<PAGE>
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 December 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
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Commission File Number: 0-22445
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FIRSTSPARTAN FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 56-2015272
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
380 East Main Street, Spartanburg, South Carolina 29302
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(Address of principal executive office)
(864) 582-2391
----------------------
(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 February 4, 1999.
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FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I. Financial Information
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Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 1998 and June 30, 1998 1
Consolidated Statements of Income for the Three and Six-Month Periods
Ended December 31, 1998 and 1997 2
Consolidated Statements of Equity for the Three and Six-Month Periods
Ended December 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the Three and Six-Month
Periods Ended December 31, 1998 and 1997 4-5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. Other Information 17-18
- -------- -----------------
Signatures 19
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
Assets 1998 1998
--------- ---------
<S> <C> <C>
Cash $ 11,838 $ 8,450
Federal funds sold and overnight
interest-bearing deposits 21,351 40,518
--------- ---------
Total cash and cash equivalents 33,189 48,968
Investment securities available-for-sale
- at fair value (amortized cost: $27,353
and $28,732 at December 31, 1998 and
June 30, 1998, respectively) 27,324 28,709
Mortgage-backed securities held-to-maturity -
at amortized cost (fair value: $72 and $90 at
December 31, 1998 and June 30, 1998, respectively) 71 88
Loans receivable, net 445,496 416,462
Loans held-for-sale at lower of cost or market
(market value: $6,619 and $7,315 at December 31,
1998 and June 30, 1998, respectively) 6,619 7,294
Office properties and equipment, net 9,931 8,445
Federal Home Loan Bank of Atlanta stock- at cost 3,446 3,446
Accrued interest receivable 3,001 2,813
Real estate acquired in settlement of loans 38 36
Other assets 1,715 1,172
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Total Assets $ 530,830 $ 517,433
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 393,145 $ 369,812
Advances from borrowers for taxes and insurance 44 1,063
Advances from Federal Home Loan Bank of Atlanta 27,000 17,000
Other liabilities 2,684 3,797
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Total liabilities 422,873 391,672
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Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized- 250,000 shares; none issued or
outstanding at December 31, 1998 and
June 30, 1998 - -
Common stock, $0.01 par value:
Authorized- 12,000,000 shares;
issued: 4,430,375 at December 31,
1998 and June 30, 1998; outstanding:
3,787,970 and 4,253,160 at December 31,
1998 and June 30, 1998, respectively 44 44
Additional paid-in capital 87,159 87,624
Retained earnings 54,604 52,662
Treasury stock- at cost (642,405 shares at
December 31, 1998 and 177,215 shares at
June 30, 1998) (20,955) (8,113)
Unearned restricted stock (6,729) -
Unallocated ESOP stock (6,147) (6,442)
Accumulated other comprehensive income (19) (14)
--------- ---------
Total stockholders' equity $ 107,957 $ 125,761
--------- ---------
Total Liabilities and Stockholders' Equity $ 530,830 $ 517,433
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investment Income:
Interest on loans $ 8,791 $ 7,922 $ 17,328 $ 15,548
Interest and dividends on investment securities,
mortgage-backed securities and other 893 1,293 1,984 3,078
---------- ---------- ---------- ----------
Total investment income 9,684 9,215 19,312 18,626
---------- ---------- ---------- ----------
Interest Expense:
Deposit accounts 4,273 4,292 8,588 8,591
Federal Home Loan Bank of Atlanta advances 365 - 647 -
---------- ---------- ---------- ----------
Total interest expense 4,638 4,292 9,235 8,591
---------- ---------- ---------- ----------
Net Interest Income 5,046 4,923 10,077 10,035
Provision for Loan Losses 200 90 400 180
