UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
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 Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
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 September 19, 2000, there were issued and outstanding
3,720,270 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 September 19, 2000, the
aggregate value of the Common Stock outstanding held by non-affiliates of the
registrant was $82,767,648 (2,913,328 shares at $28.41 per share). For purposes
of this calculation, officers and directors of the registrant and the First
Federal Bank Employee Stock Ownership Plan are excluded.
DOCUMENTS INCORPORATED BY REFERENCE
None
<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, and changes in federal and state legislation and regulation. 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
General
FirstSpartan Financial Corp. (the "Corporation") is a unitary
thrift holding company incorporated in the state of Delaware. The Corporation's
principal business activities are conducted through its wholly-owned subsidiary,
First Federal Bank (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 activities are primarily limited to
within the Spartanburg and adjacent county areas of South Carolina. The Bank was
originally founded in 1935 as a federal mutual savings and loan association. In
1997, the Bank converted to a federal stock savings bank (the "Conversion") and
as part of the Conversion, the Corporation was formed as the holding company for
the Bank. At June 30, 2000, the Company had total assets of $585.7 million,
total deposits of $419.6 million, and total stockholders' equity of $69.4
million.
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.
Spartanburg County and the City of Spartanburg had a 2000
population of approximately 248,000 and 46,000, 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 3.3% for May 2000. 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
historically has come from commercial banks, credit unions, other thrifts
operating in its market area, and other financial institutions such as brokerage
firms and insurance companies. There are 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. Additionally, the Bank
expects competition to increase as a result of recent regulatory actions and
legislative changes, most notably the recent enactment of the Gramm-Leach-Bliley
Act of 1999. These changes have eased and likely will continue to ease
restrictions on interstate banking and entry into the financial services market
by non-depository and non-traditional financial services providers, including
insurance companies, securities brokerage and underwriting firms, and specialty
financial services companies such as internet-based providers.
Lending Activities
General. At June 30, 2000, the Bank's total loans receivable
portfolio amounted to $540.5 million, or 92% 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 $309.1 million, or 57% of the total loans receivable portfolio at
June 30, 2000. 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,
----------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ------------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
-------------- --------------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $309,096 57.2% $290,219 61.3% $312,981 70.9%
Construction 75,963 14.0 72,373 15.3 41,089 9.3
Land development 24,150 4.5 18,864 4.0 16,729 3.8
Commercial and other 40,979 7.6 23,587 5.0 13,817 3.1
---------- --------- ---------- --------- --------- --------
Total mortgage loans 450,188 83.3 405,043 85.6 384,616 87.1
---------- --------- ---------- --------- --------- --------
Consumer and other loans:
Home equity 52,928 9.8 43,623 9.2 40,746 9.2
Commercial 25,259 4.7 13,885 2.9 6,987 1.6
Other 12,115 2.2 10,894 2.3 9,058 2.1
---------- --------- ---------- --------- --------- --------
Total consumer and other loans 90,302 16.7 68,402 14.4 56,791 12.9
---------- --------- ---------- --------- --------- --------
Total loans receivable 540,490 100.0% 473,445 100.0% 441,407 100.0%
========= ========= ========
Less:
Undisbursed portion of loans in process 33,367 34,807 21,923
Net deferred loan fees 554 561 843
Allowance for loan losses 3,474 2,896 2,179
---------- ---------- ---------
Loans receivable, net $503,095 $435,181 $416,462
========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Amount Percent Amount Percent
-------------- -------------- ----------------- -------------
Mortgage loans:
<S> <C> <C> <C> <C>
One- to four-family $285,969 75.1% $257,398 77.3%
Construction 35,061 9.2 32,393 9.8
Land development 12,376 3.2 5,683 1.8
Commercial and other 3,773 1.0 3,262 1.0
------------- --------- -------------- ---------
Total mortgage loans 337,179 88.5 299,276 89.9
------------- --------- -------------- ---------
Consumer and other loans:
Home equity 35,366 9.3 26,584 8.0
Commercial 1,984 0.5 433 0.1
Other 6,301 2.0 6,510 2.0
------------- --------- -------------- ---------
Total consumer and other loans 43,651 11.5 33,527 10.1
------------- --------- -------------- ---------
Total loans receivable 380,830 100.0% 332,803 100.0%
========= =========
Less:
Undisbursed portion of loans in process 15,311 15,839
Net deferred loan fees 995 1,028
Allowance for loan losses 1,796 1,000
------------- --------------
Loans receivable, net $362,728 $314,936
============= ==============
</TABLE>
3
<PAGE>
One- to Four-Family Real Estate Lending. At June 30, 2000, $309.1
million, or 57% of the Bank's total loan portfolio, consisted of one- to
four-family mortgage loans. The Bank originated $38.4 million, $88.5 million,
and $95.8 million of one- to four-family mortgage loans during the years ended
June 30, 2000, 1999, and 1998, 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, 2000, $139.1 million,
or 45% 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, 2000, however, 14 loans aggregating $502,000 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.
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. During periods of rising interest
rates the risk of default on ARM loans generally increases 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, 2000, the Bank had 11
one- to four-family first mortgage loans totaling $496,000 with principal
balances in excess of 80% of the appraised value of the real estate collateral
and with no private mortgage insurance. The majority of 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, 2000, total approved construction loans amounted
to $76.0 million ($47.3 million not directly originated by the Bank), or 14% of
the Bank's total loan portfolio. Outstanding balances under such approved
construction loans were $51.6 million ($31.5 million not directly originated by
the Bank) at June 30, 2000.
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, 2000, approved speculative
construction loans amounted to $52.1 million (outstanding balances were $40.9
million). At June 30, 2000, the largest amount of construction loans outstanding
to one builder was $2.1 million, all of which was for speculative construction.
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 "-- Non-performing 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 involves 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 $23.5
million and purchased $40.0 million of speculative construction loans from
mortgage bankers during the year ended June 30, 2000, compared to $21.0 million
and $43.1 million, respectively, during the year ended June 30, 1999.
Commercial Real Estate Lending. The Bank originates mortgage
loans for the acquisition and refinancing of commercial real estate properties.
At June 30, 2000, $41.0 million, or 8% 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 real estate 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. 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 loans to local
developers for the purpose of developing land (i.e., installing roads, sewers,
water, and other utilities) for sale. At June 30, 2000, land development loans
amounted to $24.2 million, or 5% 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.
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,
2000, consumer loans amounted to $90.3 million, or 17% of the total loan
portfolio.
At June 30, 2000, the largest component of the consumer loan
portfolio consisted of second mortgage loans and home equity lines of credit,
which totaled $52.9 million, or 10% of the total loan portfolio. At June 30,
2000, unused commitments to extend credit under home equity lines of credit
totaled $40.2 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
residential property. 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, 2000, automobile loans amounted to $5.6 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.
The Bank issues VISA credit cards to customers within its primary
market area. At June 30, 2000, there were 1,812 credit card accounts with
aggregate outstanding balances of $1.7 million. At June 30, 2000, total approved
lines of credit were $6.6 million. The Bank does not engage in direct mailings
of pre-approved credit cards.
7
<PAGE>
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.
The Bank also engages in commercial business lending. At June 30,
2000, the Bank had $25.3 million of commercial business loans which represented
5% of the total loan portfolio. Commercial business loans generally are secured
by business equipment. Of the total commercial business loans at June 30, 2000,
loans amounting to $3.6 million were unsecured. The Bank generally requires
annual financial statements from its corporate borrowers and personal guarantees
from the corporate principals.
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, 2000 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 $ 1,407 $ 3,523 $ 6,244 $ 87,475 $210,447 $309,096
Construction 52,101 3,169 287 80 20,326 75,963
Land development 6,519 13,201 2,354 1,213 863 24,150
Commercial and other 9,795 3,861 18,141 6,600 2,582 40,979
Consumer and other loans 19,174 12,382 13,598 11,901 33,247 90,302
-------- -------- -------- -------- -------- --------
Total $ 88,996 $ 36,136 $ 40,624 $107,269 $267,465 $540,490
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due
after June 30, 2001, which have fixed interest rates and have floating or
adjustable interest rates (in thousands):
Fixed- Floating- or
Rates Adjustable-Rates Total
------- ---------------- -------
Mortgage loans:
One- to four-family $180,598 $127,091 $307,689
Construction 14,374 9,488 23,862
Land development 2,770 14,861 17,631
Commercial and other 28,318 2,866 31,184
Consumer and other loans 38,920 32,208 71,128
-------- -------- --------
Total $264,980 $186,514 $451,494
======== ======== ========
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 television, 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
Senior 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.
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 $1.3 million at June 30, 2000. The Bank
does not expect any material losses on these loans due to their seasoned nature.
Recent loan sales have been predominantly 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 $25.3 million of conventional loans during fiscal
2000. Management intends to sell loans in the future as necessary to manage
interest rate risk and fund continuing operations.
10
<PAGE>
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 fee for performing these services for
others. The Bank's servicing portfolio amounted to $119.4 million at June 30,
2000. The Bank generally is paid a fee equal to 0.25% of the outstanding
principal balance for servicing sold loans. Loan servicing income totaled
$308,000, $227,000, and $178,000 for the years ended June 30, 2000, 1999, and
1998, 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, 2000, borrowers' escrow
funds amounted to $1.1 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, 2000, the Bank purchased $20.6 million of one- to four-family
mortgage loans. Currently, the majority of the loans purchased through this
mortgage banking company are secured by properties located in the Bank's primary
market area and all are located within South Carolina or North Carolina. 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, 2000, the Bank purchased
one- to four-family mortgage loans from these unaffiliated entities in the
amount of $927,000. The one- to four-family mortgage loans purchased are located
in South Carolina and generally are non-conforming to secondary marketing
standards. However, in the Bank's opinion, the higher yields justify the
slightly increased risk in these loans.
11
<PAGE>
The following table sets forth total loans originated, purchased,
sold, and repaid during the periods indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
2000 1999 1998
--------------------------------------------------------
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family $ 38,358 $ 88,500 $ 95,754
Construction 43,228 41,696 38,860
Land development 11,173 8,238 12,676
Commercial and other 25,682 11,929 9,133
Consumer and other 58,117 49,950 56,888
---------- ---------- ---------
Total loans originated 176,558 200,313 213,311
Loans purchased:
Mortgage loans:
One- to four-family 21,486 16,365 14,309
Construction 48,043 49,447 9,537
---------- ---------- ---------
Total loans purchased 69,529 65,812 23,846
Whole loans sold:
Mortgage loans:
One- to four-family (30,352) (64,225) (19,540)
Loan principal repayments (152,849) (173,781) (148,697)
Net increase (decrease) in other items 5,028 (9,400) (15,186)
---------- ---------- ---------
Net increase in loans receivable, net $ 67,914 $ 18,719 $ 53,734
========== ========== =========
</TABLE>
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, 2000, the Bank had
loan commitments (excluding undisbursed portions of interim construction and
land development loans of $33.4 million) of $6.5 million and unused lines of
credit of $55.6 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 some of 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 $98,000, $632,000, and $219,000 of deferred loan fees during the
years ended June 30, 2000, 1999, and 1998, respectively, in connection with loan
refinancings, payoffs, sales, and ongoing amortization of outstanding loans.
12
<PAGE>
Non-performing 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 non-accrual 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 non-accrual
status is charged against income at the time the loan is placed on non-accrual
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.
13
<PAGE>
The following table sets forth information with respect to the
Bank's non-performing assets and restructured loans (dollars in thousands):
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to four-family $ 524 $ 533 $ 266 $ 271 $ 719
Construction 2,580 310 787 273 1,130
Commercial and other -- -- 4 -- --
Consumer and other loans 316 378 153 74 60
------ ------ ------ ------ ------
Total non-accrual loans 3,420 1,221 1,210 618 1,909
------ ------ ------ ------ ------
Accruing loans contractually past due 90 days or more:
Mortgage loans:
Construction -- 298 145 1,401 3,965
Consumer and other loans 23 2 8 12 --
------ ------ ------ ------ ------
Total accruing loans 90 days or more
past due 23 300 153 1,413 3,965
------ ------ ------ ------ ------
Total of non-accrual loans and accruing
loans 90 days or more past due 3,443 1,521 1,363 2,031 5,874
Real estate acquired in settlement of loans 478 348 36 36 58
------ ------ ------ ------ ------
Total non-performing assets $3,921 $1,869 $1,399 $2,067 $5,932
====== ====== ====== ====== ======
Restructured loans $1,419 $ 672 $ 594 $ 863 $1,247
====== ====== ====== ====== ======
Non-accrual loans and accruing loans 90
days or more past due as a percentage
of loans receivable, net 0.68% 0.35% 0.33% 0.56% 1.87%
==== ==== ==== ==== ====
Non-accrual loans and accruing and loans
90 days or more past due as a percentage
of total assets 0.59% 0.28% 0.26% 0.31% 1.65%
==== ==== ==== ==== ====
Non-performing assets as a percentage of
total assets 0.67% 0.34% 0.27% 0.31% 1.66%
==== ==== ==== ==== ====
</TABLE>
14
<PAGE>
Interest income that would have been recorded for the year ended
June 30, 2000 had non-accruing loans been current in accordance with their
original terms amounted to $196,000. The amount of interest included in interest
income on such loans for such periods amounted to $75,000. Interest income that
would have been recorded for the year ended June 30, 2000 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, 2000, the Bank had $478,000 of real estate acquired in
settlement of loans, which consisted of eight one- to four-family properties,
six of which are under construction in a condominium development.
