UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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, 1999
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 (I.R.S. Employer
incorporation 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
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 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. [ X ]
As of August 31, 1999, there were issued and outstanding 3,787,970
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 August 31, 1999, the aggregate value of the
Common Stock outstanding held by nonaffiliates of the registrant was $64,384,075
(2,968,376 shares at $21.69 per share). For purposes of this calculation,
officers and directors of the registrant and the First Federal Bank Employee
Stock Ownership Plan are excluded.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1999 ("Annual Report") (Parts I and II).
2. Portions of Definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders (Part III).
<PAGE>
PART I
This report contains certain "forward-looking statements"
concerning the future operations of FirstSpartan Financial Corp. Forward-looking
statements are used to describe future plans and strategies, including
expectations of future financial results. Management's ability to predict
results or the effect of future plans or strategies is inherently uncertain.
Factors which could affect actual results include interest rate trends, the
general economic climate in the market area in which FirstSpartan Financial
Corp. operates, as well as nationwide, FirstSpartan Financial Corp.'s ability to
control costs and expenses, competitive products and pricing, loan delinquency
rates, changes in federal and state legislation and regulation, and the impact
of Year 2000 issues. These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such
statements.
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 (the "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, the Association changed its name to First Federal
Bank ("First Federal" or the "Bank"). At June 30, 1999, the Company had total
assets of $545.7 million, total deposits of $406.0 million and total
stockholders' equity of $66.0 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 ten branch offices. Nine
offices are located in Spartanburg County and two are located in Greenville
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 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.
<PAGE>
Spartanburg County and the City of Spartanburg had a 1995
population of approximately 240,000 and 42,000, 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 4.3% for June 1999. 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.
1
<PAGE>
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 has
historically 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, 1999, 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.
Lending Activities
General. At June 30, 1999, the Bank's total loans receivable
portfolio amounted to $473.4 million, or 87% of total assets at that date. The
Bank traditionally has concentrated its lending activities on conventional first
mortgage loans secured by one- to four-family properties, with such loans
amounting to $290.2 million, or 61.3% of the total loans receivable portfolio at
June 30, 1999. 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.
2
<PAGE>
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 (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
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1999 1998 1997
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Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $290,219 61.3% $312,981 70.9% $285,969 75.1%
Construction 72,373 15.3 41,089 9.3 35,061 9.2
Land development 18,864 4.0 16,729 3.8 12,376 3.2
Commercial and other 23,587 5.0 13,817 3.1 3,773 1.0
-------- ----- -------- ----- -------- -----
Total mortgage loans 405,043 85.6 384,616 87.1 337,179 88.5
-------- ----- -------- ----- -------- -----
Consumer and other loans
Home equity 43,623 9.2 40,746 9.2 35,366 9.3
Commercial 13,885 2.9 6,987 1.6 1,984 0.5
Other 10,894 2.3 9,058 2.1 6,301 1.7
-------- ----- -------- ----- -------- -----
Total consumer and
other loans 68,402 14.4 56,791 12.9 43,651 11.5
-------- ----- -------- ----- -------- -----
Total loans receivable 473,445 100.0% 441,407 100.0% 380,830 100.0%
===== ===== =====
Less:
Undisbursed portion of
loans in process 34,807 21,923 15,311
Net deferred loan fees 561 843 995
Allowance for loan losses 2,896 2,179 1,796
-------- -------- --------
Loans receivable, net $435,181 $416,462 $362,728
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $257,398 77.3% $219,522 77.9%
Construction 32,393 9.8 32,145 11.4
Land development 5,683 1.8 1,670 0.6
Commercial and other 3,262 1.0 3,372 1.2
-------- ----- -------- -----
Total mortgage loans 299,276 89.9 256,739 91.1
-------- ----- -------- -----
Consumer and other loans
Home equity 26,584 8.0 19,282 6.8
Commercial 433 0.1 513 0.2
Other 6,510 2.0 5,302 1.9
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Total consumer and
other loans 33,527 10.1 25,097 8.9
-------- ----- -------- -----
Total loans receivable 332,803 100.0% 281,836 100.0%
===== =====
Less:
Undisbursed portion of
loans in process 15,839 12,761
Net deferred loan fees 1,028 1,082
Allowance for loan losses 1,000 600
-------- --------
Loans receivable, net $314,936 $267,393
======== ========
</TABLE>
3
<PAGE>
One- to Four-Family Real Estate Lending. At June 30, 1999, $290.2
million, or 61.3% of the Bank's total loan portfolio, consisted of one- to
four-family mortgage loans. The Bank originated $88.5 million, $95.8 million and
$50.9 million of one- to four-family mortgage loans during the years ended June
30, 1999, 1998 and 1997, respectively.
The Bank participates in the Federal Housing Administration
("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 Veterans' Administration ("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 10 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 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, 1999, $108.8 million,
or 37% 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 that adjusts every year or that 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's current ARM loans do not provide for negative
amortization. At June 30, 1999, however, 16 loans aggregating $604,000 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.
<PAGE>
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 during periods of
rising interest rates that 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.
4
<PAGE>
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 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 mortgage 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, 1999, the Bank had 12
one- to four-family mortgage loans totaling $404,000 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 lending 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 purchases construction loans from the mortgage
banking company in which the Bank's service corporation owns a one-third equity
interest, and from unaffiliated correspondent mortgage banking relationships.
Construction loans purchased from third parties are underwritten by Bank
personnel in accordance with lending policies and are approved by Bank personnel
prior to purchase. At June 30, 1999, total approved construction loans amounted
to $72.4 million ($42.6 million not directly originated by the Bank), or 15% of
the Bank's total loan portfolio. Outstanding balances under such approved
construction loans were $43.5 million ($24.2 million not directly originated by
the Bank) at June 30, 1999.
The Bank's construction loans generally 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, 1999, speculative construction
loans amounted to $53.4 million. At June 30, 1999, the largest amount of
construction loans outstanding to one builder was $2.6 million, all of which was
for speculative construction.
<PAGE>
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 not required and all accrued interest was 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."
5
<PAGE>
Construction loans purchased from mortgage bankers 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
mortgage lending. Construction lending, however, generally is considered to
involve a higher degree of risk than single-family 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 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 purchased from 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 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 purchased from mortgage bankers by approving all
loans and selectively inspecting properties. The Bank directly originated $21.0
million and purchased $43.1 million of speculative construction loans from
mortgage bankers during the year ended June 30, 1999, compared to $17.8 million
and $5.7 million, respectively, during the year ended June 30, 1998.
Commercial Real Estate Lending. The Bank originates mortgage
loans for the acquisition and refinancing of commercial real estate properties.
At June 30, 1999, $23.6 million, or 5.0% 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 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.
<PAGE>
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 credit-worthiness of the borrower are also
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.
6
<PAGE>
Commercial real estate lending affords the Bank an opportunity to
receive interest at rates higher than those generally available from one- to
four-family mortgage 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 mortgage loans.
Because payments on loans secured by multi-family and commercial properties are
often 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, 1999,
land development loans amounted to $18.9 million, or 4.0% 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 lending rate as published in The Wall Street Journal. 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, 1999, the Bank had no
nonaccruing land development loans.
Loans secured by undeveloped land or improved lots involve
greater risks than one- to four-family 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 Commercial Loans. 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,
1999, consumer loans amounted to $68.4 million, or 14.4% of the total loan
portfolio.
At June 30, 1999, the largest component of the consumer loan
portfolio consisted of second mortgage loans and home equity lines of credit,
which totaled $43.6 million, or 9.2% of the total loan portfolio. At June 30,
1999, unused commitments to extend credit under home equity lines of credit
totaled $40.9 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
<PAGE>
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 prime lending rate as published in
The Wall Street Journal.
At June 30, 1999, automobile loans amounted to $4.8 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.
7
<PAGE>
Since June 1995, the Bank has issued VISA credit cards to
customers within its primary market area. At June 30, 1999, there were 1,496
credit card accounts with aggregate outstanding balances of $1.4 million. At
June 30, 1999, total approved lines of credit were $5.8 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.
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.
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 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, 1999, $378,000 of consumer loans were
delinquent in excess of 90 days.
The Bank also engages in commercial business lending. At June 30,
1999, the Bank had $13.9 million of commercial business loans which represented
2.9% of the total loan portfolio. Commercial business loans generally are
secured by business equipment. Of the total commercial business loans at June
30, 1999, loans amounting to $2.7 million were unsecured. The Bank generally
requires annual financial statements from its corporate borrowers and personal
guarantees from the corporate principals.
<PAGE>
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 are often 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.
8
<PAGE>
Maturity of Loan Portfolio. The following table sets forth
certain information at June 30, 1999 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 (in thousands):
<TABLE>
<CAPTION>
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
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 533 $ 5,317 $ 6,702 $ 99,377 $178,290 $290,219
Construction 48,845 3,538 -- -- 19,990 72,373
Land development 6,227 10,481 700 944 512 18,864
Commercial and other 2,717 2,413 12,837 3,412 2,208 23,587
Consumer and other loans 9,753 7,231 12,814 8,815 29,789 68,402
-------- -------- -------- -------- -------- --------
Total $ 68,075 $ 28,980 $ 33,053 $112,548 $230,789 $473,445
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due
after June 30, 2000, which have fixed interest rates and have floating or
adjustable interest rates (in thousands):
<TABLE>
<CAPTION>
Fixed- Floating-or
Rates Adjustable-Rates Total
----- ---------------- -----
<S> <C> <C> <C>
Mortgage loans:
One- to four-family $182,395 $107,291 $289,686
Construction 23,528 -- 23,528
Land development 3,179 9,458 12,637
Commercial and other 3,585 17,285 20,870
Consumer and other loans 28,197 30,452 58,649
-------- -------- --------
Total $240,884 $164,486 $405,370
======== ======== ========
</TABLE>
9
<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 businesses, building
contractors, realtors and other prospects. 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 must be approved by the Executive Board Loan Committee consisting of
the President 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- 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.
<PAGE>
The Bank periodically sells conventional one- to four-family
mortgage 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 $1.7 million at June 30, 1999. 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 $61.4 million of conventional loans during fiscal 1999. Management
intends to sell loans in the future as necessary to manage interest rate risk
and fund continuing operations.
When conventional loans are sold, the Bank retains the
responsibility for servicing the loans, including collecting and remitting of
mortgage loans 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
10
<PAGE>
fee for performing these services for others. The Bank's servicing portfolio
amounted to $102.9 million at June 30, 1999. The Bank generally is paid a fee
equal to 0.25% of the outstanding principal balance for servicing sold loans.
Loan servicing income totaled $227,000, $178,000 and $196,000 for the years
ended June 30, 1999, 1998 and 1997, 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, 1999, borrowers' escrow
funds amounted to $1.0 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 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, 1999, the Bank purchased $16.4 million of one- to four-family
mortgage loans. Currently, substantially all of the loans purchased through this
mortgage banking company are secured by properties located in the Bank's primary
market area. The Bank also purchased construction loans from the affiliated
mortgage banking company. See "-- Subsidiary Activities" and "-Construction
Lending."
The Bank has established relationships with other unaffiliated
mortgage banking companies. In the year ended June 30, 1999, the Bank purchased
one- to four-family mortgage loans from these unaffiliated entities in the
amount of $1.4 million. The one- to four-family mortgage 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.
<PAGE>
The following table sets forth total loans originated, purchased,
sold and repaid during the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family $ 88,500 $ 95,754 $ 50,886
Construction 41,696 38,860 36,770
Land development 8,238 12,676 6,924
Commercial and other 11,929 9,133 1,770
Consumer and other 49,950 56,888 29,734
--------- --------- ---------
Total loans originated 200,313 213,311 126,084
Loans purchased:
One- to four-family 16,365 14,309 9,091
Construction 49,447 9,537 5,820
--------- --------- ---------
Total loans purchased 65,812 23,846 14,911
Whole loans sold:
Conventional (61,407) (13,211) (2,824)
Government (2,818) (6,329) (7,223)
--------- --------- ---------
Total whole loans sold (64,225) (19,540) (10,047)
Loan principal repayments (173,781) (148,697) (84,423)
Net (decrease) increase in other items (9,400) (15,186) 1,267
--------- --------- ---------
Net increase in loans receivable, net $ 18,719 $ 53,734 $ 47,792
========= ========= =========
</TABLE>
11
<PAGE>
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, 1999, the Bank had
loan commitments (excluding undisbursed portions of interim construction loans
of $34.8 million) of $6.5 million and unused lines of credit of $50.9 million.
See Note 11 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 $632,000, $219,000 and $157,000 of deferred loan fees during the
years ended June 30, 1999, 1998 and 1997, 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 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 reasonably can 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>
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 (dollars in thousands):
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis:
Mortgage loans:
One- to four-family $ 533 $ 266 $ 271 $ 719 $ 348
Construction 310 787 273 1,130 471
Commercial and other -- 4 -- -- 48
Consumer and other loans 378 153 74 60 20
------ ------ ------ ------ ------
Total nonaccrual loans 1,221 1,210 618 1,909 887
------ ------ ------ ------ ------
Accruing loans contractually past due 90 days or more:
Mortgage loans:
Construction 298 145 1,401 3,965 3,906
Consumer and other loans 2 8 12 -- --
------ ------ ------ ------ ------
Total accruing loans 90
days or more past due 300 153 1,413 3,965 3,906
------ ------ ------ ------ ------
Total of nonaccrual loans and
accruing loans 90 days or more
past due 1,521 1,363 2,031 5,874 4,793
Real estate acquired in settlement
of loans 348 36 36 58 34
------ ------ ------ ------ ------
Total nonperforming assets $1,869 $1,399 $2,067 $5,932 $4,827
====== ====== ====== ====== ======
Restructured loans $ 672 $ 594 $ 863 $1,247 $1,049
====== ====== ====== ====== ======
Nonaccrual loans and accruing
loans 90 days or more past due
as a percentage of loans
receivable, net 0.35% 0.33% 0.56% 1.87% 1.79%
Nonaccrual loans and accruing
loans 90 days or more past due
as a percentage of total
assets 0.28% 0.26% 0.31% 1.65% 1.49%
Nonperforming assets as a
percentage of total assets 0.34% 0.27% 0.31% 1.66% 1.50%
</TABLE>
<PAGE>
Interest income that would have been recorded for the year ended
June 30, 1999 had nonaccruing loans been current in accordance with their
original terms amounted to $52,000. The amount of interest included in interest
income on such loans for such periods amounted to $51,000. Interest income that
would have been
13
<PAGE>
recorded for the year ended June 30, 1999 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, 1999, the Bank had $348,000 of real estate acquired in
settlement of loans, which consisted of eight one- to four-family mortgage
loans.
