UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22445
FIRSTSPARTAN FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 56-2015272
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
380 E. Main Street, Spartanburg, South Carolina 29302
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 582-2391
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
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 reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K.
As of September 14, 1998, there were issued and outstanding 4,208,856
shares of the registrant's Common Stock, which are listed on the Nasdaq
National Market System under the symbol "FSPT." Based on the average of the
bid and asked prices for the Common Stock on September 14, 1998, the aggregate
value of the Common Stock outstanding held by nonaffiliates of the registrant
was $117,743,373 (3,622,873 shares at $32.50 per share). For purposes of this
calculation, Common Stock held by officers and directors of the registrant and
the First Federal Savings and Loan Association of Spartanburg Employee Stock
Ownership Plan and Trust are considered nonaffiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
June 30, 1998 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (Part III).
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
FirstSpartan Financial Corp. ("FirstSpartan" or the "Corporation"), a
Delaware corporation, was incorporated on February 4, 1997 for the purpose of
becoming the holding company for First Federal Savings and Loan Association of
Spartanburg (the "Association") (collectively referred to as the "Company")
upon the Association's conversion from a federally chartered mutual savings
and loan association to a federally chartered stock savings and loan
association ("Conversion"). The Conversion was completed on July 8, 1997
through the sale and issuance of 4,430,375 shares of common stock by the
Corporation. In January 1998, First Federal changed its name to First Federal
Bank ("First Federal" or the "Bank"). At June 30, 1998, the Company had total
assets of $517.4 million, total deposits of $369.8 million and total equity of
$125.7 million. FirstSpartan's business activities generally are limited to
passive investment activities and oversight of its investment in First
Federal. Therefore, substantially all of the Company's operations are
conducted through the Bank.
All of the Bank's operations are located in South Carolina. The Bank
conducts its business from its main office and three branch offices located in
the city of Spartanburg; three other Spartanburg County offices located in
Boiling Springs, Inman, and Duncan; and a branch office located in a Wal-Mart
Supercenter in Greenville (Greenville County). The Inman and Duncan offices
opened in June 1997. The Greenville office opened in February 1998. In 1998,
the Bank announced plans to open three additional offices: a traditional
branch in Greer (Greenville County), a branch in a Wal-Mart Supercenter in
Greer (Spartanburg County) and a traditional branch in Chesnee (Spartanburg
County). The deposits of the Bank are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC").
The Bank is a community oriented financial institution whose business
historically has been focused principally on the origination and servicing of
residential mortgage loans and attracting retail deposits (principally
certificates of deposit and savings accounts) from the general public. In
recent years, the Bank has diversified its products and now offers a full
range of consumer and commercial products and services.
MARKET AREA
The Bank considers Spartanburg County and adjacent counties in northwest
South Carolina to be its primary market area. The City of Spartanburg, the
county seat of Spartanburg County, is located on Interstate 85 approximately
75 miles southwest of Charlotte, North Carolina, and 35 miles northeast of
Greenville, South Carolina.
Spartanburg County and the City of Spartanburg had a 1990 population of
approximately 227,000 and 43,000, respectively, according to the Spartanburg
Area Chamber of Commerce. The Spartanburg County economy is diverse and
generally stable. According to the Spartanburg Area Chamber of Commerce, the
Spartanburg County unemployment rate was 3.4% for June 1998. According to the
Spartanburg Area Chamber of Commerce, major employers include Milliken &
Company, Michelin Tire Corp., Spartan Mills, Hoechst Celanese Corp.,
Spartanburg Regional Medical Center and BMW Manufacturing Co.
LENDING ACTIVITIES
GENERAL. At June 30, 1998, the Bank's total loans receivable portfolio
amounted to $441.4 million, or 85% of total assets at that date. The Bank has
traditionally concentrated its lending activities on conventional first
mortgage loans secured by one- to four-family properties, with such loans
amounting to $313.0 million, or 71% of the total loans receivable portfolio at
June 30, 1998. In addition, the Bank originates construction loans, commercial
real estate loans, land development loans, consumer loans, and commercial
business loans. A substantial portion of the Bank's loan portfolio is secured
by real estate, either as primary or secondary collateral, located in its
primary market area.
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<TABLE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of the Bank's loan portfolio
(excluding loans held-for-sale) at the dates indicated. The Bank had no concentration of loans exceeding
10% of total gross loans other than as disclosed below.
At June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-
family...... $312,981 70.9% $285,969 75.1% $257,938 77.3% $219,552 77.9% $212,869 80.8%
Construction. 37,241 8.4 35,061 9.2 32,393 9.8 32,145 11.4 27,469 10.4
Land......... 20,577 4.7 12,376 3.2 5,683 1.8 1,670 0.6 2,250 0.9
Commercial and
other....... 10,613 2.4 3,773 1.0 3,262 1.0 3,372 1.2 2,990 1.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total
mortgage
loans...... 381,412 86.4 337,179 88.5 299,276 89.9 256,739 91.1 245,578 93.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer and
other loans:
Home equity.. 43,950 10.0 35,366 9.3 26,584 8.0 19,282 6.8 13,831 5.2
Commercial... 6,987 1.6 1,984 0.5 433 0.1 513 0.2 352 0.1
Other........ 9,058 2.0 6,301 1.7 6,510 2.0 5,302 1.9 3,853 1.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total
consumer
and other
loans...... 59,995 13.6 43,651 11.5 33,527 10.1 25,097 8.9 18,036 6.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable.... 441,407 100.0% 380,830 100.0% 332,803 100.0% 281,836 100.0% 263,614 100.0%
===== ===== ===== ===== =====
Less:
Undisbursed
portion of
loans in
process..... 21,923 15,311 15,839 12,761 14,587
Net deferred
loan fees... 843 995 1,028 1,082 1,232
Allowance for
loan losses. 2,179 1,796 1,000 600 600
-------- -------- -------- -------- --------
Total loans
receivable,
net........... $416,462 $362,728 $314,936 $267,393 $247,195
======== ======== ======== ======== ========
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ONE- TO FOUR-FAMILY REAL ESTATE LENDING. At June 30, 1998, $313 million,
or 71% of the Bank's total loan portfolio, consisted of one- to four-family
residential mortgage loans. The Bank originated $95.8 million, $50.9 million
and $59.3 million of one- to four-family residential mortgage loans during the
years ended June 30, 1998, 1997 and 1996, respectively.
The Bank participates in the FHA Direct Endorsement Program, which allows
the Bank's in-house, FHA-approved, direct endorsement underwriters to approve
or reject FHA-insured one- to four-family mortgage loans up to maximum amounts
established by the FHA. The Bank is also a VA "automatic approved lender,"
which enables designated Bank personnel to approve or reject VA-insured, one-
to four-family mortgage loans on behalf of the Bank. The Bank generally sells
all FHA and VA loan originations, servicing released.
Generally, the Bank's fixed-rate one- to four-family mortgage loans have
maturities ranging from ten to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are originated under terms, conditions
and documentation which permit them to be sold to U.S. Government sponsored
agencies such as Federal National Mortgage Association ("Fannie Mae"). The
Bank's fixed-rate loans customarily include "due on sale" clauses, which give
the Bank the right to declare a loan immediately due and payable in the event
the borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.
The Bank offers adjustable-rate mortgage ("ARM") loans at rates and terms
competitive with market conditions. At June 30, 1998, $98.0 million of one- to
four-family mortgage loans, or 31% of total one- to four-family mortgage
loans, were subject to periodic interest rate adjustments. Substantially all
of the Bank's ARM loan originations meet the underwriting standards of Fannie
Mae even though the Bank originates ARM loans primarily for its own portfolio.
The Bank originates for its portfolio ARM loans which provide for an interest
rate which adjusts every year or which is fixed for five or ten years and then
adjusts every year after the initial period. Most of the Bank's one-year and
ten-year ARMs adjust every year after the initial period based on the one-year
Treasury constant maturity index while the interest rate adjustment for its
five-year ARMs after the initial fixed period is based on the ten-year U.S.
Treasury securities rate. The Bank's ARMs typically are based on a 30-year
amortization schedule. The Bank qualifies the borrowers on its ARM loans based
on the initial rate. The one-year ARM loan generally may be converted to a
fixed-rate loan within five years of origination. The ten-year ARM provides a
conversion option after seven years have elapsed. The Bank does not offer deep
discount or "teaser" rates. The Bank's current ARM loans do not provide for
negative amortization. At June 30, 1998, however, 21 loans aggregating
$820,000 provide for negative amortization at the borrowers' option. These
loans were originated more than ten years ago. The Bank's ARM loans generally
provide for annual and lifetime interest rate adjustment limits of 1% to 2%
and 4% to 6%, respectively.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs
due to changed rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
In addition, although ARM loans allow the Bank to increase the sensitivity of
its asset base to changes in the interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations, the Bank has no assurance that yields
on ARM loans will be sufficient to offset increases in the Bank's cost of
funds. The Bank believes these risks, which have not had a material adverse
effect on the Bank to date, generally are less than the risks associated with
holding fixed-rate loans in portfolio during a rising interest rate
environment.
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The Bank generally requires title insurance insuring the status of its
lien or an acceptable attorney's opinion on all loans where real estate is the
primary source of security. The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.
The Bank's one- to four-family residential mortgage loans typically do
not exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one- to
four-family residential loan provided that the borrower purchases private
mortgage insurance for the benefit of the Bank. The private mortgage insurance
purchased generally provides coverage of the principal amount that exceeds 65%
to 70% of the appraised value of the security property. At June 30, 1998, the
Bank had twelve one- to four-family mortgage loans totaling $395,000 with
principal balances in excess of 80% of the appraised value of the real estate
collateral and with no private mortgage insurance. These loans are part of the
Spartanburg Residential Development Program, an affordable housing program.
CONSTRUCTION LENDING. The Bank originates residential construction loans
to local home builders, generally with whom it has established relationships.
The Bank also originates such loans to individuals who have a contract with a
builder for the construction of their residence. In addition, the Bank
originates construction loans through the mortgage banking company in which
the Bank's service corporation owns a one-third equity interest and to a
lesser extent, through closely monitored unaffiliated correspondent mortgage
banking relationships. At June 30, 1998, construction loans amounted to $37.2
million ($11.1 million not directly originated by the Bank), or 8% of the
Bank's total loan portfolio.
The Bank's construction loans generally have fixed interest rates and are
for a term of nine to 12 months. Construction loans to builders typically are
made with a maximum loan to value ratio of 80%. Construction loans to
individuals typically are made in connection with the granting of the
permanent financing on the property. Such loans convert to a fully amortizing
adjustable- or fixed-rate loan at the end of the construction term. The Bank
typically requires that permanent financing with the Bank or some other lender
be in place prior to closing any construction loan to an individual.
The Bank's construction loans to builders are made on either a pre-sold
or speculative (unsold) basis. However, the Bank generally limits the number
of outstanding loans on unsold homes under construction to individual
builders, with the amount dependent on the financial strength of the builder,
the present exposure of the builder, the location of the property and prior
sales of homes in the development. At June 30, 1998, speculative construction
loans amounted to $20.5 million. At June 30, 1998, the largest amount of
construction loans outstanding to one builder was $2.9 million, all of which
was for speculative construction.
Prior to making a commitment to fund a construction loan, the Bank
requires an appraisal of the property by an independent state-licensed and
qualified appraiser approved by the Board of Directors. The Bank's staff also
reviews and inspects each project prior to disbursement of funds during the
term of the construction loan. Loan proceeds are disbursed after inspection of
the project based on a percentage of completion. With respect to construction
loans originated since September 1996, the Bank has enforced the contractual
requirement that monthly interest payments be made during the construction
term. With respect to loans originated prior to that time, monthly payment of
accrued interest was at the borrower's option, with all accrued interest
collected at maturity. In periods prior to discontinuance of this practice,
this contributed, in part, to the high level of accruing construction loans
contractually past due 90 days or more. See "-- Nonperforming Assets and
Delinquencies."
Construction loans originated through all mortgage banking relationships
are subject to approval by the Bank. Appraisal policies of the mortgage
bankers are similar to the Bank's policies. The mortgage bankers generally use
outside appraisers to conduct inspections prior to disbursement of funds.
Construction lending affords the Bank the opportunity to charge higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, generally is
considered
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to involve a higher degree of risk than single-family permanent mortgage
lending because of the inherent difficulty in estimating both a property's
value at completion of the project and the estimated cost of the project. The
nature of these loans is such that they generally are more difficult to
evaluate and monitor. If the estimate of construction cost proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted at
or prior to the maturity of the loan with a project the value of which is
insufficient to assure full repayment. Projects also may be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no
purchaser has been identified carry more risk because the payoff for the loan
is dependent on the builder's ability to sell the property prior to the time
that the construction loan is due. Construction loans originated through
mortgage bankers involve additional risks due to third parties' involvement in
inspection and monitoring the loans and due to some of the loans being outside
the Bank's primary market area.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting its construction lending primarily to residential properties.
It is also the Bank's general policy to obtain personal guarantees from the
principals of its corporate borrowers. In the case of speculative construction
loans, the Bank has begun limiting the number of unsold homes to larger
borrowers and, on loans originated since September 1996, enforcing contractual
clauses requiring the payment of interest monthly (rather than at the earlier
of loan maturity or sale of the home) and assessing monetary penalties on
delinquent balances. The monthly interest payment requirement provides an
earlier indication of potential delinquency. The Bank also attempts to
minimize the risk of construction loans originated through mortgage bankers by
approving all loans and selectively inspecting properties. The Bank originated
$20.4 million of speculative construction loans during the year ended June 30,
1998, compared to $21.1 million during the year ended June 30, 1997.
COMMERCIAL REAL ESTATE LENDING. The Bank originates mortgage loans for
the acquisition and refinancing of commercial real estate properties. At June
30, 1998, $10.6 million, or 2% of the Bank's total loan portfolio, consisted
of loans secured by commercial real estate properties. The majority of the
Bank's commercial real estate loans are secured by office buildings, retail
shops and manufacturing facilities, all of which are located in the Bank's
primary market area.
The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by independent appraisers designated by
the Bank, all of which are reviewed by management. In underwriting commercial
loans, the Bank categorizes loans as either real estate dependent or owner
occupied properties. Real estate dependent loans are dependent on cash flow
generated from the operation of the security property for loan repayment.
Therefore, a property's cash flow is given the highest weight in underwriting.
Also considered are the property's appraised value and the financial strength
of the borrower. On owner occupied properties, the underwriter considers the
business as a going concern and places the most emphasis on the cash flows of
the business as a whole. As with real estate dependent loans, the value of the
collateral and the overall creditworthiness of the borrower also are
considered.
Loan to value ratios on the Bank's commercial real estate loans generally
are limited to 75%. As part of the criteria for underwriting commercial real
estate loans, the Bank generally imposes a debt coverage ratio (the ratio of
net cash from operations before payment of debt service to debt service) of
not less than 1.2. It is also the Bank's policy to obtain personal guarantees
from the principals of its corporate borrowers on its commercial real estate
loans.
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Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to
four-family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
and commercial properties often are dependent on the successful operation and
management of the properties, repayment of such loans may be affected by
adverse conditions in the real estate market or the economy. The Bank seeks to
minimize these risks by limiting the maximum loan-to-value ratio to 75% and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan. The Bank
also obtains loan guarantees from financially capable parties based on a
review of personal financial statements.
LAND DEVELOPMENT LENDING. The Bank originates land development loans to
local developers for the purpose of developing the land (i.e., installing
roads, sewers, water and other utilities) for sale. At June 30, 1998, land
development loans amounted to $20.1 million, or 5% of the Bank's total loan
portfolio. Land development loans are secured by a lien on the property,
generally are limited to 75% of the developed value of the secured property
and are made for a period of three years with an interest rate that adjusts
with the prime rate. The Bank requires monthly interest payments during the
term of the loan. The Bank's land development loans are structured so that the
Bank is repaid in full upon the sale by the borrower of approximately 75% of
the available lots. All of the Bank's land development loans are secured by
property located in its primary market area. In addition, the Bank obtains
personal guarantees from the principals of its corporate borrowers. At June
30, 1998, the Bank had no nonaccruing land development loans.
Loans secured by undeveloped land or improved lots involve greater risks
than one- to four-family residential mortgage loans because such loans are
more difficult to evaluate. If the estimate of value proves to be inaccurate,
in the event of default and foreclosure the Bank may be confronted with a
property the value of which is insufficient to assure full repayment. The Bank
attempts to minimize this risk by generally limiting the maximum loan-to-value
ratio on land development loans to 75%.
CONSUMER AND OTHER LENDING. The Bank originates a variety of consumer
loans, the majority of which are on a secured basis. Consumer loans include
second mortgage loans, home equity lines of credit, savings account loans,
automobile loans, boat loans, loans secured by marketable equity securities,
VISA credit card loans and unsecured loans. Consumer loans are made with both
fixed and variable interest rates and with varying terms. At June 30, 1998,
consumer loans amounted to $53.0 million, or 12% of the total loan portfolio.
At June 30, 1998, the largest component of the consumer loan portfolio
consisted of second mortgage loans and home equity lines of credit, which
totaled $44.0 million, or 10% of the total loan portfolio. At June 30, 1998,
unused commitments to extend credit under home equity lines of credit totaled
$38.7 million. Home equity lines of credit and second mortgage loans are made
for purposes such as the improvement of residential properties, debt
consolidation and education expenses, among others. The majority of these
loans are made to existing customers and are secured by a first or second
mortgage on residential property. The Bank actively solicits these loans by
contacting its customers directly. The loan-to-value ratio is typically 90%
or less, when taking into account both the first and second mortgage loans.
Second mortgage loans typically carry fixed interest rates with a fixed
payment over a term between five and 15 years. Home equity lines of credit
generally are for 15-year terms and the interest rate is tied to The Wall
Street Journal prime lending rate.
At June 30, 1998, automobile loans amounted to $4.0 million. The Bank
originates automobile loans for both new and used automobiles for terms
generally not exceeding 60 months. The Bank does not engage in indirect
automobile lending.
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Since June 1995, the Bank has issued VISA credit cards to customers
within its primary market area. At June 30, 1998, there were 988 credit card
accounts with aggregate outstanding balances of $878,000. At June 30, 1998,
total approved lines of credit were $3.7 million. The Bank does not engage in
direct mailings of pre-approved credit cards.
The Bank views consumer lending as an important part of its business
because consumer loans generally have shorter terms and higher yields, thus
reducing exposure to changes in interest rates. In addition, the Bank believes
that offering consumer loans helps to expand and create stronger ties to its
customer base. Subject to market conditions, the Bank intends to continue
emphasizing consumer lending, particularly home equity lines of credit and
automobile loans.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and are more likely to be affected adversely by job loss, divorce,
illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount that can be recovered on such loans. The Bank
believes that these risks are not as prevalent in the case of the Bank's
consumer loan portfolio because a large percentage of the portfolio consists
of second mortgage loans and home equity lines of credit that are underwritten
in a manner such that they result in credit risk that is substantially similar
to residential first mortgage loans. Nevertheless, second mortgage loans and
home equity lines of credit have greater credit risk than residential first
mortgage loans because they are secured by mortgages subordinated to the
existing first mortgage on the property, which may or may not be held by the
Bank. At June 30, 1998, $160,000 of consumer loans were delinquent in excess
of 90 days.
The Bank employs strict underwriting procedures for consumer loans. These
procedures include an assessment of the applicant's credit history and the
ability to meet existing and proposed debt obligations. Although the
applicant's creditworthiness is the primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, to
the proposed loan amount. The Bank generally underwrites and originates its
consumer loans internally, which the Bank believes limits its exposure to
credit risks associated with loans underwritten or purchased from brokers and
other external sources.
The Bank also engages in limited amounts of commercial business lending.
At June 30, 1998, the Bank had $7.0 million of commercial business loans which
represented 2% of the total loan portfolio. Commercial business loans
generally are secured by business equipment. Of the total commercial business
loans at June 30, 1998, loans amounting to $1.2 million were unsecured. The
Bank generally requires annual financial statements from its corporate
borrowers and personal guarantees from the corporate principals.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Although
commercial business loans often are collateralized by equipment, inventory,
accounts receivable or other business assets, the liquidation of collateral in
the event of a borrower default is often an insufficient source of repayment
because accounts receivable may be uncollectible and inventories and equipment
may be obsolete or of limited use, among other things. Accordingly, the
repayment of a commercial business loan depends primarily on the
creditworthiness of the borrower (and any guarantors), while liquidation of
collateral is a secondary and often insufficient source of repayment.
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MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at June 30, 1998 regarding the dollar amount of loans maturing in
the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as becoming due within one year. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance
for loan losses.
After After After
One Year 3 Years 5 Years
Within Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
(In thousands)
Mortgage loans:
One- to four-
family...... $ 45 $ 2,353 $ 5,860 $48,620 $256,103 $312,981
Construction. 19,612 662 -- 168 16,799 37,241
Land develop-
ment........ 5,125 10,305 3,853 936 358 20,577
Commercial and
other....... 1,645 45 4,639 2,552 1,732 10,613
Consumer and
other loans.... 6,133 5,877 8,618 8,397 30,970 59,995
------- ------- ------- ------- -------- --------
Total....... $32,560 $19,242 $22,970 $60,673 $305,962 $441,407
======= ======= ======= ======= ======== ========
The following table sets forth the dollar amount of all loans due after
June 30, 1999, which have fixed interest rates and have floating or adjustable
interest rates.
Fixed- Floating- or
Rates Adjustable-Rates Total
----- ---------------- -----
(In thousands)
Mortgage loans:
One- to four-family............... $214,987 $ 97,949 $312,936
Construction...................... 17,629 -- 17,629
Land development.................. 7,105 8,347 15,452
Commercial and other.............. 3,194 5,774 8,968
Consumer and other loans............ 27,929 25,933 53,862
-------- -------- --------
Total........................... $270,844 $138,003 $408,847
======== ======== ========
8
<PAGE>
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans
immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage loan market rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgage loans are substantially higher than current mortgage loan market
rates. Furthermore, management believes that a significant number of the
Bank's residential mortgage loans are outstanding for a period less than their
contractual terms because of the transitory nature of many of the borrowers
who reside in its primary market area.
LOAN SOLICITATION AND PROCESSING. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, walk-in customers, referrals and
existing customers. A business development program has been implemented where
loan officers and sales personnel make sales calls on building contractors and
realtors. The Bank also advertises its loan products by radio and newspaper.
