SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-K/A
                                Amendment No. 2

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

                     For the fiscal year ended June 30, 1997

                                       OR

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

          For the transition period from __________ to _______________

                          Commission File No.: 0-27388

                              HFNC Financial Corp.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


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

      139 South Tryon Street
    Charlotte, North Carolina                                    28202
    -------------------------                                    -----
            (Address)                                          (Zip Code)


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

   Securities registered pursuant to Section 12(b) of the Act: Not Applicable

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

                     Common Stock (par value $.01 per share)
                     ---------------------------------------
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
Based upon the  $16.00  closing  price of the  Registrant's  common  stock as of
September 26, 1997, the aggregate  market value of the 14,775,901  shares of the
Registrant's  common stock deemed to be held by non-affiliates of the Registrant
was: $236.4 million. Although directors and executive officers of the Registrant
and certain of its employee benefit plans were assumed to be "affiliates" of the
Registrant for purposes of this  calculation,  the  classification  is not to be
interpreted as an admission of such status.

     Number of shares of Common Stock outstanding as of September 26, 1997:
                                   17,192,500


                       DOCUMENTS INCORPORATED BY REFERENCE

         List hereunder the following  documents  incorporated  by reference and
the Part of the Form 10-K into which the document is incorporated.

(1) Portions of the Annual  Report to  Stockholders  for the year ended June 30,
1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.

(2) Portions of the  definitive  proxy  statement for the 1997 Annual Meeting of
Stockholders to be filed within 120 days of June 30, 1997 are incorporated  into
Part III, Items 9 through 13 of this Form 10-K.
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a)  Documents Filed as Part of this Report

         (1)      The  following   financial   statements  are  incorporated  by
                  reference from Item 8 hereof (see Exhibit 13):

                  Report of Independent Auditors.

                  Consolidated Balance Sheets as of June 30, 1997 and 1996.

                  Consolidated Statements of Income for the Fiscal Periods Ended
                     June 30, 1997, 1996 and 1995.

                  Consolidated Statements of Changes in Shareholders' Equity for
                     the Fiscal Periods Ended June 30, 1997, 1996 and 1995.

                  Consolidated  Statements of Cash Flows for the Fiscal  Periods
                     ended June 30, 1997, 1996 and 1995.

                  Notes to Consolidated Financial Statements.

<PAGE>

                                   SIGNATURES

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

                                     HFNC FINANCIAL CORP.


                                     By:   /s/H. Joe King, Jr.
                                           -------------------------------------
                                              H. Joe King, Jr.
                                              President, Chief Executive Officer
                                              and Chairman of the Board
 
        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant in the capacities and on the dates indicated.

Name                       Title                                Date
----                       -----                                ----
/s/H. Joe King, Jr.        President, Chief Executive Officer   July 6, 1998
------------------         and Chairman of the Board   
H. Joe King, Jr.             


/s/J. Harold Barnes, Jr.   Executive Vice President and         July 6, 1998
-----------------------    Director
J. Harold Barnes, Jr.        


/s/Ray W. Bradley, Jr.
----------------------     Director                             July 6, 1998
Ray W. Bradley, Jr.


/s/Joe M. Logan
---------------            Director                             July 6, 1998
Joe M. Logan


/s/John M. McCaskill
--------------------       Director                             July 6, 1998
John M. McCaskill


/s/Lewis H. Parham, Jr.
-----------------------    Director                             July 6, 1998
Lewis H. Parham, Jr.


/s/Willie E. Royal
------------------         Director                             July 6, 1998
Willie E. Royal


/s/A. Burton Mackey, Jr.   Vice President and Treasurer         July 6, 1998
------------------------   (principal financial officer)
A. Burton Mackey, Jr.        
<PAGE>
INDEPENDENT AUDITORS' REPORT


The Board of Directors
HFNC Financial Corp.
Charlotte, North Carolina

We have  audited  the  consolidated  statements  of  financial  position of HFNC
Financial  Corp. and its  subsidiaries  (the  "Company") as of June 30, 1997 and
1996, and the related consolidated  statements of income, equity, and cash flows
for each of the three years in the period ended June 30, 1997.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company at June 30, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1997 in conformity  with  generally  accepted
accounting principles.

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

As discussed in Note 1 to the consolidated financial statements,  effective July
1, 1995,  the  Company  changed  its  method of  accounting  for  postretirement
benefits to conform with the  provisions  of  Statement of Financial  Accounting
Standards No. 106 and effective July 1, 1994, the Company  changed its method of
accounting  for  investments  in debt and equity  securities to conform with the
provisions of Statement of Financial Accounting Standards No. 115.

   
/s/Deloitte & Touche LLP
------------------------
Deloitte & Touche LLP
Charlotte, North Carolina
    
August 12, 1997

                                     - 17 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
JUNE 30, 1997 AND 1996
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     1997                 1996
<S>                                                                                           <C>                     <C>          
CASH AND CASH EQUIVALENTS:
  Cash                                                                                        $   9,934,359           $   6,769,598
  Federal funds sold                                                                             21,436,000               2,836,000
                                                                                              -------------           -------------
          Total cash and cash equivalents                                                        31,370,359               9,605,598
                                                                                              -------------           -------------
SECURITIES - Available for sale, at fair value (amortized
  cost: $169,285,103 and $248,922,746, at June 30, 1997 and 1996,
  respectively)                                                                                 175,710,104             248,445,333
LOANS RECEIVABLE, NET (allowance for loan losses:
  $7,611,675 and $7,495,515, at June 30, 1997 and 1996,
  respectively)                                                                                 658,323,320             505,130,813
REAL ESTATE, NET                                                                                    867,876               2,539,014
OFFICE PROPERTIES AND EQUIPMENT, NET                                                             10,099,107               5,846,103
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA -
  At cost                                                                                         6,450,000               5,062,100
NET DEFERRED INCOME TAX ASSET                                                                     3,390,125               5,805,502
OTHER ASSETS                                                                                      6,709,218               6,443,605
                                                                                              -------------           -------------
TOTAL                                                                                         $ 892,920,109           $ 788,878,068
                                                                                              =============           =============

LIABILITIES AND SHAREHOLDERS' EQUITY

DEPOSITS                                                                                      $ 443,839,542           $ 448,570,916
OTHER BORROWED FUNDS                                                                            277,000,000              85,000,000
OTHER LIABILITIES                                                                                11,020,650               8,802,696
                                                                                              -------------           -------------
          Total liabilities                                                                     731,860,192             542,373,612
                                                                                              -------------           -------------
SHAREHOLDERS' EQUITY:
  Common stock, par value $0.01 per share: 25,000,000 shares
    authorized; 17,192,500 shares issued and outstanding                                            171,925                 171,925
  Additional paid-in capital                                                                     89,967,883             168,390,571
  ESOP loan and unvested restricted stock                                                       (23,137,490)             (8,700,000)
  Retained income                                                                                90,106,224              86,896,095
  Unrealized gain (loss) on securities available for sale (net of
    deferred taxes: $2,473,626 and $223,278 at June 30, 1997 and
    1996, respectively)                                                                           3,951,375                (254,135)
                                                                                              -------------           -------------
           Total shareholders' equity                                                           161,059,917             246,504,456
                                                                                              -------------           -------------
TOTAL                                                                                         $ 892,920,109           $ 788,878,068
                                                                                              =============           =============
</TABLE>
See notes to consolidated financial statements.


                                                               - 18 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                1997                  1996                  1995
<S>                                                                         <C>                   <C>                   <C>         
INTEREST INCOME:
  Interest on loans                                                         $ 49,101,206          $ 39,995,122          $ 38,918,640
  Interest on securities                                                      16,214,450            12,146,926             7,202,264
                                                                            ------------          ------------          ------------
          Total                                                               65,315,656            52,142,048            46,120,904
                                                                            ------------          ------------          ------------
INTEREST EXPENSE:
  Interest on customer deposits                                               23,564,888            27,218,333            21,464,269
  Interest on other borrowed funds                                            11,053,822               790,224             2,786,523
                                                                            ------------          ------------          ------------
          Total                                                               34,618,710            28,008,557            24,250,792
                                                                            ------------          ------------          ------------
NET INTEREST INCOME                                                           30,696,946            24,133,491            21,870,112
PROVISION FOR LOAN LOSSES (RECOVERY OF
  ALLOWANCE)                                                                     (59,286)              336,957               486,101
                                                                            ------------          ------------          ------------
NET INTEREST INCOME AFTER PROVISION FOR
  LOAN LOSSES (RECOVERY OF ALLOWANCE)                                         30,756,232            23,796,534            21,384,011
                                                                            ------------          ------------          ------------
OTHER OPERATING INCOME:
  Service charges and fees                                                       715,265               735,362               689,840
  Gain on sale of office properties and equipment                                   --                 657,616               192,436
  Gain on sale of securities                                                      19,379                  --                    --
  Other income                                                                   467,209               423,619               547,737
                                                                            ------------          ------------          ------------
          Total                                                                1,201,853             1,816,597             1,430,013
                                                                            ------------          ------------          ------------
OTHER OPERATING EXPENSES:
  Personnel expenses                                                          10,429,710             6,046,919             6,302,236
                                                                                                                                    
