HFNC Financial Corp.
--------------------------------------------------------------------------------








                                      1997
                                     ANNUAL
                                     REPORT

<PAGE>
                             Letter to Shareholders
--------------------------------------------------------------------------------

Dear Fellow Shareholders:

         We are pleased to present to you our second annual report, covering the
fiscal year ended June 30,  1997.  Our first full fiscal year of  operation as a
public  company has been an eventful one. We have seen  substantial  progress in
resolving the deposit  insurance  premium  disparity  between thrifts and banks.
Though the $3.1 million up-front cost was  considerable,  our deposit  insurance
cost in the future will be greatly reduced.  Also during this year, we have been
able to return $5.26 per share to our shareholders  through dividends,  of which
95%  represents a non-taxable  return of capital.  Our assets have  increased to
$893 million, an increase of 13%, even after payment of the special distribution
of approximately  $86 million.  The asset growth occurred  primarily in the loan
portfolio,  which has grown by more than $153  million,  an increase of over 30%
during this year alone. Contributing to the growth in our loan portfolio was the
opening of our Fairview Office,  which is a meaningful  addition to our customer
service delivery infrastructure. At this very desirable location, we have opened
a new branch and consolidated our mortgage loan department.

Fiscal 1997 Results

         Consolidated net income for the year amounted to $7.4 million,  or $.46
per share,  compared to $7.6 million for the 1996 fiscal  year.  The fiscal 1997
net  earnings,  however,  were impacted by a one time cost of $3.1 million ($1.9
million or $.12 per share after tax)  pertaining to a special  assessment by the
Federal Deposit  Insurance  Corporation to recapitalize the Savings  Association
Insurance Fund.  Earnings for the 1997 fiscal year were also lessened due to the
liquidation  of  securities  to fund the $86 million  special  dividend  paid to
shareholders on March 18, 1997. After-tax earnings were reduced by approximately
$1.1 million,  or $.07 per share, due to this reduction in interest income.  Net
interest income for the year totaled $30.7 million, an increase of $6.6 million,
or 27%, over the prior year.

         Of significance  this year has been our continued  improvement in asset
quality.  Nonperforming  assets have  declined  29.5%  during the year,  to $7.8
million at June 30, 1997 from $11.1 million at June 30, 1996.  This represents a
decline from 1.4% of total assets to 0.9% during the twelve  month  period.  The
June 30, 1997 allowance for loan losses stands at 109.3% of nonperforming loans,
as compared to 87.5% a year ago.

Outlook

         Looking to the year ahead we will  continue to look for ways to enhance
shareholder  value while  maintaining  our  commitment  to provide the very best
quality service to our customers.  Interest rates have remained  relative stable
and the area real estate  market  continues to be very good.  As a result,  loan
demand is expected to continue to be brisk. Through the variety of loan programs
that we are now offering, combined with the outstanding location of our new loan
center,  we expect  continued  growth in loan production  while  maintaining our
emphasis on asset quality.

         In the past year there were  several  extraordinary  charges as we have
reported to you. With these costs behind us, we anticipate earnings improvements
in the  year  ahead.  This  has  been a good  year  for  your  company  and  its
shareholders.  We were  delighted to be able to pay the $5 special  distribution
and will continue to look for ways to increase  shareholder value. We look ahead
with anticipation.

         We solicit  your  business and ask that you  recommend  Home Federal to
others. You can thus play a part in the growth and success of your company. I am
grateful to our  directors,  officers  and  employees  for their  commitment  to
service. I appreciate your support and welcome your comments.

Sincerely,

/s/H. Joe King, Jr.

H. Joe King, Jr.
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
                                Corporate Profile
--------------------------------------------------------------------------------

HFNC Financial Corp. (the "Company") was incorporated in August 1995 under North
Carolina  law for the purpose of  acquiring  all of the capital  stock issued by
Home Federal Savings and Loan Association  ("Home Federal" or the "Association")
in connection with its conversion from a federally  chartered mutual savings and
loan  association to a federally  chartered  stock savings and loan  association
(the "Conversion").  The Conversion was consummated on December 28, 1995 and, as
a result,  the Company became a unitary  savings and loan holding company of the
Association.  The Company has no significant assets other than the shares of the
Association's  common stock  acquired in the  Conversion and the common stock of
HFNC Investment Corp., a wholly-owned,  Delaware chartered finance subsidiary of
the Company. The Company has no significant liabilities.

The  Association  is a federally  chartered  stock savings and loan  association
which  believes  that  it is  the  oldest  thrift  presently  operating  in  the
Carolinas.  The  Association  dates back to 1883 with the  founding of Mechanics
Perpetual Building and Loan Association. Home Federal conducts business from its
main office and eight branch offices and a loan origination  office, all located
in Mecklenburg County,  North Carolina.  The Association is a community oriented
savings  institution which has  traditionally  offered a wide variety of savings
products to its retail customers while  concentrating its lending  activities on
the origination of loans secured by one- to four-family  residential  dwellings,
including an emphasis on loans for construction of residential  dwellings.  To a
significantly  lesser extent,  the  Association's  activities have also included
origination of commercial real estate, land and consumer loans. In addition, the
Association maintains a significant portfolio of investment securities which are
issued by the United  States  government  or  agencies  thereof,  or  government
sponsored enterprises.

At June 30, 1997, the Company had total assets of $892.9 million, total deposits
of $443.8 million and shareholders'  equity of $161.1 million. The Company's and
the  Association's  principal  executive  offices are located at 139 South Tryon
Street,  Charlotte,  North Carolina 28202,  and their telephone  number is (704)
373-0400.

<PAGE>

Table of Contents

        President's Letter to
        Shareholders

        Corporate Profile


                                    PAGE

     Selected Consolidated
     Financial Highlights              1

     Management's Discussion and
     Analysis of Financial
     Condition and Results of
     Operations                        2

     Report of Independent
     Certified Public Accountants     17

     Financial Statements             18

     Home Federal Savings and
     Loan Association Account
     Services                         

     Shareholder Information          

     HFNC Financial Corp.
     Directors and Officers           

     Home Federal Savings and
     Loan Association Officers
     and Banking Locations            
<PAGE>
<TABLE>
<CAPTION>
                                             SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------------------------------------------------
                                                                             AS OF OR FOR THE YEAR ENDED JUNE 30,
                                                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                       ----------------------------------------------------------------------------
                                                           1997              1996            1995            1994           1993
<S>                                                    <C>                 <C>             <C>             <C>             <C>     
Selected Consolidated Financial Data:
Total assets ...................................       $   892,920         $788,878        $589,659        $574,676        $588,337
Securities .....................................           175,710          248,445         114,387         101,249          61,277
Loans receivable, net ..........................           658,323          505,131         436,008         436,642         481,896
Real estate ....................................               868            2,539           2,804           3,818           7,960
Deposits .......................................           443,840          448,571         490,566         445,496         465,434
Other borrowings ...............................           277,000           85,000          10,000          50,000          56,000
Shareholders' equity ...........................           161,060          246,504          81,812          73,172          60,803
Book value, per share ..........................       $      9.37         $  14.34             N/A             N/A             N/A
Nonperforming assets ...........................             7,830           11,108          12,857          21,243          32,138

