UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended September 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from to
Commission File Number: 0-22445
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FIRSTSPARTAN FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 56-2015272
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
380 East Main Street, Spartanburg, South Carolina 29302
(Address of principal executive office)
(864) 582-2391
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock Outstanding: 3,787,970 shares as of November 8, 1999.
<PAGE>
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1999
and June 30, 1999 1
Consolidated Statements of Income for the Three-Month Periods
Ended September 30, 1999 and 1998 2
Consolidated Statements of Stockholders' Equity for the Three-
Month Periods Ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Three-Month
Periods Ended September 30, 1999 and 1998 4-5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II. Other Information 13-14
- -------- -----------------
Signatures 15
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands)
(Unaudited)
September 30, June 30,
1999 1999
----------- -----------
<S> <C> <C>
Assets
Cash $ 10,763 $ 14,638
Federal funds sold and overnight interest-bearing deposits 25,466 43,782
----------- -----------
Total cash and cash equivalents 36,229 58,420
Investment securities available-for-sale - at fair value (amortized cost:
$24,500 and $23,489 at September 30, 1999 and June 30, 1999, respectively) 24,260 23,344
Mortgage-backed securities held-to-maturity - at amortized cost (fair value:
$44 and $55 at September 30, 1999 and June 30, 1999, respectively) 43 54
Loans receivable, net 450,824 435,181
Loans held-for-sale - at lower of cost or market (market value: $4,555
and $9,089 at September 30, 1999 and June 30 1999, respectively) 4,495 8,984
Office properties and equipment, net 10,481 10,370
Federal Home Loan Bank of Atlanta stock - at cost 3,612 3,612
Accrued interest receivable 3,478 3,203
Real estate acquired in settlement of loans 348 348
Other assets 7,369 2,209
----------- -----------
Total Assets $ 541,139 $ 545,725
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 408,008 $ 406,011
Advances from borrowers for taxes and insurance 1,457 1,004
Advances from Federal Home Loan Bank of Atlanta 59,000 34,000
Other borrowings -- 35,000
Other liabilities 5,455 3,669
----------- -----------
Total liabilities 473,920 479,684
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued or outstanding
at September 30, 1999 and June 30, 1999 -- --
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued: 4,430,375 at September 30,
1999 and June 30, 1999; outstanding: 3,787,970 at September 30,
1999 and June 30, 1999 44 44
Additional paid-in capital 82,385 82,289
Retained earnings 15,969 15,264
Treasury stock - at cost (642,405 shares at
September 30, 1999 and June 30, 1999) (20,955) (20,955)
Unearned restricted stock (4,370) (4,660)
Unallocated ESOP stock (5,704) (5,851)
Accumulated other comprehensive income (150) (90)
----------- -----------
Total stockholders' equity 67,219 66,041
----------- -----------
Total Liabilities and Stockholders' Equity $ 541,139 $ 545,725
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Investment Income:
Interest on loans $ 8,837 $ 8,537
Interest and dividends on investment securities,
mortgage-backed securities and other 950 1,091
---------- ----------
Total investment income 9,787 9,628
---------- ----------
Interest Expense:
Deposit accounts 4,194 4,315
Other borrowings 127 --
Federal Home Loan Bank of Atlanta advances 698 282
---------- ----------
Total interest expense 5,019 4,597
---------- ----------
Net Interest Income 4,768 5,031
Provision for Loan Losses 100 200
---------- ----------
Net Interest Income After Provision for Loan Losses 4,668 4,831
---------- ----------
Non-interest Income:
Service charges and fees 724 470
Gain on sale of mortgage loans 99 293
Other, net 200 141
---------- ----------
Total non-interest income, net 1,023 904
---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Non-interest Expense:
Employee compensation and benefits 1,909 1,776
Federal deposit insurance premium 84 82
Occupancy and equipment expense 403 330
Computer services 154 63
Advertising and promotions 155 170
Office supplies, postage, printing, etc. 178 182
Other 517 390
---------- ----------
Total non-interest expense 3,400 2,993
---------- ----------