Restructured Loans. Under generally accepted accounting
principles ("GAAP"), the Bank is required to account for certain loan
modifications or restructurings as "troubled debt restructurings." 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 $672,000 of restructured loans as of June 30,
1999, which consisted of 13 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.
<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 (in thousands):
14
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Classified assets:
Loss $ -- $ --
Doubtful 32 42
Substandard assets 3,144 2,016
Special mention 1,119 1,495
Loan loss allowances 2,896 2,179
</TABLE>
At June 30, 1999, substandard assets consisted of 28 one- to
four-family mortgage loans totaling approximately $1.4 million, seven
construction loans totaling $918,000, 47 other loans totaling $480,000, and real
estate acquired through foreclosure totaling $348,000.
At June 30, 1999, special mention assets consisted of 13 one- to
four-family mortgage loans totaling $435,000 and five construction loans
totaling $684,000.
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 be reasonably
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.
<PAGE>
At June 30, 1999, the Bank had an allowance for loan losses of
$2.9 million. Management believes that the amount maintained in the allowances
at June 30, 1999 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>
The following table sets forth an analysis of the Bank's
allowance for loan losses (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total loans outstanding at end of period $473,445 $441,407 $380,830 $332,803 $281,836
======== ======== ======== ======== ========
Average loans outstanding during period $441,514 $395,465 $336,476 $298,865 273,778
======== ======== ======== ======== ========
Allowance balance at beginning of period $ 2,179 $ 1,796 $ 1,000 $ 600 $ 600
Provision for loan losses 800 460 825 419 9
Charge-offs:
Mortgage loans:
One- to four-family 16 1 15 -- --
Consumer and other 69 79 24 23 9
-------- -------- -------- -------- --------
Total charge-offs 85 80 39 23 9
-------- -------- -------- -------- --------
Recoveries:
Mortgage loans:
One- to four-family -- 2 9 -- --
Consumer and other 2 1 1 4 --
-------- -------- -------- -------- --------
Total recoveries 2 3 10 4 --
-------- -------- -------- -------- --------
Allowance balance at end of period $ 2,896 $ 2,179 $ 1,796 $ 1,000 $ 600
======== ======== ======== ======== ========
Allowance for loan losses as a percentage of
total loans receivable at end of period 0.61% 0.49% 0.47% 0.30% 0.21%
======== ======== ======== ======== ========
Net charge-offs as a percentage of average
loans outstanding during the period 0.02% 0.02% 0.01% 0.01% --
======== ======== ======== ======== --------
Ratio of allowance for loan losses to total
nonperforming loans at end of period 1.90 1.60 0.88 0.17 0.13
======== ======== ======== ======== ========
</TABLE>
The fluctuation in the ratio of allowance for loan losses to
nonperforming loans at the end of the periods 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) and consideration of the growth in the loan portfolio and
increases in consumer and commercial 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>
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 (dollars in thousands):
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ---------------------- --------------------- -------------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Category in Category in Category in Category in Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $1,411 76.9% $1,194 81.2% $1,222 83.4% $ 675 86.0% $ 400 87.2%
Nonresidential 1,112 11.3 830 6.7 423 4.0 28 3.6 17 3.5
Consumer and other loans 373 11.8 155 12.1 142 12.6 297 10.4 183 9.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for
loan losses $2,896 100.0% $2,179 100.0% $1,796 100.0% $1,000 100.0% $ 600 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
17
<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 are also 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 Agency securities and
state and local obligations with contractual maturities of between one and 20
years and a mutual fund which invests in adjustable-rate mortgage loans. The
Corporation's investment activities have been limited to overnight
interest-bearing deposits and an investment in a mutual fund that invests in
adjustable-rate mortgages.
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, 1999, the Bank's investment in the Asset Management
Fund, Inc. Adjustable Rate Mortgage Portfolio (which had an aggregate fair value
of $16.4 million and amortized cost of $16.5 million) exceeded 24% of the
Company's stockholders' equity at that date.
18
<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 (in thousands):
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed securities $ 54 $ 55 $ 88 $ 90 $ 121 $ 125
------- ------- ------- ------- ------- -------
Total held-to-maturity 54 55 88 90 121 125
------- ------- ------- ------- ------- -------
Available-for-Sale:
Debt securities:
U.S. Treasury obligations -- -- 497 498 1,492 1,488
State and local
obligations 1,480 1,468 -- -- -- --
U.S. Government
Agency obligations 5,497 5,436 6,010 6,019 6,499 6,483
------- ------- ------- ------- ------- -------
Total 6,977 6,904 6,507 6,517 7,991 7,971
Marketable equity securities(1) 16,511 16,440 22,225 22,192 2,181 2,230
------- ------- ------- ------- ------- -------
Total available-for-sale 23,488 23,344 28,732 28,709 10,172 10,201
------- ------- ------- ------- ------- -------
Total $23,542 $23,399 $28,820 $28,799 $10,293 $10,326
======= ======= ======= ======= ======= =======
</TABLE>
- -----------------
(1) Consists principally of a mutual fund that invests in adjustable-rate
mortgage-backed securities. At June 30, 1999, the mutual fund yielded
5.25%.
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, 1999.
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 due to the immateriality of the
amounts (dollars in thousands):
<PAGE>
<TABLE>
<CAPTION>
Less Than One to After
One Year Five Years Ten Years
-------------------------------- ------------------------------ -----------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield Cost Value Yield
-------- ----------- --- ------ ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State and local obligations $ -- $ -- --% $ 963 $ 951 4.65% $ 517 $ 517 4.50%
U. S. Government Agency
obligations -- -- -- 5,497 5,436 5.86 -- -- --%
Mortgage-backed securities -- -- -- 54 55 8.00 -- -- --
-------- ----------- --- ------ ------ ---- ------ ------ ----
Total $ -- $ -- --% $6,514 $6,442 5.70% $ 517 $ 517 4.50%
======== =========== === ====== ====== ==== ====== ====== ====
</TABLE>
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
19
<PAGE>
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. The majority 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 a competitive rate. 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 uses a variety of promotions to attract new deposit
accounts including direct mail, print and broadcast media, rate promotions and
premiums. These promotions are reflected in the growth in the Bank's advertising
and promotion expense in recent periods.
The following table indicates the amount of the Bank's jumbo
certificate accounts by time remaining until maturity as of June 30, 1999. Jumbo
certificate accounts have principal balances of $100,000 or more (in thousands):
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- ------
<S> <C>
Three months or less $20,270
Over three through six months 9,865
Over six through twelve months 25,597
Over twelve months 5,748
-------
Total $61,480
=======
</TABLE>
<PAGE>
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
(dollars in thousands):
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ -------------------------------- --------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
-------- ----- -------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts
Noninterest-bearing $ 19,163 4.7% $ 6,406 $ 12,757 3.4% $ 6,188 $ 6,569 1.8%
Interest-bearing 46,533 11.5 4,312 42,221 11.5 8,796 33,425 9.5
Savings accounts 56,225 13.8 (515) 56,740 15.3 (7,612) 64,352 18.2
Money market accounts 30,099 7.4 11,966 18,133 4.9 3,825 14,308 4.1
Fixed term certificate accounts which
mature:
Within 1 year 225,328 55.5 25,305 200,023 54.1 17,730 182,293 51.6
After 1 year, but within 2 years 17,481 4.3 (8,898) 26,379 7.1 (1,930) 28,309 8.0
After 2 years, but within 3 years 4,852 1.2 (2,046) 6,898 1.9 (8,268) 15,166 4.3
Thereafter 6,330 1.6 (331) 6,661 1.8 (2,110) 8,771 2.5
-------- ----- -------- -------- ----- -------- -------- -----
Total $406,011 100.0% $ 36,199 $369,812 100.0% $ 16,619 $353,193 100.0%
======== ===== ======== ======== ===== ======== ======== =====
</TABLE>
20
<PAGE>
Time Deposits by Rates. The following table sets forth the amount
of time deposits in the Bank categorized by rates at the dates indicated
(dollars in thousands):
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
3.00% or less $ 1,008 $ 412 $ 325
3.01% - 5.00% 97,638 2,623 2,613
5.01% - 7.00% 155,261 236,792 231,333
7.01% - 9.00% 84 134 268
-------- -------- --------
Total $253,991 $239,961 $234,539
======== ======== ========
</TABLE>
Time Deposits by Maturities. The following table sets forth the
amount of time deposits in the Bank categorized by maturities at June 30, 1999
(dollars in thousands):
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
3.00% or less $ 1,008 $ -- $ -- $ -- $ -- $ 1,008
3.01% - 5.00% 87,775 7,885 731 105 1,142 97,638
5.01% - 7.00% 136,501 9,590 4,121 3,223 1,826 155,261
7.01% - 9.00% 44 6 -- 34 -- 84
-------- -------- -------- -------- -------- --------
Total $225,328 $ 17,481 $ 4,852 $ 3,362 $ 2,968 $253,991
======== ======== ======== ======== ======== ========
</TABLE>
Deposit Activity. The following table set forth the deposit
activity of the Bank for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Beginning balance $369,812 $353,193 $305,831
-------- -------- --------
Net deposits before interest credited 20,919 1,452 33,743
Interest credited 15,280 15,167 13,619
-------- -------- --------
Net increase in deposits 36,199 16,619 47,362
-------- -------- --------
Ending balance $406,011 $369,812 $353,193
======== ======== ========
</TABLE>
<PAGE>
Advances from Federal Home Loan Bank of Atlanta. 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.
21
<PAGE>
The Company had advances from the FHLB, all of which are at a
fixed rate with interest payable quarterly and principal due at maturity.
Additionally, all of the advances are convertible prior to maturity (at the
option of the FHLB) to a variable three-month LIBOR-based rate. These advances
are either (i) convertible one-time only at a future conversion date or (ii)
convertible at any quarterly payment date on or after a future conversion date.
Should the FHLB exercise its conversion option on any advance, the Company has
the right to prepay the advance on any quarterly payment date through maturity.
Outstanding advances at June 30, 1999 and 1998 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
Earliest 1999 1998
Maturity Conversion ---------------------- -------------------
Date Date Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
One-time convertible March 26, 2008 March 26, 2003 $ 2,000 5.44% $ 2,000 5.44%
One-time convertible June 23, 2008 June 23, 2003 5,000 5.51 5,000 5.51
One-time convertible August 25, 2008 August 25, 2003 10,000 5.52 --- ---
One-time convertible April 22, 2004 April 22, 2001 4,000 5.01 --- ---
One-time convertible April 22, 2004 April 22, 2001 3,000 4.96 --- ---
Continuously convertible
after conversion date April 7, 2008 April 7, 1999 10,000 4.91 10,000 4.91
------- -------
Total advances 34,000 5.23 $17,000 5.15
======= =======
</TABLE>
The maximum month-end balance of FHLB advances outstanding was
$34.0 million and $17.0 million during the years ending June 30, 1999 and 1998,
respectively. The Company had an approved credit limit of $75.0 million with the
FHLB as of June 30, 1999. The advances are secured by FHLB stock and a blanket
lien on all qualifying one- to four-family first mortgage loans.
Short-term Borrowings. At June 30, 1999, the Company had
outstanding a $35.0 million note payable to a commercial bank. The note, dated
June 23, 1999, bearing interest at three-month LIBOR plus 1.0% was due on August
15, 1999. All of the Bank's common stock was pledged as collateral on the loan.
The note was paid in full on July 22, 1999.
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
$632,000 at June 30, 1999, did not exceed these limits.
<PAGE>
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, 1999, 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 $149,000 and $181,000 for the years ended June 30, 1999
and 1998, 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.
22
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Corporation is
required by federal law to file reports with, and otherwise comply with, the
rules and regulations of the OTS. The Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary federal regulator, and
the FDIC, as the deposit insurer. The Bank is a member of the FHLB and its
deposit accounts are insured up to applicable limits by the SAIF managed by the
FDIC. 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 savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. 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 regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Corporation, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Corporation are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this annual report does not purport to be a complete description of
such statutes and regulations and their effects on the Corporation and the Bank.
Holding Company Regulation
The Corporation is a nondiversified unitary savings and loan
holding company within the meaning of federal law. As a unitary savings and loan
holding company, the Corporation generally is not restricted under existing laws
as to the types of business activities in which it may engage, provided that the
Bank continues to be a qualified thrift lender. See "Federal Savings Institution
Regulation--QTL Test." Upon any non-supervisory acquisition by the Corporation
of another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the
Corporation would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and generally would be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
OTS, and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly
or indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
<PAGE>
The OTS may not approve any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
23
<PAGE>
Although savings and loan holding companies are not subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the OTS 30 days before declaring any dividend to the Corporation. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings
institutions are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal association (e.g., commercial, non-residential real property loans and
consumer loans) are limited to a specified percentage of the institution's
capital or assets. In addition, certain activities, such as mergers and
acquisitions, and branching are subject to the prior approval of the OTS.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective April
1, 1999, however, the minimum core capital ratio increased to 4% for all
institutions except those with the highest ratings on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the
risk-based capital standard itself, a 4% Tier I risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires
the maintenance of Tier I (core) and total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at least 4% and
8%, respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
<PAGE>
The capital regulations also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk- based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk component. At June 30, 1999, the Bank
met each of its capital requirements.