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
non-accrual loans. The Bank had $1.4 million of restructured loans as of June
30, 2000, which consisted of 18 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.
15
<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):
At June 30,
------------------------
2000 1999
------ ------
Classified assets:
Loss $ -- $ --
Doubtful 132 32
Substandard 5,866 3,144
Special mention 1,046 1,119
Loan loss allowances 3,474 2,896
At June 30, 2000, substandard assets consisted of 23 one- to
four-family mortgage loans totaling approximately $2.3 million, 25 construction
loans totaling $2.6 million, 46 other loans totaling $480,000, and real estate
acquired through foreclosure totaling $478,000.
At June 30, 2000, special mention assets consisted of eight one-
to four-family mortgage loans totaling $309,000 and six construction loans
totaling $737,000.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition - Asset Quality and
Allowance for Loan Losses and -- Results of Operations - Provision for Loan
Losses" for further discussion.
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.
See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition - Asset Quality and
Allowance for Loan Losses and -- Results of Operations - Provision for Loan
Losses" for further discussion.
16
<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,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total loans outstanding at end of period $540,491 $473,445 $441,407 $380,830 $332,803
======== ======== ======== ======== ========
Average loans outstanding during period $474,156 $441,514 $395,465 $336,476 $298,865
======== ======== ======== ======== ========
Allowance balance at beginning of period $ 2,896 $ 2,179 $ 1,796 $ 1,000 $ 600
Provision for loan losses 683 800 460 825 419
Charge-offs:
Mortgage loans:
One- to four-family 64 16 1 15 --
Consumer and other 46 69 79 24 23
-------- -------- -------- -------- --------
Total charge-offs 110 85 80 39 23
-------- -------- -------- -------- --------
Recoveries:
Mortgage loans:
One- to four-family -- -- 2 9 --
Consumer and other 5 2 1 1 4
-------- -------- -------- -------- --------
Total recoveries 5 2 3 10 4
-------- -------- -------- -------- --------
Allowance balance at end of period $ 3,474 $ 2,896 $ 2,179 $ 1,796 $ 1,000
======== ======== ======== ======== ========
Allowance for loan losses as a percentage of
total loans receivable at end of period 0.64% 0.61% 0.49% 0.47% 0.30%
======== ======== ======== ======== ========
Net charge-offs as a percentage of average
loans outstanding during the period 0.02% 0.02% 0.02% 0.01% 0.01%
======== ======== ======== ======== ========
Ratio of allowance for loan losses to total
non-performing loans at end of period 1.01 1.90 1.60 0.88 0.17
======== ======== ======== ======== ========
</TABLE>
The ratio of allowance for loan losses to non-performing loans
may fluctuate at the end of the periods because of changes in the composition in
non-performing loans from period to period. The level of non-performing loans is
but one factor of many considered in establishing the allowance for loan losses.
See "-- Non-performing Assets and Delinquencies" and "-- Asset Classification"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financial Condition - Asset Quality and Allowance for Loan Losses
and -- Results of Operations - Provision for Loan Losses" for further
discussion.
17
<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>
2000 1999 1998
----------------------- --------------------- -----------------------
Percent Percent Percent
of Loans of Loans of Loans
in in in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $2,050 71.5% $1,411 76.9% $1,194 81.2%
Non-residential 920 16.1 1,112 11.3 830 6.7
Consumer and other loans 504 12.4 373 11.8 155 12.1
------ ----- ------ ----- ------ -----
Total allowance for loan losses $3,474 100.0% $2,896 100.0% $2,179 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------- ---------------------
Percent Percent
of Loans of Loans
in in
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage loans:
Residential $1,222 83.4% $ 675 86.0%
Non-residential 423 4.0 28 3.6
Consumer and other loans 142 12.6 297 10.4
------ ----- ------ -----
Total allowance for loan losses $1,796 100.0% $1,000 100.0%
====== ===== ====== =====
</TABLE>
18
<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 AND SUPERVISION."
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-backed
securities. 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 mortgage- backed securities.
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, 2000, the Bank's investment in the Asset Management
Fund, Inc. Adjustable-Rate Mortgage Portfolio (which had an aggregate fair value
of $17.2 million and amortized cost of $17.5 million) exceeded 24% of the
Company's stockholders' equity at that date.
19
<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,
---------------------------------------------------------------------------
2000 1999 1998
----------------------- --------------------- --------------------
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 $ 25 $ 26 $ 54 $ 55 $ 88 $ 90
------- ------- ------- ------- ------- -------
Total held-to-maturity 25 26 54 55 88 90
------- ------- ------- ------- ------- -------
Available-for-Sale:
Debt securities:
U.S. Treasury obligations -- -- -- -- 497 498
State and local obligations 2,241 2,172 1,480 1,468 -- --
U.S. Government Agency obligations 14,500 14,236 5,497 5,436 6,010 6,019
------- ------- ------- ------- ------- -------
Total 16,741 16,408 6,977 6,904 6,507 6,517
Marketable equity securities(1) 17,498 17,285 16,511 16,440 22,225 22,192
------- ------- ------- ------- ------- -------
Total available-for-sale 34,239 33,693 23,488 23,344 28,732 28,709
------- ------- ------- ------- ------- -------
Total $34,264 $33,719 $23,542 $23,399 $28,820 $28,799
======= ======= ======= ======= ======= =======
</TABLE>
--------------------
(1) Consists principally of a mutual fund that invests in adjustable-rate
mortgage-backed securities. At June 30, 2000, the mutual fund yielded
6.39%.
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, 2000.
U.S. Treasury obligations and certain U.S. Government agency obligations are
exempt from state taxation. Their weighted average 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):
<TABLE>
<CAPTION>
Less Than One to
One Year Five Years
------------------------------ ---------------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
------ ----- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
State and local
obligations $ -- $ -- --% $ 958 $ 933 4.65%
U. S. Government
Agency obligations 1,000 990 5.14 4,500 4,412 5.97
Mortgage-backed
securities -- -- -- 25 26 8.00
------ ------ ---- ------ ------ ----
Total $1,000 $ 990 5.14% $5,483 $5,371 5.75%
====== ====== ==== ====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Five to After
Ten Years Ten Years
-------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
------ ------- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
State and local
obligations $ 294 $ 289 4.80% $ 989 $ 950 4.80%
U. S. Government
Agency obligations 9,000 8,834 7.88 -- -- --
Mortgage-backed
securities -- -- -- -- -- --
------ ------ ---- ------ ------ ----
Total $9,294 $9,123 7.78% $ 989 $ 950 4.80%
====== ====== ==== ====== ====== ====
</TABLE>
20
<PAGE>
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 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, 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.
The following table indicates the amount of the Bank's jumbo
certificate accounts by time remaining until maturity as of June 30, 2000. Jumbo
certificate accounts have principal balances of $100,000 or more (in thousands):
Maturity Period Amount
----------------------------- --------
Three months or less $13,244
Over three through six months 16,551
Over six through twelve months 33,327
Over twelve months 11,623
--------
Total $74,745
========
21
<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,
-----------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- -------------------------------- ------------------
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:
Non-interest-bearing $ 27,896 6.6% $ 8,733 $ 19,163 4.7% $ 6,406 $ 12,757 3.4%
Interest-bearing 48,551 11.6 2,018 46,533 11.5 4,312 42,221 11.5
Savings accounts 50,488 12.0 (5,737) 56,225 13.8 (515) 56,740 15.3
Money market accounts 27,711 6.6 (2,388) 30,099 7.4 11,966 18,133 4.9
Fixed-term certificate accounts
which mature:
Within 1 year 223,035 53.2 (2,293) 225,328 55.5 25,305 200,023 54.1
After 1 year, but within 2 years 28,872 6.9 11,391 17,481 4.3 (8,898) 26,379 7.1
After 2 years, but within 3 years 5,946 1.4 1,094 4,852 1.2 (2,046) 6,898 1.9
Thereafter 7,120 1.7 790 6,330 1.6 (331) 6,661 1.8
-------- ----- -------- -------- ----- -------- -------- -----
Total $419,619 100.0% $ 13,608 $406,011 100.0% $ 36,199 $369,812 100.0%
======== ===== ======== ======== ===== ======== ======== =====
</TABLE>
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):
At June 30,
-----------------------------------
2000 1999 1998
-------- -------- ---------
3.00% or less $ 951 $ 1,008 $ 412
3.01% - 5.00% 72,349 97,638 2,623
5.01% - 7.00% 183,778 155,261 236,792
7.01% - 9.00% 7,895 84 134
-------- -------- --------
Total $264,973 $253,991 $239,961
======== ======== ========
22
<PAGE>
Time Deposits by Maturities. The following table sets forth the
amount of time deposits in the Bank categorized by maturities at June 30, 2000
(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 $ 951 $ -- $ -- $ -- $ -- $ 951
3.01% - 5.00% 59,517 9,143 722 802 2,165 72,349
5.01% - 7.00% 157,574 16,893 5,158 1,716 2,437 183,778
7.01% - 9.00% 4,993 2,836 66 -- -- 7,895
-------- -------- -------- -------- -------- --------
Total $223,035 $ 28,872 $ 5,946 $ 2,518 $ 4,602 $264,973
======== ======== ======== ======== ======== ========
</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,
------------------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Beginning balance $ 406,011 $ 369,812 $ 353,193
--------- --------- ---------
Net (withdrawals) deposits before interest credited (1,655) 22,126 1,452
Interest credited 15,263 14,073 15,167
--------- --------- ---------
Net increase in deposits 13,608 36,199 16,619
--------- --------- ---------
Ending balance $ 419,619 $ 406,011 $ 369,812
========= ========= =========
</TABLE>
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.
23
<PAGE>
FHLB advances are summarized as follows (dollars in thousands):
June 30,
------------------------------------------------------
2000 1999
------------------------ ------------------------
Weighted Weighted
Average Average
Type of Advance Amount Rate Amount Rate
--------------- -------- ------ ------ ------
Fixed-rate $45,000 6.38% $34,000 5.23%
Adjustable-rate 10,000 6.58 -- --
Variable-rate 27,000 7.40 -- --
------- ---- ------- ----
Total advances $82,000 6.32% $34,000 5.23%
======= ==== ======= ====
The fixed-rate advances are convertible whereby the FHLB has the
option at a predetermined date to convert the fixed interest rate to an
adjustable rate tied to LIBOR. The Company has the option to prepay any advance
on the conversion date or any subsequent quarterly interest payment date should
the FHLB exercise its conversion option. The adjustable-rate advances adjust
quarterly based upon 3-month LIBOR and the variable-rate advances adjust daily
based on the overnight funds market.
Scheduled maturities and repricing or conversion dates of FHLB
advances as of June 30, 2000 are as follows (in thousands):
Amounts Amounts at
at Next Repricing
Year Ending Stated or Conversion
June 30, Maturity Date
-------- -------- ----------
2001 $27,000 $65,000
2002 -- --
2003 16,000 7,000
2004 7,000 10,000
2005-2007 -- --
2008 7,000 --
2009 10,000 --
2010 15,000 --
------- -------
Total advances $82,000 $82,000
======= =======
The maximum month-end balance of FHLB advances outstanding was
$82.0 million and $34.0 million during the years ending June 30, 2000 and 1999,
respectively. Average balances of FHLB advances outstanding during the years
ended June 30, 2000 and 1999 were $64.1 million and $26.8 million, respectively.
The Company had an approved credit limit of $146.2 million with the FHLB as of
June 30, 2000. The advances are secured by FHLB stock and a blanket lien on all
qualifying one- to four-family residential first mortgage loans.
24
<PAGE>
Short-term Borrowings. At June 30, 2000, the Company had sold,
under agreements to repurchase, U.S. Government agency securities. The
securities underlying the agreements were delivered to the broker-dealer who
arranged the transaction.
Information concerning securities sold under agreements to
repurchase is summarized as follows:
2000 1999
------ -----
Balance outstanding at end of year $8,763 --
====== ======
Average balance for months outstanding $8,908 --
====== ======
Average interest rate for months outstanding 6.01% --
====== ======
Maximum month-end balance during year $9,079 --
====== ======
Mortgage-related securities underlying the
agreements at year end:
Carrying value $9,000 --
====== ======
Estimated fair value $8,834 --
====== ======
At June 30, 1999, the Company had outstanding a $35.0 million
note payable to a commercial bank. The note, dated June 23, 1999, bore interest
at the 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.
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
$628,000 at June 30, 2000, did not exceed these limits.
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, 2000, 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 $63,000 and $149,000 for the years ended June 30, 2000
and 1999, 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.
25
<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 Company is a non-diversified unitary savings and loan holding
company within the meaning of federal law. Under prior law, a unitary savings
and loan holding company, such as the Company, generally was not restricted as
to the types of business activities in which it may engage, provided that the
Bank continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company 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 Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally 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.
26
<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.
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 associations (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 4% (3% for institutions receiving the highest rating on the CAMELS
financial institution rating system) leverage ratio and an 8% risk-based capital
ratio. 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
non-cumulative 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.
