SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______________
Commission File 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 [ X ] No [ ]
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 Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
Based upon the $16.00 closing price of the Registrant's common stock as of
September 26, 1997, the aggregate market value of the 14,775,901 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was: $236.4 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 26, 1997:
17,192,500
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended June 30,
1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1997 are incorporated into
Part III, Items 9 through 13 of this Form 10-K.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Report of Independent Auditors.
Consolidated Balance Sheets as of June 30, 1997 and 1996.
Consolidated Statements of Income for the Fiscal Periods Ended
June 30, 1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for
the Fiscal Periods Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Fiscal Periods
ended June 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
<PAGE>
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.
Name Title Date
- ---- ----- ----
/s/H. Joe King, Jr. President, Chief Executive Officer July 6, 1998
- ------------------ and Chairman of the Board
H. Joe King, Jr.
/s/J. Harold Barnes, Jr. Executive Vice President and July 6, 1998
- ----------------------- Director
J. Harold Barnes, Jr.
/s/Ray W. Bradley, Jr.
- ---------------------- Director July 6, 1998
Ray W. Bradley, Jr.
/s/Joe M. Logan
- --------------- Director July 6, 1998
Joe M. Logan
/s/John M. McCaskill
- -------------------- Director July 6, 1998
John M. McCaskill
/s/Lewis H. Parham, Jr.
- ----------------------- Director July 6, 1998
Lewis H. Parham, Jr.
/s/Willie E. Royal
- ------------------ Director July 6, 1998
Willie E. Royal
/s/A. Burton Mackey, Jr. Vice President and Treasurer July 6, 1998
- ------------------------ (principal financial officer)
A. Burton Mackey, Jr.
<PAGE>
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, 1997 and
1996, and the related consolidated statements of income, equity, and cash flows
for each of the three years in the period ended June 30, 1997. 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, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1997 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 and effective July 1, 1994, the Company changed its method of
accounting for investments in debt and equity securities to conform with the
provisions of Statement of Financial Accounting Standards No. 115.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Charlotte, North Carolina
August 12, 1997
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<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 1997 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash $ 9,934,359 $ 6,769,598
Federal funds sold 21,436,000 2,836,000
------------- -------------
Total cash and cash equivalents 31,370,359 9,605,598
------------- -------------
SECURITIES - Available for sale, at fair value (amortized
cost: $169,285,103 and $248,922,746, at June 30, 1997 and 1996,
respectively) 175,710,104 248,445,333
LOANS RECEIVABLE, NET (allowance for loan losses:
$7,611,675 and $7,495,515, at June 30, 1997 and 1996,
respectively) 658,323,320 505,130,813
REAL ESTATE, NET 867,876 2,539,014
OFFICE PROPERTIES AND EQUIPMENT, NET 10,099,107 5,846,103
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA -
At cost 6,450,000 5,062,100
NET DEFERRED INCOME TAX ASSET 3,390,125 5,805,502
OTHER ASSETS 6,709,218 6,443,605
------------- -------------
TOTAL $ 892,920,109 $ 788,878,068
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS $ 443,839,542 $ 448,570,916
OTHER BORROWED FUNDS 277,000,000 85,000,000
OTHER LIABILITIES 11,020,650 8,802,696
------------- -------------
Total liabilities 731,860,192 542,373,612
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.01 per share: 25,000,000 shares
authorized; 17,192,500 shares issued and outstanding 171,925 171,925
Additional paid-in capital 89,967,883 168,390,571
ESOP loan and unvested restricted stock (23,137,490) (8,700,000)
Retained income 90,106,224 86,896,095
Unrealized gain (loss) on securities available for sale (net of
deferred taxes: $2,473,626 and $223,278 at June 30, 1997 and
1996, respectively) 3,951,375 (254,135)
------------- -------------
Total shareholders' equity 161,059,917 246,504,456
------------- -------------
TOTAL $ 892,920,109 $ 788,878,068
============= =============
</TABLE>
See notes to consolidated financial statements.
