<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K


[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1998

                                       OR

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

          For the transition period from            to
                                         ----------    -------------

                          Commission File No.: 0-27388

                              HFNC FINANCIAL CORP.
                              --------------------
             (Exact name of registrant as specified in its charter)



            NORTH CAROLINA                                 56-1937349
   ---------------------------------                 ----------------------
     (State or other jurisdiction                       (I.R.S. Employer
   of incorporation or organization)                 Identification Number)

   139 SOUTH TRYON STREET
   CHARLOTTE, NORTH CAROLINA                                28202
   -------------------------                        ----------------------
          (Address)                                       (Zip Code)

      Registrant's telephone number, including area code:  (704) 373-0400

   Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE

           Securities registered pursuant to Section 12(g) of the Act

                    COMMON STOCK (PAR VALUE $.01 PER SHARE)
                    ---------------------------------------
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes     No  X  
                      ---    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Par III of this Form 10-K or any amendment to this
Form 10-K. {X }

Based upon the $10.50 closing price of the Registrant's common stock as of
September 30, 1998*, the aggregate market value of the 15,077,629 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was: $158,315,105 million. Although directors and executive officers of the
Registrant and certain of its employee benefit plans were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.

Number of shares of Common Stock outstanding as of September 30, 1998:
17,192,500

* The Registrant was merged into First Charter Corporation, a North Carolina
Corporation (FCC), on September 30, 1998 pursuant to the terms and conditions of
that certain Amended and Restated Agreement and Plan of Merger by and between
the Registrant and FCC dated as of May 17, 1998 and amended and restated as of
July 29, 1998.


<PAGE>   2







                      DOCUMENTS INCORPORATED BY REFERENCE

NONE.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I) (1) (A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM UNDER THE REDUCED
DISCLOSURE FORMAT.


<PAGE>   3







PART I

ITEM 1. BUSINESS.

GENERAL

     HFNC Financial Corp. (the "Company") is a North Carolina corporation
organized in August 1995 by Home Federal Savings and Loan Association ("Home
Federal" or the "Association") for the purpose of becoming a unitary holding
company of the Association. The Association's conversion to stock form and the
concurrent offer and sale of the Company's common stock was consummated on
December 28, 1995 (the "Conversion"). The only significant assets of the Company
are the capital stock of the Association and the capital stock of HFNC
Investment Corp., a Delaware chartered finance subsidiary ("Investment Corp.").
The business and management of the Company consists of the business and
management of the Association and Investment Corp. At June 30, 1998, the Company
had $1.01 billion in total assets, $836.4 million in total liabilities and
$170.9 million in total equity.

     Home Federal conducts business from its main office and eight branch
offices and a loan origination office, all located in Mecklenburg County, North
Carolina. All but one of the Association's offices are located in Charlotte. The
region has become a major center for financial services, distribution and
transportation. Home Federal's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), to the maximum extent permitted by law.

     The Association is a community oriented savings institution which has
traditionally offered a wide variety of savings products to its retail customers
while concentrating its lending activities on the origination of loans secured
by one- to four-family residential dwellings, including an emphasis on loans for
construction of residential dwellings. To a significantly lesser extent, the
Association's activities have also included origination of commercial real
estate, land and consumer loans. In addition, the Company maintains a
significant portfolio of investment securities, which amounted to $134.7 million
or 13.4% of total assets at June 30, 1998, approximately 30% of which have
maturities of under five years. In addition to interest income on loans and
investments, the Company receives other income primarily from loan fees and
various service charges.

     The Company entered into a definitive agreement and plan of merger (the
"Merger Agreement") with First Charter Corporation ("First Charter") dated as of
May 17, 1998, as amended and restated as of July 29, 1998, for the merger of the
Company with and into First Charter (the "Merger"). On September 30, 1998 the
Merger was completed and was accounted for as a pooling-of-interests. In the
Merger, First Charter exchanged 0.57 of a share of common stock, no par value
per share, for each outstanding share of HFNC Financial Corp. common stock, $.01
par value per share. During 1999 Home Federal will be merged into First Charter
National Bank, a subsidiary of First Charter Corporation, at which time Home
Federal's offices will become branch locations of First Charter National Bank.

     The Association is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS"), which is the Association's chartering
authority and primary regulator. The Association is also regulated by the FDIC,
the administrator of the SAIF. The Association is also subject to certain
reserve requirements established by the Federal Reserve Board and is a member of
the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
banks comprising the FHLB System.


<PAGE>   4







ITEM 2.  PROPERTIES.

     At June 30, 1998, the Company conducted its business from its executive
office in Charlotte, North Carolina, eight full service offices and one mortgage
loan office. The following table sets forth the net book value (including
leasehold improvements and equipment) and certain other information with respect
to the offices and other properties of the Company at June 30, 1998.


<TABLE>
<CAPTION>
                                                  Net Book Value       Amount of
  Description/Address              Leased/Owned    of Property          Deposits
  -------------------              ------------    -----------         ---------


<S>                                <C>            <C>                  <C>
MAIN OFFICE:
139 South Tryon Street
Charlotte, North Carolina              Owned          $1,379            $150,569 
                                                                                 
BRANCH OFFICES:                                                                  
6342 Carmel Road                                                                 
Charlotte, North Carolina  28226       Owned             371              20,348 
                                                                                 
4400 Randolph Road                                                               
Charlotte, North Carolina  28211       Owned             226              52,667 
                                                                                 
5601 Reddman Road                                                                
Charlotte, North Carolina  28212       Owned             529              57,140 
                                                                                 
I-77 and Route 73                                                                
Cornelius, North Carolina  28031       Owned             318              22,342 
                                                                                 
4323 Park Road                                                                   
Charlotte, North Carolina  28209     Leased(1)            --              64,015 
                                                                                 
4519 Sharon Road                                                                 
Charlotte, North Carolina  28211     Leased(2)           147              38,499 
                                                                                 
8601 John Maynard Keynes Drive                                                   
Charlotte, North Carolina  28262       Owned           1,466              18,687 
                                                                                 
Mortgage Loan Office:                                                            
6310 Fairview Road                                                               
Charlotte, North Carolina  28211(3)    Owned           4,374               6,234 
-----------------------------------
</TABLE>                                                                
                                                      
(1)  This property is subject to a lease that expires in 1999.

(2)  This property is subject to a lease that expires in 2002 and the
     Association has an option to renew the lease for one additional period of
     five years.

(3)  This property is also used as a branch office.


<PAGE>   5







ITEM 3.  LEGAL PROCEEDINGS.

     In June 1995, a lawsuit was initiated against Home Federal by a borrower's
affiliated companies in which the plaintiffs alleged that Home Federal
wrongfully set-off certain funds in an account being held and maintained by Home
Federal. In addition, the plaintiffs alleged that as a result of the wrongful
set-off, Home Federal wrongfully dishonored a check in the amount of $270,000.
Plaintiffs further alleged that the actions on behalf of Home Federal
constituted unfair and deceptive trade practices, thereby entitling plaintiffs
to recover treble damages and attorneys' fees. Home Federal denied any
wrongdoing and filed a motion for summary judgment. Upon consideration of the
motion, the United States Bankruptcy Judge entered a Recommended Order Granting
Summary Judgement, recommending the dismissal of all claims asserted against
Home Federal. In October 1997, the United States District Court entered an order
granting summary judgment in favor of Home Federal. The plaintiff has appealed
the order of summary judgment and the case is presently pending in the Fourth
Circuit Court of Appeals.

     In December 1996, Home Federal filed a suit against the borrower and his
company and against the borrower's wife, daughter, and a company owned by his
wife and daughter, alleging transfers of assets to the wife, daughter, and their
company in fraud of creditors, and asking that the fraudulent transfers be set
aside. The objective of the lawsuit is to recover assets which may be used to
satisfy a portion of the judgments obtained in favor of Home Federal prior to
litigation. The borrower's wife filed a counterclaim against Home Federal
alleging that she borrowed $750,000 from another financial institution, secured
by a deed of trust on her principal residence, the proceeds of which were paid
to Home Federal for application on a debt owed by one of her husband's
corporations, claiming that officers of Home Federal promised to resume making
loans to her husband's corporation after the payment. Home Federal and its
officers vigorously deny all of her allegations. Home Federal filed a motion for
summary judgment and dismissal of the counterclaim. The motion for summary
judgment was heard in the Superior Court division of the Mecklenburg County
General Court of Justice in April 1998; however, an order has not been entered.
In June 1998, Home Federal removed this case to the United States Bankruptcy
Court for the Western District of North Carolina, Charlotte Division, due to the
fact that the defendant was the debtor in a pending bankruptcy case. Home
Federal believes it has strong defenses to the defendant's counterclaim.

     In February 1997, two companies affiliated with those referred to in the
first paragraph above filed an additional action against two executive officers
of Home Federal and against an officer of another financial institution. The
action was removed from the state court to the United States Bankruptcy Court
for the Western District of North Carolina. At the same time, the borrower, who
is affiliated with all of these companies, also filed an action in the Superior
Court of Mecklenburg County, North Carolina against the two executive officers
of Home Federal and against an officer of another financial institution. The
Complaints in both actions assert virtually identical claims. The plaintiffs in
both lawsuits allege that the officers of both financial institutions engaged in
a conspiracy to wrongfully declare loans to be in default so as to eliminate
those companies as borrowers of Home Federal. Plaintiffs claim actual damages,
treble damages, and punitive damages together with interest, attorneys' fees,
and other costs. Plaintiffs allege misrepresentation, breach of fiduciary duty,
constructive fraud, interference with business expectancy, wrongful bank account
set-off, and unfair and deceptive acts and practices. The action pending in the
bankruptcy court has been stayed. All defendants filed motions for summary
judgment in the state court action which were granted, and the lawsuits were
dismissed in January 1998 by the Superior Court of Mecklenburg County. The
plaintiff appealed the order granting summary judgment to the North Carolina
Court of Appeals. In July 1998, the defendants removed the state court case to
the United States Bankruptcy Court for the Western District of North Carolina,
Charlotte Division, due to the fact that the plaintiff was a debtor in a pending
bankruptcy case. As a result of the removal, the North Carolina Court of Appeals
entered an order staying further proceedings in the North Carolina Court of
Appeals in August 1998. Home Federal has agreed to indemnify both of its
officers with respect to costs, expense, and liability which might arise in
connection with both of these cases.

     In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC, Home Federal, and the other financial
institution referred to in the paragraph above, alleging that previous judgments
in favor of Home Federal and the other financial institution obtained in prior
litigation were obtained by the perpetration of fraud on the Bankruptcy Court,
U.S. District Court, and the Fourth Circuit Court of Appeals. The plaintiffs are
seeking to have the judgments set aside on that basis. All defendants filed
motions for summary judgment and dismissal which were granted, and the lawsuit
was dismissed on September 24, 1998. The borrower, individually, has appealed
the Order dismissing the lawsuit to the Fourth Circuit Court of Appeals. That
appeal is pending.

     Management continues to deny any liability in the above-described cases and
continue to vigorously defend against the claims. However, there can be no
assurance of the ultimate outcome of the litigation, or the range of potential
loss, if any.


<PAGE>   6
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

     This item is omitted pursuant to general instruction I of Form 10-K.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Shares of HFNC Financial Corp. common stock were traded nationally under
the symbol "HFNC" on the Nasdaq National Market System, until consummation of
the Merger on September 30, 1998. At September 30, 1998, the Company had
17,192,500 shares of common stock outstanding and had approximately 2,425
shareholders of record. Such holdings do not reflect the number of beneficial
owners of common stock. The following table sets forth the reported high and low
sale prices of a share of the Company's common stock as reported by Nasdaq.


<TABLE>
<CAPTION>
QUARTER ENDED:        Fiscal Year Ended June 30, 1998        Fiscal Year Ended June 30, 1997
                     ---------------------------------      ---------------------------------
                      HIGH          LOW       DIVIDEND       HIGH          LOW       DIVIDEND
<S>                  <C>          <C>         <C>           <C>          <C>         <C>

September 30         $17.13       $14.88        $0.07       $18.38       $15.75        $0.05

December 31           16.63        13.94         0.07        18.13        17.00         0.07

March 31              15.38        13.13         0.08        22.25        16.63         5.07

June 30               13.81        11.25         0.08        19.88        15.88         0.07
</TABLE>



ITEM 6.  SELECTED FINANCIAL DATA.

     This item is omitted pursuant to general instruction I of Form 10-K.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

GENERAL

     The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earning assets, which consist principally of loans and investment
securities, and interest expense on interest-bearing liabilities, which consist
principally of deposits and other borrowed funds. The Company's net income also
is affected by its provision for loan losses, as well as the level of its other
operating income, including loan fees and service charges, its other operating
expenses, including personnel expenses, occupancy expense, federal deposit
insurance premiums, net cost of real estate operations and miscellaneous other
expenses, and its income taxes.

     The following discussion provides an overview of the results of operations
of the Company, and should be read in conjunction with the Company's
consolidated financial statements presented elsewhere herein.

RESULTS OF OPERATIONS

     NET INCOME. The Company reported net income of $13.5 million for the fiscal
year ended June 30, 1998, compared to $7.4 million for the fiscal year ended
June 30, 1997, an increase of $6.1 million, or 82.9%. This increase was
attributable to an increase in other operating income of $6.5 million and a
decrease in other operating expenses of $4.6 million. These were partially
offset by a decrease in net interest income of $883,000 and an increase in the
provision for income taxes of $4.0 million. The other operating expenses for
fiscal year ended June 30, 1997 included a $3.1 million one-time special
assessment by the FDIC to recapitalize the SAIF. Due to this recapitalization of
the SAIF, annual insurance premiums for savings and loan associations were
reduced from $0.23 per $100 of deposits to approximately $0.064 per $100, a
level more comparable to that of commercial banks. The reduced premiums took
effect in January of 1997 and therefore benefited one-half of fiscal 1997 and
all of fiscal 1998.

