fees (2,115,665) (1,788,109) (2,038,329)
Provision for losses on loans (recovery of allowance) (30,795) (59,286) 336,957
Provision for losses on real estate 4,382 92,379 139,812
Deferred income tax (benefit) provision 636,635 (281,527) 329,276
Release of ESOP shares and restricted stock 3,744,460 3,764,021 424,558
(Gain) loss on sales of:
Fixed assets - - (657,616)
Real estate owned (511,540) (149,136) 179,258
Investments (6,619,556) (19,379) (15,157)
Increase in other assets (1,958,115) (265,613) (1,474,967)
Increase in other liabilities 1,059,726 2,217,954 472,522
------------ ----------- ------------
Net cash provided by operating activities 8,525,871 11,776,967 6,853,465
------------ ----------- ------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available
for sale 42,966,184 8,394,737 42,469,426
Proceeds from sales of securities available for sale 56,879,045 67,279,572 7,515,157
Purchases of securities available for sale (68,023,806) (6,950,000) (193,170,501)
Purchases of Federal Home Loan Bank stock (8,450,000) (1,387,900) -
Principal repayment on mortgage-backed securities 11,289,908 10,584,525 4,449,592
Proceeds from sales of real estate held for
development - - 700,000
Proceeds from sales of real estate owned 3,798,449 2,841,885 1,911,353
Net loan originations (150,207,467) (152,459,102) (70,086,708)
Proceeds from disposals of office properties and
equipment - - 1,497,098
Purchases of office properties and equipment (388,990) (4,806,798) (98,415)
------------ ----------- ------------
Net cash used in investing activities (112,136,677) (76,503,081) (204,812,998)
------------ ----------- ------------
</TABLE>
<PAGE> 18
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Decrease in deposits $ (13,338,555) $ (4,731,374) $ (41,995,531)
Proceeds from Federal Home Loan Bank advances 336,000,000 129,000,000 -
Repayments of Federal Home Loan Bank advances (167,000,000) - (10,000,000)
Net (decrease) increase in securities sold under
agreements to repurchase (24,200,000) 35,000,000 85,000,000
Proceeds from bank loan - 28,000,000 -
Repayment of bank loan (28,000,000) - -
Purchases of restricted stock for benefit plan - (17,706,701) -
Net proceeds from the sale of stock - - 159,437,938
Dividends paid (4,698,654) (83,071,050) -
------------ ------------ ------------
Net cash provided by financing activities 98,762,791 86,490,875 192,442,407
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (4,848,015) 21,764,761 (5,517,126)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 31,370,359 9,605,598 15,122,724
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 26,522,344 $ 31,370,359 $ 9,605,598
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 41,328,794 $ 49,205,450 $ 28,048,607
Income taxes 9,088,648 4,696,284 2,482,214
Non-cash investing activities:
Transfers from loans to real estate acquired in
settlement of loans 4,287,533 1,113,990 2,127,081
Change in unrealized net gain/loss on securities
available for sale, net of deferred income taxes (2,680,080) 4,205,510 2,744,253
Investment securities transferred from held to maturity
to available for sale, at fair value (amortized
cost of $108,288,966) - - 108,537,197
</TABLE>
See notes to consolidated financial statements.
<PAGE> 19
HFNC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION - HFNC Financial Corp. (the
"Corporation") was incorporated under North Carolina law in August 1995
by Home Federal Savings and Loan Association of Charlotte (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 Corporation and the offer and sale of the
Corporation's common stock by the Corporation (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
accompanying consolidated financial statements include the accounts of
the Corporation and its wholly owned subsidiaries, HFNC Investment Corp.
and Home Federal Savings and Loan Association of Charlotte (collectively
referred to herein as the "Company"). The Company's consolidated
financial statements also include the accounts of the Association's
wholly owned subsidiary, Home Federal Savings Service Corporation
("HFSS"). HFSS participates in real estate joint ventures for the
development and sale of residential lots, and the sale of annuities and
various insurance products. All significant intercompany balances and
transfers have been eliminated in consolidation. The following is a
description of the more significant accounting policies which the Company
follows in preparing and presenting its consolidated statements.
ACCOUNTING PRINCIPLES - The accounting and reporting policies of the
Company conform to generally accepted accounting principles and to the
general practices within the savings and loan industry.
FINANCIAL STATEMENT ESTIMATES - The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and on
deposit and federal funds sold with a maturity date of three months or
less.
INVESTMENT SECURITIES - The Company classifies investment securities into
three categories. Debt securities that the Company has the positive
intent and ability to hold to maturity are classified as "held to
maturity securities" and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of
selling in the near term are classified as "trading securities" and
reported at fair value, with unrealized gains and losses included in
earnings. Debt securities not classified as either held to maturity
securities or trading securities and equity securities not classified as
trading securities are classified as "available for sale securities" and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of shareholders' equity,
net of tax. Losses deemed other than temporary are recognized in current
year earnings. All investment securities are classified as available for
sale, for all periods presented.
<PAGE> 20
In November 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Debt and Equity Securities, which included a
transition provision allowing all entities to reassess the
appropriateness of the classifications of all securities held and account
for any resulting reclassifications at fair value. Reclassifications from
the held to maturity category resulting from this one-time reassessment
do not call into question, or "taint," the intent of the entity to hold
other debt securities to maturity in the future. In accordance with this
Special Report, the Association transferred securities with a fair value
and amortized cost of approximately $108 million from held to maturity to
available for sale during the fiscal year ended June 30, 1996. This
transfer is disclosed as a noncash transaction in the statements of cash
flows.
Realized gains and losses on investment securities are recognized at the
time of sale based upon the specific identification method. Premiums and
discounts are amortized to expense and accreted to income over the lives
of the securities.
LOANS - Loans held for investment are recorded at cost. Mortgage loans
held for sale are valued at the aggregate lower of cost or market as
determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate loan basis. No loans have
been classified as held for sale for any periods presented.
Nonaccrual loans are those loans on which the accrual of interest has
ceased. Loans are placed on nonaccrual status if, in the opinion of
management, principal or interest is not likely to be paid in accordance
with the terms of the loan agreement, or when principal or interest is
past due 90 days or more. Interest accrued but not collected at the date
a loan is placed on nonaccrual status is reversed against interest income
in the current period. Interest income on nonaccrual loans is recognized
only to the extent received in cash. However, where there is doubt
regarding the ultimate collectibility of the loan principal, cash
receipts, whether designated as principal or interest, are thereafter
applied to reduce the carrying value of the loan. Loans are restored to
accrual status only when interest and principal payments are brought
current and future payments are reasonably assured.