  Federal deposit insurance premiums                                             664,860             1,113,602             1,027,961
                                                                                                           
  Special SAIF recapitalization assessment                                     3,077,275                 --                    --
                                                                                                                                    
  Occupancy                                                                    1,817,445             1,937,129             1,752,760
                                                                                                                                    
  Net cost of real estate operations                                              70,249               341,800             1,257,792
                                                                                                                                    
  Advertising                                                                    841,896               797,040               869,141
                                                                                                                                    
  Data processing                                                                420,862               406,429               387,380
                                                                                                                                    
  Other expenses                                                               2,662,324             1,780,266             1,209,561
                                                                            ------------          ------------          ------------
                                                                                                                                    
          Total                                                               19,984,621            12,423,185            12,806,831
                                                                            ------------          ------------          ------------
                                                                            
<PAGE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                1997                  1996                  1995
<S>                                                                         <C>                   <C>                   <C>         
INCOME BEFORE INCOME TAXES AND
  CUMULATIVE EFFECT OF A CHANGE IN
  ACCOUNTING PRINCIPLE                                                        11,973,464            13,189,946            10,007,193
PROVISION FOR INCOME TAXES                                                     4,609,783             4,565,844             3,857,182
                                                                            ------------          ------------          ------------
INCOME BEFORE CUMULATIVE EFFECT OF A
  CHANGE IN ACCOUNTING PRINCIPLE                                               7,363,681             8,624,102             6,150,011
CUMULATIVE EFFECT ON PRIOR YEARS OF A
  CHANGE IN ACCOUNTING PRINCIPLE                                                    --              (1,050,000)                 --
                                                                            ------------          ------------          ------------

NET INCOME                                                                  $  7,363,681          $  7,574,102          $  6,150,011
                                                                            ============          ============          ============

NET INCOME PER SHARE OF COMMON STOCK                                        $       0.46                   N/A                   N/A
                                                                            ============                                            

AVERAGE NUMBER OF SHARES OUTSTANDING                                          15,995,345                   N/A                   N/A
                                                                              ==========                                            
</TABLE>

See notes to consolidated financial statements.


                                                               - 19 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                          Unearned     Net Unrealized
                                                                          ESOP and     Gain (Loss) on
                                         Additional                       Unvested       Securities
                            Common         Paid-In        Retained       Restricted    Available for
                            Stock          Capital         Income          Shares         Sale (1)         Total
                            -----          -------         ------          ------         --------         -----
<S>                           <C>          <C>             <C>            <C>              <C>           <C>         
BALANCE, JUNE 30, 1994                                     $73,171,982                                     $73,171,982
  Net income                                                 6,150,011                                       6,150,011
  Net unrealized gain on
    securities available for
    sale upon adoption
    of SFAS No. 115                                                 --                      2,207,105        2,207,105
  Change in net unrealized
    gain on securities
    available for sale                                              --                        283,013          283,013
                                                           -----------                     ----------     ------------
BALANCE, JUNE 30, 1995                                      79,321,993                      2,490,118       81,812,111
  Net income                                                 7,574,102                             --        7,574,102
  Net proceeds of 
    common stock issued       $171,925    $168,266,013              --      (9,000,000)            --      159,437,938
  Shares released from
    ESOP                            --         124,558              --         300,000             --          424,558
  Net unrealized gain on
    securities transferred
    to available for sale
    portfolio                       --              --              --              --        248,231          248,231
  Change in net unrealized
    gain on securities
    available for sale              --              --              --              --     (2,992,484)      (2,992,484)
                              --------     -----------     -----------    ------------     ----------     ------------
BALANCE, JUNE 30, 1996         171,925     168,390,571      86,896,095      (8,700,000)      (254,135)     246,504,456
                              --------     -----------     -----------    ------------     ----------     ------------
  Net income                        --              --       7,363,681              --             --        7,363,681
  Shares released from
    ESOP and restricted
    stock trusts                    --         494,810              --       3,269,211             --        3,764,021
  Dividends paid                    --     (78,917,498)     (4,153,552)             --             --      (83,071,050)
  Purchase of ESOP and
    restricted stock                --              --              --    (17,706,701)             --      (17,706,701)
  Change in net unrealized
    loss on securities
    available for sale              --              --              --             --       4,205,510        4,205,510
                              --------     -----------     -----------    ------------     ----------     ------------
BALANCE, JUNE 30, 1997        $171,925     $89,967,883     $90,106,224    $(23,137,490)    $3,951,375     $161,059,917
                              ========     ===========     ===========    ============     ==========     ============
</TABLE>

(1) Net of deferred income taxes.

See notes to consolidated financial statements.

                                     - 20 -
<PAGE>
<TABLE>
<CAPTION>
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  1997                 1996               1995
<S>                                                                         <C>                  <C>                  <C>          
OPERATING ACTIVITIES:
  Net income                                                                $   7,363,681        $   7,574,102        $   6,150,011
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Cumulative effect of a change in accounting principle                            --              1,050,000                 --
    Depreciation and amortization                                                 901,982              533,049              511,339
    Amortization of net deferred loan fees                                     (1,788,109)          (2,038,329)          (1,718,914)
    Provision for losses on loans (recovery of allowance)                         (59,286)             336,957              486,101
    Provision for losses on real estate                                            92,379              139,812            1,236,027
    Deferred income tax (benefit) provision                                      (281,527)             329,276             (427,055)
    Amortization of unearned stock compensation                                 3,764,021              424,558                 --
    (Gain) loss on sales of:
      Fixed assets                                                                   --               (657,616)            (192,436)
      Real estate owned                                                          (149,136)             179,258              (29,497)
      Investments                                                                 (19,379)             (15,157)                --
    Increase in other assets                                                     (265,613)          (1,474,967)          (2,124,908)
    Increase in other liabilities                                               2,217,954              472,522            2,932,697
                                                                            -------------        -------------        -------------

          Net cash provided by operating activities                            11,776,967            6,853,465            6,823,365
                                                                            -------------        -------------        -------------

INVESTING ACTIVITIES:
  Proceeds from maturities of investment securities                             8,394,737           42,469,426            6,000,000
  Proceeds from sales of securities available for sale                         67,279,572            7,515,157                 --
  Purchases of securities available for sale                                   (6,950,000)        (193,170,501)         (14,987,327)
  Purchases of Federal Home Loan Bank stock                                    (1,387,900)                --                   --
  Principal repayment on mortgage-backed securities                            10,584,525            4,449,592                 --
  Proceeds from sales of real estate held for
    development                                                                      --                700,000              412,565
  Proceeds from sales of real estate owned                                      2,841,885            1,911,353            3,475,871
  Net loan originations                                                      (152,459,102)         (70,086,708)          (2,213,974)
  Proceeds from disposals of office properties and
    equipment                                                                        --              1,497,098              361,804
  Purchases of office properties and equipment                                 (4,806,798)             (98,415)            (157,473)
                                                                            -------------        -------------        -------------

          Net cash used in investing activities                               (76,503,081)        (204,812,998)          (7,108,534)
                                                                            -------------        -------------        -------------


                                                               - 21 -
<PAGE>
HFNC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  1997                 1996               1995
<S>                                                                         <C>                  <C>                  <C>          
FINANCING ACTIVITIES:
  (Decrease) increase in deposits                                              (4,731,374)         (41,995,531)          45,070,553
  Proceeds from other borrowed funds                                          192,000,000           85,000,000           60,000,000
  Purchases of restricted stock for benefit plan                              (17,706,701)                --                   --
  Repayments of Federal Home Loan Bank advances                                      --            (10,000,000)        (100,000,000)
  Net proceeds from the sale of stock                                                --            159,437,938                 --
  Dividends paid                                                              (83,071,050)                --                   --
                                                                            -------------        -------------        -------------

          Net cash provided by financing activities                            86,490,875          192,442,407            5,070,553
                                                                            -------------        -------------        -------------

INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS-                                                                 21,764,761           (5,517,126)           4,785,384

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                             9,605,598           15,122,724           10,337,340
                                                                            -------------        -------------        -------------

CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                                                   $  31,370,359        $   9,605,598        $  15,122,724
                                                                            =============        =============        =============

SUPPLEMENTAL DISCLOSURES:
  Cash paid during the year for:
    Interest                                                                $  49,205,450        $  28,048,607        $  23,343,529
    Income taxes                                                                4,696,284            2,482,214            3,985,685
                                                                               
  Non-cash investing activities:
    Transfers from loans to real estate acquired in
      settlement of loans                                                       1,113,990            2,127,081            4,080,832
                                                                               
    Unrealized net gain (loss) on securities available
      for sale, net of deferred income taxes                                    4,205,510            2,744,253           (2,490,118)
                                                                              
    Investment securities transferred from held to
      maturity to available  for sale, at fair value
      (amortized cost $0, $108,288,966 and $2,745,308,
      respectively)                                                                  --            108,537,197            4,952,413
</TABLE>

See notes to consolidated financial statements.