The Bank uses professional fee appraisers for most residential real
estate loans and construction loans and on all commercial real estate and land
development loans. The Bank requires hazard, title and, to the extent
applicable, flood insurance on all security property.
Residential mortgage loan applications are initiated by loan officers and
are required to be approved by the Bank's Loan Committee, consisting of the
Bank's President, Executive Vice President, two Senior Vice Presidents and two
Vice Presidents. All residential loans in excess of $300,000 but below
$400,000 also must be approved by the Executive Board Loan Committee
consisting of Director Painter and two other directors rotating among all
directors. Additionally, residential loans in excess of $400,000 must be
approved by the Bank's Board of Directors.
All commercial real estate loans less than $1.0 million must be approved
by the Bank's President, Executive Vice President of Lending and Vice
President of Commercial Lending. Commercial loans in excess of $1.0 million
must be approved by the Bank's Commercial Loan Committee consisting of the
Bank's President, Executive Vice President of Lending, Vice President of
Commercial Lending, Chief Financial Officer, the Senior Vice President of
Lending and one director rotating among all directors. Commercial loans in
excess of $1.5 million must be approved by the Bank's Board of Directors.
LOAN ORIGINATIONS, SALES AND PURCHASES. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of
loan depends upon relative customer demand for loans in its primary market
area and the rates and terms offered by the Bank relative to those offered by
competitors.
The Bank periodically sells conventional one- to four-family loans (i.e.,
non-FHA/VA loans) with servicing retained and without recourse. However,
several pools of loans were sold with recourse in 1983 and had an aggregate
outstanding balance of $2.3 million at June 30, 1998. The Bank does not expect
any material losses on these loans due to their seasoned nature. Recent loan
sales have been to Fannie Mae and primarily consisted of 30-year, fixed-rate
residential real estate loans. These sales reduce the Bank's interest rate
risk and the proceeds of sale are used to fund continuing operations. The Bank
sold $13.2 million of conventional loans during fiscal 1998. Management
intends to sell loans in the future as necessary to manage interest rate risk
and fund continuing operations.
9
<PAGE>
<PAGE>
When conventional loans are sold, the Bank retains the responsibility for
servicing the loans, including collecting and remitting mortgage loan
payments, accounting for principal and interest and holding and disbursing
escrow or impounded funds for real estate taxes and insurance premiums. The
Bank receives a servicing fee for performing these services for others. The
Bank's servicing portfolio amounted to $56.4 million at June 30, 1998. The
Bank generally is paid a fee equal to 0.25% of the outstanding principal
balance for servicing sold loans. Loan servicing income totaled $178,000,
$196,000 and $226,000 for the years ended June 30, 1998, 1997 and 1996,
respectively. The Bank earns late charges collected from delinquent customers
whose loans are serviced by the Bank.
The Bank invests escrow impounds (funds collected from mortgage customers
for the payment of property taxes and insurance premiums on mortgaged real
estate) until they are disbursed on behalf of mortgage customers, but is not
required to pay interest on these funds. At June 30, 1998, borrowers' escrow
funds amounted to $1.1 million.
The Bank sells all loans originated under FHA and VA programs, servicing
released, to private investors and the South Carolina State Housing Authority.
Historically, the Bank has not been an active purchaser of loans or
participation interests in loans. However, in September 1996 the Bank began
purchasing one- to four-family mortgage loans and residential construction
loans from a start-up mortgage banking company located in Greenville, South
Carolina, in which the Bank made an equity investment through its service
corporation subsidiary. During the fiscal year ended June 30, 1998, the Bank
purchased 175 loans with aggregate principal balances of $23.8 million, $9.5
million of which were residential construction loans. In addition, at June 30,
1998, the Bank had committed to fund $4.7 million of undisbursed construction
loan proceeds. Currently, substantially all of the loans purchased through
this mortgage banking company are secured by properties located in the Bank's
primary market area. Such purchases are expected to continue and increase in
volume as that company's operations expand, and are likely to include
purchases of loans, including commercial real estate loans and home equity
loans, secured by properties inside and outside of the Bank's primary market
area. Out-of-market lending generally is considered to involve greater risk
than in-market lending because of the lender's unfamiliarity with the other
market. However, the Bank believes this risk is mitigated in the case of any
out-of-market loan purchases from the mortgage banking company primarily
because of (i) the Bank's ability to refuse to purchase any loans not meeting
its underwriting criteria and (ii) the Bank's input in formulating policies
and procedures for the mortgage banking company though its representation on
its board of directors. See "-- Subsidiary Activities."
Additionally, in the year ended June 30, 1998, the Bank had established
relationships with other unaffiliated mortgage banking companies. The Bank
purchased both one- to four-family and construction loans from these
unaffiliated entities. The amounts purchased were not substantial as of June
30, 1998. However, the Bank intends to increase such loan purchases in the
future in order to increase the yield on its loan portfolio. The one- to
four-family loans purchased generally are nonconforming to secondary marketing
standards. However, in the Bank's opinion, the higher yields justify the
slightly increased risk in these loans. The construction lending through these
relationships involves customers outside the Bank's primary market area. These
loans are subject to the risks mentioned in the preceding paragraph. The Bank
mitigates this risk by approving all such construction loans and selectively
inspecting collateral.
10
<PAGE>
<PAGE>
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Loans originated:
Mortgage loans:
One- to four-family............. $ 95,754 $ 50,886 $ 59,296
Construction.................... 38,860 36,770 42,212
Land development................ 12,676 6,924 3,814
Commercial and other............ 9,133 1,770 316
Consumer and other............... 56,888 29,734 27,181
--------- -------- --------
Total loans originated......... 213,311 126,084 132,819
Loans purchased:
One- to four-family.............. 14,309 9,091 --
Construction..................... 9,537 5,820 --
--------- -------- --------
Total loans purchased......... 23,846 14,911 --
Whole loans sold:
Conventional..................... (13,211) (2,824) --
Government....................... (6,329) (7,223) (7,704)
--------- -------- --------
Total whole loans sold........ (19,540) (10,047) (7,704)
Loan principal repayments......... (148,697) (84,423) (87,446)
Net (decrease) increase in other
items............................ (15,186) 1,267 (3,539)
--------- -------- --------
Net increase in loans receivable,
net.............................. $ 53,734 $ 47,792 $ 34,130
========= ======== ========
LOAN COMMITMENTS. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made
in writing on specified terms and conditions and are honored for up to 20 days
from approval, depending on the type of transaction. At June 30, 1998, the
Bank had loan commitments (excluding undisbursed portions of interim
construction loans of $21.9 million) of $4.5 million and unused lines of
credit of $51.6 million. See Note 10 of Notes to Consolidated Financial
Statements.
LOAN FEES. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period depending upon the volume and
type of loans made and competitive conditions.
The Bank charges loan origination fees which are calculated as a
percentage of the amount borrowed. In accordance with applicable accounting
procedures, loan origination fees and discount points in excess of loan
origination costs are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis. Discounts and premiums on
loans purchased are accreted and amortized in the same manner. The Bank
recognized $219,000, $157,000 and $202,000 of deferred loan fees during the
years ended June 30, 1998, 1997 and 1996, respectively, in connection with
loan refinancings, payoffs, sales and ongoing amortization of outstanding
loans.
NONPERFORMING ASSETS AND DELINQUENCIES. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Contacts generally are made
15 days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either
through a notice or other means and the Bank will attempt to work out a
payment
11
<PAGE>
<PAGE>
schedule. While the Bank generally prefers to work with borrowers to resolve
such problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely to continue in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more (except in the case of construction loans
originated before September 1996 as discussed under "-- Construction
Lending"). Interest accrued but not collected at the date the loan is placed
on nonaccrual status is charged against income at the time the loan is placed
on nonaccrual status. Loans may be reinstated to accrual status when payments
are under 90 days past due and, in the opinion of management, collection of
the remaining past due balances can reasonably be expected.
In certain cases, the Bank grants extensions on construction loans that
may have become delinquent in excess of 90 days. These extensions are granted
based upon management's judgment of the creditworthiness of the borrower and
other factors such as a sales contract pending on the property held as
collateral. In the case of extended loans, interest continues to accrue and
the loans are reported as accruing but contractually past due 90 days or more.
The Bank's Board of Directors is informed monthly of the status of all
loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.
12
<PAGE>
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of Statement of
Financial Accounting Standards ("SFAS") No. 15 at the dates indicated.
At June 30,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to four-family..... $ 266 $ 271 $ 719 $ 348 $ 754
Construction............ 787 273 1,130 471 457
Commercial and other.... 4 -- -- 48 --
Consumer and other loans. 153 74 60 20 53
------ ------ ------ ------ ------
Total nonaccrual loans 1,210 618 1,909 887 1,264
------ ------ ------ ------ ------
Accruing loans contractually
past due 90 days or more:
Mortgage loans:
Construction............ 145 1,401 3,965 3,906 1,117
Consumer and other loans. 8 12 -- -- --
------ ------ ------ ------ ------
Total accruing loans 90
days or more past due 153 1,413 3,965 3,906 1,117
------ ------ ------ ------ ------
Total of nonaccrual loans
and accruing loans 90 days
or more past due......... 1,363 2,031 5,874 4,793 2,381
Real estate acquired in
settlement of loans...... 36 36 58 34 18
------ ------ ------ ------ ------
Total nonperforming
assets............... $1,399 $2,067 $5,932 $4,827 $2,399
====== ====== ====== ====== ======
Restructured loans........ $ 594 $ 863 $1,247 $1,049 $1,029
======= ======= ====== ====== ======
Nonaccrual loans and accruing
loans 90 days or more past due
as a percentage of loans
receivable, net.......... 0.33% 0.56% 1.87% 1.79% 0.96%
Nonaccrual loans and accruing
loans 90 days or more past due
as a percentage of total
assets................... 0.26% 0.31% 1.65% 1.49% 0.77%
Nonperforming assets as a
percentage of total assets 0.27% 0.31% 1.66% 1.50% 0.77%
13
<PAGE>
<PAGE>
Interest income that would have been recorded for the year ended June 30,
1998 if nonaccruing loans had been current in accordance with their original
terms amounted to $58,000. The amount of interest included in interest income
on such loans for such periods amounted to $48,000. Interest income that would
have been recorded for the year ended June 30, 1998 if restructured loans had
been current in accordance with their original terms, and the amount of
interest included in interest income on such loans for such periods, were, in
both cases, immaterial.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS. Real estate acquired by the
Bank as a result of foreclosure or by deed-in-lieu of foreclosure is
classified as real estate acquired in settlement of loans until sold. Pursuant
to Statement of Position ("SOP") 92-3 issued by the American Institute of
Certified Public Accountants, which provides guidance on determining the
balance sheet treatment of foreclosed assets in annual financial statements
for periods ended on or after December 15, 1992, there is a rebuttable
presumption that foreclosed assets are held for sale and such assets are
recommended to be carried at fair value minus estimated costs to sell the
property. After the date of acquisition, all costs incurred in maintaining the
property are expensed and costs incurred for the improvement or development of
such property are capitalized up to the extent of their net realizable value.
The Bank's accounting for its real estate acquired in settlement of loans
complies with SOP 92-3. At June 30, 1998, the Bank had $36,000 of real estate
acquired in settlement of loans, which consisted of a one- to four-family
residence.
RESTRUCTURED LOANS. Under generally accepted accounting principles
("GAAP"), the Bank is required to account for certain loan modifications or
restructuring as a "troubled debt restructuring." In general, the modification
or restructuring of a debt constitutes a troubled debt restructuring if the
Bank for economic or legal reasons related to the borrower's financial
difficulties grants a concession to the borrowers that the Bank would not
otherwise consider. Debt restructurings or loan modifications for a borrower
do not necessarily always constitute troubled debt restructurings, however,
and troubled debt restructurings do not necessarily result in nonaccrual
loans. The Bank had $594,000 of restructured loans as of June 30, 1998, which
consisted of 15 one- to four-family mortgage loans.
ASSET CLASSIFICATION. The Office of Thrift Supervision ("OTS") has
adopted various regulations regarding problem assets of savings institutions.
The regulations require that each insured institution review and classify its
assets on a regular basis. In addition, in connection with examinations of
insured institutions, OTS examiners have authority to identify problem assets
and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets have one or more defined weaknesses and are characterized
by the distinct possibility that the insured institution will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible
and of such little value that continuance as an asset of the institution is
not warranted. If an asset or portion thereof is classified as loss, the
insured institution establishes specific allowances for loan losses for the
full amount of the portion of the asset classified as loss. All or a portion
of general loan loss allowances established to cover possible losses related
to assets classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
expose the insured institution to sufficient risk to warrant classification in
one of the aforementioned categories currently but possess weaknesses are
designated "special mention" and monitored by the Bank.
14
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<PAGE>
The aggregate amounts of the Bank's classified and special mention
assets, and of the Bank's general and specific loss allowances at the dates
indicated, were as follows:
At June 30,
-----------------
1998 1997
---- ----
(In thousands)
Classified assets:
Loss..................... $ 22 $ 40
Doubtful................. 20 5
Substandard assets....... 2,016 2,359
Special mention.......... 1,495 1,540
Loan loss allowances:
General loss allowances.. 2,157 1,756
Specific loss allowances. 22 40
At June 30, 1998, substandard assets consisted of twelve one- to four-
family mortgage loans totaling $467,000, ten construction loans totaling $1.3
million, twenty other loans totaling $260,000, and a one- to four-family
property acquired through foreclosure totaling $36,000.
At June 30, 1998, special mention assets consisted of twelve one- to
four-family mortgage loans totaling approximately $395,000 and nine
construction loans totaling approximately $1.1 million.
ALLOWANCE FOR LOAN LOSSES. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. Specific valuation allowances are established to
absorb losses on loans for which full collectibility cannot reasonably be
assured. The amount of the allowance generally is based on the estimated value
of the collateral securing the loan and other analyses pertinent to each
situation. Generally, a provision for loan losses is charged against income
monthly to maintain the allowances for loan losses at the amounts determined
by management.
At June 30, 1998, the Bank had an allowance for loan losses of $2.2
million. Management believes that the amount maintained in the allowance at
June 30, 1998 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected significantly and
adversely if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to increase significantly its allowance
for loan losses. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as
a result of the factors discussed above. Any material increase in the
allowance for loan losses may affect adversely the Bank's financial condition
and results of operations.
15
<PAGE>
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
Year Ended June 30,
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding at end
of period..................... $441,407 $380,830 $332,803 $281,836 $263,614
======== ======== ======== ======== ========
Average loans outstanding
during period................. $395,465 $336,476 $298,865 $273,778 $260,135
======== ======== ======== ======== ========
Allowance balance at beginning
of period..................... $ 1,796 $ 1,000 $ 600 $ 600 $ 600
Provision for loan losses..... 460 825 419 9 --
Charge-offs:
Mortgage loans:
One- to four-family......... 1 15 -- -- --
Consumer and other........... 79 24 23 9 --
-------- -------- -------- -------- --------
Total charge-offs.......... 80 39 23 9 --
-------- -------- -------- -------- --------
Recoveries:
Mortgage loans:
One- to four-family......... 2 9 -- -- --
Consumer and other........... 1 1 4 -- --
-------- -------- -------- -------- --------
Total recoveries........... 3 10 4 -- --
-------- -------- -------- -------- --------
Allowance balance at end of
period........................ $ 2,179 $ 1,796 $ 1,000 $ 600 $ 600
======== ======== ======== ======== ========
Allowance for loan losses as
a percentage of total loans
receivable at end of period... 0.49% 0.47% 0.30% 0.21% 0.23%
======== ======== ======== ======== ========
Net charge-offs as a percentage
of average loans outstanding
during the period............. 0.02% 0.01% 0.01% -- --
======== ======== ======== ======== ========
Ratio of allowance for loan
losses to total nonperforming
loans at end of period........ 1.60x 0.88x 0.17x 0.13x 0.25x
======== ======== ======== ======== ========
The fluctuation in the ratio of allowance for loan losses to
nonperforming loans at end of period set forth in the above table results
primarily from the Bank giving greater weight to the level of classified
assets than to the level of nonperforming assets (nonaccrual loans, accruing
loans contractually past due 90 days or more, and real estate acquired in
settlement of loans) when determining the adequacy of the allowance for loan
losses. Greater weight is given to classified assets because they include not
only nonperforming assets but also performing assets that otherwise exhibit,
in management's judgment, potential credit weaknesses. See "-- Nonperforming
Assets and Delinquencies" and "-- Asset Classification."
16
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category at
the dates indicated. Management believes that the allowance can be allocated by category only on an
approximate basis. The allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in any other category.
At June 30,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- ----------------- -------------- -------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in in in in in
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential........ $1,194 54.8% $1,222 83.4% $ 675 86.0% $400 87.2% $436 89.3%
Nonresidential..... 830 38.1 432 4.0 28 3.6 17 3.5 46 3.7
Consumer and other
loans.............. 155 7.1 142 12.6 297 10.4 183 9.3 118 7.0
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Total allowance for
loan losses.... $2,179 100.0% $1,796 100.0% $1,000 100.0% $600 100.0% $600 100.0%
====== ===== ====== ===== ====== ===== ==== ===== ==== =====
17
</TABLE>
<PAGE>
<PAGE>
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
Federal Home Loan Bank of Atlanta ("FHLB"), certificates of deposit of
federally insured institutions, certain bankers' acceptances and federal
funds. Subject to various restrictions, the Bank also may invest a portion of
its assets in commercial paper and corporate debt securities. Savings
institutions like the Bank also are required to maintain an investment in FHLB
stock. The Bank is required under federal regulations to maintain a minimum
amount of liquid assets. See "REGULATION."
The Corporation is not subject to any investment restrictions.
The Bank purchases investment securities with excess liquidity arising
when investable funds exceed loan demand. The Bank's investment securities
purchases have been limited to U.S. Government and agency securities with
contractual maturities of between one and ten years and a mutual fund which
invests in ARM loans. The Corporation's investment activities have been
limited to overnight interest-bearing deposits and thus held no investment
securities during any period presented.
At June 30, 1998, the Bank's management classified all securities in the
Bank's investment portfolio as available-for-sale under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." During the
year ended June 30, 1996, pursuant to special implementation guidance allowed
by the Financial Accounting Standards Board ("FASB") under SFAS No. 115, the
Bank reclassified securities held-to-maturity with a fair value and amortized
cost of approximately $4.0 million as securities available-for-sale. Such
reclassification is disclosed as a noncash transaction in the Consolidated
Statements of Cash Flows included in the Annual Report. See Note 1 of Notes to
Consolidated Financial Statements.
The Bank's investment policies generally limit investments to U.S.
Government and agency securities, municipal bonds, certificates of deposits,
marketable corporate debt obligations, mortgage-backed securities and certain
types of mutual funds. The Bank's investment policy does not permit engaging
directly in hedging activities or purchasing high risk mortgage derivative
products or non-investment grade corporate bonds; however, mutual funds held
by the Bank periodically may engage in hedging activities and invest in
derivative securities. Investments are made based on certain considerations,
which include the interest rate, yield, settlement date and maturity of the
investment, the Bank's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The
effect that the proposed investment would have on the Bank's credit and
interest rate risk and risk-based capital also is considered.
At June 30, 1998, the Bank's investment in the Asset Management Fund,
Inc., Adjustable Rate Mortgage Portfolio (which had an aggregate fair value of
$22.1 million and amortized cost of $22.2 million) exceeded 10% of the
Company's equity at that date.
18
<PAGE>
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's securities, by accounting classification and by type of security, at
the dates indicated.
At June 30,
----------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
Held-to-maturity: (In thousands)
Debt securities:
U.S. Treasury
obligations..... $ -- $ -- $ -- $ -- $ -- $ --
U.S. Government
Agency
obligations..... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total........... -- -- -- -- -- --
Mortgage-backed
securities....... 88 90 121 125 195 209
-------- -------- -------- -------- -------- --------
Total held-to-
maturity....... 88 90 121 125 195 209
-------- -------- -------- -------- -------- --------
Available-for-sale:
Debt securities:
U.S. Treasury
obligations..... 497 498 1,492 1,488 1,986 1,975
U.S. Government
Agency
obligations..... 6,010 6,019 6,499 6,483 6,486 6,400
-------- -------- -------- -------- -------- --------
Total........... 6,507 6,517 7,991 7,971 8,472 8,375
Marketable equity
securities(1).... 22,225 22,192 2,181 2,230 9,819 9,780
-------- -------- -------- -------- -------- --------
Total available-
for-sale....... 28,732 28,709 10,172 10,201 18,291 18,155
-------- -------- -------- -------- -------- --------
Total............. $ 28,820 $ 28,799 $ 10,293 $ 10,326 $ 18,486 $ 18,364
======== ======== ======== ======== ======== ========
- ----------------
(1) Consists principally of a mutual fund that invests in adjustable rate
mortgage-backed securities. At June 30, 1998, the mutual fund yielded
5.75%.
The following table sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Bank's debt securities and mortgage-backed securities at June 30, 1998. U.S.
Treasury obligations and certain U.S. Government agency obligations are exempt
from state taxation. Their yields, however, have not been computed on a tax
equivalent basis for purposes of the table.
Less Than After One to After Five to
One Year Five Years Ten Years
-------------------- ------------------ -------------------
Amor- Amor- Amor-
tized Fair tized Fair tized Fair
Cost Value Yield Cost Value Yield Cost Value Yield
------ ------ ----- ---- ------ ----- ---- ----- -----
(Dollars in thousands)
U.S. Treasury
obligations. $ 497 $ 498 5.00% $ -- $ -- --% $ -- $ -- --%
U. S. Government
Agency
obligations. -- -- -- 5,000 5,003 6.25 1,010 1,016 7.55
Mortgage-backed
securities.. -- -- -- 88 90 8.00 -- -- --
------ ------ ---- ------ ------ ---- ------ ------ ----
Total........ $ 497 $ 498 5.00% $5,088 $5,093 6.28% $1,010 $1,016 7.55%
====== ====== ==== ====== ====== ==== ====== ====== ====
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DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
influenced significantly by general interest rates and money market
conditions. Borrowings from the FHLB are used to compensate for reductions in
the availability of funds from other sources. Presently, the Bank has no other
borrowing arrangements.
