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 March 31, 1998
{ } Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from to
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Commission File Number: 0-22445
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FIRSTSPARTAN FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 56-2015272
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
380 East Main Street, Spartanburg, South Carolina 29302
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(Address of principal executive office)
(864) 582-2391
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock Issued and Outstanding: 4,340,875 as of April 27, 1998.
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FIRSTSPARTAN FINANCIAL CORP.
Table of Contents
Page
Part I. Financial Information ----
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Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 1998
and June 30, 1997 1
Consolidated Statements of Income for the Three and
Nine-Month Periods Ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows for the Three
and Nine-Month Periods Ended March 31, 1998 and 1997 3-4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 13
Part II. Other Information 14-16
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Signatures 17
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ITEM 1. FINANCIAL STATEMENTS
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FIRSTSPARTAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Share Data)
(Unaudited)
March 31, June 30,
ASSETS 1998 1997
--------- --------
Cash $ 9,683 $ 6,688
Federal funds sold and overnight
interest-bearing deposits 47,465 270,384
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Total cash and cash equivalents 57,148 277,072
Investment securities available-for-
sale - at fair value (amortized cost:
$18,972 and $10,172 at March 31, 1998
and June 30, 1997, respectively) 19,019 10,201
Mortgage-backed securities held-to-maturity -
at amortized cost (fair value: $98 and $125
at March 31, 1998 and June 30, 1997, respectively) 97 121
Loans receivable, net 409,053 362,728
Loans held-for-sale - at lower of cost or market
(market value: $3,291 and $1,617 at March 31,
1998 and June 30, 1997, respectively) 3,269 1,617
Office properties and equipment, net 7,605 6,594
Federal Home Loan Bank of Atlanta Stock - at cost 3,446 3,011
Accrued interest receivable 2,726 2,590
Real estate acquired in settlement of loans 36 36
Other assets 925 1,476
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TOTAL ASSETS $ 503,324 $ 665,446
========== ===========
LIABILITIES AND EQUITY
LIABILITIES:
Deposit accounts $ 363,006 $ 353,193
Stock subscription escrow accounts 259,329
Advances from borrowers for taxes and insurance 717 1,001
Advances from Federal Home Loan Bank of Atlanta 2,000
Other liabilities 5,267 4,945
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Total liabilities 370,990 618,468
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EQUITY:
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued at
March 31, 1998
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued and
outstanding March 31, 1998 - 4,430,375 shares 44
Additional paid in capital 87,440
Unallocated ESOP shares (6,590)
Retained earnings 51,411 46,960
Unrealized gain on securities available-for-
sale, net of taxes 29 18
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Total equity 132,334 46,978
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TOTAL LIABILITIES AND EQUITY $ 503,324 $ 665,446
=========== ===========
See accompanying notes to consolidated financial statements.
1
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FIRSTSPARTAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
INVESTMENT INCOME:
Interest on loans $ 8,210 $ 6,899 $ 23,758 $ 20,204
Interest and dividends on
investment securities,
mortgage-backed securities
and other 1,066 393 4,144 1,245
------- ------- -------- --------
Total investment income 9,276 7,292 27,902 21,449
INTEREST EXPENSE:
Deposit accounts 4,184 3,938 12,775 11,506
Federal Home Loan Bank of
Atlanta advances 1 1
------- ------- -------- --------
Total interest expense 4,185 3,938 12,776 11,506
------- ------- -------- --------
NET INTEREST INCOME 5,091 3,354 15,126 9,943
PROVISION FOR LOAN LOSSES 130 75 310 750
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,961 3,279 14,816 9,193
------- ------- -------- --------
NONINTEREST INCOME (LOSS):
Service charges and fees 375 268 1,068 812
Gain on sale of mortgage loans 102 102 37
Loss on sale of investments (16)
Other, net 174 80 417 165
------- ------- -------- --------
Total noninterest income, net 651 348 1,587 998
------- ------- -------- --------
NONINTEREST EXPENSE:
Employee compensation and
benefits 1,196 953 3,677 2,686
Federal deposit insurance premium 114 72 270 2,203
Occupancy and equipment expense 295 258 805 755
Computer services 165 130 486 380
Advertising and promotions 161 110 421 345
Office supplies, postage, printing,
etc. 197 144 481 390
Other 402 289 1,012 789
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Total noninterest expense 2,530 1,956 7,152 7,548
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INCOME BEFORE INCOME TAXES 3,082 1,671 9,251 2,643
PROVISION FOR INCOME TAXES 1,205 625 3,580 990
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NET INCOME $ 1,877 $ 1,046 $ 5,671 $ 1,653
======= ======= ======== ========
Earnings per share $ 0.46 $ N/A $ 1.39 $ N/A
======= ======= ======== ========
Weighted average shares
outstanding (1) 4,098 N/A 4,088 N/A
======= ======= ======== ========
(1) FirstSpartan's initial public offering closed on July 8, 1997. For
purposes of earnings per share calculations, 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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
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1998 1997 1998 1997
---- ---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 1,877 $ 1,046 $ 5,671 $ 1,653
Adjustments to reconcile net
income to net cash (used in)
provided by operating activities:
Provision for loan losses 130 75 310 750
Deferred income tax benefit (303) (5) (359) (330)
Amortization of deferred income (114) (38) (147) (121)
Accretion of discounts on
investment and mortgage-backed
securities (5) (16)
Depreciation 156 111 435 411
Allocation of ESOP shares at
fair value 307 958
(Increase) decrease in other
assets (59) (194) 415 (500)
Additions to loans held-for-
sale (7,549) (1,318) (11,362) (7,349)
Proceeds from sale of loans
held-for-sale 5,674 1,885 9,812 8,420
Gain on sale of loans held-
for-sale (102) (102) (37)
Loss on disposal of property
and equipment 16
Loss on sale of investments
available-for-sale 16
(Decrease) increase in other
liabilities (216) (2,426) 390 (2,385)
Net cash (used in) provided ------- -------- ------- --------
by operating activities (199) (869) 6,021 528
------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net loan originations and
principal collections (6,703) (11,595) (30,381) (25,803)
Purchase of loans (5,999) (2,811) (16,107) (6,015)
Purchase of investment securities (7,628) (77) (17,802) (1,303)
Proceeds from sale of investment
securities available-for-sale 5,000
Proceeds from maturities of
investment securities
available-for-sale 6,002 9,002 1,000
Principal repayments and proceeds
from maturities of mortgage-
backed securities 8 24 68
Proceeds from sale of real estate
acquired in settlement of loans 58
Purchase of Federal Home Loan Bank
of Atlanta stock (435) (205) (435) (205)
Purchase of property and equipment (363) (697) (1,446) (1,382)
Proceeds from sale of property and
equipment 190 190
Net cash used in investing -------- ------- -------- --------
activities (15,118) (15,195) (57,145) (28,392)
-------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase in deposits 4,949 14,223 29,855 32,343
Stock subscription refunds (197,851)
Stock issuance costs (1,584)
Advances from Federal Home
Loan Bank of Atlanta 2,000 2,000
Dividends paid (608) (1,220)
Net cash provided by (used in) -------- ------- --------- --------
financing activities $ 6,341 $14,223 $(168,800) $ 32,343
-------- ------- --------- --------
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FIRSTSPARTAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
NET DECREASE IN CASH AND
CASH EQUIVALENTS $ (8,976) $ (1,841) (219,924) 4,479
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 66,124 17,104 277,072 10,784
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 57,148 $ 15,263 $ 57,148 $ 15,263
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,417 $ 4,320 $ 13,021 $ 11,599
======== ======== ======== ========
Income taxes $ 1,516 $ 651 $ 3,876 $ 1,120
======== ======== ======== ========
Transfers from loans to real
estate acquired in settlement
of loans $ $ 4 $ $ 106
======== ======== ======== ========
Increase in unrealized gain
(loss) on available-for-sale
investments and marketable
equity securities $ (1) $ 54 $ 18 $ (64)
======== ======== ======== ========
Increase (decrease) in deferred
tax asset related to unrealized
gain on investments $ 1 $ 21 $ (7) $ (25)
======== ======== ======== ========
Sale of common stock funded by
subscription escrow accounts $ $ $ 61,478 $
======== ======== ======== ========
Sale of common stock funded by
deposit accounts $ $ $ 20,042 $
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
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FIRSTSPARTAN FINANCIAL CORP.