                                                               - 22 -
<PAGE>
HFNC FINANCIAL CORP. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
--------------------------------------------------------------------------------

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

      Investment  Securities  -  The  Company  adopted  Statement  of  Financial
      Accounting  Standards ("SFAS") No. 115, Accounting for Certain Investments
      in Debt and  Equity  Securities,  effective  July 1,  1994.  SFAS No.  115
      requires investments to be classified in three categories. Debt securities
      that the Company has the  positive  intent and ability to hold to maturity
      are classified as "held to maturity  securities" and reported at amortized
      cost. Debt and equity  securities that are bought and held principally for
      the  purpose  of  selling  in the near  term are  classified  as  "trading
      securities" and reported at fair value,  with unrealized  gains and losses
      included in earnings.  Debt  securities  not  classified as either held to
      maturity  securities  or  trading  securities  and equity  securities  not
      classified as trading  securities  are to be classified as "available  for
      sale  securities" and reported at fair value,  with  unrealized  gains and
      losses  excluded  from  earnings and  reported as a separate  component of
      shareholders'  equity. As of June 30, 1997, all investments are classified
      as available for sale.

                                     - 23 -
<PAGE>
      In  November  1995,  the  FASB  issued  a  Special  Report,   A  Guide  to
      Implementation  of Statement 115 on Accounting for Certain Debt and Equity
      Securities, which included a transition provision allowing all entities to
      reassess the appropriateness of the classifications of all securities held
      and  account   for  any   resulting   reclassifications   at  fair  value.
      Reclassifications  from the held to maturity category  resulting from this
      one-time  reassessment will not call into question, or "taint," the intent
      of the entity to hold other debt securities to maturity in the future.  In
      accordance   with  this  Special  Report,   the  Association   transferred
      securities  with a fair value and  amortized  cost of  approximately  $108
      million  from held to maturity to  available  for sale.  This  transfer is
      disclosed as a noncash transaction in the statements of cash flows.

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

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

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

      Restructured loans are those for which concessions,  such as the reduction
      of interest rates or deferral of interest or principal payments, have been
      granted due to a  deterioration  in the  borrower's  financial  condition.
      Interest on restructured  loans is accrued at the restructured  rates. The
      difference  between interest that would have recognized under the original
      terms  of  nonaccrual  and  restructured   loans  and  interest   actually
      recognized  on such  loans was not a material  amount for the years  ended
      June 30, 1997, 1996 and 1995.

      Effective  July 1, 1995, the Company  adopted SFAS No. 114,  Accounting by
      Creditors  for  Impairment  of a Loan,  and SFAS No.  118,  Accounting  by
      Creditors for Impairment of a Loan - Income  Recognition and  Disclosures.
      SFAS No. 114 requires that the carrying value of an impaired loan be based
      on the present  value of  expected  future  cash flows  discounted  at the
      loan's effective interest rate or, as a practical expedient, at the loan's
      observable  market price or the fair value of the collateral,  if the loan
      is collateral-dependent. Under SFAS No. 114, a loan is considered impaired
      when, based on current information,  it is probable that the borrower will
      be unable to pay contractual  interest or principal  payments as scheduled
      in  the  loan  agreement.  SFAS  No.  114  applies  to  all  loans  except
      smaller-balance  homogenous  mortgage and consumer loans, loans carried at
      fair  value  or the  lower of cost or fair  value,  debt  securities,  and
      leases.  Generally,  the  Company  applies  SFAS  No.  114  to  nonaccrual
      commercial loans and restructured loans.

                                     - 24 -
<PAGE>
      SFAS No. 118 permits a creditor to use  existing  methods for  recognizing
      interest revenue on impaired loans. The Company recognizes interest income
      on impaired  loans  pursuant to the  discussion  above for  nonaccrual and
      renegotiated loans.

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

      Real Estate  Acquired  in  Settlement  of Loans - Real estate  acquired in
      settlement  of loans is  initially  recorded  at fair value at the date of
      acquisition,  establishing a new cost basis. After acquisition, valuations
      are performed periodically by management and the real estate is carried at
      the  lower  of cost or fair  value  minus  estimated  costs  of  disposal.
      Revenues,  expenses and  additions to the valuation  allowance  related to
      real estate  acquired in  settlement  of loans are included in net cost of
      real estate operations.

      Real  Estate  Held  for  Development  or  Resale  - Real  estate  held for
      development  or resale is  carried at the lower of cost or  estimated  net
      realizable  value.  Costs related to the  development  or  improvement  of
      property  are  capitalized  to the extent such costs are  estimated  to be
      recoverable,  whereas  those  costs  related to holding the  property  are
      expensed.

      Office  Properties  and  Equipment - Office  properties  and equipment are
      carried  at  cost,  net  of  accumulated  depreciation  and  amortization.
      Depreciation  is  computed  primarily  on the  straight-line  method  over
      estimated  useful lives of up to fifty years for buildings,  ten years for
      building  improvements,  four to ten years  for  furniture,  fixtures  and
      equipment  and four  years for  automobiles.  Leasehold  improvements  are
      amortized on the straight-line method over the term of the lease.

      Interest  Income  and Fees -  Interest  income  on loans is  accrued  on a
      monthly basis. Servicing fees are credited to income as earned.

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

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

      Advertising Costs - The Company expenses advertising costs as incurred.

                                     - 25 -
<PAGE>
      Income Taxes - Provisions  for income taxes are based on amounts  reported
      in the  consolidated  statements of income (after  exclusion of nontaxable
      income  such as interest on state and  municipal  securities)  and include
      changes in deferred  income taxes.  Deferred  taxes are computed using the
      asset and liability  approach.  The tax effects of differences between the
      tax and financial accounting basis of assets and liabilities are reflected
      in the balance  sheets at the tax rates  expected to be in effect when the
      differences reverse.

      Earnings Per Share - For the year ended June 30, 1997,  earnings per share
      of common stock is based on the weighted  average  number of common shares
      outstanding  during the year.  As the Company did not  complete  its stock
      conversion from a mutual  association until December 28, 1995, no earnings
      per share have been shown for any periods prior to the year ended June 30,
      1997.

      Accounting  Standards  Implemented  in the Year Ended June 30,  1997 - The
      Company  implemented  SFAS  No.  121,  Accounting  for the  Impairment  of
      Long-Lived  Assets and for Long-Lived  Assets to be Disposed Of, effective
      July 1,  1996.  SFAS No.  121  establishes  accounting  standards  for the
      impairment of long-lived assets,  certain  identifiable  intangible assets
      and  goodwill  related  to  those  assets  to be  held  and  used  and for
      long-lived assets to be held and certain  intangible assets to be disposed
      of. The  adoption of this  standard did not have a  significant  impact on
      financial condition or results of operations.

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

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

      On January 1, 1997, the Company implemented the provisions of SFAS No. 125
      which were not  deferred  by SFAS No.  127.  Its  adoption  did not have a
      significant impact on financial position or results of operations.

                                     - 26 -
<PAGE>
      Recently Issued Accounting  Standards - The FASB has recently issued three
      new accounting  standards that will affect the reporting and disclosure of
      financial  information  by the Company.  Management has not determined the
      effects of adopting these  statements,  but their adoption will not impact
      financial  condition  or  results  of  operations  because  they deal with
      reporting and disclosure.  The following is a summary of the standards and
      their required implementation dates:

            SFAS  No.  128,  Earnings  Per  Share - This  statement  establishes
           standards for computing and presenting earnings per share ("EPS"). It
           will require the  presentation of basic EPS on the face of the income
           statement  with dual  presentation  of both basic and diluted EPS for
           entities  with  complex  capital  structures.  Basic EPS excludes the
           dilutive effect that could occur if any securities or other contracts
           to issue common stock were exercised or converted into or resulted in
           the  issuance  of common  stock.  Basic EPS is  computed  by dividing
           income  available  to  common  shareholders  by the  weighted-average
           number of common shares  outstanding for the period.  The computation
           of diluted EPS is similar to the  computation of basic EPS except the
           denominator  is increased to include the number of additional  common
           shares that would have been  outstanding  if the  dilutive  potential
           common  shares had been  issued.  In the case of certain  convertible
           securities,  the numerator may also be increased by related  interest
           or dividends. This statement will be effective for interim and annual
           periods ending after December 31, 1997.