DEPOSIT ACCOUNTS. A substantial number of the Bank's depositors reside in
South Carolina. The Bank's deposit products include a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, demand deposit accounts, money market accounts, regular passbook
savings accounts, statement savings accounts and term certificate accounts.
Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate. The Bank
reviews its deposit mix and pricing weekly. The Bank does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank does not seek to pay the
highest deposit rates but competitive rates. The Bank determines the rates
paid based on a number of conditions, including rates paid by competitors,
rates on U.S. Treasury securities, rates offered on various FHLB lending
programs, and the deposit growth rate the Bank is seeking to achieve.
The Bank intends to continue to use premiums to attract new checking
accounts, particularly in conjunction with new branch openings. These premium
offers are reflected in the growth in the Bank's advertising and promotion
expense, as well as its cost of funds, in recent periods. The Bank has
introduced a number of new savings products. These include VIP Money Market,
VIP Checking, VIP Passbook Savings and an 18-month "Bump Rate CD," which
allows for a one-time rate change during the term of the CD. The Bank also
plans to seek business checking accounts and to promote individual retirement
accounts ("IRAs") and Self Employment Plan retirement accounts to businesses.
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The following table sets forth information concerning the Bank's time
deposits and other deposits at June 30, 1998.
Weighted Per-
Average centage
Interest Checking and Savings Minimum of Total
Rate Term Deposit Accounts Amount Balance Deposits
- ---- ---- ---------------- ------ ------- --------
(In thousands)
--% None NOW - noninterest-
bearing $ 100 $ 12,757 3.4%
2.66 None NOW - interest-bearing 100 42,221 11.5
4.04 None Money market 2,500 18,133 4.9
3.28 None Savings 100 56,740 15.3
Certificate Accounts
--------------------
5.49 Within 6 months Fixed-term, fixed-rate 500 116,609 31.5
5.68 7 - 12 months Fixed-term, fixed-rate 25-500 81,434 22.0
5.89 13 - 36 months Fixed-term, fixed-rate 25-500 32,985 8.9
5.55 37 - 60 months Fixed-term, fixed-rate 25-500 6,661 1.8
5.14 Within 6 months Fixed-term, adjustable
rate 25 1,378 0.4
5.13 7 - 12 months Fixed-term, adjustable
rate 25 602 0.2
5.12 13 - 36 months Fixed-term, adjustable
rate 25 292 0.1
-------- -----
$369,812 100.0%
======== =====
The following table indicates the amount of the Bank's jumbo certificate
accounts by time remaining until maturity as of June 30, 1998. Jumbo
certificate accounts have principal balances of $100,000 or more.
Maturity Period Amount
--------------- ------
(In thousands)
Three months or less.............. $13,040
Over three through six months..... 11,367
Over six through twelve months.... 17,252
Over twelve months................ 7,389
-------
Total........................ $49,048
=======
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DEPOSIT FLOW. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the dates indicated.
At June 30,
----------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------ -------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ----- ---------- ------ ----- --------- ------ -----
(Dollars in thousands)
NOW accounts
Noninterest-
bearing... $ 12,757 3.4% $ 6,188 $ 6,569 1.8% $ 905 $ 5,664 1.8%
Interest-
bearing... 42,221 11.5 8,796 33,425 9.5 9,044 24,381 8.0
Savings
accounts... 56,740 15.3 (7,612) 64,352 18.2 21,408 42,944 14.0
Money market
accounts... 18,133 4.9 3,825 14,308 4.1 (2,386) 16,694 5.5
Fixed-term
certificate
accounts
(time deposits)
which mature:
Within 1
year...... 200,023 54.1 17,730 182,293 51.6 17,992 164,301 53.7
After 1 year,
but within 2
years..... 26,379 7.1 (1,930) 28,309 8.0 4,319 23,990 7.9
After 2 years,
but within 3
years..... 6,898 1.9 (8,268) 15,166 4.3 7,272 7,894 2.6
Thereafter. 6,661 1.8 (2,110) 8,771 2.5 (11,192) 19,963 6.5
-------- ----- ------- -------- ----- ------- -------- -----
Total.... $369,812 100.0% $16,619 $353,193 100.0% $47,362 $305,831 100.0%
======== ===== ======= ======== ===== ======= ======== =====
TIME DEPOSITS BY RATES. The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.
At June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
3.00% or less.... $ 412 $ 325 $ 3,329
3.01% - 5.00%.... 2,623 2,613 7,656
5.01% - 7.00%.... 236,792 231,333 204,734
7.01% - 9.00%.... 134 268 429
-------- -------- --------
Total............ $239,961 $234,539 $216,148
======== ======== ========
TIME DEPOSITS BY MATURITIES. The following table sets forth the amount of
time deposits in the Bank categorized by maturities at June 30, 1998.
Amount Due
---------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- ----- ----- ----- ------- -----
(Dollars in thousands)
3.00% or less... $ 412 $ -- $ -- $ -- $ -- $ 412
3.01% - 5.00%... 2,623 -- -- -- -- 2,623
5.01% - 7.00%... 196,964 26,351 6,872 3,232 3,373 236,792
7.01% - 9.00%... 24 28 26 25 31 134
-------- -------- ------- ------- ------- --------
Total........... $200,023 $ 26,379 $ 6,898 $ 3,257 $ 3,404 $239,961
======== ======== ======= ======= ======= ========
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DEPOSIT ACTIVITY. The following table set forth the deposit activity of
the Bank for the periods indicated.
Year Ended June 30,
------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Beginning balance...................... $353,193 $305,831 $275,915
-------- -------- --------
Net deposits before interest credited.. 1,452 33,743 17,240
Interest credited...................... 15,167 13,619 12,676
-------- -------- --------
Net increase in deposits............... 16,619 47,362 29,916
-------- -------- --------
Ending balance.............,,,,,,,,,,,, $369,812 $353,193 $305,831
======== ======== ========
BORROWINGS. Deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has the ability to use advances from the FHLB to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB functions
as a central reserve bank providing credit for savings banks and certain other
member financial institutions. As a member of the FHLB, the Bank is required
to own capital stock in the FHLB and is authorized to apply for advances on
the security of such stock and certain of its mortgage loans and other assets
(principally securities that are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
The Bank had advances from the FHLB in the amount of $17.0 million at
June 30, 1998 (none at June 30, 1997 or 1996). These fixed-rate advances had a
weighted average rate of 5.15% and all mature in the fiscal year ending June
30, 2008. Interest is payable quarterly and principal is due at maturity. The
maximum amount of borrowings outstanding at any month end was $17.0 million
and the approximate average borrowings outstanding was $3.0 million during the
year ended June 30, 1998.
All of the advances are convertible prior to maturity (at the option of
the FHLB) to a variable three-month LIBOR-based rate. Of the advances
outstanding, $10.0 million first becomes convertible in the fiscal year ending
June 30, 1999 and is convertible at any quarterly payment date through
maturity. The FHLB has a one-time conversion option on the remaining $7.0
million of advances. The option may be exercised on the respective advances'
fifth anniversary date in the fiscal year ending June 30, 2003. Should the
conversion option on any advance be exercised by the FHLB, the Bank has the
right to prepay the advance on any quarterly payment date through maturity.
The Bank had an approved credit limit of $40 million with the FHLB at
June 30, 1998 which was subsequently increased to $75.0 million on August 19,
1998. The advances are secured by FHLB stock and a blanket lien on all
qualifying one-to-four family residential first mortgage loans.
23
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COMPETITION
The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in
the origination of loans. Its most direct competition for savings deposits
historically has come from commercial banks, credit unions, other thrifts
operating in its market area, and other financial institutions such as
brokerage firms and insurance companies. As of June 30, 1998, there were
numerous large regional state-wide and community banks as well as other
thrifts operating in its primary market area. Particularly in times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate
and government securities. The Bank's competition for loans comes from
commercial banks, thrift institutions, credit unions and mortgage bankers.
Such competition for deposits and the origination of loans may limit the
Bank's growth in the future.
SUBSIDIARY ACTIVITIES
Under OTS regulations, the Bank generally may invest up to 3% of its
assets in service corporations, provided that any investment in excess of 2%
of assets shall be used primarily for community, inner-city and community
development projects. The Bank's investment in its wholly-owned service
corporation, FirstService Corporation ("FirstService"), which was
approximately $443,000 at June 30, 1998, did not exceed these limits.
FirstService sells alternative investment products such as mutual funds,
deferred annuities and insurance. In addition, in August 1996 it purchased for
$400,000 a one-third equity interest in First Trust Mortgage Corporation,
Greenville, South Carolina ("First Trust"), a start-up mortgage banking
company. The Bank has purchased loans from First Trust in recent periods. See
"-- Lending Activities -- Loan Originations, Sales and Purchases." All loans
are purchased from First Trust subject to the Bank's underwriting standards.
At June 30, 1998, the Bank's financial commitment to First Trust and its
maximum exposure to share in any losses incurred by First Trust were limited
solely to its equity investment through FirstService. The Bank, either
directly or through FirstService, may undertake additional financial
commitments in the future that would increase its loss exposure to First
Trust's operations; however, there are no such agreements, plans or
understandings at present. The Bank recorded income of $181,000 and a loss of
approximately $97,000 for the years ended June 30, 1998 and 1997,
respectively, related to First Trust's operations. Billy L. Painter, the
Bank's President and Chief Executive Officer, and J. Stephen Sinclair, the
Bank's Executive Vice President of Lending, are directors of First Trust.
REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued by the OTS
and the FDIC to implement these statutes. These laws and regulations delineate
the nature and extent of the activities in which federal savings associations
may engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Bank's
relationship with its depositors and borrowers also is regulated to a great
extent, especially in such matters as the ownership of deposit accounts and
the form and content of the Bank's mortgage documents. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Corporation, the Bank
and their operations. The Corporation, as a savings and loan holding company,
is also required to file certain reports with, and otherwise comply with the
rules and regulations of, the OTS.
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FEDERAL REGULATION OF SAVINGS BANKS
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings banks and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM (THE "SYSTEM"). The System, consisting of
12 Federal Home Loan Banks ("FHLBs"), is under the jurisdiction of the Federal
Housing Finance Board ("FHFB"). The designated duties of the System is to
supervise the FHLBs, to ensure that the FHLBs carry out their housing finance
mission, to ensure that the FHLBs remain adequately capitalized and able to
raise funds in the capital markets and to ensure that the FHLBs operate in a
safe and sound manner. The Bank, as a member of the FHLB, is required to
acquire and hold shares of capital stock in the FHLB in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB. The Bank is in compliance with this requirement with an investment in
FHLB stock of $3.4 million at June 30, 1998. Among other benefits, the FHLB
provides a central credit facility primarily for member institutions. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the System. It makes advances to members in accordance with
policies and procedures established by the FHFB and the Board of Directors of
the FHLB.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency that insures the deposits up to prescribed statutory limits, of
depository institutions. The FDIC currently maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
the Bank.
The Bank's deposit accounts are insured by the SAIF to the maximum extent
permitted by law. The Bank pays deposit insurance premiums based on a risk-
based assessment system established by the FDIC. Under applicable regulations,
institutions are assigned to one of three capital groups that are based solely
on the level of an institution's capital -- "well capitalized," "adequately
capitalized" or "undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory
concern. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Funds Act ("DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the FDIC
reduced the assessment schedule for SAIF members, effective January 1, 1997,
to a range of 0% to 0.27%, with most institutions, including the Bank, paying
0%. This assessment schedule is the same as that for the BIF, which reached
its designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for
the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately 0.013% until the earlier of December
31, 1999 or the date upon which the last savings bank ceases to exist, after
which time the assessment will be the same for all insured deposits.
25
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<PAGE>
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings bank on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings banks. It is not known what form the common charter may take
and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is not aware of any existing circumstances that could
result in termination of the deposit insurance of the Bank.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 4.0%) of its net withdrawable accounts plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. At June 30, 1998, the Bank's liquidity ratio was 5.9%.
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of
5.0% or more and is not subject to specified requirements to meet and maintain
a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a
Tier I risk-based capital ratio of 4.0% or more, has a leverage ratio of 4.0%
or more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, has a Tier I risk-based capital ratio
that is less than 4.0% or has a leverage ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, has a Tier I
risk-based capital ratio that is less than 3.0% or has a leverage ratio that
is less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity. (The
OTS may not, however, reclassify a significantly undercapitalized institution
as critically undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
26
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<PAGE>
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. OTS regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings banks are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the bank may not make any new investment
or engage in activities that would not be permissible for national banks; (ii)
the bank may not establish any new branch office where a national bank located
in the savings institution's home state would not be able to establish a
branch office; (iii) the bank shall be ineligible to obtain new advances from
any FHLB; and (iv) the payment of dividends by the bank shall be subject to
the rules regarding the statutory and regulatory dividend restrictions
applicable to national banks. Also, beginning three years after the date on
which the savings institution ceases to be a QTL, the savings institution
would be prohibited from retaining any investment or engaging in any activity
not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings bank controlled by a company ceases to be a QTL, the company
must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code of
1986, as amended ("Code") or that 65% of an institution's "portfolio assets"
(as defined) consist of certain housing and consumer-related assets on a
monthly average basis in nine out of every 12 months. Assets that qualify
without limit for inclusion as part of the 65% requirement are loans made to
purchase, refinance, construct, improve or repair domestic residential housing
and manufactured housing; home equity loans; mortgage-backed securities (where
the mortgages are secured by domestic residential housing or manufactured
housing); FHLB stock; and direct or indirect obligations of the FDIC; and
loans for educational purposes, loans to small businesses and loans made
through credit cards. In addition, the following assets, among others, may be
included in meeting the test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage loans originated
and sold within 90 days of origination; 100% of consumer loans; and stock
issued by Federal Home Loan Mortgage Corporation or Fannie Mae. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct
its business, and (iii) liquid assets up to 20% of the institution's total
assets. At June 30, 1998, the Bank was in compliance with the QTL test.
CAPITAL REQUIREMENTS. Under OTS regulations a savings bank must satisfy
three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings banks must meet all of the standards in order to
comply with the capital requirements.
27
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<PAGE>
OTS capital regulations establish a 4% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Banks C Prompt Corrective Action."
Savings banks also must maintain "tangible capital" not less than 1.5% of
adjusted total assets. "Tangible capital" is defined, generally, as core
capital minus any "intangible assets" other than purchased mortgage servicing
rights.
Savings banks must maintain total risk-based capital equal to at least 8%
of risk-weighted assets. Total risk-based capital consists of the sum of core
and supplementary capital, provided that supplementary capital cannot exceed
core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighting factor (from
0% to 100%) assigned to that category. These products are then totaled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included in risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, a savings bank with "above normal"
interest rate risk exposure would be subject to a deduction from total capital
for purposes of calculating their risk-based capital requirements. A savings
bank's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the bank's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings bank whose measured interest rate risk exposure exceeds 2%
must deduct an interest rate risk component in calculating its total capital
under the risk-based capital rule. The interest rate risk component is an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
bank's assets. That dollar amount is deducted from
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a bank's total capital in calculating compliance with its risk-based capital
requirement. Under the rule, there is a two quarter lag between the reporting
date of an institution's financial data and the effective date for the new
capital requirement based on that data. A savings bank with assets of less
than $300 million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS determines
otherwise. The rule also provides that the Director of the OTS may waive or
defer a bank's interest rate risk component on a case-by-case basis. Under
certain circumstances, a savings bank may request an adjustment to its
interest rate risk component if it believes that the OTS-calculated interest
rate risk component overstates its interest rate risk exposure. In addition,
certain "well-capitalized" institutions may obtain authorization to use their
own interest rate risk model to calculate their interest rate risk component
in lieu of the OTS-calculated amount. The OTS has postponed the date that the
component will first be deducted from an institution's total capital.
The following table presents the Bank's capital levels as of June 30,
1998.
Percent of
Adjusted Total
Amount Assets(1)
------ ---------
(Dollars in thousands)
Tangible capital............... $90,054 18.4%
Minimum required
tangible capital.............. 7,325 1.5
------- -----
Excess......................... $82,729 16.9%
======= ====
Core capital................... $90,054 18.4%
Minimum required core
capital....................... 19,532 4.0
------- ----
Excess......................... $70,522 14.4%
======= ====
Risk-based capital(2).......... $92,211 29.9%
Minimum risk-based
capital requirement........... 24,654 8.0
------- ----
Excess......................... $67,557 21.9%
======= ====
- -------------------
(1) Based on adjusted total assets of $488.3 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of
$308.2 million for purposes of the risk-based capital requirement.
(2) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings banks to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30
days' advance notice of any proposed declaration of dividends, and the OTS has
the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings Bank's capital
level.
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A Tier 1 savings bank has capital in excess of its capital requirement
(both before and after the proposed capital distribution). A Tier 1 savings
bank may make (without application but upon prior notice to, and no objection
made by, the OTS) capital distributions during a calendar year up to 100% of
its net income to date during the calendar year plus one-half its surplus
capital ratio (i.e., the amount of capital in excess of its requirement) at
the beginning of the calendar year or the amount authorized for a Tier 2 bank.
Capital distributions in excess of such amount require advance notice to the
OTS. A Tier 2 savings bank has capital equal to or in excess of its minimum
capital requirement but below its requirement (both before and after the
proposed capital distribution). Such an bank may make (without application)
capital distributions up to an amount equal to 75% of its net income during
the previous four quarters depending on how close the bank is to meeting its
capital requirement. Capital distributions exceeding this amount require prior
OTS approval. Tier 3 banks are savings banks with capital below the minimum
capital requirement (either before or after the proposed capital
distribution). Tier 3 banks may not make any capital distributions without
prior approval from the OTS.
The Bank currently meets the criteria to be designated a Tier 1 bank and,
consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar
year less any distributions previously paid during the year.
LOANS TO ONE BORROWER. Under the HOLA, savings banks generally are
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by
readily-marketable collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the loans to one
borrower rule to permit savings banks meeting certain requirements, including
capital requirements, to extend loans to one borrower in additional amounts
under circumstances limited essentially to loans to develop or complete
residential housing units. At June 30, 1998, the Bank's limit on loans to one
borrower was $13.5 million. At June 30, 1998, the Bank's largest aggregate
amount of loans to one borrower was $4.1 million.
ACTIVITIES OF BANKS AND THEIR SUBSIDIARIES. A savings bank may establish
operating subsidiaries to engage in any activity that the savings bank may
conduct directly and may establish service corporation subsidiaries to engage
in certain preapproved activities or, with approval of the OTS, other
activities reasonably related to the activities of financial institutions.
When a savings bank establishes or acquires a subsidiary or elects to conduct
any new activity through a subsidiary that the bank controls, the savings bank
must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings banks also must
conduct the activities of subsidiaries in accordance with existing regulations
and orders.
The OTS may determine that the continuation by a savings bank of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the bank or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings bank to divest itself of control of the subsidiary. The FDIC also
may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage
in that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings banks must comply with Sections 23A
and 23B of the Federal Reserve Act relative to transactions with affiliates in
the same manner and to the same extent as if the savings bank were a Federal
Reserve member bank. A savings and loan holding company, its subsidiaries and
any other company under common control are considered affiliates of the
subsidiary savings bank under the HOLA. Generally, Sections 23A and 23B: (i)
limit the extent to which the insured bank or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of
such institution's capital and surplus and place an aggregate limit on all
such transactions with affiliates to an amount equal to 20% of such capital
and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions. Any loan or
extension of credit by the bank to an affiliate must be secured by collateral
in accordance with Section 23A.
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Three additional rules apply to savings banks: (i) a savings bank may not
make any loan or other extension of credit to an affiliate unless that
affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings bank may not purchase or invest in securities issued
by an affiliate (other than securities of a subsidiary); and (iii) the OTS
may, for reasons of safety and soundness, impose more stringent restrictions
on savings banks but may not exempt transactions from or otherwise abridge
Section 23A or 23B. Exemptions from Section 23A or 23B may be granted only by
the Federal Reserve, as is currently the case with respect to all FDIC-insured
banks.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as entities controlled by such persons, is
governed currently by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations require that
such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk
of repayment. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the
Bank's capital position, and requires certain board approval procedures to be
followed. The OTS regulations, with certain minor variances, apply Regulation
O to savings institutions.
COMMUNITY REINVESTMENT ACT. Savings banks also are subject to the
provisions of the Community Reinvestment Act of 1977, which requires the
appropriate federal bank regulatory agency, in connection with its regular
examination of a savings bank, to assess the savings bank's record in meeting
the credit needs of the community serviced by the savings bank, including low
and moderate income neighborhoods. The regulatory agency's assessment of the
savings bank's record is made available to the public. Further, such
assessment is required of any savings bank which has applied, among other
things, to establish a new branch office that will accept deposits, relocate
an existing office or merge or consolidate with, or acquire the assets or
assume the liabilities of, a federally regulated financial institution.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
COMPANY ACQUISITIONS. The HOLA and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
bank or savings and loan holding company or controlling the assets thereof.
They also prohibit, among other things, any director or officer of a savings
and loan holding company, or any individual who owns or controls more than 25%
of the voting shares of such holding company, from acquiring control of any
savings bank not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
COMPANY ACTIVITIES. As a unitary savings and loan holding company, the
Corporation generally is not subject to activity restrictions under the HOLA.
If the Corporation acquires control of another savings bank as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof
which is not an insured bank shall commence or continue for more than two
years after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than: (i) furnishing or performing
management services for a subsidiary insured institution, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary insured institution, (iv)
holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
OTS by regulation, prohibits or limits such activities for savings and loan
holding companies. Those activities described in (vii) above also must be
approved by the OTS prior to being engaged in by a multiple savings and loan
holding company.
QUALIFIED THRIFT LENDER TEST. The HOLA requires any savings and loan
holding company that controls a savings bank that fails the QTL test (as
explained under "-- Federal Regulation of Savings Banks -- Qualified Thrift
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Lender Test") to, within one year after the date on which the bank ceases to
be a QTL, register as and be deemed a bank holding company subject to all
applicable laws and regulations.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Corporation.
