UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

               For the quarterly period ended September 30, 1997

                                       OR

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

For the transition period from  ___________________ to ________________________

                         Commission file number 0-27388 

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

  
          North Carolina                                     56-1937349
(State or other jurisdiction of incorporation            (I.R.S. Employer
or organization)                                         Identification No.)

            139 South Tryon Street, Charlotte, North Carolina 28202
                    (Address of principal executive offices)
                                   (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  report[s]),  and (2) has been  subject  to such  filing
requirements for the past 90 days.

                                Yes  [ X ]   No   [   ]

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

$0.01 Par Value Common Stock                        17,192,500 shares
    Class of Stock                          Outstanding at November 5, 1997 
<PAGE>


                              HFNC FINANCIAL CORP.

                                TABLE OF CONTENTS


Part I.       Financial Information                                        

Item 1.       Financial Statements:

              Consolidated Condensed Balance Sheets,
              September 30, 1997 and June 30, 1997                         

              Consolidated Condensed Statements of Income,
              Three Month Periods Ended September 30, 1997 and 1996        

              Consolidated Condensed Statements of Changes in
              Shareholders' Equity, Three Month Periods Ended
              September 30, 1997 and 1996                                  

              Consolidated Condensed Statements of Cash Flows,
              Three Month Periods Ended September 30, 1997 and 1996        

              Notes to Consolidated Condensed Financial Statements         

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


Part II.      Other Information

Item 1.       Legal Proceedings                                            
Item 2.       Changes in Securities                                        
Item 3.       Defaults Upon Senior Securities                              
Item 4.       Submission of Matters to a Vote of Security Holders          
Item 5.       Other Information                                            
Item 6.       Exhibits and Reports on Form 8-K                             


Signatures     


<PAGE>
<TABLE>
<CAPTION>
                                               HFNC FINANCIAL CORP.

                                      CONSOLIDATED CONDENSED BALANCE SHEETS

                                                   (Unaudited)


                                                                                              As of
                                                                                September 30,         June 30,
                                                                               ---------------------------------
 ASSETS                                                                             1997               1997
                                                                               -------------      -------------
<S>                                                                            <C>                <C> 
CASH AND CASH EQUIVALENTS:
  Cash                                                                         $  15,870,659      $   9,934,359
  Federal funds sold                                                              12,277,000         21,436,000
                                                                               -------------      -------------
        Total                                                                     28,147,659         31,370,359
                                                                               -------------      -------------

SECURITIES - Available for sale, at fair value (amortized cost:
  $118,908,565 and $169,285,103, at September 30 and June 30,
  respectively)                                                                  123,044,183        175,710,104

LOANS RECEIVABLE, NET                                                            687,178,868        658,323,320

REAL ESTATE, NET                                                                   1,101,571            867,876

OFFICE PROPERTIES AND EQUIPMENT, NET                                              10,105,535         10,099,107

STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA - At cost                               8,000,000          6,450,000

DEFERRED INCOME TAX ASSET, NET                                                     3,536,789          3,390,125

OTHER ASSETS                                                                       5,744,648          6,709,218
                                                                               -------------      -------------

TOTAL                                                                          $ 866,859,253      $ 892,920,109
                                                                               =============      =============


LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS                                                                       $ 442,314,334      $ 443,839,542

OTHER BORROWED FUNDS                                                             246,800,000        277,000,000

OTHER LIABILITIES                                                                 14,717,476         11,020,650
                                                                               -------------      -------------
      Total liabilities                                                          703,831,810        731,860,192
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                               HFNC FINANCIAL CORP.

                                      CONSOLIDATED CONDENSED BALANCE SHEETS

                                                   (Unaudited)


                                                                                              As of
                                                                                September 30,         June 30,
                                                                               ---------------------------------
                                                                                     1997               1997
                                                                               -------------      -------------
<S>                                                                            <C>                <C>   
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                                                      90,077,769         89,967,883
  ESOP loan and unvested restricted stock                                        (22,832,779)       (23,137,490)
  Retained income                                                                 93,092,764         90,106,224
  Unrealized gain on securities available for sale (net of deferred taxes:
    $1,617,854 and $2,473,626 at September 30 and June 30, respectively)           2,517,764          3,951,375
                                                                               -------------      -------------
        Total shareholders' equity                                               163,027,443        161,059,917
                                                                               -------------      -------------

TOTAL                                                                          $ 866,859,253      $ 892,920,109
                                                                               =============      =============

</TABLE>
 See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                 HFNC FINANCIAL CORP.