     NET INTEREST INCOME.  Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income decreased $883,000, or 2.9%, to
$29.8 million for the year ended June 30, 1998, compared to $30.7 million

<PAGE>   7





for the prior year. This resulted from a $6.6 million, or 19.1%, increase in
interest expense, offset somewhat by $5.7 million, or 8.8%, increase in interest
income.

     During fiscal 1998, the Company's net interest margin decreased to 3.32%
from 3.70% during the prior year, while the net interest rate spread increased
slightly to 2.37% from 2.35%. The lack of significant change in the spread was
due to relatively consistent overall yields and costs on interest-earning assets
and interest-bearing liabilities. The net interest margin declined compared to
the prior year due to the payment of the special distribution to shareholders in
March 1997, which reduced interest-earning assets without a corresponding
decline in interest-bearing liabilities. Due to this distribution to the
Company's shareholders, the ratio of average interest-earning assets to average
interest-bearing liabilities declined to 1.2 during the year ended June 30,
1998, compared to 1.3 during the prior fiscal year.

     INTEREST INCOME. During fiscal 1998, interest income increased $5.7
million, or 8.8%, compared to fiscal 1997, primarily due to continued growth in
interest-earning assets to leverage the Company's capital. Average loans
receivable increased $150.4 million to a current year average balance of $734.8
million. This growth more than offset a decrease in the average yield on the
loan portfolio to 8.16% from 8.40% in the prior year, which was due to an
overall decline in market rates. The increase in interest income from loans was
offset somewhat by a decline in interest income from securities, which was
caused by an $82.4 million reduction in the average balance of such securities
to $163.6 million for the year ended June 30, 1998. This decline was due to two
factors. One factor was the liquidation of securities (primarily mortgage-backed
securities) in the third quarter of fiscal 1997 to partially fund the special
distribution to shareholders paid in March 1997. These securities were therefore
outstanding for nearly three quarters of fiscal 1997. In the current year,
additional securities were sold as part of a balance sheet restructuring in
which securities yielding less than current market rates were sold to reinvest
the proceeds into higher yielding assets, primarily loans, and to partially
repay borrowed funds. This restructuring resulted in an overall gain, however,
because a portion of these securities were equity securities that had
appreciated significantly in value and were sold at a significant gain. Because
of this sale of low yielding securities, the overall yield on the securities
portfolio increased during fiscal 1998 to 6.76%, compared to 6.59% during fiscal
1997.

     INTEREST EXPENSE. During fiscal 1998, interest expense increased $6.6
million, or 19.1%, compared to the prior year. This increase was primarily due
to an increase in the amount of other borrowed funds, though the average rate
paid for these borrowings declined somewhat. Average balances of other
borrowings increased to $313.6 million in the current year from $186.7 million
in the prior year in order to fund asset growth to leverage the Company's
capital. Average rates paid on these borrowings decreased to 5.80% during the
current year, compared to 5.92% in fiscal 1997. Interest on deposits remained
relatively consistent due to a small decline in average deposit balances to
$431.6 million in the current year, compared to $440.9 million in fiscal 1997.
Average rates paid on deposits remained essentially unchanged from the prior
year.

     PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level which is deemed to be appropriate by the Company
considering industry standards, past due loans, economic conditions in its
market area, and other factors related to the collectibility of the loan
portfolio. The Company recorded a $31,000 recovery of allowance during the year
ended June 30, 1998 and a $59,000 recovery of allowance during the year ended
June 30, 1997. These recoveries of the allowance were due to improvements in the
level and nature of the Company's non-performing loans, particularly related to
one large borrower who has been involved in a legal dispute with the Company
since 1991. Recoveries related to these improvements have offset additional loan
loss provisions by the Company for new loans originated as part of the
previously mentioned capital leveraging strategy. Overall, non-performing loans
declined $3.5 million during the current fiscal year, to $3.5 million at June
30, 1998 from $7.0 million at the prior year end. The allowance for loan losses
amounted to $7.0 million at June 30, 1998, or 202.5% of nonperforming loans.

     OTHER OPERATING INCOME. Total other operating income amounted to $7.7
million during the fiscal year ended June 30, 1998, compared to $1.2 million in
the prior year, an increase of $6.5 million. This increase was due primarily to
the $6.6 million gain on the sale of securities in fiscal 1998 discussed at
"Results of Operations -- Interest Income".

     OTHER OPERATING EXPENSES. Total other operating expenses during the current
year decreased $4.6 million, or 22.9%, as compared to the 1997 fiscal year. This
decrease resulted largely from a $3.1 million one-time assessment to
recapitalize the SAIF in the prior year (discussed previously at "Results of
Operations --Net Income"), with no corresponding cost in the current year.
Additional areas of reduction in operating expenses were a $355,000 reduction in
personnel expenses, a $386,000 reduction in federal deposit insurance premiums,
a $349,000 decrease in the cost of real estate operations, and a $446,000
decline in the "other expenses" category.


<PAGE>   8
     The current year reduction in personnel expenses resulted from a
nonrecurring level of prior year costs associated with the Company's Management
Recognition and Retention Plan (MRRP) approved by shareholders in December 1996.
One-fifth of the shares granted under the plan vested immediately, while the
remaining shares were scheduled to vest over the next four years. Fiscal 1997
therefore included six quarters of cost associated with the plan, as the shares
for the first year were charged to expense immediately, while the Company also
accrued two quarters' cost for the shares to vest the following year. The 1998
fiscal year included four quarters' cost for the plan. The reduction in federal
deposit insurance premiums resulted from the reduced premium rates following
payment of the above noted one-time SAIF assessment. The cost of real estate
operations during the year declined due to profits on the sale of foreclosed
properties during the year. Such profits amounted to $512,000 in the current
year, compared to $149,000 in the prior year, an increase of $363,000. The
decrease in "other expenses" is primarily attributable to a $317,000 decline in
legal and professional expenses. The Company experienced an unusually high level
of legal and professional expenses in fiscal year ended June 30, 1997 to
determine the nature, tax treatment, and other implications of the special
distribution to shareholders paid in March 1997 and for legal costs associated
with the ongoing lawsuit by a former borrower.

     PROVISION FOR INCOME TAXES.  The Company recorded a provision for income
taxes of $8.7 million in fiscal year ended June 30, 1998, compared to a
provision of $4.6 million in fiscal year ended June 30, 1997. The Company's
effective tax rate for fiscal 1998 was 39.1%.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

SELECTED QUARTERLY FINANCIAL DATA
(Dollars in thousands, except income per share data)


<TABLE>
<CAPTION>
                                       First     Second    Third     Fourth
Fiscal year ended June 30, 1998       Quarter   Quarter   Quarter   Quarter    Total
                                      -------   -------   -------   -------    -----
<S>                                   <C>       <C>       <C>       <C>       <C>

Total interest income                 $16,912   $17,070   $18,161   $18,888   $71,031
Total interest expense                  9,886     9,790    10,339    11,202    41,217
Net interest income                     7,026     7,280     7,822     7,686    29,814
Provision for loan losses (recovery)      (63)       65       (48)       14       (31)
Total noninterest income                3,614     1,689     1,171     1,208     7,683
Total noninterest expense               4,011     4,318     3,852     3,223    15,404
Net income before income taxes          6,692     4,586     5,189     5,657    22,124
Income taxes                            2,618     1,794     2,030     2,213     8,655
Net income                              4,074     2,792     3,159     3,444    13,469

Per share data:
Basis income per share                   0.26      0.18      0.20      0.22      0.86
Diluted income per share                 0.26      0.17      0.20      0.21      0.82
</TABLE>


<TABLE>
<CAPTION>
                                       First     Second    Third     Fourth
Fiscal year ended June 30, 1997       Quarter   Quarter   Quarter   Quarter    Total
                                      -------   -------   -------   -------    -----

<S>                                   <C>       <C>       <C>       <C>       <C>
Total interest income                 $15,640   $16,544   $16,616   $16,514   $65,316
Total interest expense                  7,729     8,489     8,707     9,692    34,619
Net interest income                     7,911     8,055     7,909     6,822    30,697
Provision for loan losses (recovery)      374      (414)      239      (259)      (59)
Total noninterest income                  312       320       313       256     1,202
Total noninterest expense               6,586     4,424     4,944     4,032    19,984
Net income before income taxes          1,263     4,365     3,039     3,305    11,974
Income taxes                              486     1,681     1,170     1,272     4,610
Net Income                                777     2,684     1,869     2,033     7,364

Per share data:
Basis income per share                   0.05      0.16      0.12      0.13      0.46
Diluted income per share                 0.05      0.16      .011      0.12      0.45
</TABLE>

     See "Index to Financial Statements and Schedules" (following) for other
information required under this Item 8.



<PAGE>   9

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

     Not applicable.


PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     This item is omitted pursuant to general instruction I of Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION.

     This item is omitted pursuant to general instruction I of Form 10-K.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     This item is omitted pursuant to general instruction I of Form 10-K.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     This item is omitted pursuant to general instruction I of Form 10-K.


PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (A)  DOCUMENTS FILED AS PART OF THIS REPORT

     (1)  The financial statements are listed in the "Index to Financial
Statements and Schedules" included in this filing.

     (2)  All schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because of the absence of conditions under
which they are required or because the required information is included in the
consolidated financial statements and related notes thereto.



<PAGE>   10


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         HFNC FINANCIAL CORP.


                                         By: /s/  H. Joe King, Jr.
                                             ---------------------
                                             H. Joe King, Jr.
                                             President, Chief Executive Officer
                                             and Chairman of the Board


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.


<TABLE>
<CAPTION>

Name                                Title                                        Date
----                                -----                                        ----
<S>                                 <C>                                          <C>
 

/s/H. Joe King, Jr.                 President, Chief Executive Officer           September 30, 1998
-------------------------            and Chairman of the Board
H. Joe King, Jr. 


/s/J. Harold Barnes, Jr.            Executive Vice President and                 September 30, 1998
-------------------------            Director
J. Harold Barnes, Jr. 


/s/Ray W. Bradley, Jr.              Director                                     September 30, 1998
-------------------------
Ray W. Bradley, Jr.


/s/Joe M. Logan                     Director                                     September 30, 1998
-------------------------
Joe M. Logan


/s/John M. McCaskill                Director                                     September 30, 1998
-------------------------
John M. McCaskill


/s/Lewis H. Parham, Jr.             Director                                     September 30, 1998
-------------------------
Lewis H. Parham, Jr.


/s/Willie E. Royal                  Director                                     September 30, 1998
-------------------------
Willie E. Royal


/s/ A. Burton Mackey                (principal financial officer)                September 30, 1998
-------------------------
A. Burton Mackey
</TABLE>





<PAGE>   11








ITEM 14. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


<TABLE>
<CAPTION>
                                                                                        PAGE
<S>                                                                                     <C>


INDEPENDENT AUDITORS' REPORT                                                              1

CONSOLIDATED FINANCIAL STATEMENTS:
 Consolidated Statements of Financial Position, June 30, 1998 and 1997                    2
 Consolidated Statements of Income for the Years Ended June 30, 1998, 1997 and  1996      3-4 
 Consolidated Statements of Changes in Shareholders' Equity for the
 Years Ended  June 30, 1998, 1997 and 1996                                                5
 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996   6-7
 Notes to Consolidated Financial Statements                                               8-32
</TABLE>







<PAGE>   12








INDEPENDENT AUDITORS' REPORT

The Board of Directors

HFNC Financial Corp.

Charlotte, North Carolina

We have audited the consolidated statements of financial position of HFNC
Financial Corp. and its subsidiaries (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 1998 and
1997, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.

As discussed in Note 11 to the consolidated financial statements, the Company is
a defendant in certain litigation in which the ultimate outcome cannot presently
be determined. Accordingly, no provision for any loss that may result upon
resolution of these matters has been made in the accompanying financial
statements.

As discussed in Note 1 to the consolidated financial statements, effective July
1, 1995, the Company changed its method of accounting for postretirement
benefits to conform with the provisions of Statement of Financial Accounting
Standards No. 106.