TAX BAD DEBT RESERVES. Historically, savings institutions such as the
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Bank's
deductions with respect to "qualifying real property loans," which generally
are loans secured by certain interest in real property, were computed using an
amount based on the Bank's actual loss experience, or a percentage equal to 8%
of the Bank's taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the non-qualifying reserve. Due to
the Bank's loss experience, the Bank generally recognized a bad debt deduction
equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the percentage of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). For taxable years beginning
after December 31, 1995, the Bank's bad debt deduction must be determined
under the experience method using a formula based on actual bad debt
experience over a period of years or, if the thrift is a "large" thrift
(assets in excess of $500 million) on the basis of net charge-offs during the
taxable year. The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continues
to be subject to provisions of present law referred to below that require
recapture of the pre-1988 bad debt reserve in the case of certain excess
distributions to shareholders.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to the Corporation, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserve. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Bank makes a "nondividend distribution," then
approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by the Bank. The Bank does
not intend to pay dividends that would result in a recapture of any portion of
its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income
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method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. In
addition, only 90% of AMTI can be offset by net operating loss carry-overs.
AMTI is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax ("AMT") is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. The Corporation may
exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate dividends-received
deduction generally is 70% in the case of dividends received from unaffiliated
corporations with which the Corporation and the Bank will not file a
consolidated tax return, except that if the Corporation or the Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
AUDITS. The Bank's Federal income tax returns are in the process of being
audited through June 30, 1997. The Consolidated Financial Statements include
the effects of all probable adjustments related to the audit.
STATE TAXATION
SOUTH CAROLINA. The provisions of South Carolina tax law mirror the Code,
with certain modifications, as it relates to savings banks. The Bank is
subject to South Carolina income tax at the rate of 6%. This rate of tax is
imposed on savings and loan banks in lieu of the general state business
corporation income tax. The Bank's state income tax returns have not been
audited within the last five years.
DELAWARE. As a Delaware holding company not earning income in Delaware,
the Corporation is exempt from Delaware corporate income tax, but is required
to file an annual report with and pay an annual franchise tax to the State of
Delaware.
For additional information regarding taxation, see Note 7 of Notes to
Consolidated Financial Statements contained in the Annual Report.
PERSONNEL
As of June 30, 1998, the Company had 124 full-time employees and 36
part-time employees. The Company believes that employees play a vital role in
the success of a service company and that the Company's relationship with its
employees is good. The employees are not represented by a collective
bargaining unit.
33
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ITEM 2. PROPERTIES
- --------------------
The following table sets forth certain information regarding the
Company's offices as of June 30, 1998.
Net
Approximate Book
Location Year Opened Square Footage Deposits Value
- -------- ----------- -------------- -------- -----
(In thousands)
MAIN OFFICE:
380 E. Main Street 1974 32,820 $208,191 $1,072
Spartanburg, South Carolina
BRANCH OFFICES:
1488 W.O. Ezell Boulevard 1980 2,453 54,438 636
Spartanburg, South Carolina
280 N. Church Street 1986 1,080 34,949 200
Spartanburg, South Carolina
1585 E. Main Street 1991 2,166 23,536 409
Spartanburg, South Carolina
2701 Boiling Springs Road 1994 3,300 28,647 581
Boiling Springs, South Carolina
1157 Asheville Highway 1997 3,330 11,008 538
Inman, South Carolina
2075 East Main Street 1997 1,680 7,114 91
Duncan, South Carolina
1451 Woodruff Road 1998 540 1,929 219
Greenville, South Carolina
The Bank uses the services of an outside service bureau for its
significant data processing applications. At June 30, 1998, the Bank had seven
proprietary automated teller machines. At June 30, 1998, the net book value of
the Bank's office properties and the Bank's fixtures, furniture and equipment
was $5.7 million.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
In the opinion of management, the Company is not a party to any pending
claims or lawsuits that are expected to have a material effect on the
Company's financial condition or operations. Periodically, there have been
various claims and lawsuits involving the Company mainly as a defendant, such
as claims to enforce liens, condemnation proceedings on properties in which
the Company holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Company's
business. Management, based on advice from legal counsel does not expect the
outcome of any pending legal proceedings to have a material effect on the
financial condition or results of operations of the Company.
34
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the
quarter ended June 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ---------------------------------------------------------------------------
MATTERS
-------
The common stock of FirstSpartan is traded on the Nasdaq National Market
under the symbol "FSPT." As of September 14, 1998, there were approximately
1,235 stockholders of record (excluding holders in nominee or street name).
Declarations or payments of dividends are subject to determination by the
Corporation's Board of Directors, which takes into account the Corporation's
financial condition, results of operations, tax considerations, capital
requirements, industry standards, economic conditions and other factors,
including the regulatory restrictions which affect the payment of dividends by
the Bank to the Corporation. See "REGULATION -- Federal Regulation of Savings
Banks C Limitations on Capital Distributions" and "-- Savings and Loan Holding
Company Regulations -- Dividends."
The Corporation's common stock was sold in its initial public offering at
$20.00 per share and commenced trading on July 8, 1997. High and low prices
and dividend information are included in the Company's Annual Report to
Shareholders which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The information under Item 6 of this Report is included in the Company's
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information under Item 7 of this Report is included in the Company's
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information under Item 7A of this Report is included in the Company's
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The information under Item 8 of this Report is included in the Company's
Annual Report to Shareholders and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
35
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information under Item 10 of this Report is included in the Company's
Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
Reference is made to the cover page of this report for information
regarding compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act").
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information under Item 11 of this Report is included in the Company's
Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information under Items 12(a) and 12(b) of this Report is included in
the Company's Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information under Items 13 of this Report is included in the
Company's Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference.
36
<PAGE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) Exhibits
(3)(a) Certificate of Incorporation of the Registrant*
(3)(b) Bylaws of the Registrant*
(10)(a) Employment Agreement with Billy L. Painter**
(10)(b) Employment Agreement with Hugh H. Brantley**
(10)(c) Employment Agreement with J. Stephen Sinclair**
(10)(d) Employment Agreement with R. Lamar Simpson***
(10)(e) Severance Agreement with Rand Peterson**
(10)(f) Severance Agreement with Thomas Bridgeman**
(10)(g) Severance Agreement with Katherine A. Dunleavy***
(10)(h) Employee Severance Compensation Plan**
(10)(i) Employee Stock Ownership Plan**
(10)(j) Registrant's 1997 Stock Option Plan****
(10)(k) Registrant's Management Recognition and Development
Plan****
(13) 1998 Annual Report to Stockholders
(21) Subsidiaries of the Registrant**
(23) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No Forms 8-K were filed during the quarter ended June 30, 1998.
- ---------------
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (333-23015) and incorporated herein by reference.
** Filed as an exhibit to the registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997 and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997 and incorporated herein by
reference.
**** Filed as an exhibit to the Registrant's Annual Meeting Definitive Proxy
Statement dated December 12, 1997 and incorporated herein by reference.
37
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<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRSTSPARTAN FINANCIAL CORP.
Date: September 23, 1998 By:/s/ Billy L. Painter
-------------------------------------
Billy L. Painter
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Billy L. Painter September 23, 1998
------------------------------------
Billy L. Painter
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ R. Lamar Simpson September 23, 1998
------------------------------------
R. Lamar Simpson
Treasurer, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert R. Odom September 23, 1998
------------------------------------
Robert R. Odom
Chairman of the Board
By: /s/ E. Lea Salter September 23, 1998
------------------------------------
E. Lea Salter
Director
By: /s/ David E. Tate September 23, 1998
------------------------------------
David E. Tate
Director
By: /s/ Robert L. Handell September 23, 1998
------------------------------------
Robert L. Handell
Director
By: /s/ E.L. Sanders September 23, 1998
------------------------------------
E.L. Sanders
Director
By: /s/ R. Wesley Hammond September 23, 1998
------------------------------------
R. Wesley Hammond
Director
<PAGE>
<PAGE>
Exhibit 13
ANNUAL
REPORT
- ------
1998
[GRAPHIC- FOUR QUARTERS]
FIRST SPARTAN
--------------------------
F I N A N C I A L C O R P.
<PAGE>
<PAGE>
Table of Contents
Letter to Stockholders 1
Financial Summary 3
Management's Discussion and
Analysis 4
Independent Auditors' Report 16
Consolidated Financial Statements 17
Notes to Consolidated
Financial Statements 22
Corporate and
Stockholder Information Inside Back Cover
<PAGE>
<PAGE>
To Our Stockholders
Our 1998 fiscal year was very exciting and rewarding. The excitement
began with our mutual to stock conversion and initial public offering on July
8, 1997 and continued with the substantial growth of the Company during the
year. We are pleased to report to you record earnings and a strong financial
condition in this annual report. Net income for the year was $7.5 million,
or $1.85 per share, for a return on average assets of 1.51%. Asset growth
was substantial during the year. Total assets at June 30, 1998 were $517.4
million. Excluding the impact of the excess subscription funds held at June
30, 1997 in connection with the conversion, assets grew by $49.8 million.
We realize that our biggest challenges are to manage our capital and
increase shareholder value. Our average assets to average equity was 25.5%
for the year which contributed significantly to our relatively low return on
average equity of 5.9% for the year. The capital level and return on equity
were, of course, anticipated effects of the conversion but as regulatory
restrictions ease somewhat in the second year after conversion, capital
management and capital leverage will be given a high priority.
Loans receivable increased $59.4 million or 16%. The increase was the
result of loan originations by First Federal Bank as well as loan purchases
from the mortgage banking affiliate in which the Bank is a one-third equity
owner. As part of our operating strategy, one of our goals is to gradually
restructure the composition of our loan portfolio to increase the proportion
of shorter-term, higher-yielding consumer and commercial loans. While this
type of lending should result in higher yields, it does involve increased
credit risk which we are striving to manage. Even with the loan growth, the
loan portfolio is performing well with nonperforming loans at 0.32% of total
loans at June 30, 1998.
Late last year we hired an experienced banker to head our commercial
lending area. Our efforts increased our commercial mortgage and commercial
business loans from $5.8 million to $17.6 million, an increase of $11.8
million. The Bank now offers a full array of commercial banking products,
including a sweep account introduced during the year.
Our residential mortgage and consumer lending functions also had an
outstanding year. As part of our growth strategy, we developed a plan to
increase lending in our branch network, with a particular emphasis on consumer
loan originations. Early in the fiscal year, we appointed a senior vice
president of retail banking who is responsible for management of the delivery
of retail products throughout the Bank. Also, the addition of several
experienced retail banking officers over the past eighteen months has had a
positive impact on loan production.
Residential mortgage loan balances increased by $27.0 million to $313.0
million at June 30, 1998. Consumer loan balances (including home equity
loans) increased by $11.3 million to $53.0 million at June 30, 1998. The
increase in consumer loans and record mortgage loan originations allowed us to
increase our average loans outstanding and at the same time begin to sell
30-year fixed rate loans again on a regular basis. For the past few years, we
had slowed our secondary market activity, allowing our fixed rate loan
portfolio to grow in order to increase yield and net interest income. By
selling longer-term fixed rate loans, we are able to lower interest rate risk
and increase noninterest income.
In the deposit area, we are extremely pleased with the growth in checking
accounts. We completed our first full year of a sales awareness and training
program for all retail service personnel and had several successful checking
account promotions during the year. Additionally, the two branches that we
opened in June 1997 and
1
<PAGE>
<PAGE>
the branch that opened in February 1998 contributed significantly to our
deposit growth. The result was an increase in deposits of $36.6 million after
excluding the impact of $20.0 million of account withdrawals on July 8, 1997
used to fund stock purchases in the conversion. Checking accounts comprised
$15.0 million of the increase in deposits.
We continue to add branches to grow our franchise. In addition to the
two branches opened in late June 1997 in Inman and Duncan, both of which
became fully operational in the current fiscal year, we established a branch
in the new Wal-Mart Supercenter in Greenville. We also announced plans for
three new offices: a traditional branch in Greer (Greenville County), a
Wal-Mart Supercenter branch in Greer (Spartanburg County) and a traditional
branch in Chesnee (Spartanburg County). We expect to open the Greer branches
in September 1998 and have already hired experienced, well qualified staff,
headed by a city executive with 26 years banking experience, which includes
service as a community bank president. We think the excellent products and
well qualified
personnel will allow the Bank to become an important part of the Greer
community. We expect to open the Chesnee office in early calendar year 1999.
During the year we also restructured FirstService Corporation, the
Bank's service corporation, to offer a broader range of investment products.
With the addition of new products and services and a seasoned investment
representative, our customers now have access to a wide variety of mutual
funds, insurance products, discount brokerage services and other investment
services.
Much attention is being focused on the Year 2000 computer system
challenge. In May 1997 we appointed a committee composed of senior management
and various operational personnel to address the issue. After months of
assessment, planning and development, the Bank will begin testing, along with
its core processing vendor, BISYS, in October 1998 to insure that all of our
computer dependent systems are Year 2000 compliant.
With all of the excitement surrounding the Company we must remember that
the success of the Company depends on its staff. We are fortunate to have
loyal, dedicated and hardworking staff who are committed to the fundamentals
of
customer service: putting customers first, doing their jobs right the first
time, and providing quality products and services.
The staff, officers and directors thank you for being a stockholder of
FirstSpartan Financial Corp. We look forward to meeting the challenges ahead
while continuing to build value for our stockholders, customers and the
communities we serve.
Sincerely,
/s/Billy L. Painter
Billy L. Painter
President and
Chief Executive Officer
2
<PAGE>
<PAGE>
<TABLE>
Financial Summary
(In thousands, except per share data)
At or For the Year Ended June 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Investment income $ 37,414 $ 29,462 $ 26,445 $ 23,835 $ 23,153
Interest expense 17,153 15,811 14,669 11,302 10,387
-------- -------- -------- -------- --------
Net interest income 20,261 13,651 11,776 12,533 12,766
Provision for loan losses 460 825 419 9 --
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses 19,801 12,826 11,357 12,524 12,766
-------- -------- -------- -------- --------
Noninterest income 2,366 1,386 1,238 278 84
Noninterest expense(1) 9,820 9,903 6,947 6,166 5,671
-------- -------- -------- -------- --------
Income before income taxes 12,347 4,309 5,648 6,636 7,179
Provision for income taxes 4,807 1,587 2,111 2,495 2,707
-------- -------- -------- -------- --------
Net income $ 7,540 $ 2,722 $ 3,537 $ 4,141 $ 4,472
======== ======== ======== ======== ========
Per Share Data:
Basic earnings per share $ 1.85 N/A N/A N/A N/A
Cash dividends declared 0.45 N/A N/A N/A N/A
Book value 29.57 N/A N/A N/A N/A
Balance Sheet Summary:
Total assets $517,433 $665,446 $356,966 $322,735 $309,879
Loans receivable, net 416,462 362,728 314,936 267,393 247,195
Investment securities 28,797 10,322 18,350 14,113 23,324
Cash and cash equivalents 48,968 277,072 10,784 15,967 11,728
Deposits 369,812 353,193 305,831 275,915 270,182
Federal Home Loan Bank
of Atlanta advances 17,000 -- -- -- --
Stock subscription
escrow accounts(2) -- 259,329 -- -- --
Total equity 125,761 46,978 44,154 40,660 36,455
Selected Financial Ratios and
Other Statistical Data:
Return on average assets 1.51% 0.71% 1.03% 1.32% 1.45%
Return on average equity 5.92% 5.94% 8.23% 10.74% 12.88%
Interest rate spread(3) 3.07% 3.22% 3.01% 3.71% 3.94%
Net interest margin(4) 4.21% 3.69% 3.55% 4.15% 4.30%
Efficiency ratio(5) 0.43 0.54 0.54 0.48 0.44
Nonperforming loans to
loans receivable, net(6) 0.32% 0.56% 1.87% 1.79% 0.96%
Allowance for losses to
gross loans receivable 0.50% 0.47% 0.30% 0.21% 0.23%
Allowance for losses to
nonperforming loans 159.87% 88.43% 17.02% 12.52% 25.20%
Total equity to total assets 24.30% 7.06% 12.37% 12.60% 11.76%
Average equity to average assets 25.50% 11.88% 12.47% 12.28% 11.24%
Dividend payout ratio(7) 24.30% N/A N/A N/A N/A
Number of offices 8 7 5 5 4
</TABLE>
<PAGE>
- -------------------
(1) Includes one-time SAIF assessment of $1.8 million with respect to the
year ended June 30, 1997.
(2) Represents subscription funds for the common stock of the Company issued
inconnection with the Conversion.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Noninterest expense (excluding the one-time SAIF assessment with respect
to the year ended June 30, 1997) divided by the sum of net interest income
and noninterest income.
(6) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans contractually past due 90 days or more.
(7) Dividends declared per share divided by net income per share.
3
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
Management's discussion and analysis of financial condition and
results of operations is intended to assist in understanding the financial
condition and results of operations of FirstSpartan Financial Corp. The
information contained in this section should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes thereto. This
discussion and analysis contains certain forward-looking statements within the
meaning of federal securities laws. These forward-looking statements consist
of estimates with respect to the financial condition and results of operations
of the Company. Such forward-looking statements are not guarantees of future
performance and are subject to various factors that could cause actual results
to differ materially from these estimates. These factors include, but are not
limited to, changes in general economic and market conditions and the
development of an interest rate environment that adversely affects the
interest rate spread or other income anticipated from the Company's operations
and assets.
The Company's Business and Strategy
FirstSpartan Financial Corp. ("the Corporation") is the holding
company for First Federal Bank (the "Bank") (collectively referred to as the
"Company") which converted from the mutual to stock form of ownership on July
8, 1997 (see Note 1 to the Consolidated Financial Statements appearing
elsewhere in this Annual Report for further details about the Conversion).
The Corporation's activities are limited to passive investment activities and
management of its investment in the Bank. Therefore, substantially all of the
Company's business activities are conducted through the Bank.
The Bank is a federally chartered savings bank whose primary regulator
is the Office of Thrift Supervision ("OTS"). Historically the Bank's business
has been focused principally on the origination and servicing of residential
mortgage loans and attracting retail deposits (primarily certificates of
deposits and savings accounts) from the general public. In recent years, the
Bank has diversified its products and now offers a full range of consumer and
commercial products and services typical of a community bank of its size.
The Bank's operations are concentrated in the Spartanburg County,
South Carolina geographic area with customers also located in adjacent
counties. In 1998 the Bank opened a branch in Greenville County, its first
retail branch office to be located outside Spartanburg County. At June 30,
1998, the Bank had eight locations (seven traditional offices and one located
in a Wal-Mart Supercenter) and had three new offices under construction or
development (two traditional and one to be located in a Wal-Mart Supercenter).
The Bank's strategy is to operate as a well-capitalized, profitable
and
independent community financial institution. The Bank believes that local
communities are well-served by community-oriented institutions that emphasize
management involvement with customers and the community, local decision-making
and quality customer service. Management believes that it can best serve an
important segment of the marketplace and enhance the long-term value of the
Company by operating independently and continuing with and expanding its
community-oriented approach, especially in light of recent consolidations of
banks and thrift institutions with large regional commercial banks in the
Bank's market area.
Financial Condition
Overview
Total assets were $517.4 million at June 30, 1998 and $665.4 million
at June 30, 1997, a decrease of $148.0 million. The decrease was
principally the result of the refund of $197.8 million of subscription escrow
funds, held by the Bank at June 30, 1997 in connection with the Conversion,
that were in excess of stock available for sale, offset by an increase in
loans receivable at June 30, 1998 when compared to June 30, 1997.
Cash and Cash Equivalents
Cash and cash equivalents totaled $49.0 million at June 30, 1998,
a decrease of $228.1 million. The majority of the decrease was attributable to
the refunding of $197.8 million of excess subscription escrow funds
held in connection with the Conversion at June 30, 1997. Other
major factors contributing to the decrease were the increase in loans
receivable of $59.4 million, the increase in investment securities in the
amount of $18.5 million and the repurchase of stock in the amount of $8.1
million. Offsetting these amounts that decreased cash was the increase in
deposits of $36.6 million (after withdrawal of $20.0 million for which stock
was issued in the Conversion) and advances from the Federal Home Loan Bank
of Atlanta ("FHLB") of $17.0 million.
4
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Investment Securities
Investment securities increased $18.5 million as some of the
proceeds from the Conversion were moved from interest-bearing deposits to
investment securities.
Loans Receivable
Loans receivable increased due to several factors. First,
originations of loans increased as the result of the development of a
sales training and incentive program which included the appointment, in
the first quarter of the fiscal year ended June 30, 1998, of a senior vice
president of retail banking who is responsible for setting and
monitoring sales goals of all loan origination personnel (including
branch managers). Additionally, loan production was impacted favorably by
several experienced banking officers who were hired as branch managers in
the latter part of the fiscal year ended June 30, 1997 and during the fiscal
year ended June 30, 1998 to assist in meeting the Bank's goal to increase
loan production in the branch network. Also, originations of residential
mortgage and consumer loans increased due to the loan activity of two
branches opened in June 1997 becoming fully operational in the current
fiscal year. Finally, originations of residential mortgage loans increased
due to the impact of lower mortgage rates during the fiscal year which
contributed to a significant amount of loan refinancing. The impact of
loan refinancing originations was offset somewhat by the impact of
loan payoffs due to refinancing as well as sales of conventional
mortgage loans by the Bank (principally 30-year fixed rate conventional
mortgage loans).
Residential mortgage loans also increased due to the purchase
of adjustable rate mortgage loans from the mortgage banking company in
which the Bank's service corporation subsidiary owns a one-third equity
interest, as well as a small amount of loan purchases through other
correspondent banking relationships.
Commercial loans increased due to the Bank's commercial
lending department becoming fully operational during the year ended June
30, 1998. Management of the Bank believes that it now has the proper systems
and qualified personnel to adequately evaluate and monitor the higher risk
associated with commercial lending.
One of the Bank's operating strategies is to increase the proportion
of higher-yielding, shorter-term consumer, construction, land development
and commercial loans in its portfolio. Management's goal is to
increase the originations of these types of loans and to supplement internal
production with purchases of such loans through its mortgage banking
affiliate, and through other closely monitored correspondent banking
relationships. It should be noted that while the objective of this
strategy is to increase yields and reduce interest rate risk, this strategy
carries with it increased credit risk and the intended effect on net income
may not materialize and net income could be lower than if it had not been
implemented.