Restructured loans are those for which concessions, such as the reduction
of interest rates or deferral of interest or principal payments, have
been granted due to a deterioration in the borrower's financial
condition. Interest on restructured loans is accrued at the restructured
rates. The difference between interest that would have been recognized
under the original terms of nonaccrual and restructured loans and
interest actually recognized on such loans was not a material amount for
the years ended June 30, 1998, 1997 and 1996.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical matter, at the loan's observable market price or the fair value
of the collateral, if the loan is collateral-dependent. A loan is
considered impaired when, based on current information, it is probable
that the borrower will be unable to pay contractual interest or principal
payments as scheduled in the loan agreement. The Company recognizes
interest income on impaired loans pursuant to the discussion above for
nonaccrual and restructured loans.
ALLOWANCE FOR LOAN LOSSES - The Company provides for loan losses using
the allowance method. Accordingly, all loan losses are charged to the
related allowance, and all recoveries are credited to the allowance.
Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment,
deserve current recognition in estimating losses. Because of the
uncertainty inherent in the estimation process, management's estimate of
the allowance for loan losses may change in the near term. However, the
amount of the change that is reasonably possible cannot be estimated.
<PAGE> 21
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS - Real estate acquired in
settlement of loans is initially recorded at fair value at the date of
acquisition, establishing a new cost basis. After acquisition, valuations
are performed periodically by management and the real estate is carried
at the lower of cost or fair value minus estimated costs to sell.
Revenues, expenses and additions to the valuation allowance related to
real estate acquired in settlement of loans are included in net cost of
real estate operations.
REAL ESTATE HELD FOR DEVELOPMENT OR RESALE - Real estate held for
development or resale is stated at the lower of cost or estimated fair
value. Costs related to the development or improvement of property are
capitalized, whereas those costs related to holding the property are
expensed.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
stated at cost, net of accumulated depreciation and amortization.
Depreciation is computed on the straight-line method over estimated
useful lives of up to fifty years for buildings, ten years for building
improvements, four to ten years for furniture, fixtures and equipment and
four years for automobiles. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or estimated
useful life.
The Company implemented Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed Of, effective July 1, 1996. SFAS No.
121 established accounting standards for the impairment of long-lived
assets, certain identifiable intangible assets and goodwill related to
those assets to be held and used and for long-lived assets to be held and
certain intangible assets to be disposed of. The adoption of this
statement did not have a significant impact on financial condition or
results of operations.
INTEREST INCOME AND FEES - Interest income on loans is accrued on a
monthly basis as earned. Servicing fees are credited to income as earned.
LOAN ORIGINATION FEES - The Company defers loan origination fees, as well
as certain direct loan origination costs and amortizes such costs and
fees as an adjustment to yield over the contractual lives of the related
loans utilizing a method of amortization that approximates the level
yield method.
MORTGAGE SERVICING RIGHTS - The Company implemented SFAS No. 122,
Accounting for Mortgage Servicing Rights, prospectively effective July 1,
1996. SFAS No. 122 amends SFAS No. 65 and the principal effect for the
Company is the elimination of the accounting distinction between rights
to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions.
When a mortgage banking enterprise purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained, it
should allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values if it is practicable to estimate
those fair values. Any cost allocated to mortgage servicing rights should
be recognized as a separate asset and amortized in proportion to and over
the period of the estimated net servicing income. Implementation of the
provisions of SFAS No. 122 did not have a material impact on the
Company's financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement amends SFAS Nos. 65 and 115 and supersedes SFAS Nos. 76, 77 and
122 and provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. It
requires that liabilities and
<PAGE> 22
derivatives incurred or obtained by transferors as part of financial
assets be initially measured at fair value, if practicable. It also
requires that servicing assets and other retained interests in the
transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on
their relative fair values at the date of the transfer. Servicing assets
and liabilities must be measured subsequently by amortization in
proportion to and over the period of estimated net servicing income or
loss and assessment for asset impairment or increased obligation based on
their fair values. This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. In December 1996, the FASB issued SFAS
No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125. This Statement deferred the effective date of
application of certain transfer and collateral provisions of SFAS No. 125
until January 1, 1998.
On January 1, 1997, the Company implemented the provisions of SFAS No.
125 which were not deferred by SFAS No. 127. On January 1, 1998, the
Company implemented the provisions of SFAS No. 125, deferred by SFAS No.
127. Implementation of the provisions of SFAS No. 125 and SFAS No. 127
did not have a significant impact on the Company's financial condition or
results of operations.
POSTRETIREMENT BENEFITS - Effective July 1, 1995, the Company adopted
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other
Than Pensions. SFAS No. 106 requires the Company to accrue the estimated
cost of retiree benefit payments during the years the employee provides
services. The Company previously expensed the cost of these benefits,
which are principally health care, as premiums were paid. SFAS No. 106
allows recognition of the cumulative effect of the liability in the year
of adoption or the amortization of the obligation over a period of up to
twenty years. The Company elected to recognize the cumulative effect of
this obligation upon adoption. The cumulative effect of adopting SFAS No.
106 as of July 1, 1995 was an increase in accrued postretirement health
care costs of $1,700,000 and a decrease in net income of $1,050,000 (net
of deferred income taxes of $650,000) for the year ended June 30, 1996.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
INCOME TAXES - Provisions for income taxes are based on amounts reported
in the consolidated statements of income (after exclusion of nontaxable
income such as interest on state and municipal securities) and include
changes in deferred income taxes. Deferred taxes are computed using the
asset and liability approach. The tax effects of differences between the
tax and financial accounting bases of assets and liabilities are
reflected in the balance sheets at the tax rates expected to be in effect
when the differences reverse. A valuation allowance is established when
necessary to reduce deferred tax assets to the amount
more-likely-than-not expected to be realized.
EARNINGS PER SHARE - Effective January 1, 1998, the Company adopted SFAS
No. 128, Earnings Per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share ("EPS"). It requires 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. The Company adopted this new method of computing
earnings per share and
<PAGE> 23
restated earnings per share for all prior periods. As the Company did not
complete its stock conversion from a mutual association until December
28, 1995, no earnings per share have been presented for any periods prior
to the fiscal year ended June 30, 1997.
The following is a reconciliation between basic and diluted earnings per
share (in thousands except per share amounts):
<TABLE>
<CAPTION>
NET AVERAGE PER SHARE
INCOME SHARES AMOUNT
<S> <C> <C> <C>
For the year ended June 30, 1998:
Earnings per common share - basic $13,469 15,693 $ 0.86
Stock-based compensation awards -- 646 (0.04)
------- ------ --------
Earnings per common share - diluted $13,469 16,339 $ 0.82
======= ====== ========
For the year ended June 30, 1997:
Earnings per common share - basic $ 7,364 15,995 $ 0.46
Stock-based compensation awards -- 411 (0.01)
------- ------ --------
Earnings per common share - diluted $ 7,364 16,406 $ 0.45
======= ====== ========
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS - The FASB has recently issued four
new accounting standards that will affect the reporting and disclosure of
financial information by the Company. Management has not determined the
effects of adopting these statements, but believes their adoption will
not impact financial condition or results of operations because they
either deal only with reporting and disclosure, or in the case of SFAS
No. 133, relate to instruments and activities not relevant to the
Company's operations. The following is a summary of the standards and
their required implementation dates:
- 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 financial statements issued for the fiscal year
beginning July 1, 1998.
- SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information - This statement establishes standards for the
way public business enterprises report information about operating
segments and establishes standards for related disclosures about
products and services, geographic areas and major customers.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. Information
required to be disclosed includes segment profit or loss, certain
specific revenue
<PAGE> 24
and expense items, segment assets and certain other information.
This statement is effective for the Company for financial
statements issued for the fiscal year beginning July 1, 1998.
- SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits - This statement revises employers'
disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans.
It standardized the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis,
and eliminates certain disclosures required by FASB statement No.
87, Employers' Accounting for Pensions, No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits. The statement suggests
combined formats for presentation of pension and other
postretirement benefit disclosures. This statement is effective for
the Company for financial statements issued for the fiscal year
beginning July 1, 1998.
- SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities - This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. The new standard requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement will be effective for
interim and annual periods ending after June 30, 1999.
RECLASSIFICATIONS - Certain June 30, 1997 and 1996 amounts have been
reclassified to conform to the June 30, 1998 presentation.
<PAGE> 25
2. SECURITIES
The maturities, amortized cost, unrealized gains, unrealized losses and
fair values of securities at June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
United States Government
Agency debt securities:
Due within one year $ 4,999,308 $ 34,447 $ 628 $ 5,033,127
Due after one year but
within five years 33,975,314 125,605 38,840 34,062,079
Due after five years but
within ten years 11,997,997 6,065 66,573 11,937,489
Due after ten years 39,940,668 3,729 361,437 39,582,960
Federal Home Loan
Mortgage Corporation
common and preferred
stocks 41,621 1,810,477 - 1,852,098
Other equity securities 102,536 - 6,910 95,626
------------- ----------- ---------- -------------
Total investment
securities 91,057,444 1,980,323 474,388 92,563,379
------------- ----------- ---------- -------------
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 9,192,228 36,883 - 9,229,111
Government National
Mortgage Association 32,352,181 524,260 - 32,876,441
------------- ----------- ---------- -------------
Total mortgage-backed
securities 41,544,409 561,143 - 42,105,552
------------- ----------- ---------- -------------
Total $ 132,601,853 $ 2,541,466 $ 474,388 $ 134,668,931
============= =========== ========== =============
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
United States Government
Agency debt securities:
Due within one year $ 11,000,000 $ 4,165 $ 45,579 $ 10,958,586
Due after one year but
within five years 66,013,428 91,680 682,172 65,422,936
Due after five years but
within ten years 7,000,000 - 169,373 6,830,627
Due after ten years 31,971,799 - 923,042 31,048,757
Federal Home Loan
Mortgage Corporation
common and preferred
stocks 249,358 8,002,792 - 8,252,150
-------------- ------------ ------------ --------------
Total investment
securities 116,234,585 8,098,637 1,820,166 122,513,056
-------------- ------------ ------------ --------------
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 12,939,158 - 75,957 12,863,201
Government National
Mortgage Association 40,111,360 405,425 182,938 40,333,847
-------------- ------------ ------------ --------------
Total mortgage-backed
securities 53,050,518 405,425 258,895 53,197,048
-------------- ------------ ------------ --------------
Total $ 169,285,103 $ 8,504,062 $ 2,079,061 $ 175,710,104
============== ============ ============ ==============
</TABLE>
As of June 30, 1998, there were approximately $94 million of investments
with call options, $88 million of which are callable within one year. As
of June 30, 1997, there were approximately $73 million of investments
with call options, all of which are callable within one year.
Gross realized gains on sales of securities for the years ended June 30,
1998, 1997 and 1996 were $7,095,959, $714,527 and $30,782, respectively.
Gross realized losses on sales of securities for the years ended June 30,
1998, 1997 and 1996 were $476,403, $695,148 and $15,625, respectively.
<PAGE> 27
3. LOANS RECEIVABLE
Loans receivable at June 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Residential (1 - 4 family) real estate loans $715,609,528 $561,352,476
Construction loans 62,913,684 68,365,540
Commercial loans 30,262,548 30,631,001
Land loans 18,616,487 19,991,562
Consumer loans:
Home equity 16,200,962 14,494,824
Credit card 6,237,322 6,198,263
Other 3,725,206 3,255,459
------------ -----------
Total 853,565,737 704,289,125
Deduct:
Allowance for loan losses (7,033,185) (7,611,675)
Undisbursed portion of loans in process (34,694,087) (33,029,829)
Unearned loan fees, net (5,448,751) (5,324,301)
------------ ------------
Loans receivable, net $806,389,714 $658,323,320
============ ============
</TABLE>
The changes in the allowance for loan losses consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Allowance, beginning of year $ 7,611,675 $7,495,515 $ 8,088,462
Provision for loan losses (recovery of allowance) (30,795) (59,286) 336,957
Write-offs (597,998) (344,230) (1,493,125)
Recoveries 50,303 519,676 563,221
----------- ---------- -----------
Allowance, end of year $ 7,033,185 $7,611,675 $ 7,495,515
=========== ========== ===========
</TABLE>
Residential real estate loans are presented net of loans serviced for
others totaling $22.7 million, $30.9 million and $36.6 million at June
30, 1998, 1997 and 1996, respectively. Loans sold in the secondary market
are generally sold without recourse. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and foreclosure processing. In
connection with these loans serviced for others, the Company held
borrowers' escrow balances of $239,499, $339,899 and $393,826 at June 30,
1998, 1997 and 1996, respectively.
Loans not currently accruing interest at June 30, 1998 and June 30, 1997
amounted to $2.9 million and $6.3 million, respectively. Interest income
that would have been accrued on these loans if they were fully accruing
amounted to $232,000 and $472,000 for the 1998 and 1997 fiscal years,
respectively.
The recorded investment in impaired loans was $1,810,145 and $4,385,280
at June 30, 1998 and 1997, respectively. The related allowance for loan
losses on these loans was $510,133 and
<PAGE> 28
$1,979,647 at June 30, 1998 and 1997, respectively. All impaired loans
required an allowance for loan loss and were evaluated using the fair
value of the collateral. The average recorded investment in impaired
loans was $1,817,515, $4,896,308 and $6,346,184 and the cash income
recognized was $71,000, $68,000 and $121,000 for the years ended June 30,
1998, 1997 and 1996, respectively.
The Company is not committed to lend additional funds to debtors whose
loans have been modified.