24
<PAGE>
The following table presents the Bank's capital position at June
30, 1999:
<TABLE>
<CAPTION>
Capital
Excess -----------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- ------- ----------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $91,006 $ 8,131 $82,875 16.8% 1.5%
Core (Leverage) 91,006 16,264 74,742 16.8 3.0
Risk-based 93,902 27,573 66,329 27.2 8.0
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk-
weighted assets of less than 8%, a ratio of Tier I (core) capital to
risk-weighted assets of less than 4% or a ratio of core capital to total assets
of less than 4% (3% or less for institutions with the highest examination
rating) is considered to be "undercapitalized." A savings institution that has a
total risk-based capital ratio less than 6%, a Tier I capital ratio of less than
3% or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to appoint
a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Compliance with the plan must be guaranteed by
any parent holding company in an amount of up to the lesser of 5% of the
institution's assets or the amount which would bring the institution into
compliance with all capital standards. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
<PAGE>
In addition to the assessment for deposit insurance, institutions
are required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members, including the Bank, approximated 6.10 basis
points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points. By
law, there will be equal sharing of FICO payments between SAIF and BIF members
on the earlier of January 1, 2000 or the date the SAIF and BIF are merged. The
FDIC has authority to increase insurance assessments. A significant increase in
SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank. Management cannot predict what
insurance assessment rates will be in the future.
25
<PAGE>
Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996
provided that the BIF and SAIF were to have merged on January 1, 1999 if there
were no more savings associations as of that date. Various proposals to
eliminate the federal savings association charter, create a uniform financial
institutions charter, abolish the OTS and restrict savings and loan holding
company activities have been introduced in Congress. Currently pending
legislation would place activities restrictions on unitary savings and loan
holding companies, subject to a grandfather for existing unitary savings and
loan holding companies such as the Corporation. The Bank is unable to predict
whether such legislation will be enacted or the extent to which the legislation
would restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings
institutions generally are subject to the limits on loans to one borrower
applicable to national banks. A savings institution may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if secured by specified readily-marketable
collateral. At June 30, 1999, the Bank's limit on loans to one borrower was
$13.6 million, and the Bank's largest aggregate outstanding balance of loans to
one borrower was $6.4 million. These loans were performing according to their
original terms at June 30, 1999.
QTL Test. The Home Owners' Loan Act ("HOLA") requires savings
institutions to meet a qualified thrift lender test. Under the test, a savings
association is required to either qualify as a "domestic building and loan
association" under the Internal Revenue Code or maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least nine months out of each 12 month period.
A savings institution that fails the qualified thrift lender test
is subject to certain operating restrictions and may be required to convert to a
bank charter. As of June 30, 1999, the Bank met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. The rule effective in 1998
established three tiers of institutions based primarily on an institution's
capital level. An institution that exceeded all capital requirements before and
after a proposed capital distribution ("Tier I Bank") and had not been advised
by the OTS that it was in need of more than normal supervision, could, after
<PAGE>
prior notice but without obtaining approval of the OTS, make capital
distributions during the calendar year equal to the greater of (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half the excess capital over its capital requirements at the beginning of
the calendar year or (ii) 75% of its net income for the previous four quarters.
Any additional capital distributions required prior regulatory approval. At
March 31, 1999, the Bank was a Tier I Bank. Effective April 1, 1999, the OTS's
capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
safety and soundness, compliance and Community Reinvestment Act examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could
26
<PAGE>
be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Bank's has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Assessments. Savings institutions are required to pay assessments
to the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report.
Transactions with Related Parties. The Bank's authority to engage
in transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Corporation) is limited by
federal law. The aggregate amount of covered transactions with any individual
affiliate is limited to 10% of the capital and surplus of the savings
institution. The aggregate amount of covered transactions with all affiliates is
limited to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in federal law. The purchase of low quality
assets from affiliates is generally prohibited. The transactions with affiliates
must be on terms and under circumstances, that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is also governed by federal law. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed. Special limitations apply to loans made to executive officers of the
institution.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring actions against the
institution and all institution-affiliated parties, including stockholders, and
any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
<PAGE>
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. The
FDIC has the authority to recommend to the Director of the OTS that enforcement
action to be taken with respect to a particular savings institution. If action
is not taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The federal banking agencies
have adopted Interagency Guidelines prescribing Standards for Safety and
Soundness. 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 a savings institution fails to meet any standard prescribed by the
guidelines, the OTS may require the institution to submit an acceptable plan to
achieve compliance with the standard.
27
<PAGE>
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB stock at June 30, 1999, of $3.6 million.
FHLB advances must be secured by specified types of collateral and all long-term
advances may be obtained only for the purpose of providing funds for residential
housing finance.
The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended June 30, 1999, 1998 and 1997,
dividends from the FHLB to the Bank amounted to $262,000, $229,000 and $207,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely be reduced also.
Federal Reserve System
The Federal Reserve Board regulations require savings
institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). The regulations
generally provide that reserves be maintained against aggregate transaction
accounts as follows: for accounts aggregating $46.5 million or less (subject to
adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts aggregating greater than $46.5 million, the reserve requirement is
$1.395 million plus 10% (subject to adjustment by the Federal Reserve Board
between 8% and 14%) against that portion of total transaction accounts in excess
of $46.5 million. The first $4.9 million of otherwise receivable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. The Bank complies with the foregoing requirements.
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
<PAGE>
may have been deducted in arriving at their taxable income. The Bank's
deductions with respect to "qualifying real property loans," which are generally
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
28
<PAGE>
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 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 is generally 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.
<PAGE>
Audits. The Bank's Federal income tax returns have been audited
through June 30, 1998. The Consolidated Financial Statements include the effects
of all 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 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.
29
<PAGE>
For additional information regarding taxation, see Note 8 of
Notes to Consolidated Financial Statements contained in the Annual Report.
Personnel
As of June 30, 1999, the Company had 141 full-time employees and
35 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.
Item 2. Properties
- ------- ----------
The following table sets forth certain information regarding the
Company's offices as of June 30, 1999.
30
<PAGE>
<TABLE>
<CAPTION>
Net
Leased/ Approximate Book
Location Year Opened Owned Square Footage Value
-------- ----------- ----- -------------- -----
<S> <C> <C> <C>
Main Office:
380 E. Main Street 1974 Owned 32,820 $1,016
Spartanburg, South Carolina
Branch Offices:
280 N. Church Street 1986 Owned 1,080 187
Spartanburg, South Carolina
1488 W.O. Ezell Boulevard 1980 Ground 2,453 603
Spartanburg, South Carolina Lease(1)
1585 E. Main Street 1991 Owned 2,166 390
Spartanburg, South Carolina
2701 Boiling Springs Road 1994 Owned 3,300 683
Boiling Springs, South Carolina
1157 Asheville Highway 1997 Owned 3,330 524
Inman, South Carolina
2075 E. Main Street 1997 Owned 3,332 714
Duncan, South Carolina
1451 Woodruff Road 1998 Leased(2) 540 203
Greenville, South Carolina
1319 W. Poinsett Street
Greer, South Carolina 1998 Owned 3,332 801
14055 E. Wade Hampton Boulevard
Greer, South Carolina 1998 Leased(3) 688 210
450 S. Alabama Avenue
Chesnee, South Carolina 1999 Owned 1,760 465
</TABLE>
(1) A fifteen-year ground lease expiring in 2012 with annual rent of
$24,500.
(2) A five-year lease expiring in 2003 with annual rent of $25,000.
(3) A five-year lease expiring in 2003 with annual rent of $30,000.
The Bank uses the services of an outside service bureau for its
significant data processing applications. At June 30, 1999, the Bank had 11
proprietary automated teller machines. At June 30, 1999, the net book value of
the Bank's office properties and the Bank's fixtures, furniture and equipment
was $8.1 million.
31
<PAGE>
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.
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, 1999.
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 August 3, 1999, there were approximately
1,188 stockholders of record (excluding holders in nominee or street name).
Declarations or payments of dividends are subject to determination
by the Company'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 -- 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.
<PAGE>
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.
32
<PAGE>
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.
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 1999 Annual Meeting of Stockholders
and is incorporated herein by reference.
Reference is made to the cover page of this report, as well as to
the Company's Definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders, 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 1999 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 1999 Annual Meeting
of Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
The information under Item 13 of this Report is included in the
Company's Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders
and is incorporated herein by reference.
<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**
33
<PAGE>
(10)(i) Employee Stock Ownership Plan**
(10)(j) Registrant's 1997 Stock Option Plan****
(10)(k) Registrant's Management Recognition and Development
Plan****
(10)(l) Loan Agreement with Central Carolina Bank and Trust
Company*****
(13) 1999 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:
On June 9, 1999, a Form 8-K was filed reporting that the Registrant had
declared a special cash distribution in the amount of $12.00 per share, payable
on June 25, 1999 to shareholders of record on June 14, 1999. Also, the
Registrant reported in the Form 8-K that it had entered into a loan agreement
with Central Carolina Bank and Trust Company in the amount of $35.0 million for
the purpose of funding payment of a portion of the special cash distribution.
The press release announcing the special cash distribution and the loan
agreement were filed by exhibit.
* 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.
*****Filed as an exhibit to the Registrant's Form 8-K dated June 9, 1999 and
incorporated herein by reference.
34
<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, there unto duly authorized.
FIRSTSPARTAN FINANCIAL CORP.
Date: September 23, 1999 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, 1999
---------------------
Billy L. Painter
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ R. Lamar Simpson September 23, 1999
---------------------
R. Lamar Simpson
Treasurer, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert R. Odom September 23, 1999
-------------------
Robert R. Odom
Chairman of the Board
By: /s/ E. Lea Salter September 23, 1999
------------------
E. Lea Salter
Director
By: /s/ David E. Tate September 23, 1999
------------------
David E. Tate
Director
By: /s/ Robert L. Handell September 23, 1999
----------------------
Robert L. Handell
Director
<PAGE>
By: /s/ E.L. Sanders September 23, 1999
-----------------
E.L. Sanders
Director
By: /s/ R. Wesley Hammond September 23, 1999
----------------------
R. Wesley Hammond
Director
<PAGE>
EXHIBIT 13
1999 ANNUAL REPORT TO STOCKHOLDERS
Table of Contents
Letter to Stockholders 1
Financial Summary 3
Management's Discussion and
Analysis 4
Independent Auditors' Report 17
Consolidated Financial Statements 18
Notes to Consolidated
Financial Statements 23
Corporate and
Stockholder Information Inside Back Cover
<PAGE>
To Our Stockholders
We are pleased to report that 1999 was another year of significant
growth in our franchise and that we made significant process in managing our
excess capital. During 1999 we added three new offices, bringing the total to
eleven, and we halved our capital ratio from 24% to 12%.
We knew at the beginning of the year that our biggest challenge was to
manage our excess capital and capital management was the highest priority in our
business plan for 1999. We repurchased 642,405 shares of our stock, representing
14.5% of the total shares outstanding. After considerable analysis of growth
projections and regulatory restrictions on future repurchases, in May our Board
of Directors determined that even after prior share repurchases, our capital
level was excessive and decided that a special capital distribution was the best
course of action at the time to reduce our capital to a manageable level.
The capital distribution, which was $12 per share, was paid on June 25,
1999. The majority of this cash distribution will be tax free to recipients and
will reduce the cost basis of their stock. We remain committed to managing our
capital and intend to continue leveraging it through growth and managing it
through economically viable and regulatory permissible activities.
During 1999 we continued to pursue our strategy of realigning the loan
portfolio toward shorter-term, higher-yielding commercial and consumer loans.
Our loans receivable grew by $20.4 million, or 4.8%.
Residential mortgage loan balances decreased by $22.8 million primarily
due to the sale of $61.4 million of principally 30-year fixed-rate loans. By
selling fixed-rate residential loans, we reduce our interest rate exposure,
generate noninterest income ($1.3 million in 1999) and free up cash for
reinvestment in shorter-term, higher-yielding commercial and consumer loans.
Our commercial lending area was successful in 1999. Commercial loan
balances grew by $16.7 million or 80.1%. Our commercial lending department also
grew during the year with the addition of a commercial lender and two
assistants. We are building the capacity necessary to take advantage of the
opportunities available in our growing local economy.
Advanced balances of construction loans grew by $19.9 million, or 84.3%,
as we continue to emphasize originations of construction loans in our offices.
Also contributing to the increase was the purchase of loans from the mortgage
banking affiliate in which the Bank owns a one-third interest, and from an
unaffiliated mortgage banking company. All loans purchased from these two
mortgage banking companies are underwritten by our personnel according to our
lending policies and are monitored and periodically inspected by our personnel
in order to mitigate any increased risk associated with third-party
originations.
Consumer loan balances (including home equity loans) increased by $4.7
million, or 9.5%. While the percentage increase was respectable, the dollar
growth was not; consumer lending will be a top priority in the coming year.
<PAGE>
Deposit growth for 1999 was $36.2 million or 9.8%. Our newer branches
contributed significantly to deposit growth. The Inman and Duncan offices,
opened in July of 1997, now have nearly $16 million and $10 million in deposits,
respectively, while our Greer office, opened in September 1998, now has
approximately $13 million in deposits.
1
<PAGE>
To Our Stockholders
Activities conducted through the Bank's wholly owned subsidiary,
FirstService Corporation, continue to be successful. The volume of non-insured
investment products sold through FirstService continues to improve. In order to
enhance customer service, FirstService recently associated itself with Raymond
James Financial Services, Inc. FirstService also has an equity interest in a
mortgage banking company, as previously mentioned, which had an outstanding
year. We also plan to continue purchasing construction and adjustable-rate
mortgage loans from this mortgage banking company.
The Year 2000 computer problem continues to be a newsworthy item. It is
acknowledged generally that the banking industry is/or will be Year 2000
compliant by year end. We have declared our system as "Year 2000 Ready" and are
currently in a customer awareness campaign. We continue to monitor third-party
vendors and to refine and execute contingency plans.
We believe that the greatest strength of our organization is our people.
Personnel will continue to be added in strategic areas of the Bank. Training
programs are being enhanced to provide skills that will enable our personnel to
better serve our customers and to sell our products. Recent training initiatives
include customer service training for all employees.
Thank you for being a stockholder. We are striving to enhance the value
of your investment through growth, profitability improvement and capital
management. We believe the Company has a bright future and look forward to
continuing to serve our customers and to work hard for our stockholders'
benefit.