/s/   Deloitte & Touche, LLP

August 7, 1998
Charlotte, NC


                                     - 1 -


<PAGE>   13








HFNC FINANCIAL CORP. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                              1998                1997

<S>                                                                    <C>                   <C>          
CASH AND CASH EQUIVALENTS:
  Cash                                                                 $     7,403,344       $   9,934,359
  Federal funds sold                                                        19,119,000          21,436,000
                                                                       ---------------       -------------
      Total cash and cash equivalents                                       26,522,344          31,370,359
                                                                       ---------------       -------------
SECURITIES - Available for sale, at fair value (amortized
  cost: $132,601,853 and $169,285,103, at June 30, 1998 and 1997,
  respectively)                                                            134,668,931         175,710,104
LOANS RECEIVABLE, NET (allowance for loan losses:
  $7,033,185 and $7,611,675, at June 30, 1998 and 1997,
  respectively)                                                            806,389,714         658,323,320
REAL ESTATE, NET                                                             1,864,118             867,876
OFFICE PROPERTIES AND EQUIPMENT, NET                                         9,832,227          10,099,107
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA -
  At cost                                                                   14,900,000           6,450,000
NET DEFERRED INCOME TAX ASSET                                                4,431,333           3,390,125
OTHER ASSETS                                                                 8,667,333           6,709,218
                                                                       ---------------       -------------

TOTAL                                                                  $ 1,007,276,000       $ 892,920,109
                                                                       ===============       =============

LIABILITIES AND SHAREHOLDERS' EQUITY

DEPOSITS                                                               $   430,500,987       $ 443,839,542
FEDERAL HOME LOAN BANK ADVANCES                                            298,000,000         129,000,000
SECURITIES SOLD UNDER AGREEMENTS TO
  REPURCHASE                                                                95,800,000         120,000,000
OTHER LIABILITIES                                                           12,080,376          39,020,650
                                                                       ---------------       -------------
      Total liabilities                                                    836,381,363         731,860,192
                                                                       ---------------       -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY:
  Common stock, par value $0.01 per share: 25,000,000 shares
    authorized; 17,192,500 shares issued and outstanding                       171,925             171,925
  Additional paid-in capital                                                89,990,396          89,967,883
  Unearned ESOP and unvested restricted shares                             (19,415,543)        (23,137,490)
  Retained income                                                           98,876,564          90,106,224
  Unrealized gain on securities available for sale (net of
    deferred taxes: $795,783 and $2,473,626 at June 30, 1998
    and 1997, respectively)                                                  1,271,295           3,951,375
                                                                       ---------------       -------------
      Total shareholders' equity                                           170,894,637         161,059,917
                                                                       ---------------       -------------

TOTAL                                                                  $ 1,007,276,000       $ 892,920,109
                                                                       ===============       =============
</TABLE>



                                      -2-

<PAGE>   14



HFNC FINANCIAL CORP. and subsidiaries


CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED JUNE 30, 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                            1998               1997               1996
<S>                                                    <C>                <C>                <C>         
INTEREST INCOME:
  Interest on loans                                    $ 59,974,826       $ 49,101,206       $ 39,995,122
  Interest on securities                                 11,056,556         16,214,450         12,146,926
                                                       ------------       ------------       ------------
       Total                                             71,031,382         65,315,656         52,142,048
                                                       ------------       ------------       ------------

INTEREST EXPENSE:
  Interest on customer deposits                          23,016,271         23,564,888         27,218,333
  Interest on other borrowed funds                       18,200,881         11,053,822            790,224
                                                       ------------       ------------       ------------
       Total                                             41,217,152         34,618,710         28,008,557
                                                       ------------       ------------       ------------

NET INTEREST INCOME                                      29,814,230         30,696,946         24,133,491

PROVISION FOR LOAN LOSSES (RECOVERY
  OF ALLOWANCE)                                             (30,795)           (59,286)           336,957
                                                       ------------       ------------       ------------

NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES (RECOVERY OF
  ALLOWANCE)                                             29,845,025         30,756,232         23,796,534
                                                       ------------       ------------       ------------

OTHER OPERATING INCOME:
  Service charges and fees                                  716,109            715,265            735,362
  Gain on sale of office properties and equipment                --                 --            657,616
  Gain on sale of securities                              6,619,556             19,379             15,157
  Other income                                              346,873            467,209            408,462
                                                       ------------       ------------       ------------
       Total                                              7,682,538          1,201,853          1,816,597
                                                       ------------       ------------       ------------

OTHER OPERATING EXPENSES:
  Personnel expenses                                     10,074,433         10,429,710          6,046,919
  Federal deposit insurance premiums                        279,190            664,860          1,113,602
  Special SAIF recapitalization assessment                       --          3,077,275                 --
  Occupancy                                               1,895,755          1,817,445          1,937,129
  Net (gain from) cost of real estate operations           (278,903)            70,249            341,800
  Advertising                                               732,379            841,896            797,040
  Data processing                                           484,067            420,862            406,429
  Other expenses                                          2,216,802          2,662,324          1,780,266
                                                       ------------       ------------       ------------
       Total                                             15,403,723         19,984,621         12,423,185
                                                       ------------       ------------       ------------

INCOME BEFORE INCOME TAXES AND
  CUMULATIVE EFFECT OF A CHANGE IN
  ACCOUNTING PRINCIPLE                                   22,123,840         11,973,464         13,189,946

PROVISION FOR INCOME TAXES                                8,654,846          4,609,783          4,565,844
                                                       ------------       ------------       ------------

INCOME BEFORE CUMULATIVE EFFECT
  OF A CHANGE IN ACCOUNTING PRINCIPLE                    13,468,994          7,363,681          8,624,102

CUMULATIVE EFFECT ON PRIOR YEARS
  OF A CHANGE IN ACCOUNTING PRINCIPLE                            --                 --         (1,050,000)
                                                       ------------       ------------       ------------

NET INCOME                                             $ 13,468,994       $  7,363,681       $  7,574,102
                                                       ============       ============       ============
</TABLE>


                                     - 3 -
<PAGE>   15
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     1998                1997             1996
<S>                                               <C>                <C>                  <C>
BASIC NET INCOME PER SHARE                        $     0.86         $     0.46            N/A
                                                  ==========         ==========
WEIGHTED AVERAGE SHARES
  OUTSTANDING                                     15,693,070         15,995,345            N/A
                                                  ==========         ==========
DILUTED NET INCOME PER SHARE
  AND POTENTIAL SHARE                             $     0.82         $     0.45            N/A
                                                  ==========         ==========
WEIGHTED AVERAGE SHARES
  OUTSTANDING ASSUMING DILUTION                   16,338,995         16,405,509            N/A
                                                  ==========         ==========
</TABLE>


See notes to consolidated financial statements.

<PAGE>   16

HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                               UNEARNED      NET UNREALIZED
                                                                               ESOP AND      GAIN (LOSS) ON
                                            ADDITIONAL                         UNVESTER       SECURITIES
                               COMMON        PAID-IN          RETAINED        RESTRICTED      AVAILABLE FOR
                                STOCK        CAPITAL           INCOME           SHARES            SALE (1)         Total
                              --------      ---------       ------------      ----------     --------------       -----
<S>                           <C>         <C>               <C>              <C>              <C>             <C>
BALANCE,
  JUNE 30, 1995               $     --    $          --     $ 79,321,993     $         --     $ 2,490,118     $  81,812,111
  Net income                        --               --        7,574,102               --              --         7,574,102
  Net proceeds of
    common stock issued        171,925      168,266,013               --       (9,000,000)             --       159,437,938
  Shares released from
    ESOP                            --          124,558               --          300,000              --           424,558
  Net unrealized gain on
    securities transferred
    to available for sale
    portfolio                       --               --               --               --         248,231           248,231
  Change in net unrealized
    gain on securities
    available for sale              --               --               --               --      (2,992,484)       (2,992,484)
                              --------    -------------     ------------     ------------     -----------     -------------

BALANCE,
  JUNE 30, 1996                171,925      168,390,571       86,896,095       (8,700,000)       (254,135)      246,504,456
  Net income                        --               --        7,363,681               --              --         7,363,681
  Shares released from
    ESOP and restricted
    stock trusts                    --          494,810               --        3,269,211              --         3,764,021
  Dividends paid                    --      (78,917,498)      (4,153,552)              --              --       (83,071,050)
  Purchase of ESOP and
    restricted stock                --               --               --      (17,706,701)             --       (17,706,701)
  Change in net unrealized
    loss on securities
    available for sale              --               --               --               --       4,205,510         4,205,510
                              --------    -------------     ------------     ------------     -----------     -------------

BALANCE,
  JUNE 30, 1997                171,925       89,967,883       90,106,224      (23,137,490)      3,951,375       161,059,917
  Net income                        --               --       13,468,994               --              --        13,468,994
  Shares released from
    ESOP and restricted
    stock trusts                    --           22,513               --        3,721,947              --         3,744,460
  Dividends paid                    --               --       (4,698,654)              --              --        (4,698,654)
  Change in net unrealized
    gain on securities
    available for sale              --               --               --               --      (2,680,080)       (2,680,080)
                              --------    -------------     ------------     ------------     -----------     -------------

BALANCE,
  JUNE 30, 1998               $171,925    $  89,990,396     $ 98,876,564     $(19,415,543)    $ 1,271,295     $ 170,894,637
                              ========    =============     ============     ============     ===========     =============
</TABLE>

(1) Net of deferred income taxes.

See notes to consolidated financial statements.

<PAGE>   17

HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                        1998               1997               1996
<S>                                                                 <C>                 <C>                <C>
OPERATING ACTIVITIES:
  Net income                                                        $ 13,468,994        $ 7,363,681        $ 7,574,102
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Cumulative effect of a change in accounting principle                      -                  -          1,050,000
    Depreciation and amortization                                        847,345            901,982            533,049
    Amortization of net deferred loan fees                            (2,115,665)        (1,788,109)        (2,038,329)
    Provision for losses on loans (recovery of allowance)                (30,795)           (59,286)           336,957
    Provision for losses on real estate                                    4,382             92,379            139,812
    Deferred income tax (benefit) provision                              636,635           (281,527)           329,276
    Release of ESOP shares and restricted stock                        3,744,460          3,764,021            424,558
    (Gain) loss on sales of:
      Fixed assets                                                             -                  -           (657,616)
      Real estate owned                                                 (511,540)          (149,136)           179,258
      Investments                                                     (6,619,556)           (19,379)           (15,157)
    Increase in other assets                                          (1,958,115)          (265,613)        (1,474,967)
    Increase in other liabilities                                      1,059,726          2,217,954            472,522
                                                                    ------------        -----------       ------------ 

          Net cash provided by operating activities                    8,525,871         11,776,967          6,853,465
                                                                    ------------        -----------       ------------ 

INVESTING ACTIVITIES:
  Proceeds from maturities of securities available
    for sale                                                          42,966,184          8,394,737         42,469,426
  Proceeds from sales of securities available for sale                56,879,045         67,279,572          7,515,157
  Purchases of securities available for sale                         (68,023,806)        (6,950,000)      (193,170,501)
  Purchases of Federal Home Loan Bank stock                           (8,450,000)        (1,387,900)                 -
  Principal repayment on mortgage-backed securities                   11,289,908         10,584,525          4,449,592
  Proceeds from sales of real estate held for
    development                                                                -                  -            700,000
  Proceeds from sales of real estate owned                             3,798,449          2,841,885          1,911,353
  Net loan originations                                             (150,207,467)      (152,459,102)       (70,086,708)
  Proceeds from disposals of office properties and
    equipment                                                                  -                  -          1,497,098
  Purchases of office properties and equipment                          (388,990)        (4,806,798)           (98,415)
                                                                    ------------        -----------       ------------ 
          Net cash used in investing activities                     (112,136,677)       (76,503,081)      (204,812,998)
                                                                    ------------        -----------       ------------ 
</TABLE>


<PAGE>   18

HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        1998               1997               1996
<S>                                                                <C>                 <C>                    <C>
FINANCING ACTIVITIES:
  Decrease in deposits                                             $ (13,338,555)      $ (4,731,374)     $ (41,995,531)
  Proceeds from Federal Home Loan Bank advances                      336,000,000        129,000,000                  -
  Repayments of Federal Home Loan Bank advances                     (167,000,000)                 -        (10,000,000)
  Net (decrease) increase in securities sold under
    agreements to repurchase                                         (24,200,000)        35,000,000         85,000,000
  Proceeds from bank loan                                                      -         28,000,000                  -
  Repayment of bank loan                                             (28,000,000)                 -                  -
  Purchases of restricted stock for benefit plan                               -        (17,706,701)                 -
  Net proceeds from the sale of stock                                          -                  -        159,437,938
  Dividends paid                                                      (4,698,654)       (83,071,050)                 -
                                                                    ------------       ------------       ------------

          Net cash provided by financing activities                   98,762,791         86,490,875        192,442,407
                                                                    ------------       ------------       ------------
(DECREASE) INCREASE IN CASH AND CASH
  EQUIVALENTS                                                         (4,848,015)        21,764,761         (5,517,126)

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                   31,370,359          9,605,598         15,122,724
                                                                    ------------       ------------       ------------
CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                                           $ 26,522,344       $ 31,370,359       $  9,605,598
                                                                    ============       ============       ============
SUPPLEMENTAL DISCLOSURES:
  Cash paid during the year for:
    Interest                                                        $ 41,328,794       $ 49,205,450       $ 28,048,607
    Income taxes                                                       9,088,648          4,696,284          2,482,214
  Non-cash investing activities:
    Transfers from loans to real estate acquired in
      settlement of loans                                              4,287,533          1,113,990          2,127,081
    Change in unrealized net gain/loss on securities
      available for sale, net of deferred income taxes                (2,680,080)         4,205,510          2,744,253
    Investment securities transferred from held to maturity
      to available for sale, at fair value (amortized
      cost of $108,288,966)                                                    -                  -        108,537,197
</TABLE>


See notes to consolidated financial statements.

<PAGE>   19

HFNC FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998 AND 1997
-------------------------------------------------------------------------------


1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      ORGANIZATION AND PRINCIPLES OF CONSOLIDATION - HFNC Financial Corp. (the
      "Corporation") was incorporated under North Carolina law in August 1995
      by Home Federal Savings and Loan Association of Charlotte (the
      "Association") in connection with the conversion of the Association from
      a federally chartered mutual savings and loan association to a federally
      chartered stock savings and loan association, the issuance of the
      Association's stock to the Corporation and the offer and sale of the
      Corporation's common stock by the Corporation (the "Conversion"). The
      Conversion, completed on December 28, 1995, resulted in the issuance and
      sale of 17,192,500 shares of $0.01 par value common stock. The
      accompanying consolidated financial statements include the accounts of
      the Corporation and its wholly owned subsidiaries, HFNC Investment Corp.
      and Home Federal Savings and Loan Association of Charlotte (collectively
      referred to herein as the "Company"). The Company's consolidated
      financial statements also include the accounts of the Association's
      wholly owned subsidiary, Home Federal Savings Service Corporation
      ("HFSS"). HFSS participates in real estate joint ventures for the
      development and sale of residential lots, and the sale of annuities and
      various insurance products. All significant intercompany balances and
      transfers have been eliminated in consolidation. The following is a
      description of the more significant accounting policies which the Company
      follows in preparing and presenting its consolidated statements.