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, 2000, the Bank
met each of its capital requirements.
27
<PAGE>
The following table presents the Bank's capital position at June
30, 2000 (dollars in thousands):
Capital
----------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
-------- --------- -------- ------- ---------
Tangible $57,310 $ 8,770 $48,540 9.8% 1.5%
Core (Leverage) 57,310 23,400 33,910 9.8 4.0
Risk-based 60,684 32,069 28,615 15.1 8.0
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 semi-annually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
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. Beginning in
2000, there is equal sharing of FICO assessments by all SAIF and Bank Insurance
Fund institutions. FICO payments for the third and fourth quarters of 1999
approximated 5.9 basis points and 2.06 basis points for the first two quarters
of 2000. 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.
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.
28
<PAGE>
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, 2000, the Bank's limit on loans to one borrower was $8.6
million, and the Bank's largest aggregate outstanding balance of loans to one
borrower was $4.9 million. These loans were performing according to their
original terms at June 30, 2000.
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, 2000, 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. An application to and the prior
approval of the OTS is 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 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 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
29
<PAGE>
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
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.
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, 2000, of $4.1 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, 2000, 1999, and 1998,
dividends from the FHLB to the Bank amounted to $284,000, $262,000 and $229,000,
respectively. If dividends were reduced, or interest on future FHLB advances
increased, the Bank's net interest income would likely be reduced also.
30
<PAGE>
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 $44.3 million or less (subject to
adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for
accounts aggregating greater than $44.3 million, the reserve requirement is
$1.329 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 $44.3 million. The first $5.0 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
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
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 "non-dividend
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. Non-dividend 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,
31
<PAGE>
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
"non-dividend 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 AND SUPERVISION" 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.
Audits. The Bank's Federal income tax returns have been audited
through June 30, 1997. 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.
For additional information regarding taxation, see Note 8 of
Notes to Consolidated Financial Statements included in Item 8, "Financial
Statements and Supplementary Data."
Personnel
As of June 30, 2000, the Company had 137 full-time employees and
20 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, 2000.
32
<PAGE>
<TABLE>
<CAPTION>
Net
Year Leased/ Approximate Book
Location Opened Owned Square Footage Value
------------------------ ------- ------- -------------- --------
<S> <C> <C> <C> <C>
Main Office:
380 E. Main Street 1974 Owned 38,909 $1,278
Spartanburg, South Carolina
Branch Offices:
280 N. Church Street 1986 Owned 1,080 176
Spartanburg, South Carolina
1488 W.O. Ezell Boulevard 1980 Ground 2,453 571
Spartanburg, South Carolina Lease(1)
1585 E. Main Street 1991 Owned 2,166 372
Spartanburg, South Carolina
2701 Boiling Springs Road 1994 Owned 3,300 644
Boiling Springs, South Carolina
1157 Asheville Highway 1997 Owned 3,330 509
Inman, South Carolina
2075 E. Main Street 1997 Owned 3,332 687
Duncan, South Carolina
1451 Woodruff Road 1998 Leased(2) 540 188
Greenville, South Carolina
1319 W. Poinsett Street 1998 Owned 3,332 773
Greer, South Carolina
14055 E. Wade Hampton Boulevard 1998 Leased(3) 688 196
Greer, South Carolina
450 S. Alabama Avenue 1999 Owned 1,760 461
Chesnee, South Carolina
</TABLE>
(1) An owned building on 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, 2000, the Bank had 11
proprietary automated teller machines. At June 30, 2000, the net book value of
the Bank's office properties and the Bank's fixtures, furniture, and equipment
was $7.9 million.
33
<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, 2000.
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, 2000, 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 AND SUPERVISION -- 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. 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).
2000 High Low Dividend
------------------- ------ ----- --------
September 30, 1999 $23.625 $19.375 $0.20
December 31, 1999 19.500 17.250 0.25
March 31, 2000 18.500 14.500 0.25
June 30, 2000 18.125 15.063 0.25
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
34
<PAGE>
Item 6. Selected Financial Data
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at the
dates and for the periods indicated. This information is qualified in its
entirety by reference to the detailed information contained in the Consolidated
Financial Statements and Notes thereto presented elsewhere in this Report.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Investment income $ 40,906 $ 38,625 $ 37,414 $ 29,462 $ 26,445
Interest expense 21,223 18,366 17,153 15,811 14,669
-------- -------- -------- -------- --------
Net interest income 19,683 20,259 20,261 13,651 11,776
Provision for loan losses 683 800 460 825 419
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 19,000 19,459 19,801 12,826 11,357
-------- -------- -------- -------- --------
Non-interest income 4,256 4,098 2,366 1,386 1,238
Non-interest expense(1) 13,448 14,980 9,820 9,903 6,947
-------- -------- -------- -------- --------
Income before income taxes 9,808 8,577 12,347 4,309 5,648
Provision for income taxes 3,866 3,602 4,807 1,587 2,111
-------- -------- -------- -------- --------
Net income $ 5,942 $ 4,975 $ 7,540 $ 2,722 $ 3,537
======== ======== ======== ======== ========
PER SHARE DATA:
Basic and diluted earnings $ 1.77 $ 1.36 $ 1.85 -- --
Cash dividends declared 0.95 0.75 0.45 -- --
Cash distribution -- 12.00 -- -- --
Book value $ 18.65 $ 17.43 $ 29.57 -- --
BALANCE SHEET SUMMARY:
Total assets $585,657 $545,725 $517,433 $665,446 $356,966
Average assets 559,080 535,283 499,035 385,347 344,390
Loans receivable, net 503,095 435,181 416,462 362,728 314,936
Investment securities 33,718 23,398 28,797 10,322 18,350
Cash and cash equivalents 20,606 58,420 48,968 227,072 10,784
Deposits 419,619 406,011 369,812 353,193 305,831
Other borrowings 8,763 35,000 -- -- --
Federal Home Loan Bank of Atlanta advances 82,000 34,000 17,000 -- --
Stock subscription escrow accounts(2) -- -- -- 259,329 --
Total equity 69,384 66,041 125,761 46,978 44,154
Average equity 68,198 113,528 127,266 45,795 42,953
</TABLE>
(footnotes on following page)
35
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-----------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
OTHER STATISTICAL DATA:
Return on average assets 1.06% 0.93% 1.51% 0.71% 1.03%
Return on average equity 8.71% 4.38% 5.92% 5.94% 8.23%
Interest rate spread(3) 3.37% 3.16% 3.07% 3.22% 3.01%
Net interest margin(4) 3.73% 3.97% 4.21% 3.69% 3.55%
Efficiency ratio(5) 0.56 0.53 0.43 0.54 0.54
Non-performing loans to loans receivable, net(6) 0.68% 0.35% 0.33% 0.56% 1.87%
Allowance for losses to gross loans receivable 0.64% 0.61% 0.49% 0.47% 0.30%
Allowance for losses to non-performing loans 100.90% 190.40% 159.87% 88.43% 17.02%
Total equity to total assets 11.85% 12.10% 24.30% 7.06% 12.37%
Average equity to average assets 12.20% 21.21% 25.50% 11.88% 12.47%
Dividend payout ratio(7) 53.67% 55.15% 24.32% -- --
Number of offices 11 11 8 7 5
</TABLE>
---------------------------
(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) Non-interest 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 non-interest
income.
(6) Non-performing loans consist of loans accounted for on a non-accrual basis
and accruing loans contractually past due 90 days or more.
(7) Dividends declared per share divided by net income per share.
Item 7. 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.
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; and other factors disclosed periodically in the Company's filings with
the Securities and Exchange Commission.
36
<PAGE>
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.
Financial Condition
Overview
Total assets were $585.7 million at June 30, 2000 and $545.7
million at June 30, 1999, an increase of $40.0 million. The increase was
principally the result of increases in loans receivable, net, investment
securities, and other assets, offset by decreases in cash and cash equivalents
and loans held-for-sale. Total liabilities increased by $36.6 million as the
result of increased deposits and borrowings. Total stockholders' equity
increased by $3.4 million principally as the result of net income offset by
dividends paid and stock repurchases.
Cash and Cash Equivalents
Cash and cash equivalents totaled $20.6 million at June 30, 2000,
a decrease of $37.8 million. The majority of the decrease was attributable to
cash used in investing activities of $80.5 million offset by cash from financing
activities of $31.0 million and from cash provided by operating activities of
$11.6 million. A more detailed reconciliation may be found in the Company's
Consolidated Statements of Cash Flows for the year ended June 30, 2000.
Investment Securities
Investment securities increased by $10.3 million to $33.7 million
at June 30, 2000 from $23.4 million at June 30, 1999.
Loans Receivable, Net
Loans receivable, net, increased primarily as a result of a net
growth of $46.6 million in mortgage loans since June 30, 1999. Included in the
$46.6 million increase were increases of $18.9 million in one- to four-family
mortgage loans, $17.4 million in commercial mortgage loans, $8.1 million in
construction loans, and $2.2 million in land development loans. The primary
factor contributing to the increase in mortgage loans was the purchase of $40.0
million in one- to four-family mortgage loans and construction loans from the
mortgage banking company in which the Bank's service corporation subsidiary owns
a one-third equity interest, and $29.4 million in mortgage loans from other
correspondent banking relationships. Offsetting loan purchases was the sale of
$25.3 million of loans (principally 30-year fixed-rate conventional mortgage
loans) in the secondary market. Loans receivable, net, also increased due to an
$11.4 million increase in non-mortgage commercial loans, a $9.3 million increase
in home equity loans, and a $1.2 million increase in other non-mortgage loans.
The increase in loans receivable, net, was funded primarily through increases in
deposits and in 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 these loans through its mortgage banking affiliate,
and through other closely monitored correspondent banking relationships. The
objective of this strategy is to increase yields and reduce interest rate risk,
but because it 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.
37
<PAGE>
Asset Quality and Allowance for Loan Losses
The allowance for loan losses represents an amount that
management believes will be adequate to absorb estimated losses inherent in
existing loans that may become uncollectible. Based upon the Company's loan
classification policy (which is in accordance with applicable regulatory
requirements), management estimates potential loan losses in the classified
loans. In addition, management assesses the risk of additional losses that are
probable but unidentified in the remaining unclassified loans. The level of the
allowance established is based upon, but not limited to the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Management deemed the allowance for
loan losses to be adequate at June 30, 2000. 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.
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 non-accrual loans and accruing loans 90 days or more past due as
non-performing loans.
Non-performing loans increased by $1.9 million to $3.4 million,
or 0.59% of total assets, at June 30, 2000 from $1.5 million, or 0.28% of total
assets, at June 30, 1999. Loans classified under OTS regulations totaled $7.0
million and $4.3 million at June 30, 2000 and 1999, respectively. The increase
in non-performing loans and classified assets was due primarily to the placement
of $2.1 million in speculative construction loans outstanding to several
partnerships with a common general partner/builder on non-accrual status as of
December 31, 1999. All of the partnerships declared Chapter 11 bankruptcy in
December 1999.
At June 30, 2000, $2.4 million of loans were considered impaired
under generally accepted accounting principles ($2.1 million of which is related
to the speculative construction loans described above). The impaired loans have
an impairment allowance of $215,000 ($200,000 of which is related to the
speculative construction loans described above), which is included in the total
allowance for loan losses of $3.5 million at June 30, 2000.
See also "-- Results of Operations - Provision for Loan Losses"
for discussion of the provision for loan losses.
Deposits
Deposit accounts increased $13.6 million to $419.6 million at
June 30, 2000 from $406.0 million at June 30, 1999. The increase in deposits
resulted from increases in deposits due to increasing market penetration of some
of the newer branches, increased commercial accounts as the result of increased
commercial lending activity, and interest credited to deposit accounts during
the period.
Stockholders' Equity
Stockholders' equity increased by $3.4 million to $69.4 million
at June 30, 2000 from $66.0 million at June 30, 1999. Items that increased
stockholders' equity were retained net income of $5.9 million for the year ended
June 30, 2000 and the allocation of shares under the Bank's Employee Stock
Option Plan ("ESOP") and the Management Recognition and Development Plan
("MRDP") which together totaled $2.0 million. Offsetting these increases to
stockholders' equity were the payment of dividends of $3.2 million and the
purchase of $1.2 million of the Company's stock in the open market during the
year ended June 30, 2000.
38
<PAGE>
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 increased $900,000 to $5.9 million for the year ended
June 30, 2000 from $5.0 million for the year ended June 30, 1999 primarily due
to a decrease in non-interest expense. The decrease was primarily due to a
charge to compensation expense associated with the special cash distribution on
the MRDP shares during the year ended June 30, 1999. Also as expected, net
income for the current year was reduced by the loss of earnings on the funds
used to pay the special cash distribution of $12.00 per share and to repurchase
shares during the year ended June 30, 1999. Earnings per share also was affected
by the special cash distribution and share repurchases in the form of a
reduction of average shares outstanding. Share repurchases in the prior year and
in the quarter ended June 30, 2000 decreased average shares outstanding by
approximately 200,000 shares. The remainder of the share reduction was due
principally to the effect of share purchases by the Company's ESOP with $4.3
million it received from the $12.00 per share 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 awarded to
participants.