- 18 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest on loans $ 49,101,206 $ 39,995,122 $ 38,918,640
Interest on securities 16,214,450 12,146,926 7,202,264
------------ ------------ ------------
Total 65,315,656 52,142,048 46,120,904
------------ ------------ ------------
INTEREST EXPENSE:
Interest on customer deposits 23,564,888 27,218,333 21,464,269
Interest on other borrowed funds 11,053,822 790,224 2,786,523
------------ ------------ ------------
Total 34,618,710 28,008,557 24,250,792
------------ ------------ ------------
NET INTEREST INCOME 30,696,946 24,133,491 21,870,112
PROVISION FOR LOAN LOSSES (RECOVERY OF
ALLOWANCE) (59,286) 336,957 486,101
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES (RECOVERY OF ALLOWANCE) 30,756,232 23,796,534 21,384,011
------------ ------------ ------------
OTHER OPERATING INCOME:
Service charges and fees 715,265 735,362 689,840
Gain on sale of office properties and equipment -- 657,616 192,436
Gain on sale of securities 19,379 -- --
Other income 467,209 423,619 547,737
------------ ------------ ------------
Total 1,201,853 1,816,597 1,430,013
------------ ------------ ------------
OTHER OPERATING EXPENSES:
Personnel expenses 10,429,710 6,046,919 6,302,236
Federal deposit insurance premiums 664,860 1,113,602 1,027,961
Special SAIF recapitalization assessment 3,077,275 -- --
Occupancy 1,817,445 1,937,129 1,752,760
Net cost of real estate operations 70,249 341,800 1,257,792
Advertising 841,896 797,040 869,141
Data processing 420,862 406,429 387,380
Other expenses 2,662,324 1,780,266 1,209,561
------------ ------------ ------------
Total 19,984,621 12,423,185 12,806,831
------------ ------------ ------------
<PAGE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 11,973,464 13,189,946 10,007,193
PROVISION FOR INCOME TAXES 4,609,783 4,565,844 3,857,182
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 7,363,681 8,624,102 6,150,011
CUMULATIVE EFFECT ON PRIOR YEARS OF A
CHANGE IN ACCOUNTING PRINCIPLE -- (1,050,000) --
------------ ------------ ------------
NET INCOME $ 7,363,681 $ 7,574,102 $ 6,150,011
============ ============ ============
NET INCOME PER SHARE OF COMMON STOCK $ 0.46 N/A N/A
============
AVERAGE NUMBER OF SHARES OUTSTANDING 15,995,345 N/A N/A
==========
</TABLE>
See notes to consolidated financial statements.
- 19 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned Net Unrealized
ESOP and Gain (Loss) on
Additional Unvested 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, 1994 $73,171,982 $73,171,982
Net income 6,150,011 6,150,011
Net unrealized gain on
securities available for
sale upon adoption
of SFAS No. 115 -- 2,207,105 2,207,105
Change in net unrealized
gain on securities
available for sale -- 283,013 283,013
----------- ---------- ------------
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
======== =========== =========== ============ ========== ============
</TABLE>
(1) Net of deferred income taxes.
See notes to consolidated financial statements.
- 20 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,363,681 $ 7,574,102 $ 6,150,011
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 901,982 533,049 511,339
Amortization of net deferred loan fees (1,788,109) (2,038,329) (1,718,914)
Provision for losses on loans (recovery of allowance) (59,286) 336,957 486,101
Provision for losses on real estate 92,379 139,812 1,236,027
Deferred income tax (benefit) provision (281,527) 329,276 (427,055)
Amortization of unearned stock compensation 3,764,021 424,558 --
(Gain) loss on sales of:
Fixed assets -- (657,616) (192,436)
Real estate owned (149,136) 179,258 (29,497)
Investments (19,379) (15,157) --
Increase in other assets (265,613) (1,474,967) (2,124,908)
Increase in other liabilities 2,217,954 472,522 2,932,697
------------- ------------- -------------
Net cash provided by operating activities 11,776,967 6,853,465 6,823,365
------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from maturities of investment securities 8,394,737 42,469,426 6,000,000
Proceeds from sales of securities available for sale 67,279,572 7,515,157 --
Purchases of securities available for sale (6,950,000) (193,170,501) (14,987,327)
Purchases of Federal Home Loan Bank stock (1,387,900) -- --
Principal repayment on mortgage-backed securities 10,584,525 4,449,592 --
Proceeds from sales of real estate held for
development -- 700,000 412,565
Proceeds from sales of real estate owned 2,841,885 1,911,353 3,475,871
Net loan originations (152,459,102) (70,086,708) (2,213,974)
Proceeds from disposals of office properties and
equipment -- 1,497,098 361,804
Purchases of office properties and equipment (4,806,798) (98,415) (157,473)
------------- ------------- -------------
Net cash used in investing activities (76,503,081) (204,812,998) (7,108,534)
------------- ------------- -------------
- 21 -
<PAGE>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
FINANCING ACTIVITIES:
(Decrease) increase in deposits (4,731,374) (41,995,531) 45,070,553
Proceeds from other borrowed funds 192,000,000 85,000,000 60,000,000
Purchases of restricted stock for benefit plan (17,706,701) -- --
Repayments of Federal Home Loan Bank advances -- (10,000,000) (100,000,000)
Net proceeds from the sale of stock -- 159,437,938 --
Dividends paid (83,071,050) -- --
------------- ------------- -------------
Net cash provided by financing activities 86,490,875 192,442,407 5,070,553
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS- 21,764,761 (5,517,126) 4,785,384
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 9,605,598 15,122,724 10,337,340
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 31,370,359 $ 9,605,598 $ 15,122,724
============= ============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 49,205,450 $ 28,048,607 $ 23,343,529
Income taxes 4,696,284 2,482,214 3,985,685
Non-cash investing activities:
Transfers from loans to real estate acquired in
settlement of loans 1,113,990 2,127,081 4,080,832
Unrealized net gain (loss) on securities available
for sale, net of deferred income taxes 4,205,510 2,744,253 (2,490,118)
Investment securities transferred from held to
maturity to available for sale, at fair value
(amortized cost $0, $108,288,966 and $2,745,308,
respectively) -- 108,537,197 4,952,413
</TABLE>
See notes to consolidated financial statements.