Selected Operating Data:
Net interest and dividend income ...............       $    30,697         $ 24,133        $ 21,870        $ 27,462        $ 28,717
Provision for loan losses
 (recovery of allowance) .......................               (59)             337             486           1,352           4,791
Other operating income .........................             1,202            1,817           1,430           2,636           1,341
Other operating expenses .......................            19,985           12,423          12,807          12,051          11,476
Net income .....................................       $     7,364         $  7,574        $  6,150        $ 12,369        $  6,578
Earnings per share:
  Excluding SAIF assessment ....................                 0.58           N/A             N/A             N/A             N/A
  Including SAIF assessment ....................                 0.46           N/A             N/A             N/A             N/A
Dividends per share ............................                 5.26           N/A             N/A             N/A             N/A

Selected Operating Ratios:
Average interest rate spread * .................                 2.35%         2.34%           3.35%           4.64%           4.77%

Net interest margin * ..........................                 3.70          3.65            3.89            5.01            5.08

Ratio of interest-earning assets
 to interest-bearing liabilities ...............                 1.32          1.31            1.12            1.10            1.07

Return on average assets:
  Excluding SAIF assessment ....................                 1.08          1.11            1.05            2.15            1.11

  Including SAIF assessment ....................                 0.86          1.11            1.05            2.15            1.11

Return on average equity:
  Excluding SAIF assessment ....................                 4.34          4.22            7.89           17.57           11.18

  Including SAIF assessment ....................                 3.46          4.22            7.89           17.57           11.18

Full-service offices at end of period ..........                 9                8               8               8               8
<PAGE>
<CAPTION>
                                             SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------------------------------------------------
                                                                             AS OF OR FOR THE YEAR ENDED JUNE 30,
                                                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                       ----------------------------------------------------------------------------
                                                           1997              1996            1995            1994           1993
<S>                                                    <C>                 <C>             <C>             <C>             <C>     
Asset Quality Ratios:
Nonperforming loans and troubled
 debt restructurings as a percent
 of net loans ..................................                 1.06%         1.70%           2.48%           4.26%           5.30%

Nonperforming assets and
 troubled debt restructurings as a
 percent of total assets .......................                 0.87          1.41            2.17            3.70            5.46

Allowance for loan losses as a
 percent of nonperforming loans and
 troubled debt restructurings ..................               109.33         87.47           74.73           42.07           28.10
</TABLE>

* Average yield information has been computed using the historical cost balances
  of investments  available for sale and does not give effect to changes in fair
  value that are reflected as a component of shareholders' equity.


                                      - 1 -
<PAGE>
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

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

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

Summary of Changes in Financial Condition

         The Company's assets  increased by $104.0 million,  or 13.2%, to $892.9
million at June 30, 1997 from $788.9  million at June 30, 1996.  The increase in
assets primarily reflects the leveraging of the Company's capital through growth
in loans receivable. Net loan originations amounted to $152.5 million during the
year,  compared to $70.1 million in fiscal 1996.  The growth in loans was offset
somewhat by the payment of a $5 per share special  distribution  to shareholders
on March  18,  1997.  This  distribution  was  partially  funded  by the sale of
securities,  which  declined  $72.7 million to $175.7  million at June 30, 1997.
Total  liabilities  increased $189.5 million,  or 34.9%,  during the 1997 fiscal
year  due to an  increase  in other  borrowed  funds of  $192.0  million.  These
borrowings were used to fund the loan portfolio growth and a portion of the cost
of the special  distribution.  Shareholders'  equity  decreased $85.4 million to
$161.1 million or 18.0% of total assets at June 30, 1997. This decrease reflects
the payment of $83.1 millon in distributions  to shareholders  during the fiscal
year (including the special  distribution  discussed above) and the net increase
in cost of unearned  Employee Stock  Ownership Plan ("ESOP") shares and unvested
restricted   stock  in  the   Recognition   and  Retention   Plan  amounting  to
approximately  $14.4 million,  offset somewhat by an increase in unrealized gain
on securities  available for sale of $4.2 million and earnings during the period
of $7.4 million.

         Securities.  At June 30,  1997,  total  securities  amounted  to $175.7
million, a decrease of $72.7 million,  or 29.3%, from the prior year level. This
decrease was due to the  liquidation of securities to partially fund the special
distribution  to  shareholders  in  March  1997.  Securities  at June  30,  1997
consisted of $53.2  million of  mortgage-backed  securities,  with the remaining
$122.5 million  invested  primarily in agency  securities  held  principally for
liquidity  purposes.  The  corresponding  amounts at June 30,  1996 were  $125.7
million and $123.2 million, respectively.

         The  Company's   securities  have  been  classified  by  management  as
"available  for sale." Under this  classification,  management may utilize these
securities for various asset/liability management purposes, and they may be sold
in response to liquidity  needs,  changes in interest rates,  and other factors.
They are accounted for at fair value,  with unrealized gains and losses recorded
as a separate component of shareholders' equity.


                                      - 2 -
<PAGE>
         Loans.  Net loans receivable  increased  $153.2 million,  or 30.3% , to
$658.3  million at June 30, 1997,  compared to $505.1  million at June 30, 1996.
This increase primarily resulted from the use of outside loan  correspondents to
supplement  the  efforts  of  the   Association's   own  loan  officers.   These
correspondent loans were originated using the Association's  normal underwriting
standards,  rates,  and  terms,  and were  approved  by the  Association's  loan
committee  prior  to  origination.  The  subject  properties  were  all  in  the
Association's  market area. The Association  intends to continue its use of loan
correspondents  as long as  management  deems their use to be  beneficial to the
Association. However, the Association has no agreement or obligation to continue
their use. A significant portion of the new loans are adjustable rate loans that
are  fixed for the first  three or five  years,  then  adjust  annually  for the
remainder  of the life of the loan.  Most of these  loans are  convertible  to a
fixed rate during the first five years of the adjustable period, upon payment of
a one-time fee.  Adjustable  rate loans  amounted to $139.6  million at June 30,
1997,  compared to $67.4 million at June 30, 1996, an increase of $72.2 million,
or 107.1%.

         As a result of the growth in permanent  residential  mortgage  loans in
the fiscal 1997 year,  these loans have  increased as a percentage  of the total
loan  portfolio to 79.7% at June 30, 1997,  up from 75.4% at June 30, 1996.  The
remainder of the loan portfolio at June 30, 1997 consisted of construction loans
(9.7%),  commercial  real estate  loans (4.3%) land loans  (2.8%),  and consumer
loans (3.5%).  The  comparable  percentages  at June 30, 1996 were  construction
loans  (11.1%),  commercial  real estate loans (5.3%),  land loans  (4.1%),  and
consumer loans (4.1%).

         Unearned  loan fee income at June 30,  1997 was $5.3  million,  up from
$5.1  million  at June  30,  1996.  These  unearned  fees are  recognized  as an
adjustment to yield over the contractual lives of the related loans. Undisbursed
amounts of loans in process (primarily construction loans) were $33.0 million at
June 30, 1997, compared to $34.8 million at June 30, 1996.

         Borrowed  Funds.  Borrowed funds increased  $192.0  million,  to $277.0
million at June 30, 1997 from $85.0  million at June 30,  1996.  The  additional
borrowings  during fiscal 1997  consisted of $35.0  million in  securities  sold
under repurchase agreements,  $129.0 million in Federal Home Loan Bank advances,
and a $28.0 million  short-term  bank loan.  These  borrowings were used to fund
loan growth and a portion of the special distribution to shareholders.