      ACCOUNTING PRINCIPLES - The accounting and reporting policies of the
      Company conform to generally accepted accounting principles and to the
      general practices within the savings and loan industry.

      FINANCIAL STATEMENT ESTIMATES - The preparation of financial statements
      in conformity with generally accepted accounting principles requires
      management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosures of contingent assets
      and liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. Actual
      results could differ from those estimates.

      CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and on
      deposit and federal funds sold with a maturity date of three months or
      less.

      INVESTMENT SECURITIES - The Company classifies investment securities into
      three categories. Debt securities that the Company has the positive
      intent and ability to hold to maturity are classified as "held to
      maturity securities" and reported at amortized cost. Debt and equity
      securities that are bought and held principally for the purpose of
      selling in the near term are classified as "trading securities" and
      reported at fair value, with unrealized gains and losses included in
      earnings. Debt securities not classified as either held to maturity
      securities or trading securities and equity securities not classified as
      trading securities are classified as "available for sale securities" and
      reported at fair value, with unrealized gains and losses excluded from
      earnings and reported as a separate component of shareholders' equity,
      net of tax. Losses deemed other than temporary are recognized in current
      year earnings. All investment securities are classified as available for
      sale, for all periods presented.

<PAGE>   20

      In November 1995, the Financial Accounting Standards Board ("FASB")
      issued a Special Report, A Guide to Implementation of Statement 115 on
      Accounting for Certain Debt and Equity Securities, which included a
      transition provision allowing all entities to reassess the
      appropriateness of the classifications of all securities held and account
      for any resulting reclassifications at fair value. Reclassifications from
      the held to maturity category resulting from this one-time reassessment
      do not call into question, or "taint," the intent of the entity to hold
      other debt securities to maturity in the future. In accordance with this
      Special Report, the Association transferred securities with a fair value
      and amortized cost of approximately $108 million from held to maturity to
      available for sale during the fiscal year ended June 30, 1996. This
      transfer is disclosed as a noncash transaction in the statements of cash
      flows.

      Realized gains and losses on investment securities are recognized at the
      time of sale based upon the specific identification method. Premiums and
      discounts are amortized to expense and accreted to income over the lives
      of the securities.

      LOANS - Loans held for investment are recorded at cost. Mortgage loans
      held for sale are valued at the aggregate lower of cost or market as
      determined by outstanding commitments from investors or current investor
      yield requirements calculated on the aggregate loan basis. No loans have
      been classified as held for sale for any periods presented.

      Nonaccrual loans are those loans on which the accrual of interest has
      ceased. Loans are placed on nonaccrual status if, in the opinion of
      management, principal or interest is not likely to be paid in accordance
      with the terms of the loan agreement, or when principal or interest is
      past due 90 days or more. Interest accrued but not collected at the date
      a loan is placed on nonaccrual status is reversed against interest income
      in the current period. Interest income on nonaccrual loans is recognized
      only to the extent received in cash. However, where there is doubt
      regarding the ultimate collectibility of the loan principal, cash
      receipts, whether designated as principal or interest, are thereafter
      applied to reduce the carrying value of the loan. Loans are restored to
      accrual status only when interest and principal payments are brought
      current and future payments are reasonably assured.

      Restructured loans are those for which concessions, such as the reduction
      of interest rates or deferral of interest or principal payments, have
      been granted due to a deterioration in the borrower's financial
      condition. Interest on restructured loans is accrued at the restructured
      rates. The difference between interest that would have been recognized
      under the original terms of nonaccrual and restructured loans and
      interest actually recognized on such loans was not a material amount for
      the years ended June 30, 1998, 1997 and 1996.

      Impaired loans are measured based on the present value of expected future
      cash flows discounted at the loan's effective interest rate or, as a
      practical matter, at the loan's observable market price or the fair value
      of the collateral, if the loan is collateral-dependent. A loan is
      considered impaired when, based on current information, it is probable
      that the borrower will be unable to pay contractual interest or principal
      payments as scheduled in the loan agreement. The Company recognizes
      interest income on impaired loans pursuant to the discussion above for
      nonaccrual and restructured loans.

      ALLOWANCE FOR LOAN LOSSES - The Company provides for loan losses using
      the allowance method. Accordingly, all loan losses are charged to the
      related allowance, and all recoveries are credited to the allowance.
      Additions to the allowance for loan losses are provided by charges to
      operations based on various factors which, in management's judgment,
      deserve current recognition in estimating losses. Because of the
      uncertainty inherent in the estimation process, management's estimate of
      the allowance for loan losses may change in the near term. However, the
      amount of the change that is reasonably possible cannot be estimated.

<PAGE>   21

      REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS - Real estate acquired in
      settlement of loans is initially recorded at fair value at the date of
      acquisition, establishing a new cost basis. After acquisition, valuations
      are performed periodically by management and the real estate is carried
      at the lower of cost or fair value minus estimated costs to sell.
      Revenues, expenses and additions to the valuation allowance related to
      real estate acquired in settlement of loans are included in net cost of
      real estate operations.

      REAL ESTATE HELD FOR DEVELOPMENT OR RESALE - Real estate held for
      development or resale is stated at the lower of cost or estimated fair
      value. Costs related to the development or improvement of property are
      capitalized, whereas those costs related to holding the property are
      expensed.

      OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
      stated at cost, net of accumulated depreciation and amortization.
      Depreciation is computed on the straight-line method over estimated
      useful lives of up to fifty years for buildings, ten years for building
      improvements, four to ten years for furniture, fixtures and equipment and
      four years for automobiles. Leasehold improvements are amortized on the
      straight-line method over the shorter of the lease term or estimated
      useful life.

      The Company implemented Statement of Financial Accounting Standards
      ("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets and
      for Long-lived Assets to be Disposed Of, effective July 1, 1996. SFAS No.
      121 established accounting standards for the impairment of long-lived
      assets, certain identifiable intangible assets and goodwill related to
      those assets to be held and used and for long-lived assets to be held and
      certain intangible assets to be disposed of. The adoption of this
      statement did not have a significant impact on financial condition or
      results of operations.

      INTEREST INCOME AND FEES - Interest income on loans is accrued on a
      monthly basis as earned. Servicing fees are credited to income as earned.

      LOAN ORIGINATION FEES - The Company defers loan origination fees, as well
      as certain direct loan origination costs and amortizes such costs and
      fees as an adjustment to yield over the contractual lives of the related
      loans utilizing a method of amortization that approximates the level
      yield method.

      MORTGAGE SERVICING RIGHTS - The Company implemented SFAS No. 122,
      Accounting for Mortgage Servicing Rights, prospectively effective July 1,
      1996. SFAS No. 122 amends SFAS No. 65 and the principal effect for the
      Company is the elimination of the accounting distinction between rights
      to service mortgage loans for others that are acquired through loan
      origination activities and those acquired through purchase transactions.
      When a mortgage banking enterprise purchases or originates mortgage loans
      and sells or securitizes those loans with servicing rights retained, it
      should allocate the total cost of the mortgage loans to the mortgage
      servicing rights and the loans (without the mortgage servicing rights)
      based on their relative fair values if it is practicable to estimate
      those fair values. Any cost allocated to mortgage servicing rights should
      be recognized as a separate asset and amortized in proportion to and over
      the period of the estimated net servicing income. Implementation of the
      provisions of SFAS No. 122 did not have a material impact on the
      Company's financial condition or results of operations.

      In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
      Servicing of Financial Assets and Extinguishments of Liabilities. This
      Statement amends SFAS Nos. 65 and 115 and supersedes SFAS Nos. 76, 77 and
      122 and provides accounting and reporting standards for transfers and
      servicing of financial assets and extinguishments of liabilities. It
      requires that liabilities and 

<PAGE>   22



      derivatives incurred or obtained by transferors as part of financial
      assets be initially measured at fair value, if practicable. It also
      requires that servicing assets and other retained interests in the
      transferred assets be measured by allocating the previous carrying amount
      between the assets sold, if any, and retained interests, if any, based on
      their relative fair values at the date of the transfer. Servicing assets
      and liabilities must be measured subsequently by amortization in
      proportion to and over the period of estimated net servicing income or
      loss and assessment for asset impairment or increased obligation based on
      their fair values. This Statement is effective for transfers and
      servicing of financial assets and extinguishments of liabilities
      occurring after December 31, 1996. In December 1996, the FASB issued SFAS
      No. 127, Deferral of the Effective Date of Certain Provisions of FASB
      Statement No. 125. This Statement deferred the effective date of
      application of certain transfer and collateral provisions of SFAS No. 125
      until January 1, 1998.

      On January 1, 1997, the Company implemented the provisions of SFAS No.
      125 which were not deferred by SFAS No. 127. On January 1, 1998, the
      Company implemented the provisions of SFAS No. 125, deferred by SFAS No.
      127. Implementation of the provisions of SFAS No. 125 and SFAS No. 127
      did not have a significant impact on the Company's financial condition or
      results of operations.

      POSTRETIREMENT BENEFITS - Effective July 1, 1995, the Company adopted
      SFAS No. 106, Employers' Accounting for Postretirement Benefits Other
      Than Pensions. SFAS No. 106 requires the Company to accrue the estimated
      cost of retiree benefit payments during the years the employee provides
      services. The Company previously expensed the cost of these benefits,
      which are principally health care, as premiums were paid. SFAS No. 106
      allows recognition of the cumulative effect of the liability in the year
      of adoption or the amortization of the obligation over a period of up to
      twenty years. The Company elected to recognize the cumulative effect of
      this obligation upon adoption. The cumulative effect of adopting SFAS No.
      106 as of July 1, 1995 was an increase in accrued postretirement health
      care costs of $1,700,000 and a decrease in net income of $1,050,000 (net
      of deferred income taxes of $650,000) for the year ended June 30, 1996.

      ADVERTISING COSTS - The Company expenses advertising costs as incurred.

      INCOME TAXES - Provisions for income taxes are based on amounts reported
      in the consolidated statements of income (after exclusion of nontaxable
      income such as interest on state and municipal securities) and include
      changes in deferred income taxes. Deferred taxes are computed using the
      asset and liability approach. The tax effects of differences between the
      tax and financial accounting bases of assets and liabilities are
      reflected in the balance sheets at the tax rates expected to be in effect
      when the differences reverse. A valuation allowance is established when
      necessary to reduce deferred tax assets to the amount
      more-likely-than-not expected to be realized.

      EARNINGS PER SHARE - Effective January 1, 1998, the Company adopted SFAS
      No. 128, Earnings Per Share. SFAS No. 128 establishes standards for
      computing and presenting earnings per share ("EPS"). It requires the
      presentation of basic EPS on the face of the income statement with dual
      presentation of both basic and diluted EPS for entities with complex
      capital structures. Basic EPS excludes the dilutive effect that could
      occur if any securities or other contracts to issue common stock were
      exercised or converted into or resulted in the issuance of common stock.
      Basic EPS is computed by dividing income available to common shareholders
      by the weighted-average number of common shares outstanding for the
      period. The computation of diluted EPS is similar to the computation of
      basic EPS except the denominator is increased to include the number of
      additional common shares that would have been outstanding if the dilutive
      potential common shares had been issued. In the case of certain
      convertible securities, the numerator may also be increased by related
      interest or dividends. The Company adopted this new method of computing
      earnings per share and 

<PAGE>   23


      restated earnings per share for all prior periods. As the Company did not
      complete its stock conversion from a mutual association until December
      28, 1995, no earnings per share have been presented for any periods prior
      to the fiscal year ended June 30, 1997.

      The following is a reconciliation between basic and diluted earnings per
      share (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                                           NET      AVERAGE      PER SHARE
                                                                         INCOME      SHARES        AMOUNT
<S>                                                                     <C>          <C>         <C>
      For the year ended June 30, 1998:
        Earnings per common share - basic                               $13,469      15,693      $   0.86
        Stock-based compensation awards                                      --         646         (0.04)
                                                                        -------      ------      --------
      
      Earnings per common share - diluted                               $13,469      16,339      $   0.82
                                                                        =======      ======      ========
      For the year ended June 30, 1997:
        Earnings per common share - basic                               $ 7,364      15,995      $   0.46
        Stock-based compensation awards                                      --         411         (0.01)
                                                                        -------      ------      --------
      
      Earnings per common share - diluted                               $ 7,364      16,406      $   0.45
                                                                        =======      ======      ========
</TABLE>


      RECENTLY ISSUED ACCOUNTING STANDARDS - The FASB has recently issued four
      new accounting standards that will affect the reporting and disclosure of
      financial information by the Company. Management has not determined the
      effects of adopting these statements, but believes their adoption will
      not impact financial condition or results of operations because they
      either deal only with reporting and disclosure, or in the case of SFAS
      No. 133, relate to instruments and activities not relevant to the
      Company's operations. The following is a summary of the standards and
      their required implementation dates:

          - SFAS No. 130, Reporting Comprehensive Income - This statement
            establishes standards for reporting and disclosure of comprehensive
            income and its components (revenues, expenses, gains and losses).
            This statement requires that all items that are required to be
            recognized under accounting standards as components of
            comprehensive income (including, for example, unrealized holding
            gains and losses on available for sale securities) be reported in a
            financial statement similar to the statement of income and retained
            income. The accumulated balance of other comprehensive income will
            be disclosed separately from retained income in the shareholders'
            equity section of the balance sheet. This statement is effective
            for the Company for financial statements issued for the fiscal year
            beginning July 1, 1998.

