UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{ X } Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 1998
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
--------------- ---------------
Commission File Number: 0-22445
FIRSTSPARTAN FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 56-2015272
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
380 East Main Street, Spartanburg, South Carolina 29302
-------------------------------------------------------
(Address of principal executive office)
(864) 582-2391
-------------------------------
(Registrant's telephone number)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock Outstanding: 3,906,856 shares as of November 9, 1998.
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FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Table of Contents
Page
Part I. Financial Information ----
- ------ ---------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1998
and June 30, 1998 1
Consolidated Statements of Income for the Three-Month
Periods Ended September 30, 1998 and 1997 2
Consolidated Statements of Equity for the Three-Month
Periods Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows for the Three-Month
Periods Ended September 30, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
Part II. Other Information 14-15
- ------- -----------------
Signatures 16
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ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands)
(Unaudited)
September 30, June 30,
Assets 1998 1998
------------- --------
Cash $ 11,621 $ 8,450
Federal funds sold and overnight interest-bearing
deposits 38,039 40,518
-------- --------
Total cash and cash equivalents 49,660 48,968
Investment securities available-for-sale - at
fair value (amortized cost: $29,045 and $28,732
at September 30, 1998 and June 30, 1998,
respectively) 29,080 28,709
Mortgage-backed securities held-to-maturity -
at amortized cost (fair value: $78 and $90 at
September 30, 1998 and June 30, 1998, respectively) 77 88
Loans receivable, net 422,753 416,462
Loans held-for-sale - at lower of cost or market
(market value: $11,317 and $7,315 at September 30,
1998 and June 30, 1998, respectively) 11,317 7,294
Office properties and equipment, net 9,502 8,445
Federal Home Loan Bank of Atlanta stock - at cost 3,446 3,446
Accrued interest receivable 3,110 2,813
Real estate acquired in settlement of loans 36 36
Other assets 1,431 1,172
-------- --------
Total Assets $530,412 $517,433
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $376,984 $369,812
Advances from borrowers for taxes and insurance 1,371 1,063
Advances from Federal Home Loan Bank of Atlanta 27,000 17,000
Other liabilities 4,807 3,797
-------- --------
Total liabilities 410,162 391,672
-------- --------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued or
outstanding at September 30, 1998 and June
30, 1998 -- --
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued:
4,430,375 at September 30, 1998 and June 30,
1998; outstanding: 4,208,856 and 4,253,160
at September 30, 1998 and June 30, 1998,
respectively 44 44
Additional paid-in capital 87,076 87,624
Unallocated ESOP stock (6,294) (6,442)
Unearned restricted stock (7,071) --
Treasury stock - at cost (221,519 shares at
September 30, 1998 and 177,215 shares at
June 30, 1998) (7,259) (8,113)
Retained earnings 53,734 52,662
Unrealized gain (loss) on securities available-
for-sale, net of taxes 20 (14)
-------- --------
Total stockholders' equity 120,250 125,761
-------- --------
Total Liabilities and Stockholders' Equity $530,412 $517,433
======== ========
See accompanying notes to consolidated financial statements.
1
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
----------------------
1998 1997
---------- ----------
Investment Income:
Interest on loans $ 8,537 $ 7,626
Interest and dividends on investment
securities, mortgage-backed
securities and other 1,091 1,785
---------- ----------
Total investment income 9,628 9,411
---------- ----------
Interest Expense:
Deposit accounts 4,315 4,299
Federal Home Loan Bank of Atlanta advances 282 --
---------- ----------
Total interest expense 4,597 4,299
---------- ----------
Net Interest Income 5,031 5,112
Provision for Loan Losses 200 90
---------- ----------
Net Interest Income After Provision for Loan Losses 4,831 5,022
---------- ----------
Noninterest Income:
Service charges and fees 470 329
Gain on sale of mortgage loans 293 --
Other, net 141 120
---------- ----------
Total noninterest income, net 904 449
---------- ----------
Noninterest Expense:
Employee compensation and benefits 1,776 1,207
Federal deposit insurance premium 82 77
Occupancy and equipment expense 330 248
Computer services 63 153
Advertising and promotions 170 133
Office supplies, postage, printing, etc. 182 146
Other 390 247
---------- ----------
Total noninterest expense 2,993 2,211
---------- ----------
Income Before Income Taxes 2,742 3,260
Provision for Income Taxes 1,056 1,225
---------- ----------
Net Income $ 1,686 $ 2,035
========== ==========
Basic earnings per share $ 0.42 $ 0.50
========== ==========
Weighted average shares outstanding(1) 4,040,738 4,078,380
========== ==========
(1) FirstSpartan's initial public offering closed on July 8, 1997. For
purposes of earnings per share calculations for the three months ended
September 30, 1997, shares issued on July 8, 1997 have been assumed to be
outstanding as of July 1, 1997.