                                      - 3 -
<PAGE>
         Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The  following  table sets forth,  for the  periods  and at the date  indicated,
information regarding the Company's average balance sheet.  Information is based
on average daily balances during the periods presented.
<TABLE>
<CAPTION>
                                                                   Year Ended June 30,
                                           At          -------------------------------------------
                                        June 30,
                                          1997                             1997                      
                                     ------------      -------------------------------------------          

                                        Weighted                                          Average    
                                         Yield/            Average                         Yield/    
                                         Rate(1)           Balance         Interest         Rate     
                                     ------------      -------------     -----------     -------     
                                                        (Dollars in Thousands)
<S>                                      <C>               <C>             <C>            <C>        
Interest-earning assets:
  Investment securities                  5.79%             $119,816        $ 7,443        6.21%      
  Mortgage-backed securities             7.40               101,010          6,990        6.92       
  Loans receivable                       7.97               584,418         49,101        8.40       
  Other interest-earning assets          5.91                25,216          1,781        7.06       
                                                            -------        -------                   
    Total interest-earning assets        7.57%              830,460         65,315        7.87%      
                                         ====                              =======        ====       
                                                                                                     
Noninterest-earning assets                                   24,315                                  
                                                           --------                                  
    Total assets                                           $854,775                                  
                                                           ========                                  
                                                                                                     
Interest-bearing liabilities:                                                                        
  Deposits                               5.24%             $440,899        $23,565        5.34%      
  Other borrowed funds                   5.85               186,657         11,054        5.92       
                                                           --------        -------                   
    Total interest-bearing                                                                           
      liabilities                        5.46%             $627,556        $34,619        5.52%      
                                         ====                              =======        ====       
                                                                                                     
Noninterest-bearing liabilities                              14,130                                  
                                                           --------                                  
   Total liabilities                                        641,686                                  
Equity                                                      213,089                                  
                                                           --------                                  
   Total liabilities and equity                            $854,775                                  
                                                           ========                                  
                                                                                                     
Net interest-earning assets                                $202,904                                  
                                                           ========                                  
Net interest income/interest                                                                         
 rate spread                                                               $30,696        2.35%      
                                                                           =======        ====       
Net interest margin (2)                                                                   3.70%      
                                                                                          ====       
Ratio of average interest-earning                                                              
  assets to average interest-bearing                                                           
  liabilities                                                                             1.32       
                                                                                          ====       
<PAGE>                                                                                          
<CAPTION>
                                                                      Year Ended June 30,
                                     -------------------------------------------------------------------------------------
                                     
                                                        1996                                          1995
                                     -----------------------------------------     ---------------------------------------

                                                                      Average                                      Average
                                       Average                         Yield/       Average                         Yield/
                                       Balance        Interest          Rate        Balance       Interest           Rate
                                     ----------     ----------      ----------     --------     -----------     -----------
                                                                     (Dollars in Thousands)
<S>                                    <C>            <C>              <C>         <C>             <C>             <C>  
Interest-earning assets:
  Investment securities                $119,069       $ 6,818          5.73%       $114,483        $ 6,246         5.46%
  Mortgage-backed securities             38,912         2,730          7.02              --             --           --
  Loans receivable                      454,168        39,995          8.81         433,081         38,909         8.98
  Other interest-earning assets          49,873         2,599          5.21          15,353            966         6.29
                                       --------       -------                      --------         ------
    Total interest-earning assets       662,022       $52,142          7.88%        562,917        $46,121         8.19%
                                                      =======          ====                         ======         ====
                                               
Noninterest-earning assets               24,696                                      24,605
                                       --------                                    --------
    Total assets                       $686,718                                    $587,522
                                       ========                                    ========
                                               
Interest-bearing liabilities:                  
  Deposits                             $491,065       $27,218          5.54%       $452,497       $ 21,464         4.74%
  Other borrowed funds                   14,423           790          5.48          48,101          2,787         5.79
                                       --------       -------                      --------        -------
    Total interest-bearing                     
      liabilities                      $505,488       $28,008          5.54%        500,598       $ 24,251         4.84%
                                                      =======          ====                        =======         ====
                                               
Noninterest-bearing liabilities          11,786                                       8,933
                                       --------                                    --------
   Total liabilities                    517,274                                     509,531
Equity                                  169,444                                      77,991
                                       --------                                    --------
   Total liabilities and equity        $686,718                                    $587,522
                                       ========                                    ========
                                               
Net interest-earning assets            $156,534                                    $ 62,319
                                       ========                                    ========
Net interest income/interest           
 rate spread                                         $ 24,134          2.34%                      $ 21,870         3.35%
                                                     ========          ====                        =======         ====
Net interest margin (2)                                                3.65%                                       3.89%
                                                                       ====                                        ====
Ratio of average interest-earning    
  assets to average interest-bearing 
  liabilities                                                          1.31                                        1.12
                                                                       ====                                        ====
</TABLE>

(1)      Includes non-accrual loans.
(2)       Net interest income divided by average interest-earning assets.

                                      - 4 -
<PAGE>
         Rate/Volume  Analysis.  The  following  table  sets forth the extent to
which changes in interest rates and changes in volume of interest-related assets
and liabilities  have affected the Company's  interest income and expense during
the  periods  indicated.  For  each  category  of  interest-earning  assets  and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume  multiplied by prior year rate) and (ii)
changes in rate (change in rate multiplied by prior year volume). The net change
attributable  to the  combined  impact  of  volume  and rate has been  allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
                                                                            Year Ended June 30,
                                        -----------------------------------------------------------------------------------------
                                               1997 vs. 1996                                  1996 vs. 1995
                                                 Increase                                        Increase
                                             (Decrease) Due to                              (Decrease) Due to
                                        ----------------------                        ------------------------
                                                                          Total                                            Total
                                                                        Increase                                         Increase
                                            Rate          Volume       (Decrease)         Rate            Volume        (Decrease)
                                        ----------     ---------      -----------     -----------     -----------      -----------
                                                                             (In Thousands)
                                        <C>            <C>            <C>             <C>             <C>              <C>
Interest-earnings assets:
  Investment securities                     $  582         $   43        $  625         $     316      $     256       $     572
  Mortgage-backed securities                  (37)          4,297         4,260                --          2,730           2,730
  Loans receivable, net                    (1,737)         10,843         9,106             (753)          1,830           1,077
  Other interest-earning assets              2,089        (2,907)         (818)             (129)          1,771           1,642
                                             -----        -------       -------                         --------        --------
       Total interest-earning assets           897         12,276        13,173             (566)          6,587           6,021
                                           -------         ------        ------         --------        --------        --------

Interest-bearing liabilities:
  Deposits                                   (954)        (2,699)       (3,653)             3,823          1,931           5,754
  Other borrowed funds                          69         10,195        10,264             (141)        (1,855)         (1,996)
                                             -----         ------        ------         --------       --------        --------
       Total interest-bearing liabilities    (885)          7,496         6,611             3,682             76           3,758
                                             -----          -----        ------          --------       --------        --------
Increase (decrease) in net interest income  $1,782         $4,780        $6,562        $  (4,248)      $   6,511       $   2,263
                                             -----          -----         -----         ========        ========        ========
</TABLE>

                                      - 5 -
<PAGE>
Results of Operations

         Net Income.  The Company  reported  net income of $7.4  million for the
fiscal year ended June 30,  1997,  compared to $7.6  million for the fiscal year
ended  June 30,  1997,  a decrease  of  $210,000,  or 2.8%.  This  decrease  was
attributable to a decrease in other operating income of $615,000,  or 33.8%, and
an increase in other operating expenses of $7.6 million,  or 60.9%. The increase
in other operating  expenses  included a $3.1 million  one-time  federal deposit
insurance assessment, as discussed below. These changes were partially offset by
an increase in net interest income of $6.6 million,  or 27.2%, and a decrease in
the  provision for loan losses of $396,000.  The Company  reported net income of
$7.6 million for the fiscal year ended June 30,  1996,  compared to $6.2 million
for the fiscal year ended June 30,  1995,  an increase of $1.4 million or 23.2%.
This  increase  was  attributable  to an increase in net  interest  and dividend
income of $2.3  million,  or 10.3%,  an  increase in other  operating  income of
$386,000,  or 27.0%, and a decrease in other operating expenses of $384,000,  or
3.0%.  Such  results  were  partially  offset by an  increase  in the income tax
provision of $709,000,  or 18.4%, and an after-tax one-time cost of $1.1 million
resulting  from the  adoption of  Statement  of  Financial  Accounting  Standard
("SFAS") No. 106 related to post-retirement benefits.