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 and/or nine months ended March 31,
1998 are not necessarily indicative of the results to be expected for the year
ending June 30, 1998. The consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
thereto for the year ended June 30, 1997.
2. Earnings Per Share
Earnings per share has been computed for the three and nine months ended March
31, 1998 based upon weighted average common shares outstanding of 4,098,436
and 4,088,141, respectively. For the purposes of computing weighted average
shares outstanding for the nine months ended March 31, 1998, shares issued in
the Conversion on July 8, 1997 were assumed to have been outstanding since
July 1, 1997. Earnings per share for the three and nine months ended March
31, 1997 is not presented as there was no common stock issued or outstanding.
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
established new standards for computing and presenting earnings per share.
The standard is effective for annual and interim periods ending after December
15, 1997. This standard had no impact on the computation of the Company's
earnings per share upon adoption.
5
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3. Share Repurchases
On March 30, 1998, the Company announced its intention to repurchase up to 4%,
or 177,215 shares, of its common stock. No shares had been purchased as of
March 31, 1998. As of April 27, 1998, 89,500 shares had been purchased at an
average price of $45.94 per share.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at March 31, 1998 and June 30, 1997
Total assets were $503.3 million at March 31, 1998 and $665.4 million at June
30, 1997, a decrease of $162.1 million or 24%. This decrease resulted
primarily from a $222.9 million decrease in federal funds sold and overnight
interest-bearing deposits offset by an increase of $46.3 million, or 13%, in
loans receivable, net, and an increase of $8.8 million, or 86%, in investment
securities available-for-sale. The primary reason for the decrease in
interest-bearing deposits was the refund of subscription escrow accounts of
$197.9 million related to the Conversion. Loans receivable, net, increased
primarily as a result of an increase of $34.0 million in mortgage loans since
June 30, 1997. Included in the $34.0 million increase was a $26.2 million
increase in one- to- four family mortgage loans (including the purchase of
$16.1 million of one- to- four family mortgage loans from the mortgage banking
company in which the Bank's service corporation has an equity investment), a
$7.3 million increase in multifamily and commercial and other mortgage loans
and a $0.5 million increase in land mortgage loans. Loans receivable, net,
also increased due to a $6.9 million increase in non-mortgage commercial
business loans and a $4.8 million increase in home equity loans. The increase
in loans was attributable to market demand, emphasis on loan production in the
branch network and having the commercial loan department become fully
operational during the nine months ended March 31, 1998. The increase in
loans receivable, net, was funded primarily through an increase in deposits
before withdrawals to purchase common stock issued in the Conversion and the
use of cash equivalents.
Deposit accounts increased $9.8 million to $363.0 million at March 31, 1998
from $353.2 million at June 30, 1997. This increase is after approximately
$20.0 million of withdrawals by depositors subsequent to June 30, 1997 to
purchase stock issued in the Conversion. Excluding the effect of stock
purchase withdrawals, there was an increase in deposit accounts of $29.8
million. The increase in deposits was the result of interest credited to
deposit accounts during the period, the effect of three recently opened branch
offices, a special checking account promotion, and the deposit of funds by
account holders who purchased stock in the Conversion but sold their stock
after issuance. Stock subscription escrow accounts decreased by $259.3
million from June 30, 1997 to March 31, 1998 as a result of $61.4 million of
stock issued in the Conversion funded by the escrow accounts and refunds to
subscribers of $197.9 million. Advances from the FHLB of Atlanta increased to
$2.0 million at March 31, 1998. There were no outstanding advances at June
30, 1997.
6
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Stockholders' equity increased by $85.3 million from June 30, 1997 to March
31, 1998 as a result of net proceeds received in the Conversion of $79.9
million, net income of $5.7 million and allocation of shares under the Bank's
Employee Stock Ownership Plan ("ESOP") with a market value of $0.9 million,
offset by payment of dividends of $1.2 million.