         -  SFAS No. 131, Disclosures About Segments of an Enterprise and 
            Related Information - This statement establishes standards for the
            way public business enterprises report information about operating
            segments and establishes standards for related disclosures about
            products and services, geographic areas and major customers.
            Operating segments are components of an enterprise about which
            separate financial information is available that is evaluated
            regularly by the chief operating decision-maker in deciding how to
            allocate resources and in assessing performance. Information
            required to be disclosed includes segment profit or loss, certain
            specific revenue 

<PAGE>   24

            and expense items, segment assets and certain other information.
            This statement is effective for the Company for financial
            statements issued for the fiscal year beginning July 1, 1998.

         -  SFAS No. 132, Employers' Disclosures about Pensions and Other 
            Postretirement Benefits - This statement revises employers'
            disclosures about pension and other postretirement benefit plans.
            It does not change the measurement or recognition of those plans.
            It standardized the disclosure requirements for pensions and other
            postretirement benefits to the extent practicable, requires
            additional information on changes in the benefit obligations and
            fair values of plan assets that will facilitate financial analysis,
            and eliminates certain disclosures required by FASB statement No.
            87, Employers' Accounting for Pensions, No. 88, Employers'
            Accounting for Settlements and Curtailments of Defined Benefit
            Pension Plans and for Termination Benefits, and No. 106, Employers'
            Accounting for Postretirement Benefits. The statement suggests
            combined formats for presentation of pension and other
            postretirement benefit disclosures. This statement is effective for
            the Company for financial statements issued for the fiscal year
            beginning July 1, 1998.

         -  SFAS No. 133, Accounting for Derivative Instruments and Hedging
            Activities - This statement establishes accounting and reporting
            standards for derivative instruments, including certain derivative
            instruments embedded in other contracts (collectively referred to as
            derivatives) and for hedging activities. The new standard requires
            that an entity recognize all derivatives as either assets or
            liabilities in the statement of financial position and measure those
            instruments at fair value. This statement will be effective for
            interim and annual periods ending after June 30, 1999.

      RECLASSIFICATIONS - Certain June 30, 1997 and 1996 amounts have been
      reclassified to conform to the June 30, 1998 presentation.

<PAGE>   25

2.    SECURITIES

      The maturities, amortized cost, unrealized gains, unrealized losses and
      fair values of securities at June 30, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>

                                                                             1998
                                      --------------------------------------------------------------------------
                                                                 GROSS             GROSS
                                           AMORTIZED           UNREALIZED        UNREALIZED            FAIR
                                             COST                GAINS             LOSSES             VALUE
<S>                                     <C>                  <C>                <C>               <C>
United States Government
  Agency debt securities:
  Due within one year                   $   4,999,308        $    34,447        $      628        $   5,033,127
  Due after one year but                                                                          
    within five years                      33,975,314            125,605            38,840           34,062,079
  Due after five years but                                                                        
    within ten years                       11,997,997              6,065            66,573           11,937,489
  Due after ten years                      39,940,668              3,729           361,437           39,582,960
Federal Home Loan                                                                                 
  Mortgage Corporation                                                                            
  common and preferred                                                                            
  stocks                                       41,621          1,810,477                 -            1,852,098
Other equity securities                       102,536                  -             6,910               95,626
                                        -------------        -----------        ----------        -------------
       Total investment                                                                           
          securities                       91,057,444          1,980,323           474,388           92,563,379
                                        -------------        -----------        ----------        -------------
Mortgage-backed securities:                                                                       
  Federal Home Loan                                                                               
    Mortgage Corporation                    9,192,228             36,883                 -            9,229,111
  Government National                                                                             
    Mortgage Association                   32,352,181            524,260                 -           32,876,441
                                        -------------        -----------        ----------        -------------
       Total mortgage-backed                                                                      
         securities                        41,544,409            561,143                 -           42,105,552
                                        -------------        -----------        ----------        -------------
                                                                                                  
Total                                   $ 132,601,853        $ 2,541,466        $  474,388        $ 134,668,931
                                        =============        ===========        ==========        =============
</TABLE>                                                     



<PAGE>   26

<TABLE>
<CAPTION>                                      
                                                                    1997
                                   ----------------------------------------------------------------------------
                                                                 GROSS              GROSS
                                            AMORTIZED          UNREALIZED         UNREALIZED           FAIR
                                              COST               GAINS             LOSSES              VALUE
   <S>                                 <C>                  <C>               <C>                <C>
   United States Government
     Agency debt securities:
     Due within one year               $   11,000,000       $      4,165      $     45,579       $   10,958,586
     Due after one year but
       within five years                   66,013,428             91,680           682,172           65,422,936
     Due after five years but
       within ten years                     7,000,000                  -           169,373            6,830,627
     Due after ten years                   31,971,799                  -           923,042           31,048,757
   Federal Home Loan
     Mortgage Corporation
     common and preferred
     stocks                                   249,358          8,002,792                 -            8,252,150
                                       --------------       ------------      ------------       --------------
          Total investment
             securities                   116,234,585          8,098,637         1,820,166          122,513,056
                                       --------------       ------------      ------------       --------------
   Mortgage-backed securities:
     Federal Home Loan
       Mortgage Corporation                12,939,158                  -            75,957           12,863,201
     Government National
       Mortgage Association                40,111,360            405,425           182,938           40,333,847
                                       --------------       ------------      ------------       --------------
          Total mortgage-backed
            securities                     53,050,518            405,425           258,895           53,197,048
                                       --------------       ------------      ------------       --------------
   
   Total                               $  169,285,103       $  8,504,062      $  2,079,061       $  175,710,104
                                       ==============       ============      ============       ==============
</TABLE>


      As of June 30, 1998, there were approximately $94 million of investments
      with call options, $88 million of which are callable within one year. As
      of June 30, 1997, there were approximately $73 million of investments
      with call options, all of which are callable within one year.

      Gross realized gains on sales of securities for the years ended June 30,
      1998, 1997 and 1996 were $7,095,959, $714,527 and $30,782, respectively.
      Gross realized losses on sales of securities for the years ended June 30,
      1998, 1997 and 1996 were $476,403, $695,148 and $15,625, respectively.

<PAGE>   27

3.    LOANS RECEIVABLE

      Loans receivable at June 30, 1998 and 1997 consisted of the following:

     <TABLE>
     <CAPTION>

                                                                                   1998                1997

      <S>                                                                         <C>                 <C>
      Residential (1 - 4 family) real estate loans                                $715,609,528        $561,352,476
      Construction loans                                                            62,913,684          68,365,540
      Commercial loans                                                              30,262,548          30,631,001
      Land loans                                                                    18,616,487          19,991,562
      Consumer loans:
   
        Home equity                                                                 16,200,962          14,494,824
        Credit card                                                                  6,237,322           6,198,263
        Other                                                                        3,725,206           3,255,459
                                                                                  ------------         -----------
      Total                                                                        853,565,737         704,289,125
      Deduct:
        Allowance for loan losses                                                   (7,033,185)         (7,611,675)
        Undisbursed portion of loans in process                                    (34,694,087)        (33,029,829)
        Unearned loan fees, net                                                     (5,448,751)         (5,324,301)
                                                                                  ------------        ------------

      Loans receivable, net                                                       $806,389,714        $658,323,320
                                                                                  ============        ============
     </TABLE>


     The changes in the allowance for loan losses consisted of the following:

     <TABLE>
     <CAPTION>
                                                                    1998               1997              1996
     <S>                                                          <C>                <C>              <C>
     Allowance, beginning of year                                 $ 7,611,675        $7,495,515       $ 8,088,462
     Provision for loan losses (recovery of allowance)                (30,795)          (59,286)          336,957
     Write-offs                                                      (597,998)         (344,230)       (1,493,125)
     Recoveries                                                        50,303           519,676           563,221
                                                                  -----------        ----------       -----------
   
     Allowance, end of year                                       $ 7,033,185        $7,611,675       $ 7,495,515
                                                                  ===========        ==========       ===========
     </TABLE>


      Residential real estate loans are presented net of loans serviced for
      others totaling $22.7 million, $30.9 million and $36.6 million at June
      30, 1998, 1997 and 1996, respectively. Loans sold in the secondary market
      are generally sold without recourse. Servicing loans for others generally
      consists of collecting mortgage payments, maintaining escrow accounts,
      disbursing payments to investors and foreclosure processing. In
      connection with these loans serviced for others, the Company held
      borrowers' escrow balances of $239,499, $339,899 and $393,826 at June 30,
      1998, 1997 and 1996, respectively.

      Loans not currently accruing interest at June 30, 1998 and June 30, 1997
      amounted to $2.9 million and $6.3 million, respectively. Interest income
      that would have been accrued on these loans if they were fully accruing
      amounted to $232,000 and $472,000 for the 1998 and 1997 fiscal years,
      respectively.

      The recorded investment in impaired loans was $1,810,145 and $4,385,280
      at June 30, 1998 and 1997, respectively. The related allowance for loan
      losses on these loans was $510,133 and 

<PAGE>   28

      $1,979,647 at June 30, 1998 and 1997, respectively. All impaired loans
      required an allowance for loan loss and were evaluated using the fair
      value of the collateral. The average recorded investment in impaired
      loans was $1,817,515, $4,896,308 and $6,346,184 and the cash income
      recognized was $71,000, $68,000 and $121,000 for the years ended June 30,
      1998, 1997 and 1996, respectively.

      The Company is not committed to lend additional funds to debtors whose
      loans have been modified.

4.    REAL ESTATE

      Real estate consisted of the following:

<TABLE>
<CAPTION>
                                                                                       1998              1997
<S>                                                                                <C>               <C>
Acquired in settlement of loans                                                   $ 2,050,607        $1,138,277
Less allowance for estimated losses                                                  (186,489)         (270,401)
                                                                                  -----------        ----------

Real estate, net                                                                  $ 1,864,118        $  867,876
                                                                                  ===========        ==========
<CAPTION>

      The changes in the allowance for losses on real estate acquired in
      settlement of loans consisted of the following:

                                                                    1998              1997              1996
<S>                                                              <C>               <C>               <C>
Allowance, beginning of year                                     $  270,401        $1,143,540       $ 1,542,253
Provision                                                             4,382            92,379           139,812
Write-offs                                                          (88,294)         (965,518)         (538,525)
                                                                 ----------        ----------       -----------

Allowance, end of year                                           $  186,489        $  270,401       $ 1,143,540
                                                                 ==========        ==========       ===========
</TABLE>



5.    OFFICE PROPERTIES AND EQUIPMENT

      Office properties and equipment consisted of the following:

<TABLE>
<CAPTION>

                                                                                    1998               1997
<S>                                                                              <C>                <C>
Land                                                                             $ 2,863,969        $ 2,863,967
Office buildings and improvements                                                 10,021,121          9,741,536
Office equipment and leasehold improvements                                        2,974,549          2,922,692
Automobiles                                                                          112,295            100,388
                                                                                 -----------        -----------
Total                                                                             15,971,934         15,628,583
Less accumulated depreciation and amortization                                    (6,139,707)        (5,529,476)
                                                                                 -----------        -----------

Office properties and equipment, net                                             $ 9,832,227        $10,099,107
                                                                                 ===========        ===========

</TABLE>


<PAGE>   29

6.    DEPOSITS

      Customer deposits at June 30, 1998 and 1997 consisted of the following:
      
      <TABLE>
      <CAPTION>
      
                                                                                  1998                 1997
      <S>                                                                   <C>                  <C>
      Non interest bearing checking accounts                                $   15,132,459       $   9,192,647
      NOW accounts - 2.50% at June 30, 1998 and 1997                            10,457,300          11,798,817
      Flexible rate checking:
        Money market deposit accounts, 2.50% to 4.89% at
          June 30, 1998 and 1997                                                49,553,642          34,759,502
        Other - 2.50% to 2.55% at June 30, 1998 and 1997                         3,527,101           3,369,134
                                                                            --------------       -------------
      Total checking accounts                                                   78,670,502          59,120,100
                                                                            --------------       -------------
      Passbook accounts - 2.50% at June 30, 1998 and 1997                       13,816,775          14,447,314
                                                                            --------------       -------------
      Certificate accounts:
        2.50% - 3.99%                                                            1,690,706           3,940,677
        4.00% - 4.99%                                                           60,745,866          15,680,883
        5.00% - 6.99%                                                          250,335,324         320,077,671
        7.00% - 8.99%                                                           24,340,850          29,712,983
        9.00% and over                                                             900,964             859,914
                                                                            --------------       -------------
          Total certificate accounts                                           338,013,710         370,272,128
                                                                            --------------       -------------
      
      Total deposits                                                        $  430,500,987       $ 443,839,542
                                                                            ==============       =============
      </TABLE>


      The weighted average coupon rate on customer deposits at June 30, 1998
      and 1997 was 5.16% and 5.24%, respectively.

      Scheduled maturities of certificate accounts at June 30, 1998 were as
follows:
      
      <TABLE>
      <CAPTION>
      YEAR ENDING JUNE 30,                                                                          Amount
      <S>                                                                                        <C>
      1999                                                                                       $  263,148,606
      2000                                                                                           53,275,113
      2001                                                                                           15,375,870
      2002                                                                                            3,209,215
      2003                                                                                            2,387,262
      Thereafter                                                                                        617,644
                                                                                                 --------------
      
      Total certificate accounts                                                                 $  338,013,710
                                                                                                 ==============
      </TABLE>


      The aggregate amount of certificate accounts in excess of $100,000 was
      $87,668,887 and $145,100,828 at June 30, 1998 and 1997, respectively.
      Deposits in excess of $100,000 are not federally insured.