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

            SFAS No.  131,  Disclosures  About  Segments  of an  Enterprise  and
           Related  Information - This statement  establishes  standards for the
           way public business  enterprises  report  information about operating
           segments and  establishes  standards  for related  disclosures  about
           products  and  services,   geographic   areas  and  major  customers.
           Operating  segments  are  components  of an  enterprise  about  which
           separate  financial   information  is  available  that  is  evaluated
           regularly by the chief  operating  decision  maker in deciding how to
           allocate resources and in assessing performance. Information required
           to be disclosed  includes  segment profit or loss,  certain  specific
           revenue  and  expense   items,   segment  assets  and  certain  other
           information.   This  statement  is  effective  for  the  Company  for
           financial  statements  issued for the fiscal year  beginning  July 1,
           1998.

      Reclassifications  -  Certain  June 30,  1996 and 1995  amounts  have been
      reclassified to conform to the June 30, 1997 presentation.

                                     - 27 -
<PAGE>
2.    SECURITIES

      The maturities,  amortized cost,  unrealized gains,  unrealized losses and
      fair values of securities at June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
                                                                                          1997
                                                      ------------------------------------------------------------------------------
                                                                               Gross                Gross
                                                       Amortized            Unrealized            Unrealized                Fair
                                                          Cost                 Gains                 Losses                 Value
                                                      ------------          ------------          ------------          ------------
<S>                                                   <C>                   <C>                         <C>             <C>         
United States Government
  Agency debt securities:
  Due within one year                                 $ 11,000,000          $      4,165                45,579          $ 10,958,586
  Due after one year but
    within five years                                   66,013,428                91,680               682,172            65,422,936
  Due after five years but
     within ten years                                    7,000,000                  --                 169,373             6,830,627
  Due after ten years                                   31,971,799                  --                 923,042            31,048,757
Federal Home Loan
  Mortgage Corporation
  common and preferred
  stocks                                                   249,358             8,002,792                  --               8,252,150
                                                      ------------          ------------          ------------          ------------
       Total investment
          securities                                   116,234,585             8,098,637             1,820,166           122,513,056
                                                      ------------          ------------          ------------          ------------
Mortgage-backed securities:
  Federal National
      Mortgage Association                              12,939,158                  --                  75,957            12,863,201
  Government National
      Mortgage Association                              40,111,360               405,425               182,938            40,333,847
                                                      ------------          ------------          ------------          ------------
       Total mortgage-backed
         securities                                     53,050,518               405,425               258,895            53,197,048
                                                      ------------         ------------           ------------          ------------
Total                                                 $169,285,103          $  8,504,062          $  2,079,061          $175,710,104
                                                      ============          ============          ============          ============

</TABLE>

                                     - 28 -
<PAGE>
<TABLE>
<CAPTION>
                                                                                            1996
                                                         ---------------------------------------------------------------------------
                                                                                 Gross                Gross
                                                           Amortized           Unrealized           Unrealized             Fair
                                                             Cost                Gains                Losses               Value
                                                         ------------         ------------         ------------         ------------
<S>                                                      <C>                  <C>                  <C>                  <C>        
United States Government
  Agency debt securities:
  Due within one year                                    $  2,000,000                 --           $      5,140         $  1,994,860

  Due after one year but
    within five years                                      82,935,029         $    166,528            1,692,814           81,408,743
  Due after five years but
     within ten years                                       8,000,000                 --                267,511            7,732,489
  Due after ten years                                      29,969,822                 --              1,300,699           28,669,123
Federal Home Loan
  Mortgage Corporation
  common and preferred
  stocks                                                      273,905            5,279,533                 --              5,553,438
                                                         ------------         ------------         ------------         ------------
       Total investment
          securities                                      123,178,756            5,446,061            3,266,164          125,358,653
                                                         ------------         ------------         ------------         ------------
Mortgage-backed securities:
  Federal National
      Mortgage Association                                 28,328,508                 --                494,668           27,833,840

  Government National
      Mortgage Association                                 97,415,482                 --              2,162,642           95,252,840
                                                         ------------         ------------         ------------         ------------
       Total mortgage-backed
         securities                                       125,743,990                 --              2,657,310          123,086,680
                                                         ------------         ------------         ------------         ------------

Total                                                    $248,922,746         $  5,446,061         $  5,923,474         $248,445,333
                                                         ============         ============         ============         ============
</TABLE>

      As of June 30, 1997, there were  approximately  $73 million of investments
      with call options,  all of which are callable  within one year. As of June
      30, 1996,  there were  approximately  $93 million of investments with call
      options, of which $90 million are callable within one year.

      Gross realized  gains and losses on sales of securities  were $714,527 and
      $695,148, respectively, in fiscal 1997. Gross realized gains and losses on
      sales of  securities  were  $30,782 and $15,625,  respectively,  in fiscal
      1996. There were no sales of investment securities for the year ended June
      30, 1995.

                                     - 29 -
<PAGE>
3.    LOANS RECEIVABLE

      Loans receivable at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
                                                       1997            1996

<S>                                              <C>              <C>          
Residential (1 - 4 family) real estate loans     $ 561,352,476    $ 416,710,946
Construction loans                                  68,365,540       61,015,061
Commercial loans                                    30,631,001       29,342,750
Land loans                                          19,991,562       22,843,531
Consumer loans:
  Home equity                                       14,494,824       13,696,894
  Credit card                                        6,198,263        5,644,392
  Other                                              3,255,459        3,277,814
Total                                              704,289,125      552,531,388
Deduct:
  Allowance for loan losses                         (7,611,675)      (7,495,515)
  Undisbursed portion of loans in process          (33,029,829)     (34,846,054)
  Unearned loan fees, net                           (5,324,301)      (5,059,006)
                                                 -------------    -------------

Loans receivable, net                            $ 658,323,320    $ 505,130,813
                                                 =============    =============
</TABLE>

      The changes in the allowance for loan losses consisted of the following:
<TABLE>
<CAPTION>
                                                         1997          1996           1995
<S>                                                 <C>            <C>            <C>        
Allowance, beginning of year                        $ 7,495,515    $ 8,088,462    $ 7,828,492
Provision for loan losses (recovery of allowance)       (59,286)       336,957        486,101
Write-offs                                             (344,230)    (1,493,125)      (395,182)
Recoveries                                              519,676        563,221        169,051
                                                    -----------    -----------    -----------
Allowance, end of year                              $ 7,611,675    $ 7,495,515    $ 8,088,462
                                                    ===========    ===========    ===========
</TABLE>

      Residential  real estate  loans are  presented  net of loans  serviced for
      others totaling $30.9 million, $36.6 million and $43.0 million at June 30,
      1997, 1996 and 1995, respectively.  Loans sold in the secondary market are
      generally  sold without  recourse.  Servicing  loans for others  generally
      consists of collecting  mortgage  payments,  maintaining  escrow accounts,
      disbursing payments to investors and foreclosure processing. In connection
      with these loans serviced for others,  the Company held borrowers'  escrow
      balances of $339,899,  $393,826  and  $476,131 at June 30, 1997,  1996 and
      1995, respectively.

      Loans not currently  accruing  interest at June 30, 1997 and June 30, 1996
      amounted to $6.3 million and $8.0 million,  respectively.  Interest income
      that would have been  accrued on these  loans if they were fully  accruing
      amounted  to $472,000  and  $791,000  for the 1997 and 1996 fiscal  years,
      respectively.

      In  accordance  with SFAS Nos.  114 and 118, the  recorded  investment  in
      impaired  loans was  $4,385,280  and $6,275,358 at June 30, 1997 and 1996,
      respectively.  The  related  allowance  for loan losses on these loans was
      $1,979,647  and  $2,804,497 at June 30, 1997 and 1996,  respectively.  All
      impaired  loans  required an  allowance  for loan loss and were  evaluated
      using the fair value of the collateral. The average recorded investment in
      impaired  loans was  $4,896,308  and $6,346,184 at June 30, 1997 and 1996,
      respectively,  and the cash income recognized for the years ended June 30,
      1997 and 1996 was $68,000 and $121,000, respectively.

                                     - 30 -
<PAGE>
      The Company is not  committed to lend  additional  funds to debtors  whose
loans have been modified.