                     CONSOLIDATED CONDENSED STATEMENTS OF INCOME

                                     (Unaudited)

                                                          Three Month Periods Ended
                                                               September 30,
                                                          1997              1996
                                                       ----------       ------------
<S>                                                   <C>               <C>
INTEREST INCOME:
  Interest on loans                                   $ 13,877,882      $ 11,193,955
  Interest on securities                                 3,034,062         4,447,357
                                                      ------------      ------------
        Total                                           16,911,944        15,641,312
                                                      ------------      ------------

INTEREST EXPENSE:
  Interest on deposits                                   5,965,898         5,947,190
  Interest on other borrowed funds                       3,920,174         1,782,656
                                                      ------------      ------------
        Total                                            9,886,072         7,729,846
                                                      ------------      ------------

NET INTEREST INCOME                                      7,025,872         7,911,466

PROVISION FOR LOAN LOSSES (RECOVERY OF ALLOWANCE)          (62,970)          374,397
                                                      ------------      ------------

NET INTEREST INCOME AFTER PROVISION FOR
  LOAN LOSSES (RECOVERY OF ALLOWANCE)                    7,088,842         7,537,069
                                                      ------------      ------------

OTHER OPERATING INCOME:
  Service charges and fees                                 205,775           196,043
  Gain on sale of securities                             3,341,155              --
  Other income                                              67,701           115,562
                                                      ------------      ------------
        Total                                            3,614,631           311,605
                                                      ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 HFNC FINANCIAL CORP.

                     CONSOLIDATED CONDENSED STATEMENTS OF INCOME

                                     (Unaudited)
                                     (continued)

                                                          Three Month Periods Ended
                                                               September 30,
                                                          1997              1996
                                                       ----------       ------------
<S>                                                   <C>               <C>

OTHER OPERATING EXPENSES:
  Personnel expenses                                     2,679,764         1,600,810
  Federal deposit insurance premiums                        70,601           265,484
  Special SAIF recapitalization assessment                    --           3,077,275
  Occupancy                                                460,083           410,565
  Net cost of real estate operations                        (6,743)          173,203
  Advertising                                              186,722           182,285
  Data processing                                          108,174            95,829
  Other expenses                                           512,587           780,300
                                                      ------------      ------------
        Total                                            4,011,188         6,585,751
                                                      ------------      ------------

INCOME BEFORE INCOME TAXES                               6,692,285         1,262,923

PROVISION FOR INCOME TAXES                               2,618,022           486,225
                                                      ------------      ------------

NET INCOME                                            $  4,074,263      $    776,698
                                                      ============      ============

Earnings per share                                    $       0.26      $       0.05
Dividends per share                                   $       0.07      $       0.05
</TABLE>
              See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                 HFNC FINANCIAL CORP.

              CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

             FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996

                                      (Unaudited)

                                         Common        Additional Paid       Retained
                                          Stock           In Capital           Income
                                          -----           ----------           ------
<S>                                 <C>                <C>              <C>
BALANCE,
  JUNE 30, 1996 ................           171,925       168,390,571        86,896,095

Net income .....................              --                --             776,698

Shares released from ESOP ......              --             103,950              --   

Dividends paid .................              --                --            (814,625)

Change in net unrealized loss on
  securities available for sale               --                --                --   
                                     -------------     -------------     -------------
BALANCE,
  SEPTEMBER 30, 1996 ...........     $     171,925     $ 168,494,521     $  86,858,168
                                     =============     =============     =============

BALANCE,
  JUNE 30, 1997 ................     $     171,925     $  89,967,883     $  90,106,224

Net income .....................              --                --           4,074,263

Shares released from ESOP and
  restricted stock trusts ......              --             109,886              --

Dividends paid .................              --                --          (1,087,723)

Change in net unrealized gain on
  securities available for sale               --                --                --   
                                     -------------     -------------     -------------
BALANCE,
  SEPTEMBER 30, 1997 ...........     $     171,925     $  90,077,769     $  93,092,764
                                     =============     =============     =============

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 HFNC FINANCIAL CORP.

              CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

             FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996

                                      (Unaudited)


                                                         Net unrealized
                                           ESOP and      Gain (Loss) on
                                          Unvested          Securities
                                         Restricted       Available for
                                           Stock            Sale (1)            Total
                                           -----            --------            -----
<S>                                   <C>               <C>                <C>
BALANCE,
  JUNE 30, 1996 ................        (8,700,000)          (254,135)       246,504,456

Net income .....................              --                 --              776,698

Shares released from ESOP ......           150,000               --              253,950

Dividends paid .................              --                 --             (814,625)

Change in net unrealized loss on
  securities available for sale               --            1,043,701          1,043,701
                                     -------------     -------------     ---------------

BALANCE,
  SEPTEMBER 30, 1996 ...........     $  (8,550,000)     $     789,566      $ 247,764,180
                                     =============      =============      =============

BALANCE,
  JUNE 30, 1997 ................     $ (23,137,490)     $   3,951,375      $ 161,059,917

Net income .....................              --                 --            4,074,263

Shares released from ESOP and
  restricted stock trusts ......           304,711               --              414,597

Dividends paid .................              --                 --           (1,087,723)

Change in net unrealized gain on
  securities available for sale               --           (1,433,611)        (1,433,611)
                                     -------------     -------------     ---------------
BALANCE,
  SEPTEMBER 30, 1997 ...........     $ (22,832,779)     $   2,517,764      $ 163,027,443
                                     =============      =============      =============


</TABLE>

 (1) Net of deferred income taxes.

 See notes to consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                                 HFNC FINANCIAL CORP.

                                    CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

                                                      (Unaudited)

                                                                                          Three Month Periods Ended
                                                                                                 September 30,
                                                                                       ------------------------------
                                                                                             1997             1996
                                                                                       ------------      ------------
<S>                                                                                    <C>               <C>
OPERATING ACTIVITIES:
Net income .......................................................................     $  4,074,263      $    776,698
Adjustments to reconcile net income to net cash provided by operating activities:
  Depreciation ...................................................................          163,515           110,545
  Net amortization of premiums on investment securities ..........................           20,342           165,792
  Amortization of net deferred loan fees .........................................         (449,612)         (453,356)
  Provision for loan loss (recovery of allowance) ................................          (62,970)          374,397
  Provision for losses on real estate (recovery of allowance) ....................             (822)           70,379
  Fair value of released ESOP ....................................................          414,597           253,950
  (Gain) loss on sales of:
    Real estate owned ............................................................          (54,544)           30,073
    Investments ..................................................................       (3,341,155)             --
  Decrease (increase) in other assets ............................................        1,728,619          (319,659)
  Increase in other liabilities ..................................................        3,696,828         4,631,084
                                                                                       ------------      ------------
    Net cash provided by operating activities ....................................        6,189,061         5,639,903
                                                                                       ------------      ------------

INVESTING ACTIVITIES:
  Proceeds from maturities of investment securities ..............................       14,466,184         2,000,000
  Proceeds from sales of securities available for sale ...........................       53,518,151              --
  Purchases of securities available for sale .....................................      (15,993,125)       (4,950,000)
  Purchases of Federal Home Loan Bank stock ......................................       (1,550,000)             --
  Principal repayment on mortgage-backed securities ..............................        1,651,200         3,040,936
  Proceeds from sales of real estate .............................................          407,543         1,232,594
  Net loan originations ..........................................................      (28,928,839)      (48,316,475)
  Purchases of office properties & equipment .....................................         (169,944)       (3,361,415)
                                                                                       ------------      ------------
    Net cash provided by (used in) investing activities ..........................       23,401,170       (50,354,360)
                                                                                       ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                 HFNC FINANCIAL CORP.