The following table presents a summary of the loan portfolio at
June 30, 1998 and 1997 (in thousands of dollars):
June 30,
1998 1997
--------- ---------
Real estate mortgage loans:
Residential (1-4 family) $ 312,981 $ 285,969
Construction 37,241 35,061
Land development 20,577 12,376
Commercial 10,613 3,773
--------- ---------
381,412 337,179
--------- ---------
Consumer and commercial loans:
Home equity 43,950 35,366
Commercial 6,987 1,984
Other 9,058 6,301
--------- ---------
59,995 43,651
--------- ---------
Gross loans 441,407 380,830
Less:
Undisbursed portion of loans in process (21,923) (15,311)
Net deferred loan fees (843) (995)
Allowance for loan losses (2,179) (1,796)
--------- ---------
Net loans $ 416,462 $ 362,728
========= =========
5
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table presents a summary of the changes in net loans
for the year ended June 30, 1998, 1997 and 1996 (in thousands of dollars):
1998 1997 1996
--------- --------- ---------
Loans originated:
Real estate mortgage loans:
Residential (1-4 family) $ 95,754 $ 50,886 $ 59,296
Construction 38,860 36,770 42,212
Land development 12,676 6,924 3,814
Commercial 9,133 1,770 316
Consumer and other 56,888 29,734 27,181
Loans purchased:
Residential (1-4 family) 14,309 9,091 --
Construction 9,537 5,820 --
Loans sold:
Conventional (13,211) (2,824) --
Government (FHA,VA) (6,329) (7,223) (7,704)
Loan principal repayments (148,697) (84,423) (87,446)
Net (decrease) increase in
other items (15,186) 1,267 (3,539)
--------- --------- ---------
Net increase in loans
receivable, net $ 53,734 $ 47,792 $ 34,130
========= ========= =========
Asset Quality and Allowance for Loan Losses
The allowance for loan losses represents an amount that
management believes will be adequate to absorb estimated losses inherent in
the existing total loan portfolio which may become uncollectible. Factors
considered in assessing the adequacy of the allowance include historical
loss experience, delinquency trends, characteristics of specific loan
types, growth and composition of the loan portfolios, loans classified
under OTS regulations, and other factors. Management deemed the allowance for
loan losses to be adequate as of June 30, 1998. Based on the uncertainty in
the estimation process however, management's estimate of the allowance
for loan losses may change and such change could occur in the near term.
Further, the allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and could be adjusted as a result of their
examinations.
The accrual of interest is ceased when, in the opinion of
management, principal or interest payments are not likely to continue
according to the terms of the loan agreement, or when principal or
interest is 90 days past due. In certain cases, extensions are granted on
construction loans that may have become delinquent. These extensions are
granted based upon management's judgment of the creditworthiness of the
borrower and other factors such as sales contracts pending on the
property held as collateral. In the case of extended loans, interest
continues to accrue and the loans are reported as accruing but
contractually past due 90 days or more. Management considers the total
of nonaccrual loans and accruing loans 90 days or more past due as
nonperforming loans.
6
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
A summary of nonperforming loans as of June 30, 1998 and 1997
follows (in thousands of dollars):
1998 1997
------ ------
Nonaccrual loans:
Residential (1-4 family) $ 266 $ 271
Construction 787 273
Other 157 74
------ ------
1,210 618
Accruing loans contractually past due 90 days or more 153 1,413
------ ------
Total nonperforming loans $1,363 $2,031
====== ======
Nonperforming loans as a percentage
of loans receivable, net 0.3% 0.6%
====== ======
Allowance for loan losses as a percentage
of nonperforming loans 159.9% 88.4%
====== ======
Loans classified under OTS regulations totaled $3.6 million and
$3.9 million at June 30, 1998 and 1997, respectively.
The changes in the allowance for loan losses is as follows for the
years ended June 30, 1998, 1997, and 1996 (in thousands of dollars):
1998 1997 1996
-------- -------- --------
Allowance, beginning of year $ 1,796 $ 1,000 $ 600
Provision 460 825 419
Write-offs (80) (39) (23)
Recoveries 3 10 4
-------- -------- --------
Allowance, end of year $ 2,179 $ 1,796 $ 1,000
======== ======== ========
Deposits
Deposit accounts increased $16.6 million to $369.8 million at June
30, 1998 from $353.2 million at June 30, 1997. This increase is after
approximately $20.0 million of deposits withdrawn on July 8, 1997 to purchase
stock issued in the Conversion. Excluding the effect of the withdrawals to
purchase stock, there was an increase in deposit accounts of $36.6 million.
The increase in deposits was the result of interest credited to existing
deposit accounts, the effect of two branch offices opened in June 1997
becoming fully operational during the fiscal year ended June 30, 1998,
the effect of a new branch office opened in February 1998, various deposit
account promotions, and the deposit of funds by account holders who
purchased stock in the Conversion but sold their stock at a gain after the
Conversion. Stock subscription escrow accounts decreased by $259.3
million from June 30, 1997 to June 30, 1998 as a result of $61.5 million of
stock issued in the Conversion from funds held in the escrow accounts and
refunds to subscribers of $197.8 million. The following table presents a
summary of deposits at June 30, 1998 and 1997 (in thousands of dollars):
June 30, 1998 June 30, 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Demand accounts:
NOW:
Noninterest-bearing $ 12,757 --% $ 6,569 --%
Interest-bearing 42,221 2.66 33,425 2.79
Savings 56,740 3.28 64,352 3.31
Money market 18,133 4.04 14,308 3.18
Certificate accounts 239,961 5.60 234,539 5.66
-------- --------
$369,812 $353,193
======== ========
7
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Equity
Equity increased by $78.8 million from June 30, 1997 to June 30, 1998
as a result of net proceeds received in the Conversion of $79.9 million, net
income of $7.5 million and allocation of shares under the Bank's
Employee Stock Ownership Plan ("ESOP") with a market value of $1.3
million, offset by the repurchase of $8.1 million of stock, and payment of
dividends of $1.8 million.
Results of Operations
The earnings of the Company depend primarily on its level of
net interest income, which is the difference between interest
earned on interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is a function of the interest rate
spread, which is the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities, as well as a function of the average balance of
interest-earning assets as compared to the average balance of
interest-bearing liabilities.
Performance Overview
Net income increased to $7.5 million for the year ended June 30,
1998 from $2.7 million for the year ended June 30, 1997 primarily as a
result of increased investment income and increased noninterest income,
partially offset by an increase in interest expense and an increased
provision for income taxes due to increased income before income taxes. The
increase in investment income is principally the result of additional funds
available for investment from the Conversion and an increase in average loans
outstanding during the year ended June 30, 1998. The increase in interest
expense is due to an increase in average deposit balances during the year
ended June 30, 1998.
Net income decreased 23% to $2.7 million for the year ended June
30, 1997 from $3.5 million for the year ended June 30, 1996 primarily as a
result of increases in the provision for loan losses and noninterest expense.
The increase in noninterest expense was primarily the result of the
legislatively-mandated, one-time assessment levied by the FDIC on all
SAIF-insured institutions to recapitalize the SAIF. Without this assessment,
which amounted to approximately $1.1 million after tax, net income would
have been $3.8 million for the year ended June 30, 1997.
Net Interest Income
Net interest income increased 48% to $20.3 million for the year
ended June 30, 1998 from $13.7 million for the year ended June 30, 1997.
Investment income increased 27% to $37.4 million for the year ended June
30, 1998 from $29.5 million for the year ended June 30, 1997 as a result of
an increase in the average balance of interest-earning assets to $481.5
million from $369.6 million more than offsetting a decrease in average yield
on interest-earning assets to 7.77% from 7.97% for the respective annual
periods. The decrease in the average yield on interest-earning assets was
due principally to stock subscription escrow funds held prior to the
consummation of the Conversion and a portion of the proceeds of the
Conversion being invested principally in lower yielding overnight
interest-bearing deposits during the year ended June 30, 1998. The average
balance of interest-earning assets increased as a result of the holding of
stock subscription escrow funds prior to the consummation of the Conversion
which were invested in overnight interest-bearing deposits, the net
proceeds retained from the Conversion and an increase in the average
balance of loans receivable. Interest expense increased 9% to $17.2 million
for the year ended June 30, 1998 from $15.8 million for the year ended June
30, 1997 as a result of an increase in the average balance of
interest-bearing liabilities to $364.9 million from $333.0 million in the
prior year. The increase in the average balance of interest-bearing
liabilities more than offset a decrease in the average cost of funds to
4.70% for the year ended June 30, 1998 from 4.75% for the year ended June
30, 1997. The average balance of interest-bearing liabilities during
the year ended June 30, 1998 includes the average balance of the special
escrow accounts established to hold subscription funds received in
connection with the Conversion. These accounts amounted to $259.3 million
and were outstanding for approximately two weeks during the year ended
June 30, 1998. The decrease in the average cost of funds resulted from
the savings account rate of interest (2.5%) being paid on the subscription
escrow accounts and an increase in the amount of deposits in lower cost
negotiable order of withdrawal ("NOW") and savings accounts as a result of
promotions of NOW and savings accounts. Interest rate spread decreased to
3.07% for the year ended June 30, 1998 from 3.22% for the year ended June 30,
1997.
Net interest income increased 16% to $13.7 million for the year
ended June 30, 1997 from $11.8 million for the year ended June 30, 1996.
Investment income increased 12% to $29.5 million for the year ended June
30, 1997 from $26.4 million for the year ended June 30, 1996 as a result of an
increase in the average balance of interest-earning assets to $369.6
million from $331.4 million, more than offsetting a slight decrease in the
average yield on interest-earning assets to
8
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
7.97% from 7.98%. The average yield did not change significantly because of
relatively stable interest rates and the stabilizing effect that fixed
rate loans in the portfolio have on the weighted average yield. Interest
expense increased 7% to $15.8 million for the year ended June 30, 1997
from $14.7 million for the year ended June 30, 1996 as a result of an
increase in the average balance of deposits to $333.0 million from $295.0
million. The increase in the average balance of deposits more than offset
a decrease in the average cost of deposits to 4.75% for the year ended June
30, 1997 from 4.97% for the year ended June 30, 1996. The decrease in the
average cost of deposits resulted from a combination of a change in the
mix of deposits from higher cost certificates of deposit to lower cost
NOW and savings accounts as a result of promotions of NOW and savings
accounts. The weighted average cost of certificates of deposit also
decreased as a result of the Bank's focus on the NOW and savings account
promotions rather than certificate of deposit promotional rates.
Interest rate spread increased to 3.22% for the year ended June 30, 1997 from
3.01% for the year ended June 30, 1996.
Average Balances, Interest and Average Yields/Costs
The following table sets forth, for the periods indicated,
information regarding average balances of assets and liabilities as well as
the total dollar amounts of interest income from average interest-earning
assets and interest expense on average interest-bearing liabilities and
average yields and costs. Average balances for a period have been
calculated using the daily average balances. (Dollar amounts in the table
are in thousands.)
<PAGE>
<TABLE> Year Ended June 30,
1998 1997 1996
--------------------------- -------------------------- -------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans receivable,
net(1) $395,465 $32,146 8.13% $336,476 $27,455 8.16% $298,865 $24,421 8.17%
Mortgage-backed
securities 106 9 8.49 138 9 6.52 333 29 8.71
Investment securities 18,831 1,111 5.90 14,055 903 6.42 17,035 997 5.85
FHLB stock 3,122 229 7.34 2,865 207 7.23 2,693 196 7.28
Federal funds sold
and overnight
interest-bearing
deposits 63,967 3,919 6.13 16,060 888 5.53 12,517 802 6.41
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning assets 481,491 37,414 7.77 369,594 29,462 7.97 331,443 26,445 7.98
------- ---- -------- ------- ---- -------- ------- ----
Noninterest-earning
assets 17,544 15,753 12,947
-------- -------- --------
Total assets $499,035 $385,347 $344,390
======== ======== ========
Interest-bearing
liabilities (2):
Deposit accounts:
Savings $ 61,931 2,032 3.28 $ 64,062 2,263 3.53 $ 39,289 1,364 3.47
Money market 12,733 434 3.41 13,669 422 3.09 17,196 626 3.64
NOW 48,389 1,039 2.15 32,517 651 2.00 27,351 542 1.98
Certificate 238,845 13,498 5.65 222,773 12,475 5.60 211,179 12,137 5.75
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposit accounts 361,898 17,003 4.70 333,021 15,811 4.75 295,015 14,669 4.97
Advances from FHLB 2,970 150 5.05 -- -- -- -- -- --
Total interest- -------- ------- ---- -------- ------- ---- -------- ------- ----
bearing liabilities 364,868 17,153 4.70 333,021 15,811 4.75 295,015 14,669 4.97
------- ---- -------- ------- ---- -------- ------- ----
Noninterest-bearing
liabilities 6,901 6,531 6,422
-------- -------- --------
Total liabilities 371,769 339,552 301,437
Retained earnings 127,266 45,795 42,953
-------- -------- --------
Total liabilities and
retained earnings $499,035 $385,347 $344,390
======== ======== ========
Net interest income $20,261 $13,651 $11,776
======= ======= =======
Interest rate spread 3.07% 3.22% 3.01%
==== ==== ====
Net interest margin 4.21% 3.69% 3.55%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 1.32x 1.11x 1.12x
==== ==== ====
- --------------
(1) Includes loans held-for-sale. Excludes interest on nonaccrual loans.
(2) Excludes escrow balances.
9
</TABLE>
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on interest income and interest expense. Information is provided
with respect to: (i) effects attributable to changes in rate (changes in
rate multiplied by prior volume); and (ii) effects attributable to changes
in volume (changes in volume multiplied by prior rate). The net change
attributable to the combined impact of rate and volume has been allocated
proportionately to the change due to rate and the change due to volume.
(Dollar amounts in the table are in thousands.)
<PAGE>
<TABLE>
Year Ended June 30, 1998 Year Ended June 30, 1997
Compared to Year Ended Compared to Year Ended
June 30, 1997 June 30, 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------- ---------------------------
Rate Volume Total Rate Volume Total
----- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $(101) $4,792 $4,691 $ (35) $3,069 $3,034
Mortgage-backed securities -- -- -- (6) (14) (20)
Investment securities (65) 273 208 118 (212) (94)
FHLB stock 3 19 22 (1) 12 11
Federal funds sold and overnight
interest-bearing deposits 106 2,925 3,031 (81) 167 86
----- ------ ------ ----- ------ ------
Total net change in income
on interest-earning assets (57) 8,009 7,952 (5) 3,022 3,017
----- ------ ------ ----- ------ ------
Interest-bearing liabilities:
Savings accounts (157) (74) (231) 24 875 899
Money market accounts 35 (23) 12 (87) (117) (204)
NOW accounts 52 336 388 6 103 109
Certificate accounts 112 911 1,023 (296) 634 338
Advances from FHLB -- 150 150 -- -- --
----- ------ ------ ----- ------ ------
Total net change in expense
on interest-bearing liabilities 42 1,300 1,342 (353) 1,495 1,142
----- ------ ------ ----- ------ ------
Net change in net
interest income $ (99) $6,709 $6,610 $ 348 $1,527 $1,875
===== ====== ====== ===== ====== ======
- --------------
(1) Excludes interest on nonaccrual loans.
</TABLE>
<PAGE>
Provision for Loan Losses
Provisions for loan losses are charges to earnings to bring the
total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's
evaluation of the collectibility of the loan portfolio. The provision
for loan losses was $460,000, $825,000, and $419,000 for the years ended
June 30, 1998, 1997 and 1996, respectively. Management deemed the increase
in the provision for loan losses in the year ended June 30, 1997 necessary in
light of the increase in the relative level of estimated losses caused by
the growth of the loan portfolio and a continuing increase in classified
assets from June 30, 1996 to June 30, 1997.
See "Financial Condition - Asset Quality and Allowance for Loan
Losses" for more analysis of the allowance for loan losses.
10
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Noninterest Income
Noninterest income increased to $2.4 million for the year ended June
30, 1998 from $1.4 million for the year ended June 30, 1997. Service
charges and fees increased to $1.4 million for the year ended June 30,
1998 from $1.1 million for the year ended June 30, 1997 primarily as a
result of increased deposit account fees, particularly on the increased
number of NOW accounts. Other income, net increased to $646,000 for the
year ended June 30, 1998 from $270,000 for the year ended June 30, 1997,
partially attributable to income of $181,000 in the current year versus a
$97,000 loss for the previous year, representing the Company's share of
net income of the mortgage banking company in which the Bank's service
corporation subsidiary has an equity investment. Gain on sale of mortgage
loans increased to $342,000 during the year ended June 30, 1998 from
$38,000 for the year ended June 30, 1997 due to increased conventional
loan sales.
Noninterest income increased to $1.4 million for the year ended June
30, 1997 from $1.3 million for the year ended June 30, 1996 primarily as a
result of the increase in service charges and fees offset by a decrease in
other income. Service charges and fees increased to $1.1 million for the
year ended June 30, 1997 from $843,000 for the year ended June 30, 1996
primarily as a result of increased income associated with the origination
and sale of FHA and VA loans and increased deposit account fees, particularly
on the increased number of NOW accounts. Other income, net, decreased to
$270,000 for the year ended June 30, 1997 from $395,000 for the year ended
June 30, 1996 primarily as a result of a $97,000 loss representing the
Company's share of the losses incurred by the mortgage banking company in
which the Bank's service corporation subsidiary has an equity investment.
Noninterest Expense
Noninterest expense was $9.8 million for the year ended June 30,
1998 compared to $9.9 million for the same period in 1997. Federal deposit
insurance premiums decreased to $354,000 for the year ended June 30,
1998 from $2.3 million for the year ended June 30, 1997. This decrease
resulted primarily from the FDIC special assessment in the year ended June
30, 1997 on all SAIF-insured institutions to recapitalize the SAIF. The
Bank's assessment amounted to $1.8 million and was accrued during the
quarter ended September 30, 1997. Prior to the SAIF recapitalization, the
Bank's total annual deposit insurance premiums amounted to 0.23% of
assessable deposits. Effective January 1, 1997, the rate decreased to
0.065% of assessable deposits. Employee compensation and benefits, increased
to $5.0 million for the year ended June 30, 1998 from $4.0 million for the
year ended June 30, 1997 primarily as a result of increased personnel costs
for the three newest branch offices, the establishment of a commercial
lending department, normal annual salary increases and implementation of the
ESOP. The increases in other categories of other operating expenses
generally are attributable to the growth of the Company, additional costs
associated with operating as a public company and to inflation. The Company
anticipates that other operating expenses will continue to increase in
subsequent periods as a result of the adoption of the FirstSpartan
Financial Corp. Management Recognition and Development Plan on July 8,
1998 which will result in increased compensation of $1.5 million annually
over a five-year period. The three new branch offices previously
mentioned will also continue to contribute to increased operating
expenses in future periods as will three additional branch offices that are
expected to open during the fiscal year ending June 30, 1999.
Noninterest expense increased to $9.9 million for the year ended
June 30, 1997 from $6.9 million for the year ended June 30, 1996. This
increase resulted primarily from the previously mentioned FDIC special
assessment of $1.8 million. Additionally, employee compensation and
benefits increased to $4.0 million for the year ended June 30, 1997 from
$3.1 million for the same period in 1996 as a result of the hiring of
additional operations personnel to service the increased number of NOW
accounts, the hiring of the Bank's current Chief Financial Officer in June
1996 and the adoption of a director emeritus plan. Occupancy and equipment
expense also increased for the year ended June 30, 1997 to $1.0 million as
compared to $731,000 for the year ended June 30, 1996 primarily due to
increased computer and software expenses. The increases in other
categories of noninterest expense generally are attributable to growth and
inflation.
Income Taxes
The provision for income taxes was $4.8 million for the year ended
June 30, 1998 compared to $1.6 million for the year ended June 30, 1997. The
increase is a result of higher income before income taxes for fiscal 1998.
The provision for income taxes decreased to $1.6 million for the
year ended June 30, 1997 from $2.1 million for the year ended June 30,
1996 as a result of lower income before taxes.
11
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Analysis of Other Financial and Operating Matters
Year 2000
The approach of the year 2000 ("Year 2000") presents significant
issues for many financial, information, and operational systems. Many
systems in use today may not be able to interpret dates after December 31,
1999 appropriately, because such systems allow only two digits to indicate
the year in a date. The Year 2000 problem may occur in computer
programs, computer hardware or electronic devices that utilize computer
chips to process any information that contains dates. Therefore, the issue
is not limited to dates in computer programs but is a complex
combination of problems that may exist in computer programs, data files,
computer hardware and other devices essential to the operation of the
business. Further, companies must consider the potential impact that Year 2000
may have on services provided by third parties.
Substantially all of the Year 2000 risk is related to the
Bank's activities. The Bank has a formal Year 2000 Plan which includes a
Year 2000 Committee. The Plan has been reviewed by senior management and
the Board of Directors. Included in the Plan is a listing of all systems
(whether in-house or provided/supported by third parties) which may be
impacted by Year 2000 and a categorization of the systems by their potential
impact on Bank operations. The Committee has received Year 2000 plans from
third parties identified during the assessment phase of the Year 2000 Plan.
For systems that have been classified as critical to the operations of the
Bank, contingency plans have been developed. Each contingency plan was
developed by operational personnel who utilize the particular system.
Contingency plans may include utilization of alternate third party vendors,
alternate processing methods and software, or manual processing. The plans
have various activation dates (e.g., the date on which a third party
processor fails to meet its Year 2000 compliance deadline). In addition
to addressing its own Year 2000 issues, the Bank is in the process of
assessing the impact of the Year 2000 on significant commercial borrowers.
The Bank's Year 2000 readiness is reviewed and monitored by the OTS.
The Bank's core processing systems are outsourced through a
contract with The BISYS Group, Inc. ("BISYS"). BISYS has developed a Year
2000 Plan and provides the Bank with periodic updates. BISYS also has
held Year 2000 workshops, whose objectives have been to assist the Bank in
the development of its Year 2000 Plan, to provide updates on the BISYS Year
2000 plan, and training on the use of the BISYS Year 2000 test facility,
whose function is to allow BISYS clients to test their systems'
compatibility with the BISYS system. BISYS expects to complete all program
maintenance associated with its Year 2000 plan by October 31, 1998 and
expects a full year of testing prior to January 1, 2000. Like the Bank, BISYS
Year 2000 activities are subject to OTS oversight.
The incremental costs associated with the Bank's Year 2000
compliance are expected to be less than $100,000. The majority of all
hardware upgrades required had been planned as a part of an overall
project begun in 1997 to upgrade the Bank's computer systems to increase
efficiency and eliminate obsolescence of some components of the system.