- 22 -
<PAGE>
HFNC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
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 (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 (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 adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments
in Debt and Equity Securities, effective July 1, 1994. SFAS No. 115
requires investments to be classified in 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 to be 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. As of June 30, 1997, all investments are classified
as available for sale.
- 23 -
<PAGE>
In November 1995, the 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 will 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. 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.
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 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, 1997, 1996 and 1995.
Effective July 1, 1995, the Company adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures.
SFAS No. 114 requires that the carrying value of an impaired loan be based
on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the loan
is collateral-dependent. Under SFAS No. 114, 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. SFAS No. 114 applies to all loans except
smaller-balance homogenous mortgage and consumer loans, loans carried at
fair value or the lower of cost or fair value, debt securities, and
leases. Generally, the Company applies SFAS No. 114 to nonaccrual
commercial loans and restructured loans.
- 24 -
<PAGE>
SFAS No. 118 permits a creditor to use existing methods for recognizing
interest revenue on impaired loans. The Company recognizes interest income
on impaired loans pursuant to the discussion above for nonaccrual and
renegotiated 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.
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 of disposal.
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 carried at the lower of cost or estimated net
realizable value. Costs related to the development or improvement of
property are capitalized to the extent such costs are estimated to be
recoverable, whereas those costs related to holding the property are
expensed.
Office Properties and Equipment - Office properties and equipment are
carried at cost, net of accumulated depreciation and amortization.
Depreciation is computed primarily 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 term of the lease.
Interest Income and Fees - Interest income on loans is accrued on a
monthly basis. 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
to interest income as an adjustment to yield over the contractual lives of
the related loans utilizing a method of amortization that approximates the
level yield method.
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 has 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.
- 25 -
<PAGE>
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 basis of assets and liabilities are reflected
in the balance sheets at the tax rates expected to be in effect when the
differences reverse.
Earnings Per Share - For the year ended June 30, 1997, earnings per share
of common stock is based on the weighted average number of common shares
outstanding during the year. As the Company did not complete its stock
conversion from a mutual association until December 28, 1995, no earnings
per share have been shown for any periods prior to the year ended June 30,
1997.
Accounting Standards Implemented in the Year Ended June 30, 1997 - The
Company implemented 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 establishes 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 standard did not have a significant impact on
financial condition or results of operations.
The Company also 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 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. It
requires that liabilities and 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 subsequently measured
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 defers 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. Its adoption did not have a
significant impact on financial position or results of operations.
- 26 -
<PAGE>
Recently Issued Accounting Standards - The FASB has recently issued three
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 their adoption will not impact
financial condition or results of operations because they deal with
reporting and disclosure. The following is a summary of the standards and
their required implementation dates:
SFAS No. 128, Earnings Per Share - This statement establishes
standards for computing and presenting earnings per share ("EPS"). It
will require the presentation of basic EPS on the face of the income
statement with dual presentation of both basic and diluted EPS for
entities with complex capital structures. Basic EPS excludes the
dilutive effect that could occur if any securities or other contracts
to issue common stock were exercised or converted into or resulted in
the issuance of common stock. Basic EPS is computed by dividing
income available to common shareholders by the weighted-average
number of common shares outstanding for the period. The computation
of diluted EPS is similar to the computation of basic EPS except the
denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares had been issued. In the case of certain convertible
securities, the numerator may also be increased by related interest
or dividends. This statement will be effective for interim and annual
periods ending after December 31, 1997.
SFAS No. 130, Reporting Comprehensive Income - This statement
establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses).
This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income (including, for example, unrealized holding gains and losses
on available for sale securities) be reported in a financial
statement similar to the statement of income and retained income. The
accumulated balance of other comprehensive income will be disclosed
separately from retained income in the shareholders' equity section
of the balance sheet. This statement is effective for the Company for
the fiscal year beginning July 1, 1998.
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 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.
Reclassifications - Certain June 30, 1996 and 1995 amounts have been
reclassified to conform to the June 30, 1997 presentation.