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 non-interest expense and the absence of earnings on funds
used to repurchase stock, partially offset by increased non-interest income and
a decreased provision for income taxes due to lower income before income taxes.
The increase in non-interest expense was principally the result of increased
compensation expense 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 Interest Income
Net interest income decreased $600,000 to $19.7 million for the
year ended June 30, 2000 from $20.3 million for the year ended June 30, 1999. As
discussed above, net interest income was reduced by the loss of earnings on
approximately $65.6 million used for the payment of the $12.00 per share cash
distribution in June 1999 and share repurchases during the first and second
quarters of fiscal year 1999. The effect of the $65.6 million cash outlay is
estimated to have decreased net income by approximately $1.8 million, or 36%,
when comparing the years ended June 30, 2000 and 1999. The cash distribution and
share repurchases were funded partially with cash equivalents and also through
borrowings.
As described below, the average balance of interest-earning
assets increased even though a large amount of interest-earning assets were used
in the cash distribution and share repurchases. Also described below, interest-
bearing liabilities increased in greater proportion than the increase in
interest-earning assets due to the funding of a portion of the cash distribution
and share repurchases with borrowings. Since interest-earning assets increased
(principally an increase in loans receivable, net) the spread earned on those
assets served to offset the loss of net interest income on the funds used for
the cash distribution and share repurchases.
39
<PAGE>
The average balance of interest-earning assets increased to
$527.1 million during the year ended June 30, 2000 from $510.5 million during
the year ended June 30, 1999. The average yield increased to 7.76% from 7.57%
for the prior year due to higher market interest rates during the current year.
The average balance of interest-bearing liabilities increased to $483.9 million
during the year ended June 30, 2000 from $416.0 million during the year ended
June 30, 1999, more than offsetting a decrease in the average cost of
interest-bearing liabilities to 4.39% from 4.41%. The decrease in the average
cost is attributable to deposits that repriced during lower market interest
rates in late 1998 and throughout much of 1999. Recent increases in market
interest rates have not yet had a full impact on deposits since a large portion
of deposits have not yet repriced at prevailing market interest rates as they
have not yet reached their contractual maturity. The cost of interest-bearing
liabilities is expected to increase if current interest rates prevail or
increase; however, the amount cannot be quantified. Net yield on
interest-earning assets decreased to 3.73% during the year ended June 30, 2000
from 3.97% during the year ended June 30, 1999 due primarily to the above
mentioned increase in the average balance of interest-bearing liabilities.
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 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 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.
40
<PAGE>
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.)
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1) $474,156 $37,622 7.93% $441,514 $34,811 7.88%
Mortgage-backed securities 38 3 7.89 68 6 8.82
Investment securities 31,090 1,927 6.20 30,567 1,668 5.46
FHLB stock 3,692 284 7.69 3,492 262 7.50
Federal funds sold and overnight
interest-bearing deposits 18,147 1,070 5.90 34,902 1,878 5.38
-------- ------- ---- -------- ------- ----
Total interest-earning assets 527,123 40,906 7.76 510,543 38,625 7.57
------- ---- ------- ----
Non-interest-earning assets 31,957 24,740
-------- --------
Total assets $559,080 $535,283
======== ========
Interest-bearing liabilities(2):
Savings accounts $ 53,001 1,334 2.52 $ 55,485 1,623 2.93
Money market accounts 30,905 1,179 3.81 26,656 1,043 3.91
NOW accounts 70,500 962 1.36 60,566 1,034 1.71
Certificate accounts 257,055 13,682 5.32 245,720 13,185 5.37
-------- ------- ---- -------- ------- ----
Total deposits 411,461 17,157 4.17 388,427 16,885 4.35
Advances from FHLB of Atlanta 64,104 3,560 5.46 26,836 1,432 5.34
Other borrowings 8,301 506 6.00 767 49 6.39
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 483,866 21,223 4.39 416,030 18,366 4.41
------- ---- ------- ----
Non-interest-bearing liabilities 7,016 5,725
-------- --------
Total liabilities 490,882 421,755
Stockholders' equity 68,198 113,528
-------- --------
Total liabilities and stockholders'
equity $559,080 $535,283
======== ========
Net interest income $19,683 $20,259
======= =======
Interest rate spread 3.37% 3.16%
==== ====
Net interest margin 3.73% 3.97%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.09x 1.23x
==== ====
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1998
-----------------------------------
Interest
Average and Yield/
Balance Dividends Cost
------- --------- ----
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1) $395,465 $32,146 8.13%
Mortgage-backed securities 106 9 8.49
Investment securities 18,831 1,111 5.90
FHLB stock 3,122 229 7.34
Federal funds sold and overnight
interest-bearing deposits 63,967 3,919 6.13
-------- ------- ----
Total interest-earning assets 481,491 37,414 7.77
------- ----
Non-interest-earning assets 17,544
--------
Total assets $499,035
========
Interest-bearing liabilities(2):
Savings accounts $ 61,931 2,032 3.28
Money market accounts 12,733 434 3.41
NOW accounts 48,389 1,039 2.15
Certificate accounts 238,845 13,498 5.65
-------- ------- ----
Total deposits 361,898 17,003 4.70
Advances from FHLB of Atlanta 2,970 150 5.05
Other borrowings -- -- --
-------- ------- ----
Total interest-bearing liabilities 364,868 17,153 4.70
------- ----
Non-interest-bearing liabilities 6,901
--------
Total liabilities 371,769
Stockholders' equity 127,266
--------
Total liabilities and stockholders'
equity $499,035
========
Net interest income $20,261
=======
Interest rate spread 3.07%
====
Net interest margin 4.21%
====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 1.32x
====
</TABLE>
---------------------
(1) Includes loans held-for-sale. Includes non-accrual loans but excludes
interest on non-accrual loans.
(2) Excludes escrow balances.
41
<PAGE>
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, 2000 Year Ended June 30, 1999
Compared to Year Ended June 30, Compared to Year Ended June 30,
1999 1998
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) $ 222 $ 2,589 $ 2,811 $ (957) $ 3,622 $ 2,665
Mortgage-backed securities (1) (2) (3) -- (3) (3)
Investment securities 230 29 259 (76) 633 557
FHLB stock 7 15 22 5 28 33
Federal funds sold and overnight
interest-bearing deposits 203 (1,011) (808) (433) (1,608) (2,041)
------- ------- ------- ------- ------- -------
Total net change in income on
interest-earning assets 661 1,620 2,281 (1,461) 2,672 1,211
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings accounts (219) (70) (289) (208) (201) (409)
Money market accounts (26) 162 136 72 537 609
NOW accounts (363) 291 (72) 22 (27) (5)
Certificate accounts (126) 623 497 (745) 432 (313)
Advances from FHLB of Atlanta 58 2,070 2,128 10 1,272 1,282
Other borrowings (2) 459 457 -- 49 49
------- ------- ------- ------- ------- -------
Total net change in expense
on interest-bearing liabilities (678) 3,535 2,857 (849) 2,062 1,213
Net change in net interest income $ 1,339 $(1,915) $ (576) $ (612) $ 610 $ (2)
======= ======= ======= ======= ======= =======
</TABLE>
(1) Excludes interest on non-accrual loans.
42
<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. Management assesses the allowance for loan
losses on a quarterly basis and makes provisions for loan losses as deemed
appropriate in order to maintain the adequacy of the allowance for loan losses.
As the provision for loan losses is the result of periodic evaluation of the
allowance for loan losses, the resulting provision for loan losses may fluctuate
from period to period. Factors that influence the level of the allowance for
loan losses are discussed in "-- Financial Condition - Asset Quality and
Allowance for Loan Losses." The provision for loan losses was $683,000,
$800,000, and $460,000 for the years ended June 30, 2000, 1999, and 1998,
respectively.
See "-- Financial Condition - Asset Quality and Allowance for
Loan Losses" for more analysis of the allowance for loan losses.
Non-interest Income
Non-interest income increased by $158,000 to $4.3 million for the
year ended June 30, 2000 from $4.1 million for the year ended June 30, 1999,
primarily as a result of an increase in service charges and fees to $3.2 million
for the year ended June 30, 2000 from $2.2 million for the year ended June 30,
1999 principally due to the growth in checking accounts. The growth in fee
income, however, was offset by a decrease in gain on sale of mortgage loans to
$287,000 for the year ended June 30, 2000 from $1.3 million in the year ended
June 30, 1999. The Bank periodically sells loans in response to interest rate
changes, liquidity needs, and other factors. The Bank sold $25.3 million of
mortgage loans during the year ended June 30, 2000 compared to $61.4 million
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 during the year ended June 30, 1999 due to lower market
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.
Non-interest 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 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 was higher than normal
during 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.
Non-interest Expense
Non-interest expense was $13.4 million for the year ended June
30, 2000 compared to $15.0 million for the year ended June 30, 1999. The
decrease consisted principally of employee compensation and benefits which
decreased to $7.6 million for the year ended June 30, 2000 from $9.3 million for
the year ended June 30, 1999. The decrease in compensation expense was due
primarily to a charge of approximately $2.1 million related to the payment of
the special cash distribution on shares of stock awarded under the MRDP in 1999.
The increases in other categories of other operating expenses generally are
attributable to the continuing growth of the Company and to inflation.
43
<PAGE>
Non-interest 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 awarded under 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
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.
Income Taxes
The provision for income taxes was $3.9 million for the year
ended June 30, 2000 compared to $3.6 million for the year ended June 30, 1999
primarily due to an increase in income before 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.
Analysis of Other Financial and Operating Matters
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits,
proceeds from principal and interest payments on loans, proceeds from 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 loan prepayments, particularly mortgage loan
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, 2000, cash and cash equivalents totaled $20.6 million, or 4% 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, 2000, 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 $146.2
million of which $82.0 million had been advanced.
As of June 30, 2000, the Bank's regulatory capital was in excess
of all applicable regulatory requirements. At June 30, 2000, under regulations
of the OTS, the Bank's actual tangible, core, and risk-based capital ratios were
9.8%, 9.8 %, and 15.1%, respectively, compared to requirements of 1.5%, 4.0%,
and 8.0%, respectively.
At June 30, 2000, the Company had loan commitments (excluding
undisbursed portions of interim construction loans) of approximately $6.5
million ($1.0 million at fixed rates ranging from 8.125% to 8.625%). In
addition, at June 30, 2000, the unused portion of credit (principally
variable-rate home equity lines of credit) extended by the Company was
approximately $55.6 million. Furthermore, at June 30, 2000, the Company had
certificates of deposit scheduled to mature in one year or less of $223.0
million. Based on historical experience, the Company anticipates that a majority
of these certificates of deposit will be renewed at maturity.
44
<PAGE>
As of June 30, 2000, the Board of Directors had authorized the
repurchase of up to 378,797 shares of the outstanding stock of the Corporation,
of which 67,700 had been repurchased. Management of the Company is unable to
predict when (or if) the remaining shares authorized to be repurchased will be
repurchased or at what price.
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 in this report 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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
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 five 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.
45
<PAGE>
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,
emphasized the origination and purchase of 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 also
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.
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
based on the FHLB model. 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.)
June 30,
-------------------------------------------------
2000 1999
-------------------- -------------------
Basis Point Estimated Change in Estimated Change in
Change in Rate Net Portfolio Value Net Portfolio Value
-------------- ------------------- -------------------
+200 $(14,757) (25.2)% $(15,349) (16.2)%
+100 (7,239) (12.4) (7,244) (7.6)
0 -- -- -- --
-100 5,238 8.9 6,404 6.7
-200 7,890 13.5 12,003 12.6
The above table illustrates, for example, that an instantaneous
200 basis point increase in market interest rates at June 30, 2000 would reduce
the Company's NPV by approximately $14.8 million at that date. Accordingly, the
Company could be adversely affected during the periods of rising interest rates.
Certain assumptions utilized in assessing the interest rate risk of savings
banks within the Bank's geographic region were utilized in preparing the
46
<PAGE>
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, 2000 and 1999 are within
policy limits established by the Company's Board of Directors.
While the Company principally relies on 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, 2000. 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.)