Should the Bank or any of its third party service providers fail to
complete Year 2000 measures in a timely manner it would likely have a material
adverse effect, whose amount cannot be reasonably estimated at this time, on
the Company.
Market Risk and Interest Rate Sensitivity
The principal market risk affecting the Company is risk associated
with interest rate volatility ("interest rate risk"). The Company does not
own any trading assets nor does it have any hedging contracts or
transactions in place such as interest rate swaps, caps, floors or collars.
Further, the Company is not subject to foreign currency exchange risk
or commodity price risk. Substantially all of the Company's interest rate
risk is derived from the Bank's lending and deposit-taking activities. This
risk could result in reduced net interest income, loss in fair values of
assets and/or increase in fair values of liabilities due to upward changes in
interest rates.
The Bank's principal financial objective is to achieve
long-term profitability while reducing its exposure to fluctuating market
interest rates. The Bank has sought to reduce the exposure of its earnings to
changes in market interest rates by attempting to manage the mismatch between
asset and liability maturities and interest rates. The principal element in
achieving this objective is to increase the interest-rate sensitivity of
the Bank's interest-earning assets by retaining for its portfolio loans
with interest rates subject to periodic adjustment to market conditions
and periodically selling fixed rate one- to four-family mortgage loans. In
addition, the Bank maintains short-term cash investments and an investment
portfolio of U.S. Government and agency securities with contractual
maturities of between one and ten years. The Bank relies on retail deposits
as its primary source of funds. Management believes retail deposits,
compared to brokered deposits, reduce somewhat the effects of interest rate
fluctuations because they generally represent a more stable source of funds.
As part of its interest rate risk management strategy, the Bank promotes
transaction accounts and certificates of deposit with terms up to four years.
12
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Using data compiled by the FHLB, the Bank receives a report
which measures interest rate risk by modeling the change in Net
Portfolio Value ("NPV") over a variety of interest rate scenarios. This
procedure for measuring interest rate risk was developed by the OTS to
replace the "gap" analysis (the difference between interest-earning assets
and interest-bearing liabilities that mature or reprice within a specific
time period). NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The calculation is intended
to illustrate the change in NPV that will occur in the event of an immediate
change in interest rates with no effect given to any steps that management
might take to counter the effect of that interest rate movement.
The following table is provided by the FHLB and sets forth the change
in the Bank's and the Company's NPV at June 30, 1998, based on FHLB
assumptions, that would occur in the event of an immediate change in interest
rates, with no effect given to any steps that management might take to
counteract that change. As with any method of measuring interest rate risk,
certain shortcomings are inherent in the method of analysis presented
in the following table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, 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 may lag behind changes in market rates. Additionally,
certain assets, such as adjustable rate loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could
deviate significantly from those assumed in calculating the table. (Dollar
amounts in the table are in thousands.)
Bank Company
Basis Basis
Point Point
Change Estimated Change in Changes Estimated Change in
In Rates Net Portfolio Value In Rates Net Portfolio Value
------------------------------ ------------------------------
+400 $(33,360) (32.5)% +400 $(31,977) (25.7)%
+300 (23,971) (23.4) +300 (22,925) (18.5)
+200 (14,601) (14.2) +200 (13,872) (11.2)
+100 (7,301) (7.1) +100 (6,936) (5.6)
0 -- -- 0 -- --
-100 3,161 3.1 -100 2,741 2.2
-200 6,322 6.2 -200 5,482 4.4
-300 6,563 6.4 -300 5,238 4.2
-400 6,804 6.6 -400 4,993 4.0
The above table illustrates, for example, that an instantaneous
200 basis point increase in market interest rates at June 30, 1998 would
reduce the Bank's NPV by approximately $14.6 million at that date. Certain
assumptions utilized in assessing the interest rate risk of savings banks
within its region were utilized in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under differing interest
rate scenarios, among others.
13
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following table prepared with information supplied by the
FHLB presents the Company's financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair values at June 30, 1998. Certain assumptions about loan
prepayment rates and deposit decay rates, among others, were utilized in
the preparation of the table. There are shortcomings inherent in this method
of analysis. For example, although a financial instrument may have a similar
maturity or remaining term to repricing as another financial instrument,
the two may react differently to changes in market interest rates. In the
event of changes in interest rates, prepayments and withdrawals would
likely deviate significantly from those assumed in the data underlying the
table. (Dollar amounts in the table are in thousands.)
Aver- Within One After 3
age One Year to Years to Beyond Fair
Rate Year 3 Years 5 Years 5 Years Total Value
---- ---- --------- --------- ------- ----- --------
Interest-
sensitive
assets:
Loans
receivable,
net of
loans in
process
and
deferred
loan fees 7.97% $154,752 $ 87,508 $ 63,265 $113,116 $418,641 $424,357
Loans held-
for-sale 6.91 7,294 -- -- -- 7,294 7,315
Mortgage-
backed
securi-
ties 8.00 -- 88 -- -- 88 90
Investment
securities 5.89 22,628 998 3,005 2,078 28,709 28,709
FHLB stock 7.50 3,446 -- -- -- 3,446 3,446
Federal
funds
sold and
overnight
interest-
bearing
deposits 6.10 40,518 -- -- -- 40,518 40,518
Interest-
sensitive
liabilities:
Savings
accounts 3.28 9,804 14,892 9,708 22,336 56,740 56,740
Money market
accounts 4.04 14,325 1,995 950 863 18,133 18,133
NOW
accounts 2.03 20,502 18,766 5,021 10,689 54,978 54,978
Certificate
accounts 5.60 200,023 33,277 6,661 -- 239,961 240,207
Advances
from FHLB 5.15 -- -- -- 17,000 17,000 15,817
Off-balance
sheet items:
Commitments
to extend
credit 7.66 4,512 -- -- -- 4,512 4,512
Unused
lines of
credit 9.75 51,587 -- -- -- 51,587 51,587
Loans in
process 8.67 21,923 -- -- -- 21,923 21,923
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits,
proceeds from payments of principal and interest on loans, the sale of
loans, maturing securities and FHLB advances. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are influenced greatly by general interest
rates, other economic conditions and competition. Regulations of the OTS
require the Bank to maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations, deposit
withdrawals and to satisfy other financial commitments. Currently, the OTS
regulatory liquidity requirement for the Bank is the maintenance of an
average daily balance of liquid assets (cash and eligible investments)
equal to at least 4% of the average daily balance of net
withdrawable deposits and short-term borrowings. This liquidity requirement
is subject to periodic change. The Company and the Bank generally
maintain sufficient cash and short-term investments to meet short-term
liquidity needs. At June 30, 1998, cash and cash equivalents totaled $49.0
million, or 9% of total assets, and investment securities classified as
available-for-sale with maturities of one year or less totaled $22.6 million.
At June 30, 1998, the Bank also maintained an uncommitted credit facility with
the FHLB, which provides for immediately available advances up to an
aggregate amount of $40.0 million (increased on August 19, 1998 to $75.0
million) of which $17.0 million had been advanced.
As of June 30, 1998, the Bank's regulatory capital was in excess of
all applicable regulatory requirements. At June 30, 1998, under regulations
of the OTS, the Bank's actual tangible, core and risk-based capital ratios
were 18.4%, 18.4%, and 29.9%, respectively, compared to regulatory capital
requirements of 1.5%, 4.0%, and 8.0%, respectively. The Corporation is
not subject to any separate regulatory capital requirements.
14
<PAGE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At June 30, 1998, the Company had loan commitments
(excluding undisbursed portions of interim construction loans) of
approximately $4.5 million ($3.6 million at fixed rates ranging from 6.75% to
10%). In addition, at June 30, 1998, the unused portion of credit
(principally variable rate home equity lines of credit) extended by the
Company was approximately $51.6 million. Furthermore, at June 30. 1998, the
Company had certificates of deposit scheduled to mature in one year or less of
$200.0 million. Based on historical experience, the Company anticipates that
a majority of such certificates of deposit will be renewed at maturity.
Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued four
new accounting standards that will affect accounting, reporting, and
disclosure of financial information by the Company. Adoption of these
standards is not expected to have a material impact on financial
condition or results of operations. The following is a summary of the
standards and their required implementation dates:
SFAS No. 130, "Reporting Comprehensive Income" - This
statement establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses). This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income (including, for
example, unrealized holding gains and losses on available-for-sale
securities) be reported in a financial statement that is displayed with
the same prominence as other financial statements. The accumulated
balance of other comprehensive income will be disclosed separately from
retained income in the equity section of the balance sheet. This statement is
effective for the Company for the fiscal year beginning July 1, 1998.
SFAS No. 131, "Disclosure 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, and segment assets and certain
other information. This statement is effective for the Company for financial
statements issued for the fiscal year beginning July 1, 1998.
SFAS No. 132, "Employers' Disclosures about Pensions and
other Post-Retirement Benefits" - This statement deals principally with
employers' disclosures about defined benefit plans and other post-retirement
benefit plans. This statement is effective for the Company for the fiscal
year beginning July 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" - This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative. The statement is
effective for the Company for the fiscal year beginning July 1, 1999 and may
not be applied retroactively.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial
data presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over
time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance
than do general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and
services.
15
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
FirstSpartan Financial Corp.
Spartanburg, South Carolina
We have audited the accompanying consolidated balance sheets of
FirstSpartan Financial Corp. and subsidiaries (the "Company") as of June 30,
1998 and 1997, and the related consolidated statements of income, equity,
and cash flows for each of the three years in the period ended June 30,
1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at June 30,
1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
/s/Deloitte & Touche LLP
July 24, 1998
Greenville, South Carolina
16
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
June 30, 1998 and 1997
1998 1997
--------- --------
Assets
Cash $ 8,450 $ 6,688
Federal funds sold and overnight
interest-bearing deposits 40,518 270,384
--------- --------
Total cash and cash equivalents 48,968 277,072
Investment securities available-for-
sale - at fair value (amortized cost:
$28,732 and $10,172 at June 30, 1998
and June 30, 1997, respectively) 28,709 10,201
Mortgage-backed securities held-to-
maturity - at amortized cost (fair
value: $90 and $125 at June 30, 1998
and June 30, 1997, respectively) 88 121
Loans receivable, net 416,462 362,728
Loans held-for-sale - at lower of cost
or market (market value: $7,315 and
$1,617 at June 30, 1998 and June 30,
1997, respectively) 7,294 1,617
Office properties and equipment, net 8,445 6,594
Federal Home Loan Bank of Atlanta stock
- at cost 3,446 3,011
Accrued interest receivable 2,813 2,590
Real estate acquired in settlement of loans 36 36
Other assets 1,172 1,476
--------- --------
Total Assets $ 517,433 $ 665,446
========= =========
Liabilities and Equity
Liabilities:
Deposit accounts $ 369,812 $ 353,193
Stock subscription escrow accounts -- 259,329
Advances from borrowers for taxes
and insurance 1,063 1,001
Advances from Federal Home Loan Bank
of Atlanta 17,000 --
Other liabilities 3,797 4,945
--------- --------
Total liabilities 391,672 618,468
Equity: --------- --------
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued or
outstanding at June 30, 1998 and 1997 -- --
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued and
outstanding: 4,253,160 shares at June 30,
1998 (none issued or outstanding at June
30, 1997) 44 --
Additional paid-in capital 87,624 --
Retained earnings 52,662 46,960
Treasury stock - at cost (177,215 shares
at June 30, 1998) (8,113) --
Unallocated ESOP shares (6,442) --
Unrealized (loss) gain on investment
securities available-for-sale, net
of taxes (14) 18
--------- --------
Total equity 125,761 46,978
--------- --------
Total Liabilities and Equity $ 517,433 $ 665,446
========= =========
See accompanying notes to consolidated financial statements.
17
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share Data)
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Investment Income:
Interest on loans $ 32,146 $ 27,455 $ 24,421
Interest and dividends on investment
securities, mortgage-backed
securities and other 5,268 2,007 2,024
---------- ---------- ----------
Total investment income 37,414 29,462 26,445
---------- ---------- ----------
Interest Expense:
Deposit accounts 17,003 15,811 14,669
Federal Home Loan Bank of Atlanta
advances 150 -- --
---------- ---------- ----------
Total interest expense 17,153 15,811 14,669
---------- ---------- ----------
Net Interest Income 20,261 13,651 11,776
Provision for Loan Losses 460 825 419
---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 19,801 12,826 11,357
---------- ---------- ----------
Noninterest Income (Loss):
Service charges and fees 1,378 1,090 843
Gain on sale of mortgage loans 342 38 --
Loss on sale of investments -- (12) --
Other, net 646 270 395
---------- ---------- ----------
Total noninterest income, net 2,366 1,386 1,238
---------- ---------- ----------
Noninterest Expense:
Employee compensation and benefits 5,016 4,025 3,131
Federal deposit insurance premium 354 2,278 737
Occupancy and equipment expense 1,106 1,006 731
Computer services 680 523 449
Advertising and promotions 566 463 418
Office supplies, postage,
printing, etc. 626 535 502
Other 1,472 1,073 979
---------- ---------- ----------
Total noninterest expense 9,820 9,903 6,947
---------- ---------- ----------
Income Before Income Taxes 12,347 4,309 5,648
Provision for Income Taxes 4,807 1,587 2,111
---------- ---------- ----------
Net Income $ 7,540 $ 2,722 $ 3,537
========== ========== ==========
Basic earnings per share $ 1.85 $ -- $ --
========== ========== ==========
Weighted average shares outstanding 4,066,692 -- --
========== ========== ==========
See accompanying notes to consolidated financial statements.
18
<PAGE>
<PAGE>
<TABLE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Equity
(In Thousands, Except Share Data)
Years Ended June 30, 1998, 1997 and 1996
Net Unreal-
ized Gain
Addi- Unallo- (Loss) on
tional cated Securities
Common Common Paid-In Retained Treasury ESOP Available- Total
Shares Stock Capital Earnings Stock Shares for-Sale Equity
------ ----- ------- -------- ----- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 -- $ -- $ -- $ 40,701 $ -- $ -- $ (41) $ 40,660
Net income -- -- -- 3,537 -- -- -- 3,537
Change in net
unrealized loss -- -- -- -- -- -- (43) (43)
--------- ----- ------- ------- -------- -------- ------ --------
Balance, June 30, 1996 -- -- -- 44,238 -- -- (84) 44,154
Net income -- -- -- 2,722 -- -- -- 2,722
Change in net
unrealized loss -- -- -- -- -- -- 102 102
--------- ----- ------- ------- -------- -------- ------ --------
Balance, June 30, 1997 -- -- -- 46,960 -- -- 18 46,978
Net income -- -- -- 7,540 -- -- -- 7,540
Change in net
unrealized gain -- -- -- -- -- -- (32) (32)
Issuance of common
stock 4,430,375 44 86,981 -- -- (7,089) -- 79,936
ESOP shares committed
for release -- -- 643 -- -- 647 -- 1,290
Purchase of treasury
stock (177,215) -- -- -- (8,113) -- -- (8,113)
Dividends ($0.45
per share) -- -- -- (1,838) -- -- -- (1,838)
--------- ----- ------- ------- -------- -------- ------ --------
Balance, June 30,
1998 4,253,160 $ 44 $87,624 $52,662 $ (8,113) $ (6,442) $ (14) $125,761
========= ===== ======= ======= ======== ======== ====== ========
See accompanying notes to consolidated financial statements.
19
</TABLE>
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
--------- ---------- --------
Cash Flows from Operating Activities:
Net income $ 7,540 $ 2,722 $ 3,537
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for loan losses 460 825 419
Deferred income tax (benefit)
provision (829) (435) 175
Amortization of deferred income (219) (157) (202)
Amortization (accretion) of premiums
(discounts) on investment and
mortgage-backed securities 3 (20) (3)
Depreciation 603 529 311
Allocation of ESOP shares at fair
value 1,290 -- --
Decrease (increase) in other assets 81 (1,057) (133)
Additions to loans held-for-sale (25,217) (9,753) (15,198)
Proceeds from sale of loans held-
for-sale 19,882 10,085 7,704
Gain on sale of loans held-for-sale (342) (38) --
Loss (gain) on disposal of property
and equipment 7 11 (3)
(Gain) loss on sale of real estate
acquired in settlement of loans -- (14) 10
Loss on sale of investment securities
available-for-sale -- 12 --
(Decrease) increase in other
liabilities (237) (663) 672
--------- ---------- --------
Net cash provided by (used in)
operating activities 3,022 2,047 (2,711)
--------- ---------- --------
Cash Flows from Investing Activities:
Net loan originations and principal
collections (30,129) (33,740) (26,968)
Purchase of loans (23,846) (14,911) --
Purchase of investment securities (29,063) (1,374) (9,992)
Proceeds from sale of investment
securities available-for-sale -- 8,000 --
Proceeds from maturities of
investment securities
available-for-sale 10,500 1,500 5,500
Principal repayments and proceeds
from maturities of mortgage-
backed securities 33 75 189
Proceeds from sale of real estate
acquired in settlement of loans -- 227 81
Purchase of Federal Home Loan Bank
of Atlanta stock (435) (205) (157)
Purchase of property and equipment (2,461) (2,249) (1,168)
Purchase of treasury stock (8,113) -- --
Proceeds from sale of property and
equipment -- 227 127
--------- ---------- --------
Net cash used in investing
activities (83,514) (42,450) (32,388)
--------- ---------- --------
Cash Flows from Financing Activities:
Net increase in deposits 36,661 47,362 29,916
Stock subscription proceeds -- 259,329 --
Stock subscription refunds (197,851) -- --
Stock issuance costs (1,584) -- --
Advances from Federal Home Loan
Bank of Atlanta 17,000 -- --
Dividends paid (1,838) -- --
--------- ---------- --------
Net cash (used in) provided by
financing activities (147,612) 306,691 29,916
--------- ---------- --------
Net (Decrease) Increase in Cash and
Cash Equivalents (228,104) 266,288 (5,183)
Cash and Cash Equivalents at
Beginning of Year 277,072 10,784 15,967
--------- ---------- --------
Cash and Cash Equivalents at End
of Year $ 48,968 $ 277,072 $ 10,784
========= ========== ========
20
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands of Dollars)
Years Ended June 30, 1998, 1997 and 1996
1998 1997 1996
-------- -------- --------
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $ 17,433 $ 15,715 $ 14,461
======== ======== ========
Income taxes $ 5,358 $ 1,870 $ 2,274
======== ======== ========
Transfers from loans to real
estate acquired in
settlement of loans $ -- $ 191 $ 115
======== ======== ========
Change in unrealized gain (loss) on
investment securities available-
for-sale $ (52) $ (165) $ 70
======== ======== ========
Increase (decrease) in deferred
taxes related to unrealized gain
(loss) on investment securities
available-for-sale $ 20 $ (63) $ 27
======== ======== ========
Investment securities transferred
from held-to-maturity to available-
for-sale, at fair value $ -- $ -- $ 4,002
======== ======== ========
Loans held-for-sale transferred to
loans held-for-investment at lower
of cost or market $ -- -- $ 20,907
======== ======== ========
Sale of common stock funded by
subscription escrow accounts $ 61,478 $ -- --
======== ======== ========
Sale of common stock funded by
deposit accounts $ 20,042 $ -- $ --
======== ======== ========
Sale of common stock to ESOP $ 7,089 $ -- $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
21
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30,1998, 1997 and 1996
1. Organization and Summary of Significant Accounting Policies
Change in Reporting Entity - On February 3, 1997, the Board of
Directors of First Federal Savings and Loan Association of Spartanburg (the
"Association") adopted a Plan of Conversion to convert from a federally
chartered mutual savings and loan association to a federally chartered
capital stock association (the "Conversion"). The Conversion was
accomplished through the formation of FirstSpartan Financial Corp. (the
"Corporation") on February 4, 1997, the adoption of a federal stock
charter on June 25, 1997, the sale of all of the Association's stock to
the Corporation on July 8, 1997 and the sale of the Corporation's stock to
the public on July 8, 1997.
A subscription offering ("offering") of the shares of common stock
of the Corporation was conducted whereby the shares were offered
initially to eligible account holders, the First Federal Employee Stock
Ownership Plan ("ESOP"), supplemental eligible account holders and
other members of the Association (collectively "subscribers"). During
the offering, subscribers submitted orders for common stock along with
full payment for the order in either cash, by an authorization to withdraw
funds for payment from an existing deposit account at the Association upon
issuance of stock, or a combination of cash and account withdrawal. The
offering began May 14, 1997 and concluded on June 17, 1997. Subscription
funds received in connection with the offering were placed in special escrow
accounts in the Association. For those orders that were to be funded through
account withdrawals, the Association placed "holds" on those accounts,
restricting the withdrawal of any amount which would reduce the account
balance below the amount of the order. At June 30, 1997, the Association held
$259.3 million in subscription escrow accounts and had restricted
withdrawal from deposit accounts in the amount of $26.0 million.
On July 8, 1997, the Corporation issued approximately 4.4 million
shares of common stock for gross proceeds of approximately $88.6 million. The
aggregate purchase price of the Corporation's stock was determined by an
independent appraisal. As the Corporation received subscriptions in
excess of shares available, shares were allocated in accordance with the
Plan of Conversion. Sources of gross proceeds were as follows (in thousands
of dollars):
Subscription escrow accounts $ 61,478
Deposit account withdrawals 20,042
Note receivable from ESOP 7,088
--------
Gross proceeds $ 88,608
========
All excess subscription funds were refunded to subscribers and holds
on deposit accounts were released after the stock was issued.
Conversion expenses totaled approximately $1.6 million and were
deducted from gross proceeds to result in net proceeds of approximately $87.0
million. As of June 30, 1997, Conversion costs were approximately $716,000
and are included in the balance sheet caption "Other Assets."
The Association issued all of its outstanding capital stock to the
Corporation in exchange for one-half of the net proceeds from the sale of the
Corporation's capital stock. The Corporation accounted for the purchase in a
manner similar to a pooling of interests whereby assets and liabilities of the
Association maintain their historical cost basis in the consolidated
financial statements of the Company.
In January 1998, the Association changed its name to First Federal
Bank (the "Bank").
Principles of Consolidation - The consolidated financial
statements include the accounts of the Corporation, the Bank and its
wholly owned subsidiary, FirstService Corporation ("FirstService")
(collectively referred to as the "Company"). Since the Corporation was
inactive from incorporation through July 8, 1997, the information contained
in the financial statements prior to that date relates to the Bank and its
subsidiary.