See accompanying notes to consolidated financial statements.
2
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Equity
For the Three Months Ended September 30, 1998 and 1997
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
Accumu-
lated
Addi- Unearned Unallo- Other
tional Trea- Restrict- cated Compre-
Common Paid-in Retained sury ed ESOP hensive Total
Stock Capital Earnings Stock Stock Stock Income Equity
----- -------- -------- -------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ -- $ -- $ 46,960 $ -- $ -- $ -- $ 18 $ 46,978
Net income -- -- 2,035 -- -- -- -- 2,035
Change in net unrealized gain
on available-for-sale
securities -- -- -- -- -- -- 19 19
Issuance of common stock 44 86,981 -- -- -- (7,089) -- 79,936
ESOP shares committed for
release -- 118 -- -- -- 148 -- 266
----- -------- -------- -------- -------- -------- ---- ---------
Balance, September 30, 1997 $ 44 $ 87,099 $ 48,995 $ -- $ -- $ (6,941) $ 37 $ 129,234
===== ======== ======== ======== ======== ======== ==== =========
Balance, June 30, 1998 $ 44 $ 87,624 $ 52,662 $ (8,113) $ -- $ (6,442) $(14) $125,761
Net income -- -- 1,686 -- -- -- -- 1,686
Change in net unrealized loss
on available-for-sale securities -- -- -- -- -- -- 34 34
Issuance of treasury stock to MRDP -- (670) 8,113 (7,443) -- -- --
Purchase of treasury stock -- -- -- (7,259) -- -- -- (7,259)
Cash dividends ($0.15 per share) -- -- (614) -- -- -- -- (614)
Prorata vesting of restricted stock -- -- -- -- 372 -- -- 372
ESOP shares committed for release -- 122 -- -- -- 148 -- 270
----- -------- -------- -------- -------- -------- ---- ---------
Balance, September 30, 1998 $ 44 $ 87,076 $ 53,734 $ (7,259) $ (7,071) $ (6,294) $ 20 $ 120,250
===== ======== ======== ======== ======== ======== ==== =========
See accompanying notes to consolidated financial statements.
3
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
Three Months Ended
September 30,
-------------------
1998 1997
-------- --------
Cash Flows from Operating Activities:
Net income $ 1,686 $ 2,035
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Provision for loan losses 200 90
Deferred income tax benefit -- (44)
Recognition of deferred income (113) (32)
Amortization of loan servicing assets 22 15
Amortization of premiums on investment and
mortgage-backed securities 2 --
Depreciation 175 138
ESOP shares committed for release at fair value 270 266
Prorata vesting of restricted stock 372 --
(Increase) decrease in other assets (578) 554
Additions to loans held-for-sale (17,054) (2,258)
Proceeds from sale of loans held-for-sale 13,324 1,995
Gain on sale of loans held-for-sale (293) --
Increase in other liabilities 1,296 1,722
-------- ----------
Net cash (used in) provided by operating
activities (691) 4,481
-------- ----------
Cash Flows from Investing Activities:
Net loan originations and principal collections 654 (11,325)
Purchase of loans (7,032) (5,101)
Purchase of investment securities available-for-
sale (317) (8,070)
Proceeds from maturities of investment securities
available-for-sale -- 2,000
Principal repayments and proceeds from maturities
of mortgage-backed securities 11 5
Purchase of property and equipment (1,232) (415)
-------- ----------
Net cash used in investing activities (7,916) (22,906)
-------- ----------
Cash Flows from Financing Activities:
Net increase in deposits 7,172 12,293
Dividends paid (614) --
Advances from Federal Home Loan Bank of Atlanta 10,000 --
Purchase of treasury stock (7,259) --
Stock subscription refunds -- (197,851)
Stock issuance costs -- (1,584)
Net cash provided by (used in) -------- ----------
financing activities $ 9,299 $ (187,142)
-------- ----------
4
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
Three Months Ended
September 30,
1998 1997
--------- -----------
Net Increase (Decrease) In Cash and Cash
Equivalents $ 692 $ (205,567)
Cash and Cash Equivalents at Beginning of Period 48,968 277,072
--------- ----------
Cash and Cash Equivalents at End of Period $ 49,660 $ 71,505
========= ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,718 $ 4,444
========= ==========
Income taxes $ 820 $ 75
Change in unrealized gain on investment ========= ==========
securities available-for-sale $ 56 $ 31
Change in deferred taxes related to ========= ==========
unrealized gain on investment