4. REAL ESTATE
Real estate consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Acquired in settlement of loans $ 2,050,607 $1,138,277
Less allowance for estimated losses (186,489) (270,401)
----------- ----------
Real estate, net $ 1,864,118 $ 867,876
=========== ==========
<CAPTION>
The changes in the allowance for losses on real estate acquired in
settlement of loans consisted of the following:
1998 1997 1996
<S> <C> <C> <C>
Allowance, beginning of year $ 270,401 $1,143,540 $ 1,542,253
Provision 4,382 92,379 139,812
Write-offs (88,294) (965,518) (538,525)
---------- ---------- -----------
Allowance, end of year $ 186,489 $ 270,401 $ 1,143,540
========== ========== ===========
</TABLE>
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 2,863,969 $ 2,863,967
Office buildings and improvements 10,021,121 9,741,536
Office equipment and leasehold improvements 2,974,549 2,922,692
Automobiles 112,295 100,388
----------- -----------
Total 15,971,934 15,628,583
Less accumulated depreciation and amortization (6,139,707) (5,529,476)
----------- -----------
Office properties and equipment, net $ 9,832,227 $10,099,107
=========== ===========
</TABLE>
<PAGE> 29
6. DEPOSITS
Customer deposits at June 30, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Non interest bearing checking accounts $ 15,132,459 $ 9,192,647
NOW accounts - 2.50% at June 30, 1998 and 1997 10,457,300 11,798,817
Flexible rate checking:
Money market deposit accounts, 2.50% to 4.89% at
June 30, 1998 and 1997 49,553,642 34,759,502
Other - 2.50% to 2.55% at June 30, 1998 and 1997 3,527,101 3,369,134
-------------- -------------
Total checking accounts 78,670,502 59,120,100
-------------- -------------
Passbook accounts - 2.50% at June 30, 1998 and 1997 13,816,775 14,447,314
-------------- -------------
Certificate accounts:
2.50% - 3.99% 1,690,706 3,940,677
4.00% - 4.99% 60,745,866 15,680,883
5.00% - 6.99% 250,335,324 320,077,671
7.00% - 8.99% 24,340,850 29,712,983
9.00% and over 900,964 859,914
-------------- -------------
Total certificate accounts 338,013,710 370,272,128
-------------- -------------
Total deposits $ 430,500,987 $ 443,839,542
============== =============
</TABLE>
The weighted average coupon rate on customer deposits at June 30, 1998
and 1997 was 5.16% and 5.24%, respectively.
Scheduled maturities of certificate accounts at June 30, 1998 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, Amount
<S> <C>
1999 $ 263,148,606
2000 53,275,113
2001 15,375,870
2002 3,209,215
2003 2,387,262
Thereafter 617,644
--------------
Total certificate accounts $ 338,013,710
==============
</TABLE>
The aggregate amount of certificate accounts in excess of $100,000 was
$87,668,887 and $145,100,828 at June 30, 1998 and 1997, respectively.
Deposits in excess of $100,000 are not federally insured.
<PAGE> 30
Interest expense by type of deposit for the years ended June 30, 1998,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Checking accounts $ 2,247,084 $ 1,349,244 $ 1,510,906
Passbook accounts 261,417 237,366 341,530
Certificate accounts 20,560,583 22,035,269 25,429,660
Less: Penalties (52,813) (56,991) (63,763)
------------- ------------ ------------
Total interest expense $ 23,016,271 $ 23,564,888 $ 27,218,333
============= ============ ============
</TABLE>
7. OTHER BORROWED FUNDS
At June 30, 1998 and 1997, the Company had $298.0 million and $129.0
million, respectively, of outstanding advances from the Federal Home Loan
Bank of Atlanta ("FHLB"). Advances were at fixed rates. The maximum
amount of outstanding advances at any month-end during 1998 and 1997 was
$298.0 million and $129.0 million, respectively, and the average balance
outstanding for such years was approximately $215.3 million and $61.1
million, respectively. The weighted average interest rate during fiscal
years 1998 and 1997 was 5.59% and 5.90%, respectively.
The Company pledges as collateral for these borrowings their FHLB stock
and has entered into blanket collateral agreements with the FHLB whereby
the Company maintains, free of other encumbrances, qualifying mortgages
(as defined) with unpaid principal balances, when discounted at 75% of
the unpaid principal balances, of at least 100% of total advances.
The Company also borrowed funds using securities sold under repurchase
agreements during 1998 and 1997. At June 30, 1998 and 1997, $95.8 million
and $120.0 million of such borrowings were outstanding, respectively. The
maximum amount of outstanding agreements at any month-end during 1998 and
1997 was $120.0 million and the average outstanding balance of such
agreements for the years were approximately $96.0 million and $117.3
million, respectively. Collateral for the securities sold under
repurchase agreements consisted of U.S. Government Agency securities and
mortgage-backed securities which were transferred to a third party for
safekeeping during the terms of the agreements. At June 30, 1998, the
market value of such collateralized securities totaled approximately
$101.6 million (amortized cost of approximately $101.2 million).
During the 1997 fiscal year, the Company also borrowed $28.0 million in
short term funds from a commercial bank to fund a portion of a $5 per
share special distribution paid to shareholders on March 18, 1997. The
loan, at prime rate less .5%, was obtained on March 18, 1997 and was paid
off during the current fiscal year.
<PAGE> 31
8. INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current provision:
Federal $ 6,558,672 $ 4,656,460 $ 3,925,383
State 1,459,539 234,850 311,185
--------------- ----------- ------------
Total current 8,018,211 4,891,310 4,236,568
--------------- ----------- ------------
Deferred (benefit) provision:
Federal 457,990 (225,828) 253,845
State 178,645 (55,699) 75,431
--------------- ----------- ------------
Total deferred 636,635 (281,527) 329,276
--------------- ----------- ------------
Total income tax expense $ 8,654,846 $ 4,609,783 $ 4,565,844
=============== =========== ============
</TABLE>
For the years ended June 30, 1998 and 1997, deferred tax liabilities of
$795,783 and $2,473,626, respectively, were included in total
shareholders' equity for the tax effect of the unrealized gain on
investment securities available for sale.