         The  current  year was  impacted  by a $3.1  million  one-time  special
assessment by the Federal Deposit Insurance Corporation ("FDIC") to recapitalize
the Savings Association Insurance Fund ("SAIF"). Due to this recapitalization of
the SAIF,  annual  insurance  premiums  for savings and loan  associations  were
reduced from $.23 per $100 of deposits to approximately  $.064 per $100, a level
more comparable to that of commercial banks. The reduced premiums took effect in
January 1997 and will benefit the Company's net income in future periods.

         Net Interest Income. Net interest income is determined by the Company's
interest  rate spread  (i.e.,  the  difference  between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing  liabilities)
and  the  relative  amounts  of  interest-earning  assets  and  interest-bearing
liabilities. The Company's net interest income increased $6.6 million, or 27.2%,
to $30.7 million for the year ended June 30, 1997, compared to $24.1 million for
the prior year. This increase consisted of a $13.2 million,  or 25.3%,  increase
in interest  income,  offset somewhat by a $6.6 million,  or 23.6%,  increase in
interest expense.  The Company's net interest income increased $2.3 million,  or
10.3%,  to $24.1  million  for the year ended June 30,  1996,  compared to $21.9
million for the prior year.  This  consisted of a $6.0 million or 13.1% increase
in  interest  income,  offset  somewhat by a $3.8  million or 15.5%  increase in
interest expense.

         During the current year,  the Company's net interest  margin  increased
slightly to 3.70% from 3.65% during the prior year,  and the net  interest  rate
spread increased  similarly to 2.35% from 2.34%. These minor changes were due to
relatively  consistent overall yields and costs on  interest-earning  assets and
interest-bearing  liabilities.  The net interest margin  declined,  however,  to
3.28%  during the quarter  ended June 30, 1997 due to the payment of the special
distribution  to shareholders  in March 1997,  which decreased  interest-earning
assets without a  corresponding  decline in  interest-bearing  liabilities.  The
ratio of average interest-earning assets to average interest-bearing liabilities
declined to 1.2 during the quarter  ended June 30, 1997,  compared to 1.3 during
the prior fiscal year.  The net interest  margin in future periods will continue
to be impacted by this payment of interest-earning funds.

         During fiscal 1996, the Company's net interest margin declined to 3.65%
from 3.89% in the fiscal  year ended  June 30,  1995 and the net  interest  rate
spread decreased to 2.34% from 3.35%. These decreases were due to the continuing
effects of the interest rate increases and flattening of the yield curve

                                      - 6 -
<PAGE>
experienced  during late 1994 and early 1995, which increased the  Association's
cost of funds during that period.  Fiscal 1996 net interest and dividend  income
increased over the prior year, however,  because the decrease in spread was more
than offset by an increase in the ratio of average  interest  earning  assets to
average  interest-bearing  liabilities  to 1.3 for the year ended June 30,  1996
from 1.1 for the year ended June 30, 1995.  This  increase was  primarily due to
investment of the proceeds of the Conversion and a significant  increase in loan
originations during the year, which combined to increase interest earning assets
to an  average  of  $662.0  million  in 1996 from  $562.9  million  in 1995.  In
addition,  the Company  experienced a moderation in the cost of deposits  during
the period, with the weighted average cost of deposits dropping to 5.42% at June
30, 1996,  compared to 5.67% at June 30, 1995,  though the average rate paid for
the year was higher  than the average  rate for fiscal year 1995.  Consequently,
the net interest  margin  improved over the course of fiscal 1996,  amounting to
4.23%  during the quarter  ended June 30,  1996,  compared  to 3.54%  during the
quarter ended June 30, 1995.

         Interest  Income.  During fiscal 1997,  interest income increased $13.2
million,  or 25.3%,  from the prior year due primarily to continued  loan growth
and  to a  lesser  extent,  to  a  higher  average  balance  in  mortgage-backed
securities.  Average loans outstanding  increased during the current fiscal year
to  $584.4  million  from  $454.2  million  in the prior  year due to  continued
leveraging of the Company's  capital  (discussed more extensively at "Summary of
Changes  in   Financial   Condition   --  Loans").   The   average   balance  of
mortgage-backed  securities  increased  to $101.0  million in the current  year,
compared to $38.9 million in the prior year.  These  securities  were  purchased
with a portion of the proceeds of the stock conversion  during the third quarter
of the 1996  fiscal  year  and  were  therefore  outstanding  for less  than two
quarters of fiscal 1996.  Approximately  one-half of these  securities were sold
during  the third  quarter  of  fiscal  1997 to fund a  portion  of the  special
distribution to  shareholders,  while the remainder  continued to be outstanding
throughout  fiscal  1997.  Consequently,  the average  for the current  year was
significantly  higher than the average for the prior year.  These  increases  in
average earning assets were  complemented by an increase in the average yield on
securities,  and offset to some extent by a decrease in average  yield on loans.
The average yield on securities increased to 6.59% in the current year, compared
to 5.84% in the prior year,  due to increased  investment  in longer  term,  and
higher yielding,  securities,  including mortgage-backed securities, than in the
time period prior to the  conversion  to stock  ownership  in fiscal  1996.  The
average yield on loans declined  during the current year to 8.40% from 8.81% due
to two primary factors.  First, the initial rate of the new adjustable rate loan
products introduced during the last two years is at a moderate discount compared
to the rate for fixed rate loans.  These  initial  rates are fixed for the first
three or five years before adjusting to market rates. Secondly, current interest
rates for new loan originations in the overall market are lower than the average
rate of the portfolio,  so that new originations  reduce the portfolio's average
rate. During fiscal 1996, interest and dividend income increased $6.0 million or
13.1% from the prior year due to the investment of the conversion  proceeds into
interest-earning assets, including loans and securities.  The positive impact of
an increase  in the  average  balance of  interest-earning  assets was  somewhat
offset by moderate  declines in the yields on loans and other  interest-earnings
assets. The average balance of investment  securities amounted to $119.1 million
during the year ended June 30,  1996,  compared to an average  balance of $114.5
million during the prior year,  while the average yield  increased to 5.73% from
5.46%.  The  average  balance  increased  due to  the  temporary  deployment  of
conversion  proceeds,  while the average  yield  increased  due to investment in
longer term and higher  yielding  securities  than in the 1995 year. The average
balance of mortgage-backed  securities increased from none during the prior year
to $38.9  million  during  fiscal  1996 due to  investment  of a portion  of the
conversion  proceeds in these securities during the latter half of the year. The
average  yield on these  securities  was 7.02%.  Net loans  receivable  averaged
$454.2  million  during the year ended June 30, 1996,  compared to an average of
$433.1  million  during the year ended June 30,  1995,  while the average  yield
declined to 8.81% from 8.98%. The

                                      - 7 -
<PAGE>
increase  in the average  balance  was  largely due to the heavy  volume of loan
originations during the last quarter of fiscal 1996, during which time net loans
outstanding increased $43.1 million. This growth resulted from new loan products
and from the use of outside loan  correspondents  in generating  new loans.  The
average yield generally  declined due to the flattening of the yield curve noted
above and to the new adjustable rate loan products that were originated at lower
initial  rates then fixed rate loans,  though  allowing  greater  interest  rate
sensitivity in future periods.