securities available-for-sale $ (22) $ (12)
========= ==========
Issuance of common stock to MRDP $ 7,443 $ --
Sale of common stock funded by subscription ========= ==========
escrow accounts $ -- $ 61,478
Sale of common stock funded by deposit ========= ==========
account $ -- $ 20,042
========= ==========
Sale of common stock to ESOP $ -- $ 7,089
========= ==========
See accompanying notes to consolidated financial statements.
5
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FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
FirstSpartan Financial Corp. ("FirstSpartan" or the "Company"), a Delaware
corporation, was incorporated on February 4, 1997 for the purpose of becoming
the holding company for First Federal Bank ("First Federal" or the "Bank")
upon the Bank'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 Company. Information
set forth in this report relating to periods prior to the Conversion,
including consolidated financial statements and related data, relates to First
Federal and its subsidiary.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for
a fair statement of results for the interim periods.
The results of operations for the three months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
June 30, 1999. The consolidated financial statements and notes thereto should
be read in conjunction with the audited financial statements and notes thereto
for the year ended June 30, 1998.
2. Earnings Per Share
Earnings per share ("EPS") has been computed for the three months ended
September 30, 1998 and 1997 based upon weighted average common shares
outstanding of 4,040,738 and 4,078,380, respectively. For the purposes of
computing weighted average shares outstanding for the three months ended
September 30, 1997, shares issued in the Conversion on July 8, 1997 were
assumed to have been outstanding since July 1, 1997. The Company had no
dilutive securities outstanding during the three months ended September 30,
1998 and 1997; therefore, diluted EPS is the same as basic EPS for both
periods.
3. Share Repurchases
During the quarter ended September 30, 1998 the Company purchased 221,519 of
its common stock at an average price of $32.77 per share.
6
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On October 8, 1998, the Company announced its intention to repurchase up to an
additional 10%, or 420,886 shares, of its common stock. As of November 9,
1998, 302,000 of the additional 420,886 shares had been purchased at an
average price of $31.22 per share.
4. Comprehensive Income
Effective July 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." In accordance with the provisions of SFAS No. 130, comparative
financial statements presented for earlier periods have been reclassified to
reflect the provisions of this Statement. Comprehensive income is the change
in the Company's equity during the period from transactions and other events
and circumstances. Comprehensive income is divided into net income and other
comprehensive income. The Company's "other comprehensive income" for the
three months ended September 30, 1998 and 1997 and "accumulated other
comprehensive income" as of September 30, 1998 and 1997 are comprised solely
of unrealized gains and losses on investment securities available-for-sale.
Comprehensive income for the three months ended September 30, 1998 and 1997 is
as follows (in thousands):
Three Months Ended
September 30,
--------------------
1998 1997
---- ----
Net income $ 1,686 $ 2,035
Other comprehensive income - Unrealized
gains on investment securities available-
for-sale arising during the period, net
of income taxes 34 19
------- -------
Total comprehensive income $ 1,720 $ 2,054
======= =======
5. Stock Compensation Plans
Restricted Stock - On July 8, 1998, 177,215 shares of restricted stock were
awarded to participants in the FirstSpartan Financial Corp. Management
Recognition and Development Plan which was approved at the Company's Annual
Meeting of Stockholders on January 21, 1998. The stock awards vest over a
five-year period. The stock was issued from the 177,215 shares held as
treasury stock on the date of the grant. The Company recorded the stock award
at the market value on the date of grant ($42.00 per share) as unearned
compensation in stockholders' equity and will amortize it over the vesting
period.