<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 8.15% $ 173,405 $ 137,345 $ 85,596 $ 110,223 $ 506,569 $ 496,322
Loans held-for-sale 7.90 1,933 -- -- -- 1,933 1,967
Investment securities 6.58 18,275 5,008 337 10,073 33,693 33,693
Other assets 4.55 5,171 -- 25 -- 5,196 5,197
FHLB stock 7.63 4,100 -- -- -- 4,100 4,100
Federal funds sold and overnight
interest-bearing deposits 7.09 7,231 -- -- -- 7,231 7,231
--------- --------- --------- --------- --------- ---------
Total interest-sensitive assets 210,115 142,353 85,958 120,296 558,722 548,510
--------- --------- --------- --------- --------- ---------
Interest-sensitive liabilities:
Savings accounts 2.47 8,692 13,202 8,607 19,987 50,488 50,488
Money market accounts 4.15 21,728 3,026 1,441 1,516 27,711 27,711
NOW accounts 1.22 28,606 26,186 7,007 14,648 76,447 76,447
Certificate accounts 5.85 223,035 34,818 7,120 -- 264,973 263,359
Advances from FHLB 6.32 65,000 7,000 10,000 -- 82,000 81,164
Other borrowings 6.58 8,763 -- -- -- 8,763 8,763
--------- --------- --------- --------- --------- ---------
Total interest-sensitive liabilities 355,824 84,232 34,175 36,151 510,382 507,932
--------- --------- --------- --------- --------- ---------
Rate sensitive gap $(145,709) $ 58,121 $ 51,783 $ 84,145 $ 48,340 $ 40,578
========= ========= ========= ========= ========= =========
Cumulative rate sensitive gap $(145,709) $ (87,588) $ (35,805) $ 48,340 $ -- $ --
========= ========= ========= ========= ========= =========
Off-balance sheet items:
Commitments to extend credit 8.40 $ 6,490 $ -- $ -- $ -- $ 6,490 $ 6,490
Unused lines of credit 10.51 55,575 -- -- -- 55,575 55,575
Loans in process 9.63 33,367 -- -- -- 33,367 33,367
</TABLE>
47
<PAGE>
Item 8. Financial Statements and Supplementary Data
[Consolidated Financial Statements and Notes Thereto of FirstSpartan Financial
Corp. and Subsidiaries follow]
48
<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, 2000 and 1999,
and the related consolidated statements of income, equity, and cash flows for
each of the three years in the period ended June 30, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended June 30, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP
July 19, 2000
(September 5, 2000 as to Note 16)
Greenville, South Carolina
49
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Balance Sheets
June 30, 2000 and 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Assets
Cash $ 13,375 $ 14,638
Federal funds sold and overnight interest-bearing deposits 7,231 43,782
-------------- -------------
Total cash and cash equivalents 20,606 58,420
Investment securities available-for-sale - at fair value (amortized cost:
$34,239 and $23,489 at June 30, 2000 and 1999, respectively) 33,693 23,344
Loans receivable, net 503,095 435,181
Loans held-for-sale - at lower of cost or market (market value: $1,967
and $9,089 at June 30, 2000 and 1999, respectively) 1,933 8,984
Office properties and equipment, net 10,241 10,370
Federal Home Loan Bank of Atlanta stock - at cost 4,100 3,612
Real estate acquired in settlement of loans 478 348
Other assets 11,511 5,466
-------------- -------------
Total Assets $ 585,657 $ 545,725
============== =============
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 419,619 $ 406,011
Advances from Federal Home Loan Bank of Atlanta 82,000 34,000
Other borrowings 8,763 35,000
Other liabilities 5,891 4,673
-------------- -------------
Total liabilities 516,273 479,684
-------------- -------------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued or outstanding at June 30,
2000 and 1999
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued: 4,430,375 at June 30, 2000
and 1999; outstanding: 3,720,270 and 3,787,970 at June 30,
2000 and 1999, respectively 44 44
Additional paid-in capital 42,894 42,648
Retained earnings 57,674 54,905
Treasury stock - at cost (710,105 and 642,405 shares at
June 30, 2000 and 1999, respectively) (22,126) (20,955)
Unearned restricted stock (3,502) (4,660)
Unallocated ESOP stock (5,261) (5,851)
Accumulated other comprehensive loss (339) (90)
-------------- -------------
Total stockholders' equity 69,384 66,041
-------------- -------------
Total Liabilities and Stockholders' Equity $ 585,657 $ 545,725
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Income
Years Ended June 30, 2000, 1999, and 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
Investment Income:
Interest on loans $ 37,622 $ 34,811 $ 32,146
Interest and dividends on investment securities,
mortgage-backed securities, and other 3,284 3,814 5,268
---------- ---------- -----------
Total investment income 40,906 38,625 37,414
---------- ---------- -----------
Interest Expense:
Deposit accounts 17,157 16,885 17,003
Advances from Federal Home Loan Bank of Atlanta 3,560 1,432 150
Other borrowings 506 49 --
---------- ---------- -----------
Total interest expense 21,223 18,366 17,153
---------- ---------- -----------
Net Interest Income 19,683 20,259 20,261
Provision for Loan Losses 683 800 460
---------- ---------- -----------
Net Interest Income After Provision for Loan Losses 19,000 19,459 19,801
---------- ---------- -----------
Non-interest Income (Loss):
Service charges and fees 3,181 2,225 1,378
Gain on sale of mortgage loans 287 1,333 342
Loss on sale of investments -- (53) --
Other, net 788 593 646
---------- ---------- -----------
Total non-interest income, net 4,256 4,098 2,366
---------- ---------- -----------
Non-interest Expense:
Employee compensation and benefits 7,627 9,318 5,016
Federal deposit insurance premium 265 326 354
Occupancy and equipment expense 1,566 1,504 1,106
Computer services 590 481 680
Advertising and promotions 496 543 566
Office supplies, postage, printing, etc. 748 751 626
Other 2,156 2,057 1,472
---------- ---------- -----------
Total non-interest expense 13,448 14,980 9,820
---------- ---------- -----------
Income Before Income Taxes 9,808 8,577 12,347
Provision for Income Taxes 3,866 3,602 4,807
---------- ---------- -----------
Net Income $ 5,942 $ 4,975 $ 7,540
========== ========== ===========
Basic and Diluted Earnings Per Share $ 1.77 $ 1.36 $ 1.85
========== ========== ===========
Weighted Average Shares Outstanding 3,359,824 3,665,778 4,066,692
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Equity
Years Ended June 30, 2000, 1999, and 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained Treasury
Shares Amount Capital Earnings Stock
------------- ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ -- $ -- $ -- $ 46,960 $ --
============= =========== ============= ============== ============
Net income -- -- -- 7,540 --
Unrealized loss on securities available-
for-sale, net of taxes -- -- -- -- --
------------- ----------- ------------- -------------- ------------
Total comprehensive income -- -- -- 7,540 --
------------- ----------- ------------- -------------- ------------
Issuance of common stock 4,430,375 44 86,981 -- --
ESOP stock committed for release -- -- 643 -- --
Purchase of treasury stock (177,215) -- -- -- (8,113)
Dividends ($0.45 per share) -- -- -- (1,838) --
------------- ----------- ------------- -------------- ------------
Balance, June 30, 1998 $ 4,253,160 $ 44 $ 87,624 $ 52,662 $ (8,113)
============= =========== ============= ============== ============
Net income -- -- -- 4,975 --
Unrealized loss on securities available-
for-sale, net of taxes -- -- -- -- --
------------- ----------- ------------- -------------- ------------
Total comprehensive income -- -- -- 4,975 --
------------- ----------- ------------- -------------- ------------
Issuance of treasury stock to MRDP 177,215 -- (670) -- 8,113
ESOP stock committed for release -- -- 356 -- --
Purchase of treasury stock (642,405) -- -- -- (20,955)
Dividends ($0.75 per share) -- -- -- (2,732) --
Prorata vesting of restricted MRDP stock -- -- -- -- --
Cash distribution ($12.00 per share) -- -- (44,662) -- --
------------- ----------- ------------- -------------- ------------
Balance, June 30, 1999 $ 3,787,970 $ 44 $ 42,648 $ 54,905 $ (20,955)
============= =========== ============= ============== ============
Net income -- -- -- 5,942 --
Unrealized loss on securities available-
for-sale, net of taxes -- -- -- -- --
------------- ----------- ------------- -------------- ------------
Total comprehensive income -- -- -- 5,942 --
------------- ----------- ------------- -------------- ------------
ESOP stock committed for release -- -- 246 -- --
Purchase of treasury stock (67,700) -- -- -- (1,171)
Dividends ($0.95 per share) -- -- -- (3,173) --
Prorata vesting of restricted MRDP stock -- -- -- -- --
------------- ----------- ------------- -------------- ------------
Balance, June 30, 2000 $ 3,720,270 $ 44 $ 42,894 $ 57,674 $ (22,126)
============= =========== ============= ============== ============
<CAPTION>
Comprehen-
Unearned Unallocated sive
Restricted ESOP (Loss) Total
Stock Stock Income Equity
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $ -- $ -- $ 18 $ 46,978
============== ============= ============= ============
Net income -- -- -- 7,540
Unrealized loss on securities available-
for-sale, net of taxes -- -- (32) (32)
-------------- ------------- ------------- ------------
Total comprehensive income -- -- (32) 7,508
-------------- ------------- ------------- ------------
Issuance of common stock -- (7,089) -- 79,936
ESOP stock committed for release -- 647 -- 1,290
Purchase of treasury stock -- -- -- (8,113)
Dividends ($0.45 per share) -- -- -- (1,838)
-------------- ------------- ------------- ------------
Balance, June 30, 1998 $ -- $ (6,442) $ (14) $ 125,761
============== ============= ============= ============
Net income -- -- -- 4,975
Unrealized loss on securities available-
for-sale, net of taxes -- -- (76) (76)
-------------- ------------- ------------- ------------
Total comprehensive income -- -- (76) 4,899
-------------- ------------- ------------- ------------
Issuance of treasury stock to MRDP (7,443) -- -- --
ESOP stock committed for release -- 591 -- 947
Purchase of treasury stock -- -- -- (20,955)
Dividends ($0.75 per share) -- -- -- (2,732)
Prorata vesting of restricted MRDP stock 1,450 -- -- 1,450
Cash distribution ($12.00 per share) 1,333 -- -- (43,329)
-------------- ------------- ------------- ------------
Balance, June 30, 1999 $ (4,660) $ (5,851) $ (90) $ 66,041
============== ============= ============= ============
Net income -- -- -- 5,942
Unrealized loss on securities available-
for-sale, net of taxes -- -- (249) (249)
-------------- ------------- ------------- ------------
Total comprehensive income -- -- (249) 5,693
-------------- ------------- ------------- ------------
ESOP stock committed for release -- 590 -- 836
Purchase of treasury stock -- -- -- (1,171)
Dividends ($0.95 per share) -- -- -- (3,173)
Prorata vesting of restricted MRDP stock 1,158 -- -- 1,158
-------------- ------------- ------------- ------------
Balance, June 30, 2000 $ (3,502) $ (5,261) $ (339) $ 69,384
============== ============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999, and 1998
(In Thousands)
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,942 $ 4,975 $ 7,540
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 683 800 460
Deferred income tax benefit (370) (60) (829)
Amortization of deferred income (98) (632) (219)
Amortization of loan servicing assets 191 78 17
Amortization (accretion) of premiums (discounts) on
investment securities (24) 7 4
Depreciation 821 797 603
Allocation of ESOP stock at fair value 836 947 1,290
Prorata vesting of restricted MRDP stock 1,158 1,450 --
Loss on sale of investment securities available-for-sale -- 53 --
Gain on sale of real estate acquired in settlement of loans (49) -- --
Loss on disposal of property and equipment -- 13 7
Decrease (increase) in loans held-for-sale 7,051 (1,690) (5,677)
(Increase) decrease in other assets (6,236) (1,471) 96
Increase (decrease) in other liabilities 1,740 (81) (237)
------------- ------------- ---------------
Net cash provided by operating activities 11,645 5,186 3,055
------------- ------------- ---------------
Cash Flows from Investing Activities:
Net loan originations and principal collections (699) 46,613 (30,129)
Purchase of loans (68,449) (65,812) (23,846)
Purchase of investment securities available-for-sale (10,726) (17,317) (29,063)
Proceeds from sale of investment securities
available-for-sale -- 17,000 --
Proceeds from maturities of investment securities
available-for-sale -- 5,500 10,500
Proceeds from sale of real estate acquired
in settlement of loans 568 -- --
Purchase of Federal Home Loan Bank of Atlanta stock (488) (166) (435)
Purchase of property and equipment (695) (2,738) (2,461)
Proceeds from sale of property and equipment 3 3 --
------------- ------------- ---------------
Net cash used in investing activities (80,486) (16,917) (75,434)
------------- ------------- ---------------
Cash Flows from Financing Activities:
Net increase in deposits 13,608 36,199 36,661
Dividends paid (3,173) (2,732) (1,838)
Cash distribution -- (43,329) --
Advances from Federal Home Loan Bank of Atlanta 73,000 17,000 17,000
Repayment of advances from Federal Home Loan Bank of Atlanta (25,000) -- --
Other borrowings 9,281 35,000 --
Principal payments on other borrowings (35,518) -- --
Purchases of treasury stock (1,171) (20,955) (8,113)
Stock subscription proceeds -- -- --
Stock subscription refunds -- -- (197,851)
Stock issuance costs -- -- (1,584)
------------- ------------- ---------------
Net cash provided by (used in) financing activities 31,027 21,183 (155,725)
------------- ------------- ---------------
</TABLE>
53
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended June 30, 2000, 1999, and 1998
(In Thousands)
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -----------
<S> <C> <C> <C>
Net (Decrease) Increase in Cash and Cash Equivalents $ (37,814) $ 9,452 $ (228,104)
Cash and Cash Equivalents at Beginning of Year $ 58,420 $ 48,968 $ 277,072
------------- ------------- -----------
Cash and Cash Equivalents at End of Year $ 20,606 $ 58,420 $ 48,968
============= ============= ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 21,262 $ 17,447 $ 17,433
============= ============= ===========
Income taxes $ 3,097 $ 4,821 $ 5,358
============= ============= ===========
Supplemental Disclosures of Non-Cash Transactions:
Transfers from loans to real estate acquired in
settlement of loans $ 649 $ 312 $ --
============= ============= ===========
Change in unrealized loss on investment securities
available-for-sale $ (401) $ (122) $ (52)
============= ============= ===========
Change in deferred taxes related to unrealized loss on
investment securities available-for-sale $ 152 $ 46 $ 20
============= ============= ===========
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.