                                    CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

                                                      (Unaudited)
                                                      (continued)

                                                                                          Three Month Periods Ended
                                                                                                 September 30,
                                                                                       ------------------------------
                                                                                             1997             1996
                                                                                       ------------      ------------
<S>                                                                                    <C>               <C>

FINANCING ACTIVITIES:
  Decrease in deposits ...........................................................       (1,525,208)       (9,694,389)
  Proceeds from other borrowed funds .............................................       31,000,000        60,000,000
  Repayments of other borrowed funds .............................................      (61,200,000)             --
  Dividends paid .................................................................       (1,087,723)         (814,625)
                                                                                       ------------      ------------
    Net cash (used in) provided by financing activities ..........................      (32,812,931)       49,490,986
                                                                                       ------------      ------------

(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS ...................................       (3,222,700)        4,776,529

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD ...................................       31,370,359         9,605,598
                                                                                       ------------      ------------

CASH & CASH EQUIVALENTS AT END OF PERIOD .........................................     $ 28,147,659      $ 14,382,127
                                                                                       ============      ============

SUPPLEMENTAL DISCLOSURES:
  Cash paid during the period for:
     Interest ....................................................................     $ 10,406,882      $  8,396,563
     Income taxes ................................................................            7,000           431,501
  Loans foreclosed ...............................................................          585,873            98,444
  Unrealized (loss) gain on investment securities available for sale, net of taxes       (1,433,611)        1,043,701
</TABLE>

 See notes to consolidated condensed financial statements.
<PAGE>
                              HFNC FINANCIAL CORP.

              Notes to Consolidated Condensed Financial Statements


1.   BASIS OF PRESENTATION

HFNC Financial Corp. (the "Company") 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 Company and the
offer and sale of the Company's common stock by the Company (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 gross proceeds of
the Conversion totaled  $171,925,000,  of which $171,925 was allocated to common
stock and  $168,266,013  (net of conversion  costs of $3,487,062) is included in
additional  paid-in  capital.  Approximately  50% of the net  proceeds  from the
Conversion  were used to acquire  100% of the common  stock of the  Association.
Substantially  all of the  remaining  net  proceeds  from  the  Conversion  were
retained by HFNC Investment Corp., a wholly owned subsidiary of the Company.

The accompanying consolidated condensed financial statements of the Company have
been prepared in accordance with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes  required by generally accepted
accounting   principles  for  complete  financial   statements.   However,  such
information  reflects all  adjustments  (consisting  solely of normal  recurring
adjustments)  which are,  in the  opinion of  management,  necessary  for a fair
statement of results for the interim periods.

The results of  operations  for the three month period ended  September 30, 1997
are not necessarily indicative of the results to be expected for the year ending
June 30, 1998. The consolidated financial statements and notes thereto should be
read in conjunction with the audited financial  statements and notes thereto for
the year ended June 30, 1997, contained in the Company's 1997 annual report.

Earnings Per Share
Earnings  per share for periods has been  computed by dividing net income by the
weighted  average number of shares of common stock and common stock  equivalents
outstanding  during the period.  The weighted average shares outstanding for the
three  month  periods  ended  September  30, 1997 and 1996 were  15,601,251  and
16,330,000,  respectively. Options granted during the quarter ended December 31,
1996 and  March  31,  1997  quarters  under  the  Company's  stock  option  plan
represented additional potentially dilutive securities.  The potential dilution,
however, was less than the amount requiring income statement  presentation under
Accounting  Principles  Board Opinion No. 15. Full dilution  would have included
15,813,253  weighted  average  shares  outstanding  at September  30,  1997.  In
accordance  with  generally  accepted  accounting  principles,   employee  stock
ownership plan and  recognition  and retention  plan shares are only  considered
outstanding  for earnings per share  calculations  when they are committed to be
released.
<PAGE>
New Accounting Pronouncements
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.

2.   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.  On October 11, 1997, the United States District Court
for the Western  District of North Carolina  entered 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 counterclaim  against the  Association
alleging that she borrowed $750,000 from another financial institution,  secured
<PAGE>
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  corporations after the payment.  Home Federal and
its officers  vigorously deny all of her  allegations.  The case is currently in
the discovery  phase,  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 Home Federal and the other financial  institution  obtained in prior
litigation were obtained by the  perpetration of fraud on the Bankruptcy  Court,
U.S.  District Court,  and the 4th Circuit Court of Appeals.  The plaintiffs are
seeking to have the judgments set aside on that basis.  Home Federal has filed a
motion to dismiss  this  lawsuit  and is  awaiting  ruling on that  motion.  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.  All defendants have filed
motions to dismiss this lawsuit and are awaiting rulings on these motions.