Income Before Income Taxes 2,291 2,742
Provision for Income Taxes 921 1,056
---------- ----------
Net Income $ 1,370 $ 1,686
========== ==========
Basic Earnings Per Share $ 0.41 $ 0.42
========== ==========
Weighted Average Shares Outstanding 3,351,990 4,040,738
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For Three Months Ended September 30, 1999 and 1998
(In Thousands Except Share Data)
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 4,253,160 $ 44 $ 87,624 $ 52,662 $ (8,113)
--------- ---------- ---------- ---------- ----------
Net income -- -- -- 1,686 --
Unrealized gain on securities
available-for-sale, net of taxes -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 1,686 --
--------- ---------- ---------- ---------- ----------
Issuance of treasury stock to MRDP 177,215 -- (670) -- 8,113
ESOP stock committed for release -- -- 122 -- --
Purchase of treasury stock (221,519) -- -- -- (7,259)
Dividends ($0.15 per share) -- -- -- (614) --
Prorata vesting of restricted stock -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Balance, September 30, 1998 4,208,856 $ 44 $ 87,076 $ 53,734 $ (7,259)
========= ========== ========== ========== ==========
Balance, June 30, 1999 3,787,970 $ 44 $ 82,289 $ 15,264 $ (20,955)
--------- ---------- ---------- ---------- ----------
Net income -- -- -- 1,370 --
Unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 1,370 --
--------- ---------- ---------- ---------- ----------
ESOP stock committed for release -- -- 96 -- --
Dividends ($0.20 per share) -- -- -- (665) --
Prorata vesting of restricted stock -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 3,787,970 $ 44 $ 82,385 $ 15,969 $ (20,955)
========= ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehen-
Unearned Unallocated sive Total
Restricted ESOP (Loss) Stockholders'
Stock Stock Income Equity
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, June 30, 1998 $ -- $ (6,442) $ (14) $ 125,761
---------- ---------- ---------- ----------
Net income -- -- -- 1,686
Unrealized gain on securities
available-for-sale, net of taxes -- -- 34 34
---------- ---------- ---------- ----------
Total comprehensive income -- -- 34 1,720
---------- ---------- ---------- ----------
Issuance of treasury stock to MRDP (7,443) -- -- --
ESOP stock committed for release -- 148 -- 270
Purchase of treasury stock -- -- -- (7,259)
Dividends ($0.15 per share) -- -- -- (614)
Prorata vesting of restricted stock 372 -- -- 372
---------- ---------- ---------- ----------
Balance, September 30, 1998 $ (7,071) $ (6,294) $ 20 $ 120,250
========== ========== ========== ==========
Balance, June 30, 1999 $ (4,660) $ (5,851) $ (90) $ 66,041
---------- ---------- ---------- ----------
Net income -- -- -- 1,370
Unrealized loss on securities
available-for-sale, net of taxes -- -- (60) (60)
---------- ---------- ---------- ----------
Total comprehensive income -- -- (60) 1,310
---------- ---------- ---------- ----------
ESOP stock committed for release -- 147 -- 243
Dividends ($0.20 per share) -- -- -- (665)
Prorata vesting of restricted stock 290 -- -- 290
---------- ---------- ---------- ----------
Balance, September 30, 1999 $ (4,370) $ (5,704) $ (150) $ 67,219
========== ========== ========== ==========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
Three Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,370 $ 1,686
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 100 200
Amortization of deferred income (54) (113)
Amortization of loan servicing assets 45 11
(Accretion) amortization of (discounts) premiums
on investment and mortgage-backed securities (1) 2
Depreciation 207 175
Allocation of ESOP stock at fair value 243 270
Prorata vesting of restricted stock 290 372
Decrease (increase) in loans held-for-sale 4,489 (4,023)
Increase in other assets (5,480) (567)
Increase in other liabilities 2,275 1,296
-------- --------
Net cash provided by (used in) operating activities 3,484 (691)
-------- --------
Cash Flows from Investing Activities:
Net loan originations and principal collections (2,381) 654
Purchase of loans (13,350) (7,032)
Purchase of investment securities available-for-sale (1,012) (317)
Principal repayments and proceeds from maturities
of mortgage-backed securities 12 11
Proceeds from sale of real estate acquired
in settlement of loans 42 --
Purchase of property and equipment (318) (1,232)
-------- --------
Net cash used in investing activities (17,007) (7,916)