Stock Option Plan - On July 8, 1998, the Company granted options to purchase
363,291 shares of Company stock at $42.00 per share to 17 officers and
directors of the Company and the Bank under the 1997 FirstSpartan Financial
Corp. Stock Option Plan which was approved at the Company's Annual Meeting of
Stockholders on January 21, 1998.
7
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On October 21, 1998, the Compensation Committee of the Board of Directors
determined that because of the decline in market value of the Company's stock
such a short time after the granting of the stock options, the desired
incentive effect for employee performance was diminished. Accordingly, the
Committee recommended, and the Board of Directors approved, the repricing of
all options granted on July 9, 1998. On October 28, 1998, the Committee
repriced the options at the fair market value of the stock that day which was
$33.75 per share. Since the repricing was at market value, no compensation
was recorded as a result of the repricing.
Additionally, on October 28, 1998, an additional 50,000 options were awarded
at $33.75 per share to 22 employees and officers of the Bank in order to
provide incentives on a broader scale. None of these employees and officers
were included in the original grant of 363,291 options.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at September 30, 1998 and June 30, 1998
Total assets were $530.4 million at September 30, 1998 and $517.4 million at
June 30, 1998, an increase of $13.0 million or 3%. This increase resulted
primarily from a $10.3 million, or 2%, increase in loans receivable, net
(including loans held-for-sale) and an increase of $1.1 million, or 13%, in
office properties and equipment, net. Loans receivable, net, increased
primarily as a result of an increase of $6.5 million in mortgage loans since
June 30, 1998. Included in the $6.5 million increase were increases of $3.5
million in construction loans, $2.2 million in commercial mortgage loans and
$1.8 million in land development loans, which more than offset a decrease of
$1.0 million in one- to four-family mortgage loans. One factor contributing
to the decrease in one- to four- family mortgage loans was the sale of $15.3
million of loans in the secondary market. Offsetting loan sales was the
purchase of $6.3 million of one- to four-family mortgage loans from the
mortgage banking company in which the Bank's service corporation has an equity
investment. Loans receivable, net, also increased due to a $2.0 million
increase in home equity loans and a $1.5 million increase in non-mortgage
commercial loans. The increase in loans was attributable to market demand and
emphasis on loan production in the branch network. The increase in loans
receivable, net, was funded primarily through an increase in deposits and FHLB
advances.
Deposit accounts increased $7.2 million to $377.0 million at September 30,
1998 from $369.8 million at June 30, 1998. The increase in deposits was the
result of interest credited to deposit accounts during the period and the
effect of two recently opened branch offices. Advances from the FHLB of
Atlanta increased $10.0 million to $27.0 million at September 30, 1998 from
$17.0 million at June 30, 1998.
Stockholders' equity decreased by $5.5 million to $120.3 million at September
30, 1998 from $125.8 million at June 30, 1998. Items that decreased
stockholders' equity were the purchase of $7.3 million of treasury stock,
payment of dividends of $600,000, and allocation of shares in the amount of
$642,000 under the Bank's Employee Stock Ownership Plan ("ESOP") and
Management Recognition and Development Plan ("MRDP"). Net income for the
quarter was $1.7 million which slightly offset these charges to stockholders'
equity.