---------- ---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 4,846 4,833 9,677 9,855
---------- ---------- ---------- ----------
Noninterest Income:
Service charges and fees 496 364 966 693
Gain on sale of mortgage loans 366 - 659 -
Other, net 108 123 249 243
---------- ---------- ---------- ----------
Total noninterest income, net 970 487 1,874 936
---------- ---------- ---------- ----------
Noninterest Expense:
Employee compensation and benefits 1,718 1,274 3,494 2,481
Federal deposit insurance premium 81 79 163 156
Occupancy and equipment expense 397 262 727 510
Computer services 132 168 195 321
Advertising and promotions 116 127 286 260
Office supplies, postage, printing, etc. 180 138 362 284
Other 466 363 856 610
---------- ---------- ---------- ----------
Total noninterest expense 3,090 2,411 6,083 4,622
---------- ---------- ---------- ----------
Income Before Income Taxes 2,726 2,909 5,468 6,169
Provision for Income Taxes 1,130 1,150 2,186 2,375
---------- ---------- ---------- ----------
Net Income $ 1,596 $ 1,759 $ 3,282 $ 3,794
========== ========== ========== ==========
Basic earnings per share $ 0.44 $ 0.43 $ 0.86 $ 0.93
========== ========== ========== ==========
Weighted average shares outstanding/(1)/ 3,622,344 4,087,721 3,831,541 4,083,729
========== ========== ========== ==========
</TABLE>
/(1)/ FirstSpartan's initial public offering closed on July 8, 1997. For
purposes of earnings per share calculations for the six months ended
December 31, 1997, shares issued on July 8, 1997 have been assumed to be
outstanding as of July 1, 1997.
See accompanying notes to consolidated financial statements.
2
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Equity
For the Six Months Ended December 31, 1998 and 1997
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Unallocated Other
Common Paid-In Retained Treasury Restricted ESOP Comprehensive Total
Stock Capital Earnings Stock Stock Stock Income Equity
------ --------- -------- --------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ - $ - $ 46,960 $ - $ - $ - $ 18 $ 46,978
Net income - - 3,794 - - - - 3,794
Change in net unrealized gain
on available-for-sale securities - - - - - - 11 11
Issuance of common stock 44 86,981 - - - (7,089) - 79,936
ESOP shares committed for release - 299 - - - 352 - 651
Cash dividends ($0.15 per share) - - (612) - - - - (612)
------- ------- -------- -------- -------- ------- ------ --------
Balance, December 31, 1997 $ 44 $87,280 $ 50,142 $ - $ - $(6,737) $ 29 $130,758
======= ======= ======== ======== ======== ======= ====== ========
Balance, June 30, 1998 $ 44 $87,624 $ 52,662 $ (8,113) $ - $(6,442) $ (14) $125,761
Net income - - 3,282 - - - - 3,282
Change in net unrealized loss
on available-for-sale securities - - - - - - (5) (5)
Issuance of treasury stock to MRDP - (670) - 8,113 (7,443) - - -
Purchase of treasury stock - - - (20,955) - - - (20,955)
Cash dividends ($0.35 per share) - - (1,340) - - - - (1,340)
Prorata vesting of restricted stock - - - - 714 - - 714
ESOP shares committed for release - 205 - - - 295 - 500
------- ------- ------- -------- ------- ------- ------ --------
Balance, December 31, 1998 $ 44 $87,159 $54,604 $(20,955) $(6,729) $(6,147) $ (19) $107,957
======= ======= ======= ======== ======= ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,596 $ 1,759 $ 3,282 $ 3,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 200 90 400 180
Deferred income tax benefit (339) (12) (339) (56)
Recognition of deferred income (124) (1) (237) (33)
Amortization of loan servicing assets 28 14 50 29
Amortization of premiums on investment and
mortgage-backed securities 2 -- 4 --
Depreciation 203 141 378 279
ESOP shares committed for release at fair value 230 384 500 651
Prorata vesting of restricted stock 342 -- 714 --
(Increase) decrease in other assets (203) (109) (781) 445
Additions to loans held-for-sale (11,022) (1,555) (28,076) (3,813)
Proceeds from sale of loans held-for-sale 16,086 2,143 29,410 4,138
Gain on sale of loans held-for-sale (366) -- (659) --
Loss on disposal of property and equipment 13 -- 13 --
(Decrease) increase in other liabilities (3,086) (1,115) (1,790) 606
-------- -------- -------- ---------
Net cash provided by operating activities 3,560 1,739 2,869 6,220
-------- -------- -------- ---------