-------- --------
Cash Flows from Financing Activities:
Net increase in deposits 1,997 7,172
Dividends paid (665) (614)
Advances from Federal Home Loan Bank of Atlanta 25,000 10,000
Principal payment on other borrowings (35,000) --
Purchase of treasury stock -- (7,259)
-------- --------
Net cash (used in) provided by financing activities $ (8,668) $ 9,299
-------- --------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Net (Decrease) Increase in Cash and Cash Equivalents $(22,191) $ 692
Cash and Cash Equivalents at Beginning of Period 58,420 48,968
-------- --------
Cash and Cash Equivalents at End of Period $ 36,229 $ 49,660
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 5,121 $ 4,718
======== ========
Income taxes $ -- $ 820
======== ========
Transfers from loans to real estate acquired in
settlement of loans $ 42 $ --
======== ========
Change in unrealized (loss) gain on investment
securities available-for-sale $ (96) $ 56
======== ========
Change in deferred taxes related to unrealized
loss (gain) on investment securities available-for-sale $ 36 $ (21)
======== ========
Issuance of common stock to MRDP $ -- $ 7,443
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
FirstSpartan Financial Corp. ("FirstSpartan" or the "Company"), a
Delaware corporation, is the holding company for First Federal Bank
("First Federal" or the "Bank") which is a federally chartered stock
savings bank.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods.
The results of operations for the three months ended September 30, 1999
are not necessarily indicative of the results to be expected for the
year ending June 30, 2000. The consolidated financial statements and
notes thereto should be read in conjunction with the audited financial
statements and notes thereto contained in the Annual Report to
Stockholders for the year ended June 30, 1999.
2. Earnings Per Share
Earnings per share ("EPS") has been computed based upon weighted
average common shares outstanding of 3,351,990 and 4,040,738,
respectively, for the three months ended September 30, 1999 and 1998.
The Company had no dilutive securities outstanding during the three
months ended September 30, 1999 and 1998; therefore, diluted EPS is the
same as basic EPS for all periods presented.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at September 30, 1999 and June 30, 1999
Total assets were $541.1 million at September 30, 1999 and $545.7
million at June 30, 1999, a decrease of $4.6 million or 1%. This
decrease resulted primarily from decreases of $22.2 million, or 38%, in
cash and cash equivalents and $4.5 million in loans held-for-sale,
offset by increases of $15.6 million, or 4%, in loans receivable, net
and $5.2 million in other assets. The majority of the decrease was
attributable to uses of cash in investing and financing activities of
$17.0 million and $8.7 million, respectively. A more detailed
reconciliation may be found in the Consolidated Statements of Cash
Flows for the three months ended September 30, 1999. Loans receivable,
net, increased primarily as a result of an increase of $8.9 million in
mortgage loans since June 30, 1999. Included in the $8.9 million
increase were increases of $4.3 million in construction loans, $4.3
million in commercial mortgage loans. Loans receivable, net, also
increased due to a $2.7 million increase in non-mortgage commercial
loans and a $3.4 million increase in home equity loans. The increase in
loans receivable, net, was funded primarily through an increase in
deposits and FHLB advances and a decrease in cash and cash equivalents.
Deposit accounts increased $2.0 million to $408.0 million at September
30, 1999 from $406.0 million at June 30, 1999. The increase in deposits
resulted primarily from newly opened branch offices and, to a lesser
extent, interest credited to deposit accounts during the period.
Advances from the FHLB of Atlanta increased $25.0 million to $59.0
million at September 30, 1999 from $34.0 million at June 30, 1999.
Stockholders' equity increased by $1.2 million to $67.2 million at
September 30, 1999 from $66.0 million at June 30, 1999. Items that
increased stockholders' equity were the allocation of shares in the
amount of $533,000 under the Bank's Employee Stock Ownership Plan
("ESOP") and restricted stock plan and net income of $1.4 million for
the three months ended September 30, 1999. Offsetting these increases
to stockholders' equity was payment of dividends of $664,000.