22
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
FirstService Corp. has a one-third ownership interest in a
mortgage banking company (since August 1996) which is accounted for under
the equity method of accounting. The investment is included in Other Assets
in the balance sheet and totaled $484,000 and $303,000, at June 30,
1998 and 1997, respectively. Equity in the earnings (losses) of the mortgage
banking company is included in Other Income and totaled $181,000 and
$(97,000) for the years ended June 30, 1998 and 1997, respectively.
Significant intercompany balances and transactions have been
eliminated in consolidation and under the equity method.
Nature of Operations and Customer Concentration - The
Company's principal business activities are conducted through the Bank,
which is a federally chartered savings bank engaged in the business of
accepting savings and demand deposits and providing mortgage, consumer and
commercial loans to the general public through its retail banking
offices. The Bank's business is limited primarily to the Spartanburg and
adjacent county areas of South Carolina.
Basis of Accounting - The accounting and reporting policies of
the Company conform to generally accepted accounting principles and to
general practices within the banking industry.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure 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 and Cash Equivalents - For purposes of reporting cash flows,
cash and cash equivalents includes cash on hand and amounts due from
depository institutions, federal funds sold and overnight interest-bearing
deposits.
Investment Securities - 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
them in the near term are classified as "trading" securities and reported at
fair value with unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as "available-for-sale" securities and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of equity, net of taxes. No
securities have been classified by the Company as trading securities during
the reporting periods.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report, "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Debt and Equity Securities," which included a
transition provision allowing entities that adopted Statement of Financial
Accounting Standards ("SFAS") No. 115 to reassess the appropriateness of the
classifications of securities held and account for any resulting
reclassifications at fair value. Reclassifications from the held-to-maturity
category resulting from this one-time reassessment did 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, on December 28, 1995,
the Company transferred securities with a fair value and amortized
cost of approximately $4.0 million from held-to-maturity to
available-for-sale. This transfer is disclosed as a noncash transaction in
the statement of cash flows.
Gains and losses on sales of securities are determined on the
specific identification method. Premiums and discounts are amortized to
maturity on a method which approximates the level yield method.
Loans - Loans are reported at the principal amount outstanding and
reduced by net deferred loan origination fees and the allowance for loan
losses. Loan origination and commitment fees and certain direct loan
origination costs are deferred and the net amount is accreted as an adjustment
of the related loan's yield over the contractual life of the loan. Net
deferred loan fees on loans sold are included in determining the gain or loss
on the sale. Loans held-for-sale are stated at the lower of cost or
estimated market value as determined by outstanding commitments from
investors or current investor market yield requirements calculated on an
aggregate basis. Net unrealized losses are recognized in a valuation allowance
by charges to income. During the year ended June 30, 1996, the Company
reclassified approximately $20.9 million of loans from held-for-sale to
held-for-investment at the lower of cost or market at the time the loans were
reclassified.
23
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
Upon the sale of mortgage loans, the Company receives cash in the
amount of the fair value of the loans and gain or loss is recognized at
the time of sale for the difference between the proceeds and carrying
value. On mortgage loans sold for which servicing rights were retained, the
carrying value of the loan is adjusted at the time of sale by allocating the
total cost of the loan to the mortgage servicing right and the loan (without
the mortgage servicing right) based on their relative fair values. The
cost allocated to the mortgage servicing right is recognized as a separate
asset (included in "Other Assets") and amortized in proportion to and
over the period of the estimated net servicing income. Prior to July 1,
1996, the value of servicing rights on originated mortgage loans was
not allowed to be recognized as an asset by generally accepted accounting
principles but was included in the carrying value of the loans sold in the
determination of gain or loss on sale.
Interest on loans is credited to income as earned based upon
the contractual interest rate of the loans applied to principal
outstanding. Interest accrual on impaired and unimpaired loans is ceased if
collection in the near term is uncertain, or when principal or interest is
90 days or more past due. Such interest is accounted for in an allowance for
uncollected interest by a charge to interest income equal to all interest
previously accrued. Loans generally are returned to accrual status when the
loan is brought current and it appears likely that payments will continue to
be received as scheduled.
Allowance for Loan Losses - The Company provides for loan losses on
the allowance method. Accordingly, loans deemed uncollectible are deducted
from the allowance and provisions for estimated loan losses and
recoveries on loans previously charged off are added to the allowance. The
allowance is an amount that management believes will be adequate to absorb
estimated losses inherent in existing loans which may become uncollectible.
Factors considered in assessing the adequacy of the allowance include
historical loss experience, delinquency trends, characteristics of specific
loan types, growth and composition of the loan portfolios, the relationship
of the allowance for loan losses to outstanding loans, local and regional
economic conditions, evaluations of impaired loans, and other factors.
Based on this assessment, the allowance is adjusted through a charge to
operations. 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. Further, the allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examinations.
Management periodically evaluates speculative construction,
land development, commercial and restructured loans to determine if any
such loans are impaired. Loans are considered to be impaired when, in
management's judgement, the collection of principal or interest is not
collectible according to the contractual terms of the loan agreement.
When conducting loan evaluations, management considers various factors
such as historical loan performance, the financial condition of the
borrower and adequacy of collateral to determine if a loan is impaired.
The measurement of impaired loans generally is based on the
present value of future cash flows discounted at the historical effective
interest rate, except that collateral-dependent loans generally are
measured for impairment based on the fair value of the collateral. When
the measured amount of an impaired loan is less than the recorded
investment in the loan, the impairment is recorded as a charge to income and
a valuation allowance which is included as a component of the allowance for
loan losses.
Office Properties and Equipment - Office properties and equipment
are stated at cost less accumulated depreciation. Depreciation is computed
over the estimated useful lives of the related assets using the straight-line
method.
Real Estate Acquired in Settlement of Loans - Real estate acquired
in settlement of loans is recorded initially at fair value less estimated
cost of disposal at the date of foreclosure, establishing a new cost basis.
Any accrued interest on the related loan at the date of acquisition
is charged to operations. After foreclosure, valuations are performed
periodically by management and the real estate is carried at the lower of
cost or fair value minus estimated costs to sell. Revenues, expenses and
additions to the valuation allowance related to real estate acquired in
settlement of loans are charged to operations. Such amounts were not
material in the years ended June 30, 1998, 1997 and 1996 and are included in
Noninterest Expense.
Advertising - The Company expenses the production cost of advertising
as incurred.
Income Taxes - Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes.
24
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
Recently Issued Accounting Standards - The FASB has recently issued
four new accounting standards that will affect accounting, reporting, and
disclosure of financial information by the Company. Adoption of these
standards is not expected to have a material impact on financial
condition or results of operations. The following is a summary of the
standards and their required implementation dates:
SFAS No. 130, "Reporting Comprehensive Income" - This statement
establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses).
This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income (including, for example, unrealized holding gains and losses
on available-for-sale securities) be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The accumulated balance of other comprehensive
income will be disclosed separately from retained earnings in the
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, and segment assets and certain
other information. This statement is effective for the Company for
financial statements issued for the fiscal year beginning July 1,
1998.
SFAS No. 132, "Employers' Disclosures about Pensions and other Post-
retirement Benefits" - This statement deals principally with
employers' disclosures about defined benefit plans and other
post-retirement benefit plans. The statement is effective for the
Company for the fiscal year beginning July 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" - This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use
of the derivative. The statement is effective for the Company for
the fiscal year beginning July 1, 1999 and may not be applied
retroactively.
Reclassifications - Certain June 30, 1997 and 1996 amounts have
been reclassified to conform to the June 30, 1998 presentation.
2. Investment and Mortgage-Backed Securities
Investment securities available-for-sale at June 30, 1998 and 1997
are summarized as follows (in thousands of dollars):
June 30, 1998
Gross Gross
Unrea- Unrea-
Amortized lized lized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities:
U.S. Treasury obligations $ 497 $ 1 $ -- $ 498
U.S. Government Agency obligations 6,010 16 (7) 6,019
-------- --- ---- -------
6,507 17 (7) 6,517
Marketable equity securities 22,225 -- (33) 22,192
-------- --- ---- -------
$ 28,732 $17 $(40) $28,709
======== === ==== =======
25
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
June 30, 1998
Gross Gross
Unrea- Unrea-
Amortized lized lized Fair
Cost Gains Losses Value
---- ----- ------ -----
Debt securities:
U.S. Treasury obligations $ 1,492 $-- $ (4) $ 1,488
U.S. Government Agency obligations 6,499 2 (18) 6,483
-------- --- ---- -------
7,991 2 (22) 7,971
Marketable equity securities 2,181 49 -- 2,230
-------- --- ---- -------
$ 10,172 $51 $(22) $10,201
======== === ==== =======
Gross realized gains and losses on sales of investment
securities available-for-sale were not material for the years ended June 30,
1998, 1997 and 1996.
Marketable equity securities at June 30, 1998 and 1997
consisted principally of a mutual fund that invests in adjustable rate
mortgages.
Investment securities totaling approximately $3.6 million at June
30, 1998 were pledged as collateral for public deposits.
The contractual maturities of debt securities available-for-sale (at
amortized cost and estimated fair value) are summarized as follows at June 30,
1998 (in thousands of dollars):
Amortized Fair
Cost Value
------- -------
Due within one year $ 497 $ 498
Due after one through five years 5,000 5,003
Due after five through ten years 1,010 1,016
------- -------
$ 6,507 $ 6,517
======= =======
Mortgage-backed securities held-to-maturity at June 30, 1998 and
1997 consisted of U.S. Government Agency obligations. Gross unrealized
gains and losses were not material at June 30, 1998 and 1997. The contractual
maturity of the entire balance of mortgage-backed securities at June 30, 1998
is due within five years.
26
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
3. Loans Receivable
Loans receivable at June 30, 1998 and 1997 consisted of the
following (in thousands of dollars):
June 30,
1998 1997
--------- ---------
Real estate mortgage loans:
Residential (1-4 family) $ 312,981 $ 285,969
Construction 37,241 35,061
Land development 20,577 12,376
Commercial 10,613 3,773
--------- ---------
381,412 337,179
--------- ---------
Consumer and commercial loans:
Home equity 43,950 35,366
Commercial 6,987 1,984
Other 9,058 6,301
--------- ---------
59,995 43,651
--------- ---------
Gross loans 441,407 380,830
Less:
Undisbursed portion of loans in process (21,923) (15,311)
Net deferred loan fees (843) (995)
Allowance for loan losses (2,179) (1,796)
--------- ---------
Net loans $ 416,462 $ 362,728
========= =========
The changes in the allowance for loan losses consisted of the
following (in thousands of dollars):
June 30,
1998 1997 1996
------- ------- -------
Allowance, beginning of year $ 1,796 $ 1,000 $ 600
Provision 460 825 419
Write-offs (80) (39) (23)
Recoveries 3 10 4
------- ------- -------
Allowance, end of year $ 2,179 $ 1,796 $ 1,000
======= ======= =======
At June 30, 1998 and 1997, the Company had loans totaling $1,210,000
and $618,000, respectively, which were in nonaccrual status. Interest
income that would have been recorded for the years ended June 30, 1998,
1997 and 1996 had nonaccrual loans been current in accordance with their
contractual terms amounted to $58,000, $34,000 and $84,000, respectively.
The amount of interest included in interest income on such loans for such
periods amounted to $48,000, $18,000 and $69,000, respectively.
27
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
The Company had impaired loans at June 30, 1998 and 1997 as follows
(in thousands of dollars):
June 30,
1998 1997
------ ------
Impaired loans:
No valuation allowance required $1,112 $1,091
Valuation allowance required 214 --
------ ------
$1,326 $1,091
====== ======
Valuation allowance $ 15 $ --
====== ======
The average recorded investment in impaired loans was $1.3 million,
$1.5 million and $1.1 million for the years ended June 30, 1998, 1997
and 1996. Interest income recognized on impaired loans was not significant
during the years ended June 30, 1998, 1997, and 1996. Residential real
estate loans are presented net of loans serviced for others totaling
approximately $56.4 million, $54.5 million and $59.2 million at June 30, 1998,
1997 and 1996, respectively. 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
$253,000, $248,000 and $390,000 at June 30, 1998, 1997 and 1996,
respectively.
The Company originates loans to officers and directors at
terms substantially identical to those available to other borrowers.
Mortgage and consumer loans to officers and directors at June 30, 1998
and 1997 were approximately $1.1 million and $1.0 million respectively.
4. Office Properties and Equipment
Office properties and equipment at June 30, 1998 and 1997 are
summarized as follows (in thousands of dollars):
June 30,
1998 1997
-------- --------
Major Classification:
Land $ 2,094 $ 1,679
Office buildings and improvements 6,753 5,488
Furniture, fixtures and equipment 3,522 2,804
Automobiles 75 51
-------- --------
12,444 10,022
Less accumulated depreciation (3,999) (3,428)
-------- --------
Office properties and equipment,net $ 8,445 $ 6,594
======== ========
5. Deposit Accounts
Deposit accounts at June 30, 1998 and 1997 are summarized as follows
(in thousands of dollars):
28
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
June 30, 1998 June 30, 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Demand accounts:
NOW:
Noninterest-bearing $ 12,757 --% $ 6,569 --%
Interest-bearing 42,221 2.66 33,425 2.79
Savings 56,740 3.28 64,352 3.31
Money market 18,133 4.04 14,308 3.18
Certificate accounts 239,961 5.60 234,539 5.66
-------- --------
$369,812 $353,193
======== ========
Scheduled maturities of certificate accounts at June 30, 1998 are
as follows (in thousands of dollars):
Within 1 year $200,023
After 1 but within 2 years 26,379
After 2 but within 3 years 6,898
Thereafter 6,661
--------
$239,961
========
The aggregate amount of certificate accounts with principal amounts
of $100,000 or more was $49.0 million and $48.5 million at June 30, 1998 and
1997, respectively. Deposits in excess of $100,000 are not federally insured.
Interest expense by type of deposit is summarized as follows
(in thousands of dollars):
Year Ended June 30,
1998 1997 1996
--------- -------- --------
Demand accounts:
Savings $ 2,032 $ 2,263 $ 1,364
NOW 1,039 651 542
Money market 434 422 626
Certificate accounts 13,498 12,475 12,137
--------- -------- --------
$ 17,003 $ 15,811 $ 14,669
========= ======== ========
6. Advances from Federal Home Loan Bank of Atlanta
The Company had advances from the Federal Home Loan Bank of Atlanta
("FHLB") in the amount of $17.0 million at June 30, 1998 (none at June 30,
1997). These fixed rate advances had a weighted average rate of 5.15% and ll
mature in the fiscal year ending June 30, 2008. Interest is payable quarterly
and principal is due at maturity.
All of the advances are convertible prior to maturity (at the option
of the FHLB) to a variable three-month LIBOR-based rate. Of the advances
outstanding, $10.0 million first becomes convertible in the fiscal year ending
June 30, 1999 and is convertible at any quarterly payment date through
maturity. The FHLB has a one-time conversion option on the remaining $7.0
million of advances. The option may be exercised on the respective advances'
fifth anniversary date in
29
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
the fiscal year ending June 30, 2003. Should the conversion option on
any advance be exercised by the FHLB, the Company has the right to
prepay the advance on any quarterly payment date through maturity.
The Company had an approved credit limit of $40.0 million with the
FHLB as of June 30, 1998. This limit was raised to $75.0 million on August
19, 1998. The advances are secured by FHLB stock and a blanket lien on all
qualifying one-to four-family residential first mortgage loans.
7. Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the Company's net deferred tax liability
(included in "Other Liabilities" on the balance sheet) as of June 30, 1998
and 1997 are as follows (in thousands of dollars):
June 30,
1998 1997
-------- -------
Deferred tax liabilities:
Allowance for loan losses $ -- $ 359
Federal Home Loan Bank of
Atlanta stock dividends 431 431
Accumulated depreciation 206 137
Deferred loan fees and costs, net -- 253
Unrealized gain on investment securities
available-for-sale -- 11
Other 213 159
-------- -------
850 1,350
-------- -------
Deferred tax assets:
Deferred loan fees and costs, net 165 --
Allowance for loan losses 128 --
Unrealized loss on investment securities
available-for-sale 9 --
Other 222 183
-------- -------
524 183
-------- -------
Net deferred tax liability $ 326 $ 1,167
======== =======
No valuation allowance on deferred tax assets has been established
as management believes that the existing deductible temporary differences
will reverse during periods in which the Company generates net taxable income.
In years ended June 30, 1996 and prior, the Bank was allowed under
the Internal Revenue Code to deduct, subject to certain conditions, an
annual addition to a reserve for bad debts ("reserve method") in determining
taxable income. Legislation enacted in August 1996 repealed the reserve method
effective for the Bank in the fiscal year ended June 30, 1997.
Deferred income taxes have been provided on differences between the
bad debt reserve for tax purposes determined under the formerly used reserve
method and the loan loss allowance for financial accounting purposes only to
the extent of differences arising subsequent to December 31, 1987. Under
the legislation previously mentioned, the Bank is required to recapture the
post-1987 tax bad debt reserve of approximately $2.8 million into income
over a six-year period beginning with the fiscal year ended June 30,
1997. Since a deferred tax liability has been provided on this
difference, the recapture will have no impact on equity or results of
operations.
30
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
Retained earnings as of June 30, 1998 includes approximately
$4.1 million representing reserve method bad debt reserves originating
prior to December 31, 1987 for which no deferred income taxes are
required to be provided. These reserves may be included in taxable
income if the Bank pays dividends in excess of its accumulated earnings and
profits (as defined by the Internal Revenue Code) or in the event of a
distribution in partial or complete liquidation of the Bank.
The provision for income taxes is summarized as follows (in thousands
of dollars):
Year Ended June 30,
1998 1997 1996
------- ------- -------
Current provision:
Federal $ 4,956 $ 1,763 $ 1,679
State 680 259 257
------- ------- -------
5,636 2,022 1,936
------- ------- -------
Deferred provision:
Federal (700) (377) 148
State (129) (58) 27
------- ------- -------
(829) (435) 175
------- ------- -------
Total provision for income taxes $ 4,807 $ 1,587 $ 2,111
======= ======= =======
For the years ended June 30, 1998, 1997 and 1996, a tax
(benefit) provision of $(20,000), $63,000, and $(27,000), respectively, was
allocated to equity for the tax effects of changes in unrealized gains
and losses on investment securities available-for-sale.
The Company's effective tax rate is greater than the statutory
Federal income tax rate for the following reasons (in thousands of dollars):
Year Ended June 30,
1998 1997 1996
------- ------- -------
Tax at statutory Federal income
tax rate (34%) $ 4,198 $ 1,465 $ 1,920
Increase (decrease) resulting from:
State income taxes 364 133 187
Nondeductible compensation
under ESOP 218 -- --
Other, net 27 (11) 4
------- ------- -------
$ 4,807 $ 1,587 $ 2,111
======= ======= =======
Effective income tax rate 38.9% 36.8% 37.4%
======= ======= =======
8. Employee Benefit Plans
401(k) Plan - The Company sponsors a 401(k) plan which is available
to all employees who meet minimum eligibility requirements. Participants
may generally contribute from 2%-10% of their compensation and the
Company is allowed to make discretionary contributions, subject to certain
limitations. Expense related to Company discretionary contributions
amounted to $105,000, $83,000, and $72,000 in the years ended June 30,
1998, 1997 and 1996, respectively.
31
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
ESOP - The ESOP is a noncontributory retirement plan adopted by
the Company effective January 1, 1997 which includes all employees who meet
minimum eligibility requirements. The ESOP acquired 354,430 shares of the
Corporation's common stock in the Conversion at a price of $20 per share
with proceeds of a loan from the Corporation in the amount of approximately
$7.1 million. The Bank makes periodic cash contributions to the ESOP in an
amount sufficient for the ESOP to make the scheduled payments under the note
payable to the Corporation.
The note payable has a term of 12 years, bears interest at 8.5%
and requires a level quarterly payment of principal and interest of
approximately $237,000. The note is collateralized by the shares of common
stock held by the ESOP.
As the note is repaid, shares are released from collateral based on
the proportion of the payment in relation to total payments required to be
made on the loan. The shares released from collateral are then allocated to
participants based upon compensation. Compensation expense is determined by
multiplying the per share market price of the Corporation's stock at the
time the shares are committed to be released by the number of shares to be
released. Any difference between the value of the released shares at
market and cost is recorded as an addition or deduction to additional
paid-in-capital. The Company recognized approximately $1.3 million in
compensation expense in the year ended June 30, 1998 related to the ESOP of
which approximately $650,000 reduced the cost of unallocated ESOP shares and
$640,000 increased additional paid-in capital on the balance sheet.
The cost of the unallocated shares is reflected as a reduction of
equity. Unallocated shares are considered neither outstanding shares for
computation of basic earnings per share nor potentially dilutive securities
for computation of diluted earnings per share. Dividends on unallocated ESOP
shares are reflected as a reduction in the note payable (and the Bank's
contribution reduced accordingly).
Shares released or committed to be released for allocation during
the year ended June 30, 1998 totaled 32,333. Shares remaining not
released or committed to be released for allocation at June 30, 1998 totaled
322,097 and had a market value of approximately $13.4 million.
9. Stock Compensation Plans
Management Recognition and Development Plan - On January 21, 1998,
the Corporation's stockholders approved the FirstSpartan Financial Corp.
Management Recognition and Development Plan ("MRDP"). A maximum of 177,215
shares may be awarded under the MRDP. The objective of the MRDP is to
provide an additional ownership interest in the Company as a long-term
incentive and retention program for key employees and directors. Shares of
common stock awarded under the MRDP vest in equal amounts over a five-year
period. In the event of a change in control of the Company, all shares
will become fully vested. Compensation expense is determined by the value
of the stock on the award date, recognized on a straight-line basis over the
vesting period. Upon the granting of shares under the MRDP, participants
will be entitled to all voting and other stockholder rights related to the
shares, including unvested shares. Participants may also receive dividends
and other distributions with respect to such stock. Also, all such shares
will be included in outstanding shares for the computation of basic earnings
per share.
At June 30, 1998, no shares had been awarded under the MRDP. On July
8, 1998, 177,215 shares of stock were awarded and the closing price of the
stock on that date was $42.00 per share. Therefore, $1.5 million of
compensation will be recognized in each of the years in the five-year vesting
period ending June 30, 2003. Shares awarded under the MRDP were issued
from the 177,215 shares of treasury stock held at June 30, 1998. The shares
had been repurchased in 1998 at an average price of $45.78.