- 27 -
<PAGE>
2. SECURITIES
The maturities, amortized cost, unrealized gains, unrealized losses and
fair values of securities at June 30, 1997 and 1996 were as follows:
<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 National
Mortgage Association 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>
- 28 -
<PAGE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------------
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 $ 2,000,000 -- $ 5,140 $ 1,994,860
Due after one year but
within five years 82,935,029 $ 166,528 1,692,814 81,408,743
Due after five years but
within ten years 8,000,000 -- 267,511 7,732,489
Due after ten years 29,969,822 -- 1,300,699 28,669,123
Federal Home Loan
Mortgage Corporation
common and preferred
stocks 273,905 5,279,533 -- 5,553,438
------------ ------------ ------------ ------------
Total investment
securities 123,178,756 5,446,061 3,266,164 125,358,653
------------ ------------ ------------ ------------
Mortgage-backed securities:
Federal National
Mortgage Association 28,328,508 -- 494,668 27,833,840
Government National
Mortgage Association 97,415,482 -- 2,162,642 95,252,840
------------ ------------ ------------ ------------
Total mortgage-backed
securities 125,743,990 -- 2,657,310 123,086,680
------------ ------------ ------------ ------------
Total $248,922,746 $ 5,446,061 $ 5,923,474 $248,445,333
============ ============ ============ ============
</TABLE>
As of June 30, 1997, there were approximately $73 million of investments
with call options, all of which are callable within one year. As of June
30, 1996, there were approximately $93 million of investments with call
options, of which $90 million are callable within one year.
Gross realized gains and losses on sales of securities were $714,527 and
$695,148, respectively, in fiscal 1997. Gross realized gains and losses on
sales of securities were $30,782 and $15,625, respectively, in fiscal
1996. There were no sales of investment securities for the year ended June
30, 1995.
- 29 -
<PAGE>
3. LOANS RECEIVABLE
Loans receivable at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Residential (1 - 4 family) real estate loans $ 561,352,476 $ 416,710,946
Construction loans 68,365,540 61,015,061
Commercial loans 30,631,001 29,342,750
Land loans 19,991,562 22,843,531
Consumer loans:
Home equity 14,494,824 13,696,894
Credit card 6,198,263 5,644,392
Other 3,255,459 3,277,814
Total 704,289,125 552,531,388
Deduct:
Allowance for loan losses (7,611,675) (7,495,515)
Undisbursed portion of loans in process (33,029,829) (34,846,054)
Unearned loan fees, net (5,324,301) (5,059,006)
------------- -------------
Loans receivable, net $ 658,323,320 $ 505,130,813
============= =============
</TABLE>
The changes in the allowance for loan losses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance, beginning of year $ 7,495,515 $ 8,088,462 $ 7,828,492
Provision for loan losses (recovery of allowance) (59,286) 336,957 486,101
Write-offs (344,230) (1,493,125) (395,182)
Recoveries 519,676 563,221 169,051
----------- ----------- -----------
Allowance, end of year $ 7,611,675 $ 7,495,515 $ 8,088,462
=========== =========== ===========
</TABLE>
Residential real estate loans are presented net of loans serviced for
others totaling $30.9 million, $36.6 million and $43.0 million at June 30,
1997, 1996 and 1995, 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 $339,899, $393,826 and $476,131 at June 30, 1997, 1996 and
1995, respectively.
Loans not currently accruing interest at June 30, 1997 and June 30, 1996
amounted to $6.3 million and $8.0 million, respectively. Interest income
that would have been accrued on these loans if they were fully accruing
amounted to $472,000 and $791,000 for the 1997 and 1996 fiscal years,
respectively.
In accordance with SFAS Nos. 114 and 118, the recorded investment in
impaired loans was $4,385,280 and $6,275,358 at June 30, 1997 and 1996,
respectively. The related allowance for loan losses on these loans was
$1,979,647 and $2,804,497 at June 30, 1997 and 1996, 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 $4,896,308 and $6,346,184 at June 30, 1997 and 1996,
respectively, and the cash income recognized for the years ended June 30,
1997 and 1996 was $68,000 and $121,000, respectively.