Sincerely,
Billy L. Painter
President and
Chief Executive Officer
2
<PAGE>
<TABLE>
<CAPTION>
Financial Summary
(Dollars in thousands, except per share data)
At or For the Year Ended June 30,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Investment income $ 38,625 $ 37,414 $ 29,462 $ 26,445 $ 23,835
Interest expense 18,366 17,153 15,811 14,669 11,302
-------- -------- -------- -------- --------
Net interest income 20,259 20,261 13,651 11,776 12,533
Provision for loan losses 800 460 825 419 9
-------- -------- -------- -------- --------
Net interest income
after provision for loan losses 19,459 19,801 12,826 11,357 12,524
-------- -------- -------- -------- --------
Noninterest income 4,098 2,366 1,386 1,238 278
Noninterest expense(1) 14,980 9,820 9,903 6,947 6,166
-------- -------- -------- -------- --------
Income before income taxes 8,577 12,347 4,309 5,648 6,636
Provision for income taxes 3,602 4,807 1,587 2,111 2,495
-------- -------- -------- -------- --------
Net income $ 4,975 $ 7,540 $ 2,722 $ 3,537 $ 4,141
======== ======== ========= ========= =======
Per Share Data:
Basic and diluted earnings $ 1.36 $ 1.85 -- -- --
Cash dividends declared 0.75 0.45 -- -- --
Cash distribution 12.00 -- -- -- --
Book value 17.43 29.57 -- -- --
Balance Sheet Summary:
Total assets $545,725 $517,433 $665,446 $356,966 $322,735
Average assets 535,283 499,035 385,347 344,390 313,954
Loans receivable, net 435,181 416,462 362,728 314,936 267,393
Investment securities 23,398 28,797 10,322 18,350 14,113
Cash and cash equivalents 58,420 48,968 227,072 10,784 15,967
Deposits 406,011 369,812 353,193 305,831 275,915
Other borrowings 35,000 -- -- -- -
Federal Home Loan Bank
of Atlanta advances 34,000 17,000 -- -- --
Stock subscription escrow accounts(2) -- -- 259,329 -- --
Total equity 66,041 125,761 46,978 44,154 40,660
Average equity 113,528 127,266 45,795 42,953 38,547
Selected Financial Ratios and
Other Statistical Data:
Return on average assets 0.93% 1.51% 0.71% 1.03% 1.32%
Return on average equity 4.38% 5.92% 5.94% 8.23% 10.74%
Interest rate spread(3) 3.16% 3.07% 3.22% 3.01% 3.71%
Net interest margin(4) 3.97% 4.21% 3.69% 3.55% 4.15%
Efficiency ratio(5) 0.53 0.43 0.54 0.54 0.48
Nonperforming loans to loans receivable, net(6) 0.35% 0.33% 0.56% 1.87% 1.79%
Allowance for losses to gross loans receivable 0.61% 0.49% 0.47% 0.30% 0.21%
Allowance for losses to nonperforming loans 190.40% 159.87% 88.43% 17.02% 12.52%
Total equity to total assets 12.10% 24.30% 7.06% 12.37% 12.60%
Average equity to average assets 21.21% 25.50% 11.88% 12.47% 12.28%
Dividend payout ratio(7) 55.15% 24.32% -- -- --
Number of offices 11 8 7 5 5
</TABLE>
<PAGE>
(1) Includes a $2.1 million compensation charge related to the cash
distribution of $12.00 per share with respect to the year ended June 30,
1999 and a charge of $1.8 million for the one-time SAIF assessment with
respect to the year ended June 30, 1997.
(2) Represents subscription funds for the common stock of the Company issued in
connection with the Bank's mutual to stock 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 compensation charge related to the cash
distribution of $12.00 per share with respect to the year ended June 30,
1999 and 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>
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 the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes contained in this Annual Report.
Private Securities Litigation Reform Act Safe Harbor Statement
This Annual Report contains forward-looking statements within the
meaning of the federal securities laws. These statements are not historical
facts, rather statements based on the Company's current expectations regarding
its business strategies and their intended results and its future performance.
Forward-looking statements are preceded by terms such as "expects," "believes,"
"anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance.
Numerous risks and uncertainties could cause the Company's actual results,
performance, and achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to these differences include, without limitation, general economic conditions,
including changes in market interest rates and changes in monetary and fiscal
policies of the federal government; legislative and regulatory changes; the
Company's ability to remedy any computer malfunctions that may result from the
advent of the Year 2000; and other factors disclosed periodically in the
Company's filings with the Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking
statements, readers are cautioned not to place undue reliance on them, whether
included in this report or made elsewhere from time to time by the Company or on
its behalf. The Company assumes no obligation to update any forward-looking
statements.
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 (the "Conversion") 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 primarily 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.
<PAGE>
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, 1999, the Bank had
eleven locations (nine traditional offices and two in-store offices).
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 $545.7 million at June 30, 1999 and $517.4 million at
June 30, 1998, an increase of $28.3 million. The increase was principally the
result of increases in loans receivable, net and in cash and cash equivalents,
offset by a decrease in investment securities available-for-sale at June 30,
1999 when compared to June 30, 1998. Total liabilities increased by $88.0
4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
million as the result of increased deposits and borrowings. Total stockholders'
equity decreased by $59.7 million principally as the result of a cash
distribution of $12.00 per share and share repurchases which decreased
stockholders' equity by approximately $43.3 million and $21.0 million,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents totaled $58.4 million at June 30, 1999, an
increase of $9.4 million. The majority of the increase was attributable to
increases in cash from operations of $5.1 million and cash from financing
activities of $21.1 offset by cash used to fund investments of $16.9 million. A
more detailed reconciliation may be found in the Company's Consolidated
Statements of Cash Flows for the year ended June 30, 1999.
Investment Securities
Investment securities decreased by $5.4 million to $23.3 million at June
30, 1999 from $28.7 million at June 30, 1998. Investments were reduced primarily
to help fund the cash distribution payment to stockholders.
Loans Receivable, Net
Loans receivable, net, increased primarily as a result of a net growth
of $7.5 million in mortgage loans since June 30, 1998. Included in the $7.5
million increase were increases of $19.9 million in construction loans, $9.8
million in commercial mortgage loans and $0.6 million in land development loans,
which more than offset a decrease of $22.8 million in one- to four-family
mortgage loans. The primary factor contributing to the decrease in one- to
four-family mortgage loans was the sale of $61.4 million of loans (principally
30-year fixed-rate conventional mortgage loans) in the secondary market.
Offsetting loan sales was the purchase of $65.8 million in mortgage loans from
the mortgage banking company in which the Bank's service corporation subsidiary
owns a one-third equity interest, and purchases from other correspondent banking
relationships. Loans receivable, net, also increased due to a $6.9 million
increase in non-mortgage commercial loans, a $2.9 million increase in home
equity loans and a $1.8 million increase in other non-mortgage loans. The
increase in loans receivable, net, was funded primarily through an increase in
deposits and FHLB advances.
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.
<PAGE>
The following table presents a summary of the loan portfolio at June 30,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Real estate mortgage loans:
Residential (1-4 family) $ 290,219 $ 312,981
Construction 72,373 41,089
Land development 18,864 16,729
Commercial 23,587 13,817
--------- ---------
405,043 384,616
--------- ---------
Consumer and commercial loans:
Home equity 43,623 40,746
Commercial 13,885 6,987
Other 10,894 9,058
--------- ---------
68,402 56,791
--------- ---------
Gross loans 473,445 441,407
Less:
Undisbursed portion of loans in process (34,807) (21,923)
Net deferred loan fees (561) (843)
Allowance for loan losses (2,896) (2,179)
--------- ---------
Net loans $ 435,181 $ 416,462
========= =========
</TABLE>
5
<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, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Loans originated:
Real estate mortgage loans:
Residential (1-4 family) $ 88,500 $ 95,754 $ 50,886
Construction 41,696 38,860 36,770
Land development 8,238 12,676 6,924
Commercial 11,929 9,133 1,770
Consumer and other 49,950 56,888 29,734
Loans purchased:
Residential (1-4 family) 16,365 14,309 9,091
Construction 49,447 9,537 5,820
Loans sold:
Conventional (61,407) (13,211) (2,824)
Government (FHA,VA) (2,818) (6,329) (7,223)
Loan principal repayments (173,781) (148,697) (84,423)
Net (decrease) increase in other items (9,400) (15,186) 1,267
--------- --------- ---------
Net increase in loans receivable, net $ 18,719 $ 53,734 $ 47,792
========= ========= =========
</TABLE>
Asset Quality and Allowance for Loan Losses
The allowance for loan losses represents an amount that management
believes will be 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 regulatory requirements. 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. Based on the uncertainty in the
estimation process however, management's estimate of the allowance for loan
losses may change in the near term. Further, the allowance for loan losses is
subject to periodic evaluation by various regulatory authorities and may be
subject to adjustment upon their examination.
<PAGE>
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 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>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
A summary of nonperforming loans as of June 30, 1999 and 1998 follows
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Nonaccrual loans:
Residential (1-4 family) $ 533 $ 266
Construction 310 787
Other 378 157
------ ------
1,221 1,210
Accruing loans contractually past due 90 days or more 300 153
------ ------
Total nonperforming loans $1,521 $1,363
====== ======
Nonperforming loans as a percentage
of loans receivable, net 0.3% 0.3%
====== ======
Allowance for loan losses as a percentage
of nonperforming loans 190.4% 159.9%
====== ======
</TABLE>
Loans classified under OTS regulations totaled $4.3 million and $3.6
million at June 30, 1999 and 1998, respectively.
The changes in the allowance for loan losses is as follows for the years
ended June 30, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Allowance, beginning of year $ 2,179 $ 1,796 $ 1,000
Provision 800 460 825
Write-offs (85) (80) (39)
Recoveries 2 3 10
------- ------- -------
Allowance, end of year $ 2,896 $ 2,179 $ 1,796
======= ======= =======
</TABLE>
See also "Results of Operations - Provision for Loan Losses" for
discussion of the provision for loan losses.
<PAGE>
Deposits
Deposit accounts increased $36.2 million to $406.0 million at June 30,
1999 from $369.8 million at June 30, 1998. The increase in deposits resulted
primarily from newly opened branch offices and, to a lesser extent, interest
credited to deposit accounts during the period. The following table presents a
summary of deposits at June 30, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand accounts:
NOW:
Noninterest-bearing $ 19,163 $ 12,757
Interest-bearing 46,533 2.29% 42,221 2.66%
Savings 56,225 2.75 56,740 3.28
Money market 30,099 3.91 18,133 4.04
Certificate accounts 253,991 5.09 239,961 5.60
-------- --------
$406,011 $369,812
======== ========
</TABLE>
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Stockholders' Equity
Stockholders' equity decreased by $59.8 million to $66.0 million at June
30, 1999 from $125.8 million at June 30, 1998. Items that decreased
stockholders' equity were a cash distribution of $43.3 million, the purchase of
$21.0 million of the Company's stock from the open market, and payment of
dividends of $2.7 million. Offsetting these charges to stockholders' equity were
the allocation of shares under the Bank's Employee Stock Ownership Plan ("ESOP")
and the Management Recognition and Development Plan ("MRDP") which totaled $2.4
million, and net income of $5.0 million for the year ended June 30, 1999.
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 yield earned on interest-earning assets and the rate paid
on 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 decreased $2.5 million to $5.0 million for the year ended
June 30, 1999 from $7.5 million for the year ended June 30, 1998 as a result of
increased noninterest expense and the absence of earnings on funds used to
repurchase stock, partially offset by increased noninterest income and a
decreased provision for income taxes due to lower income before income taxes.
The increase in noninterest expense was principally the result of increased
compensation expense. The increased compensation expense was associated with the
MRDP (particularly with a compensation charge related to the cash distribution
on the MRDP shares), and the hiring of additional personnel for the newly opened
branches.
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 Interest Income
Net interest income was $20.3 million for the years ended June 30, 1999
and 1998. Investment income increased 3% to $38.6 million for the year ended
June 30, 1999 from $37.4 million for the year ended June 30, 1998 as a result of
an increase in the average balance of interest-earning assets to $510.5 million
from $481.5 million more than offsetting a decrease in the yield to 7.57% from
7.77% for the respective annual periods. The decrease in the average yield on
<PAGE>
interest-earning assets was due primarily to lower prevailing market interest
rates during the year ended June 30, 1999. The average balance of
interest-earning assets increased as a result of an increase in average loans
receivable and investment securities, partially offset by a decrease in average
overnight interest-bearing deposits. Although interest-earning assets were
higher during the year ended June 30, 1999 as compared to June 30, 1998, share
repurchases of approximately $21.0 million since the year ended June 30, 1998
significantly offset asset growth and, accordingly, investment income. Interest
expense increased 7% to $18.4 million for the year ended June 30, 1999 from
$17.2 million for the year ended June 30, 1998 as a result of an increase in the
average balance of interest-bearing liabilities to $416.0 million from $364.9
million more than offsetting a decrease in the cost of funds to 4.41% from 4.70%
for the respective annual periods. The average balance increased as the result
of deposits obtained through newly opened branch offices and various deposit
promotions as well as increased FHLB advances and other borrowings. The decrease
in the average cost is attributable to the decrease in prevailing market rates
since June 30, 1998. Another factor that affected net interest income was net
interest earnings of approximately $300,000 on excess stock subscription funds
held and refunded in connection with the Conversion in the year ended June 30,
1998, which were absent in the year ended June 30, 1999.
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
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 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 3.07% for the year ended June 30,
1998 from 3.22% for the year ended June 30, 1997.
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 each period have been calculated using daily average
balances. (Dollar amounts in the table are in thousands.)