Stock Option Plan - Also on January 21, 1998, the Corporation's
stockholders approved the 1997 FirstSpartan Financial Corp. Stock Option Plan
("SOP"). The SOP allows the granting to management and directors the option
to purchase common stock of the Corporation ("options") aggregating to
443,038 shares. All employees and non-employee directors are eligible to
participate in the SOP. Each option will have a term of 10 years and the
exercise price of each option will not be less than the fair market value of
the shares on the date of grant. Options will vest in equal installments over
a three-year period. In the event of a change in control of the Company, all
options will become fully vested and immediately exercisable. If provision
is not made for the assumption of the options in connection with the change
of control, the SOP provides for the cash settlement of any outstanding
options. No options had been awarded at June 30, 1998. On July 8, 1998,
options to purchase 363,291 shares at $42.00 per share were awarded.
32
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
The Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees"
and related interpretations in accounting for its stock options as permitted
under SFAS No. 123, "Accounting for Stock-Based Compensation." In
accordance with APB 25, no compensation cost is recognized by the Company
when stock options are granted because the exercise price of the Company's
stock options equals the market price of the underlying common stock on the
date of grant.
10. COMMITMENTS AND CONTINGENT LIABILITIES
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 interim construction loans, were approximately $4.5 million ($3.6
million at fixed rates ranging from 6.75%-10.00%) at June 30, 1998.
Commitments, which are disbursed subject to certain limitations, extend over
periods of time with the majority of such commitments disbursed within a
30-day period. Additionally, at June 30, 1998, unused lines of credit
extended by the Company (principally variable-rate consumer lines secured by
real estate) amounted to approximately $51.6 million.
Loans Sold with Recourse - At June 30, 1998, approximately $2.3
million of loans serviced for others had been sold with recourse (i.e., all
credit risk associated with these loans was retained). Loans sold with
recourse resulted from the sale of several pools of loans in 1983. Due to
the seasoned nature of these loans and their typical low loan-to-value
ratios, management believes that these loans do not present a significant risk
to the Company.
Financial Instruments with Off-Balance Sheet Risk - The Company has
no other additional financial instruments with off-balance sheet risk.
Concentration of Credit Risk - The Company's business activities
are principally with customers located in South Carolina. Except for loans
in the Company's market area, there are no other significant concentrations
of credit risk. The majority of the Company's loans are residential
mortgage loans, construction loans, home equity loans and other mortgage
loans. Generally, first mortgage loans are allowed up to 80% of the value of
the real estate pledged as collateral or up to 95% with private mortgage
insurance. Home equity loans are generally allowed up to 90% of the
value of the real estate pledged as collateral.
Potential Impact of Changes in Interest Rates - The Company's
profitability depends to a large extent on its net interest income, which is
the difference between interest income on loans and investments and interest
expense on deposits and borrowings. 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 mortgage
loans which adjust more slowly to changes in interest rates than its
interest- bearing savings deposits. Accordingly, the Company's earnings would
be adversely affected during periods of rising interest rates.
Litigation - The Company is involved in legal actions in the normal
course of business. Management, based on advice of legal counsel, does
not expect any material losses from any current litigation.
Employment Agreements - Both the Corporation and the Bank have entered
into employment agreements with four executive officers ("executives"). The
employment agreements establish the duties and compensation of the executives
and have been executed in order to ensure a stable and competent management
base. The employment agreements provide for an initial term of three years.
The Bank's Board of Directors may agree after conducting a performance
evaluation of the executive, to extend an employment agreement on each
anniversary date for an additional year so that the remaining term shall be
three years.
The employment agreements generally provide for the continued payment
of specified compensation and benefits for the remaining term of the
agreement after the executives are terminated, unless the termination is for
"cause" as defined in the employment agreement. Additionally, the employment
agreements provide for severance payments if employment is terminated
following a change in control in the amount of 2.99 times the average annual
compensation paid during the five years immediately preceding the change in
control to the respective executive.
33
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
Severance Agreements - The Bank and the Corporation have entered
into severance agreements with three senior officers ("officers") (none of
whom have entered into employment agreements) with an initial term of two
years. The severance agreements may be extended in the same manner as
the employment agreements. The severance agreements provide for
severance payments in the amount of 2 times annual salary (and continuation
of insured employee welfare benefits for a two-year period) in
connection with termination or other specified actions in the event of a
change in control of the Company.
Employee Severance Compensation Plan ("Severance Plan") - In general,
all employees (except for executives and officers who have entered into
separate employment or severance agreements) are eligible to participate in
the Severance Plan. Under the Severance Plan, employees terminated within 12
months of a change in control are entitled to a severance benefit of 2 to 52
weeks of their current compensation based upon length of service. Similarly,
officers covered under the Severance Plan would be entitled to a severance
benefit of 6 to 18 months of their current compensation depending on length of
service and position.
11. Equity
Liquidation Account - At the time of the Conversion, the
Bank established a liquidation account for the benefit of eligible account
holders as of December 31, 1996 who continue to maintain their accounts at
the Bank after the Conversion. The liquidation account will be reduced
annually to the extent that eligible account holders have reduced their
qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation of the Bank, each eligible account holder will be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held before any distribution may be made to the Corporation
with respect to the Bank's capital stock.
Dividends - The Corporation's sources of income and funds for
dividends to its stockholders are earnings on its investments and dividends
from the Bank. The Corporation is not subject to any regulatory restrictions
on the payment of dividends to its stockholders. However, the Bank's primary
regulator, the Office of Thrift Supervision ("OTS"), has regulations that
impose certain restrictions on payment of dividends to the Corporation. The
Corporation was dependent on dividends from the Bank to support the level of
quarterly dividends paid by the Corporation during the year ended June 30,
1998. Current regulations of the OTS allow the Bank (based upon its current
capital level and supervisory status assigned by the OTS) to pay a dividend
of up to 100% of net income to date during the calendar year plus 50% of its
surplus capital existing at the beginning of the calendar year. Supervisory
approval is not required, but30 days prior notice to the OTS is required. Any
capital distribution in excess of this amount would require supervisory
approval. Capital distributions are further restricted should the Bank's
capital level fall below he fully phased-in capital requirements of the
OTS. In no case will the Bank be allowed to make a capital distribution in
excess of the balance of the liquidation account. The Bank paid dividends to
the Corporation amounting to $1.0 million in the year ended June 30, 1998.
Share Repurchases - OTS regulations also place restrictions for
a three-year period after the Conversion on the Corporation with
respect to repurchases of its common stock. The Corporation is not allowed
to repurchase stock in the first year after Conversion. With prior notice
to the OTS, the Corporation is allowed to repurchase 5% of its outstanding
shares in each of the next two years after Conversion. The above
restrictions are not applicable to repurchases of stock to fund an approved
benefit plan such as the Company's MRDP.
Capital Adequacy - The Bank is subject to various regulatory capital
requirements administered by the federal financial institution regulatory
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weighting and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios. Under
regulations of the OTS, the Bank must have: (i) core capital equal to 4.0% 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.
34
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
In measuring compliance with all three capital standards, institutions
must deduct from their capital (with several exceptions primarily for
mortgage banking subsidiaries and insured depository institution
subsidiaries) their investments in, and advances to, subsidiaries
engaged (as principal) in activities not permissible for national banks,
and certain other adjustments. Management believes, as of June 30, 1998,
that the Bank meets all capital adequacy requirements to which it is
subject.
The following is a reconciliation of the Bank's equity determined
under generally accepted accounting principles to OTS regulatory capital
requirements (in thousands of dollars):
Tangible Core Risk-Based
Capital Capital Capital
-------- -------- --------
June 30, 1998
Total equity as determined under generally
accepted accounting principles $ 90,040 $ 90,040 $ 90,040
General allowance for loan losses -- -- 2,157
Unrealized loss on securities
available-for-sale 14 14 14
-------- -------- --------
Regulatory capital $ 90,054 $ 90,054 $ 92,211
======== ======== ========
June 30, 1997
Total equity as determined under generally
accepted accounting principles $ 46,978 $ 46,978 $ 46,978
General allowance for loan losses -- -- 1,756
Unrealized gain on securities
available-for-sale (18) (18) (18)
-------- -------- --------
Regulatory capital $ 46,960 $ 46,960 $ 48,716
======== ======== ========
The Bank's actual and required capital amounts and ratios are
summarized as follows (in thousands of dollars):
Minimum
Actual Requirement
Amount Ratio Amount Ratio
------ ----- ------ -----
June 30, 1998
Tangible capital
(to total assets) $ 90,054 18.4% $ 7,325 1.5%
Core capital
(to adjusted total assets) $ 90,054 18.4% $ 19,532 4.0%
Risk-based capital
(to risk-weighted assets) $ 92,211 29.9% $ 24,654 8.0%
June 30, 1997
Tangible capital
(to total assets) $ 46,960 7.1% $ 9,979 1.5%
Core capital
(to adjusted total assets) $ 46,960 7.1% $ 19,958 3.0%
Risk-based capital
(to risk-weighted assets) $ 48,716 16.3% $ 23,933 8.0%
35
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
As of June 30, 1998 and June 30, 1997, the most recent
respective notifications from the OTS classified the Bank 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 Bank's category. To be categorized
as well capitalized, the Bank 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 Bank's actual and minimum capital
requirements to be well capitalized under prompt corrective action
provisions are as follows (in thousands of dollars):
Minimum
Actual Requirement
Amount Ratio Amount Ratio
------ ----- ------ -----
June 30, 1998
Tier I capital
(to adjusted total assets) $ 90,054 18.4% $ 24,416 5.0%
Tier I capital
(to risk-weighted assets) $ 90,054 29.2% $ 18,491 6.0%
Total capital
(to risk-weighted assets) $ 92,211 29.9% $ 30,818 10.0%
June 30, 1997
Tier I capital
(to adjusted total assets) $ 46,960 7.1% $ 33,261 5.0%
Tier I capital
(to risk-weighted assets) $ 46,960 15.7% $ 17,950 6.0%
Total capital
(to risk-weighted assets) $ 48,716 16.3% $ 29,916 10.0%
On September 30, 1996, legislation was enacted to recapitalize
the Savings Association Insurance Fund. The effect of this legislation
was to require a one-time assessment on all federally insured savings
associations' deposits and was levied by the Federal Depository Insurance
Corporation ("FDIC") at 0.675% of insured deposits at March 31, 1995. The
amount of the Bank's assessment was approximately $1.78 million. The
assessment was accrued as a charge to earnings in the quarter ended September
30, 1996 and paid on November 27, 1996.
12. Earnings Per Share
Earnings per share ("EPS") for the years ended June 30, 1996 and
1995 are not presented because no shares were issued or outstanding during
those periods.
For purposes of EPS calculations, shares issued in connection with
the Conversion have been assumed to be outstanding as of July 1, 1997.
The Company had no potentially dilutive securities outstanding
during the year ended June 30, 1998; therefore, diluted EPS is the same as
basic EPS. For the year ended June 30, 1998, 4,066,692 weighted average
shares were outstanding.
36
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 1998, 1997 and 1996
13. Financial Instruments
The stated and fair value amounts of financial instruments as of
June 30, 1998 and 1997, are summarized below (in thousands of dollars):
June 30, 1998 June 30, 1997
Stated Fair Stated Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 48,968 $ 48,968 $277,072 $277,072
Investment securities 28,709 28,709 10,201 10,201
Mortgage-backed securities 88 90 121 125
Loans receivable, net 416,462 422,178 362,728 365,358
Loans held-for-sale 7,294 7,315 1,617 1,617
Federal Home Loan Bank of
Atlanta stock 3,446 3,446 3,011 3,011
Other assets 2,813 2,813 2,590 2,590
Retained servicing on
mortgage loans 213 555 24 561
--------- --------- -------- --------
$ 507,993 $ 514,074 $657,364 $660,535
========= ========= ======== ========
Financial liabilities:
Deposit accounts:
Demand $129,851 $129,851 $118,654 $118,654
Certificate 239,961 240,207 234,539 234,114
Stock subscription escrow
accounts -- -- 259,329 259,329
Advances from Federal Home
Loan Bank of Atlanta 17,000 15,817 -- --
Other liabilities 3,068 3,068 3,586 3,586
--------- --------- -------- --------
$ 389,880 $ 388,943 $616,108 $615,683
========= ========= ======== ========
The Company had off-balance sheet financial commitments, which
include $56.1 million and $30.5 million at June 30, 1998 and 1997
respectively, of commitments to originate loans and unused consumer lines of
credit. Since these commitments are based on current rates, the commitment
amount is considered to be a reasonable estimate of fair market value.
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - Both 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.
Investment and Mortgage-Backed Securities - Fair values for
investment and mortgage-backed securities are based on quoted market prices.
If a quoted market price is not available, fair value is estimated using
market prices of similar securities.
Loans - Fair values of loans held-for-investment are estimated
by segregating the portfolio by type of loan and discounting scheduled cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio. A
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
37
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Loans held-for-sale are valued at the lower of cost or market
as determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis.
Federal Home Loan Bank of Atlanta Stock - 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.
Retained Servicing on Mortgage Loans Sold - The fair value of
retained servicing on mortgage loans sold is calculated by discounting
the expected future cash flows using current rates.
Deposits - The fair values disclosed for demand deposits are equal
to the amounts payable on demand at the reporting date (i.e., their
stated amounts). The fair value of certificates of deposit are estimated by
discounting the amounts payable at the certificate rate using the rates
currently offered for deposits of similar remaining maturities.
Stock Subscription Escrow Accounts - The carrying amount of
stock subscription escrow accounts is equal to fair value due to their short
duration.
Other Assets and Other Liabilities - Other assets represent
principally accrued interest receivable; other liabilities represent advances
from borrowers for taxes and insurance, outstanding checks and accrued
interest payable. Since these financial instruments will be typically
received or paid within three months, the stated amounts of such
instruments are deemed to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale the Company's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, current interest rates and prepayment trends,
risk characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair
value also would affect significantly the estimates. Further, the fair value
estimates were calculated as of June 30, 1998 and 1997. Changes in market
interest rates and prepayment assumptions could change significantly the
fair value.
Fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial assets
or liabilities including loan servicing portfolio, 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. Condensed Parent Company Only Financial Statements
The following table presents the condensed balance sheets of
the Corporation at June 30, 1998 and the condensed statements of income
and cash flows for the year then ended (the Corporation was inactive from
its inception on February 4, 1997 through the Conversion on July 8, 1997)
(in thousands of dollars):
38
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Condensed Balance Sheet
Assets:
Cash and cash equivalents $ 29,260
Investment in Bank 90,040
Note receivable from Bank 6,661
Other assets 156
---------
Total assets $ 126,117
=========
Liabilities and Stockholders' Equity:
Other liabilities $ 356
Stockholders' equity 125,761
---------
Total liabilities and stockholders' equity $ 126,117
=========
Condensed Statement of Income
Investment Income:
Interest income $ 2,474
Dividends from Bank 1,000
---------
3,474
Noninterest Expense 415
---------
Income Before Income Taxes and Equity
in Undistributed Earnings of Bank 3,059
Provision for Income Taxes 745
---------
Net Income Before Equity in Undistributed
Earnings of Bank 2,314
Equity in Undistributed Earnings of Bank 5,226
---------
Net Income $ 7,540
=========
Condensed Statement of Cash Flows
Cash flows from operating activities:
Net income $ 7,540
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of Bank (5,226)
Net change in other assets and liabilities 201
---------
Net cash provided by operating activities 2,515
Cash flows from investing activities:
Investment in Bank (43,516)
Sale of common stock 81,519
Collections on note receivable from Bank 277
---------
Net cash provided by investing activities 38,280
---------
Cash flows from financing activities:
Purchase of treasury stock (8,113)
Stock issuance costs (1,584)
Dividends paid (1,838)
---------
Net cash used in financing activities (11,535)
---------
Net increase in and ending balance of cash and cash
equivalents $ 29,260
=========
39
<PAGE>
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
15. Quarterly Results of Operations (Unaudited)
Summarized unaudited quarterly operating results for the years
ended June 30, 1998 and 1997 are as follows (in thousands, except share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
June 30, 1998
Investment income $ 9,411 $ 9,215 $ 9,276 $ 9,512
Interest expense 4,299 4,292 4,185 4,377
-------- -------- -------- --------
Net interest income 5,112 4,923 5,091 5,135
Provision for loan losses 90 90 130 150
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,022 4,833 4,961 4,985
Noninterest income 449 487 651 779
Noninterest expense 2,211 2,411 2,530 2,668
-------- -------- -------- --------
Income before income taxes 3,260 2,909 3,082 3,096
Income taxes 1,225 1,150 1,205 1,227
-------- -------- -------- --------
Net income $ 2,035 $ 1,759 $ 1,877 $ 1,869
======== ======== ======== ========
Basic earnings per share $ 0.50 $ 0.43 $ 0.46 $ 0.47
======== ======== ======== ========
Weighted average shares
outstanding 4,077,791 4,087,721 4,098,436 4,003,425
========= ========= ========= =========
June 30, 1997
Investment income $ 6,997 $ 7,160 $ 7,292 $ 8,013
Interest expense 3,740 3,828 3,938 4,305
-------- -------- -------- --------
Net interest income 3,257 3,332 3,354 3,708
Provision for loan losses 29 646 75 75
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,228 2,686 3,279 3,633
Noninterest income 308 342 348 388
Noninterest expense 3,594 1,998 1,956 2,355
-------- -------- -------- --------
Income before income taxes (58) 1,030 1,671 1,666
Income taxes (22) 387 625 597
-------- -------- -------- --------
Net income $ (36) $ 643 $ 1,046 $ 1,069
======== ======== ======== ========
Basic earnings per share N/A N/A N/A N/A
======== ======== ======== ========
Weighted average shares
outstanding N/A N/A N/A N/A
======== ======== ======== ========
40
<PAGE>
<PAGE>
Corporate and Stockholder Information
Corporate Headquarters
380 East Main Street
Spartanburg, South Carolina 29302
Independent Auditors
Deloitte & Touche LLP
Greenville, South Carolina
General Counsel
Odom, Terry, Cantrell and Hammett
Spartanburg, South Carolina
Special Securities Counsel
Breyer & Aguggia LLP
Washington, D.C.
Transfer Agent
For stockholder inquiries concerning dividend checks,
transferring ownership, address changes or lost or stolen
certificates please contact our transfer agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 368-5948
Common Stock
FirstSpartan Financial Corp. common stock is traded on
the NASDAQ National Market under the symbol FSPT.
10-K Information
A copy of Form 10-K will be furnished without charge to stockholders
upon written request to R. Lamar Simpson, Secretary, FirstSpartan Financial
Corp. at the Corporate Headquarters address
Annual Meeting
The Annual Meeting of Stockholders will be held on October 21, 1998 at
10:00 a.m., Eastern Time, at the Spartanburg County Library, 151 South Church
Street, Spartanburg, South Carolina.
Officers and Directors
Directors of FirstSpartan Financial Corp.
and First Federal Bank
R. Wesley Hammond - President and Chief Operating
Officer, Hammond-Brown-Jennings
Robert L. Handell - Retired President, First Federal Bank
Billy L. Painter - President and Chief Executive Officer of
FirstSpartan Financial Corp. and First Federal Bank
Robert R. Odom - Partner, Odom, Terry, Cantrell
and Hammett Law Firm
E. Lea Salter - President, Christman & Parsons, Inc.
E. L. Sanders - Retired Owner, Brodie Insurance Agency
David E. Tate - President, Tate Metal Works
Officers of FirstSpartan Financial Corp.
Robert R. Odom - Chairman of the Board
Billy L. Painter - President and Chief Executive Officer
R. Lamar Simpson - Treasurer, Secretary
and Chief Financial Officer
Senior Officers of First Federal Bank
Robert R. Odom - Chairman of the Board
Billy L. Painter - President and Chief Executive Officer
R. Lamar Simpson - Chief Financial Officer
Hugh H. Brantley - Executive Vice President
and Chief Operating Officer
J. Stephen Sinclair - Executive Vice President, Lending
Tom Bridgeman - Senior Vice President, Operations
Kathy Dunleavy - Senior Vice President, Retail Banking
Rand Peterson - Senior Vice President, Lending
J. Timothy Camp - Vice President, Commercial Lending
Hugh McDowell - Vice President, Consumer Lending
Clay Shill - Vice President, Branch Operations
Jill Thrift - Vice President, Operations
Common Stock Market Price and Dividend Information
The table below contains the range of high and low per share closing prices
of the Company's common stock as reported by the Nasdaq Stock Market, and per
share dividends declared during each quarter:
High Low Dividend
------- ------- --------
1998
September 30, 1997 $39.000 $35.000 $ --
December 31, 1997 40.250 35.000 0.15
March 31, 1998 45.125 38.250 0.15
June 30, 1998 47.250 41.000 0.15
1997
There were no shares issued or outstanding during the fiscal year ended June
30, 1997.
<PAGE>
<PAGE>
FIRSTSPARTAN
--------------
FINANCIAL CORP.
380 EAST MAIN STREET
SPARTANBURG, SC 29302
==============================================================================
=
OFFICE LOCATIONS
Main Office
[GRAPHIC-FOUR QUARTERS] 380 East Main Street
Spartanburg, SC 29302
Branch Offices
1585 E. Main Street
Spartanburg, SC
1488 W.O. Ezell Blvd.
Spartanburg, SC
280 N. Church Street
Spartanburg, SC
2701 Boiling Springs Road
Boiling Springs, SC
2075 E. Main Street
Duncan, SC
11157 Asheville Hwy.
Inman, SC
1451 Woodruff Road
Greenville, SC(1)
1313 W. Poinsett Street
Greer, SC(2)
14055 E. Wade Hampton Blvd.
Greer, SC(1)(2)
(1)Located in Wal-Mart Supercenter
(2)Opening September 1998
<PAGE>
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-30589 and Registration Statement No. 333-59781 of FirstSpartan Financial
Corp. on Forms S-8 of our report dated July 24, 1998, appearing in the Annual
Report of FirstSpartan Financial Corp. for the year ended June 30, 1998
incorporated by reference in this Form 10-K.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Greenville, South Carolina
September 23, 1998
<PAGE>
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