The Association,  its officers and its attorneys  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
at the present time to give an opinion as to the likely  outcome of the lawsuits
or estimate the amount or range of potential loss, if any.
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Financial Condition

The Company's assets amounted to $866.9 million at September 30, 1997,  compared
to $892.9  million at June 30, 1997, a decrease of $26.1  million or 2.9%.  This
decrease in total assets was due to the sale of $53.5  million of the  Company's
securities  portfolio,  partially  offset by an increase in loans  receivable of
$28.9 million.  The securities sold were yielding less than current market rates
and were sold to reinvest the proceeds into higher  yielding  assets,  primarily
loans, and to partially repay borrowed funds.  Approximately $3.9 million of the
securities sold were equity  securities  which had appreciated  significantly in
value and were sold at a $3.8 million  gain.  An  additional  $49.6 million were
investment  securities  which were also yielding less than current  market rates
and were sold at a $476,000 loss. Loans receivable  increased $28.9 million,  or
4.4%,  during the quarter due to the reinvestment of the securities  proceeds in
conjunction with the Company's loan growth strategy. Total liabilities decreased
$28.0 million to $703.8 million due primarily to the partial  repayment of other
borrowed funds following the sale of securities.  Shareholders' equity increased
$2.0  million to $163.0  million  due to net  earnings  of $4.1  million and the
release of $415,000 in ESOP shares, offset somewhat by $1.1 million in dividends
and a $1.4 million reduction in the unrealized gain on securities  available for
sale.

Results of Operations for the Three Months Ended September 30, 1997 and 1996

General:  Net income for the three months ended  September  30, 1997 amounted to
$4.1 million,  an increase of $3.3 million from the three months ended September
30,  1996,  due to a $3.3 million  increase in other  operating  income,  a $2.6
million  decrease in other operating  expenses,  and a $437,000  decrease in the
provision for loan losses, which were partially offset by a $886,000 decrease in
net interest  income and a $2.1  million  increase in the  provision  for income
taxes.

Net Interest Income: Net interest income is determined by the Company's interest
rate  spread   (i.e.,   the   difference   between  the  yields  earned  on  its
interest-earning assets and the rates paid on its interest-bearing  liabilities)
and  the  relative  amounts  of  interest-earning  assets  and  interest-bearing
liabilities.  The Company's net interest income decreased $886,000, or 11.2%, to
$7.0  million for the three months ended  September  30, 1997,  compared to $7.9
million  for the three  months  ended  September  30,  1996.  This  decrease  is
primarily the result of a reduction in the ratio of  interest-earning  assets to
interest-bearing  liabilities  to  1.20  at  September  30,  1997  from  1.40 at
September  30,  1996.  This  ratio  declined  due  to the  Company's  additional
borrowings to fund loan growth,  coupled with the  liquidation  of a significant
portion  of  the  securities   portfolio  to  fund  the  $5  per  share  special
distribution  paid to shareholders in March 1997. The Company also experienced a
moderate  decrease in the interest rate spread to 2.34%, from 2.43% in the prior
year quarter.  The net interest  margin declined to 3.26% in the current quarter
from 4.00% in the prior year  quarter,  also due to the  reduction  in  interest
earning assets following the special distribution.
<PAGE>
Interest  Income:  Interest income increased $1.3 million or 8.1% from the prior
year  quarter due to an increase  in interest on loans of $2.7  million,  offset
somewhat by a decrease in interest on securities  of $1.4 million.  The increase
in interest on loans resulted from loan growth during the year, with the average
balance  outstanding  during the 1997 quarter  increasing to $672.4 million from
$525.9  million in the prior year  quarter,  an  increase  of $146.5  million or
27.9%. The average yield on loans decreased  somewhat,  to 8.26% from 8.51%, due
to the large volume of new mortgage  loan  products  originated  during the past
year that have a moderate rate discount during the first three to five years. At
the end of the  initial  period,  the loans  convert to a fixed rate or one year
adjustable rate loan at the full market rate.  These  competitive  loan products
were  instrumental in the recent loan growth and the yields are expected to rise
somewhat when the initial  terms expire.  The decrease in interest on securities
primarily resulted from a decline in the average balance of securities to $188.8
million  for the quarter  ended  September  30, 1997 from $264.3  million in the
prior  year  quarter.  This  decrease  was due to the  sale  of  mortgage-backed
securities to fund the special $5  distribution  paid to  shareholders  in March
1997. A decline in the yield on securities  also  contributed to the decrease in
securities income. The yield declined to 6.43% in the current quarter from 6.65%
in the prior  year  quarter  because  the  securities  sold to fund the  special
distribution  were  mortgage-backed  securities,  which  generally have a higher
yield than securities held primarily for liquidity purposes.  Consequently,  the
liquidation of these securities reduced the average yield of the portfolio.