8
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Nonperforming assets decreased by $100,000, or 7%, to $1.3 million at
September 30, 1998 from $1.4 million at June 30, 1998. The decrease was due
primarily to a $200,000 decrease in nonaccrual construction loans more than
offsetting a $100,000 increase in construction loans contractually past due 90
days or more and still accruing interest.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and September 30, 1997
Net Income. Net income decreased $300,000 to $1.7 million for the three
months ended September 30, 1998 from $2.0 million for the three months ended
September 30, 1997. The $300,000 decrease in net income resulted from changes
in several components of income and expense in the comparable quarters. Net
interest income decreased by $100,000 principally from the absence in the
quarter ended September 30, 1998 of net interest earnings on excess stock
subscription funds held and refunded in connection with the Bank's conversion
from the mutual to stock form of ownership in the quarter ended September 30,
1997. The provision for loan losses increased by $110,000 primarily as the
result of growth in consumer and commercial loans which are believed by
management to present higher risk of credit loss relative to one- to
four-family mortgage loans. Also, noninterest expense increased by $800,000
in the quarter ended September 30, 1998 compared to the quarter ended
September 30, 1997 due primarily to compensation expense associated with the
adoption of the Company's Management Recognition and Development Plan ("MRDP")
and costs associated with additional personnel at new branches. Offsetting
the above items that decreased net income in the quarter ended September 30,
1998 was an increase in noninterest income of $455,000 primarily related to
mortgage loan sales and a decrease in the provision for income taxes due to
lower income before income taxes. Earnings per share for the quarter ended
September 30, 1998 was $0.42 compared to $0.50 for the quarter ended September
30, 1997. Earnings per share for the quarter ended June 30, 1998 was $0.47.
Net Interest Income. Net interest income decreased $100,000 to $5.0 million
for the three months ended September 30, 1998 from $5.1 million for the three
months ended September 30, 1997. The principal reason for the decrease was
net interest earnings of approximately $300,000 on excess stock subscription
funds held and refunded in connection with the Bank's conversion from the
mutual to stock form of ownership in the quarter ended September 30, 1997,
which were absent in the quarter ended September 30, 1998.
Investment income increased $200,000 from $9.6 million for the quarter ended
September 30, 1998 from $9.4 million for the quarter ended September 30, 1997
as a result of the increase in the average balances of interest-earning assets
to $502.9 million from $478.9 million (including the previously mentioned
stock subscription funds) more than offsetting the decrease in average yield
to 7.60% from 7.80%.
Interest expense increased $300,000 to $4.6 million for the three months ended
September 30, 1998 from $4.3 million for the three months ended September 30,
1997. The increase was due primarily to interest expense on advances from the
FHLB during the quarter ended September 30, 1998 that was absent in the
quarter ended September 30, 1997. Excluding the FHLB advances, the average
balances of interest-bearing liabilities were $372.0 million and $369.9
million (including the previously mentioned
9
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stock subscription funds) and the average costs were 4.60% and 4.61% for the
quarters ended September 30, 1998 and 1997, respectively. The average balance
increased as the result of the opening of three new branch offices and various
deposit promotions that have increased deposit balances since the prior year's
comparable quarter.
Interest rate spread decreased to 2.96% for the three months ended September
30, 1998 from 3.19% for the three months ended September 30, 1997 due
primarily to a decrease in average yield on loans to 7.88% from 8.14%
resulting from lower market interest rates during the three months ended
September 30, 1998.
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, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Management also
considers the level of problem assets that the Company classifies in
accordance with Office of Thrift Supervision ("OTS") regulations. The Company
gives 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) because
classified assets include not only nonperforming assets but also performing
assets that otherwise exhibit, in management's judgment, potential credit
weaknesses.
The provision for loan losses was $200,000 for the three months ended
September 30, 1998 compared to $90,000 for the three months ended September
30, 1997. The provision for loan losses has increased over the past several
quarters primarily as the result of the increase in the amount of consumer and
commercial loans in the Company's loan portfolio. Management believes that
such loans present a higher risk of credit loss relative to one- to four-
family mortgage loans and accordingly, a higher allowance for loan losses is
warranted. 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 at September 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 or more
past due. In certain cases, extensions are granted on construction loans that
are past due 90 days or more. 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.
Noninterest Income. Noninterest income increased by $455,000 to $904,000 for
the three months ended September 30, 1998 from $449,000 for the three months
ended September 30, 1997, primarily
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as a result of a gain on sale of mortgage loans of $293,000 in the three
months ended September 30, 1998 that did not occur in the three months ended
September 30, 1997. The Bank periodically sells loans in response to interest
rate changes, liquidity needs and other factors. Management cannot predict
whether there will be any such gains in the future.
Service charges and fees increased to $470,000 for the three months ended
September 30, 1998 from $329,000 for the three months ended September 30, 1997
primarily as a result of increased deposit account fees, particularly on the
increased number of NOW accounts.