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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) $441,514 $34,811 7.88% $395,465 $32,146 8.13% $336,476 $27,455 8.16%
Mortgage-backed securities 68 6 8.82 106 9 8.49 138 9 6.52
Investment securities 30,567 1,668 5.46 18,831 1,111 5.90 14,055 903 6.42
FHLB stock 3,492 262 7.50 3,122 229 7.34 2,865 207 7.23
Federal funds sold and overnight
interest-bearing deposits 34,902 1,878 5.38 63,967 3,919 6.13 16,060 888 5.53
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets 510,543 38,625 7.57 481,491 37,414 7.77 369,594 29,462 7.97
------- ---- ------- ---- ------- ----
Noninterest-earning assets 24,740 17,544 15,753
-------- -------- --------
Total assets $535,283 $499,035 $385,347
======== ======== ========
Interest-bearing liabilities(2):
Savings accounts $ 55,485 1,623 2.93 $ 61,931 2,032 3.28 $ 64,062 2,263 3.53
Money market accounts 26,656 1,043 3.91 12,733 434 3.41 13,669 422 3.09
NOW accounts 60,566 1,034 1.71 48,389 1,039 2.15 32,517 651 2.00
Certificate accounts 245,720 13,185 5.37 238,845 13,498 5.65 222,773 12,475 5.60
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total deposits 388,427 16,885 4.35 361,898 17,003 4.70 333,021 15,811 4.75
Advances from FHLB of Atlanta 26,836 1,432 5.34 2,970 150 5.05 -- -- --
Other borrowings 767 49 6.39 -- -- -- -- -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 416,030 18,366 4.41 364,868 17,153 4.70 333,021 15,811 4.75
------- ---- ------- ---- ------- ----
Noninterest-bearing liabilities 5,725 6,901 6,531
-------- -------- --------
Total liabilities 421,755 371,769 339,552
Stockholders' equity 113,528 127,266 45,795
-------- -------- --------
Total liabilities and
stockholders' equity $535,283 $499,035 $385,347
======== ======== ========
Net interest income $20,259 $20,261 $13,651
======= ======= =======
Interest rate spread 3.16% 3.07% 3.22%
==== ==== ====
Net interest margin 3.97% 4.21% 3.69%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.23x 1.32x 1.11x
==== ==== ====
</TABLE>
(1) Includes loans held-for-sale. Includes nonaccrual loans but excludes
interest on nonaccrual loans.
(2) Excludes escrow balances.
9
<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.)
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
Compared to Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
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) $ (957) $3,622 $2,665 $(101) $4,792 $4,691
Mortgage-backed securities -- (3) (3) -- -- --
Investment securities (76) 633 557 (65) 273 208
FHLB stock 5 28 33 3 19 22
Federal funds sold and overnight
interest-bearing deposits (433) (1,608) (2,041) 106 2,925 3,031
------ ------ ------ ----- ------ ------
Total net change in income
on interest-earning assets (1,461) 2,672 1,211 (57) 8,009 7,952
------ ------ ------ ----- ------ ------
Interest-bearing liabilities:
Savings accounts (208) (201) (409) (157) (74) (231)
Money market accounts 72 537 609 35 (23) 12
NOW accounts 22 (27) (5) 52 336 388
Certificate accounts (745) 432 (313) 112 911 1,023
Advances from FHLB of Atlanta 10 1,272 1,282 -- 150 150
Other borrowings -- 49 49 -- -- --
------ ------ ------ ----- ------ ------
Total net change in expense
on interest-bearing liabilities (849) 2,062 1,213 42 1,300 1,342
------ ------ ------ ----- ------ ------
Net change in net interest income $ (612) $ 610 $ (2) $ (99) $6,709 $6,610
====== ====== ====== ====== ====== ======
</TABLE>
(1) Excludes interest on nonaccrual loans.
<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, 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 regulatory requirements.
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 $800,000, $460,000, and
$825,000 for the years ended June 30, 1999, 1998, and 1997, respectively. The
provision for loan losses for 1999 increased over the past year primarily as the
result of the increase in the amount of construction 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.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
Noninterest Income
Noninterest income increased by $1.7 million to $4.1 million for the
year ended June 30, 1999 from $2.4 million for the year ended June 30, 1998,
primarily as a result of an increase in gain on sale of mortgage loans to $1.3
million for the year ended June 30, 1999 from $342,000 in the year ended June
30, 1998. The Bank periodically sells loans in response to interest rate
changes, liquidity needs, and other factors. The Bank sold $61.4 million of
mortgage loans during the year ended June 30, 1999 primarily to reduce the
amount of fixed-rate loans in the loan portfolio. The amount of fixed-rate loan
originations were higher than normal for the year ended June 30, 1999 due to
lower interest rates which led to a higher than normal level of mortgage loan
refinancings. Management cannot predict the level of such gains, if any, in the
future. Service charges and fees increased to $2.2 million for the year ended
June 30, 1999 from $1.4 million for the year ended June 30, 1998 primarily as a
result of increased deposit account fees, particularly on the increased number
of NOW accounts.
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 twelve-month period versus a $97,000 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 $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 Expense
Noninterest expense was $15.0 million for the year ended June 30, 1999
compared to $9.8 million for the year ended June 30, 1998. The increase
consisted principally of increased employee compensation and benefits which
increased to $9.3 million for the year ended June 30, 1999 from $5.0 million for
the year ended June 30, 1998. The increase in compensation expense was
attributable primarily to the adoption of the MRDP in the year ended June 30,
1999. In addition to compensation associated with the vesting of shares under
the MRDP, there was a charge of approximately $2.1 million related to the
payment of the cash distribution on shares of stock in the MRDP. Also, the
hiring of personnel to staff the newly opened branch offices increased
compensation. These increases to compensation expense were offset partially by a
<PAGE>
decrease in ESOP expense due to a lower average stock price used to determine
related compensation expense. 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 1999 become fully operational.
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.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Income Taxes
The provision for income taxes was $3.6 million for the year ended June
30, 1999 compared to $4.8 million for the year ended June 30, 1998 primarily due
to lower income before 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 as a result
of higher income before income taxes.
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). 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 continued testing up to January 1, 2000. The Bank established a Year
2000 test facility and tested the processing system from November 1998 through
January 1999. The test results were satisfactory. Like the Bank, BISYS Year 2000
activities are subject to OTS oversight.
<PAGE>
In addition to addressing its own Year 2000 issues, the Bank is
continuing to assess the impact of the Year 2000 on significant commercial
borrowers. To date, based on written representations from borrowers, the Bank
has determined that substantially all such borrowers have either (a) completed
Year 2000 systems replacement or renovation or (b) developed Year 2000
remediation plans. The Bank continues to monitor those borrowers whose plans
have not yet been completed. Based upon borrowers' representations, the Bank
believes that its significant commercial borrowers will have Year 2000 compliant
systems in place before December 31, 1999. However, those borrowers cannot give
assurance that their customers or suppliers will be Year 2000 compliant before
December 31, 1999. The Bank is unable to determine the impact upon collections
on these loans should either the borrowers' representations prove inaccurate or
their suppliers or customers not be Year 2000 compliant.
The Bank has recently organized a Year 2000 liquidity committee. This
committee is in the process of estimating cash needs in the event there are
unusually high cash withdrawals at or near December 31, 1999. In addition to
planning for the availability of liquid funds, this committee will also develop
plans for distribution of cash to the Bank's offices and any other related
plans.
The external costs associated with the Bank's Year 2000 compliance
incurred to date have been less than $100,000. Additional external costs are
expected to be less than $25,000. The Bank has not separately tracked internal
costs associated with Year 2000 compliance. Such costs would consist principally
of personnel costs of employees on various committees, a Year 2000 coordinator
and operational personnel involved in system testing. The majority of all
12
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
required hardware upgrades 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.
The Bank's operations are highly dependent on computer systems and
computer hardware, both internal and those provided through third parties. Due
to such a high level of dependency on computers and computer systems, the
failure of systems due to Year 2000 problems could have a material adverse
financial impact on the Bank. The following risks are believed by management to
present the most reasonably likely worst-case scenario:
o BISYS could experience unforseen system(s) failure resulting in the
inability to access customer accounts and process transactions;
o Loss of utilities could cause major disruptions of business. Should the
Bank lose power, it would lose the ability to operate electronic
equipment to access customer accounts. Should telephone service be
disrupted the Bank would lose the ability to communicate with BISYS,
which again would prohibit access to customer accounts;
o Failures in the payments system could cause a severe disruption to the
Bank's business. These failures could occur in the Federal Reserve
Banks, correspondent banks, or electronic payments clearing houses.
These failures could cause processing backlogs and could affect the
Bank's ability to process customer deposits and withdrawals as well as
fund loans;
o Failures of the Bank's correspondent banks such as the FHLB could
impair the Bank's liquidity and the ability to process certain
payments;
o Loss of customer confidence that the Bank or the banking system in
general will be Year 2000 compliant could cause excessive deposit
withdrawals impairing the Bank's liquidity.
Should any or a combination of any of the above scenarios actually
materialize, the results could be loss of revenue, increased costs, and/or
impaired liquidity. It is not possible to estimate the extent of loss that may
occur nor is it possible to estimate the length of time that it would take to
remedy any problems encountered.
There can be no assurances that the Bank, BISYS, other third-party
processors, government agencies, utility companies, correspondent banks, or any
other vendor upon which the Bank relies will effectively address the Year 2000
problem. Year 2000 failures by any of the above mentioned parties could cause a
material adverse affect on the Bank and the Company.
Market Risk and Interest Rate Sensitivity
Market risk is the risk of loss from adverse changes in market prices
and interest rates. Risk associated with market interest rate volatility
("interest rate risk") is the Company's principal market risk exposure.
Substantially all of the Company's interest rate risk is derived from the Bank's
<PAGE>
lending, investment, 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 Company
does not own any trading assets nor does it have any hedging contracts or
derivative 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.
The Company's objective is to maximize net interest income while
managing its interest rate risk. Interest rate risk is monitored and managed
principally through the Bank's Asset/Liability Committee ("ALCO"), which is
comprised of four senior officers and a member of the Bank's Board of Directors.
The ALCO develops and reviews business strategies that further the Bank's
objective of increasing net interest income while managing interest rate risk.
The ALCO meets regularly to review the current balance sheet structure, current
and potential changes in market interest rates, economic outlook, and the impact
of specific business strategies, among other issues. Considered in the review of
the current balance sheet structure are, among other things, the sensitivity of
assets and liabilities to changes in interest rates, liquidity, loan origination
and sales activity, deposit inflows and outflows, investment portfolio activity,
and borrowings.
In order to manage its interest rate risk, the Company has in recent
years sold fixed-rate mortgage loans with terms in excess of 15 years,
originated and purchased adjustable-rate mortgage loans, and implemented
programs to increase shorter-term, variable-rate loans such as construction,
commercial, and consumer loans. In recent years, an emphasis has been placed on
generating transactional deposit accounts which have a longer average life and
are less sensitive to changes in interest rates. Also, advances from the FHLB
have been obtained, some of which have longer terms to maturity and /or
repricing than the Company's average certificates of deposit.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The principal method utilized by ALCO to evaluate the Bank's exposure to
changes in interest rates is a sensitivity analysis which measures the change in
the Bank's net portfolio value ("NPV") and net interest income under various
interest rate scenarios. 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
Bank utilizes a sensitivity model developed and maintained by the FHLB.
The OTS utilizes the NPV methodology to evaluate interest sensitivity in
its regulation and supervision of the Bank. The OTS utilizes its own model with
data submitted by the Bank on the quarterly Thrift Financial Report. The results
of the OTS model may differ from the results of the FHLB model due to
differences in assumptions about loan prepayment rates, cash flow reinvestment
rates, and deposit decay rates, among others.
The following table sets forth the change in the Company's NPV at June
30, 1999 and 1998 based on the FHLB model, 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 ARM 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.)
<TABLE>
<CAPTION>
At June 30,
1999 1998
------------------- -------------------
Basis Point Estimated Change in Estimated Change in
Change in Rate Net Portfolio Value Net Portfolio Value
-------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
+200 $(15,349) (16.2)% $(13,872) (11.2)%
+100 (7,244) (7.6) (6,936) (5.6)
0 -- -- -- --
-100 6,404 6.7 2,741 2.2
-200 12,003 12.6 5,482 4.4
</TABLE>
<PAGE>
The above table illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at June 30, 1999 would reduce the
Company's NPV by approximately $15.3 million at that date. Certain assumptions
utilized in assessing the interest rate risk of savings banks within the Bank's
geographic 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. The level of interest rate sensitivity as indicated by
the table above at June 30, 1999 and 1998 are within policy limits established
by the Company's Board of Directors.
While the Company principally utilizes the NPV method to evaluate its
interest rate exposure as previously discussed, the following table presents the
Company's financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity, and the instruments' average rates and fair
values at June 30, 1999. The table was prepared based upon the FHLB interest
sensitivity model and certain assumptions about loan prepayment rates and
deposit decay rates, among others, were utilized. 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 material 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.)
14
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
<TABLE>
<CAPTION>
Average Within One One Year After 3 Years Beyond
Rate Year To 3 Years To 5 Years 5 Years Total Fair Value
---- ---- ---------- ---------- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Loan receivable, net of loans in
process and deferred loan fees 7.72% $ 120,743 $126,944 $ 80,803 $109,587 $438,077 $436,232
Loans held-for-sale 7.35 8,984 -- -- -- 8,984 9,089
Mortgage-backed securities 8.00 -- 54 -- -- 54 55
Investment securities 5.37 18,334 1,479 2,937 594 23,344 23,344
FHLB stock 7.38 3,612 -- -- -- 3,612 3,612
Federal funds sold and overnight
interest-bearing deposits 4.95 43,782 -- -- -- 43,782 43,782
--------- -------- -------- -------- -------- --------
Total interest-sensitive assets 195,455 128,477 83,740 110,181 517,853 516,114
--------- -------- -------- -------- -------- --------
Interest-sensitive liabilities:
Passbook accounts 2.75 9,665 14,651 9,551 22,358 56,225 56,225
Money market accounts 3.91 23,778 3,311 1,577 1,433 30,099 30,099
NOW accounts 1.62 24,562 22,466 6,012 12,656 65,696 65,696
Certificate accounts 5.09 225,328 22,333 6,330 -- 253,991 253,546
Advances from FHLB 5.23 17,000 -- 17,000 -- 34,000 33,266
Other borrowings 6.39 35,000 -- -- -- 35,000 35,000
--------- -------- -------- -------- -------- --------
Total interest-sensitive liabilities 335,333 62,761 40,470 36,447 475,011 473,832
--------- -------- -------- -------- -------- --------
Rate sensitive gap $(139,878) $ 65,716 $ 43,270 $ 73,734 $ 42,842 $ 42,282
========= ============ ======== ======== ======== =========
Cumulative rate sensitive gap $(139,878) $ (74,162) $(30,892) $ 42,842 $ -- $ --
========= ============ ======== ======== ======== =========
Off-balance sheet items:
Commitments to extend credit 7.32 $ 6,462 $ -- $ -- $ -- $ 6,462 $ 6,462
Unused lines of credit 9.13 50,881 -- -- -- 50,881 50,881
Loans in process 8.36 34,807 -- -- -- 34,807 34,807
</TABLE>
<PAGE>
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, FHLB advances, and other borrowings. 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, 1999, cash and cash equivalents totaled $58.4 million, or 11% of
total assets, and investment securities classified as available-for-sale with
maturities of one year or less totaled $18.3 million. At June 30, 1999, 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 $34.0 million had been advanced.