Interest  Expense:  Total interest  expense for the quarter ended  September 30,
1997 increased $2.2 million or 27.9% over the quarter ended  September 30, 1997.
Interest on deposits during the current quarter was virtually unchanged from the
prior year  quarter,  with both the average  balance  and the average  rate paid
approximating prior year levels. Interest on other borrowed funds increased $2.1
million to $3.9 million for the quarter  ended  September  30,  1997,  from $1.8
million in the prior year  quarter.  This increase was due to an increase in the
average  balance of borrowed funds to $274.0 million in the current quarter from
$122.7  million in the prior year  quarter,  resulting  from the use of borrowed
funds to support the  Company's  loan growth  during the past year and partially
fund  the  special  distribution.  Meanwhile,  the  average  rate  paid on these
borrowings increased slightly to 5.72% from 5.64%.

Provision for Loan Losses: The Company's allowance for loan losses is maintained
at a level which is deemed to be  appropriate  based upon an assessment of prior
loss experience, the volume and type of lending presently being conducted by the
Company,  industry standards, past due loans, general economic conditions in the
Company's market area, and to other factors related to the collectibility of the
loan  portfolio.  During the quarter ended  September 30, 1997, the  Association
recorded a net  recovery of  provision  of $62,970  compared to a net  provision
during the prior year quarter of $374,397. The current quarter recovery resulted
from significant  improvements in the Company's  nonperforming  loans. One major
borrower represented $2.8 million or 40.5% of the Company's  nonperforming loans
at September  30, 1997.  This  represented a reduction of over $540,000 from the
June 30, 1997 level and a reduction of $1.6 million from this  borrower's  level
at September  30,  1996.  As a result of this and other  improvements,  reserves
related to specific nonperforming loans, including those to this borrower,  were
reduced  during the quarter by $697,000.  Meanwhile,  reserves for  unidentified
risks in the  portfolio at large were  increased  during the quarter by $437,000
due to portfolio  growth.  At September 30, 1997,  the allowance for loan losses
amounted to $7.4 million,  which was 107.4% of  nonperforming  loans and 1.1% of
total loans.
<PAGE>
Other Operating Income:  Other operating income increased $3.3 million,  to $3.6
million compared to $312,000 in the prior year quarter, due to a current quarter
gain on the sale of securities  amounting to $3.3 million.  This sale, discussed
in  "Financial  Condition"  above,  resulted in a net gain  because a portion of
these securities had  significantly  appreciated in value. The sale was executed
during the quarter  ended  September  30, 1997 due to the disparity at that time
between  the yield on the these  securities  and the yields  available  on loans
receivable and the costs of borrowed funds.

Other Operating  Expenses:  Other operating  expenses declined $2.6 million,  to
$4.1 million  compared to $6.6 million in the prior year quarter.  The September
1997  decrease  over the prior year  quarter was primary due to the $3.1 million
special  one time  assessment  in  September  1996 to  recapitalize  the Savings
Association  Insurance Fund (SAIF).  Additional  expense  reductions  during the
current year quarter included a reduction in federal deposit insurance  premiums
of $195,000, a $180,000 decline in the net cost of real estate operations, and a
reduction in "other  expenses"  of $268,000.  These  reductions  were  partially
offset by an increase in personnel expenses amounting to $1.1 million.