<PAGE>   30

      Interest expense by type of deposit for the years ended June 30, 1998,
1997 and 1996 was as follows:
      
      <TABLE>
      <CAPTION>
      
                                                                 1998                1997               1996
      <S>                                                    <C>                 <C>                <C>
      Checking accounts                                    $   2,247,084        $  1,349,244       $  1,510,906
      Passbook accounts                                          261,417             237,366            341,530
      Certificate accounts                                    20,560,583          22,035,269         25,429,660
      Less:  Penalties                                           (52,813)            (56,991)           (63,763)
                                                           -------------        ------------       ------------
      
      Total interest expense                               $  23,016,271        $ 23,564,888       $ 27,218,333
                                                           =============        ============       ============
      </TABLE>


7.    OTHER BORROWED FUNDS

      At June 30, 1998 and 1997, the Company had $298.0 million and $129.0
      million, respectively, of outstanding advances from the Federal Home Loan
      Bank of Atlanta ("FHLB"). Advances were at fixed rates. The maximum
      amount of outstanding advances at any month-end during 1998 and 1997 was
      $298.0 million and $129.0 million, respectively, and the average balance
      outstanding for such years was approximately $215.3 million and $61.1
      million, respectively. The weighted average interest rate during fiscal
      years 1998 and 1997 was 5.59% and 5.90%, respectively.

      The Company pledges as collateral for these borrowings their FHLB stock
      and has entered into blanket collateral agreements with the FHLB whereby
      the Company maintains, free of other encumbrances, qualifying mortgages
      (as defined) with unpaid principal balances, when discounted at 75% of
      the unpaid principal balances, of at least 100% of total advances.

      The Company also borrowed funds using securities sold under repurchase
      agreements during 1998 and 1997. At June 30, 1998 and 1997, $95.8 million
      and $120.0 million of such borrowings were outstanding, respectively. The
      maximum amount of outstanding agreements at any month-end during 1998 and
      1997 was $120.0 million and the average outstanding balance of such
      agreements for the years were approximately $96.0 million and $117.3
      million, respectively. Collateral for the securities sold under
      repurchase agreements consisted of U.S. Government Agency securities and
      mortgage-backed securities which were transferred to a third party for
      safekeeping during the terms of the agreements. At June 30, 1998, the
      market value of such collateralized securities totaled approximately
      $101.6 million (amortized cost of approximately $101.2 million).

      During the 1997 fiscal year, the Company also borrowed $28.0 million in
      short term funds from a commercial bank to fund a portion of a $5 per
      share special distribution paid to shareholders on March 18, 1997. The
      loan, at prime rate less .5%, was obtained on March 18, 1997 and was paid
      off during the current fiscal year.

<PAGE>   31

8.    INCOME TAXES

      The provision for income taxes is summarized as follows:

      
      <TABLE>
      <CAPTION>
      
                                                                           YEAR ENDED JUNE 30,
                                                           --------------------------------------------------
                                                                 1998              1997             1996
      <S>                                                      <C>              <C>              <C>
      Current provision:
        Federal                                                $ 6,558,672      $ 4,656,460      $  3,925,383
        State                                                    1,459,539          234,850           311,185
                                                           ---------------      -----------      ------------
      
      Total current                                              8,018,211        4,891,310         4,236,568
                                                           ---------------      -----------      ------------
      Deferred (benefit) provision:
        Federal                                                    457,990         (225,828)          253,845
        State                                                      178,645          (55,699)           75,431
                                                           ---------------      -----------      ------------
      
      Total deferred                                               636,635         (281,527)          329,276
                                                           ---------------      -----------      ------------
           
      Total income tax expense                             $     8,654,846      $ 4,609,783      $  4,565,844
                                                           ===============      ===========      ============
      </TABLE>


      For the years ended June 30, 1998 and 1997, deferred tax liabilities of
      $795,783 and $2,473,626, respectively, were included in total
      shareholders' equity for the tax effect of the unrealized gain on
      investment securities available for sale.

      Income taxes differed from amounts computed by applying the statutory
      federal rate (35% for 1998 and 34% for 1997 and 1996) to income before
      income taxes and cumulative effect of a change in accounting principle
      (see Note 1) as follows:


      <TABLE>
      <CAPTION>
                                                                               Year Ended June 30,
                                                                ------------------------------------------------
                                                                    1998             1997              1996
      <S>                                                        <C>              <C>               <C> 
      Tax at federal income tax rate                            $ 7,743,344       $ 4,070,978        $ 4,484,581
      (Decrease) increase resulting from:
        Statutory bad debt deduction for tax purposes                     -                 -           (520,000)
        State income tax expense, net of federal benefit          1,064,820           118,240            255,166
        Effect of change in tax rate used in computing
         deferred taxes                                            (123,116)                -                  -
        Valuation allowance                                         182,209                 -                  -
        Other, net                                                 (212,411)          420,565            346,097
                                                                -----------       -----------        -----------

      Total                                                     $ 8,654,846       $ 4,609,783        $ 4,565,844
                                                                ===========       ===========        ===========

      Effective tax rate                                               39.1%             38.5%              34.6%
                                                                ===========       ===========        ===========

      </TABLE>
      
      
<PAGE>   32
      The tax effects of significant items comprising the Company's net deferred
      tax asset at June 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                              1998               1997
        <S>                                                                <C>               <C>
        Deferred tax assets:
          Differences between book and tax basis bad debt reserves         $ 2,843,719       $ 3,290,767
          Difference between book and tax basis of deferred loan fees          682,608           966,132
          Deferred compensation                                                691,802         2,011,241
          Net operating loss carryforward                                      182,209           677,562
          Capital loss carryforward                                            277,060                 -
          Management recognition and retention plan compensation
            accrual                                                          1,034,294           295,575
          Other                                                                636,043          (455,676)
          Valuation allowance                                                 (182,209)                -
                                                                           -----------       -----------
          Total deferred tax assets, net                                     6,165,526         6,785,601
                                                                           -----------       -----------
          Deferred tax liabilities:
            Differences between book and tax basis of Federal Home Loan
              Bank of Atlanta stock                                            938,410           921,850
          Unrealized gain on securities available for sale                     795,783         2,473,626
                                                                           -----------       -----------
          Total deferred tax liabilities                                     1,734,193         3,395,476
                                                                           -----------       -----------

          Net deferred tax asset                                           $ 4,431,333       $ 3,390,125
                                                                           ===========       ===========
</TABLE>


      The Company is permitted a bad debt deduction in determining federal
      taxable income that may differ from actual experience, subject to certain
      limitations. If the amounts that qualify as bad debt deductions for
      federal income tax purposes are later used for purposes other than for bad
      debt losses, they will be subject to federal income tax at the then
      current statutory rate. As permitted under SFAS No. 109, no deferred tax
      liability is provided for approximately $16.9 million (approximately $6.4
      million tax effect) of such tax basis bad debt reserves that arose prior
      to June 30, 1988.

      HFNC Financial Corporation has a state net operating loss carryforward of
      $2,429,450 ($182,209 tax effect) at June 30, 1998, which begins to expire
      in 2001. The Company recorded a valuation allowance of $182,209 to reduce
      the carrying value of this asset to zero. Realization of this deferred
      asset is dependent upon the recognition of sufficient taxable income in
      the future.

9.    BENEFIT PLANS

      401(K)/PROFIT SHARING PLAN - Effective November 30, 1995, the Company
      modified its non-contributory qualified defined contribution retirement
      plan to a contributory 401(k) profit sharing plan. The profit sharing plan
      permits all full time employees with at least one year of service to
      contribute up to 9% of their salary to the plan each year. The plan
      provides for matching contributions by the Company equal to 100% of
      employee contributions up to the first 3% of compensation. The Company
      may, at its discretion, make profit sharing contributions to the plan.
      Plan participants' accounts are 100% vested in Company contributions after
      5 years of qualifying service. The Company's matching contribution charged
      to expense was approximately $87,000, $76,000 and $69,000 for the years
      ended June 30, 1998, 1997 and 1996, respectively.



<PAGE>   33


      The plan, prior to modification, was a non-contributory plan which covered
      all full time employees with at least one year of service. Annual employer
      contributions under the plan were based on a percentage of compensation of
      all regular employees (as defined) less termination credits. Retirement
      expenses relating to this plan were funded as accrued and amounted to
      $352,094 for the year ended June 30, 1996. No expenses were accrued during
      the years ended June 30, 1998 and 1997 due to the modification of the plan
      during fiscal year ended 1996.

      STOCK OPTION AND MANAGEMENT RECOGNITION AND RETENTION PLANS - In December
      1996, the Company's shareholders approved the Stock Option Plan ("SOP")
      and Management Recognition and Retention Plan ("MRRP").

      Stock Option Plan - The SOP provides for the Company's Board of Directors
      to award incentive stock options, non-qualified or compensatory stock
      options and stock appreciation rights representing up to 1,719,250 shares
      of Corporation stock. One-third of the options granted vested immediately
      upon grant, with the balance vesting in equal amounts on the two
      subsequent anniversary dates of the grant. Two-thirds of the options
      granted to date have vested as of June 30, 1998. Options granted vest
      immediately in the event of retirement, disability, or death. Outstanding
      stock options can be exercised over a ten-year period.

      Under the SOP, options have been granted to directors and key employees to
      purchase common stock of HFNC Financial Corp. The exercise price in each
      case equals the fair market value of the Corporation's stock at the date
      of grant which has been adjusted for the impact of the $5 per share
      special distribution to shareholders on March 18, 1997. Options granted in
      the fiscal year ended June 30, 1997 have exercise prices ranging from
      $13.67 to $14.78, and a current weighted average contract life of 7.5
      years. No options were granted during the fiscal year ended June 30, 1998.

      The following table presents the status of the Company's stock option plan
      as of June 30, 1998 and June 30, 1997, respectively, and changes during
      the years then ended:


<TABLE>
<CAPTION>
                                                                                              WEIGHTED
                                                                                              AVERAGE
                                                                                              EXERCISE
       STOCK OPTION PLAN                                                    SHARES             PRICE
       <S>                                                                <C>               <C>
       Outstanding at June 30, 1996                                                 -       $         -
         Granted                                                            1,548,471             13.92
         Exercised                                                                  -                 -
         Forfeited                                                             (1,398)            14.78
                                                                          -----------       

       Outstanding at June 30, 1997                                         1,547,073       $     13.92
         Granted                                                                    -                 -
         Exercised                                                                  -                 -
         Forfeited                                                             (2,063)            14.78
                                                                          -----------       

       Outstanding at June 30, 1998                                         1,545,010       $     13.92
                                                                          ===========       

       Options exercisable at year end                                      1,030,983       $     13.92
                                                                          ===========       
</TABLE>

<PAGE>   34


      The Company applies the provisions of APB Opinion No. 25 in accounting for
      its stock option plan, as allowed under SFAS No. 123, Accounting for
      Stock-Based Compensation. Accordingly, no compensation cost has been
      recognized for options granted to employees. Had compensation cost for
      this plan been determined based on the fair value at the grant dates for
      awards under the plan consistent with the methods of SFAS No. 123, the
      Company's pro forma net income and pro forma earnings per share would have
      been as follows:

<TABLE>
<CAPTION>
                                                                            1998               1997
<S>                                                                      <C>               <C>
      Net income:
        As reported                                                      $13,468,994       $ 7,363,681
        Pro forma                                                        $12,628,609       $ 6,510,387
      Basic income per share:
        As reported                                                      $       .86       $       .46
        Pro forma                                                        $       .80       $       .41
      Diluted income per share:
        As reported                                                      $       .82       $       .45
        Pro forma                                                        $       .77       $       .40
</TABLE>


      In determining the above pro forma disclosure, the fair value of options
      granted during the fiscal year ended June 30, 1997 was estimated on the
      date of grant using the Black-Scholes option-pricing model with the
      following weighted average assumptions: expected volatility - 18.23%,
      expected life of grant - 3.83 years, risk-free interest rate - 6.28%,
      expected dividend rate - 1.70%. The weighted average fair value of options
      granted during the fiscal year ended June 30, 1997 was $2.69 per share.

      Management Recognition and Retention Plan - The MRRP provides for the
      Company's Board of Directors to award restricted stock to officers and key
      employees as well as non-employee directors. The MRRP authorizes the
      Company to grant up to 687,700 shares of Corporation stock. One-fifth of
      the shares granted vested immediately upon grant, with the remainder
      vesting at a rate of 25% per year over the next four anniversary dates of
      the grants. Two-fifths of the shares granted to date have vested as of
      June 30, 1998. As in the case with the SOP, shares granted will be vested
      in the event of retirement, disability, or death. Approximately $3.2
      million in compensation expense was recognized for each of the years ended
      June 30, 1998 and June 30, 1997 related to the MRRP. The following table
      presents the status of the MRRP as of June 30, 1998 and June 30, 1997 and
      changes during the years then ended:

<PAGE>   35



<TABLE>
<CAPTION>
                                                                                      WEIGHTED
                                                                                      AVERAGE
                                                                                       GRANT
MANAGEMENT RECOGNITION AND RETENTION PLAN                            SHARES            PRICE
<S>                                                                <C>               <C>
Outstanding at June 30, 1996                                                 -       $         -
  Granted                                                              619,540             17.41
  Vested                                                              (123,908)            18.07
  Forfeited                                                               (600)            17.25
                                                                   -----------       

Outstanding at June 30, 1997                                           495,032       $     17.25
  Granted                                                                    -                 -
  Vested                                                              (123,608)            17.25
  Forfeited                                                             (1,200)            17.25
                                                                   -----------      

Outstanding at June 30, 1998                                           370,224       $     17.25
                                                                   ===========       ===========
</TABLE>


      EMPLOYEE STOCK OWNERSHIP PLAN - In connection with the Conversion (Note
      1), the Company established an Employee Stock Ownership Plan ("ESOP"). In
      order to fund the ESOP, 900,000 shares of the Corporation's common stock
      were purchased on December 28, 1995 by the ESOP with the proceeds of a
      $9.0 million loan from the Corporation's wholly owned subsidiary, HFNC
      Investment Corp. A corresponding amount related to unearned ESOP shares of
      $10,694,904 and $11,956,555 at June 30, 1998 and 1997, respectively, is
      shown as a reduction of shareholders' equity. As the loan is internally
      leveraged, the note receivable from the ESOP is not reported as an asset
      nor is the ESOP's debt reported as a liability. Expense related to the
      ESOP was approximately $1.5 million for each of the years ended June 30,
      1998 and 1997.