Nonperforming assets decreased by $800,000 to $1.1 million at September
30, 1999 from $1.9 million at June 30, 1999. The increase was due
primarily to a $600,000 decrease in nonaccrual loans.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and September 30, 1998
Net Income. Net income decreased $400,000 to $1.4 million for the three
months ended September 30, 1999 from $1.7 million for the three months
ended September 30, 1998. The principal item reducing net income for
the quarter was the expected reduction in net interest income due to
payment of the special cash distribution of $12.00 per share last June
and share repurchases since the prior year quarter. Other items
affecting net income for the quarter were a decrease in the provision
for loan losses, increased non-interest income and increased
non-interest expense. Earnings per share for the current quarter did
not decrease in the same proportion as net income due to a reduction in
7
<PAGE>
average shares outstanding. The share repurchases previously mentioned
decreased average shares outstanding during the quarter by
approximately 479,000 shares as compared to the prior year quarter. The
remainder of the share reduction was principally due to the effect of
share purchases by the Company's ESOP with $4.3 million it received
from the $12.00 special cash distribution. Shares held in the ESOP but
not yet awarded to participants are not considered to be outstanding
shares for computation of earnings per share until such shares are
awarded to participants.
Net Interest Income. Net interest income decreased to $4.8 million for
the three months ended September 30, 1999 from $5.0 million for the
three months ended September 30, 1998. As discussed above, net interest
income was reduced due to the payment of the special cash distribution
in June and the repurchase of stock during the first and second
quarters of fiscal year 1999. The total cash outlay for the
distribution was approximately $45.5 million and its effect is
estimated to have decreased net income by approximately $390,000, or
23%, when comparing the current and prior year quarters. The impact of
the stock repurchases is estimated to have decreased net income by
approximately $150,000, or 9%, when comparing the current and prior
year quarters. Growth in interest-earning assets was offset by an
increase in interest-bearing liabilities and a decrease in net yield on
interest-earning assets in the quarter ended September 30, 1999
compared to the quarter ended September 30, 1998.
The average balance of interest-earning assets was $516.1 million
during the quarter ended September 30, 1999 compared to $502.9 million
during the quarter ended September 30, 1998. The average yield
decreased to 7.59% from 7.66% for the prior year quarter due to lower
market interest rates.
The average balance of interest-bearing liabilities increased to $470.9
million during the three months ended September 30, 1999 from $393.0
million during the three months ended September 30, 1998, more than
offsetting a decrease in the average cost of interest-bearing
liabilities to 4.23% from 4.64%. The decrease in the average cost is
attributable to the decrease in prevailing market rates since the
quarter ended September 30, 1998.
Net yield on interest-earning assets decreased to 3.70% for the quarter
ended September 30, 1999 from 4.00% for the quarter ended September 30,
1998 due primarily to the above mentioned decrease in the average yield
on interest-earning assets and increase in the average balance of
interest-bearing liabilities.
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.
8
<PAGE>
The provision for loan losses was $100,000 for the three months ended
September 30, 1999 compared to $200,000 for the three months ended
September 30, 1998. The provision for loan losses decreased due to the
improvement in non-performing assets and loan charge-offs during the
current quarter. The ratio of allowance for loan losses to
non-performing loans has increased to 396.4% at September 30, 1999 from
185.7% at September 30, 1998 (and 190.4% at June 30, 1999). The
allowance for loan losses represents an amount that management believes
will be adequate to absorb estimated losses inherent in the total loan
portfolio which may become uncollectible. Factors considered in
assessing the adequacy of the allowance include historical loss
experience, delinquency trends, characteristics of specific loan types,
growth and composition of the loan portfolios, loans classified under
OTS regulations, and other factors. Management deemed the allowance for
loan losses to be adequate at September 30, 1999. 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 could be adjusted as a result of
their examinations.