Cash Flows from Investing Activities:
Net loan originations and principal collections (13,368) (12,353) (12,714) (23,678)
Purchase of loans (9,453) (5,007) (16,485) (10,108)
Purchase of investment securities available-for-sale (310) (2,104) (627) (10,174)
Proceeds from maturities of investment securities
available-for-sale 2,000 1,000 2,000 3,000
Principal repayments and proceeds from maturities of
mortgage-backed securities 6 11 17 16
Purchase of property and equipment (648) (668) (1,880) (1,083)
Proceeds from sale of property and equipment 3 -- 3 --
-------- -------- -------- ---------
Net cash used in investing activities (21,770) (19,121) (29,686) (42,027)
-------- -------- -------- ---------
Cash Flows from Financing Activities:
Net increase in deposits 16,161 12,613 23,333 24,906
Dividends paid (726) (612) (1,340) (612)
Advances from Federal Home Loan Bank of Atlanta -- -- 10,000 --
Purchase of treasury stock (13,696) -- (20,955) --
Stock subscription refunds -- -- -- (197,851)
Stock issuance costs -- -- -- (1,584)
-------- -------- -------- ---------
Net cash provided by (used in) financing activities $ 1,739 $ 12,001 $ 11,038 $(175,141)
-------- -------- -------- ---------
</TABLE>
4
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FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net Decrease in Cash and Cash Equivalents $ (16,471) $ (5,381) $(15,779) $(210,948)
Cash and Cash Equivalents at Beginning of Period 49,660 71,505 48,968 277,072
--------- -------- -------- ---------
Cash and Cash Equivalents at End of Period $ 33,189 $ 66,124 $ 33,189 $ 66,124
========= ======== ======== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,384 $ 4,160 $ 9,102 $ 8,604
========= ======== ======== =========
Income taxes $ 2,364 $ 2,360 $ 3,184 $ 2,435
========= ======== ======== =========
Transfers from loans to real estate acquired in
settlement of loans $ 2 $ - $ 2 $ 2,435
========= ======== ======== =========
Change in unrealized (loss) gain on investment
securities available-for-sale $ (64) $ (12) $ (8) $ 19
========= ======== ======== =========
Change in deferred taxes related to unrealized
loss (gain) on investment securities available-for-sale $ 25 $ 5 $ 3 $ (8)
========= ======== ======== =========
Issuance of common stock to MRDP $ - $ - $ 7,443 $ -
========= ======== ======== =========
Sale of common stock funded by subscription escrow accounts $ - $ - $ - $ 61,478
========= ======== ======== =========
Sale of common stock funded by deposit accounts $ - $ - $ - $ 20,042
========= ======== ======== =========
Sale of common stock to ESOP $ - $ - $ - $ 7,089
========= ======== ======== =========
</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, was incorporated on February 4, 1997 for the purpose of
becoming the holding company for First Federal Bank ("First Federal" or the
"Bank") upon the Bank's conversion from a federally chartered mutual
savings association to a federally chartered stock savings association
("Conversion"). The Conversion was completed on July 8, 1997 through the
sale and issuance of 4,430,375 shares of common stock by the Company.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair statement of results for the interim periods.
The results of operations for the three and six months ended December 31,
1998 are not necessarily indicative of the results to be expected for the
year ending June 30, 1999. The consolidated financial statements and notes
thereto should be read in conjunction with the audited financial statements
and notes thereto for the year ended June 30, 1998.
2. Earnings Per Share
Earnings per share ("EPS") has been computed based upon weighted average
common shares outstanding of 3,622,344 and 4,087,721, respectively, for the
three months ended December 31, 1998 and 1997 and weighted average common
shares outstanding of 3,831,541 and 4,083,729, respectively, for the six
months ended December 31, 1998 and 1997. For the purposes of computing
weighted average shares outstanding for the six months ended December 31,
1997, shares issued in the Conversion on July 8, 1997 were assumed to have
been outstanding since July 1, 1997. The Company had no dilutive
securities outstanding during the three and six months ended December 31,
1998 and 1997; therefore, diluted EPS is the same as basic EPS for all
periods.