      OTHER POSTRETIREMENT BENEFITS - The Company provides certain health care
      and life insurance benefits for substantially all of its retired
      employees. The Company's postretirement plans currently are funded on a
      pay-as-you-go (cash) basis. As discussed in Note 1, the Company adopted
      SFAS No. 106, resulting in an increase in accrued postretirement health
      care costs of $1.7 million and a decrease in net income of $1.1 million
      (after income taxes of $650,000), which has been included in the Company's
      consolidated statement of income for the year ended June 30, 1996. The
      status of the plans were as follows:

     Accumulated postretirement benefit obligation at June 30, 1998 and June 30,
     1997:

<TABLE>
<CAPTION>
                                                                           1998              1997
<S>                                                                     <C>               <C>
     Retirees                                                           $   526,145       $   457,067
     Fully eligible active plan participants                                644,031           572,783
     Other active plan participants                                         808,488           830,975
                                                                        -----------       -----------
     Accumulated postretirement benefit obligation                        1,978,664         1,860,825
     Unrealized net gain                                                    320,242           260,081
                                                                        -----------       -----------
     
     Accrued postretirement benefit liability                           $ 2,298,906       $ 2,120,906
                                                                        ===========       ===========
</TABLE>



<PAGE>   36



      Net periodic postretirement benefit cost for the years ended June 30, 1998
      and June 30, 1997 consisted of the following components:


<TABLE>
<CAPTION>
                                                                            1998              1997
<S>                                                                      <C>               <C>
      Service cost - benefits earned during the year                     $    77,708       $    91,491
      Interest cost on accumulated postretirement benefit obligation         142,424           132,418
      Unrecognized gain                                                       (8,674)           (5,537)
                                                                         -----------       -----------
      
      Net periodic postretirement benefit cost                           $   211,458       $   218,371
                                                                         ===========       ===========
</TABLE>


      The assumed health care cost trend rate used in measuring the accumulated
      postretirement benefit obligation as of June 30, 1998 was 8%, decreasing
      linearly each successive year until it reaches 6% in 2000, after which it
      remains constant. A one percentage point increase in the assumed health
      care cost trend rate for each year would increase the accumulated
      postretirement benefit obligation as of June 30, 1998 by approximately
      $344,000 and net annual postretirement benefit cost by approximately
      $45,000. The assumed discount rate used in determining the accumulated
      postretirement benefit obligation was 8%.

10.   DEFERRED COMPENSATION AGREEMENTS AND NON-EMPLOYEE DIRECTORS' RETIREMENT
      PLAN

      The Company has entered into deferred compensation agreements with the
      President/CEO, Executive Vice President, Vice President/Treasurer, and
      certain other Vice Presidents and is providing for the present value of
      such benefits over the anticipated remaining period of employment. The
      agreements will be funded by life insurance policies, owned by the
      Company, on such employees. Deferred compensation expense was
      approximately $17,000, $32,000 and $31,000 for the years ended June 30,
      1998, 1997 and 1996, respectively.

      The Company has a Non-employee Directors' Retirement Plan (the "Directors'
      Plan"). Under the Directors' Plan, a non-employee director becomes a
      participant upon completion of ten years of continuous service as a
      director. Full benefits under the Director's Plan are payable at the later
      of attaining age 65 or retiring from the Board of Directors. (Retirement
      with reduced benefits is available beginning at age 62.) The annual
      benefit for a retired director is equal to the amount of compensation to
      which the director was entitled to receive in the twelve months preceding
      retirement. This annual benefit is to be paid quarterly for a ten-year
      period. Related pension expense for the years ended June 30, 1998, 1997
      and 1996 was approximately $44,000, $54,000 and $25,000, respectively.

      The Directors' Plan also contains provisions for death benefits to a
      surviving spouse at 100% of the retirement benefit that would have been
      paid to the director upon retirement or would be payable over the
      remaining term if the director was already receiving retirement benefits.

11.   COMMITMENTS AND CONTINGENCIES

      LOAN COMMITMENTS - The Company, in the normal course of business, is a
      party to commitments which involve, to varying degrees, elements of risk
      in excess of the amounts recognized in the consolidated financial
      statements. These commitments include unused consumer lines of credit and
      commitments to extend credit. Loan commitments, excluding undisbursed
      portions of loans in process, were approximately $22.1 million and 15.7
      million at June 30, 1998 and 1997, respectively.

<PAGE>   37




      Commitments, which are disbursed subject to certain limitations, extend
      over periods of time with the majority of such commitments disbursed
      within a six-month period. The Company had commitments approximating $19.5
      million and 12.7 million representing available credit under open line
      loans and approximately $1.3 million and $600,000 under outstanding
      letters of credit at June 30, 1998 and 1997, respectively.

      CONCENTRATIONS OF CREDIT RISK - Most of the Company's business activity is
      with customers in the Charlotte, North Carolina area. The majority of the
      Company's loans are residential mortgage loans, construction loans for
      residential property and land loans for development of residential real
      estate. The Company's policy generally allows mortgage loans up to 80% of
      the value of the real estate that is pledged as collateral or up to 95%
      with private mortgage insurance.

      INTEREST RATE RISK - The Company's profitability depends to a large extent
      on its net interest income, which is the difference between interest
      income from loans and investments and interest expense on deposits and
      other borrowed funds. Like most financial institutions, the Company's
      interest income and interest expense are significantly affected by changes
      in market interest rates and other economic factors beyond its control.
      The Company's interest-earning assets consist primarily of long-term,
      fixed-rate mortgage loans and investments which adjust more slowly to
      changes in interest rates than its interest-bearing liabilities which are
      primarily term deposits and advances. Accordingly, the Company's earnings
      would be adversely affected during periods of rising interest rates and
      would be positively impacted during periods of declining interest rates.

      LITIGATION - In June 1995, a lawsuit was initiated against the Association
      by a borrower's affiliated companies in which the plaintiffs alleged that
      the Association wrongfully set-off certain funds in an account being held
      and maintained by the Association. In addition, the plaintiffs alleged
      that as a result of the wrongful set-off, the Association wrongfully
      dishonored a check in the amount of $270,000. Plaintiffs further alleged
      that the actions on behalf of the Association constituted unfair and
      deceptive trade practices, thereby entitling plaintiffs to recover treble
      damages and attorney fees. The Association denied any wrongdoing and filed
      a motion for summary judgment. Upon consideration of the motion, the
      United States Bankruptcy Judge entered a Recommended Order Granting
      Summary Judgment, recommending the dismissal of all claims asserted
      against the Association. In October 1997, the United States District Court
      entered an order granting summary judgment in favor of the Association.
      The plaintiff has appealed the order of summary judgment and the case is
      presently pending in the Fourth Circuit Court of Appeals.

      In December 1996, the Association filed a suit against the borrower and
      his company and against the borrower's wife, daughter and a company owned
      by his wife and daughter, alleging transfers of assets to the wife,
      daughter, and their company in fraud of creditors, and asking that the
      fraudulent transfers be set aside. The objective of the lawsuit is to
      recover assets which may be used to satisfy a portion of the judgments
      obtained in favor of the Association in prior litigation. The borrower's
      wife filed a counterclaim against the Association alleging that she
      borrowed $750,000 from another financial institution, secured by a deed of
      trust on her principal residence, the proceeds of which were paid to the
      Association for application on a debt owed by one of her husband's
      corporations, claiming that officers of the Association promised to resume
      making loans to her husband's corporation after the payment. Home Federal
      and its officers vigorously deny all of her allegations. The Association
      filed a motion for summary judgment and dismissal of the counterclaim. The
      motion for summary judgment was heard in the Superior Court division of
      the Mecklenburg County General Court of Justice in April 1998; however, an
      order has not been entered. In June 1998, the Association removed this
      case to the United States Bankruptcy Court for the Western District of
      North Carolina, Charlotte Division, due to the fact that the defendant was
      the debtor in a pending bankruptcy case. The Association believes it has
      strong defenses to the defendant's counterclaim.

<PAGE>   38


      In February 1997, two companies affiliated with those referred to in the
      first paragraph above filed an additional action against two executive
      officers of the Association and against an officer of another financial
      institution. The action was removed from the state court and is presently
      pending in the United States Bankruptcy Court for the Western District of
      North Carolina. At the same time, the borrower, who is affiliated with all
      of these companies, also filed an action against the two executive
      officers of the Association and against an officer of another financial
      institution. The Complaints in both actions assert virtually identical
      claims. The plaintiffs in both lawsuits allege that the officers of both
      financial institutions engaged in a conspiracy to wrongfully declare loans
      to be in default so as to eliminate those companies as borrowers of the
      Association. Plaintiffs allege misrepresentation, breach of fiduciary
      duty, constructive fraud, interference with business expectancy, wrongful
      bank account set-off, and unfair and deceptive acts and practices.
      Plaintiffs claim actual damages, treble damages and punitive damages
      together with interest, attorneys' fees and other costs. All defendants
      filed motions for summary judgment which were granted and the lawsuits
      were dismissed in January 1998 by the Superior Court of Mecklenburg
      County. The plaintiff appealed the order granting summary judgment to the
      North Carolina Court of Appeals. In July of 1998, the defendants removed
      the case to the United States Bankruptcy Court for the Western District of
      North Carolina, Charlotte Division, due to the fact that the plaintiff was
      a debtor in a pending bankruptcy case. As a result of the removal, the
      North Carolina Court of Appeals entered an order staying further
      proceedings in the North Carolina Court of Appeals in August 1998. The
      Association has agreed to indemnify both of its officers with respect to
      costs, expense and liability which might arise in connection with both of
      these cases.

      In July 1997, the above borrower and affiliated companies filed an
      additional action against HFNC Financial Corp., the Association, and the
      other financial institution referred to in the paragraph above, alleging
      that previous judgments in favor of the Association and the other
      financial institution obtained in prior litigation were obtained by the
      perpetration of fraud on the Bankruptcy Court, U.S. District Court, and
      the Fourth Circuit Court of Appeals. The plaintiffs are seeking to have
      the judgments set aside on that basis. The Association vehemently denies
      that any fraud was perpetrated upon the courts and has filed a motion for
      summary judgment and dismissal which is presently pending the United
      States District Court.

      In August 1997, the borrower filed a lawsuit against attorneys for the
      Association, attorneys for the other financial institution, and two United
      States Bankruptcy Judges in which the borrower alleges that the defendants
      have conspired against him and his corporations by allowing the
      Association to obtain judgments against him and his various corporations.

      The Association and its officers continue to deny any liability in the
      above-described cases and continue to vigorously defend against the
      claims. However, based on the advice of legal counsel, the Association is
      unable to give an opinion as to the likely outcome of the litigation or
      estimate the amount or range of potential loss, if any.

12.   REGULATORY CAPITAL REQUIREMENTS

      The Corporation is not subject to any regulatory capital requirements.
      However, the Association is subject to various regulatory capital
      requirements imposed by the federal financial institution agencies.
      Failure to meet minimum capital requirements can result in certain
      mandatory and possibly additional discretionary actions by regulators
      that, if undertaken, could have a direct material effect on the Company's
      financial statements. Under capital adequacy guidelines and the regulatory
      framework for prompt corrective action, the Association must meet specific
      capital guidelines that involve quantitative measures of the Association's
      assets, liabilities and certain off-balance-sheet items as calculated
      under regulatory accounting practices. The Association's capital

<PAGE>   39


      amounts and classification are also subject to qualitative judgments by
      the regulators about components, risk weightings and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Association to maintain minimum amounts and ratios. Under
      regulations of the OTS, the Association must have: (i) core capital equal
      to 3% of adjusted total assets, (ii) tangible capital equal to 1.5% of
      adjusted total assets and (iii) total capital equal to 8.0% of
      risk-weighted assets. In measuring compliance with all three capital
      standards, institutions must deduct from their capital (with several
      exceptions primarily for mortgage banking subsidiaries and insured
      depository institution subsidiaries) their investments in, and advances
      to, subsidiaries engaged (as principal) in activities not permissible for
      national banks, and certain other adjustments. Management believes, as of
      June 30, 1998, that the Association meets all capital adequacy
      requirements to which it is subject.