- 30 -
<PAGE>
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>
1997 1996
<S> <C> <C>
Acquired in settlement of loans $ 1,138,277 $ 3,682,554
Less allowance for estimated losses (270,401) (1,143,540)
----------- -----------
Real estate, net $ 867,876 $ 2,539,014
=========== ===========
</TABLE>
The changes in the allowance for losses on real estate acquired in
settlement of loans consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Allowance, beginning of year $ 1,143,540 $ 1,542,253 $ 1,920,257
Provision 92,379 139,812 1,236,027
Write-offs (965,518) (538,525) (1,614,031)
----------- ----------- -----------
Allowance, end of year $ 270,401 $ 1,143,540 $ 1,542,253
=========== =========== ===========
</TABLE>
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 2,863,967 $ 1,921,737
Office buildings and improvements 9,741,536 6,463,490
Office equipment and leasehold improvements 2,922,692 2,336,170
Automobiles 100,388 100,388
------------ ------------
Total 15,628,583 10,821,785
Less accumulated depreciation and amortization (5,529,476) (4,975,682)
------------ ------------
Office properties and equipment, net $ 10,099,107 $ 5,846,103
============ ============
</TABLE>
- 31 -
<PAGE>
6. DEPOSITS
Customer deposits at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Checking accounts $ 9,192,647 $ 9,326,000
NOW accounts - 2.50% at June 30, 1997 and 1996 11,798,817 10,109,446
Flexible rate checking:
Money market deposit accounts, 2.50% to 4.89% at
June 30, 1997 and 2.50% to 2.90% at June 30, 1996 34,759,502 32,315,154
Other - 2.50% to 2.55% at June 30, 1997 and 2.50% to
2.55% at June 30, 1996
3,369,134 3,528,117
------------ ------------
Total checking accounts 59,120,100 55,278,717
------------ ------------
Passbook accounts - 2.50% at June 30, 1997 and 1996 14,447,314 15,141,246
------------ ------------
Certificate accounts:
2.50% - 3.95%
3,940,677 1,764,422
4.00% - 4.95% 15,680,883 33,454,451
5.00% - 6.95% 320,077,671 284,252,015
7.00% - 8.95% 29,712,983 57,854,550
9.00% and over 859,914 825,515
------------ ------------
Total certificate accounts 370,272,128 378,150,953
------------ ------------
Total deposits $443,839,542 $448,570,916
============ ============
</TABLE>
- 32 -
<PAGE>
The weighted average coupon rate on customer deposits at June 30, 1997 and
1996 was 5.24% and 5.42%, respectively.
Scheduled maturities of certificate accounts at June 30, 1997 were as
follows:
Year Ending June 30, Amount
- -------------------- ------
1998 $291,650,026
1999 55,764,166
2000 15,368,010
2001 3,529,827
2002 2,968,272
Thereafter 991,827
------------
Total certificate accounts $370,272,128
============
The aggregate amount of certificate accounts in excess of $100,000 was
$145,100,828 and $129,249,220 at June 30, 1997 and 1996, respectively.
Deposits in excess of $100,000 are not federally insured.
- 33 -
<PAGE>
Interest expense by type of deposit for the years ended June 30, 1997,
1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Checking accounts $ 1,349,244 $ 1,510,906 $ 2,029,954
Passbook accounts
237,366 341,530 374,275
Certificate accounts 22,035,269 25,429,660 19,194,800
Less: Penalty income (56,991) (63,763) (134,760)
------------ ------------ ------------
Total interest expense $ 23,564,888 $ 27,218,333 $ 21,464,269
============ ============ ============
</TABLE>
7. OTHER BORROWED FUNDS
At June 30, 1997, the Company had $129.0 million of outstanding advances
from the Federal Home Loan Bank of Atlanta ("FHLB"). No advances were
outstanding at June 30, 1996. Advances were at fixed rates. The maximum
amount of outstanding advances at any month-end during 1997 and 1996 was
$129.0 million and $10.0 million, respectively, and the average balance
outstanding for such years was approximately $61.1 million and $1.0
million respectively. The weighted average interest rate during fiscal
years 1997 and 1996 was 5.90% and 5.89%, 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 1997 and 1996. At June 30, 1997 and 1996, $120.0 million
and $85.0 million of such borrowings were outstanding, respectively. The
maximum amount of outstanding agreements at any month-end during 1997 and
1996 was $120.0 million and $85.0 million, respectively, and the average
outstanding balance of such agreements for the years were approximately
$117.4 million and $13.4 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, 1997, the market value of such collateralized securities totaled
approximately $114.4 million (amortized cost of approximately $115.6
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 subsequent to June 30, 1997.
8. INCOME TAXES
The provision for income taxes is summarized as follows:
- 34 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Current provision:
Federal $ 4,656,460 $ 3,925,383 $ 3,907,273
State 234,850 311,185 376,964
----------- ----------- -----------
Total current 4,891,310 4,236,568 4,284,237
----------- ----------- -----------
<CAPTION>
Year Ended June 30,
----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Deferred (benefit) provision:
Federal $ (225,828) $ 253,845 $ (331,675)
State (55,699) 75,431 (95,380)
----------- ----------- -----------
Total deferred (281,527) 329,276 (427,055)
----------- ----------- -----------
Total provision for income taxes $ 4,609,783 $ 4,565,844 $ 3,857,182
=========== =========== ===========
</TABLE>
For the years ended June 30, 1997 and 1996, deferred tax liabilities
(assets) of $2,473,626 and $(223,278), respectively, were allocated to
equity for the tax effect of the unrealized gain (loss) on investment
securities available for sale.