3. Share Repurchases
During the quarter ended December 31, 1998 the Company repurchased 420,886
shares of its common stock at an average price of $32.54 per share.
Cumulative shares repurchased for the six months ended December 31, 1998
was 642,405 at an average price of $32.62.
6
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4. Comprehensive Income
Effective July 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." In accordance with the provisions of SFAS No. 130, comparative
financial statements presented for earlier periods have been reclassified
to reflect the provisions of this Statement. Comprehensive income is the
change in the Company's equity during the period from transactions and
other events and circumstances. Comprehensive income is divided into net
income and other comprehensive income. The Company's "other comprehensive
income" for the three and six months ended December 31, 1998 and 1997 and
"accumulated other comprehensive income" as of December 31, 1998 and 1997
are comprised solely of unrealized gains and losses on investment
securities available-for-sale.
Comprehensive income for the three and six-month periods ended December 31,
1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months Ended
December 31, December 31,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $1,596 $1,759 $3,282 $3,794
Other comprehensive income (loss) -
Unrealized gains (losses) on investment
securities available-for-sale arising
during the period, net of income taxes (39) (8) (5) 11
------ ------ ------ ------
Total comprehensive income $1,557 $1,751 $3,277 $3,805
====== ====== ====== ======
</TABLE>
5. Stock Compensation Plans
Restricted Stock Plan - On July 8, 1998, 177,215 shares of restricted stock
were awarded to participants in the FirstSpartan Financial Corp. Management
Recognition and Development Plan ("MRDP") which was approved at the
Company's Annual Meeting of Stockholders on January 21, 1998. The stock
awards vest over a five-year period. The stock was issued from the 177,215
shares held as treasury stock on the date of the grant. The Company
recorded the stock award at the market value on the date of grant ($42.00
per share) as unearned compensation in stockholders' equity and will
amortize it over the vesting period.
Stock Option Plan - On July 8, 1998, the Company granted options to
purchase 363,291 shares of Company stock at $42.00 per share to 17 officers
and directors of the Company and the Bank under the 1997 FirstSpartan
Financial Corp. Stock Option Plan which was approved at the Company's
7
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Annual Meeting of Stockholders on January 21, 1998.
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 significantly
diminished. Accordingly, the Committee recommended, and the Board of
Directors approved, the repricing of all options granted on July 9, 1998.
On October 28, 1998, the Committee repriced the options at the fair market
value of the stock that day which was $33.75 per share. Since the
repricing was at market value, no compensation was recorded as a result of
the repricing.
Additionally, on October 28, 1998, an additional 50,000 options were
awarded at $33.75 per share to 22 employees and officers of the Bank in
order to provide incentives on a broader scale. None of these employees
and officers were included in the original grant of 363,291 options.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at December 31, 1998 and June 30, 1998
Total assets were $530.8 million at December 31, 1998 and $517.4 million at
June 30, 1998, an increase of $13.4 million or 3%. This increase resulted
primarily from a $28.3 million, or 7%, increase in loans receivable, net
(including loans held-for-sale) and an increase of $1.5 million, or 18%, in
office properties and equipment, net offset by a decrease of $15.8 million,
or 32%, in cash and cash equivalents. Loans receivable, net, increased
primarily as a result of an increase of $15.7 million in mortgage loans
since June 30, 1998. Included in the $15.7 million increase were increases
of $9.3 million in construction loans, $6.2 million in commercial mortgage
loans and $4.3 million in land development loans, which more than offset a
decrease of $4.1 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 $29.4 million of loans in the secondary
market. Offsetting loan sales was the purchase of $16.5 million of one- to
four-family mortgage loans from the mortgage banking company in which the
Bank's service corporation has an equity investment. Loans receivable,
net, also increased due to a $10.4 million increase in non-mortgage
commercial loans and a $1.7 million increase in home equity loans. The
increase in loans was attributable to market demand and emphasis on loan
production in the branch network. The increase in loans receivable, net,
was funded primarily through an increase in deposits and FHLB advances.