Nonperforming assets decreased by $1.0 million, or 48%, to $1.1 million at
March 31, 1998 from $2.1 million at June 30, 1997. The decrease was due
primarily to a $1.3 million decrease in construction loans contractually past
due more than 90 days and still accruing more than offsetting a $0.5 million
increase in construction loans accounted for on a nonaccrual basis.
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
March 31, 1997
Net Income. Net income increased to $1.9 million for the three months ended
March 31, 1998 from $1.0 for the three months ended March 31, 1997 primarily
as a result of increased investment income offset partially by 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
from the Conversion available for investment and an increase in average loans
outstanding during the three-month period ended March 31, 1998.
Net Interest Income. Net interest income increased 50% to $5.1 million for
the three months ended March 31, 1998 from $3.4 million for the three months
ended March 31, 1997. Investment income increased 27% to $9.3 million for the
three months ended March 31, 1998 from $7.3 million for the three months ended
March 31, 1997 as a result of an increase in the average balance of interest-
earning assets to $479.0 million from $364.9 million more than offsetting a
decrease in average yield on interest-earning assets to 7.85% from 8.11% for
the respective three-month periods. The decrease in the average yield on
interest-earning assets was due principally to proceeds of the Conversion
being invested primarily in lower yielding overnight interest-bearing deposits
during the quarter ended March 31, 1998. The average balance of interest-
earning assets increased as a result of the net proceeds retained from the
Conversion and an increase in the average balance of loans receivable.
Interest expense increased 8% to $4.2 million for the three months ended March
31, 1998 from $3.9 million for the three months ended March 31, 1997
principally as a result of an increase in the average balance of deposits to
$359.1 million from $328.4 million more than offsetting a decrease in the cost
of deposits to 4.73% from 4.86% for the respective three-month periods. 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 3.12% for the three months ended March 31,
1998 from 3.25% for the three months ended March 31, 1997.
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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 according to
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 $130,000 for the three months ended March
31, 1998 compared to $75,000 for the three months ended March 31, 1997.
Classified assets were $4.1 million at March 31, 1998 compared to $3.3 million
at December 31, 1997 and management expects classified assets to continue to
increase moderately, although no assurances can be given that this will in
fact occur. Management's expectation is based upon its anticipation of
continued loan growth, particularly in the areas of construction, commercial
real estate and consumer lending. Management deemed the allowance for loan
losses adequate at March 31, 1998.
Noninterest Income. Noninterest income increased to $651,000 for the three
months ended March 31, 1998 from $348,000 for the three months ended March 31,
1997, primarily as a result of the gain on sale of mortgage loans of $102,000
in the three months ended March 31, 1998. There was no gain on sale of
mortgage loans during the three months ended March 31, 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 $375,000 for the three months ended
March 31, 1998 from $268,000 for the three months ended March 31, 1997
primarily as a result of loan origination fee income recognized on loans sold
of $36,000 and increased deposit account fees, particularly on the increased
number of NOW accounts. Other income, net increased to $174,000 for the three
months ended March 31, 1998 from $80,000 for the three months ended March 31,
1997. The increase was partially attributable to income of $46,000 in the
current three-month period versus a $15,000 loss for the same period 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.
8
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Noninterest Expense. Noninterest expense was $2.5 million for the three
months ended March 31, 1998 compared to $2.0 million for the same period in
1997. Employee compensation and benefits, increased to $1.2 million for the
three months ended March 31, 1998 from $953,000 for the three months ended
March 31, 1997 primarily as a result of the hiring of additional personnel for
two new branch offices which became fully operational during the quarter ended
September 30, 1997 and an additional branch which became fully operational
during the quarter ended March 31, 1998, the establishment of a commercial
lending department, normal annual salary increases and implementation of the
Bank's 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 increased costs associated with operating as
a public company. The three recently opened branch offices referred to above
also will continue to contribute to increased operating expenses in future
periods as will three recently announced branch offices that are expected to
open in calendar year 1998.
Income Taxes. The provision for income taxes was $1.2 million for the three
months ended March 31, 1998 compared to $625,000 for the three months ended
March 31, 1997 as a result of higher income before income taxes.