Non-interest Income. Non-interest income increased by $119,000 to $1.0
million for the three months ended September 30, 1999 from $904,000 for
the three months ended September 30, 1998, primarily as a result of an
increase in fee income to $724,000 from $470,000 principally due to the
growth in checking accounts of approximately 20%. The growth in fee
income, however, was offset by a decrease in gains from the sale of
mortgage loans to $99,000 in the three months ended September 30, 1999
from $293,000 in the three months ended September 30, 1998 which was
due primarily to the larger number of loan refinancings occurring
during the period of lower market interest rates in the prior year
quarter. The Bank periodically sells fixed-rate loans in response to
interest rate changes, liquidity needs and other factors. Management
cannot predict whether there will be any such gains in the future.
Non-interest Expense. Non-interest expense was $3.4 million for the
three months ended September 30, 1999 compared to $3.0 million for the
same period in 1998. The increase consisted principally of increased
occupancy and personnel costs and various other operating expenses
associated with the opening of new branch offices.
Income Taxes. The provision for income taxes decreased $135,000 to
$921,000 for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998 primarily as a result of lower
income before income taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from loan principal and interest payments, sales of loans, maturing
securities, FHLB of Atlanta 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.
9
<PAGE>
Federal regulations require the Bank to maintain an adequate level of
liquidity to ensure the availability of sufficient funds to fund loan
originations, deposit withdrawals and to satisfy other financial
commitments. Currently, the federal regulatory liquidity requirement
for the Bank is the maintenance of an average daily balance of liquid
assets (cash and eligible investments) equal to at least 4% of the
average daily balance of net withdrawable deposits and short-term
borrowings. This liquidity requirement is subject to periodic change.
The Company and the Bank generally maintain sufficient cash and
short-term investments to meet short-term liquidity needs. At September
30, 1999, cash and cash equivalents totaled $36.2 million, or 7% of
total assets, and investment securities classified as
available-for-sale with maturities of one year or less totaled $18.5
million or 3% of total assets. At September 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 approximately $91.4 million of which $59.0 million had been
advanced.
FirstSpartan is not subject to any separate regulatory capital
requirements. As of September 30, 1999, the Bank's regulatory capital
was in excess of all applicable regulatory requirements. At September
30, 1999, under applicable regulations, the Bank's actual tangible,
core and risk-based capital ratios were 10.8%, 10.8% and 17.3%,
respectively, compared to requirements of 1.5%, 3.0% and 8.0%,
respectively.
At September 30, 1999, the Company had loan commitments (excluding
undisbursed portions of interim construction loans) of approximately
$4.8 million ($1.6 million at fixed rates ranging from 7.25% to 8.50%).
In addition, at September 30, 1999, the unused portion of lines of
credit (principally variable-rate home equity lines of credit) extended
by the Company was approximately $52.6 million. Furthermore, at
September 30, 1999, the Company had certificates of deposit scheduled
to mature in one year or less of $225.6 million. Based on historical
experience, the Company anticipates that a majority of such
certificates of deposit will be renewed at maturity.
Year 2000
The approach of the year 2000 ("Year 2000") presents significant issues
for many financial, information, and operational systems. Many systems
in use today may not be able to interpret dates after December 31, 1999
appropriately, because such systems allow only two digits to indicate
the year in a date. The Year 2000 problem may occur in computer
programs, computer hardware, or electronic devices that utilize
computer chips to process any information that contains dates.
Therefore, the issue is not limited to dates in computer programs but
is a complex combination of problems that may exist in computer
programs, data files, computer hardware, and other devices essential to
the operation of the business. Further, companies must consider the
potential impact that Year 2000 may have on services provided by third
parties.
Substantially all of the Year 2000 risk is related to the Bank's
activities. The Bank has a formal Year 2000 plan which includes a Year
2000 committee. The plan has been reviewed by senior management and the
Board of Directors. Included in the plan is a listing of all systems
(whether in-house or provided/supported by third parties) which may be
impacted by Year 2000 and a categorization of the systems by their
potential impact on Bank operations. The committee has received Year
2000 plans from third parties identified during the assessment phase of
the Year 2000 plan. For systems that have been classified as critical
to the operations of the Bank, contingency plans have been developed.