Income taxes differed from amounts computed by applying the statutory
federal rate (35% for 1998 and 34% for 1997 and 1996) to income before
income taxes and cumulative effect of a change in accounting principle
(see Note 1) as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Tax at federal income tax rate $ 7,743,344 $ 4,070,978 $ 4,484,581
(Decrease) increase resulting from:
Statutory bad debt deduction for tax purposes - - (520,000)
State income tax expense, net of federal benefit 1,064,820 118,240 255,166
Effect of change in tax rate used in computing
deferred taxes (123,116) - -
Valuation allowance 182,209 - -
Other, net (212,411) 420,565 346,097
----------- ----------- -----------
Total $ 8,654,846 $ 4,609,783 $ 4,565,844
=========== =========== ===========
Effective tax rate 39.1% 38.5% 34.6%
=========== =========== ===========
</TABLE>
<PAGE> 32
The tax effects of significant items comprising the Company's net deferred
tax asset at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Differences between book and tax basis bad debt reserves $ 2,843,719 $ 3,290,767
Difference between book and tax basis of deferred loan fees 682,608 966,132
Deferred compensation 691,802 2,011,241
Net operating loss carryforward 182,209 677,562
Capital loss carryforward 277,060 -
Management recognition and retention plan compensation
accrual 1,034,294 295,575
Other 636,043 (455,676)
Valuation allowance (182,209) -
----------- -----------
Total deferred tax assets, net 6,165,526 6,785,601
----------- -----------
Deferred tax liabilities:
Differences between book and tax basis of Federal Home Loan
Bank of Atlanta stock 938,410 921,850
Unrealized gain on securities available for sale 795,783 2,473,626
----------- -----------
Total deferred tax liabilities 1,734,193 3,395,476
----------- -----------
Net deferred tax asset $ 4,431,333 $ 3,390,125
=========== ===========
</TABLE>
The Company is permitted a bad debt deduction in determining federal
taxable income that may differ from actual experience, subject to certain
limitations. If the amounts that qualify as bad debt deductions for
federal income tax purposes are later used for purposes other than for bad
debt losses, they will be subject to federal income tax at the then
current statutory rate. As permitted under SFAS No. 109, no deferred tax
liability is provided for approximately $16.9 million (approximately $6.4
million tax effect) of such tax basis bad debt reserves that arose prior
to June 30, 1988.
HFNC Financial Corporation has a state net operating loss carryforward of
$2,429,450 ($182,209 tax effect) at June 30, 1998, which begins to expire
in 2001. The Company recorded a valuation allowance of $182,209 to reduce
the carrying value of this asset to zero. Realization of this deferred
asset is dependent upon the recognition of sufficient taxable income in
the future.
9. BENEFIT PLANS
401(K)/PROFIT SHARING PLAN - Effective November 30, 1995, the Company
modified its non-contributory qualified defined contribution retirement
plan to a contributory 401(k) profit sharing plan. The profit sharing plan
permits all full time employees with at least one year of service to
contribute up to 9% of their salary to the plan each year. The plan
provides for matching contributions by the Company equal to 100% of
employee contributions up to the first 3% of compensation. The Company
may, at its discretion, make profit sharing contributions to the plan.
Plan participants' accounts are 100% vested in Company contributions after
5 years of qualifying service. The Company's matching contribution charged
to expense was approximately $87,000, $76,000 and $69,000 for the years
ended June 30, 1998, 1997 and 1996, respectively.
<PAGE> 33
The plan, prior to modification, was a non-contributory plan which covered
all full time employees with at least one year of service. Annual employer
contributions under the plan were based on a percentage of compensation of
all regular employees (as defined) less termination credits. Retirement
expenses relating to this plan were funded as accrued and amounted to
$352,094 for the year ended June 30, 1996. No expenses were accrued during
the years ended June 30, 1998 and 1997 due to the modification of the plan
during fiscal year ended 1996.
STOCK OPTION AND MANAGEMENT RECOGNITION AND RETENTION PLANS - In December
1996, the Company's shareholders approved the Stock Option Plan ("SOP")
and Management Recognition and Retention Plan ("MRRP").
Stock Option Plan - The SOP provides for the Company's Board of Directors
to award incentive stock options, non-qualified or compensatory stock
options and stock appreciation rights representing up to 1,719,250 shares
of Corporation stock. One-third of the options granted vested immediately
upon grant, with the balance vesting in equal amounts on the two
subsequent anniversary dates of the grant. Two-thirds of the options
granted to date have vested as of June 30, 1998. Options granted vest
immediately in the event of retirement, disability, or death. Outstanding
stock options can be exercised over a ten-year period.
Under the SOP, options have been granted to directors and key employees to
purchase common stock of HFNC Financial Corp. The exercise price in each
case equals the fair market value of the Corporation's stock at the date
of grant which has been adjusted for the impact of the $5 per share
special distribution to shareholders on March 18, 1997. Options granted in
the fiscal year ended June 30, 1997 have exercise prices ranging from
$13.67 to $14.78, and a current weighted average contract life of 7.5
years. No options were granted during the fiscal year ended June 30, 1998.
The following table presents the status of the Company's stock option plan
as of June 30, 1998 and June 30, 1997, respectively, and changes during
the years then ended:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
STOCK OPTION PLAN SHARES PRICE
<S> <C> <C>
Outstanding at June 30, 1996 - $ -
Granted 1,548,471 13.92
Exercised - -
Forfeited (1,398) 14.78
-----------
Outstanding at June 30, 1997 1,547,073 $ 13.92
Granted - -
Exercised - -
Forfeited (2,063) 14.78
-----------
Outstanding at June 30, 1998 1,545,010 $ 13.92
===========
Options exercisable at year end 1,030,983 $ 13.92
===========
</TABLE>
<PAGE> 34
The Company applies the provisions of APB Opinion No. 25 in accounting for
its stock option plan, as allowed under SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been
recognized for options granted to employees. Had compensation cost for
this plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the methods of SFAS No. 123, the
Company's pro forma net income and pro forma earnings per share would have
been as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net income:
As reported $13,468,994 $ 7,363,681
Pro forma $12,628,609 $ 6,510,387
Basic income per share:
As reported $ .86 $ .46
Pro forma $ .80 $ .41
Diluted income per share:
As reported $ .82 $ .45
Pro forma $ .77 $ .40
</TABLE>
In determining the above pro forma disclosure, the fair value of options
granted during the fiscal year ended June 30, 1997 was estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility - 18.23%,
expected life of grant - 3.83 years, risk-free interest rate - 6.28%,
expected dividend rate - 1.70%. The weighted average fair value of options
granted during the fiscal year ended June 30, 1997 was $2.69 per share.
Management Recognition and Retention Plan - The MRRP provides for the
Company's Board of Directors to award restricted stock to officers and key
employees as well as non-employee directors. The MRRP authorizes the
Company to grant up to 687,700 shares of Corporation stock. One-fifth of
the shares granted vested immediately upon grant, with the remainder
vesting at a rate of 25% per year over the next four anniversary dates of
the grants. Two-fifths of the shares granted to date have vested as of
June 30, 1998. As in the case with the SOP, shares granted will be vested
in the event of retirement, disability, or death. Approximately $3.2
million in compensation expense was recognized for each of the years ended
June 30, 1998 and June 30, 1997 related to the MRRP. The following table
presents the status of the MRRP as of June 30, 1998 and June 30, 1997 and
changes during the years then ended:
<PAGE> 35
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
GRANT
MANAGEMENT RECOGNITION AND RETENTION PLAN SHARES PRICE
<S> <C> <C>
Outstanding at June 30, 1996 - $ -
Granted 619,540 17.41
Vested (123,908) 18.07
Forfeited (600) 17.25
-----------
Outstanding at June 30, 1997 495,032 $ 17.25
Granted - -
Vested (123,608) 17.25
Forfeited (1,200) 17.25
-----------
Outstanding at June 30, 1998 370,224 $ 17.25
=========== ===========
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN - In connection with the Conversion (Note
1), the Company established an Employee Stock Ownership Plan ("ESOP"). In
order to fund the ESOP, 900,000 shares of the Corporation's common stock
were purchased on December 28, 1995 by the ESOP with the proceeds of a
$9.0 million loan from the Corporation's wholly owned subsidiary, HFNC
Investment Corp. A corresponding amount related to unearned ESOP shares of
$10,694,904 and $11,956,555 at June 30, 1998 and 1997, respectively, is
shown as a reduction of shareholders' equity. As the loan is internally
leveraged, the note receivable from the ESOP is not reported as an asset
nor is the ESOP's debt reported as a liability. Expense related to the
ESOP was approximately $1.5 million for each of the years ended June 30,
1998 and 1997.