54
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
1. Summary of Significant Accounting Policies
Nature of Operations and Customer Concentration - FirstSpartan
Financial Corp. (the "Corporation") is a unitary thrift holding company
incorporated in the state of Delaware. The Corporation's principal business
activities are conducted through its wholly-owned subsidiary, First Federal Bank
(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 activities are primarily limited to within
Spartanburg County and adjacent counties of South Carolina. The Bank was
originally founded in 1935 as a federal mutual savings and loan association. In
1997, the Bank converted to a federal stock savings bank (the "Conversion") and
as part of the Conversion, the Corporation was formed as the holding company for
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").
FirstService has a one-third ownership interest in a mortgage
banking company which is accounted for using the equity method of accounting.
Neither the investment nor the equity in the earnings in the mortgage banking
company was material for any of the periods presented. See Note 3 for disclosure
of the amount of loans purchased from this company. There were no other
transactions with this related party.
Significant intercompany balances and transactions have been
eliminated in consolidation.
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.
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.
The estimate most susceptible to change in the near term is the allowance for
loan losses.
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
as a separate component of equity, net of taxes. No securities have been
classified by the Company as trading securities during the reporting periods.
55
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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.
Loans - Loans are reported at the principal amount outstanding
and reduced by undisbursed portions of loans in process, 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 a 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 equally 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, 2000 and
1999, the cost of the mortgage servicing rights approximated their fair value.
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, and income
is subsequently recognized only to the extent cash payments are received until,
in management's judgment, the borrower is able to make periodic principal and
interest payments. 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 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.
56
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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.
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, 2000, 1999 and 1998 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 and Guidance - In June 1998,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement, as amended, 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. The Company adopted this
statement as of July 1, 2000. SFAS No. 133 had no effect on the Company's
financial position and is currently not expected to affect results of
operations.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements which summarizes certain views of the SEC staff related to
the application of generally accepted accounting principles with respect to
revenue recognition in financial statements. SAB No. 101, as amended, must be
adopted by the Company no later than April 1, 2001. The Company believes that
adoption of SAB No. 101 will not materially affect its financial position or
results of operations.
57
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
2. Investment Securities
Investment securities available-for-sale are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government Agency obligations $ 14,500 $ -- $ (264) $ 14,236
State and local obligations 2,241 -- (69) 2,172
-------- -------- --------
16,741 -- (333) 16,408
Marketable equity securities 17,498 51 (264) 17,285
-------- -------- -------- --------
$ 34,239 $ 51 $ (597) $ 33,693
======== ======== ======== ========
</TABLE>
<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
======== ======== ======== ========
</TABLE>
Gross realized gains and losses on sales of investment securities
available-for-sale were as follows (in thousands):
Year Ended June 30,
----------------------------------
2000 1999 1998
------ ------ ------
Gross gains $-- $ 10 $--
Gross losses -- (63) --
--- ----- ---
Net losses $-- $(53) $--
=== ===== ===
Marketable equity securities at June 30, 2000 and 1999 consist
principally of a mutual fund that invests in adjustable-rate mortgages.
Investment securities totaling approximately $14.8 million at June
30, 2000 were pledged as collateral for public deposits and other borrowings.
The contractual maturities of debt securities available-for-sale (at
amortized cost and estimated fair value) are summarized as follows at June 30,
2000 (in thousands):
58
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
Amortized Fair
Cost Value
--------- ------
Due within one year $ 1,000 $ 990
Due after one through five years 5,458 5,345
Due after five through ten years 9,294 9,123
Due after ten years 989 950
------- -------
$16,741 $16,408
======= =======
3. Loans Receivable
Loans receivable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------
2000 1999
--------- ----------
<S> <C> <C>
Real estate mortgage loans:
Residential (1-4 family) $309,096 $290,219
Construction 75,963 72,373
Land development 24,150 18,864
Commercial 40,979 23,587
-------- --------
450,188 405,043
-------- --------
Consumer and commercial loans:
Home equity 52,928 43,623
Commercial 25,259 13,885
Other 12,115 10,894
-------- --------
90,302 68,402
-------- --------
Gross loans 540,490 473,445
-------- --------
Less:
Undisbursed portion of loans in process (33,367) (34,807)
Net deferred loan fees (554) (561)
Allowance for loan losses (3,474) (2,896)
-------- --------
Net loans $503,095 $435,181
======== ========
</TABLE>
59
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
The changes in the allowance for loan losses consisted of the
following (in thousands):
Year Ended June 30,
2000 1999 1998
------ ------ ------
Allowance, beginning of year $2,896 $2,179 $1,796
Provision for loan losses 683 800 460
Write-offs (110) (85) (80)
Recoveries 5 2 3
------- ------- -------
Allowance, end of year $3,474 $2,896 $2,179
======= ======= =======
At June 30, 2000 and 1999, the Company had loans totaling $3.4
million which were on non-accrual status. Interest income that would have been
recorded for the years ended June 30, 2000, 1999, and 1998 had non-accrual loans
been current in accordance with their contractual terms amounted to $196,000,
$52,000, and $58,000, respectively. The amount of interest included in interest
income on such loans for such periods amounted to $75,000, $51,000, and $48,000,
respectively.
Impaired loans are summarized as follows (in thousands):
June 30,
----------------------
2000 1999
------- -------
Impaired loans:
No valuation allowance required $ 132 $ 722
Valuation allowance required 2,448 --
------- ------
$ 2,580 $ 722
======= ======
Valuation allowance $ 215 $ --
======= ======
The average recorded investment in impaired loans was $1.7 million,
$1.0 million, and $1.3 million for the years ended June 30, 2000, 1999, and
1998, respectively. Interest income recognized on impaired loans was not
significant during the years ended June 30, 2000, 1999, and 1998.
Residential real estate loans are presented net of loans serviced for
others totaling approximately $119.4 million, $102.9 million and $56.4 million
at June 30, 2000, 1999 and 1998, 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
$571,000, $438,000, and $253,000 at June 30, 2000, 1999, and 1998, respectively.
60
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
The following is an analysis of the changes in mortgage servicing
rights (in thousands):
Year Ended June 30,
-----------------------------------------
2000 1999 1998
-------- --------- ---------
Balance, beginning of year $1,042 $ 213 $ 24
Capitalization 377 907 206
Amortization (191) (78) (17)
------ ------ ----
Balance, end of year $1,228 $1,042 $213
====== ====== ====
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, 2000 and 1999 were approximately $1.5 million
and $1.2 million, respectively.
During the years ended June 30, 2000, 1999, and 1998, the Company
purchased $40.0 million, $32.5 million, and $14.9 million, respectively, of
loans from a mortgage banking company in which the Company has a one-third
equity interest. Also, at June 30, 2000 and 1999, the mortgage banking company
serviced $53.5 million and $32.5 million, respectively, of mortgage loans on
behalf of the Company. Management believes that the loans were purchased at
terms (including the servicing terms) similar to those that prevailed in the
mortgage secondary market at the time of purchase.
4. Office Properties and Equipment
Office properties and equipment are summarized as follows (in
thousands):
June 30,
-------------------------
2000 1999
-------- ---------
Major classification:
Land $ 2,277 $ 2,099
Office buildings and improvements 8,809 8,472
Furniture, fixtures, and equipment 4,623 4,445
Automobiles 108 108
------- -------
15,817 15,124
Less accumulated depreciation (5,576) (4,754)
------- -------
Office properties and equipment, net $10,241 $10,370
======= =======
61
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
5. Deposit Accounts
Deposit accounts are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------------
2000 1999
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Demand accounts:
NOW:
Non-interest-bearing $ 27,896 --% $ 19,163 --%
Interest-bearing 48,551 1.92 46,533 2.29
Savings 50,488 2.47 56,225 2.75
Money market 27,711 4.15 30,099 3.91
Certificate accounts 264,973 5.85 253,991 5.09
-------- --------
$419,619 $406,011
======== ========
</TABLE>
Scheduled maturities of certificate accounts at June 30, 2000 are as
follows (in thousands):
Within 1 year $223,035
After 1 but within 2 years 28,872
After 2 but within 3 years 5,946
Thereafter 7,120
--------
$264,973
========
The aggregate amount of certificate accounts with principal amounts
of $100,000 or more was $74.7 million and $61.5 million at June 30, 2000 and
1999, respectively. Deposits in excess of $100,000 are not federally insured.
Interest expense by type of deposit is summarized as follows (in
thousands):
Year Ended June 30,
----------------------------------
2000 1999 1998
------ ------ ------
Demand accounts:
Savings $ 1,334 $ 1,623 $ 2,032
NOW 962 1,034 1,039
Money market 1,179 1,043 434
Certificate accounts 13,682 13,185 13,498
------- -------- --------
$17,157 $16,885 $17,003
======= ======= =======
6. Advances From Federal Home Loan Bank of Atlanta
FHLB advances are summarized as follows (dollars in thousands):
62
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
June 30,
------------------------------------------------------
2000 1999
----------------------- -------------------------
Weighted Weighted
Average Average
Type of Advance Amount Rate Amount Rate
-------- ------ -------- ------
Fixed-rate $45,000 6.38% $34,000 5.23%
Adjustable-rate 10,000 6.58 -- --
Variable-rate 27,000 7.40 -- --
------- -------
$82,000 6.32% $34,000 5.23%
======= ==== ======= ====
The fixed-rate advances are convertible whereby the FHLB has the
option at a predetermined date to convert the fixed interest rate to an
adjustable rate tied to LIBOR. The Company has the option to prepay any advance
on the conversion date or any subsequent quarterly interest payment date should
the FHLB exercise its conversion option. The adjustable-rate advances adjust
quarterly based upon 3-month LIBOR and the variable-rate advances adjust daily
based on the overnight funds market.
Scheduled maturities and repricing or conversion dates of FHLB
advances as of June 30, 2000 are as follows (in thousands):
Amount Amount at
at Next Repricing
Year Ended Stated or Conversion
June 30, Maturity Date
---------- --------- -----------
2001 $27,000 $65,000
2002 -- --
2003 16,000 7,000
2004 7,000 10,000
2005-2007 -- --
2008 7,000 --
2009 10,000 --
2010 15,000 --
------- -------
$82,000 $82,000
======= =======
The maximum month-end balance of FHLB advances outstanding was $82.0
million and $34.0 million during the years ending June 30, 2000 and 1999,
respectively. Average balances of FHLB advances outstanding during the years
ended June 30, 2000 and 1999 were $64.1 million and $26.8 million, respectively.
The Company had an approved credit limit of $146.2 million with the FHLB as of
June 30, 2000. The advances are secured by FHLB stock and a blanket lien on all
qualifying one- to four-family residential first mortgage loans.
63
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
7. Short-Term Borrowings
At June 30, 2000, the Company had sold, under agreements to
repurchase, U.S. Government agency securities. The securities underlying the
agreements were delivered to the broker-dealer who arranged the transaction.
Information concerning securities sold under agreements to repurchase
is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------
2000 1999
------ -----
<S> <C> <C>
Balance outstanding at end of year $8,763 --
Average balance for months outstanding 8,908 --
Average interest rate for months outstanding 6.01% --
Average interest rate at end of year 6.58% --
Maximum month-end balance during year $9,079 --
Mortgage-related securities underlying the agreements at year end:
Carrying value 9,000 --
Estimated fair value 8,834 --
</TABLE>
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.
64
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
8. Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the Company's net deferred tax asset (liability) are as
follows (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
2000 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $1,080 $ 599
Management recognition and development plan 232 308
Unrealized loss on investment securities available-for-sale 207 55
Other 238 160
------ -------
1,757 1,122
------ -------
Deferred tax liabilities:
Mortgage servicing rights 466 396
FHLB stock dividends 431 431
Accumulated depreciation 340 289
Deferred loan fees and costs, net 77 17
Other 133 201
------ -------
1,447 1,334
------ -------
Net deferred tax asset (liability) $ 310 $ (212)
====== =======
</TABLE>
No valuation allowance on deferred tax assets has been established as
management believes it is more likely than not 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.
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, 2000 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.
65
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
The provision for income taxes is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Current provision:
Federal $3,645 $3,180 $4,956
State 591 482 680
------ ------ ------
4,236 3,662 5,636
Deferred provision:
Federal (310) (50) (700)
State (60) (10) (129)
------ ------ ------
(370) (60) (829)
------ ------ ------
Total provision for income taxes $3,866 $3,602 $4,807
====== ====== ======
</TABLE>
For the years ended June 30, 2000, 1999, and 1998, a tax benefit of
$152,000, $46,000, and $20,000, respectively, was allocated to equity for the
tax effects of unrealized 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,
-------------------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Tax at statutory federal income tax rate (34%) $3,335 $2,916 $4,198
Increase (decrease) resulting from:
State income taxes 350 304 364
Non-deductible compensation:
ESOP 83 121 218
MRDP 186 217 --
Other, net (88) 44 27
------ ------ ------
$3,866 $3,602 $4,807
====== ====== ======
Effective income tax rate 39.4% 42.0% 38.9%
====== ====== ======
</TABLE>
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 $153,000, $125,000, and $105,000
in the years ended June 30, 2000, 1999, and 1998, respectively.