Income taxes differed from amounts computed by applying the statutory
federal rate (34%) 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,
---------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Tax at federal income tax rate $4,070,978 $4,484,581 $3,402,446
(Decrease) increase resulting from:
Statutory bad debt deduction for tax purposes -- (520,000) --
State income tax expense, net of federal benefit 118,240 255,166 185,845
Other, net 420,565 346,097 268,891
---------- ---------- ----------
Total $4,609,783 $4,565,844 $3,857,182
========== ========== ==========
Effective tax rate 38.5% 34.6% 38.5%
========== ========== ==========
</TABLE>
The tax effects of significant items comprising the Company's net deferred
tax asset at June 30, 1997 and 1996 are as follows:
- 35 -
<PAGE>
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Differences between book and tax basis bad debt reserves $ 3,290,767 $ 3,606,805
Difference between book and tax basis of deferred loan fees 966,132 1,183,796
Deferred compensation 2,011,241 1,466,286
Net operating loss carryforward 677,562 --
Other (160,101) 247,187
----------- -----------
Total deferred tax assets 6,785,601 6,504,074
----------- -----------
Deferred tax liabilities:
Differences between book and tax basis of Federal Home Loan
Bank of Atlanta stock 921,850 921,850
Unrealized gain (loss) on securities available for sale 2,473,626 (223,278)
----------- -----------
Total deferred tax liabilities 3,395,476 698,572
----------- -----------
Net deferred tax asset $ 3,390,125 $ 5,805,502
=========== ===========
</TABLE>
- 36 -
<PAGE>
The realization of the entire amount of the deferred tax asset is
considered to be more likely than not; therefore, no valuation allowance
has been provided.
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.
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 for the years ended June 30, 1997 and 1996 was approximately
$76,000 and $69,000, respectively.
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 and $608,782 for the years ended June 30, 1996 and 1995,
respectively.
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 Company 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. 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 current year have exercise prices ranging from $13.67 to $14.78, and a
weighted average contract life of 8.5 years.
- 37 -
<PAGE>
A summary of the status of the Company's stock option plan as of June 30,
1997 and changes during the year ending on that date is presented below:
<TABLE>
Weighted
Average
Exercise
Options Shares Price
<S> <C> <C>
Outstanding at beginning of year -- --
Granted 1,548,471 $13.92
Exercised -- --
Forfeited (1,398) 14.78
---------
Outstanding at June 30, 1997 1,547,073 $13.92
========= ======
Options exercisable at June 30, 1997 516,157 $13.92
========= ======
</TABLE>
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
these plans been determined based on the fair value at the grant dates for
awards under those plans 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>
1997
--------------------------
As Reported Proforma
<S> <C> <C>
Net income $7,363,681 $6,510,387
Earnings per share $ .46 $ .41
</TABLE>
In determining the above pro forma disclosure, the fair value of options
granted during the year 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%, and 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 Company stock. One-fifth of the
shares granted to date vested immediately on the date of grant. The
remainder will vest at a rate of 25% per year over the next four
anniversary dates of the grants. As is the case with the SOP, shares
granted will
- 38 -
<PAGE>
be deemed vested in the event of retirement, disability, or death. The
shares available for award under this plan were purchased on the open
market at a total cost of $13.0 million. An additional 25,704 shares at a
cost of $472,000 were purchased using a portion of the $5 per share
special distribution attributable to ungranted shares. Approximately $3.2
million in compensation expense was recognized during the current year
related to the MRRP. The following table presents the status of the MRRP
as of June 30, 1997, and changes during the year:
<TABLE>
<CAPTION>
Weighted
Average
Grant
Restricted Stock Award Plan Shares Price
<S> <C> <C>
Outstanding at beginning of year -- --
Granted 619,540 $ 17.41
Vested (123,908) 18.07
Forfeited (600) 17.25
--------
Outstanding at June 30, 1997 495,032 $ 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. Unearned ESOP shares are 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. An additional 230,154 shares,costing $4.2
million, were purchased by the plan using the $5 per share special
distribution attributable to unallocated shares in the plan. Expense
related to the ESOP was $1.5 million and $424,000 for the years ended June
30, 1997 and 1996, respectively.
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 not funded. 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 deeferred income tax credits
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, 1997 and June
30, 1996:
1997 1996
---------- ----------
Retirees $ 457,067 $ 460,129
Fully eligible active plan participants 572,783 629,967
Other active plan participants 830,975 836,692
---------- ----------
Accumulated postretirement benefit obligation 1,860,825 1,926,788
Unrealized net gain 260,081 8,103
---------- ----------
Accrued postretirement benefit liability $2,120,906 $1,934,891
========== ==========
- 39 -
<PAGE>
Net periodic postretirement benefit cost for the period ended June 30,
1997 and June 30, 1996 consisted of the following components:
1997 1996
---------- ----------
Service cost - benefits earned during the year $ 91,491 $ 115,169
Interest cost on accumulated postretirement
benefit obligation 132,418 135,406
Unrecognized gain (5,537) ---
--------- ---------
Net periodic postretirement benefit cost $ 218,372 $ 250,575
========= =========
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of June 30, 1997 was 9%, 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, 1997 by approximately
$327,000 and net annual postretirement benefit cost by approximately
$46,000. The assumed discount rate used in determining the accumulated
postretirement benefit obligation for both years was 8%.