Deposit accounts increased $23.3 million to $393.1 million at December 31,
1998 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. Advances
from the FHLB of Atlanta increased $10.0 million to $27.0 million at
December 31, 1998 from $17.0 million at June 30, 1998.
8
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Stockholders' equity decreased by $17.8 million to $108.0 million at
December 31, 1998 from $125.8 million at June 30, 1998. Items that
decreased stockholders' equity were the purchase of $21.0 million of
treasury stock and payment of dividends of $1.3 million. Offsetting these
charges to stockholders' equity were the allocation of shares in the amount
of $1.2 million under the Bank's Employee Stock Ownership Plan ("ESOP") and
restricted stock plan and net income of $3.3 million for the six months
ended December 31, 1998.
Nonperforming assets decreased by $100,000 to $1.3 million at December 31,
1998 from $1.4 million at June 30, 1998. The decrease was due to a
$100,000 decrease in nonaccrual loans.
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
December 31, 1997
Net Income. Net income decreased $200,000 to $1.6 million for the three
months ended December 31, 1998 from $1.8 million for the three months ended
December 31, 1997. The decrease for the quarter was attributable to an
increase in noninterest expense in the quarter ended December 31, 1998
compared to the quarter ended December 31, 1997 due primarily to
compensation expense associated with the adoption of the Company's
restricted stock plan and costs associated with the hiring of personnel at
newly opened branch offices. Offsetting the above items that decreased net
income in the quarter ended December 31, 1998 was an increase in
noninterest income of $483,000 primarily related to mortgage loan sales.
Although net income decreased for the quarter ended December 31, 1998,
earnings per share increased to $0.44 from $0.43 in the quarter ended
December 31, 1997. The increase in earnings per share was attributable to
fewer shares outstanding during the quarter ended December 31, 1998 as the
result of share repurchases.
Net Interest Income. Net interest income increased by $100,000 to $5.0
million for the three months ended December 31, 1998 from $4.9 million for
the three months ended December 31, 1997. The increase was attributable
primarily to growth in interest-earning assets offset by an increase in
interest-bearing liabilities and a decrease in net yield on interest-
earning assets in the quarter ended December 31, 1998 compared to the
quarter ended December 31, 1997.
Investment income increased $500,000 to $9.7 million for the quarter ended
December 31, 1998 from $9.2 million for the quarter ended December 31, 1997
as a result of the increase in the average balances of interest-earning
assets to $505.4 million from $474.5 million more than offsetting the
decrease in average yield to 7.66% from 7.77%. Although interest-earning
assets were higher in the quarter ended December 31, 1998 as compared to
December 31, 1997, share repurchases of approximately $21.0 million since
the quarter ended December 31, 1997 significantly offset asset growth and,
accordingly, investment income.
9
<PAGE>
Interest expense increased $300,000 to $4.6 million for the three months
ended December 31, 1998 from $4.3 million for the three months ended
December 31, 1997. The increase was due primarily to interest expense on
advances from the FHLB during the quarter ended December 31, 1998 that was
absent in the quarter ended December 31, 1997. The average balance of
deposits increased to $383.9 million in the three months ended December 31,
1998 from $352.9 million in the comparable prior year period. The impact
of increased deposit balances on interest expense was more than offset by a
decrease in the average cost to 4.42% from 4.83% for the quarters ended
December 31, 1998 and 1997, respectively. The average balance increased as
the result of newly opened branch offices and various deposit promotions
that have increased deposit balances since the prior year's comparable
quarter. The decrease in average cost is attributable to the decrease in
prevailing market rates since the quarter ended December 31, 1997.
Net yield on interest-earning assets decreased to 3.99% for the quarter
ended December 31, 1998 from 4.15% for the quarter ended December 31, 1997
due primarily to the above mentioned decrease in the average yield on
interest-earning assets.
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 $200,000 for the three months ended
December 31, 1998 compared to $90,000 for the three months ended December
31, 1997. The provision for loan losses has increased over the past
several quarters primarily as the result of the increase in the amount of
consumer and commercial loans in the Company's loan portfolio. Management
believes that such loans present a higher risk of credit loss relative to
one- to four-family mortgage loans and accordingly, a higher allowance for
loan losses is warranted. The allowance for loan losses represents an
amount that management believes will be adequate to absorb estimated losses
inherent in the 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 December 31, 1998. 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.
