SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A-3
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report: May 17, 1998
(Date of earliest event reported)
First Charter Corporation
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina
---------------------------------------------
(State or other jurisdiction of incorporation)
0-15829 56-1355866
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(Commission File Number) (IRS Employer Identification Number)
22 Union Street, North
Concord, North Carolina
-----------------------
(Address of principal executive offices)
28025
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(Zip Code)
Registrant's telephone number, including area code: (704) 786-3300
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
The Current Report on Form 8-K dated May 17, 1998 and filed
with the Securities and Exchange Commission on May 28, 1998, as
amended by Form 8-K/A-1 filed on August 4, 1998 and Form 8-K/A-2
filed on September 10, 1998, is further amended to include the following:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
HFNC Financial Corp. and Subsidiaries
Consolidated Financial Statements as of June 30, 1998 and 1997 and
for each of the three years ended June 30, 1998 and Independent Auditors'
Report
HFNC FINANCIAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
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
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 share-
holders'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.
August 7, 1998
-1-
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30,1998 AND 1997
- -----------------------------------------------------------------
1998 1997
------------- -------------
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
============== =============
See notes to consolidated financial statements.
-2-
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
-3-
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------
1998 1997 1996
---------- ---------- ----
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
========== ========== ===
See notes to consolidated financial statements.
-4-
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------
Additional
Common Paid-In Retained
Stock Capital Income
-------- ------------ ------------
BALANCE,
JUNE 30, 1995 $ - $ - $79,321,993
Net income - - 7,574,102
Net proceeds of
common stock issued 171,925 168,266,013 -
Shares released from
ESOP - 124,558 -
Net unrealized gain on
securities transferred
to available for sale
portfolio - - -
Change in net unrealized
gain on securities
available for sale - - -
-------- ------------ -----------
BALANCE,
JUNE 30, 1996 171,925 168,390,571 86,896,095
Net income - - 7,363,681
Shares released from
ESOP and restricted
stock trusts - 494,810 -
Dividends paid - (78,917,498) (4,153,552)
Purchase of ESOP and
restricted stock - - -
Change in net unrealized
loss on securities
available for sale - - -
-------- ------------ -----------
BALANCE,
JUNE 30, 1997 171,925 89,967,883 90,106,224
Net income - - 13,468,994
Shares released from
ESOP and restricted
stock trusts - 22,513 -
Dividends paid - - (4,698,654)
Change in net unrealized
gain on securities
available for sale - - -
-------- ------------ ------------
BALANCE,
JUNE 30, 1998 $171,925 $ 89,990,396 $ 98,876,564
======== ============ ============
Unearned Net Unrealized
ESOP and Gain (Loss) on
Unvested Securities
Restricted Available for
Shares Sale (1) Total
----------- ------------ ------------
BALANCE,
JUNE 30, 1995 $ - $ 2,490,118 $ 81,812,111
Net income - - 7,574,102
Net proceeds of
common stock issued (9,000,000) - 159,437,938
Shares released from
ESOP 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 (8,700,000) (254,135) 246,504,456
Net income - - 7,363,681
Shares released from
ESOP and restricted
stock trusts 3,269,211 - 3,764,021
Dividends paid - - (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 (23,137,490) 3,951,375 161,059,917
Net income - - 13,468,994
Shares released from
ESOP and restricted
stock trusts 3,721,947 - 3,744,460
Dividends paid - - (4,698,654)
Change in net unrealized
gain on securities
available for sale - (2,680,080) (2,680,080)
----------- ----------- -------------
BALANCE,
JUNE 30, 1998 $(19,415,543) $ 1,271,295 $ 170,894,637
============ =========== =============
(1) Net of deferred income taxes.
See notes to consolidated financial statements.