66
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
ESOP - The ESOP is a non-contributory 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.
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 are then 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 market value of the released shares and their cost is
recorded as an addition or deduction to additional paid-in capital. The Company
recognized approximately $836,000, $947,000, and $1.3 million in compensation
expense in the years ended June 30, 2000, 1999, and 1998, respectively, related
to the ESOP of which approximately $590,000, $591,000, and $647,000 reduced the
cost of unallocated ESOP shares and $246,000, $356,000 and $643,000 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, 2000 and 1999 totaled 44,578 and 29,536, respectively.
Shares remaining not released or committed to be released for allocation at June
30, 2000 and 1999 totaled 396,975 and 441,553 and had a market value of
approximately $6.8 million and $10.3 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 fully vest.
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
the shares, including unvested shares. Also, all such shares will be included in
outstanding shares for the computation of basic earnings per share.
67
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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 of options to
purchase up to 443,038 shares of common stock of the Corporation. 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.
The following is an analysis of stock option activity:
Weighted
Options Average
Available Options Exercise
for Grant Outstanding Price
--------- ----------- ---------
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
Granted (12,437) 12,437 18.31
-------- -------
Balance, June 30, 2000 16,808 426,230 21.63
======== =======
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 per share. 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.
68
<PAGE>
The following is a summary of stock options outstanding at June 30,
2000:
Weighted
Average
Remaining
Exercise Contractual Options Options
Price Life (Years) Outstanding Exercisable
-------- ------------- ----------- ------------
$21.75 8.1 410,793 136,931
19.39 8.7 3,000 1,000
18.31 9.6 12,437 --
------- -------
21.63 8.1 426,230 137,931
======= =======
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 would have decreased to the pro
forma amounts indicated below (in thousands, except per share data):
Year Ended June 30,
---------------------------
2000 1999
------- -------
Net income:
As reported $5,942 $4,975
Pro forma 4,427 3,931
Basic earnings per share:
As reported 1.77 1.36
Pro forma 1.32 1.07
The weighted average fair value of options granted in the years ended
June 30, 2000 and 1999 was $4.77 and $13.28 per share, respectively. The fair
value of the option grant is estimated on the date of grant using an option
pricing model with the following assumptions:
Year Ended June 30,
------------------------
2000 1999
-------- -----------
Dividend yield 4% 3%
Risk-free interest rate 6.82% 5.07%-5.75%
Expected volatility 25% 25%
Expected life (years) 8 8
69
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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 ($1.0 million at fixed rates ranging from
8.125%-8.625%) at June 30, 2000. 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, 2000,
unused lines of credit extended by the Company (principally variable-rate
consumer lines secured by real estate) amounted to approximately $55.6 million.
Loans Sold with Recourse - At June 30, 2000, approximately $1.3
million of loans serviced for others had been sold with recourse (i.e., all
credit risk associated with these loans was retained by the Company). 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 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,
construction, home equity, 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
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
control in the amount of three times the average annual compensation paid during
the five calendar years immediately preceding the change in control to the
respective executive. The contracts also require indemnification to the
executives should any portion of the payments under the employment agreements be
deemed "excess parachute payments" under applicable Internal Revenue Service
regulations.
70
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
Severance Agreements - The Bank and the Corporation have entered into
severance agreements with four 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 its net income to date during the calendar year plus its retained
net income (defined as net income for a specified period less total dividends
declared during that period) for the preceding two years. 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 $42.0 million, $600,000, and
$1.0 million in the years ended June 30, 2000, 1999, and 1998, respectively.
Share Repurchases - The Company repurchased 67,700, 642,405, and
177,215 shares at average prices of $17.30, $32.62, and $45.78 per share during
the year ended June 30, 2000, 1999, and 1998, respectively. All shares were
repurchased in accordance with applicable OTS regulations. As of June 30, 2000,
the Board had authorized the repurchase of up to 378,797 shares of the
Corporation's outstanding common stock, of which 67,700 had been repurchased.
71
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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.
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 4.0% 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, 2000, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 2000 and 1999, 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 required capital amounts and ratios are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum Requirements
---------------------------------------------
To Be Well-
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000
Tangible capital (to total assets) $57,310 9.8% $ 8,770 1.5% N/A N/A
Core capital (to adjusted total assets) 57,310 9.8 23,400 4.0 $29,250 5.0%
Tier I capital (to risk-weighted assets) 57,310 14.3 N/A N/A 24,052 6.0
Total capital (to risk-weighted assets) 60,684 15.1 32,069 8.0 40,086 10.0
June 30, 1999
Tangible capital (to total assets) $ 91,006 16.8% $ 8,131 1.5% N/A N/A
Core capital (to adjusted total assets) 91,006 16.8 21,685 4.0 $27,107 5.0%
Tier I capital (to risk-weighted assets) 91,006 26.4 N/A N/A 20,680 6.0
Total capital (to risk-weighted assets) 93,902 27.2 27,573 8.0 34,467 10.0
</TABLE>
72
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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, 2000
Total stockholder's equity as determined under
generally accepted accounting principles $57,102 $57,102 $57,102
General allowance for loan losses -- -- 3,259
Unrealized loss on certain available-
for-sale securities, net of taxes 208 208 208
Other miscellaneous adjustments -- -- 115
------- ------- -------
Regulatory capital $57,310 $57,310 $60,684
======= ======= =======
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 securities
available-for-sale, net of taxes 47 47 47
------- ------- -------
Regulatory capital $91,006 $91,006 $93,902
======= ======= =======
</TABLE>
13. Earnings Per Share
The Company had no dilutive securities outstanding during the year
ended June 30, 2000 and had no potentially dilutive securities outstanding
during the year ended June 30, 2000; therefore, diluted earnings per share
("EPS") is the same as basic EPS for all periods presented. For the years ended
June 30, 2000, 1999, and 1998, 3,359,824, 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.
73
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
14. Financial Instruments
The stated and fair value amounts of financial instruments as of June
30, 2000 and 1999, are summarized below (in thousands):
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
Stated Fair Stated Fair
Amount Value Amount Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 20,606 $ 20,606 $ 58,420 $ 58,420
Investment securities 33,693 33,693 23,344 23,344
Loans receivable, net 503,095 492,848 435,181 433,336
Loans held-for-sale 1,933 1,967 8,984 9,089
FHLB stock 4,100 4,100 3,612 3,612
Other assets 10,572 10,523 4,245 4,114
-------- -------- -------- --------
$573,999 $563,737 $533,840 $531,970
======== ======== ======== ========
Financial liabilities:
Deposit accounts:
Demand $154,646 $154,646 $152,020 $152,020
Certificate 264,973 263,359 253,991 253,546
Other borrowings 8,763 8,763 35,000 35,000
Advances from FHLB 82,000 81,164 34,000 33,276
Other liabilities 4,109 4,109 3,521 3,521
-------- -------- -------- --------
$514,491 $512,041 $478,532 $477,363
======== ======== ======== ========
</TABLE>
The Company had off-balance sheet financial commitments, which
include $62.1 million and $57.4 million at June 30, 2000 and 1999, 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.
Investment Securities - Fair values for investment 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.
74
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
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.
Other Assets and Other Liabilities - Other assets consist principally
of accrued interest receivable, mortgage servicing rights, and cash surrender
value of life insurance. The fair value of accrued interest receivable is
estimated to be its stated value since generally it will be paid in three months
or less. 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. The fair value of
life insurance policies is estimated to be the cash surrender value determined
under the contractual terms of the policies, which equals their stated values.
Other liabilities consist principally of advances from borrowers for taxes and
insurance, outstanding checks, and accrued interest payable. Due to the
short-term nature of these financial instruments, the stated amounts of such
instruments are deemed to be a reasonable estimate of fair value.
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.
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
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, 2000 and 1999. 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.
75
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
15. Condensed Parent Company Financial Statements
Condensed financial information of the Corporation is as follows
(in thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------
Condensed Balance Sheets 2000 1999
-------- --------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 728 $ 3,616
Investment in Bank 57,103 91,046
Other investment securities 122 116
Note receivable from Bank 5,843 6,268
Dividends receivable from Bank 5,571 --
Other assets 132 153
------- --------
Total assets $69,499 $101,199
======= ========
Liabilities and Stockholders' Equity:
Other borrowings $ -- $ 35,000
Other liabilities 115 158
Stockholders' equity 69,384 66,041
------- --------
Total liabilities and stockholders' equity $69,499 $101,199
======= ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------
Condensed Statements of Income 2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Investment Income:
Interest income $ 699 $1,626 $2,474
Dividends from Bank 42,000 600 1,000
---------- ------ ------
42,699 2,226 3,474
Interest Expense 127 49 --
---------- ------ ------
Net Interest Income 42,572 2,177 3,474
Non-interest Income -- 10 --
Non-interest Expense 496 663 415
---------- ------ ------
Income Before Income Taxes and Equity
in Undistributed Earnings of Bank 42,076 1,524 3,059
Provision for Income Taxes 26 315 745
---------- ------ ------
Net Income Before Equity in Undistributed Earnings of 42,050 1,209 2,314
Bank
Equity in Undistributed Earnings of Bank (36,108) 3,766 5,226
--------- ------ ------
Net Income $ 5,942 $4,975 $7,540
========== ====== ======
</TABLE>
76
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
Condensed Statements of Cash Flows 2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,942 $ 4,975 $ 7,540
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Bank 36,108 (3,766) (5,226)
Net change in other assets and liabilities (5,593) (195) 200
Gain on sale of investment securities -- (10) --
-------- -------- --------
Net cash provided by operating activities 36,457 1,004 2,514
-------- -------- --------
Cash Flows from Investing Activities:
Investment in Bank (1) 5,270 (43,516)
Purchase of investment securities (6) (10,116) --
Proceeds from sale of investment securities -- 10,000 --
Sale of common stock -- -- 81,519
Collections on note receivable from Bank 6 214 278
-------- -------- --------
Net cash provided by investing activities (1) 5,368 38,281
-------- -------- --------
Cash Flows from Financing Activities:
Other borrowings (35,000) 35,000 --
Purchase of treasury stock (1,171) (20,955) (8,113)
Stock issuance costs -- -- (1,584)
Dividends paid (3,173) (2,732) (1,838)
Cash distribution -- (43,329) --
-------- -------- --------
Net cash used in financing activities (39,344) (32,016) (11,535)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (2,888) (25,644) 29,260
Cash and Cash Equivalents at Beginning of Year 3,616 29,260 --
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 728 $ 3,616 $ 29,260
======== ======== ========
</TABLE>
77
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
16. Subsequent Event
On September 5, 2000, the Corporation and BB&T Corporation ("BB&T")
entered into an Agreement and Plan of Reorganization (the "Agreement") pursuant
to which the Corporation will merge with and into BB&T. Pursuant to the terms of
the Agreement, each share of the Corporation's common stock issued and
outstanding at the effective time of the merger will become and be converted
into the right to receive one share of BB&T common stock. Consummation of the
merger is subject to various conditions, including the approval of the
Corporation's stockholders and the receipt of all requisite regulatory
approvals.
In connection with the Agreement, the Corporation granted to BB&T a
stock option pursuant to a stock option agreement dated as of September 5, 2000,
which under certain defined circumstances, would enable BB&T to purchase 740,300
shares of the Corporation's common stock, subject to adjustment, at a price of
$21.25 per share.
78
<PAGE>
FirstSpartan Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended June 30, 2000, 1999, and 1998
17. Quarterly Results of Operations (Unaudited)
Summarized unaudited quarterly operating results for the years ended
June 30, 2000 and 1999 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, 2000
Investment income $ 9,787 $ 10,049 $ 10,233 $ 10,837
Interest expense 5,019 5,084 5,291 5,829
---------- ---------- ---------- ----------
Net interest income 4,768 4,965 4,942 5,008
Provision for loan losses 100 167 200 216
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 4,668 4,798 4,742 4,792
Non-interest income 1,023 1,027 963 1,243
Non-interest expense 3,400 3,323 3,304 3,421
---------- ---------- ---------- ----------
Income before income taxes 2,291 2,502 2,401 2,614
Provision for income taxes 921 977 964 1,004
---------- ---------- ---------- ----------
Net income $ 1,370 $ 1,525 $ 1,437 $ 1,610
========== ========== ========== ==========
Basic and diluted earnings per share $ 0.41 $ 0.45 $ 0.43 $ 0.48
========== ========== ========== ==========
Weighted average shares outstanding 3,351,990 3,363,135 3,374,280 3,349,696
========== ========== ========== ==========
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
Non-interest income 904 970 1,084 1,140
Non-interest expense 2,993 3,090 3,208 5,689
---------- ---------- ---------- ----------
Income before income taxes 2,742 2,726 2,728 381
Provision for 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>
79
<PAGE>
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
<TABLE>
<CAPTION>
Year First
Elected Term to
Name Age (1) Position with Company Director (2) Expire
-------------------- ------------------- ------------------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
E. Lea Salter 65 Director 1988 2003
R. Wesley Hammond 51 Director 1990 2003
Billy L. Painter 55 Director, President, and Chief 1984 2002
Executive Officer
Robert R. Odom 78 Chairman of the Board 1953 2002
E.L. Sanders 66 Director 1987 2001
David E. Tate 60 Director 1993 2001
Executive Officers Who Are Not Directors
Hugh H. Brantley 57 Executive Vice President and -- --
Chief Operating Officer
J. Stephen Sinclair 58 Executive Vice President of -- --
Lending
R. Lamar Simpson 41 Chief Financial Officer -- --
</TABLE>
-------------
(1) As of June 30, 2000.