As of June 30, 1999, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30, 1999, under regulations of the
OTS, the Bank's actual tangible, core, and risk-based capital ratios were 16.8%,
16.8%, and 27.2%, respectively, compared to requirements of 1.5%, 3.0%, and
8.0%, respectively.
15
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
At June 30, 1999, the Company had loan commitments (excluding
undisbursed portions of interim construction loans) of approximately $6.5
million ($2.6 million at fixed rates ranging from 7.25% to 9%). In addition, at
June 30, 1999, the unused portion of credit (principally variable-rate home
equity lines of credit) extended by the Company was approximately $50.9 million.
Furthermore, at June 30, 1999, the Company had certificates of deposit scheduled
to mature in one year or less of $225.3 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
See Note 1 to the Consolidated Financial Statements for a discussion of
recently issued accounting standards that affect accounting, reporting, and
disclosure of financial information by the Company.
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 Bank'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.
16
<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, 1999 and 1998, and the related consolidated statements of income,
equity, and cash flows for each of the three years in the period ended
June 30, 1999. 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999
in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
July 16, 1999
Greenville, South Carolina
17
<PAGE>
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, 1999 and 1998
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash $ 14,638 $ 8,450
Federal funds sold and overnight interest-bearing deposits 43,782 40,518
----------- -----------
Total cash and cash equivalents 58,420 48,968
Investment securities available-for-sale - at fair value (amortized cost:
$23,489 and $28,732 at June 30, 1999 and 1998, respectively) 23,344 28,709
Mortgage-backed securities held-to-maturity - at amortized cost
(fair value: $55 and $90 at June 30, 1999 and 1998, respectively) 54 88
Loans receivable, net 435,181 416,462
Loans held-for-sale - at lower of cost or market (market value:
$9,089 and $7,315 at June 30, 1999 and 1998, respectively) 8,984 7,294
Office properties and equipment, net 10,370 8,445
Federal Home Loan Bank of Atlanta stock - at cost 3,612 3,446
Accrued interest receivable 3,203 2,813
Real estate acquired in settlement of loans 348 36
Other assets 2,209 1,172
----------- -----------
Total Assets $ 545,725 $ 517,433
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 406,011 $ 369,812
Advances from borrowers for taxes and insurance 1,004 1,063
Advances from Federal Home Loan Bank of Atlanta 34,000 17,000
Other borrowings 35,000 --
Other liabilities 3,669 3,797
----------- -----------
Total liabilities 479,684 391,672
----------- -----------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued or
outstanding at June 30, 1999 and 1998 -- --
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued: 4,430,375 at
June 30, 1999 and 1998; outstanding: 3,787,970 and
4,253,160 at June 30, 1999 and 1998, respectively 44 44
Additional paid-in capital 82,289 87,624
Retained earnings 15,264 52,662
Treasury stock - at cost (642,405 and 177,215 shares
at June 30, 1999 and 1998, respectively) (20,955) (8,113)
Unearned restricted stock (4,660) --
Unallocated ESOP stock (5,851) (6,442)
Accumulated other comprehensive loss (90) (14)
----------- -----------
Total stockholders' equity 66,041 125,761
----------- -----------
Total Liabilities and Stockholders' Equity $ 545,725 $ 517,433
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Income
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Investment Income:
Interest on loans $ 34,811 $ 32,146 $ 27,455
Interest and dividends on investment securities,
mortgage-backed securities, and other 3,814 5,268 2,007
----------- ----------- -----------
Total investment income 38,625 37,414 29,462
----------- ----------- -----------
Interest Expense:
Deposit accounts 16,885 17,003 15,811
Advances from Federal Home Loan Bank of Atlanta 1,432 150
Other borrowings 49 -- --
----------- ----------- -----------
Total interest expense 18,366 17,153 15,811
----------- ----------- -----------
Net Interest Income
20,259 20,261 13,651
Provision for Loan Losses 800 460 825
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 19,459 19,801 12,826
----------- ----------- -----------
Noninterest Income (Loss):
Service charges and fees 2,225 1,378 1,090
Gain on sale of mortgage loans 1,333 342 38
Loss on sale of investments (53) -- (12)
Other, net 593 646 270
----------- ----------- -----------
Total noninterest income, net 4,098 2,366 1,386
----------- ----------- -----------
Noninterest Expense:
Employee compensation and benefits 9,318 5,016 4,025
Federal deposit insurance premium 326 354 2,278
Occupancy and equipment expense 1,504 1,106 1,006
Computer services 481 680 523
Advertising and promotions 543 566 463
Office supplies, postage, printing, etc 751 626 535
Other 2,057 1,472 1,073
----------- ----------- -----------
Total noninterest expense 14,980 9,820 9,903
----------- ----------- -----------
Income Before Income Taxes 8,577 12,347 4,309
Provision for Income Taxes 3,602 4,807 1,587
----------- ----------- -----------
Net Income $ 4,975 $ 7,540 $ 2,722
=========== =========== ===========
Basic and Diluted Earnings Per Share $ 1.36 $ 1.85 $ --
=========== =========== ===========
Weighted Average Shares Outstanding 3,665,778 4,066,692 --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998 and 1997
Other
Addi- Unallo- Compre-
tional Unearned cated hensive
Common Stock Paid-In Retained Treasury Restricted ESOP (Loss) Total
Shares Amount Capital Earnings Stock Stock Stock Income Equity
------ ------ ---------------- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 -- $ -- $ -- $ 44,238 $ -- $ -- $ -- $ (84) $ 44,154
--------- ----- ------- ------- -------- --------- -------- ----- --------
Net income -- -- -- 2,722 -- -- -- -- 2,722
Unrealized gain on securities
available-for-sale, net of taxes -- -- -- -- -- -- -- 102 102
--------- ----- ------- ------- -------- --------- -------- ----- --------
Total comprehensive income -- -- -- 2,722 -- -- -- 102 2,824
--------- ----- ------- ------- -------- --------- -------- ----- --------
Balance, June 30, 1997 -- -- -- 46,960 -- -- -- 18 46,978
--------- ----- ------- ------- -------- --------- -------- ----- --------
Net income -- -- -- 7,540 -- -- -- -- 7,540
Unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- -- -- -- (32) (32)
--------- ----- ------- ------- -------- --------- -------- ----- --------
Total comprehensive income -- -- -- 7,540 -- -- -- (32) 7,508
--------- ----- ------- ------- -------- --------- -------- ----- --------
Issuance of common stock 4,430,375 44 86,981 -- -- -- (7,089) -- 79,936
ESOP stock 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
--------- ----- ------- ------- -------- --------- -------- ----- --------
Net income -- -- -- 4,975 -- -- -- -- 4,975
Unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- -- -- -- (76) (76)
--------- ----- ------- ------- -------- --------- -------- ----- --------
Total comprehensive income -- -- -- 4,975 -- -- -- (76) 4,899
--------- ----- ------- ------- -------- --------- -------- ----- --------
Issuance of treasury stock
to MRDP 177,215 -- (670) -- 8,113 (7,443) -- -- --
ESOP stock committed
for release -- -- 356 -- -- -- 591 -- 947
Purchase of treasury stock (642,405) -- -- -- (20,955) -- -- -- (20,955)
Dividends ($0.75 per share) -- -- -- (2,732) -- -- -- -- (2,732)
Prorata vesting of restricted stock -- -- -- -- -- 1,450 -- -- 1,450
Cash distribution
($12.00 per share) -- -- (5,021) (39,641) -- 1,333 -- -- (43,329)
--------- ----- ------- ------- -------- --------- -------- ----- --------
Balance, June 30, 1999 3,787,970 $ 44 $82,289 $15,264 $(20,955) $ (4,660) $ (5,851) $ (90) $ 66,041
========= ===== ======= ======= ======== ========= ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
--------- ------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,975 $ 7,540 $ 2,722
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 800 460 825
Deferred income tax benefit (60) (829) (435)
Amortization of deferred income (632) (219) (157)
Amortization of loan servicing assets 127 72 74
Amortization (accretion) of premiums (discounts)
on investments and mortgage-backed securities 6 3 (20)
Depreciation 797 603 529
Allocation of ESOP stock at fair value 947 1,290 --
Prorata vesting of restricted stock 1,450 -- --
Loss on sale of investment securities available-for-sale 53 -- 12
Gain on sale of real estate acquired in settlement of loans -- -- (14)
Loss on disposal of property and equipment 13 7 11
(Increase) decrease in loans held-for-sale (1,690) (5,677) 294
(Increase) decrease in other assets (1,554) 9 (1,131)
Decrease in other liabilities (81) (237) (663)
--------- ------- ----------
Net cash provided by operating activities 5,151 3,022 2,047
--------- ------- ----------
Cash Flows from Investing Activities:
Net loan originations and principal collections 46,613 (30,129) (33,740)
Purchase of loans (65,812) (23,846) (14,911)
Purchase of investment securities available-for-sale (17,317) (29,063) (1,374)
Proceeds from sale of investment securities available-for-sale 17,000 -- 8,000
Proceeds from maturities of investment securities
available-for-sale 5,500 10,500 1,500
Principal repayments and proceeds from maturities
of mortgage-backed securities 35 33 75
Proceeds from sale of real estate acquired
in settlement of loans -- -- 227
Purchase of Federal Home Loan Bank of Atlanta stock (166) (435) (205)
Purchase of property and equipment (2,738) (2,461) (2,249)
Proceeds from sale of property and equipment 3 -- 227
--------- ------- ----------
Net cash used in investing activities (16,882) (75,401) (42,450)
--------- ------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Net increase in deposits 36,199 36,661 47,362
Dividends paid (2,732) (1,838) --
Cash distribution (43,329) -- --
Advances from Federal Home Loan Bank of Atlanta 17,000 17,000 --
Other borrowings 35,000 -- --
Purchase of treasury stock (20,955) (8,113) --
Stock subscription proceeds -- -- 259,329
Stock subscription refunds -- (197,851) --
Stock issuance costs -- (1,584) --
--------- ------- ----------
Net cash provided by (used in) financing activities 21,183 (155,725) 306,691
--------- ------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 9,452 (228,104) 266,288
Cash and Cash Equivalents at Beginning of Year 48,968 277,072 10,784
--------- ------- ----------
Cash and Cash Equivalents at End of Year $ 58,420 $ 48,968 $ 277,072
======== ======== =========
</TABLE>
21
<PAGE>
Consolidated Statements of Cash Flows (continued)
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
--------- ------- ----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 17,447 $ 17,433 $ 15,715
========= ======== ==========
Income taxes $ 4,821 $ 5,358 $ 1,870
========= ======= ==========
Supplemental Disclosures of Non-Cash Transactions:
Transfers from loans to real estate acquired in
settlement of loans $ 312 $ -- $ 191
========= ======== ==========
Change in unrealized (loss) gain on investment
securities available-for-sale $ (122) $ (52) $ 165
========= ======== ==========
Change in deferred taxes related to unrealized loss
(gain) on investment securities available-for-sale $ 46 $ 20 $ (63)
========= ======== ==========
Transfer of common stock from treasury to MRDP $ 7,443 -- $ --
========= ======== ==========
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 $ --
========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
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 eligible depositors and the Association's Employee Stock
Ownership Plan ("ESOP") on July 8, 1997.
The Corporation issued approximately 4.4 million shares of common stock
for proceeds of approximately $87.0 million (net of costs of $1.6 million). The
Association issued all of its outstanding capital stock to the Corporation in
exchange for one-half of the net proceeds. 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 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 or the Association and its subsidiary.
FirstService has a one-third ownership interest in a mortgage banking
company which is accounted for using the equity method of accounting. The
investment is included in Other Assets in the balance sheet and totaled $632,000
and $484,000, at June 30, 1999 and 1998, respectively. Equity in the earnings
(losses) of the mortgage banking company is included in Other Income in the
statement of income and totaled $149,000, $181,000 and $(97,000) for the years
ended June 30, 1999, 1998 and 1997, respectively.
Significant intercompany balances and transactions have been eliminated
in consolidation.
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
primarily limited 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.
<PAGE>
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.
Gains and losses on sales of securities are determined on the specific
identification method. Premiums and discounts are amortized to maturity on a
method that approximates the level yield method.
23
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
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.
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 are 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. The carrying value of loan servicing rights and the
amortization thereon are periodically evaluated in relation to estimated future
net servicing revenues. The Company evaluates the carrying value of the
servicing portfolio for impairment by estimating the future net servicing income
of the portfolio based on management's best estimate of remaining loan lives and
estimated prepayment rates. Loan type and note rate are the predominant risk
characteristics of the underlying loans used to stratify capitalized mortgage
servicing rights for purposes of measuring impairment. At June 30, 1999 and 1998
the cost of the mortgage servicing rights approximated their fair value. 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
<PAGE>
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 examination.
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 judgment
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 through a valuation allowance which is included as a component of
the allowance for loan losses.
24
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
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, 1999, 1998 and 1997 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.
Recently Issued Accounting Standards - The following is a summary of
recent Statements of Financial Accounting Standards ("SFAS") issued by the
Financial Accounting Standards Board ("FASB") that affect accounting, reporting,
and disclosure of financial information by the Company:
o 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 is to be disclosed separately from retained
earnings in the equity section of the balance sheet. The Company
adopted this statement for the fiscal year ended June 30, 1999.
o SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" - This statement establishes standards for the
way public business enterprises report information about operating
segments and establishes standards for related disclosures about
products and services, geographic areas, and major customers.
Operating segments are components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Information
required to be disclosed includes segment profit or loss, certain
specific revenue and expense items, segment assets, and certain
other information. This statement is effective for the Company for
financial statements issued for the fiscal year ended June 30,1999.
Management has reviewed this statement and determined that the
Company has one qualifying segment, and therefore no additional
disclosure is required.
<PAGE>
o 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. SFAS No. 137 delayed the implementation date for
this standard and, as a result, it will become effective for the
Company for the fiscal year beginning July 1, 2000. The Company is
in the process of evaluating the effect of SFAS No. 133 on its
financial position and results of operations, and therefore is
unable to estimate the effect of the adoption. It may not be
applied retroactively.