-5-
HFNC FINANCIAL CORP. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------
1998 1997
------------- -------------
OPERATING ACTIVITIES:
Net income $ 13,468,994 $ 7,363,681
Adjustments to reconcile net
income to net cash provided
by operating activities:
Cumulative effect of a change
in accounting principle - -
Depreciation and amortization 847,345 901,982
Amortization of net deferred
loan fees (2,115,665) (1,788,109)
Provision for losses on loans
(recovery of allowance) (30,795) (59,286)
Provision for losses on
real estate 4,382 92,379
Deferred income tax
(benefit) provision 636,635 (281,527)
Release of ESOP shares
and restricted stock 3,744,460 3,764,021
(Gain) loss on sales of:
Fixed assets - -
Real estate owned (511,540) (149,136)
Investments (6,619,556) (19,379)
Increase in other assets (1,958,115) (265,613)
Increase in other liabilities 1,059,726 2,217,954
------------ ------------
Net cash provided
by operating activities 8,525,871 11,776,967
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of
securities available for sale 42,966,184 8,394,737
Proceeds from sales of securities
available for sale 56,879,045 67,279,572
Purchases of securities
available for sale (68,023,806) (6,950,000)
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
Proceeds from sales of
real estate held for
development - -
Proceeds from sales of
real estate owned 3,798,449 2,841,885
Net loan originations (150,207,467) (152,459,102)
Proceeds from disposals
of office properties and
equipment - -
Purchases of office
properties and equipment (388,990) (4,806,798)
------------- ------------
Net cash used in
investing activities (112,136,677) (76,503,081)
------------ ------------
1996
-------------
OPERATING ACTIVITIES:
Net income $ 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 533,049
Amortization of net deferred
loan fees (2,038,329)
Provision for losses on loans
(recovery of allowance) 336,957
Provision for losses on
real estate 139,812
Deferred income tax
(benefit) provision 329,276
Release of ESOP shares
and restricted stock 424,558
(Gain) loss on sales of:
Fixed assets (657,616)
Real estate owned 179,258
Investments (15,157)
Increase in other assets (1,474,967)
Increase in other liabilities 472,522
------------
Net cash provided
by operating activities 6,853,465
------------
INVESTING ACTIVITIES:
Proceeds from maturities of
securities available for sale 42,469,426
Proceeds from sales of securities
available for sale 7,515,157
Purchases of securities
available for sale (193,170,501)
Purchases of Federal Home
Loan Bank stock -
Principal repayment on
mortgage-backed securities 4,449,592
Proceeds from sales of
real estate held for
development 700,000
Proceeds from sales of
real estate owned 1,911,353
Net loan originations (70,086,708)
Proceeds from disposals
of office properties and
equipment 1,497,098
Purchases of office
properties and equipment (98,415)
-------------
Net cash used in
investing activities (204,812,998)
------------
-6-
HFNC FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
- -----------------------------------------------------------------
1998 1997
-------------- --------------
FINANCING ACTIVITIES:
Decrease in deposits $ (13,338,555) $ (4,731,374)
Proceeds from Federal Home
Loan Bank advances 336,000,000 129,000,000
Repayments of Federal Home
Loan Bank advances (167,000,000) -
Net (decrease) increase in
securities sold under
agreements to repurchase (24,200,000) 35,000,000
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 - -
Dividends paid (4,698,654) (83,071,050)
------------- ------------
Net cash provided by
financing activities 98,762,791 86,490,875
------------- ------------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (4,848,015) 21,764,761
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 31,370,359 9,605,598
------------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 26,522,344 $ 31,370,359
============= ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 41,328,794 $ 49,205,450
Income taxes 9,088,648 4,696,284
Non-cash investing activities:
Transfers from loans to
real estate acquired in
settlement of loans 4,287,533 1,113,990
Change in unrealized
net gain/loss on securities
available for sale, net of
deferred income taxes (2,680,080) 4,205,510
Investment securities
transferred from held
to maturity to available
for sale, at fair value
(amortized cost of
$108,288,966) - -
1996
--------------
FINANCING ACTIVITIES:
Decrease in deposits $ (41,995,531)
Proceeds from Federal Home
Loan Bank advances -
Repayments of Federal Home
Loan Bank advances (10,000,000)
Net (decrease) increase in
securities sold under
agreements to repurchase 85,000,000
Proceeds from bank loan -
Repayment of bank loan -
Purchases of restricted
stock for benefit plan -
Net proceeds from the sale
of stock 159,437,938
Dividends paid -
------------
Net cash provided by
financing activities 192,442,407
------------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (5,517,126)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 15,122,724
------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 9,605,598
============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 28,048,607
Income taxes 2,482,214
Non-cash investing activities:
Transfers from loans to
real estate acquired in
settlement of loans 2,127,081
Change in unrealized
net gain/loss on securities
available for sale. net of
deferred income taxes 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
See notes to consolidated financial statements.
-7-
HFNC FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 3O, 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.
-8-
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.
-9-
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 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
-10-
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 $1,700,000 and
a decrease in net income of$l,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 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.