OTHER POSTRETIREMENT BENEFITS - The Company provides certain health care
and life insurance benefits for substantially all of its retired
employees. The Company's postretirement plans currently are funded on a
pay-as-you-go (cash) basis. As discussed in Note 1, the Company adopted
SFAS No. 106, resulting in an increase in accrued postretirement health
care costs of $1.7 million and a decrease in net income of $1.1 million
(after income taxes of $650,000), which has been included in the Company's
consolidated statement of income for the year ended June 30, 1996. The
status of the plans were as follows:
Accumulated postretirement benefit obligation at June 30, 1998 and June 30,
1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Retirees $ 526,145 $ 457,067
Fully eligible active plan participants 644,031 572,783
Other active plan participants 808,488 830,975
----------- -----------
Accumulated postretirement benefit obligation 1,978,664 1,860,825
Unrealized net gain 320,242 260,081
----------- -----------
Accrued postretirement benefit liability $ 2,298,906 $ 2,120,906
=========== ===========
</TABLE>
<PAGE> 36
Net periodic postretirement benefit cost for the years ended June 30, 1998
and June 30, 1997 consisted of the following components:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Service cost - benefits earned during the year $ 77,708 $ 91,491
Interest cost on accumulated postretirement benefit obligation 142,424 132,418
Unrecognized gain (8,674) (5,537)
----------- -----------
Net periodic postretirement benefit cost $ 211,458 $ 218,371
=========== ===========
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of June 30, 1998 was 8%, decreasing
linearly each successive year until it reaches 6% in 2000, after which it
remains constant. A one percentage point increase in the assumed health
care cost trend rate for each year would increase the accumulated
postretirement benefit obligation as of June 30, 1998 by approximately
$344,000 and net annual postretirement benefit cost by approximately
$45,000. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 8%.
10. DEFERRED COMPENSATION AGREEMENTS AND NON-EMPLOYEE DIRECTORS' RETIREMENT
PLAN
The Company has entered into deferred compensation agreements with the
President/CEO, Executive Vice President, Vice President/Treasurer, and
certain other Vice Presidents and is providing for the present value of
such benefits over the anticipated remaining period of employment. The
agreements will be funded by life insurance policies, owned by the
Company, on such employees. Deferred compensation expense was
approximately $17,000, $32,000 and $31,000 for the years ended June 30,
1998, 1997 and 1996, respectively.
The Company has a Non-employee Directors' Retirement Plan (the "Directors'
Plan"). Under the Directors' Plan, a non-employee director becomes a
participant upon completion of ten years of continuous service as a
director. Full benefits under the Director's Plan are payable at the later
of attaining age 65 or retiring from the Board of Directors. (Retirement
with reduced benefits is available beginning at age 62.) The annual
benefit for a retired director is equal to the amount of compensation to
which the director was entitled to receive in the twelve months preceding
retirement. This annual benefit is to be paid quarterly for a ten-year
period. Related pension expense for the years ended June 30, 1998, 1997
and 1996 was approximately $44,000, $54,000 and $25,000, respectively.
The Directors' Plan also contains provisions for death benefits to a
surviving spouse at 100% of the retirement benefit that would have been
paid to the director upon retirement or would be payable over the
remaining term if the director was already receiving retirement benefits.
11. COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS - The Company, in the normal course of business, is a
party to commitments which involve, to varying degrees, elements of risk
in excess of the amounts recognized in the consolidated financial
statements. These commitments include unused consumer lines of credit and
commitments to extend credit. Loan commitments, excluding undisbursed
portions of loans in process, were approximately $22.1 million and 15.7
million at June 30, 1998 and 1997, respectively.
<PAGE> 37
Commitments, which are disbursed subject to certain limitations, extend
over periods of time with the majority of such commitments disbursed
within a six-month period. The Company had commitments approximating $19.5
million and 12.7 million representing available credit under open line
loans and approximately $1.3 million and $600,000 under outstanding
letters of credit at June 30, 1998 and 1997, respectively.
CONCENTRATIONS OF CREDIT RISK - Most of the Company's business activity is
with customers in the Charlotte, North Carolina area. The majority of the
Company's loans are residential mortgage loans, construction loans for
residential property and land loans for development of residential real
estate. The Company's policy generally allows mortgage loans up to 80% of
the value of the real estate that is pledged as collateral or up to 95%
with private mortgage insurance.
INTEREST RATE RISK - The Company's profitability depends to a large extent
on its net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits and
other borrowed funds. Like most financial institutions, the Company's
interest income and interest expense are significantly affected by changes
in market interest rates and other economic factors beyond its control.
The Company's interest-earning assets consist primarily of long-term,
fixed-rate mortgage loans and investments which adjust more slowly to
changes in interest rates than its interest-bearing liabilities which are
primarily term deposits and advances. Accordingly, the Company's earnings
would be adversely affected during periods of rising interest rates and
would be positively impacted during periods of declining interest rates.
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. In October 1997, the United States District Court
entered an order granting summary judgment in favor of the Association.
The plaintiff has appealed the order of summary judgment and the case is
presently pending in the Fourth Circuit Court of Appeals.
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 corporation after the payment. Home Federal
and its officers vigorously deny all of her allegations. The Association
filed a motion for summary judgment and dismissal of the counterclaim. The
motion for summary judgment was heard in the Superior Court division of
the Mecklenburg County General Court of Justice in April 1998; however, an
order has not been entered. In June 1998, the Association removed this
case to the United States Bankruptcy Court for the Western District of
North Carolina, Charlotte Division, due to the fact that the defendant was
the debtor in a pending bankruptcy case. The Association believes it has
strong defenses to the defendant's counterclaim.