4.    REAL ESTATE

      Real estate consisted of the following:
<TABLE>
<CAPTION>
                                                      1997              1996
<S>                                               <C>               <C>        
Acquired in settlement of loans                   $ 1,138,277       $ 3,682,554
Less allowance for estimated losses                  (270,401)       (1,143,540)
                                                  -----------       -----------

Real estate, net                                  $   867,876       $ 2,539,014
                                                  ===========       ===========
</TABLE>

      The  changes  in the  allowance  for  losses on real  estate  acquired  in
      settlement of loans consisted of the following:
<TABLE>
<CAPTION>
                                          1997           1996           1995
<S>                                   <C>            <C>            <C>        
Allowance, beginning of year          $ 1,143,540    $ 1,542,253    $ 1,920,257
Provision                                  92,379        139,812      1,236,027        
Write-offs                               (965,518)      (538,525)    (1,614,031)
                                      -----------    -----------    -----------

Allowance, end of year                $   270,401    $ 1,143,540    $ 1,542,253
                                      ===========    ===========    ===========
</TABLE>

5.    OFFICE PROPERTIES AND EQUIPMENT

      Office properties and equipment consisted of the following:
<TABLE>
<CAPTION>
                                                        1997           1996
<S>                                                <C>             <C>         
Land                                               $  2,863,967    $  1,921,737
Office buildings and improvements                     9,741,536       6,463,490
Office equipment and leasehold improvements           2,922,692       2,336,170
Automobiles                                             100,388         100,388
                                                   ------------    ------------
Total                                                15,628,583      10,821,785
Less accumulated depreciation and amortization       (5,529,476)     (4,975,682)
                                                   ------------    ------------

Office properties and equipment, net               $ 10,099,107    $  5,846,103
                                                   ============    ============
</TABLE>

                                     - 31 -
<PAGE>
6.    DEPOSITS

      Customer deposits at June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
                                                             1997            1996
<S>                                                      <C>            <C>         
Checking accounts                                        $  9,192,647   $  9,326,000
NOW accounts - 2.50% at June 30, 1997 and 1996             11,798,817     10,109,446
Flexible rate checking:
  Money market deposit accounts, 2.50% to 4.89% at
    June 30, 1997 and 2.50% to 2.90% at June 30, 1996      34,759,502     32,315,154
  Other - 2.50% to 2.55% at June 30, 1997 and 2.50% to
    2.55% at June 30, 1996
                                                            3,369,134      3,528,117
                                                         ------------   ------------
Total checking accounts                                    59,120,100     55,278,717
                                                         ------------   ------------
Passbook accounts - 2.50% at June 30, 1997 and 1996        14,447,314     15,141,246
                                                         ------------   ------------
Certificate accounts:
  2.50% - 3.95%
                                                            3,940,677      1,764,422
  4.00% - 4.95%                                            15,680,883     33,454,451
  5.00% - 6.95%                                           320,077,671    284,252,015
  7.00% - 8.95%                                            29,712,983     57,854,550
  9.00% and over                                              859,914        825,515
                                                         ------------   ------------
    Total certificate accounts                            370,272,128    378,150,953
                                                         ------------   ------------

Total deposits                                           $443,839,542   $448,570,916
                                                         ============   ============
</TABLE>


                                     - 32 -
<PAGE>
      The weighted average coupon rate on customer deposits at June 30, 1997 and
      1996 was 5.24% and 5.42%, respectively.

      Scheduled  maturities  of  certificate  accounts  at June 30, 1997 were as
follows:


Year Ending June 30,                                            Amount
--------------------                                            ------
1998                                                          $291,650,026
1999                                                            55,764,166
2000                                                            15,368,010
2001                                                             3,529,827
2002                                                             2,968,272
Thereafter                                                         991,827
                                                              ------------
Total certificate accounts                                    $370,272,128
                                                              ============

      The  aggregate  amount of  certificate  accounts in excess of $100,000 was
      $145,100,828  and  $129,249,220  at June 30, 1997 and 1996,  respectively.
      Deposits in excess of $100,000 are not federally insured.

                                     - 33 -
<PAGE>
      Interest  expense by type of deposit  for the years  ended June 30,  1997,
1996 and 1995 was as follows:
<TABLE>
<CAPTION>
                                     1997             1996             1995
                                 ------------     ------------     ------------
<S>                              <C>              <C>              <C>         
Checking accounts                $  1,349,244     $  1,510,906     $  2,029,954
Passbook accounts
                                      237,366          341,530          374,275
Certificate accounts               22,035,269       25,429,660       19,194,800
Less:  Penalty income                 (56,991)         (63,763)        (134,760)
                                 ------------     ------------     ------------

Total interest expense           $ 23,564,888     $ 27,218,333     $ 21,464,269
                                 ============     ============     ============
</TABLE>

7.    OTHER BORROWED FUNDS

      At June 30, 1997, the Company had $129.0  million of outstanding  advances
      from the Federal  Home Loan Bank of Atlanta  ("FHLB").  No  advances  were
      outstanding  at June 30, 1996.  Advances were at fixed rates.  The maximum
      amount of outstanding  advances at any month-end  during 1997 and 1996 was
      $129.0 million and $10.0 million,  respectively,  and the average  balance
      outstanding  for such  years  was  approximately  $61.1  million  and $1.0
      million  respectively.  The weighted  average  interest rate during fiscal
      years 1997 and 1996 was 5.90% and 5.89%, respectively.

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

      The Company also borrowed  funds using  securities  sold under  repurchase
      agreements during 1997 and 1996. At June 30, 1997 and 1996, $120.0 million
      and $85.0 million of such borrowings were outstanding,  respectively.  The
      maximum amount of outstanding  agreements at any month-end during 1997 and
      1996 was $120.0 million and $85.0 million,  respectively,  and the average
      outstanding  balance of such  agreements for the years were  approximately
      $117.4  million  and  $13.4  million,  respectively.  Collateral  for  the
      securities sold under repurchase  agreements  consisted of U.S. Government
      Agency securities and mortgage-backed securities which were transferred to
      a third party for safekeeping during the terms of the agreements.  At June
      30,  1997,  the market  value of such  collateralized  securities  totaled
      approximately  $114.4  million  (amortized  cost of  approximately  $115.6
      million).

      During the 1997 fiscal year,  the Company also  borrowed  $28.0 million in
      short  term  funds  from a  commercial  bank to fund a portion of a $5 per
      share special  distribution  paid to  shareholders  on March 18, 1997. The
      loan,  at prime rate less .5%, was obtained on March 18, 1997 and was paid
      off subsequent to June 30, 1997.

8.    INCOME TAXES

      The provision for income taxes is summarized as follows:


                                     - 34 -
<PAGE>
<TABLE>
<CAPTION>
                                                   Year Ended June 30,
                                       ----------------------------------------
                                           1997           1996          1995
<S>                                    <C>            <C>           <C>        
Current provision:
  Federal                              $ 4,656,460    $ 3,925,383   $ 3,907,273
  State                                    234,850        311,185       376,964
                                       -----------    -----------   -----------

Total current                            4,891,310      4,236,568     4,284,237
                                       -----------    -----------   -----------
<CAPTION>
                                                   Year Ended June 30,
                                       ----------------------------------------
                                           1997           1996          1995
<S>                                    <C>            <C>           <C>        
Deferred (benefit) provision:
  Federal                              $  (225,828)   $   253,845   $  (331,675)
  State                                    (55,699)        75,431       (95,380)
                                       -----------    -----------   -----------

Total deferred                            (281,527)       329,276      (427,055)
                                       -----------    -----------   -----------

Total provision for income taxes       $ 4,609,783    $ 4,565,844   $ 3,857,182
                                       ===========    ===========   ===========
</TABLE>

      For the years  ended  June 30,  1997 and 1996,  deferred  tax  liabilities
      (assets) of $2,473,626  and  $(223,278),  respectively,  were allocated to
      equity  for the tax effect of the  unrealized  gain  (loss) on  investment
      securities available for sale.

      Income  taxes  differed  from amounts  computed by applying the  statutory
      federal rate (34%) to income before income taxes and cumulative  effect of
      a change in accounting principle (see Note 1) as follows:
<TABLE>
<CAPTION>
                                                              Year Ended June 30,
                                                     ---------------------------------------
                                                        1997          1996          1995
<S>                                                  <C>           <C>           <C>       
Tax at federal income tax rate                       $4,070,978    $4,484,581    $3,402,446
(Decrease) increase resulting from:
  Statutory bad debt deduction for tax purposes            --        (520,000)           --
  State income tax expense, net of federal benefit      118,240       255,166       185,845
  Other, net                                            420,565       346,097       268,891
                                                     ----------    ----------    ----------

Total                                                $4,609,783    $4,565,844    $3,857,182
                                                     ==========    ==========    ==========

Effective tax rate                                         38.5%         34.6%         38.5%
                                                     ==========    ==========    ==========
</TABLE>

      The tax effects of significant items comprising the Company's net deferred
      tax asset at June 30, 1997 and 1996 are as follows:

                                     - 35 -
<PAGE>
<TABLE>
<CAPTION>
                                                                    1997           1996
<S>                                                             <C>            <C>        
Deferred tax assets:
  Differences between book and tax basis bad debt reserves      $ 3,290,767    $ 3,606,805
  Difference between book and tax basis of deferred loan fees       966,132      1,183,796
  Deferred compensation                                           2,011,241      1,466,286
  Net operating loss carryforward                                   677,562           --
  Other                                                            (160,101)       247,187
                                                                -----------    -----------
Total deferred tax assets                                         6,785,601      6,504,074
                                                                -----------    -----------
Deferred tax liabilities:
  Differences between book and tax basis of Federal Home Loan
    Bank of Atlanta stock                                           921,850        921,850
  Unrealized gain (loss) on securities available for sale         2,473,626       (223,278)
                                                                -----------    -----------
Total deferred tax liabilities                                    3,395,476        698,572
                                                                -----------    -----------

Net deferred tax asset                                          $ 3,390,125    $ 5,805,502
                                                                ===========    ===========
</TABLE>

                                     - 36 -
<PAGE>
      The  realization  of the  entire  amount  of the  deferred  tax  asset  is
      considered to be more likely than not;  therefore,  no valuation allowance
      has been provided.