-11-
The following is a reconciliation between basic and diluted earnings per
share (in thousands except per share amounts):
Net Average Per Share
Income Shares Amount
------- ------- ---------
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
======= ====== ======
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 standardsfor 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 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
-12-
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.
2. SECURITIES
The maturities, amortized cost, unrealized gains, unrealized losses and
fair values of securities at June 30, 1998 and 1997 were as follows:
1998
------------------------
Gross
Amortized Unrealized
Cost Gains
----------- ----------
United States Government
Agency debt securities:
Due within one year $ 4,999,308 $ 34,447
Due after one year but
within five years 33,975,314 125,605
Due after five years but
within ten years 11,997,997 6,065
Due after ten years 39,940,668 3,729
Federal Home Loan
Mortgage Corporation
common and preferred
stocks 41,621 1,810,477
Other equity securities 102,536
------------ ----------
Total investment
securities 91,057,444 1,980,323
------------ ----------
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 9,192,228 36,883
Government National
Mortgage Association 32,352,181 524,260
------------ ----------
Total mortgage-backed
securities 41,544,409 561,143
------------ ----------
Total $132,601,853 $2,541,466
============ ==========
Gross
Unrealized Fair
Losses Value
------------ ------------
United States Government
Agency debt securities:
Due within one year $ 628 $ 5,033,127
Due after one year but
within five years 38,840 34,062,079
Due after five years but
within ten years 66,573 11,937,489
Due after ten years 361,437 39,582,960
Federal Home Loan
Mortgage Corporation
common and preferred
stocks - 1,852,098
Other equity securities 6,910 95,626
----------- -------------
Total investment
securities 474,388 92,563,379
----------- -------------
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation - 9,229,111
Government National
Mortgage Association - 32,876,441
----------- ------------
Total mortgage-backed
securities - 42,105,552
----------- ------------
Total $ 474,388 $134,668,931
=========== ============
-13-
1997
--------------------------
Gross
Amortized Unrealized
Cost Gains
----------- ----------
United States Government
Agency debt securities:
Due within one year $ 11,000,000 $ 4,165
Due after one year but
within five years 66,013,428 91,680
Due after five years but
within ten years 7,000,000 -
Due after ten years 31,971,799 -
Federal Home Loan
Mortgage Corporation
common and preferred
stocks 249,358 8,002,792
------------ ----------
Total investment
securities 116,234,585 8,098,637
------------ ----------
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 12,939,158 -
Government National
Mortgage Association 40,111,360 405,425
------------ ----------
Total mortgage-backed
securities 53,050,518 405,425
------------- -----------
Total $ 169,285,103 $ 8,504,062
============= ===========
Gross
Unrealized Fair
Losses Value
----------- ------------
United States Government
Agency debt securities:
Due within one year $ 45,579 $ 10,958,586
Due after one year but
within five years 682,172 65,422,936
Due after five years but
within ten years 169,373 6,830,627
Due after ten years 923,042 31,048,757
Federal Home Loan
Mortgage Corporation
common and preferred
stocks - 8,252,150
----------- ------------
Total investment
securities 1,820,166 122,513,056
----------- ------------
Mortgage-backed securities:
Federal Home Loan
Mortgage Corporation 75,957 12,863,201
Government National
Mortgage Association 182,938 40,333,847
----------- ------------
Total mortgage-backed
securities 258,895 53,197,048
----------- ------------
Total $ 2,079,061 $175,710,104
=========== ============
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.
-14-
3. LOANS RECEIVABLE
Loans receivable at June 30, 1998 and 1997 consisted of the following:
1998 1997
------------ ------------
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
============ ============
The changes in the allowance for loan losses consisted of the following:
1998 1997 1996
---------- ---------- ----------
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
========== ========== ==========
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 $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.
-15-
4. REAL ESTATE
Real estate consisted of the following:
1998 1997
---------- ----------
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
========== ==========
The changes in the allowance for losses on real estate acquired in settlement
of loans consisted of the following:
1998 1997 1996
---------- ----------- -----------
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
========== =========== ===========
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following:
1998 1997
----------- -----------
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
=========== ===========
-16-
6. DEPOSITS
Customer deposits at June 30, 1998 and 1997 consisted of the following:
1998 1997
------------- -------------
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
============= =============
The weighted average coupon rate on customer deposits at June30, 1998 and
1997 was 5.16% and 5.24%, respectively.
Scheduled maturities of certificate accounts at June 30, 1998 were as follows:
Year Ending June 30, Amount
-------------------- -------------
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
=============
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.