<PAGE> 38
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. All defendants
filed motions for summary judgment which were granted and the lawsuits
were dismissed in January 1998 by the Superior Court of Mecklenburg
County. The plaintiff appealed the order granting summary judgment to the
North Carolina Court of Appeals. In July of 1998, the defendants removed
the case to the United States Bankruptcy Court for the Western District of
North Carolina, Charlotte Division, due to the fact that the plaintiff was
a debtor in a pending bankruptcy case. As a result of the removal, the
North Carolina Court of Appeals entered an order staying further
proceedings in the North Carolina Court of Appeals in August 1998. 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 the Association 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 Fourth Circuit Court of Appeals. The plaintiffs are seeking to have
the judgments set aside on that basis. The Association vehemently denies
that any fraud was perpetrated upon the courts and has filed a motion for
summary judgment and dismissal which is presently pending the United
States District Court.
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.
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.
12. REGULATORY CAPITAL REQUIREMENTS
The Corporation is not subject to any regulatory capital requirements.
However, the Association is subject to various regulatory capital
requirements imposed by the federal financial institution agencies.
Failure to meet minimum capital requirements can result in certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Association must meet specific
capital guidelines that involve quantitative measures of the Association's
assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Association's capital
<PAGE> 39
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios. Under
regulations of the OTS, the Association must have: (i) core capital equal
to 3% of adjusted total assets, (ii) tangible capital equal to 1.5% of
adjusted total assets and (iii) total capital equal to 8.0% of
risk-weighted assets. In measuring compliance with all three capital
standards, institutions must deduct from their capital (with several
exceptions primarily for mortgage banking subsidiaries and insured
depository institution subsidiaries) their investments in, and advances
to, subsidiaries engaged (as principal) in activities not permissible for
national banks, and certain other adjustments. Management believes, as of
June 30, 1998, that the Association meets all capital adequacy
requirements to which it is subject.
<PAGE> 40
The following is a reconciliation of the Association's equity reported in
the consolidated financial statements under generally accepted accounting
principles to OTS regulatory capital requirements (dollars in thousands):
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
JUNE 30, 1998
Total equity for the Association $ 157,245 $ 157,245 $ 157,245
General allowance for loan losses - - 6,764
Unrealized gain on available for sale securities (1,271) (1,271) (1,271)
Investments not includable in regulatory capital (1,788) (1,788) (1,818)
--------- --------- ---------
Regulatory capital $ 154,186 $ 154,186 $ 160,920
========= ========= =========
JUNE 30, 1997
Total equity for the Association $ 172,894 $ 172,894 $ 172,894
General allowance for loan losses - - 5,936
Unrealized gain on available for sale securities (3,951) (3,951) (3,951)
Investments not includable in regulatory capital (1,716) (1,716) (1,746)
--------- --------- ---------
Regulatory capital $ 167,227 $ 167,227 $ 173,133
========= ========= =========
</TABLE>
The Association's actual and required capital amounts and ratios are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
MINIMUM
ACTUAL REQUIREMENT
-------------------- ----------------
AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
JUNE 30, 1998
Tangible capital (to adjusted total assets) $ 154,186 15.4% $15,050 1.5%
Core capital (to adjusted total assets) $ 154,186 15.4% $30,100 3.0%
Risk-based capital (to risk-weighted assets) $ 160,920 29.7% $43,284 8.0%
JUNE 30, 1997
Tangible capital (to adjusted total assets) $ 167,227 18.9% $13,291 1.5%
Core capital (to adjusted total assets) $ 167,227 18.9% $26,582 3.0%
Risk-based capital (to risk-weighted assets) $ 173,133 36.5% $37,960 8.0%
</TABLE>
<PAGE> 41
As of June 30, 1998 and 1997, the most recent respective notifications
from the OTS classified the Association as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions
or events since the most recent notification that management believes have
changed the Association's category. To be categorized as well capitalized,
the Association must maintain minimum ratios of total capital to
risk-weighted assets, core capital to risk-weighted assets and core
capital to adjusted total assets. The Association's actual and minimum
capital requirements to be well capitalized under prompt corrective action
provisions are as follows (dollars in thousands):
<TABLE>
<CAPTION>
MINIMUM
ACTUAL REQUIREMENT
-------------------- ------------------
JUNE 30, 1998 AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C>
Tier I Capital (to adjusted total assets) $ 154,186 15.4% $50,166 5.0%
Tier I Capital (to risk-weighted assets) $ 154,186 28.5% $32,463 6.0%
Total Capital (to risk-weighted assets) $ 160,920 29.7% $54,106 10.0%
JUNE 30, 1997
Tier I Capital (to adjusted total assets) $ 167,227 18.9% $44,303 5.0%
Tier I Capital (to risk-weighted assets) $ 167,227 35.2% $28,470 6.0%
Total Capital (to risk-weighted assets) $ 173,133 36.5% $47,450 10.0%
</TABLE>
On September 30, 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund. The effect of this legislation is to require a
one-time assessment on all federally insured savings associations'
deposits and was levied by the Federal Depository Insurance Corporation
("FDIC") at .657% of insured deposits at June 30, 1996. The amount of the
Association's assessment was approximately $3.1 million. The assessment
was accrued as a charge to earnings in the quarter ended September 30,
1996 and paid on November 27, 1996.
<PAGE> 42
13. FAIR VALUE DISCLOSURE
The carrying and estimated fair value amounts of financial instruments as
of June 30, 1998 and 1997, are summarized below:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- -------------------------------
STATED ESTIMATED STATED ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents $ 26,522,344 $ 26,522,344 $ 31,370,359 $ 31,370,359
Securities available
for sale 134,668,931 134,668,931 175,710,104 175,710,104
Loans receivable, net 806,389,714 811,590,928 658,323,320 653,393,693
Stock of Federal
Home Loan Bank
of Atlanta 14,900,000 14,900,000 6,450,000 6,450,000
Other assets 6,385,116 6,385,116 6,151,280 6,151,280
Liabilities:
Demand deposits $ 92,487,277 $ 92,487,277 $ 73,567,414 $ 73,567,414
Time deposits 338,013,710 338,845,224 370,272,128 370,720,757
Other borrowed funds 393,800,000 390,737,811 277,000,000 277,334,949
Other liabilities 35,284,080 5,284,080 4,961,756 4,961,756
</TABLE>
Cash and cash equivalents have maturities of three months or less, and
accordingly, the stated amount of such instruments is deemed to be a
reasonable estimate of fair value. The fair value of securities is based
on quoted market prices obtained from independent pricing services. The
fair values of loans, time deposits and other borrowings are estimated
based on present values using applicable risk-adjusted spreads to the U.S.
Treasury curve and other applicable market rates to approximate current
entry-value interest rates applicable to each category of such financial
instruments. Investment in stock of the Federal Home Loan Bank is required
by law for every federally insured savings institution. No ready market
exists for this stock, and it has no quoted market value. However,
redemption of this stock has historically been at par value. Accordingly,
the stated amount is deemed to be a reasonable estimate of fair value.
Other assets primarily represent accrued interest receivable; other
liabilities primarily represent advances from borrowers for taxes and
insurance and accrued interest payable. Since these financial instruments
will typically be received or paid within three months, the stated amounts
of such instruments are deemed to be a reasonable estimate of fair value.