10
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The accrual of interest is ceased when, in the opinion of management,
principal or interest payments are not likely to continue according to the
terms of the loan agreement, or when principal or interest is 90 days or
more past due. In certain cases, extensions are granted on construction
loans that are past due 90 days or more. These extensions are granted
based upon management's judgment of the creditworthiness of the borrower
and other factors such as sales contracts pending on the property held as
collateral. In the case of extended loans, interest continues to accrue
and the loans are reported as accruing but contractually past due 90 days
or more. Management considers the total of nonaccrual loans and accruing
loans 90 days or more past due as nonperforming loans.
Noninterest Income. Noninterest income increased by $483,000 to $970,000
for the three months ended December 31, 1998 from $487,000 for the three
months ended December 31, 1997, primarily as a result of the gain on sale
of mortgage loans of $366,000 in the three months ended December 31, 1998
that did not occur in the three months ended December 31, 1997. The Bank
periodically sells loans in response to interest rate changes, liquidity
needs and other factors. The Bank sold mortgage loans during the quarter
ended December 31, 1998 primarily to reduce the amount of 30-year fixed
rate loans in the loan portfolio. Management cannot predict whether there
will be any such gains in the future.
Service charges and fees increased to $496,000 for the three months ended
December 31, 1998 from $364,000 for the three months ended December 31,
1997 primarily as a result of increased deposit account fees, particularly
on the increased number of NOW accounts.
Noninterest Expense. Noninterest expense was $3.1 million for the three
months ended December 31, 1998 compared to $2.4 million for the same period
in 1997. The increase consisted principally of increased employee
compensation and benefits which increased to $1.7 million for the three
months ended December 31, 1998 from $1.3 million for the three months ended
December 31, 1997. The increase in compensation expense is principally
attributable to the adoption of the MRDP and costs associated with the
hiring of personnel at newly opened branch offices offset by a 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 1998 and the announced, but not yet opened, branch in Chesnee,
South Carolina become fully operational.
Income Taxes. The provision for income taxes decreased $20,000 to $1.1
million for the three months ended December 31, 1998 compared to the three
months ended December 31, 1997 as a result of lower income before income
taxes.
11
<PAGE>
Comparison of Operating Results for the Six Months Ended December 31, 1998 and
December 31, 1997
Net Income. Net income decreased $500,000 to $3.3 million for the six
months ended December 31, 1998 from $3.8 million for the six months ended
December 31, 1997. The decrease for the six months was attributable to an
increase of $1.5 million in noninterest expense to $6.1 million in the six
months ended December 31, 1998 from $4.6 million in the six months ended
December 31, 1997 due primarily to compensation expense associated with the
adoption of the Company's restricted stock plan and costs associated with
the hiring of personnel at newly opened branch offices. Offsetting the
above items that decreased net income in the six months ended December 31,
1998 was an increase in noninterest income of $1.0 million primarily
related to mortgage loan sales and a decrease of $200,000 in the provision
for income taxes due to lower income before income taxes. Earnings per
share for the six months ended December 31, 1998 was $0.86 compared to
$0.93 for the six months ended December 31, 1997.
Net Interest Income. Net interest income increased $42,000 to $10.1
million for the six months ended December 31, 1998 compared to the previous
year period. The increase was attributable primarily to growth in
interest-earning assets offset by an increase in interest-bearing
liabilities and a decrease in net yield on interest-earning assets in the
six months ended December 31, 1998 compared to the six months ended
December 31, 1997. 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 Bank's
conversion from the mutual to stock form of ownership in the six months
ended December 31, 1997, which were absent in the six months ended December
31, 1998.
Investment income increased $700,000 to $19.3 million for the six months
ended December 31, 1998 from $18.6 million for the six months ended
December 31, 1997 as a result of the increase in the average balances of
interest-earning assets to $504.2 million from $476.7 million (including
the previously mentioned stock subscription funds) more than offsetting the
decrease in average yield to 7.66% from 7.81%. Although interest-earning
assets were higher during the six months ended December 31, 1998 as
compared to December 31, 1997, share repurchases of approximately $21.0
million since the six months ended December 31, 1997 significantly offset
asset growth and, accordingly, investment income.