         Interest Expense.  During fiscal 1997,  interest expense increased $6.6
million,  or 23.6%,  compared to the prior year  primarily due to an increase in
the average  balance of other borrowed funds and an increase in the average rate
paid on these funds. The average balance of other borrowings increased to $186.7
million in the  current  year from  $14.4  million in the prior year in order to
fund the growth in assets and  therefore  leverage the  Company's  capital.  The
average rate paid on these borrowings  increased to 5.92%,  compared to 5.48% in
fiscal 1996. This increase in the average rate of borrowings was somewhat offset
by a decrease in the cost of deposits.  The  Association  has sought to moderate
its cost of deposits by not renewing high rate  certificates  of deposit as they
have  matured,  or by renewing them at market  rates.  As a result,  the cost of
deposits declined to 5.34% for the fiscal year ended June 30, 1997 from 5.54% in
the prior year. Interest expense for the year ended June 30, 1996 increased $3.8
million,  or 15.5%  compared to the prior year  primarily  due to an increase in
interest  paid on  customer  deposits  of $5.8  million,  offset  somewhat  by a
decrease  in the  interest  on other  borrowings  of $2.0  million.  Interest on
deposits  primarily  increased  due to an increase  in the average  rate paid to
5.54% in fiscal  1996 from 4.74% in the prior  year.  An increase in the average
balance of deposits to $491.1  million  during the year ended June 30, 1996 from
$452.5  million  during  the year ended June 30,  1995 also  contributed  to the
increase in interest expense.  The increase in the average balance was partially
due to stock  subscription  funds that were temporarily held in deposit accounts
pending the close of the stock  conversion in December 1995. The increase in the
average rate paid primarily  resulted from the continuing  effects of the higher
rates paid on certain certificates of deposit opened during the third and fourth
quarters of fiscal 1995. As noted above, many of these certificates have matured
and have  either not been  renewed or have been  renewed at lower  rates,  but a
portion of these products remain on the Association's books and will continue to
impact the Association's interest expense through the second quarter of the 1997
fiscal year.  Interest on other  borrowings  decreased  due to a decrease in the
average  balance  outstanding  to $14.4 million for the year ended June 30, 1996
from $48.1  million in the prior year as well as a decline in average  rate paid
to 5.48% in 1996 from 5.79% in 1995.

         Provision for Loan Losses. The Company establishes  provisions for loan
losses, which are charged to operations,  in order to maintain the allowance for
loan  losses  at a level  which  is  deemed  to be  appropriate  by the  Company
considering  industry  standards,  past due loans,  economic  conditions  in its
market  area,  and  other  factors  related  to the  collectibility  of the loan
portfolio.  The Company recorded a $59,000 recovery of allowance during the year
ended June 30, 1997 compared to a provision  for loan losses of $337,000  during
the year ended June 30, 1996.  The recovery of allowance in the current year was
due to  improvements  in the level and  nature of the  Company's  non-performing
loans,  particularly  related to one large  borrower who has been  involved in a
legal dispute with the Company since 1991. Overall, nonperforming loans declined
$1.6 million  during  fiscal year ended June 30, 1997, to $7.0 million from $8.6
million at the prior year end. The  allowance  for loan losses  amounted to $7.6
million at June 30,  1997,  or 109.3% of  nonperforming  loans at June 30, 1997,
compared to $7.5 million,  or 87.5% of nonperforming loans at June 30, 1996. The
Company  recorded a $175,000 net recovery of  charged-off  loans during the 1997
fiscal year,  compared to a net  charge-off of $929,000 in the 1996 fiscal year.
The 1996 charge-offs included a charge-off of $909,000 related to one borrower.


                                      - 8 -
<PAGE>
         Other Operating  Income.  Total other operating income amounted to $1.2
million during the fiscal year ended June 30, 1997,  compared to $1.8 million in
the prior  year,  a  decrease  of  $615,000,  or 33.8%.  This  decrease  was due
primarily to a fiscal 1996 gain of $658,000 on the sale of excess land  adjacent
to a branch office, with no such sale in the current year. In fiscal 1996, total
other operating  income  increased  $387,000,  or 27.0% over the prior year, due
primarily to a gain of $658,000 on the sale of excess land  adjacent to a branch
office. This was offset somewhat by a decline of $124,000 in other miscellaneous
items of  operating  income,  the most  significant  of which was a reduction of
$262,000  in  commissions  from  the sale of  annuities  and  various  insurance
products by the Association's wholly owned subsidiary.

         Other Operating  Expenses.  Total other  operating  expenses during the
current year  increased $7.6 million,  or 60.9%,  as compared to the 1996 fiscal
year. This increase resulted from a $4.4 million increase in personnel expenses,
a $3.1 million  one-time  assessment to recapitalize the SAIF and an increase in
other  miscellaneous  expenses  category  of  $882,000.   These  increases  were
partially offset by a $449,000  decrease in federal deposit  insurance  premiums
and a $272,000 decrease in the net cost of real estate operations.

         The fiscal  1997  increase  in  personnel  expenses  included  the $2.2
million  fair  market  value of 61,953  vested  shares of stock  granted  to the
Company's  three  executive  officers in December  1996 and 61,955 vested shares
granted to the Company's Board of Directors and various employees and members of
management  during the quarter ended March 31, 1997 pursuant to the  Recognition
and Retention Plan and Trust adopted by the  shareholders  on December 30, 1996.
An  additional  cost of $1.0  million  was  accrued  during the third and fourth
quarters for shares awarded under the plan that will vest in fiscal 1998. Due to
the vesting  schedule and accrual of fiscal 1998 cost,  the current  fiscal year
included  approximately  1.5 years of cost related to the plan. Costs related to
the ESOP represent the other significant  component of the increase in personnel
expenses.  Generally  accepted  accounting  principles  require  recognition  of
compensation  expense for shares released from the ESOP at the fair value of the
shares at the time they are committed to be released  rather than at the cost of
the shares to the ESOP.  Because the ESOP was in  existence  for the full fiscal
year in 1997 and  only  two  quarters  of the  1996  fiscal  year and due to the
significant  increase in stock price during the 1997 fiscal year, the accounting
cost  recognized  for the ESOP increased  markedly,  to $1.5 million in the 1997
fiscal year compared to a fiscal 1996 cost of $425,000.

         The   increase   in  fiscal  1997  other   miscellaneous   expenses  is
attributable to two primary factors. The Company experienced a $460,000 increase
in legal and professional fees to determine the nature, tax treatment, and other
implications of the special  distribution to shareholders paid in March 1997 and
for legal costs  associated with the ongoing lawsuit by a former  borrower.  The
Company also experienced $237,000 in new corporate costs during the current year
such as a new franchise tax,  annual and special  meeting  costs,  quarterly and
annual  reports,  shareholder  mailings,  and stock  market  listing  fees.  The
$449,000  decrease  in the  federal  deposit  insurance  premiums  was  due to a
reduction in the annual rate paid by the Association for FDIC insurance premiums
beginning in January 1997,  resulting  from the special  assessment in the first
fiscal quarter. The net cost of real estate operations declined primarily due to
a $149,000  net gain on the sale of  foreclosed  real estate in the current year
compared to a $179,000 net loss in the prior year, a difference of $328,000 from
fiscal 1996 to fiscal 1997.