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


9.    BENEFIT PLANS

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

      The plan, prior to modification, was a non-contributory plan which covered
      all full time employees with at least one year of service. Annual employer
      contributions under the plan were based on a percentage of compensation of
      all regular  employees (as defined) less termination  credits.  Retirement
      expenses  relating  to this plan were  funded as accrued  and  amounted to
      $352,094  and  $608,782  for the  years  ended  June 30,  1996  and  1995,
      respectively. 

      Stock Option and Management Recognition and Retention Plans - In December,
      1996,  the Company's  shareholders  approved the Stock Option Plan ("SOP")
      and Management Recognition and Retention Plan ("MRRP").

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

      Under the SOP, options have been granted to directors and key employees to
      purchase  common stock of HFNC Financial  Corp. The exercise price in each
      case equals the fair market value of the  Corporation's  stock at the date
      of grant  which  has been  adjusted  for the  impact  of the $5 per  share
      special distribution to shareholders on March 18, 1997. Options granted in
      the current year have exercise prices ranging from $13.67 to $14.78, and a
      weighted average contract life of 8.5 years.

                                     - 37 -
<PAGE>
      A summary of the status of the Company's  stock option plan as of June 30,
      1997 and changes during the year ending on that date is presented below:
<TABLE>
                                                                         Weighted
                                                                          Average
                                                                         Exercise
Options                                                   Shares          Price
<S>                                                     <C>               <C>   
Outstanding at beginning of year                             --             --
Granted                                                 1,548,471         $13.92
Exercised                                                    --             --
Forfeited                                                  (1,398)         14.78
                                                        ---------         
Outstanding at June 30, 1997                             1,547,073        $13.92
                                                        =========         ======

Options exercisable at June 30, 1997                      516,157         $13.92
                                                        =========         ======
</TABLE>

      The Company applies the provisions of APB Opinion No. 25 in accounting for
      its stock  option  plan,  as allowed  under SFAS No. 123,  Accounting  for
      Stock-Based  Compensation.  Accordingly,  no  compensation  cost  has been
      recognized for options  granted to employees.  Had  compensation  cost for
      these plans been determined based on the fair value at the grant dates for
      awards under those plans  consistent with the methods of SFAS No. 123, the
      Company's pro forma net income and pro forma earnings per share would have
      been as follows:
<TABLE>
<CAPTION>
                                                       1997
                                            --------------------------
                                            As Reported     Proforma
<S>                                         <C>            <C>       
Net income                                  $7,363,681     $6,510,387
Earnings per share                          $      .46     $      .41
</TABLE>

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

      Management  Recognition  and  Retention  Plan - The MRRP  provides for the
      Company's Board of Directors to award restricted stock to officers and key
      employees  as well as  non-employee  directors.  The MRRP  authorizes  the
      Company to grant up to 687,700 shares of Company  stock.  One-fifth of the
      shares  granted  to date  vested  immediately  on the date of  grant.  The
      remainder  will  vest  at a rate  of 25%  per  year  over  the  next  four
      anniversary  dates  of the  grants.  As is the case  with the SOP,  shares
      granted will

                                     - 38 -
<PAGE>
      be deemed vested in the event of  retirement,  disability,  or death.  The
      shares  available  for award  under this plan were  purchased  on the open
      market at a total cost of $13.0 million.  An additional 25,704 shares at a
      cost of  $472,000  were  purchased  using a  portion  of the $5 per  share
      special distribution attributable to ungranted shares.  Approximately $3.2
      million in  compensation  expense was  recognized  during the current year
      related to the MRRP.  The following  table presents the status of the MRRP
      as of June 30, 1997, and changes during the year:
<TABLE>
<CAPTION>
                                                                            Weighted
                                                                            Average
                                                                             Grant
Restricted Stock Award Plan                               Shares             Price
<S>                                                     <C>               <C>
Outstanding at beginning of year                            --                 --
Granted                                                  619,540          $   17.41
Vested                                                  (123,908)             18.07
Forfeited                                                   (600)             17.25
                                                        --------           
Outstanding at June 30, 1997                             495,032          $   17.25
                                                        ========          =========
</TABLE>

      Employee Stock  Ownership Plan - In connection  with the Conversion  (Note
      1), the Company established an Employee Stock Ownership Plan ("ESOP").  In
      order to fund the ESOP,  900,000 shares of the Corporation's  common stock
      were  purchased  on December  28, 1995 by the ESOP with the  proceeds of a
      $9.0 million loan from the  Corporation's  wholly owned  subsidiary,  HFNC
      Investment  Corp.  Unearned  ESOP  shares  are  shown  as a  reduction  of
      shareholders'  equity.  As the  loan is  internally  leveraged,  the  note
      receivable  from the ESOP is not  reported  as an asset nor is the  ESOP's
      debt reported as a liability.  An additional 230,154  shares,costing  $4.2
      million,  were  purchased  by the  plan  using  the $5 per  share  special
      distribution  attributable  to  unallocated  shares in the  plan.  Expense
      related to the ESOP was $1.5 million and $424,000 for the years ended June
      30, 1997 and 1996, respectively.

      Other  Postretirement  Benefits - The Company provides certain health care
      and  life  insurance   benefits  for  substantially  all  of  its  retired
      employees. The Company's postretirement plans currently are not funded. As
      discussed  in Note 1, the Company  adopted  SFAS No. 106,  resulting in an
      increase in accrued postretirement health care costs of $1.7 million and a
      decrease in net income of $1.1 million (after deeferred income tax credits
      of  $650,000),  which  has been  included  in the  Company's  consolidated
      statement  of income for the year ended June 30,  1996.  The status of the
      plans were as follows:

      Accumulated  postretirement  benefit  obligation at June 30, 1997 and June
      30, 1996:

                                                           1997           1996
                                                       ----------    ----------

Retirees                                               $  457,067    $  460,129
Fully eligible active plan participants                   572,783       629,967
Other active plan participants                            830,975       836,692
                                                       ----------    ----------
Accumulated postretirement benefit obligation           1,860,825     1,926,788
Unrealized net gain                                       260,081         8,103
                                                       ----------    ----------
Accrued postretirement benefit liability               $2,120,906    $1,934,891
                                                       ==========    ==========

                                     - 39 -
<PAGE>
      Net  periodic  postretirement  benefit  cost for the period ended June 30,
      1997 and June 30, 1996 consisted of the following components:

                                                           1997           1996
                                                       ----------    ----------


Service cost - benefits earned during the year         $  91,491     $ 115,169
Interest cost on accumulated postretirement
 benefit obligation                                      132,418       135,406
Unrecognized gain                                         (5,537)        ---
                                                       ---------     ---------
Net periodic postretirement benefit cost               $ 218,372     $ 250,575
                                                       =========     =========

      The assumed health care cost trend rate used in measuring the  accumulated
      postretirement  benefit  obligation as of June 30, 1997 was 9%, decreasing
      linearly each successive year until it reaches 6% in 2000,  after which it
      remains  constant.  A one percentage  point increase in the assumed health
      care  cost  trend  rate for  each  year  would  increase  the  accumulated
      postretirement  benefit  obligation  as of June 30, 1997 by  approximately
      $327,000  and net  annual  postretirement  benefit  cost by  approximately
      $46,000.  The assumed  discount rate used in determining  the  accumulated
      postretirement benefit obligation for both years was 8%.


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

      The Company has entered into  deferred  compensation  agreements  with the
      President and CEO, Executive Vice President, Vice President and Treasurer,
      and certain other Vice  Presidents  and is providing for the present value
      of such benefits over the anticipated remaining periods of employment. The
      agreements will be funded through life insurance policy  investments owned
      by the  Company,  on the lives of such  employees.  Deferred  compensation
      expense was  approximately  $32,000,  $31,000 and  $115,000  for the years
      ended June 30, 1997, 1996 and 1995, respectively.