Noninterest Expense. Noninterest expense was $3.0 million for the three
months ended September 30, 1998 compared to $2.2 million for the same period
in 1997. The increase consisted principally of increased employee
compensation and benefits which increased to $1.8 million for the three months
ended September 30, 1998 from $1.2 million for the three months ended
September 30, 1997. Additionally, the adoption of the MRDP and costs
associated with additional personnel at new branches opened since the quarter
ended September 30, 1997 contributed to the increase. The increases in other
categories of other operating expenses generally are attributable to the
growth of the Company and to inflation. The Company anticipates that other
operating expenses will continue to increase in subsequent periods until the
new branches that were opened in 1998 and the announced, but not yet opened,
branch become fully operational.
Income Taxes. The provision for income taxes was $1.1 million for the three
months ended September 30, 1998 compared to $1.2 million for the three months
ended September 30, 1997 as a result of lower income before income taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments from and the sale of loans, maturing
securities and FHLB of Atlanta 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. OTS regulations 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 September 30, 1998, cash and cash equivalents
totaled $49.7 million, or 9% of total assets, and investment securities
classified as available-for-sale with maturities of one year or less totaled
$23.0 million. At September 30, 1998, the Bank also maintained an uncommitted
credit facility with the FHLB of Atlanta, which provides for immediately
available advances up to an aggregate amount of $75.0 million of which $27.0
million had been advanced.
As of September 30, 1998, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At September 30, 1998, under regulations
of the OTS, the Bank's actual tangible, core and risk-based capital ratios
were 16.9%, 16.9% and 27.4%, respectively, compared to requirements of 1.5%,
3.0% and 8.0%, respectively.
11
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<PAGE>
At September 30, 1998, the Company had loan commitments (excluding undisbursed
portions of interim construction loans) of approximately $4.7 million ($3.9
million at fixed rates ranging from 6.0% to 9%). In addition, at September
30, 1998, the unused portion of lines of credit (principally variable rate
home equity lines of credit) extended by the Company was approximately $48.6
million. Furthermore, at September 30, 1998, the Company had certificates of
deposit scheduled to mature in one year or less of $196.7 million. Based on
historical experience, the Company anticipates that a majority of such
certificates of deposit will be renewed at maturity.
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 has also provided 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 has completed all program maintenance associated with its Year
2000 plan and expects a full year of testing prior to January 1, 2000. The
Bank has established its Year 2000 test facility and began testing in November
1998. 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
12
<PAGE>
<PAGE>
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 1998, there have been no material changes in the
quantitative and qualitative disclosures about market risks presented in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
13
<PAGE>
<PAGE>
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
-----------------
Not applicable
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On October 21, 1998, the Company held an annual meeting of
shareholders for the following purposes:
1. To elect two directors to serve for a term of three years;
2. To ratify the appointment of Deloitte & Touche LLP as
independent auditors for the fiscal year ending June 30, 1999;
and
3. To act upon such other matters as may properly come before the
meeting or any adjournment's thereof.
The results of the voting are set forth below:
1. Election of Directors:
Name For Withheld
---- --- --------
E. L. Sanders 3,878,343 42,696
David E. Tate 3,880,169 40,870
Directors continuing in office (and date of expiration of term)
are: Billy L. Painter (1999), Robert L. Handell (1999), Robert
R. Odom (1999), E. Lea Salter (2000) and R. Wesley Hammond
(2000).
2. Ratification of Deloitte & Touche LLP as independent auditors
for the fiscal year ending June 30, 1999:
For Against Abstain
--- ------- -------
3,903,804 15,959 1,276
14
<PAGE>
<PAGE>
3. Other matters:
No other matters came before the meeting.
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits 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****
(21) Subsidiaries of the Registrant**
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
- -----------------------
* 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, 1998 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.
15
<PAGE>
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FirstSpartan Financial Corp.
Date: November 9, 1998 By: /s/ Billy L. Painter
-------------------------------------
Billy L. Painter
President and Chief Executive Officer
Date: November 9, 1998 By: /s/R. Lamar Simpson
-------------------------------------
R. Lamar Simpson
Treasurer, Secretary and Chief
Financial Officer
16
<PAGE>
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