Interest expense increased $600,000 to $9.2 million for the six months
ended December 31, 1998 from $8.6 million for the six months ended December
31, 1997. The increase was due primarily to interest expense on advances
from the FHLB during the six months ended December 31, 1998 that was absent
in the six months ended December 31, 1997. The average balance of deposits
increased to $377.9 million in the six months ended December 31, 1998
compared to $361.4 million (including the previously mentioned stock
subscription funds) in the comparable prior year period. The impact of
increased deposit balances on interest expense was more than offset by a
decrease in the average cost to 4.51% from 4.72% for the six months ended
December 31, 1998 and 1997, respectively. The average balance increased as
the result of newly opened branch offices and various deposit promotions
that have increased deposit balances since December 31, 1997. The decrease
in average costs is attributable to the decrease in prevailing market rates
since December 31, 1997.
12
<PAGE>
Net yield on interest-earning assets decreased to 4.00% for the six months
ended December 31, 1998 from 4.21% for the six months ended December 31,
1997 due primarily to the above mentioned decrease in the average yield on
interest-earning assets.
Provision for Loan Losses. The provision for loan losses was $400,000 for
the six months ended December 31, 1998 compared to $180,000 for the six
months ended December 31, 1997. See "Comparison of Operating Results for
the Three Months Ended December 31, 1998 and December 31, 1997 - Provision
for Loan Losses" for a discussion of management's process for determining
the provision for loan losses.
Noninterest Income. Noninterest income increased by $1.0 million to $1.9
million for the six months ended December 31, 1998 from $0.9 million for
the six months ended December 31, 1997, primarily as a result of the gain
on sale of mortgage loans of $659,000 in the six months ended December 31,
1998 that did not occur in the six months ended December 31, 1997. The
Bank periodically sells loans in response to interest rate changes,
liquidity needs and other factors. The Bank sold mortgage loans during the
six months ended December 31, 1998 primarily to reduce the amount of 30-
year fixed rate loans in the loan portfolio. Management cannot predict
whether there will be any such gains in the future.
Service charges and fees increased to $966,000 for the six months ended
December 31, 1998 from $693,000 for the six months ended December 31, 1997
primarily as a result of increased deposit account fees, particularly on
the increased number of NOW accounts.
Noninterest Expense. Noninterest expense was $6.1 million for the six
months ended December 31, 1998 compared to $4.6 million for the same period
in 1997. The increase consisted principally of increased employee
compensation and benefits which increased to $3.5 million for the six
months ended December 31, 1998 from $2.5 million for the six months ended
December 31, 1997. The increase in compensation expense is principally
attributable to the adoption of the MRDP and costs associated with the
hiring of personnel at newly opened branch offices offset by a 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 1998 and the announced, but not yet opened, branch in Chesnee,
South Carolina become fully operational.
Income Taxes. The provision for income taxes was $2.2 million for the six
months ended December 31, 1998 compared to $2.4 million for the six months
ended December 31, 1997 as a result of lower income before income taxes.
13
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds from
principal and interest payments from loans, the sale of loans, maturing
securities and FHLB of Atlanta advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are influenced greatly by general interest rates,
other economic conditions and competition. 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 December 31, 1998, cash
and cash equivalents totaled $33.2 million, or 6% of total assets, and
investment securities classified as available-for-sale with maturities of
one year or less totaled $23.3 million or 4% of total assets. At December
31, 1998, the Bank also maintained an uncommitted credit facility with the
FHLB of Atlanta, which provides for immediately available advances up to an
aggregate amount of $75.0 million of which $27.0 million had been advanced.
As of December 31, 1998, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At December 31, 1998, under applicable
regulations, the Bank's actual tangible, core and risk-based capital ratios
were 16.7%, 16.7% and 25.6%, respectively, compared to requirements of
1.5%, 3.0% and 8.0%, respectively.