Reclassification - Certain June 30, 1998 and 1997 amounts have been
reclassified to conform to the June 30, 1999 presentation.
25
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
2. Investment and Mortgage-Backed Securities
Investment securities available-for-sale at June 30, 1999 and 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government Agency obligations $ 5,497 $ -- $ (61) $ 5,436
State and local obligations 1,480 -- (12) 1,468
-------- -------- -------- --------
6,977 -- (73) 6,904
Marketable equity securities 16,512 76 (148) 16,440
-------- -------- -------- --------
$ 23,489 $ 76 $ (221) $ 23,344
======== ======== ======== ========
<CAPTION>
June 30, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
<PAGE>
Gross realized gains and losses on sales of investment securities
available-for-sale for the years ended June 30, 1999, 1998 and 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998 1997
---- --- ----
<S> <C> <C> <C>
Gross gains $ 10 $-- $ 3
Gross losses (63) -- (15)
---- --- ----
Net losses $(53) $-- $(12)
==== === ====
</TABLE>
Marketable equity securities at June 30, 1999 and 1998 consist principally of a
mutual fund that invests in adjustable-rate mortgages.
Investment securities totaling approximately $4.8 million at June 30,
1999 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,
1999 (in thousands):
26
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due after one through five years $6,460 $6,387
Due after ten years 517 517
------ ------
$6,977 $6,904
====== ======
</TABLE>
Mortgage-backed securities held-to-maturity at June 30, 1999 and 1998
consist of U.S. Government Agency obligations. Gross unrealized gains and losses
were not material at June 30, 1999 and 1998. The contractual maturity of the
entire balance of mortgage-backed securities at June 30, 1999 is due within five
years.
3. Loans Receivable
Loans receivable at June 30, 1999 and 1998 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
June 30,
1999 1998
--------- ---------
<S> <C> <C>
Real estate mortgage loans:
Residential (1-4 family) $ 290,219 $ 312,981
Construction 72,373 41,089
Land development 18,864 16,729
Commercial 23,587 13,817
--------- ---------
405,043 384,616
--------- ---------
Consumer and commercial loans:
Home equity 43,623 40,746
Commercial 13,885 6,987
Other 10,894 9,058
--------- ---------
68,402 56,791
--------- ---------
Gross loans 473,445 441,407
--------- ---------
Less:
Undisbursed portion of loans in process (34,807) (21,923)
Net deferred loan fees (561) (843)
Allowance for loan losses (2,896) (2,179)
--------- ---------
Net loans $ 435,181 $ 416,462
========= =========
</TABLE>
<PAGE>
The changes in the allowance for loan losses consisted of the following
(in thousands):
<TABLE>
<CAPTION>
June 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Allowance, beginning of year $ 2,179 $ 1,796 $ 1,000
Provision 800 460 825
Write-offs (85) (80) (39)
Recoveries 2 3 10
------- ------- -------
Allowance, end of year $ 2,896 $ 2,179 $ 1,796
======= ======= =======
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
At June 30, 1999 and 1998, the Company had loans totaling $1.2 million
which were in nonaccrual status. Interest income that would have been recorded
for the years ended June 30, 1999, 1998 and 1997 had nonaccrual loans been
current in accordance with their contractual terms amounted to $52,000, $58,000
and $34,000, respectively. The amount of interest included in interest income on
such loans for such periods amounted to $51,000, $48,000 and $18,000,
respectively. The Company had impaired loans at June 30, 1999 and 1998 as
follows (in thousands):
<TABLE>
<CAPTION>
June 30,
1999 1998
----- -------
<S> <C> <C>
Impaired loans:
No valuation allowance required $ 722 $ 1,112
Valuation allowance required -- 214
----- -------
$ 722 $ 1,326
===== =======
Valuation allowance $ -- $ 15
===== =======
</TABLE>
The average recorded investment in impaired loans was $1.0 million, $1.3
million and $1.5 million for the years ended June 30, 1999, 1998 and 1997,
respectively. Interest income recognized on impaired loans was not significant
during the years ended June 30, 1999, 1998 and 1997.
Residential real estate loans are presented net of loans serviced for
others totaling approximately $102.9 million, $56.4 million and $54.5 million at
June 30, 1999, 1998 and 1997, 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
$438,000, $253,000 and $248,000 at June 30, 1999, 1998 and 1997, respectively.
The following is an analysis of the changes in mortgage servicing rights
(in thousands):
<TABLE>
<CAPTION>
June 30,
1999 1998 1997
------- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 213 $ 24 $ --
Capitalization 907 206 28
Amortization (78) (17) (4)
------- ---- ----
Balance, end of year $ 1,042 $213 $ 24
======= ==== ====
</TABLE>
<PAGE>
The Company originates loans to officers and directors at terms
substantially identical to other borrowers. Mortgage and consumer loans to
officers and directors at June 30, 1999 and 1998 were approximately $1.2 million
and $1.1 million, respectively.
28
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
4. Office Properties and Equipment
Office properties and equipment at June 30, 1999 and 1998 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
1999 1998
-------- -------
<S> <C> <C>
Major classification:
Land $ 2,099 $ 2,094
Office buildings and improvements 8,472 6,753
Furniture, fixtures, and equipment 4,445 3,522
Automobiles 108 75
-------- -------
15,124 12,444
Less accumulated depreciation (4,754) (3,999)
-------- -------
Office properties and equipment, net $ 10,370 $ 8,445
======== =======
</TABLE>
5. Deposit Accounts
Deposit accounts at June 30, 1999 and 1998 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand accounts:
NOW:
Noninterest-bearing $ 19,163 $ 12,757
Interest-bearing 46,533 2.29% 42,221 2.66%
Savings 56,225 2.75 56,740 3.28
Money market 30,099 3.91 18,133 4.04
Certificate accounts 253,991 5.09 239,961 5.60
-------- --------
$406,011 $369,812
======== ========
</TABLE>
<PAGE>
Scheduled maturities of certificate accounts at June 30, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Within 1 year $225,328
After 1 but within 2 years 17,481
After 2 but within 3 years 4,852
Thereafter 6,330
--------
$253,991
========
</TABLE>
The aggregate amount of certificate accounts with principal amounts of
$100,000 or more was $61.5 million and $49.0 million at June 30, 1999 and 1998,
respectively. Deposits in excess of $100,000 are not federally insured.
29
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
Interest expense by type of deposit is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Demand accounts:
Savings $ 1,623 $ 2,032 $ 2,263
NOW 1,034 1,039 651
Money market 1,043 434 422
Certificate accounts 13,185 13,498 12,475
------- ------- -------
$16,885 $17,003 $15,811
======= ======= =======
</TABLE>
6. Advances from Federal Home Loan Bank of Atlanta
The Company had advances from the Federal Home Loan Bank of Atlanta
("FHLB"), all of which were at a fixed rate with interest payable quarterly and
principal due at maturity. Additionally, all of the advances are convertible
prior to maturity (at the option of the FHLB) to a variable three-month
LIBOR-based rate. These advances are either (a) convertible one-time only at a
future conversion date or (b) convertible at any quarterly payment date on or
after a future conversion date. Should the FHLB exercise its conversion option
on any advance, the Company has the right to prepay the advance on any quarterly
payment date through maturity. Outstanding advances at June 30, 1999 and 1998
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
Earliest 1999 1998
Advance Type Maturity Date Conversion Date Amount Rate Amount Rate
------------ ------------- --------------- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
One-time convertible March 26, 2008 March 26, 2003 $ 2,000 5.44% $ 2,000 5.44%
One-time convertible June 23, 2008 June 23, 2003 5,000 5.51 5,000 5.51
One-time convertible August 25, 2008 August 25, 2003 10,000 5.52 -- --
One-time convertible April 22, 2004 April 22, 2001 4,000 5.01 -- --
One-time convertible April 22, 2004 April 22, 2001 3,000 4.96 -- --
Continuously convertible
after conversion date April 7, 2008 April 7, 1999 10,000 4.91 10,000 4.91
------- -------
$34,000 5.23 $17,000 5.15
======= ==== ======= ====
</TABLE>
<PAGE>
The maximum month-end balance of FHLB advances outstanding was $34.0
million and $17.0 million during the years ending June 30, 1999 and 1998,
respectively. Average balances of FHLB advances outstanding during the years
ended June 30, 1999 and 1998 were $26.8 million and $3.0 million, respectively.
The Company had an approved credit limit of $75.0 million with the FHLB as of
June 30, 1999. The advances are secured by FHLB stock and a blanket lien on all
qualifying one- to four-family residential first mortgage loans.
7. Short-Term Borrowings
At June 30, 1999, the Company had outstanding a $35.0 million note
payable to a commercial bank. The note, dated June 23, 1999, bearing interest at
three-month LIBOR plus 1.0%, was due on August 15, 1999. All of the outstanding
stock of the Bank was pledged as collateral on the loan. The note was paid in
full on July 22, 1999.
30
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
8. 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, 1999 and 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
June 30,
1999 1998
------ ------
<S> <C> <C>
Deferred tax liabilities:
Mortgage servicing rights $ 396 $ 81
FHLB stock dividends 431 431
Accumulated depreciation 289 206
Deferred loan fees and costs, net 17 --
Other 201 132
------ ------
1,334 850
------ ------
Deferred tax assets:
Allowance for loan losses 599 128
Management recognition and development plan 308 --
Unrealized loss on investment securities
available-for-sale 55 9
Deferred loan fees and costs, net -- 165
Other 160 230
------ ------
1,122 532
------ ------
Net deferred tax liability $ 212 $ 318
====== ======
</TABLE>
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.
<PAGE>
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.
Retained earnings as of June 30, 1999 include 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.
31
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
The provision for income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current provision:
Federal $ 3,180 $ 4,956 $ 1,763
State 482 680 259
------- ------- -------
3,662 5,636 2,022
Deferred provision:
Federal (50) (700) (377)
State (10) (129) (58)
------- ------- -------
(60) (829) (435)
------- ------- -------
Total provision for income taxes $ 3,602 $ 4,807 $ 1,587
======= ======= =======
</TABLE>
For the years ended June 30, 1999, 1998 and 1997, a tax provision
(benefit) of $(46,000), $(20,000) and $63,000, respectively, was allocated to
equity for the tax effects of unrealized gains and losses on securities
available-for-sale.
The Company's effective tax rate is greater than the statutory Federal
income tax rate for the following reasons (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Tax at statutory Federal income tax rate (34%) $ 2,916 $ 4,198 $ 1,465
Increase (decrease) resulting from:
State income taxes 304 364 133
Nondeductible compensation:
ESOP 121 218 --
MRDP 217 -- --
Other, net 44 27 (11)
------- ------- -------
$ 3,602 $ 4,807 $ 1,587
======= ======= =======
Effective income tax rate 42.0% 38.9% 36.8%
======= ======= =======
</TABLE>
<PAGE>
9. Employee Benefit Plans
401(k) Plan - The Company sponsors a 401(k) plan which covers all
employees who meet minimum eligibility requirements. Participants generally may
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 $125,000, $105,000 and $83,000
in the years ended June 30, 1999, 1998 and 1997, respectively.
ESOP - The ESOP is a noncontributory retirement plan adopted by the
Company effective January 1, 1997 which covers 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.
In connection with the cash distribution (discussed in note 12), the ESOP
received approximately $4.3 million on its shares of the Corporation's common
stock. The ESOP purchased an additional 180,436 shares with the proceeds.
32
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
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 secured 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 then are 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 $947,000 and $1.3 million in compensation expense in the years
ended June 30, 1999 and 1998, respectively, related to the ESOP of which
approximately $590,000 and $650,000 reduced the cost of unallocated ESOP shares
and $360,000 and $640,000 increased additional paid-in capital on the balance
sheet in each respective year.
The cost of the shares not yet committed to be released from collateral
is reflected as a reduction of stockholders' equity. Uncommitted 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
years ended June 30, 1999 and 1998 totaled 29,536 and 32,333, respectively.
Shares remaining not released or committed to be released for allocation at June
30, 1999 and 1998 totaled 441,553 and 322,097 and had a market value of
approximately $10.3 and $13.4 million, respectively.
10. 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.
<PAGE>
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 which became the basis of recognizing
compensation over the five-year 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. In connection with the $12.00 per share cash distribution on June
25, 1999 (discussed in note 12), a compensation charge of $2.1 million was
recorded related to the pass through of the cash distribution on the shares in
the MRDP. Also, as a result of the cash distribution, the basis of recognizing
compensation over the vesting period was reduced from $42.00 to $32.67.
Stock Option Plan - 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 cash
settlement of any outstanding options.
33
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
The following is an analysis of stock option activity:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Options Exercise
for Grant Outstanding Price
-------- ------- ------
<S> <C> <C> <C>
Balance, June 30, 1998 -- -- $ --
Plan adopted 443,038 -- --
Granted (414,793) 414,793 21.73
Forfeited 1,000 (1,000) 21.75
-------- ------- ------
Balance, June 30, 1999 29,245 413,793 21.73
======== ======= ======
</TABLE>
Of the 414,793 options granted in the year ended June 30, 1999, 363,291
were granted at the plan's inception on July 9, 1998 at an exercise price of
$42.00. 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 significantly.
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.
In connection with the $12.00 per share cash distribution (discussed in
Note 12), the exercise price of all options was adjusted in accordance with FASB
Emerging Issues Task Force Issue No. 90-9, "Changes to Fixed Employee Stock
Option Plans as a Result of Equity Restructuring." The weighted average
reduction in exercise price was $12.00 per share.