         Total other operating expenses during fiscal 1996 declined $384,000, or
3.0%,  resulting  from a decline in the net cost of real  estate  operations  of
$916,000 and a decline in personnel  expenses of $255,000,  which were partially
offset by an  increase in the "other"  category  of  $571,000  and several  less
significant increases in other components of non-interest  expenses. The primary
component of the

                                      - 9 -
<PAGE>
cost of real  estate  operations  is the  provision  for  losses  on  foreclosed
properties,  which  declined  from $1.2 million in the prior year to $140,000 in
the  current  year.  This  decline  resulted  from  the  resolution  of  several
significant  groups of foreclosed  properties  during the 1995 fiscal year and a
lower  level  of  additional  foreclosures  in the 1996  year.  The  decline  in
personnel  expenses was due to several changes.  A retirement plan for the Board
of Directors  and several  officers was  implemented  in the year ended June 30,
1995,  resulting  in  the  recognition  of an  initial  implementation  cost  of
$751,000,  compared  to a periodic  cost in fiscal  1996 of only  $25,000.  This
decline in cost was  substantially  offset by increases in the periodic  cost of
post-retirement  benefits  following the  implementation  of SFAS No. 106 with a
year-to-date  cost of $251,000 (see "Change in Accounting  Principle" below) and
to costs associated with the employee stock ownership plan adopted in connection
with the  Conversion.  Such costs  amounted to $425,000  in fiscal  1996.  Other
miscellaneous  operating  expenses  increased due to the  accumulated  effect of
several cost factors.

         Provision for Income Taxes. The Company recorded a provision for income
taxes of $4.6  million,  $4.6  million,  $3.9 million for the fiscal years ended
June 30, 1997,  1996 and 1995,  respectively.  The effective tax rates for these
years were 38.5%, 34.6% and 38.5%, respectively.

         Change in  Accounting  Principle.  The  Company  adopted  SFAS No. 106,
"Employers' Accounting for Post-retirement  Benefits Other Than Pensions" during
the 1996  fiscal  year.  As a result,  the  Company  recognized  a $1.7  million
accumulated  post-retirement  benefit  obligation  effective July 1, 1995. On an
after-tax  basis,  this charge  amounted to  approximately  $1.1  million and is
reported as a change in  accounting  principle for the year ended June 30, 1996.
Ongoing  periodic  costs of such  benefits are  included in  operating  expenses
subsequent to adoption.

Asset and Liability Management

         The  Company's  principal  business  is the making of loans,  funded by
customer  deposits  and,  to  the  extent   necessary,   other  borrowed  funds.
Consequently,  a significant portion of the Company's assets and liabilities are
monetary in nature and  fluctuations in interest rates will affect the Company's
future  net  interest  income and cash  flows.  This  interest  rate risk is the
Company's   primary  market  risk  exposure.   The  Company  manages  this  risk
principally through the use of simulation modeling under various rate scenarios.
Using this  model,  the Company  computes,  among  other  things,  the change in
projected  net  interest  income  over a rolling 12 month  period,  taking  into
consideration asset and liability maturity dates and repricing opportunities, as
well as assumptions utilized by the FHLB of Atlanta regarding core deposit decay
rates,  loan prepayment  rates,  etc. The analyses  comprehend all interest rate
sensitive assets and liabilities such as securities,  loans,  deposits and other
borrowed funds.  The Company holds none of these assets in a trading  portfolio;
all are held to maturity or available for sale. Certain  shortcomings,  however,
are  inherent  in any  modeling  technique.  The model  utilized  by the Company
assumes an  instantaneous  and sustained  change in rates,  various  assumptions
about customer behavior in varied market environments, and assumes no subsequent
actions by  management  to respond to changes in rates.  At June 30,  1997,  the
Company's simulation model indicated that a 200 basis point increase in interest
rates would reduce the  Company's  projected  net interest  income over the next
twelve months by $4.4 million,  or 18.9%.  A 200 basis point change in rates was
used because  management  considers this to be a reasonably  possible  near-term
change in rates.

         The Company also measures  interest rate  sensitivity as the difference
between  amounts of  interest-earning  assets and  interest-bearing  liabilities
which either reprice or mature

                                     - 10 -
<PAGE>
within a given period of time.  The  difference,  or the interest rate repricing
"gap," provides an indication of the extent to which an  institution's  interest
rate spread will be affected by changes in interest  rates.  A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities,  and is considered negative when the amount
of  interest-rate  sensitive  liabilities  exceeds  the amount of  interest-rate
sensitive  assets.  Generally,  during a period  of  rising  interest  rates,  a
negative  gap within  shorter  maturities  would  adversely  affect net interest
income,  while a  positive  gap within  shorter  maturities  would  result in an
increase in net interest income,  and during a period of falling interest rates,
a negative  gap within  shorter  maturities  would  result in an increase in net
interest  income while a positive gap within shorter  maturities  would have the
opposite   effect.   As  of  June  30,  1997,   the  amount  of  the   Company's
interest-bearing  liabilities  which were  estimated to mature or reprice within
one  year  exceeded  the  Company's   interest-earning   assets  with  the  same
characteristics by $391.1 million or 43.7% of the Company's total assets.

         The  Company's  actions  with  respect  to  interest  rate risk and its
asset/liability   gap   management   are  taken   under  the   guidance  of  the
Asset/Liability  Management Committee,  which is comprised of certain members of
senior  management.  This  committee  meets  quarterly  to review the  Company's
current  composition  of  assets  and  liabilities  in light  of the  prevailing
interest rate environment and to devise a quarterly  interest rate risk strategy
which is reviewed by the Board of Directors.

         The Company has  historically  emphasized the origination of fixed-rate
residential  real estate loans and other  fixed-rate  loans for retention in its
portfolio.  As a  result,  at June  30,  1997,  $564.7  million  or 80.2% of the
Company's  total loan  portfolio  consisted of  fixed-rate  loans.  Although the
Company  anticipates  that a majority  of its loan  portfolio  will  continue to
consist of fixed-rate loans, the Company has recently  attempted to mitigate the
interest rate risk of holding a significant  portion of fixed-rate  loans in its
portfolio  through the  origination of ARMs,  commercial  real estate loans with
call  provisions  after  three or five  years  and  short-term  consumer  loans.
Historically,  however, consumers tend to favor fixed-rate loans in a decreasing
interest rate environment and, as a result,  the origination of  adjustable-rate
loans  will   typically  be  negatively   impacted  in  such  an  interest  rate
environment.  In addition, while consumer loans generally have shorter terms and
higher  interest rates than mortgage loans,  such loans  generally  involve more
credit risk than mortgage loans because of the type and nature of the collateral
and, in certain  cases,  the absence of  collateral.  At June 30,  1997,  $175.7
million  or  19.7%  of  the  Company's  total  assets  consisted  of  investment
securities.  The classification of such securities as available for sale and the
relatively  short-term  nature of such portfolio  permits  reinvestment  of such
funds into securities or other assets at then market rates.  Notwithstanding the
foregoing,  the  Company's  present  negative  gap will  continue  to expose the
Company to material and prolonged increases in interest rates and will adversely
affect net interest income in an increasing  interest rate  environment.  During
periods of rising interest rates, the Company has  historically  relied and will
continue to rely on its strong capital base.