The payment of the SAIF assessment in late 1996 reduced the future periodic cost
of federal deposit insurance premiums, resulting in a cost of $71,000 during the
current quarter,  compared to $265,000 in the 1996 quarter. The net cost of real
estate operations decreased from a net cost in the 1996 quarter of $173,000 to a
net gain in the 1997 quarter of $7,000,  due to a $66,000  reduction in expenses
related to foreclosed  properties  and to a $109,000  reduction in the quarterly
provision for losses on foreclosed  properties.  Both costs declined  during the
quarter ended September 30, 1997 due to the nature of the foreclosed  properties
-- at September  30, 1996 a  substantial  portion of the  foreclosed  properties
included  houses in various stages of  completion,  which bear a greater cost of
upkeep and risk of loss,  while at  September  30,  1997  foreclosed  properties
included  only one small house,  with the remainder  being land for  residential
construction.  The "other  expense"  category also  declined  during the quarter
ended  September  30,  1997,  to $513,000  from  $780,000  in the quarter  ended
September  30, 1996.  This decline was  primarily  due to a $158,000  decline in
legal expenses,  mostly related to the long-standing legal dispute with a former
borrower,  and to a reduction in miscellaneous  other expenses.  The increase in
personnel expenses  principally  consisted of a $857,000 accrual for the cost of
shares of stock granted pursuant to the Recognition and Retention Plan and Trust
that will vest during fiscal 1998.

Liquidity and Capital Resources

The Company's liquidity,  represented by cash and cash equivalents, is a product
of its  operating,  investing and financial  activities.  The Company's  primary
sources  of  funds  are  deposits,  borrowings,  amortization,  prepayments  and
maturities  of  outstanding  loans,  sales of loans,  maturities  of  investment
securities and other short-term  investments and funds provided from operations.
While  scheduled  loan  amortization  and  maturing  investment  securities  and
short-term  investments  are relatively  predictable  sources of funds,  deposit
flows and loan  prepayments  are greatly  influenced by general  interest rates,
economic  conditions  and  competition.  The  Company  invests  excess  funds in
overnight deposits and other short term interest-earning assets. The Company can
use cash generated  through the retail deposit market,  its traditional  funding
source,  to offset the cash  utilized in  investing  activities.  The  Company's
available for sale securities and short term interest-earning assets can also be
used to provide liquidity for lending and other operational requirements.  As an
additional  source of funds,  the Company may borrow from the FHLB of Atlanta or
through securities sold under repurchase agreements.
<PAGE>
The  Association  is required  by Office of Thrift  Supervision  regulations  to
maintain tangible capital equal to at least 1.5% of adjusted total assets,  core
capital equal to at least 3.0% of adjusted  total assets and total capital equal
to at least 8.0% of risk-weighted assets. The Association substantially exceeded
such  requirements with tangible,  core and total capital equal to 16.7%,  16.7%
and 31.4%, respectively, at September 30, 1997.
<PAGE>

                              HFNC FINANCIAL CORP.

                                     Part II


Item 1.       Legal Proceedings
              Other  than as  discussed  in  Note 2 of the  Notes  to  Unaudited
              Consolidated  Condensed Financial  Statements,  the Company is not
              engaged in any legal  proceedings  at the present  time other than
              those generally associated with the normal course of business.

Item 2.       Changes in Securities
              Not applicable.

Item 3.       Defaults Upon Senior Securities
              Not applicable.

Item 4.       Submission of Matters to a Vote of Security Holders
              Not applicable.

Item 5.       Other Information
              None.

Item 6.       Exhibits and Reports on Form 8-K
              None.



<PAGE>



                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                            HFNC FINANCIAL CORP.


November 5, 1997                      By:  /s/  H. Joe King, Jr.
                                           ---------------------
                                           H. Joe King, Jr.
                                           President and Chief Executive Officer


November 5, 1997                      By:  /s/  A. Burton Mackey, Jr.
                                           --------------------------
                                           A. Burton Mackey, Jr.
                                           Vice President and Treasurer