Comparison of Operating Results for the Nine Months Ended March 31, 1998 and
March 31, 1997
Net Income. Net income increased to $5.7 million for the nine months ended
March 31, 1998 from $1.7 million for the nine months ended March 31, 1997
primarily as a result of increased investment income, increased noninterest
income and decreased noninterest expense partially offset by 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 nine months ended March 31, 1998. The decrease in
noninterest expense is principally the result of decreased federal deposit
insurance premiums which were impacted in the nine months ended March 31, 1997
by the legislatively-mandated, one-time assessment levied by the Federal
Deposit Insurance Corporation ("FDIC") on all institutions insured by the
Savings Association Insurance Fund ("SAIF") to recapitalize the SAIF.
Net Interest Income. Net interest income increased 53% to $15.1 million for
the nine months ended March 31, 1998 from $9.9 million for the nine months
ended March 31, 1997. Investment income increased 30% to $27.9 million for
the nine months ended March 31, 1998 from $21.4 million for the nine months
ended March 31, 1997 as a result of an increase in the average balance of
interest-earning assets to $477.5 million from $356.5 million more than
offsetting a decrease in average yield on interest-earning assets to 7.78%
from 8.01% for the respective nine-month 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 proceeds of
the Conversion being invested principally in lower yielding overnight
interest-bearing deposits during the nine months ended March 31, 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.
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Interest expense increased 11% to $12.8 million for the nine months ended
March 31, 1998 from $11.5 million for the nine months ended March 31, 1997 as
a result of an increase in the average balance of deposits to $360.7 million
from $318.5 million in the comparable nine-month period. The increase in the
average balance of deposits more than offset a decrease in the average cost of
deposits to 4.72% for the nine months ended March 31, 1998 from 4.81% for the
nine months ended March 31, 1997. The average balance of deposits during the
nine months ended March 31, 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 nine-month period ended
March 31, 1998. The average balance also 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 and was
offset by the withdrawal of approximately $20.0 million of deposits to fund
stock purchases in the Conversion as discussed under "Comparison of Financial
Condition at March 31, 1998 and June 30, 1997." The decrease in the average
cost of deposits resulted from the passbook 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 passbook accounts as
a result of promotions of NOW and passbook accounts. Interest rate spread
decreased to 3.06% for the nine months ended March 31, 1998 from 3.20% for the
nine months ended March 31, 1997.
Provision for Loan Losses. The provision for loan losses was $310,000 for the
nine months ended March 31, 1998 compared to $750,000 for the nine months
ended March 31, 1997. See "Comparison of Operating Results for the Three
Months Ended March 31, 1998 and March 31, 1997 - Provision for Loan Losses"
for a discussion of management's process for determining the provision for
loan losses.
Noninterest Income. Noninterest income increased to $1.6 million for the
nine months ended March 31, 1998 from $1.0 million for the nine months ended
March 31, 1997, primarily as a result of an increase in service charges and
fees. Service charges and fees increased to $1.1 million for the nine months
ended March 31, 1998 from $812,000 for the nine months ended March 31, 1997
primarily as a result of increased income associated with the origination and
sale of FHA and VA mortgage loans and increased deposit account fees,
particularly on the increased number of NOW accounts. Other income, net
increased to $417,000 for the nine months ended March 31, 1998 from $165,000
for the nine months ended March 31, 1997, partially attributable to income of
$67,000 in the current nine-month period versus a $113,000 loss for the same
period in 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 $102,000 during the nine months ended March 31, 1998 from $37,000 for the
nine months ended March 31, 1997.
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Noninterest Expense. Noninterest expense was $7.2 million for the nine
months ended March 31, 1998 compared to $7.5 million for the same period in
1997. This decrease resulted primarily from the FDIC special assessment in
the nine months ended March 31, 1997 on all SAIF-insured institutions to
recapitalize the SAIF. The Association'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 $3.7 million for the nine months ended March 31, 1998
from $2.7 million for the nine months ended March 31, 1997 primarily as a
result of the hiring of additional personnel for three new branch offices that
became fully operational during the nine months ended March 31, 1998, the
establishment of a commercial lending department, normal annual salary
increases and implementation of the Bank's 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
increased costs associated with operating as a public company. The three new
branch offices also will continue to contribute to increased operating
expenses in future periods as will the three recently announced branch offices
that are expected to open during calendar year 1998.