      On August 25,  1994,  the  Company  adopted  the  Non-employee  Directors'
      Retirement  Plan (the  "Directors'  Plan").  Under the Directors'  Plan, a
      non-employee  director  becomes a participant upon completion of ten years
      of continuous  service as a director.  Full benefits  under the Director's
      Plan are payable at the later of  attaining  age 65 or  retiring  from the
      Board  of  Directors.   Retirement  with  reduced  benefits  is  available
      beginning at age 62. The annual benefit for a retired director is equal to
      the amount of  compensation  to which the director was entitled to receive
      in the twelve months  preceding  retirement.  This annual benefit is to be
      paid quarterly for a ten year period.

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

      In the year  ended  June  30,  1995,  the  Company  accrued  approximately
      $750,000 related to the Directors' Plan. This accrual  represented  vested
      benefits as of the adoption date and benefits accumulated from the date of
      adoption  through June 30, 1995.  Such pension expense for the years ended
      June  30,  1997  and  1996  was   approximately   $54,000   and   $25,000,
      respectively.

                                     - 40 -
<PAGE>
11.   COMMITMENTS AND CONTINGENCIES

      Loan  Commitments - The Company,  in the normal  course of business,  is a
      party to financial  instruments and commitments which involve,  to varying
      degrees,  elements  of risk in excess  of the  amounts  recognized  in the
      consolidated   financial  statements.   These  financial  instruments  and
      commitments  include unused  consumer  lines of credit and  commitments to
      extend credit. Loan commitments,  excluding  undisbursed portions of loans
      in  process,   were   approximately   $15.7  million  at  June  30,  1997.
      Commitments,  which are disbursed subject to certain  limitations,  extend
      over  periods  of time with the  majority  of such  commitments  disbursed
      within a  six-month  period.  Also,  at June 30,  1997,  the  Company  had
      commitments  approximating  $12.7 million  representing  available  credit
      under open line loans and approximately $600,000 under outstanding letters
      of credit.

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

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

      Litigation - In June 1995, a lawsuit was initiated against the Association
      by a borrower's  affiliated companies in which the plaintiffs alleged that
      the Association  wrongfully set-off certain funds in an account being held
      and maintained by the  Association.  In addition,  the plaintiffs  alleged
      that as a result  of the  wrongful  set-off,  the  Association  wrongfully
      dishonored a check in the amount of $270,000.  Plaintiffs  further alleged
      that the  actions  on behalf of the  Association  constituted  unfair  and
      deceptive trade practices,  thereby entitling plaintiffs to recover treble
      damages and attorney fees. The Association denied any wrongdoing and filed
      a motion for summary  judgment.  Upon  consideration  of the  motion,  the
      United  States  Bankruptcy  Judge  entered a  Recommended  Order  Granting
      Summary  Judgment,  recommending  the  dismissal  of all  claims  asserted
      against the  Association.  The Recommended  Order is now before the United
      States  District Court for the Western  District of North Carolina and the
      parties are awaiting the Federal  District  Court's decision of whether to
      enter  an  Order  Granting   Summary   Judgment  in  accordance  with  the
      Recommended Order by the United States Bankruptcy Judge.

      In December  1996, the  Association  filed a suit against the borrower and
      his company and against the borrower's wife,  daughter and a company owned
      by his wife and  daughter,  alleging  transfers  of  assets  to the  wife,
      daughter,  and their  company in fraud of  creditors,  and asking that the
      fraudulent  transfers  be set aside.  The  objective  of the lawsuit is to
      recover  assets  which may be used to satisfy a portion  of the  judgments
      obtained in favor of the Association in prior  litigation.  The borrower's
      wife filed a

                                     - 41 -
<PAGE>
      counterclaim  against the Association  alleging that she borrowed $750,000
      from  another  financial  institution,  secured  by a deed of trust on her
      principal  residence,  the proceeds of which were paid to the  Association
      for  application  on a debt  owed  by one of her  husband's  corporations,
      claiming that officers of the Association  promised to resume making loans
      to her  husband's  corporation  after the  payment.  Home  Federal and its
      officers vigorously deny all of her allegations. The case is scheduled for
      discovery in September 1997, after which the Association intends to file a
      motion for summary judgment for dismissal of the counterclaim.

      In February 1997, two companies  affiliated  with those referred to in the
      first  paragraph  above filed an additional  action  against two executive
      officers of the  Association  and against an officer of another  financial
      institution.  The action was removed from the state court and is presently
      pending in the United States  Bankruptcy Court for the Western District of
      North Carolina. At the same time, the borrower, who is affiliated with all
      of  these  companies,  also  filed an  action  against  the two  executive
      officers of the  Association  and against an officer of another  financial
      institution.  The  Complaints in both actions assert  virtually  identical
      claims.  The plaintiffs in both lawsuits  allege that the officers of both
      financial institutions engaged in a conspiracy to wrongfully declare loans
      to be in default so as to  eliminate  those  companies as borrowers of the
      Association.  Plaintiffs  allege  misrepresentation,  breach of  fiduciary
      duty, constructive fraud, interference with business expectancy,  wrongful
      bank  account  set-off,  and  unfair  and  deceptive  acts and  practices.
      Plaintiffs  claim actual  damages,  treble  damages and  punitive  damages
      together with interest,  attorneys' fees and other costs.  The Association
      has  agreed to  indemnify  both of its  officers  with  respect  to costs,
      expense and liability  which might arise in connection  with both of these
      cases.

      In July  1997,  the  above  borrower  and  affiliated  companies  filed an
      additional  action against HFNC Financial Corp., the Association,  and the
      other financial  institution referred to in the paragraph above,  alleging
      that  previous  judgments  in  favor  of the  Association  and  the  other
      financial  institution  obtained in prior  litigation were obtained by the
      perpetration of fraud on the Bankruptcy  Court,  U.S.  District Court, and
      the 4th Circuit Court of Appeals.  The  plaintiffs are seeking to have the
      judgments  set aside on that basis.  The  Association  has not yet filed a
      responsive pleading.  The Association vehemently denies that any fraud was
      perpetrated upon the courts and intends to vigorously contest this matter.

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

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


12.   REGULATORY CAPITAL REQUIREMENTS

      The  Association  is subject to various  regulatory  capital  requirements
      imposed by the federal  financial  institution  agencies.  Failure to meet
      minimum capital  requirements can result in certain mandatory and possibly
      additional discretionary actions by regulators that, if undertaken,  could
      have a direct material effect on the Company's financial statements. Under
      capital adequacy guidelines and the regulatory

                                     - 42 -
<PAGE>
      framework for prompt corrective action, the Association must meet specific
      capital guidelines that involve quantitative measures of the Association's
      assets,  liabilities  and certain  off-balance-sheet  items as  calculated
      under regulatory accounting  practices.  The Association's capital amounts
      and  classification  are also  subject  to  qualitative  judgments  by the
      regulators about components, risk weightings and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the  Association  to maintain  minimum  amounts and ratios.  Under
      regulations of the OTS, the Association  must have: (i) core capital equal
      to 3% of adjusted  total assets,  (ii)  tangible  capital equal to 1.5% of
      adjusted   total  assets  and  (iii)  total   capital  equal  to  8.0%  of
      risk-weighted  assets.  In  measuring  compliance  with all three  capital
      standards,  institutions  must deduct  from their  capital  (with  several
      exceptions   primarily  for  mortgage  banking  subsidiaries  and  insured
      depository  institution  subsidiaries)  their investments in, and advances
      to, subsidiaries  engaged (as principal) in activities not permissible for
      national banks, and certain other adjustments.  Management believes, as of
      June  30,  1997,   that  the  Association   meets  all  capital   adequacy
      requirements to which it is subject.

      The following is a reconciliation of the Association's  equity reported in
      the consolidated  financial statements under generally accepted accounting
      principles to OTS regulatory capital requirements (dollars in thousands):
<TABLE>
<CAPTION>
                                                           Tangible       Core       Risk-Based
                                                           Capital       Capital      Capital
                                                           ---------    ---------    ---------
<S>                                                        <C>          <C>          <C>      
June 30, 1997
  Total equity as reported in the consolidated financial
    statements                                             $ 172,894    $ 172,894    $ 172,894
  General allowance for loan losses                             --           --          5,936
  Unrealized loss on available for sale securities            (3,951)      (3,951)      (3,951)
  Investments not includable in regulatory capital            (1,716)      (1,716)      (1,746)
                                                           ---------    ---------    ---------

Regulatory capital                                         $ 167,227    $ 167,227    $ 173,133
                                                           =========    =========    =========

June 30, 1996
  Total equity as reported in the consolidated financial
    statements                                             $ 161,163    $ 161,163    $ 161,163
  General allowance for loan losses
                                                                --           --          4,770
  Unrealized loss on available for sale securities
                                                                (787)        (787)        (787)
  Investments not includable in regulatory capital
                                                              (1,587)      (1,587)      (1,667)
                                                           ---------    ---------    ---------

Regulatory capital                                         $ 158,789    $ 158,789    $ 163,479
                                                           =========    =========    =========
</TABLE>