<PAGE>   40


      The following is a reconciliation of the Association's equity reported in
      the consolidated financial statements under generally accepted accounting
      principles to OTS regulatory capital requirements (dollars in thousands):


<TABLE>
<CAPTION>
                                                            TANGIBLE          CORE          RISK-BASED
                                                            CAPITAL          CAPITAL         CAPITAL
    <S>                                                     <C>             <C>             <C>
    JUNE 30, 1998
      Total equity for the Association                      $ 157,245       $ 157,245       $ 157,245
      General allowance for loan losses                             -               -           6,764
      Unrealized gain on available for sale securities         (1,271)         (1,271)         (1,271)
      Investments not includable in regulatory capital         (1,788)         (1,788)         (1,818)
                                                            ---------       ---------       ---------
    
    Regulatory capital                                      $ 154,186       $ 154,186       $ 160,920
                                                            =========       =========       =========

    JUNE 30, 1997

      Total equity for the Association                      $ 172,894       $ 172,894       $ 172,894
      General allowance for loan losses                             -               -           5,936
      Unrealized gain on available for sale securities         (3,951)         (3,951)         (3,951)
      Investments not includable in regulatory capital         (1,716)         (1,716)         (1,746)
                                                            ---------       ---------       ---------
    
    Regulatory capital                                      $ 167,227       $ 167,227       $ 173,133
                                                            =========       =========       =========

</TABLE>


      The Association's actual and required capital amounts and ratios are
      summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                           MINIMUM
                                                                               ACTUAL                    REQUIREMENT
                                                                        --------------------          ----------------
                                                                         AMOUNT       RATIO           AMOUNT     RATIO
    <S>                                                                 <C>           <C>             <C>        <C>
    JUNE 30, 1998
         Tangible capital (to adjusted total assets)                    $ 154,186      15.4%          $15,050     1.5%
         Core capital (to adjusted total assets)                        $ 154,186      15.4%          $30,100     3.0%
         Risk-based capital (to risk-weighted assets)                   $ 160,920      29.7%          $43,284     8.0%
       
    JUNE 30, 1997
       
         Tangible capital (to adjusted total assets)                    $ 167,227      18.9%          $13,291     1.5%
         Core capital (to adjusted total assets)                        $ 167,227      18.9%          $26,582     3.0%
         Risk-based capital (to risk-weighted assets)                   $ 173,133      36.5%          $37,960     8.0%
</TABLE>










<PAGE>   41


      As of June 30, 1998 and 1997, the most recent respective notifications
      from the OTS classified the Association as well capitalized under the
      regulatory framework for prompt corrective action. There are no conditions
      or events since the most recent notification that management believes have
      changed the Association's category. To be categorized as well capitalized,
      the Association must maintain minimum ratios of total capital to
      risk-weighted assets, core capital to risk-weighted assets and core
      capital to adjusted total assets. The Association's actual and minimum
      capital requirements to be well capitalized under prompt corrective action
      provisions are as follows (dollars in thousands):

      <TABLE>
      <CAPTION>
                                                                                                         MINIMUM
                                                                              ACTUAL                   REQUIREMENT
                                                                     --------------------         ------------------
      JUNE 30, 1998                                                    AMOUNT       RATIO         AMOUNT       RATIO
      <S>                                                             <C>            <C>           <C>          <C>

       Tier I Capital (to adjusted total assets)                     $ 154,186      15.4%         $50,166       5.0%
       Tier I Capital (to risk-weighted assets)                      $ 154,186      28.5%         $32,463       6.0%
       Total Capital (to risk-weighted assets)                       $ 160,920      29.7%         $54,106      10.0%

      JUNE 30, 1997

       Tier I Capital (to adjusted total assets)                     $ 167,227      18.9%         $44,303       5.0%
       Tier I Capital (to risk-weighted assets)                      $ 167,227      35.2%         $28,470       6.0%
       Total Capital (to risk-weighted assets)                       $ 173,133      36.5%         $47,450      10.0%
      </TABLE>

      On September 30, 1996, legislation was enacted to recapitalize the Savings
      Association Insurance Fund. The effect of this legislation is to require a
      one-time assessment on all federally insured savings associations'
      deposits and was levied by the Federal Depository Insurance Corporation
      ("FDIC") at .657% of insured deposits at June 30, 1996. The amount of the
      Association's assessment was approximately $3.1 million. The assessment
      was accrued as a charge to earnings in the quarter ended September 30,
      1996 and paid on November 27, 1996.



<PAGE>   42




13.   FAIR VALUE DISCLOSURE

      The carrying and estimated fair value amounts of financial instruments as
      of June 30, 1998 and 1997, are summarized below:

<TABLE>
<CAPTION>
                                                 1998                                       1997
                                    ---------------------------------          -------------------------------
                                      STATED             ESTIMATED                STATED             ESTIMATED
                                      AMOUNT             FAIR VALUE               AMOUNT            FAIR VALUE
<S>                                 <C>                 <C>                    <C>                 <C>
Assets:
  Cash and cash
    equivalents                     $ 26,522,344        $ 26,522,344           $ 31,370,359        $ 31,370,359
  Securities available
    for sale                         134,668,931         134,668,931            175,710,104         175,710,104
  Loans receivable, net              806,389,714         811,590,928            658,323,320         653,393,693
  Stock of Federal
    Home Loan Bank
    of Atlanta                        14,900,000          14,900,000              6,450,000           6,450,000
  Other assets                         6,385,116           6,385,116              6,151,280           6,151,280

Liabilities:
  Demand deposits                   $ 92,487,277        $ 92,487,277           $ 73,567,414        $ 73,567,414
  Time deposits                      338,013,710         338,845,224            370,272,128         370,720,757
  Other borrowed funds               393,800,000         390,737,811            277,000,000         277,334,949
  Other liabilities                   35,284,080           5,284,080              4,961,756           4,961,756
</TABLE>


      Cash and cash equivalents have maturities of three months or less, and
      accordingly, the stated amount of such instruments is deemed to be a
      reasonable estimate of fair value. The fair value of securities is based
      on quoted market prices obtained from independent pricing services. The
      fair values of loans, time deposits and other borrowings are estimated
      based on present values using applicable risk-adjusted spreads to the U.S.
      Treasury curve and other applicable market rates to approximate current
      entry-value interest rates applicable to each category of such financial
      instruments. Investment in stock of the Federal Home Loan Bank is required
      by law for every federally insured savings institution. No ready market
      exists for this stock, and it has no quoted market value. However,
      redemption of this stock has historically been at par value. Accordingly,
      the stated amount is deemed to be a reasonable estimate of fair value.
      Other assets primarily represent accrued interest receivable; other
      liabilities primarily represent advances from borrowers for taxes and
      insurance and accrued interest payable. Since these financial instruments
      will typically be received or paid within three months, the stated amounts
      of such instruments are deemed to be a reasonable estimate of fair value.

      The Company had off-balance sheet financial commitments to originate loans
      and fund unused consumer lines of credit (see Note 11) of $42.9 million
      and $29.0 million at June 30, 1998 and 1997, respectively. Since the loan
      commitments are at interest rates that approximate current market rates,
      the estimated fair value of the commitments have no other financial
      statement impact.

<PAGE>   43



      Fair value estimates are made at a specific point in time, based on
      relevant market information and information about the financial
      instrument. These estimates do not reflect any premium or discount that
      could result from offering for sale the Company's entire holdings of a
      particular financial instrument. Because no active market exists for a
      significant portion of the Company's financial instruments, fair value
      estimates are based on judgments regarding future expected loss
      experience, current economic conditions, current interest rates and
      prepayment trends, risk characteristics of various financial instruments,
      and other factors. These estimates are subjective in nature and involve
      uncertainties and matters of significant judgment and therefore cannot be
      determined with precision. Changes in any of these assumptions used in
      calculating fair value also would significantly affect the estimates.
      Further, the fair value estimates were calculated as of June 30, 1998 and
      1997. Changes in market interest rates and prepayment assumptions could
      change significantly the fair value.

      Fair value estimates are based on existing on and off-balance sheet
      financial instruments without attempting to estimate the value of
      anticipated future business and the value of assets and liabilities that
      are not considered financial instruments. For example, the Company has
      significant assets and liabilities that are not considered financial
      assets or liabilities including real estate, deferred tax assets and
      premises and equipment. In addition, the tax ramifications related to the
      realization of the unrealized gains and losses can have a significant
      effect on fair value estimates and have not been considered in any of
      these estimates.

14.   SPECIAL DISTRIBUTION TO SHAREHOLDERS

      On March 18, 1997, the Corporation paid to its shareholders a special
      distribution of $78.9 million, or $5 per share. The Company has determined
      that 95% of all shareholder distributions during that year represented a
      return of shareholder capital. Consequently, the return of capital portion
      is reflected in the Company's financial records as a reduction of
      additional paid-in capital and the remainder has been reflected as a
      reduction of retained income.



<PAGE>   44
15.   HFNC FINANCIAL CORP.

      The following condensed statements of financial condition, as of June 30,
      1998 and 1997 and condensed statements of income and cash flows for the
      years ended June 30, 1998 and 1997 and for the period from August 29, 1995
      (date of incorporation) to June 30, 1996 for HFNC Financial Corp. should
      be read in conjunction with the consolidated financial statements and the
      notes thereto:

<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL POSITION                                       1998             1997
<S>                                                                <C>               <C>
ASSETS

Cash and cash equivalents                                         $     24,274      $     42,904
Equity investment in subsidiaries                                  168,643,525       188,324,313
Deferred merger costs                                                  756,847                 -
Deferred tax asset                                                   1,873,718           990,521
                                                                  ------------      ------------

Total                                                             $171,298,364      $189,357,738
                                                                  ------------      ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Note payable                                                      $          -       $28,000,000
Other liabilities                                                      403,727           297,821
Shareholders' equity                                               170,894,637       161,059,917
                                                                  ------------      ------------
Total                                                             $171,298,364      $189,357,738
                                                                  ============      ============
</TABLE>


<TABLE>
<CAPTION>
STATEMENT OF INCOME                              1998               1997              1996
<S>                                          <C>                <C>                <C>
Cash dividends received from subsidiary
  banks                                      $ 31,431,950       $ 76,620,890       $   50,000
Interest income                                       915             14,365            3,980
                                             ------------       ------------       ----------
Total income                                   31,432,865         76,635,255           53,980
                                             ------------       ------------       ----------

Interest expense                                  169,556            651,778                -
Other expense                                   1,469,608          1,382,115                -
                                             ------------       ------------       ----------
Total expense                                   1,639,164          2,033,893                -
                                             ------------       ------------       ----------

                                               29,793,701         74,601,362           53,980
Income tax benefit                                883,197            988,963                -
(Dividends in excess of earnings of
  subsidiaries) equity in undistributed
  earnings of subsidiaries                    (17,207,904)       (68,226,644)       7,520,122
                                             ------------       ------------       ----------

Net income                                   $ 13,468,994       $  7,363,681       $7,574,102
                                             ============       ============       ==========
</TABLE>

<PAGE>   45


<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS                              1998               1997               1996
<S>                                              <C>                <C>                <C>    
Operating activities:
  Net income                                     $ 13,468,994       $  7,363,681       $   7,574,102
  Adjustments to reconcile net income to
    cash provided by operating activities:
    Deferred income tax benefit                      (883,197)          (990,521)                  -
    Increase (decrease) in subsidiary
      receivable                                    3,537,264         (2,630,950)                  -
    Increase in other liabilities                     105,906            297,821                   -
    Increase in deferred merger asset                (756,847)                 -                   -
    Dividends in excess of earnings of
      subsidiaries (equity in undistributed
      earnings of subsidiaries)                    17,207,904         68,226,644          (7,520,122)
                                                 ------------       ------------       -------------

Net cash provided by operating activities          32,680,024         72,266,675              53,980
                                                 ------------       ------------       -------------

Investing activities:
  Purchase of capital stock of subsidiaries                 -                  -        (167,937,938)
                                                 ------------       ------------       -------------

Net cash used in investing activities                       -                  -        (167,937,938)
                                                 ------------       ------------       -------------

Financing activities:
  Net proceeds from sale of common stock                    -                  -         168,437,938
  Proceeds of note payable                                  -         28,000,000                   -
  Repayment of note payable                       (28,000,000)                 -                   -
  Dividends paid                                   (4,698,654)       (83,071,050)                  -
  Purchases of restricted stock for
    benefit plans                                           -        (17,706,701)                  -
                                                 ------------       ------------       -------------

Net cash (used in) provided by financing
  activities                                      (32,698,654)       (72,777,751)        168,437,938
                                                 ------------       ------------       -------------

Net (decrease) increase in cash and
  cash equivalents                                    (18,630)          (511,076)            553,980
Cash and cash equivalents at beginning
  of period                                            42,904            553,980                   -
                                                 ------------       ------------       -------------

Cash and cash equivalents at end of period       $     24,274       $     42,904       $     553,980
                                                 ============       ============       =============
</TABLE>

<PAGE>   46


16.   SUBSEQUENT EVENT

      On May 17, 1998, the Company signed a definitive agreement to merge with
      First Charter Corporation, headquartered in Concord, North Carolina. The
      agreement stipulates that the Corporation shareholders will exchange each
      share of Corporation common stock for 0.57 share of First Charter
      Corporation common stock. The transaction will be structured to qualify as
      a tax-free reorganization and will be accounted for as a pooling of
      interests. Consummation of the transaction is subject to certain
      conditions, including receipt of approval by the shareholders of both
      companies and approval of various regulatory authorities. A special
      meeting of the shareholders of the Corporation will be held on September
      29, 1998 to consider and vote on a proposal to approve the Amended and
      Restated Agreement and Plan of Merger by and between the Company and First
      Charter Corporation. Pursuant to the Agreement, the Corporation will merge
      with and into First Charter Corporation, with the effect that First
      Charter Corporation will be the surviving corporation resulting from the
      merger. Consummation of the merger is planned for September 30, 1998.





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