The following is a summary of stock options outstanding at June 30,
1999:
<TABLE>
<CAPTION>
Average
Remaining
Exercise Contractual Options Options
Price Life (Years) Outstanding Exercisable
----- ------------ ----------- -----------
<S> <C> <C> <C> <C>
$21.75 9.1 410,793 --
19.39 9.8 3,000 --
21.73 9.1 413,793 --
===== === ======= ==
</TABLE>
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25 ("APB
25"), "Accounting for Stock Issued to Employees," and related interpretations in
accounting for the plan. No compensation cost has been recognized for the plan
because the stock option price is equal to or greater than the fair value at the
grant date. Had compensation cost for the plan been determined based on the fair
value method of SFAS 123 "Accounting for Stock-Based Compensation," the
Company's net income and net income per share for the year ended June 30, 1999
would have decreased to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Net income:
As reported $ 4,975
Pro forma 4,054
Basic earnings per share:
As reported 1.36
Pro forma 1.11
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
The weighted average fair value of options granted in 1999 was $11.37
per share. The fair value of the option grant is estimated on the date of grant
using an option pricing model with the following assumptions:
<TABLE>
<CAPTION>
<S> <C>
Dividend yield 3%
Risk-free interest rate 5.07%-5.75%
Expected volatility 25%
Expected life (years) 8
</TABLE>
11. 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 $6.5 million ($2.6 million at fixed rates ranging from
7.25%-9.00%) at June 30, 1999. 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, 1999,
unused lines of credit extended by the Company (principally variable-rate
consumer lines secured by real estate) amounted to approximately $50.9 million.
Loans Sold with Recourse - At June 30, 1999, approximately $1.7 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 activity is
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
<PAGE>
on deposits and borrowings. Like most financial institutions, the Company's
interest income and interest expense are affected significantly 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 may be affected adversely
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
35
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
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.
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 weeks to 18 months of
their current compensation based upon length of service and position.
12. Stockholders' 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 by the Bank to the Corporation. On June 25, 1999, the
Corporation paid a cash distribution of $12.00 per share to its stockholders.
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, but 30 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 the fully phased-in capital requirements of the OTS. In no case
will the Bank be allowed to make a capital distribution if it would reduce the
regulatory capital of the Bank below the balance of the liquidation account. The
Bank paid dividends to the Corporation amounting to $600,000 and $1.0 million in
the years ended June 30, 1999 and 1998, respectively. On July 21, 1999, the Bank
paid a dividend of $35.0 million to the Corporation.
<PAGE>
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. Generally, the Corporation is not allowed to
repurchase stock in the first year after Conversion, and is allowed to
repurchase 5% of its outstanding shares in each of the next two years after
Conversion. However, in the year ended June 30, 1999, the OTS allowed
repurchases in excess of the regulatory limits and the Company repurchased
642,405 shares of its common stock. Restrictions apply, unless the OTS approves
a waiver for benefit plans.
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.
36
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
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 3.0% 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. 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, 1999, that the Bank meets all capital adequacy
requirements to which it is subject.
The following is a reconciliation of the Bank's stockholder's equity
determined under generally accepted accounting principles to OTS regulatory
capital requirements (in thousands):
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
-------- -------- --------
<S> <C> <C> <C>
June 30, 1999
Total stockholder's equity as determined under generally
accepted accounting principles $ 90,959 $ 90,959 $ 90,959
General allowance for loan losses -- -- 2,896
Unrealized loss on certain available-
for-sale securities, net of taxes 47 47 47
-------- -------- --------
Regulatory capital $ 91,006 $ 91,006 $ 93,902
======== ======== ========
June 30, 1998
Total stockholder's 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
======== ======== ========
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
The Bank's actual and required capital amounts and ratios are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum
Actual Requirement
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
June 30, 1999
Tangible capital
(to total assets) $ 91,006 16.8% $ 8,131 1.5%
Core capital
(to adjusted total assets) 91,006 16.8 16,264 3.0
Risk-based capital
(to risk-weighted assets) 93,902 27.2 27,573 8.0
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 14,650 3.0
Risk-based capital
(to risk-weighted assets) 92,211 29.9 24,654 8.0
</TABLE>
As of June 30, 1999 and June 30, 1998, 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 (dollars in thousands):
<TABLE>
<CAPTION>
Minimum
Actual Requirement
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
June 30, 1999
Tier I capital
(to adjusted total assets) $ 91,006 16.8% $ 27,107 5.0%
Tier I capital
(to risk-weighted assets) 91,006 26.4 20,680 6.0
Total capital
(to risk-weighted assets) 93,902 27.2 34,467 10.0
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
</TABLE>
38
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
13. Earnings Per Share
The Company had no dilutive securities outstanding during the year ended
June 30, 1999 and had no potentially dilutive securities outstanding during the
year ended June 30, 1998; therefore, diluted earnings per share ("EPS") is the
same as basic EPS for all periods presented. For the years ended June 30, 1999
and 1998, 3,665,778 and 4,066,692 weighted average shares, respectively, were
outstanding. For purposes of EPS calculations, shares issued in connection with
the Conversion have been assumed to be outstanding as of July 1, 1997.
There were no shares outstanding prior to the Conversion, therefore no
earnings per share is presented for the year ended June 30, 1997.
14. Financial Instruments
The stated and fair value amounts of financial instruments as of June
30, 1999 and 1998, are summarized below (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
Stated Fair Stated Fair
Amount Value Amount Value
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 58,420 $ 58,420 $ 48,968 $ 48,968
Investment securities 23,344 23,344 28,709 28,709
Mortgage-backed securities 54 55 88 90
Loans receivable, net 435,181 433,336 416,462 422,178
Loans held-for-sale 8,984 9,089 7,294 7,315
FHLB stock 3,612 3,612 3,446 3,446
Other assets 3,203 3,203 2,813 2,813
Mortgage servicing rights 1,042 911 213 555
--------- --------- -------- --------
$ 533,840 $ 531,970 $507,993 $514,074
========= ========= ======== ========
Financial liabilities:
Deposit accounts:
Demand $152,020 $152,020 $129,851 $129,851
Certificate 253,991 253,546 239,961 240,207
Other borrowings 35,000 35,000 -- --
Advances from FHLB 34,000 33,276 17,000 15,817
Other liabilities 3,521 3,521 3,068 3,068
-------- -------- -------- --------
$478,532 $477,363 $389,880 $388,943
======== ======== ======== ========
</TABLE>
<PAGE>
The Company had off-balance sheet financial commitments, which include
$57.4 million and $56.1 million at June 30, 1999 and 1998, 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.
39
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
Investment and Mortgage-Backed Securities - Fair values for investments
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.
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.
FHLB Stock - No ready market exists for this stock, and it has no quoted
market value. However, redemption of this stock historically has been at par
value. Accordingly, the stated amount is deemed to be a reasonable estimate of
fair value.
Mortgage Servicing Rights - The fair value of retained servicing on
mortgage loans sold is calculated by discounting the expected future cash flows,
which are based on principal balances, remaining terms, and servicing spreads.
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.
Other Borrowings - The stated amount is a reasonable estimate of fair
value.
Advances from the FHLB - The fair value of these advances is estimated
by discounting the future cash flows of these advances using the current rates
at which similar advances could be obtained.
Other Assets and Other Liabilities - Other assets consist principally of
accrued interest receivable; other liabilities consist principally of 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
<PAGE>
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, 1999 and 1998. Changes
in market interest rates and prepayment assumptions could change significantly
the fair value.
Fair value estimates are based on existing recorded 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.
15. Condensed Parent Company Financial Statements
The following presents the condensed balance sheets of the Corporation
at June 30, 1999 and 1998 and the condensed statements of income and cash flows
for the years then ended (the Corporation was inactive from its inception on
February 4, 1997 through the Conversion on July 8, 1997) (in thousands):
40
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
June 30,
Condensed Balance Sheet 1999 1998
-------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 3,616 $ 29,260
Investment in Bank 91,046 90,040
Other investment securities 116 --
Note receivable from Bank 6,268 6,661
Other assets 153 156
-------- --------
Total assets $101,199 $126,117
======== ========
Liabilities and Stockholders' Equity:
Other borrowings $ 35,000 $ --
Other liabilities 158 356
Stockholders' equity 66,041 125,761
-------- --------
Total liabilities and stockholders' equity $101,199 $126,117
======== ========
<CAPTION>
Years Ended June 30,
Condensed Statements of Income 1999 1998
------- -------
<S> <C> <C>
Investment Income:
Interest income $ 1,626 $ 2,474
Dividends from Bank 600 1,000
------- -------
2,226 3,474
Interest Expense 49 --
------- -------
Net Interest Income 2,177 3,474
Noninterest Income 10 --
Noninterest Expense 663 415
------- -------
Income Before Income Taxes and Equity
in Undistributed Earnings of Bank 1,524 3,059
Provision for Income Taxes 315 745
------- -------
Net Income Before Equity in Undistributed
Earnings of Bank 1,209 2,314
Equity in Undistributed Earnings of Bank 3,766 5,226
------- -------
Net Income $ 4,975 $ 7,540
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
Condensed Statements of Cash Flows 1999 1998
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,975 $ 7,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bank (3,766) (5,226)
Net change in other assets and liabilities (195) 200
Gain on sale of investment securities (10) --
------- -------
Net cash provided by operating activities $ 1,004 $ 2,514
======= =======
</TABLE>
41
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Years Ended June 30,
Condensed Statements of Cash Flows (continued) 1999 1998
-------- ---------
<S> <C> <C>
Cash Flows from Investing Activities:
Investment in Bank $ 5,270 $ (43,516)
Purchase of investment securities (10,116) --
Proceeds from sale of investment securities 10,000 --
Sale of common stock -- 81,519
Collections on note receivable from Bank 214 278
-------- ---------
Net cash provided by investing activities 5,368 38,281
-------- ---------
Cash Flows from Financing Activities:
Other borrowings 35,000 --
Purchase of treasury stock (20,955) (8,113)
Stock issuance costs -- (1,584)
Dividends paid (2,732) (1,838)
Cash distribution (43,329) --
-------- ---------
Net cash used in financing activities (32,016) (11,535)
-------- ---------
Net (Decrease) Increase in Cash
and Cash Equivalents (25,644) 29,260
Cash and Cash Equivalents at Beginning of Year 29,260 --
-------- ---------
Cash and Cash Equivalents at End of Year $ 3,616 $ 29,260
======== =========
</TABLE>
<PAGE>
16. Quarterly Results of Operations (Unaudited)
Summarized unaudited quarterly operating results for the years ended
June 30, 1999 and 1998 are as follows (in thousands, except share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1999
Investment income $ 9,628 $ 9,684 $ 9,547 $ 9,766
Interest expense 4,597 4,638 4,495 4,636
---------- ---------- ---------- ----------
Net interest income 5,031 5,046 5,052 5,130
Provision for loan losses 200 200 200 200
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 4,831 4,846 4,852 4,930
Noninterest income 904 970 1,084 1,140
Noninterest expense 2,993 3,090 3,208 5,689
---------- ---------- ---------- ----------
Income before income taxes 2,742 2,726 2,728 381
Income taxes 1,056 1,130 1,117 299
---------- ---------- ---------- ----------
Net income $ 1,686 $ 1,596 $ 1,611 $ 82
========== ========== ========== ==========
Basic and diluted earnings per share $ 0.42 $ 0.44 $ 0.46 $ 0.02
========== ========== ========== ==========
Weighted average shares outstanding 4,040,738 3,622,344 3,484,336 3,491,720
========== ========== ========== ==========
</TABLE>
42
<PAGE>
Notes to Consolidated Financial Statements
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
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 and diluted 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
========== ========== ========== ==========
</TABLE>
43
<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
Muldoon, Murphy & Faucette 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. As of August 3, 1999, there were 1,188 record
holders of the common stock, excluding holders in "street name."
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 20, 1999 at 10:00
a.m., Eastern Time, at the Spartanburg County Library, 151 South Church Street,
Spartanburg, South Carolina.
<PAGE>
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 - Retired 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
<PAGE>
Common Stock Market Price and Dividend Information
The table below contains the range of high and low per share bid prices of the
Company's common stock as reported by the Nasdaq Stock Market, and per share
dividends declared during each quarter (as restated to give retroactive
recognition to the $12.00 per share capital distribution paid on June 25, 1999).
<TABLE>
<CAPTION>
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1999
September 30, 1998 $30.125 $16.125 $ 0.15
December 31, 1998 24.000 10.375 0.20
March 31, 1999 18.750 17.000 0.20
June 30, 1999 23.563 16.000 0.20
<CAPTION>
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1998
September 30, 1997 $26.875 $22.875 $ --
December 31, 1997 28.000 22.875 0.15
March 31, 1998 32.625 25.750 0.15
June 30, 1998 35.000 28.750 0.15
</TABLE>
EXHIBIT 23
CONSENT OF DELOITTE & TOUCHE LLP
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-30589 and Registration Statement No. 333-59781of FirstSpartan Financial
Corp. on Forms S-8 and Registration Statement No. 333-70393 of FirstSpartan
Financial Corp. on Form S-3D of our report dated July 16, 1999, appearing in the
Annual Report of FirstSpartan Financial Corp. for the year ended June 30, 1999
incorporated by reference in this Form 10-K.
/s/ DELOITTE & TOUCHE LLP
Greenville, South Carolina
September 23, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of FirstSpartan Financial Corp. for the year ended June 30,
1999 and is qualified in its entirety by reference to such financial statements
(dollars in thousands).
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,638
<INT-BEARING-DEPOSITS> 42,302
<FED-FUNDS-SOLD> 1,480
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 23,344
<INVESTMENTS-CARRYING> 54
<INVESTMENTS-MARKET> 55
<LOANS> 444,165
<ALLOWANCE> 2,896
<TOTAL-ASSETS> 545,725
<DEPOSITS> 406,011
<SHORT-TERM> 35,000
<LIABILITIES-OTHER> 4,673
<LONG-TERM> 34,000
0
0
<COMMON> 44
<OTHER-SE> 66,041
<TOTAL-LIABILITIES-AND-EQUITY> 545,725
<INTEREST-LOAN> 34,811
<INTEREST-INVEST> 3,814
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 38,625
<INTEREST-DEPOSIT> 16,885
<INTEREST-EXPENSE> 18,366
<INTEREST-INCOME-NET> 20,259
<LOAN-LOSSES> 800
<SECURITIES-GAINS> (53)
<EXPENSE-OTHER> 14,980
<INCOME-PRETAX> 8,577
<INCOME-PRE-EXTRAORDINARY> 8,577
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,975
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.97
<LOANS-NON> 1,221
<LOANS-PAST> 300
<LOANS-TROUBLED> 672
<LOANS-PROBLEM> 3,176
<ALLOWANCE-OPEN> 2,179
<CHARGE-OFFS> 85
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 2,896
<ALLOWANCE-DOMESTIC> 2,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