10. DEFERRED COMPENSATION AGREEMENTS AND NON-EMPLOYEE DIRECTORS'
RETIREMENT PLAN
The Company has entered into deferred compensation agreements with the
President and CEO, Executive Vice President, Vice President and Treasurer,
and certain other Vice Presidents and is providing for the present value
of such benefits over the anticipated remaining periods of employment. The
agreements will be funded through life insurance policy investments owned
by the Company, on the lives of such employees. Deferred compensation
expense was approximately $32,000, $31,000 and $115,000 for the years
ended June 30, 1997, 1996 and 1995, respectively.
On August 25, 1994, the Company adopted the 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.
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.
In the year ended June 30, 1995, the Company accrued approximately
$750,000 related to the Directors' Plan. This accrual represented vested
benefits as of the adoption date and benefits accumulated from the date of
adoption through June 30, 1995. Such pension expense for the years ended
June 30, 1997 and 1996 was approximately $54,000 and $25,000,
respectively.
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<PAGE>
11. COMMITMENTS AND CONTINGENCIES
Loan Commitments - The Company, in the normal course of business, is a
party to financial instruments and commitments which involve, to varying
degrees, elements of risk in excess of the amounts recognized in the
consolidated financial statements. These financial instruments and
commitments include unused consumer lines of credit and commitments to
extend credit. Loan commitments, excluding undisbursed portions of loans
in process, were approximately $15.7 million at June 30, 1997.
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. Also, at June 30, 1997, the Company had
commitments approximating $12.7 million representing available credit
under open line loans and approximately $600,000 under outstanding letters
of credit.
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 permits 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. The Recommended Order is now before the United
States District Court for the Western District of North Carolina and the
parties are awaiting the Federal District Court's decision of whether to
enter an Order Granting Summary Judgment in accordance with the
Recommended Order by the United States Bankruptcy Judge.
In December 1996, the Association filed a suit against the borrower and
his company and against the borrower's wife, daughter and a company owned
by his wife and daughter, alleging transfers of assets to the wife,
daughter, and their company in fraud of creditors, and asking that the
fraudulent transfers be set aside. The objective of the lawsuit is to
recover assets which may be used to satisfy a portion of the judgments
obtained in favor of the Association in prior litigation. The borrower's
wife filed a
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<PAGE>
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 case is scheduled for
discovery in September 1997, after which the Association intends to file a
motion for summary judgment for dismissal of the counterclaim.
In February 1997, two companies affiliated with those referred to in the
first paragraph above filed an additional action against two executive
officers of the Association and against an officer of another financial
institution. The action was removed from the state court and is presently
pending in the United States Bankruptcy Court for the Western District of
North Carolina. At the same time, the borrower, who is affiliated with all
of these companies, also filed an action against the two executive
officers of the Association and against an officer of another financial
institution. The Complaints in both actions assert virtually identical
claims. The plaintiffs in both lawsuits allege that the officers of both
financial institutions engaged in a conspiracy to wrongfully declare loans
to be in default so as to eliminate those companies as borrowers of the
Association. Plaintiffs allege misrepresentation, breach of fiduciary
duty, constructive fraud, interference with business expectancy, wrongful
bank account set-off, and unfair and deceptive acts and practices.
Plaintiffs claim actual damages, treble damages and punitive damages
together with interest, attorneys' fees and other costs. The Association
has agreed to indemnify both of its officers with respect to costs,
expense and liability which might arise in connection with both of these
cases.
In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC Financial Corp., the Association, and the
other financial institution referred to in the paragraph above, alleging
that previous judgments in favor of 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 4th Circuit Court of Appeals. The plaintiffs are seeking to have the
judgments set aside on that basis. The Association has not yet filed a
responsive pleading. The Association vehemently denies that any fraud was
perpetrated upon the courts and intends to vigorously contest this matter.
In August 1997, the borrower filed a lawsuit against attorneys for the
Association, attorneys for the other financial institution, and two United
States Bankruptcy Judges in which the borrower alleges that the defendants
have conspired against him and his corporations by allowing the
Association to obtain judgments against him and his various corporations.
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 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
- 42 -
<PAGE>
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 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, 1997, that the Association meets all capital adequacy
requirements to which it is subject.