                                     - 43 -
<PAGE>
      The  Association's  actual and  required  capital  amounts  and ratios are
      summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                                Minimum
                                                                     Actual                   Requirement
                                                           ---------------------------  ------------------------
                                                               Amount        Ratio         Amount       Ratio
<S>                                                            <C>           <C>         <C>             <C>  
June 30, 1997
  Tangible capital (to total assets)                           $167,227      18.9%       $13,291         1.5%  
  Core capital (to adjusted total assets)                      $167,227      18.9%       $26,582         3.0% 
  Risk-based capital (to risk-weighted assets)                 $173,133      36.5%       $37,960         8.0% 
                                                                                                              
June 30, 1996                                                                                                 
  Tangible capital (to total assets)                           $158,789      22.3%       $10,667         1.5% 
  Core capital (to adjusted total assets)                      $158,789      22.3%       $21,332         3.0% 
  Risk-based capital (to risk-weighted assets)                 $163,479      42.9%       $30,462         8.0% 
</TABLE>

      As of June 30,  1997 and 1996,  the most recent  respective  notifications
      from the OTS classified  the  Association  as well  capitalized  under the
      regulatory framework for prompt corrective action. There are no conditions
      or events since the most recent notification that management believes have
      changed the Association's category. To be categorized as well capitalized,
      the  Association   must  maintain  minimum  ratios  of  total  capital  to
      risk-weighted  assets,  core  capital  to  risk-weighted  assets  and core
      capital to adjusted  total assets.  

      The  Association's  actual and  minimum  capital  requirements  to be well
      capitalized  under  prompt  corrective  action  provisions  are as follows
      (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                               Minimum
                                                                   Actual                    Requirement
                                                         ---------------------------   -------------------------
                                                              Amount        Ratio         Amount       Ratio
<S>                                                           <C>          <C>          <C>             <C> 
June 30, 1997
  Tier I Capital (to adjusted total assets)                   $167,227     18.9%        $44,303         5.0%
  Tier I Capital (to risk-weighted assets)                    $167,227     35.2%        $28,470         6.0%
  Total Capital (to risk-weighted assets)                     $173,133     36.5%        $47,450        10.0%
                                                                                                            
June 30, 1996                                                                                               
  Tier I Capital (to adjusted total assets)                   $158,789     22.3%        $35,555         5.0%
  Tier I Capital (to risk-weighted assets)                    $158,789     41.7%        $22,847         6.0%
  Total Capital (to risk-weighted assets)                     $163,479     42.9%        $38,078        10.0%
</TABLE>

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


                                     - 44 -
<PAGE>
13.   FAIR VALUE DISCLOSURE

      The carrying and estimated fair value amounts of financial  instruments as
      of June 30, 1997 and 1996, are summarized below:
<TABLE>
<CAPTION>
                                              1997                                       1996
                             ----------------------------------------   ----------------------------------------
                                  Carrying            Estimated              Carrying            Estimated
                                   Amount            Fair Value               Amount            Fair Value
<S>                               <C>                 <C>                   <C>                 <C>            
Assets:
  Cash and cash
    equivalents                   $   31,370,359      $   31,370,359        $     9,605,598     $     9,605,598
 Securities available
   for sale                          175,710,104         175,710,104            248,445,333         248,445,333
  Loans receivable                   658,323,320         653,393,693            505,130,813         491,177,000
  Stock of Federal
    Home Loan Bank
    of Atlanta                         6,450,000           6,450,000              5,062,100           5,062,100
  Other assets                         6,151,280           6,151,280              5,907,147           5,907,147
Liabilities:
  Demand deposits                 $   73,567,414      $   73,567,414         $   70,419,963      $   70,419,963
  Time deposits                      370,272,128         370,720,757            378,150,953         380,838,000
  Other borrowed funds               277,000,000         277,354,949             85,000,000          84,975,000
  Other liabilities                    4,961,756           4,961,756              4,361,974           4,361,974
</TABLE>

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

      The Company had off-balance sheet financial commitments to originate loans
      and fund unused  consumer  lines of credit (see Note 11) of $29.0  million
      and $31.0 million at June 30, 1997 and 1996, respectively.  Since the loan
      commitments are at interest rates that  approximate  current market rates,
      the  estimated  fair  value of the  commitments  have no  other  financial
      statement impact.

      Fair  value  estimates  are made at a  specific  point  in time,  based on
      relevant  market   information   and   information   about  the  financial
      instrument.  These  estimates do not reflect any premium or discount  that
      could result from  offering for sale the  Company's  entire  holdings of a
      particular  financial  instrument.  Because no active  market exists for a
      significant  portion of the Company's  financial  instruments,  fair value
      estimates  are  based  on  judgments   regarding   future   expected  loss
      experience, current economic

                                     - 45 -
<PAGE>
      conditions,   current   interest   rates  and  prepayment   trends,   risk
      characteristics of various financial instruments, and other factors. These
      estimates are subjective in nature and involve  uncertainties  and matters
      of significant judgment and therefore cannot be determined with precision.
      Changes in any of these  assumptions  used in calculating  fair value also
      would  significantly  affect  the  estimates.   Further,  the  fair  value
      estimates were calculated as of June 30, 1997 and 1996.  Changes in market
      interest rates and prepayment  assumptions could change  significantly the
      fair value.

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

14.   SPECIAL DISTRIBUTION TO SHAREHOLDERS

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

15.   HFNC FINANCIAL CORP.

      The following condensed statements of financial condition,  as of June 30,
      1997 and 1996 and  condensed  statements  of income and cash flows for the
      year ended June 30,  1997 and for the period from August 29, 1995 (date of
      incorporation) to June 30, 1996 for HFNC Financial Corp. should be read in
      conjunction  with the  consolidated  financial  statements  and the  notes
      thereto.
<TABLE>
<CAPTION>
        Statement of Financial Position                 1997            1996
<S>                                                <C>              <C>         
Assets

Cash and cash equivalents                          $     42,904     $    553,980
Equity investment in subsidiaries                   188,324,313      245,950,476
Deferred tax asset                                      990,521             --
                                                   ------------     ------------
Total                                              $189,357,738     $246,504,456
                                                   ============     ============

Liabilities and Shareholders' Equity

Note payable                                       $ 28,000,000
Other liabilities                                       297,821
Shareholders' equity                                161,059,917     $246,504,456
                                                   ------------     ------------

Total                                              $189,357,738     $246,504,456
                                                   ============     ============

</TABLE>

                                     - 46 -
<PAGE>
<TABLE>
<CAPTION>
                    Statement of Income                    1997          1996
<S>                                                   <C>             <C> 
Dividends from subsidiaries                           $ 75,912,925        $ 50,000        
Interest income                                             14,365           3,980
                                                      ------------    ------------
Total income                                            75,927,290          53,980
                                                      ------------    ------------

Interest expense                                           651,778            --
Other expense                                              674,150            --
                                                      ------------    ------------
Total expense                                            1,325,928            --

Income before taxes and equity in
  undistributed earnings of subsidiaries                74,601,362          53,980
Income tax benefit                                         988,963            --
                                                      ------------    ------------
Income before equity in earnings of subsidiaries        75,590,325          53,980

Equity in undistributed earnings of subsidiaries 
(excess of dividends from subsidiaries over
earnings from subsidiaries)                            (68,226,644)      7,520,122
                                                      ------------    ------------
Total                                                 $  7,363,681    $  7,574,102
                                                      ============    ============
<CAPTION>
                        Statement of Cash Flows                       1997            1996
<S>                                                             <C>              <C>          
Operating activities:
  Net income                                                    $  7,363,681     $   7,574,102
  Adjustments to reconcile net income to net cash
    provided by operating activities:
  Deferred income tax benefit                                       (990,521)            --
  Dividends on unallocated ESOP and MRRP shares, net              (6,394,971)            --
  Amortization of unearned stock compensation                      3,764,021             --
  Increase in other liabilities                                      297,821
  Equity in undistributed earnings of subsidiaries 
   (excess of dividends from subsidiaries over earnings
   from subsidiaries)                                             68,226,644        (7,520,122)
                                                                -------------    -------------

Net cash provided by operating activities                         72,266,675            53,980

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

Net cash used in investing activities                                    --       (167,887,938)
                                                                -------------    -------------
Financing activities:
  Net proceeds from sale of common stock                                 --        168,437,938
  Proceeds from note payable                                       28,000,000            --
  Dividends paid                                                  (83,071,050)           --    
  Purchases of restricted stock for benefit plans                 (17,706,701)           --
                                                                -------------    -------------

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

Net increase in cash and cash equivalents                            (511,076)         553,980
Cash and cash equivalents at beginning of period                      553,980             --
                                                                -------------    -------------

Cash and cash equivalents at end of period                      $      42,904    $     553,980
                                                                =============    =============
</TABLE>
                                     - 47 -