-17-
Interest expense by type of deposit for the years ended June 30, 1998, 1997 and
1996 was as follows:
1998 1997 1996
----------- ----------- -----------
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
=========== =========== ===========
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 fond 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.
-18-
8. INCOME TAXES
The provision for income taxes is summarized as follows:
Year Ended June 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
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
========== ========== ==========
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:
Year Ended June 30,
-------------------------------------
1998 1997 1996
---------- ---------- -----------
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%
========== ========== ==========
-19-
The tax effects of significant items comprising the Company's net deferred tax
asset at June 30, 1998 and 1997 are as follows:
1998 1997
---------- ----------
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
========== ==========
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.
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.
-20-
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, 1997, respectively and changes during the years then ended:
1998 and June
Weighted
Average
Exercise
Stock Option Plan Shares Price
----------- -------
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
========= =======
-21-
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:
1998 1997
----------- -----------
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
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:
Weighted
Average
Grant
Management Recognition and Retention Plan Shares Price
- ----------------------------------------- -------- ---------
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
======== =======
-22-
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:
1998 1997
---------- ----------
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
========== ==========
Net periodic postretirement benefit cost for the years ended June 30, 1998 and
June 30, 1997 consisted of the following components:
1998 1997
-------- --------
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
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%.
-23-
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 often 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 June 30, 1997, respectively. 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 June 30, 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.
-24-
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 wrongful1y 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.
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 is 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.
-25-
In July 1997, the above borrower and affiliated companies filed an additional
action against RFNC 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 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 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.
-26-
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):
Tangible Core Risk-Based
June 30, 1998 Capital Capital Capital
- ------------- -------- -------- --------
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
======== ======== ========
The Association's actual and required capital amounts and ratios are summarized
as follows (in thousands):
Minimum
Actual Requirement
---------------- --------------
June 30, 1998 Amount Ratio Amount Ratio
- ------------- -------- ----- ------- -----
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%
-27-
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):
Minimum
Actual Requirement
---------------- --------------
June 30, 1998 Amount Ratio Amount Ratio
- ------------- -------- ----- ------- -----
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%
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.
13. FAIR VALUE DISCLOSURE
The carrying and estimated fair value amounts of financial instruments as
of June 30, 1998 and 1997, are summarized below:
1998 1997
------------------------- -------------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
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 393,800,000 390,737,811 277,000,000 277,354,949
Other
liabilities 5,284,080 5,284,080 4,961,756 4,961,756
-28-
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.
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.
-29-
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.
Statement of Financial Position 1998 1997
- ------------------------------- ------------ ------------
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
Statement of Income 1998 1997 1996
- ------------------- ------------ ------------ ------------
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
============ ============ ============
-30-
Statement of Cash Flows 1998 1997 1996
- ----------------------- ------------ ------------- ------------
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
============ ============ ============
-31-
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.
* * * * * * * * *
-32-
(c) Exhibits.
The following exhibits are filed herewith:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
99.1 Consent of Deloitte & Touche LLP
SIGNATURE
Pursuant to the requirements of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
FIRST CHARTER CORPORATION
Registrant
By: /s/ ROBERT O. BRATTON
Date: October 1, 1998 Robert O. Bratton
Vice President and Controller
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation in the First Charter Corporation
(the "Corporation") Registration Statement on Form S-3 (No. 33-52004),
Registration Statement on Form S-8 (No. 33-60949), Registration Statement
on Form S-4 (No. 33-63157) as amended by the Corporation's Post-Effective
Amendment No. 1 thereto on Form S-8, Registration Statement on Form S-4
(No. 333-35905) as amended by the Corporation's Post-Effective Amendment
No. 1 thereto on Form S-8, Registration Statement on Form S-8 (No.
333-43617), Registration Statement on Form S-8 (No. 333-54019),
Registration Statement on Form S-8 (No. 333-54021), Registration Statement
on Form S-8 (333-54023), Registration Statement on Form S-4 (No. 333-60449)
and Registration Statement on Form S-3 (No. 333-60641), of our report
dated August 7, 1998, on the consolidated statements of financial position
of HFNC Financial Corp. and its subsidiaries as of June 30, 1998 and
1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of these years in the period
ended June 30, 1998 appearing in the Current Report on Form 8-K/A-3 dated
May 17, 1998 of First Charter Corporation.
/s/ DELOITTE & TOUCHE LLP
Hickory, North Carolina
October 1, 1998