                                     - 11 -
<PAGE>
         The following table summarizes the anticipated  maturities or repricing
of the Company's interest-earning assets and interest-bearing  liabilities as of
June 30, 1997,  based on the  information and assumptions set forth in the notes
to the table.
<TABLE>
<CAPTION>
                                    
                                                      More Than         More Than       Three Years
                                    Within Six      Six to Twelve      One Year to        to Five          Over Five
                                      Months           Months          Three Years         Years             Years          Total
                                  ------------     ------------      -------------     ------------     ------------     --------
                                                                        (Dollars in Thousands)
<S>                                <C>             <C>               <C>               <C>              <C>              <C>
Interest-earning assets:
  Investment and                        $17,918           $8,411           $66,391          $20,012            $62,438     $175,710
    mortgage-backed
    securities(1)
  Loans receivable, net(2)               64,342           95,864           160,380          141,958            195,779      658,323
  Other interest-earning assets          31,370               --                --               --                 --       31,370
                                     ----------     ------------      ------------       ----------        -----------      -------
    Total interest-earning
      assets                            113,630          104,275           227,311          161,970            258,217      865,403
                                     ----------       ----------           -------          -------            -------      -------

Interest-bearing liabilities:
  Deposits(3)                           131,879          200,152            86,346           13,621             11,842      443,840
  Other borrowings                      173,000          104,000                --               --                 --      277,000
                                     ----------       ----------        ----------         --------          ---------      -------
    Total interest-bearing
      liabilities                       304,879          304,152            86,346           13,621             11,842      720,840
                                     ----------        ---------         ---------        ---------          ---------      -------

Excess (deficiency) of
 interest-earning assets over
 interest-bearing liabilities        $(191,249)       $(199,877)         $ 140,965        $ 148,349          $ 246,375
                                      ========         ========           ========         ========           ========

Cumulative excess (deficiency)
 of interest-earning assets
 over interest-bearing
 liabilities                         $(191,249)       $(391,126)        $(250,161)       $(101,812)           $144,563
                                      ========         ========          ========         ========             =======

Cumulative excess (deficiency)
 of interest-earning assets
 over interest-bearing
 liabilities as a percentage of
 total assets                            (21.4)%          (43.8)%           (28.0)%          (11.4)%             16.2%
                                          ====             ====              ====             ====               ====
</TABLE>

---------------------------


(1)      Reflects repricing or contractual maturity.

(2)      Fixed  rate  loans  are  included  in the  periods  in  which  they are
         scheduled to be repaid,  based on scheduled  amortization,  adjusted to
         take into  account  estimated  prepayments.  Adjustable-rate  loans are
         included in the periods in which  interest  rates are next scheduled to
         adjust  rather  than in the period in which they are due.  Non-accruing
         loans are assumed to reprice within six months.

(3)      Although the Company's negotiable order of withdrawal ("NOW") accounts,
         money market deposit ("MMDA")  accounts,  and passbook savings accounts
         are subject to immediate withdrawal, management considers a substantial
         amount of such accounts to be core deposits having significantly longer
         effective  maturities based on the Company's retention of such deposits
         in changing interest rate environments. Based on decay rate assumptions
         utilized by the FHLB of Atlanta,  the above  table  assumes  that funds
         will  be  withdrawn   from  deposit   accounts  as  follows:   NOW  and
         noninterest-bearing  checking accounts -- 37% during periods within the
         first 12 months,  33.87%  during the more than one year- to  three-year
         period,  9.06% during the more than three-  years to five-year  period,
         and 20.07%  thereafter;  MMDA accounts -- 79% during periods within the
         first twelve  months,  11% during the more than  one-year to three-year
         period,  5.24% during the more than three-year to five-year period, and
         4.76%  thereafter;  and passbook  accounts -- 17% during periods within
         the first  twelve  months,  25.82%  during  the more than  one-year  to
         three-year period,  16.83% during the more than three-year to five-year
         period and 40.35% thereafter.

                                     - 12 -
<PAGE>
         The preceding  table was  summarized  from data provided by the FHLB of
Atlanta using certain  assumptions based on data for the second calendar quarter
of 1997.  Certain  shortcomings are inherent in the method of analysis presented
in the above table.  Although  certain assets and  liabilities  may have similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes in market interest rates.  The interest rates on certain types of assets
and  liabilities  may fluctuate in advance of changes in market  interest rates,
while  interest  rates on other types of assets and  liabilities  may lag behind
changes in market interest rates.

         The OTS adopted a final rule in August 1993  incorporating  an interest
rate risk  component  into the  risk-based  capital  rules.  Under the rule,  an
institution  with a greater than  "normal"  level of interest  rate risk will be
subject to a deduction of its interest  rate  component  from total  capital for
purposes of calculating the risk-based capital requirement.  An institution with
a greater than  "normal"  interest rate risk is defined as an  institution  that
would  suffer  a loss  of net  portfolio  value  ("NPV")  exceeding  2.0% of the
estimated  market value of its assets in the event of a 200 basis point increase
or  decrease in interest  rates.  NPV is the  difference  between  incoming  and
outgoing discounted cash flows from assets,  liabilities,  and off-balance sheet
contracts.  A resulting  change in NPV of more than 2% of the  estimated  market
value of an institution's assets will require the institution to deduct from its
capital 50% of that excess  change for  regulatory  capital  purposes.  The rule
provides that the OTS will calculate the interest rate risk component  quarterly
for each institution.  The OTS has recently indicted that no institution will be
required to deduct capital for interest rate risk until further notice. However,
utilizing this measurement  concept, at June 30, 1997, there would be a decrease
in the Company's NPV of approximately  6.8% of the estimated market value of the
Company's  assets,  assuming  a 200 basis  point  increase  in  interest  rates.
Accordingly,  if the  regulation  had been  implemented as of June 30, 1997, the
Company  would have been  required to deduct 50% of the excess  amount  (2.4% or
$21.7 million) from its risk-based capital.

Liquidity and Capital Resources

         The  Company's  primary  sources  of funds  are  deposits,  repayments,
prepayments  and  maturities  of  outstanding  loans,  maturities  of investment
securities and other short-term investments, and funds provided from operations.
While  scheduled  loan  repayments  and  maturing   investment   securities  and
short-term  investments  are relatively  predictable  sources of funds,  deposit
flows and loan  prepayments  are greatly  influenced by the movement of interest
rates in general,  economic conditions and competition.  The Company manages the
pricing of its deposits to maintain a deposit  balance  deemed  appropriate  and
desirable.  In  addition,  the  Company's  available  for  sale  securities  and
short-term  interest-earning  assets provide liquidity to meet lending and other
operational  requirements.  Although the Company's  deposits  have  historically
represented  the majority of its total  liabilities,  the Company also  utilizes
other  borrowing  sources,  primarily  FHLB advances and  securities  sold under
repurchase  agreements.  At June 30,  1997,  the Company  had $120.0  million of
securities sold under  repurchase  agreements,  FHLB advances  totalling  $129.0
million and a $28.0 million short-term bank loan.

         Liquidity  management  is both a daily and long-term  function.  Excess
liquidity is generally invested in short-term  investments such as cash and cash
equivalents,  and U.S. Government agency securities. On a longer-term basis, the
Company  invests in various  lending  products and  investment  securities.  The
Company uses its sources of funds  primarily to meet its ongoing  commitments to
pay maturing savings certificates and savings withdrawals, fund loan commitments
and maintain an investment  securities  portfolio.  At June 30, 1997,  the total
approved loan commitments  outstanding  (excluding undisbursed portions of loans
in process) amounted to $15.7 million.  At the same date, the unadvanced portion
of  loans  in  process  approximated  $33.0  million.  Certificates  of  deposit
scheduled to mature in one

                                     - 13 -
<PAGE>
year or less at June  30,  1997,  totalled  $291.7  million.  Management  of the
Company believes that the Company has adequate  resources,  including  principal
prepayments and repayments of loans and maturing investments, to fund all of its
commitments  to  the  extent  required.   Based  upon  its  historical   run-off
experience,  management believes that a significant portion of maturing deposits
will  remain  with  the  Company.  See Note 6 of the  Notes to the  Consolidated
Financial Statements of the 1997 Annual Report.