At December 31, 1998, the Company had loan commitments (excluding
undisbursed portions of interim construction loans) of approximately $6.4
million ($5.0 million at fixed rates ranging from 6% to 9%). In addition,
at December 31, 1998, the unused portion of lines of credit (principally
variable rate home equity lines of credit) extended by the Company was
approximately $48.9 million. Furthermore, at December 31, 1998, the Company
had certificates of deposit scheduled to mature in one year or less of
$176.9 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.
14
<PAGE>
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 a full year of testing prior to January 1, 2000.
The Bank has established its Year 2000 test facility and began testing in
November 1998. Like the Bank, BISYS Year 2000 activities are subject to
OTS oversight.
In addition to addressing its own Year 2000 issues, the Bank is in the
process of assessing the impact of the Year 2000 on significant commercial
borrowers. 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 will continue 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 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:
15
<PAGE>
. BISYS could experience unforseen system(s) failure resulting in
the inability to access customer accounts and process
transactions;
. 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;
. 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;
. Failures of the Bank's correspondent banks such as the Federal
Home Loan Bank of Atlanta could impair the Bank's liquidity and
the ability to process certain payments;
. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 1998, there have been no material changes in the
quantitative and qualitative disclosures about market risks presented in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1998.
16
<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
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(3) (a) Certificate of Incorporation of the Registrant*
(3) (b) Bylaws of the Registrant*
(10) (a) Employment Agreement with Billy L. Painter**
(10) (b) Employment Agreement with Hugh H. Brantley**
(10) (c) Employment Agreement with J. Stephen Sinclair**
(10) (d) Employment Agreement with R. Lamar Simpson***
(10) (e) Severance Agreement with Rand Peterson**
(10) (f) Severance Agreement with Thomas Bridgeman**
(10) (g) Severance Agreement with Katherine A. Dunleavy***
(10) (h) Employee Severance Compensation Plan**
(10) (i) Employee Stock Ownership Plan**
(10) (j) Registrant's 1997 Stock Option Plan****
(10) (k) Registrant's Management Recognition and Development
Plan****
(21) Subsidiaries of the Registrant**
(27) Financial Data Schedule
(b) Reports on Form 8-K:
None.
- -----------------
* Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(333-23015) and incorporated herein by reference.
** Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998 and incorporated herein by reference.
*** Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended December 31, 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.
18
<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: By: /s/ Billy L. Painter
-------------------- -------------------------------------
Billy L. Painter
President and Chief Executive Officer
Date: By: /s/ R. Lamar Simpson
-------------------- -------------------------------------
R. Lamar Simpson
Treasurer, Secretary and Chief
Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of FirstSpartan Financial Corp. as of or for the six months
ended December 31, 1998 and is qualified in its entirety by reference to such
financial statements (dollars in thousands except per share data).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,838
<INT-BEARING-DEPOSITS> 19,871
<FED-FUNDS-SOLD> 1,480
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,324
<INVESTMENTS-CARRYING> 71
<INVESTMENTS-MARKET> 72
<LOANS> 452,115
<ALLOWANCE> 2,524
<TOTAL-ASSETS> 530,830
<DEPOSITS> 393,145
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 2,728
<LONG-TERM> 17,000
0
0
<COMMON> 44
<OTHER-SE> 107,957
<TOTAL-LIABILITIES-AND-EQUITY> 530,830
<INTEREST-LOAN> 17,328
<INTEREST-INVEST> 1,984
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,312
<INTEREST-DEPOSIT> 8,588
<INTEREST-EXPENSE> 9,235
<INTEREST-INCOME-NET> 10,077
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,083
<INCOME-PRETAX> 5,468
<INCOME-PRE-EXTRAORDINARY> 5,468
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,282
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
<YIELD-ACTUAL> 4.00
<LOANS-NON> 1,121
<LOANS-PAST> 109
<LOANS-TROUBLED> 948
<LOANS-PROBLEM> 3,371
<ALLOWANCE-OPEN> 2,179
<CHARGE-OFFS> 55
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,524
<ALLOWANCE-DOMESTIC> 2,524
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