Income Taxes. The provision for income taxes was $3.6 million for the nine
months ended March 31, 1998 compared to $1.0 million for the nine months ended
March 31, 1997 as a result of higher 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. Regulations of the Office of Thrift
Supervision ("OTS"), the Bank's primary regulator, 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 March 31, 1998, cash and cash equivalents
totaled $57.1 million, or 11% of total assets, and investment securities
classified as available-for-sale with maturities of one year or less totaled
$13.9 million. At March 31, 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 $40.0 million of which $2.0
million had been advanced. At April 24, 1998, $12.0 million had been advanced
under the credit facility.
11
<PAGE>
<PAGE>
As of March 31, 1998, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At March 31, 1998, under regulations of
the OTS, the Bank's actual tangible, core and risk-based capital ratios were
19.1%, 19.1% and 30.9%, respectively, compared to requirements of 1.5%, 4.0%
and 8.0%, respectively.
At March 31, 1998, the Company had loan commitments (excluding undisbursed
portions of interim construction loans) of approximately $10.5 million ($7.7
million at fixed rates ranging from 6.5% to 10%). In addition, at March 31,
1998, the unsed portion of lines of credit (principally variable rate home
equity lines of credit) extended by the Company was approximately $44.7
million. Furthermore, at March 31, 1998, the Company had certificates of
deposit scheduled to mature in one year or less of $192.2 million. Based on
historical experience, the Company anticipates that a majority of such
certificates of deposit will be renewed at maturity.
12
<PAGE>
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the quantitative and qualitative
disclosures about market risks as of March 31, 1998 than presented in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
13
<PAGE>
<PAGE>
FirstSpartan Financial Corp.
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 January 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 vote upon a proposal to adopt the FirstSpartan Financial Corp.
1997 Stock Option Plan;
3. To vote upon a proposal to adopt the FirstSpartan Financial Corp.
Management Recognition and Development Plan;
4. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ending June 30, 1998;
5. 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. Lea Salter 3,848,263 25,073
R. Wesley Hammond 3,848,328 25,008
Directors continuing in office (and date of expiration of term) are: E.L.
Sanders (1998), David E. Tate (1998), Billy L. Painter (1999), Robert L.
Handell (1999) and Robert R. Odom (1999).
14
<PAGE>
<PAGE>
2. Adoption of the FirstSpartan Financial Corp. Stock Option Plan:
For Against Abstain Non-Vote
--- ------- ------- --------
2,912,998 98,926 10,704 850,708
3. Adoption of the FirstSpartan Financial Corp. Management
Recognition and Development Plan:
For Against Abstain Non-Vote
--- ------- ------- --------
2,890,285 125,898 12,495 844,658
4. Ratification of Deloitte & Touche LLP as independent auditors for
the fiscal year ending June 30, 1998:
For Against Abstain
--- ------- -------
3,864,854 3,985 4,497
5. Other Matters:
No other matters came before the meeting.
Item 5. Other Information
On April 15, 1998, the Company announced that First Federal plans to establish
two new branch offices in Spartanburg County, South Carolina.
First Federal intends to open a branch office in the Wal-Mart Supercenter
under construction on Wade Hampton Boulevard in Greer. This will be First
Federal's second Wal-Mart Supercenter branch, the first being opened in
Greenville, South Carolina in February 1998. This branch will be in addition
to the previously announced branch currently under construction in Greer.
Operations at the branch are expected to begin in October 1998, subject to
regulatory approval.
First Federal also intends to open a branch office on Highway 221 in Chesnee
in late 1998 on property currently owned by First Federal, subject to receipt
of regulatory approval.
15
<PAGE>
<PAGE>
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, 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.
16
<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: April 30, 1998 By: /s/ Billy L. Painter
------------------------------------------
Billy L. Painter
President and Chief Executive Officer
Date: April 30, 1998 By: /s/ R. Lamar Simpson
------------------------------------------
R. Lamar Simpson
Treasurer, Secretary and Chief Financial
Officer
17
<PAGE>
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