         The  Association  is  required  by the OTS to  maintain  average  daily
balances of liquid assets and  short-term  liquid assets (as defined) in amounts
equal to 5% and 1%,  respectively,  of net withdrawable  deposits and borrowings
payable in one year or less to assure its ability to meet demand for withdrawals
and repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic  conditions and
deposit flows. The Association's  average monthly liquidity ratio and short-term
liquid assets for June 1996, was 10.8% and 2.5%, respectively.

         As of June 30, 1997,  the Company had  regulatory  capital which was in
excess of applicable limits. At June 30, 1997, the Association's  tangible, core
and risk-based capital ratios amounted to 18.9%, 18.9% and 36.5%,  respectively,
compared to regulatory  requirements of 1.5%, 3.0% and 8.0%,  respectively.  See
also Note 12 to the Notes to the  Consolidated  Financial  Statement to the 1997
Annual Report.

Recent Accounting Pronouncements

         In May 1993, the Financial  Accounting  Standards Board ("FASB") issued
SFAS  No.  115,   "Accounting  for  Certain   Investments  in  Debt  and  Equity
Securities,"  affecting  the  accounting  for  investments  in debt  and  equity
securities, which are to be classified into one of three categories.  Securities
which  management has positive  intent and ability to hold until maturity are to
be  classified  as held to maturity and reported at amortized  cost.  Securities
that are bought and held principally for the purpose of selling them in the near
term are to be classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. All other 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 equity until realized.  The Company adopted SFAS No. 115 as of July
1, 1994. The Company had previously classified its debt and equity securities in
its  Consolidated  Statements  of Financial  Condition  as held for  investment.
However, on December 31, 1995,  management of the Company reevaluated its intent
with respect to its investment  portfolio,  and,  accordingly,  reclassified all
investments   and   mortgage-backed   securities   to  the  available  for  sale
classification.  As of June 30, 1997, the Company had designated  $122.5 million
of  investment  securities  and $53.2 million of  mortgage-backed  securities as
"available for sale." The Company classifies its investment and  mortgage-backed
securities  at the time of purchase of such assets.  As a result of its adoption
of SFAS No. 115, the Company included in  stockholders'  equity at June 30, 1997
an  unrealized  gain net of taxes of $4.0 million on  securities  available  for
sale. See also Note 1 of the Notes to the Consolidated Financial Statements.

         In November 1993, the AICPA issued SOP 93-6,  Employers' Accounting for
Employee Stock Ownership Plans, which applied to the Company for its fiscal year
beginning  July 1, 1995.  SOP 93-6  requires  the  measurement  of  compensation
expense  recorded by  employers  for  leveraged  ESOPs at the fair value of ESOP
shares.  Under SOP 93-6, the Company  recognizes  compensation cost equal to the
fair value of the ESOP shares during the periods in which they become  committed
to be  released.  To the extent  that fair value of the  Company's  ESOP  shares
differ  from the cost of such  shares,  this  differential  will be  charged  or
credited  to  equity.  Employers  with  internally  leveraged  ESOPs such as the
Company will not report the loan  receivable  from the ESOP as an asset and will
not report the ESOP debt from the

                                     - 14 -
<PAGE>
employer  as a  liability.  The  application  of SOP 93-6 has not had a material
impact on the Company's financial condition.

Impact of Inflation and Changing Prices

         The Consolidated  Financial Statements of the Company and related notes
presented  herein  have been  prepared in  accordance  with  generally  accepted
accounting  principles  ("GAAP")  which  require the  measurement  of  financial
position  and  operating  results  in  terms  of  historical  dollars,   without
considering  changes in the relative  purchasing power of money over time due to
inflation.

         Unlike most industrial  companies,  substantially all of the assets and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
interest  rates  have a more  significant  impact on a  financial  institution's
performance  than the effects of general levels of inflation.  Interest rates do
not  necessarily  move in the same  direction  or in the same  magnitude  as the
prices of goods and  services,  since such prices are affected by inflation to a
larger extent than interest  rates.  In the current  interest rate  environment,
management of liquidity and the maturity  structure of the Company's  assets and
liabilities are critical to the maintenance of acceptable performance levels.



                                     - 15 -
<PAGE>

                       [PAGE 16 INTENTIONALLY LEFT BLANK]



<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.





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
                                                   ============     ============


                                     - 46 -
<PAGE>
<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 -
<PAGE>
                             Shareholder Information

--------------------------------------------------------------------------------

     HFNC  Financial  Corp.  is a  unitary  savings  and  loan  holding  company
     conducting  business  through its  wholly-owned  subsidiary,  Home  Federal
     Savings and Loan  Association.  The  Association is a  federally-chartered,
     SAIF-insured  savings  institution  operating  through  its main office and
     eight  branch  offices  and  a  loan  origination   office.  The  Company's
     headquarters  are  located  at 139 South  Tryon  Street,  Charlotte,  North
     Carolina 28202.

               -------------------------------------------------
                           TRANSFER AGENT / REGISTRAR
               -------------------------------------------------
                         Registrar and Transfer Company
                                10 Commerce Drive
                           Cranford, New Jersey 07016

--------------------------------------------------------------------------------

                              Shareholder Requests

--------------------------------------------------------------------------------

     Shareholders  needing  assistance  with stock  records,  transfers  or lost
     certificates,  please contact the Company's  transfer agent,  Registrar and
     Transfer Company.

     Requests  for annual  reports,  quarterly  reports and related  shareholder
     literature should be directed to Corporate Secretary, HFNC Financial Corp.,
     139 South Tryon Street, Charlotte, North Carolina 28202.
<PAGE>
                            Common Stock Information

--------------------------------------------------------------------------------

     Shares of HFNC Financial  Corp.'s common stock are traded  nationally under
     the symbol "HFNC" on the Nasdaq  National  Market  System.  At September 5,
     1997, the Company had 17,192,500 shares of common stock outstanding and had
     approximately  2,625  shareholders of record.  Such holdings do not reflect
     the number of beneficial owners of common stock.

     The  following  table sets forth the reported high and low sale prices of a
     share of the Company's common stock as reported by Nasdaq (the common stock
     commenced  trading on the Nasdaq  National  Market  System on December  28,
     1995).
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
 QUARTER ENDED                 FISCAL YEAR ENDED JUNE 30, 1997             FISCAL YEAR ENDED JUNE 30, 1996
-----------------------------------------------------------------------------------------------------------------
                              HIGH           LOW         DIVIDEND         HIGH           LOW         DIVIDEND
                         ----------------------------------------------------------------------------------------
<S>                          <C>           <C>            <C>           <C>           <C>            <C>  
  September 30               $18.38        $15.75         $0.05              -             -              -
                                                           
  December 31                 18.13         17.00          0.07         $13.38        $12.63              -
                                                                                            
  March 31                    22.25         16.63          5.07          15.13         12.88              -

  June 30                     19.88         15.88          0.07          16.63         13.75              -

-----------------------------------------------------------------------------------------------------------------
</TABLE>