The Company had off-balance sheet financial commitments to originate loans
and fund unused consumer lines of credit (see Note 11) of $42.9 million
and $29.0 million at June 30, 1998 and 1997, respectively. Since the loan
commitments are at interest rates that approximate current market rates,
the estimated fair value of the commitments have no other financial
statement impact.
<PAGE> 43
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale the Company's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and
prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value also would significantly affect the estimates.
Further, the fair value estimates were calculated as of June 30, 1998 and
1997. Changes in market interest rates and prepayment assumptions could
change significantly the fair value.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial
assets or liabilities including real estate, deferred tax assets and
premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of
these estimates.
14. SPECIAL DISTRIBUTION TO SHAREHOLDERS
On March 18, 1997, the Corporation paid to its shareholders a special
distribution of $78.9 million, or $5 per share. The Company has determined
that 95% of all shareholder distributions during that year represented a
return of shareholder capital. Consequently, the return of capital portion
is reflected in the Company's financial records as a reduction of
additional paid-in capital and the remainder has been reflected as a
reduction of retained income.
<PAGE> 44
15. HFNC FINANCIAL CORP.
The following condensed statements of financial condition, as of June 30,
1998 and 1997 and condensed statements of income and cash flows for the
years ended June 30, 1998 and 1997 and for the period from August 29, 1995
(date of incorporation) to June 30, 1996 for HFNC Financial Corp. should
be read in conjunction with the consolidated financial statements and the
notes thereto:
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL POSITION 1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 24,274 $ 42,904
Equity investment in subsidiaries 168,643,525 188,324,313
Deferred merger costs 756,847 -
Deferred tax asset 1,873,718 990,521
------------ ------------
Total $171,298,364 $189,357,738
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ - $28,000,000
Other liabilities 403,727 297,821
Shareholders' equity 170,894,637 161,059,917
------------ ------------
Total $171,298,364 $189,357,738
============ ============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF INCOME 1998 1997 1996
<S> <C> <C> <C>
Cash dividends received from subsidiary
banks $ 31,431,950 $ 76,620,890 $ 50,000
Interest income 915 14,365 3,980
------------ ------------ ----------
Total income 31,432,865 76,635,255 53,980
------------ ------------ ----------
Interest expense 169,556 651,778 -
Other expense 1,469,608 1,382,115 -
------------ ------------ ----------
Total expense 1,639,164 2,033,893 -
------------ ------------ ----------
29,793,701 74,601,362 53,980
Income tax benefit 883,197 988,963 -
(Dividends in excess of earnings of
subsidiaries) equity in undistributed
earnings of subsidiaries (17,207,904) (68,226,644) 7,520,122
------------ ------------ ----------
Net income $ 13,468,994 $ 7,363,681 $7,574,102
============ ============ ==========
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS 1998 1997 1996
<S> <C> <C> <C>
Operating activities:
Net income $ 13,468,994 $ 7,363,681 $ 7,574,102
Adjustments to reconcile net income to
cash provided by operating activities:
Deferred income tax benefit (883,197) (990,521) -
Increase (decrease) in subsidiary
receivable 3,537,264 (2,630,950) -
Increase in other liabilities 105,906 297,821 -
Increase in deferred merger asset (756,847) - -
Dividends in excess of earnings of
subsidiaries (equity in undistributed
earnings of subsidiaries) 17,207,904 68,226,644 (7,520,122)
------------ ------------ -------------
Net cash provided by operating activities 32,680,024 72,266,675 53,980
------------ ------------ -------------
Investing activities:
Purchase of capital stock of subsidiaries - - (167,937,938)
------------ ------------ -------------
Net cash used in investing activities - - (167,937,938)
------------ ------------ -------------
Financing activities:
Net proceeds from sale of common stock - - 168,437,938
Proceeds of note payable - 28,000,000 -
Repayment of note payable (28,000,000) - -
Dividends paid (4,698,654) (83,071,050) -
Purchases of restricted stock for
benefit plans - (17,706,701) -
------------ ------------ -------------
Net cash (used in) provided by financing
activities (32,698,654) (72,777,751) 168,437,938
------------ ------------ -------------
Net (decrease) increase in cash and
cash equivalents (18,630) (511,076) 553,980
Cash and cash equivalents at beginning
of period 42,904 553,980 -
------------ ------------ -------------
Cash and cash equivalents at end of period $ 24,274 $ 42,904 $ 553,980
============ ============ =============
</TABLE>
<PAGE> 46
16. SUBSEQUENT EVENT
On May 17, 1998, the Company signed a definitive agreement to merge with
First Charter Corporation, headquartered in Concord, North Carolina. The
agreement stipulates that the Corporation shareholders will exchange each
share of Corporation common stock for 0.57 share of First Charter
Corporation common stock. The transaction will be structured to qualify as
a tax-free reorganization and will be accounted for as a pooling of
interests. Consummation of the transaction is subject to certain
conditions, including receipt of approval by the shareholders of both
companies and approval of various regulatory authorities. A special
meeting of the shareholders of the Corporation will be held on September
29, 1998 to consider and vote on a proposal to approve the Amended and
Restated Agreement and Plan of Merger by and between the Company and First
Charter Corporation. Pursuant to the Agreement, the Corporation will merge
with and into First Charter Corporation, with the effect that First
Charter Corporation will be the surviving corporation resulting from the
merger. Consummation of the merger is planned for September 30, 1998.
**********
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,403,344
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,119,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,668,931
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 813,422,899
<ALLOWANCE> 7,033,185
<TOTAL-ASSETS> 1,007,276,000
<DEPOSITS> 430,500,987
<SHORT-TERM> 194,800,000
<LIABILITIES-OTHER> 0
<LONG-TERM> 102,000,000
0
0
<COMMON> 171,925
<OTHER-SE> 170,722,712
<TOTAL-LIABILITIES-AND-EQUITY> 1,007,276,000
<INTEREST-LOAN> 59,974,826
<INTEREST-INVEST> 11,056,556
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 71,031,382
<INTEREST-DEPOSIT> 23,016,271
<INTEREST-EXPENSE> 41,217,152
<INTEREST-INCOME-NET> 29,814,230
<LOAN-LOSSES> (30,795)
<SECURITIES-GAINS> 6,619,556
<EXPENSE-OTHER> 15,403,723
<INCOME-PRETAX> 22,173,840
<INCOME-PRE-EXTRAORDINARY> 13,468,994
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,468,994
<EPS-PRIMARY> .86
<EPS-DILUTED> .82
<YIELD-ACTUAL> 3.32
<LOANS-NON> 2,892,035
<LOANS-PAST> 0
<LOANS-TROUBLED> 581,789
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,084,991
<CHARGE-OFFS> 69,663
<RECOVERIES> 2,945
<ALLOWANCE-CLOSE> 7,033,185
<ALLOWANCE-DOMESTIC> 7,033,185
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>