Each contingency plan was developed by operational personnel who
utilize the particular system. Contingency plans may include
utilization of alternate third party vendors, alternate processing
methods and software, or manual processing. The plans have various
activation dates (e.g., the date on which a third party processor fails
to meet its Year 2000 compliance deadline). The Bank's Year 2000
readiness is reviewed and monitored by the OTS.
10
<PAGE>
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.
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 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:
11
<PAGE>
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; and,
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.
Pending Legislation
Pending legislation designed to modernize the regulation of the
financial services industry expands the ability of bank holding
companies to affiliate with other types of financial services companies
such as insurance companies and investment banking companies. However,
the legislation provides that companies that acquire control of a
single savings association after May 4, 1999 (or that filed an
application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan
holding company. Rather, these companies will have authority to engage
in the activities permitted "a financial holding company" under the new
legislation, including insurance and securities-related activities, and
the activities currently permitted for multiple savings and loan
holding companies, but generally not in commercial activities. The
authority for unrestricted activities is grandfathered for unitary
savings and loan holding companies, such as the Company, that existed
prior to May 4, 1999. However, the authority for unrestricted
activities would not apply to any company that acquired the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of September 30, 1999, there have been no material changes in the
quantitative and qualitative disclosures about market risks presented
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1999.
12
<PAGE>
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
-----------------
Not applicable
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(3) (a) Certificate of Incorporation of the Registrant*
(3) (b) Bylaws of the Registrant*
(10) (a) Employment Agreement with Billy L. Painter**
(10) (b) Employment Agreement with Hugh H. Brantley**
(10) (c) Employment Agreement with J. Stephen Sinclair**
(10) (d) Employment Agreement with R. Lamar Simpson***
(10) (e) Severance Agreement with Rand Peterson**
(10) (f) Severance Agreement with Thomas Bridgeman**
(10) (g) Severance Agreement with Katherine A. Dunleavy***
(10) (h) Employee Severance Compensation Plan**
(10) (i) Employee Stock Ownership Plan**
(10) (j) Registrant's 1997 Stock Option Plan****
(10) (k) Registrant's Management Recognition and Development
Plan****
(10) (l) Loan Agreement with Central Carolina Bank and Trust
Company*****
(21) Subsidiaries of the Registrant**
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
- --------------
* Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (333-23015) and incorporated herein by reference.
** Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1997 and incorporated herein by
reference.
*** Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998 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.
14
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FirstSpartan Financial Corp.
Date: November 12, 1999 By: /s/Billy L. Painter
-------------------
Billy L. Painter
President and Chief Executive Officer
Date: November 12, 1999 By: /s/R. Lamar Simpson
-------------------
R. Lamar Simpson
Treasurer, Secretary and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of FirstSpartan Financial Corp. as of or for the three
months ended September 30, 1999 and is qualified in its entirety by reference to
such financial statements (dollars in thousands except per share data).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 10,763
<INT-BEARING-DEPOSITS> 23,986
<FED-FUNDS-SOLD> 1,480
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,260
<INVESTMENTS-CARRYING> 43
<INVESTMENTS-MARKET> 44
<LOANS> 455,319
<ALLOWANCE> 2,993
<TOTAL-ASSETS> 541,139
<DEPOSITS> 408,008
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,912
<LONG-TERM> 59,000
0
0
<COMMON> 44
<OTHER-SE> 67,219
<TOTAL-LIABILITIES-AND-EQUITY> 541,139
<INTEREST-LOAN> 8,837
<INTEREST-INVEST> 950
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,787
<INTEREST-DEPOSIT> 4,194
<INTEREST-EXPENSE> 5,019
<INTEREST-INCOME-NET> 4,768
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,400
<INCOME-PRETAX> 2,291
<INCOME-PRE-EXTRAORDINARY> 2,291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,370
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 3.70
<LOANS-NON> 622
<LOANS-PAST> 133
<LOANS-TROUBLED> 847
<LOANS-PROBLEM> 2,839
<ALLOWANCE-OPEN> 2,896
<CHARGE-OFFS> 5
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 2,993
<ALLOWANCE-DOMESTIC> 2,993
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