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, 1997
Total equity as reported in the consolidated financial
statements $ 172,894 $ 172,894 $ 172,894
General allowance for loan losses -- -- 5,936
Unrealized loss 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
========= ========= =========
June 30, 1996
Total equity as reported in the consolidated financial
statements $ 161,163 $ 161,163 $ 161,163
General allowance for loan losses
-- -- 4,770
Unrealized loss on available for sale securities
(787) (787) (787)
Investments not includable in regulatory capital
(1,587) (1,587) (1,667)
--------- --------- ---------
Regulatory capital $ 158,789 $ 158,789 $ 163,479
========= ========= =========
</TABLE>
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<PAGE>
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, 1997
Tangible capital (to 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%
June 30, 1996
Tangible capital (to total assets) $158,789 22.3% $10,667 1.5%
Core capital (to adjusted total assets) $158,789 22.3% $21,332 3.0%
Risk-based capital (to risk-weighted assets) $163,479 42.9% $30,462 8.0%
</TABLE>
As of June 30, 1997 and 1996, 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
--------------------------- -------------------------
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
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%
June 30, 1996
Tier I Capital (to adjusted total assets) $158,789 22.3% $35,555 5.0%
Tier I Capital (to risk-weighted assets) $158,789 41.7% $22,847 6.0%
Total Capital (to risk-weighted assets) $163,479 42.9% $38,078 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.
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<PAGE>
13. FAIR VALUE DISCLOSURE
The carrying and estimated fair value amounts of financial instruments as
of June 30, 1997 and 1996, are summarized below:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------- ----------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents $ 31,370,359 $ 31,370,359 $ 9,605,598 $ 9,605,598
Securities available
for sale 175,710,104 175,710,104 248,445,333 248,445,333
Loans receivable 658,323,320 653,393,693 505,130,813 491,177,000
Stock of Federal
Home Loan Bank
of Atlanta 6,450,000 6,450,000 5,062,100 5,062,100
Other assets 6,151,280 6,151,280 5,907,147 5,907,147
Liabilities:
Demand deposits $ 73,567,414 $ 73,567,414 $ 70,419,963 $ 70,419,963
Time deposits 370,272,128 370,720,757 378,150,953 380,838,000
Other borrowed funds 277,000,000 277,354,949 85,000,000 84,975,000
Other liabilities 4,961,756 4,961,756 4,361,974 4,361,974
</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 $29.0 million
and $31.0 million at June 30, 1997 and 1996, 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.
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
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<PAGE>
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, 1997 and 1996. 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 liabilities 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 Company 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 the year represent a
return of shareholder capital. Consequently, the return of capital portion
has been 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.
15. HFNC FINANCIAL CORP.
The following condensed statements of financial condition, as of June 30,
1997 and 1996 and condensed statements of income and cash flows for the
year ended June 30, 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 1997 1996
<S> <C> <C>
Assets
Cash and cash equivalents $ 42,904 $ 553,980
Equity investment in subsidiaries 188,324,313 245,950,476
Deferred tax asset 990,521 --
------------ ------------
Total $189,357,738 $246,504,456
============ ============
Liabilities and Shareholders' Equity
Note payable $ 28,000,000
Other liabilities 297,821
Shareholders' equity 161,059,917 $246,504,456
------------ ------------
Total $189,357,738 $246,504,456
============ ============
</TABLE>
- 46 -
<PAGE>
<TABLE>
<CAPTION>
Statement of Income 1997 1996
<S> <C> <C>
Dividends from subsidiaries $ 75,912,925 $ 50,000
Interest income 14,365 3,980
------------ ------------
Total income 75,927,290 53,980
------------ ------------
Interest expense 651,778 --
Other expense 674,150 --
------------ ------------
Total expense 1,325,928 --
Income before taxes and equity in
undistributed earnings of subsidiaries 74,601,362 53,980
Income tax benefit 988,963 --
------------ ------------
Income before equity in earnings of subsidiaries 75,590,325 53,980
Equity in undistributed earnings of subsidiaries
(excess of dividends from subsidiaries over
earnings from subsidiaries) (68,226,644) 7,520,122
------------ ------------
Total $ 7,363,681 $ 7,574,102
============ ============
<CAPTION>
Statement of Cash Flows 1997 1996
<S> <C> <C>
Operating activities:
Net income $ 7,363,681 $ 7,574,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income tax benefit (990,521) --
Dividends on unallocated ESOP and MRRP shares, net (6,394,971) --
Amortization of unearned stock compensation 3,764,021 --
Increase in other liabilities 297,821
Equity in undistributed earnings of subsidiaries
(excess of dividends from subsidiaries over earnings
from subsidiaries) 68,226,644 (7,520,122)
------------- -------------
Net cash provided by operating activities 72,266,675 53,980
Investing activities:
Purchase of capital stock of subsidiaries -- (167,937,938)
------------- -------------
Net cash used in investing activities -- (167,887,938)
------------- -------------
Financing activities:
Net proceeds from sale of common stock -- 168,437,938
Proceeds from note payable 28,000,000 --
Dividends paid (83,071,050) --
Purchases of restricted stock for benefit plans (17,706,701) --
------------- -------------
Net cash (used in ) provided by financing activities (72,777,751) 168,437,938
Net increase in cash and cash equivalents (511,076) 553,980
Cash and cash equivalents at beginning of period 553,980 --
------------- -------------
Cash and cash equivalents at end of period $ 42,904 $ 553,980
============= =============
</TABLE>
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