(2) Includes prior service on the Board of Directors of the Bank. Each member
of the Board of Directors also serves as a director of the Bank and vice
versa.
Biographical Information for Last Five Years
R. Wesley Hammond is the President and Chief Executive Officer of
Hammond-Brown-Jennings, a furniture company. He is past-President of the
Southern Home Furnishings Association and past-Chairman of its Executive
Committee.
Robert R. Odom is a senior partner in the law firm of Odom, Terry
& Cantrell, Spartanburg, South Carolina, with which he has been associated for
over 50 years.
Billy L. Painter has been President and Chief Executive Officer
of the Corporation since its inception in 1997. He also has served as the Bank's
President and Chief Executive Officer since 1984. Mr. Painter is a former
Chairman of the Spartanburg Area Chamber of Commerce. He serves on the Boards of
Piedmont Interstate Fair, Spartanburg Development Council and Habitat for
Humanity. He also serves on the Advisory Board of Salvation Army and is Chairman
of the Spartanburg County Transportation Committee.
E. Lea Salter, retired, is the former President of Christman &
Parsons, Inc., general contractors. He is active in the Lions Club of
Spartanburg.
80
<PAGE>
E.L. Sanders is a retired insurance executive. He is past
Chairman of the Board of Directors for Mobile Meals of Spartanburg and past Vice
Chairman of the Board of Directors of the Foundation for the Multi-Handicapped,
Blind and Deaf of South Carolina. Mr. Sanders is on the Board of Directors and
is a past President of the Civitan Club of Spartanburg.
David E. Tate has been President and sole owner of Tate Metal
Works, Inc., a tank fabrication and erection company, since 1972. He was named
the South Carolina Small Business Person of the Year in 1998.
Hugh H. Brantley is the Bank's Executive Vice President and Chief
Operating Officer, holding this position since 1987. Mr. Brantley is Chairman
and Director of Spartanburg Christian Community Foundation and is a Director of
Upward Basketball.
J. Stephen Sinclair is the Bank's Executive Vice President of
Lending, holding this position since 1987. He is a Director of Safe Homes - Rape
Crisis Coalition, a former Director of Communities and Schools through the
Chamber of Commerce, and a member of the Home Builders Association of Greater
Spartanburg.
R. Lamar Simpson has been the Corporation's Treasurer, Secretary
and Chief Financial officer since its inception in 1997. He is also the Bank's
Chief Financial Officer, holding this position since 1996. He is a member of the
American Institute of Certified Public Accountants, a member of the South
Carolina Association of Certified Public Accountants, and a member of the
Financial Managers Society.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than 10% of
any registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the SEC. Executive officers, directors
and greater than 10% shareholders are required by regulation to furnish the
Company with copies of all Section 16(a) reports they file.
Based solely on its review of the copies of the reports it has
received and written representations provided to the Company from the
individuals required to file the reports, the Company believes that each of the
Company's executive officers and directors has complied with applicable
reporting requirements for transactions in FirstSpartan common stock during the
fiscal year ended June 30, 2000.
81
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
The following information is furnished for the chief executive
officer and all other executive officers of First Federal who received salary
and bonus of $100,000 (collectively, the "Named Executive Officers")or more
during the year ended June 30, 2000.
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------
Annual Compensation Awards
------------------------------------ -------------------------
Other Restricted Securities
Annual Stock Underlying All Other
Name and Principal Compensation Awards Options/SARs Compensation
Positions Year Salary($) Bonus($) ($)(1) ($)(2) (#) ($)
----------------------------------- ------ -------- --------- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Billy L. Painter 2000 $162,154 $30,000 $-- $ -- -- $ 62,260(3)
President and 1999 156,000 25,000 -- 1,265,334 70,886 431,548
Chief Executive Officer............... 1998 146,620 40,000 -- -- -- 69,323
R. Lamar Simpson
Treasurer, Secretary and Chief
Financial Officer of the Company 2000 $102,629 $22,000 $-- $ -- -- $ 33,314(4)
and Chief Financial Officer 1999 96,575 20,000 -- 372,120 31,013 142,573
of the Bank........................... 1998 90,666 16,000 -- -- -- 33,721
Hugh H. Brantley
Executive Vice President, 2000 $101,173 $16,000 $-- $ -- -- $ 32,311(5)
Chief Operating Officer and Treasurer 1999 95,064 16,000 -- 669,858 31,013 228,804
of the Bank........................... 1998 92,481 16,000 -- -- -- 33,196
J. Stephen Sinclair 2000 $100,072 15,000 $-- $ -- -- $ 32,394(6)
Executive Vice President 1999 94,509 16,000 -- 669,858 31,013 228,455
of Lending of the Bank................ 1998 91,523 16,000 -- -- -- 33,265
</TABLE>
--------------------
(1) Other annual compensation excludes perquisites and other personal benefits
that were less than 10% of the total annual salary and bonus reported.
(2) Includes restricted stock awards of 30,127, 8,860, 15,949 and 15,949
granted to Messrs. Painter, Simpson, Brantley and Sinclair under the MRDP.
The dollar amounts set forth in the table represent the market value of
the shares awarded on the date of grant and, therefore, do not take into
account the decrease in the market value of the shares resulting from the
$12 per share special cash distribution paid on June 25, 1999. As of June
30, 2000, the market value of the shares held by Messrs. Painter, Simpson,
Brantley and Sinclair was $519,691, $152,835, $275,120 and $275,120,
respectively. The awards vest in three equal annual installments, provided
the recipient continues in the employ of the Company or the Bank,
commencing on July 9, 1999, the first anniversary of the effective date of
the award. When shares vest and are distributed from the trust in which
they are held, the recipients will also receive an amount equal to
unaccumulated cash and stock dividends (if any) paid on the shares, plus
accrued earnings.
(3) Consists of directors' fees ($18,000), market value of stock allocated
under ESOP ($35,116), employer 401(k) Plan matching contributions
($7,883), term life insurance premiums ($1,065) and split-dollar life
insurance premiums ($196).
(4) Consists of market value of stock allocated under ESOP ($27,060), employer
401(k) Plan matching contributions ($5,959), term life insurance premiums
($236) and split-dollar life insurance premiums ($59).
(5) Consists of market value of stock allocated under ESOP ($25,342), employer
401(k) Plan matching contributions ($5,741), term life insurance premiums
($1,034) and split-dollar life insurance premiums ($194).
(6) Consists of market value of stock allocated under ESOP ($25,510), employer
401(k) Plan matching contributions ($5,688), term life insurance premiums
($1,020) and split-dollar life insurance premiums ($176).
82
<PAGE>
Employment Agreements
The Company and the Bank have entered into employment agreements
with Messrs. Painter, Simpson, Brantley and Sinclair. The employment agreements
provide for three-year terms. The term of the Company employment agreements may
be extended on a daily basis unless written notice of non-renewal is given by
the Board of Directors and the term of the First Federal employment agreements
are renewable on an annual basis. The employment agreements provide that the
executive's base salary will be reviewed at least annually. The base salaries
which are currently effective for such employment agreements for Messrs.
Painter, Simpson, Brantley and Sinclair are $165,000, $104,798, $102,628 and
$101,506, respectively. In addition to the base salary, the employment
agreements provide for, among other things, participation in stock benefits
plans and other fringe benefits applicable to executive personnel.
The employment agreements provide for termination by the Company
and the Bank for cause, as defined in the employment agreements, at any time. If
the Company or the Bank chooses to terminate the executive's employment for
reasons other than for cause, or if the executive resigns from the Company or
the Bank after specified circumstances that would constitute constructive
termination, the executive or, if the executive dies, his beneficiary, would be
entitled to receive an amount equal to the remaining base salary payments due to
the executive for the remaining term of the employment agreement and the
contributions that would have been made on the executive's behalf to any
employee benefit plans of the Company and the Bank during the remaining term of
the employment agreement. The Company and the Bank would also continue and/or
pay for the executive's life, health, medical, dental and disability coverage
for the remaining term of the employment agreement. Upon termination of the
executive for reasons other than a change in control, the executive must comply
with a one year non-competition agreement.
Under the employment agreements, if voluntary or involuntary
termination follows a change in control of the Company or the Bank, the
executive or, if the executive dies, his beneficiary, would be entitled to a
severance payment equal of three times the average of the five preceding taxable
years' annual compensation. The Company and the Bank would also continue the
executive's life, health, and disability coverage for thirty-six months. Even
though both the Company and the Bank employment agreements provide for a
severance payment if a change in control occurs, the executive would not receive
duplicative payments or benefits under the agreements. The executive would also
be entitled to receive an additional tax indemnification payment if payments
under the employment agreements or otherwise triggered liability under the
Internal Revenue Code for the excise tax applicable to "excess parachute
payments." Under applicable law, the excise tax is triggered by change in
control-related payments which equal or exceed three times the executive's
average annual compensation over the five years preceding the change in control.
The excise tax equals 20% of the amount of the payment in excess of one times
the executive's average compensation over the preceding five-year period.
Payments to the executive under the First Federal employment
agreement will be guaranteed by the Company if payments or benefits are not paid
by First Federal. Payment under the Company employment agreement would be made
by the Company. All reasonable costs and legal fees paid or incurred by the
executive under any dispute or question of interpretation relating to the
employment agreements shall be paid by the Company or the Bank, respectively, if
the executive is successful on the merits in a legal judgment, arbitration or
settlement. The employment agreements also provide that the Company and the Bank
shall indemnify the executive to the fullest extent legally allowable.
Directors' Compensation
Directors of the Bank receive a fee of $1,500 per month.
Directors' fees totaled $126,000 for the fiscal year ended June 30, 2000. In
addition, Mr. Odom receives annual compensation of $10,200 for his service as
Chairman of the Board. No separate fees are paid for service on the Company's
Board of Directors.
83
<PAGE>
Director Emeritus Plan
The Director Emeritus Plan provides that each director elected to
the Board of Directors of the Bank on or after March 17, 1987 shall become a
director emeritus on (i) the date the director attains age 72 or (ii) the
expiration of the director's then current term of office after attaining age 72,
whichever event occurs last. In addition, a director with at least ten years of
service on the Board may, upon attaining age 65, apply to the Board to assume
director emeritus status. Under the Director Emeritus Plan, a director emeritus
receives 50% of the fee payable to regular Board members for attendance at
monthly Board meetings. If the director emeritus attends the monthly Board
meeting, the amount payable is increased to 75% of the fee payable to regular
Board members. The Board may also designate as a director emeritus a director
who becomes disabled. An additional feature of the Director Emeritus Plan
provides that, in the event of a change in control of the Company or the Bank
(as defined in the Director Emeritus Plan), each director would be treated as a
director emeritus on the effective date of the change in control. Within 30 days
of such date, each director emeritus would receive a payment equal to three
times the fees received by the director during the 12-month period ending prior
to the effective date of the change in control. Assuming a change in control had
occurred at June 30, 2000, the aggregate amount payable under the Director
Emeritus Plan to all directors would be approximately $408,000.
Outstanding Options Held by Executive Officers
No options were granted to or exercised by the Named Executive
Officers during the fiscal year ended June 30, 2000. The following table
provides certain information with respect to the number of shares of Common
Stock represented by outstanding options held by the Named Executive Officers as
of June 30, 2000. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the year end price of the Common Stock.
<TABLE>
<CAPTION>
Fiscal Year-End Option Value
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year-End(#) at Fiscal Year-End($)(1)(2)
--------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---------- ------------ ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Billy L. Painter.................... 23,629 47,257 -- --
R. Lamar Simpson.................... 10,337 20,676 -- --
Hugh H. Brantley.................... 10,337 20,676 -- --
J. Stephen Sinclair................. 10,337 20,676 -- --
</TABLE>
---------------------
(1) The options in this table have an exercise price of $21.75 per share.
(2) The price of the Common Stock on June 30, 2000 was $17.25 per share.
84
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Persons and groups beneficially owning in excess of 5% of the Common
Stock are required to file with the Securities and Exchange Commission ("SEC"),
and provide a copy to the Company, certain reports disclosing such ownership
pursuant to the Exchange Act. Based upon such reports, the following table sets
forth, as of August 31, 2000, certain information as to those persons who were
beneficial owners of more than 5% of the outstanding shares of Common Stock. A
person may be considered to own any shares of common stock over which he or she
has, directly or indirectly, sole or shared voting or investing power.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of Common
Beneficial Owner Ownership Stock Outstanding
---------------------------------------------------- ------------------ ----------------------
<S> <C> <C>
First Federal Bank Employee Stock Ownership Plan 534,109(1) 14.4%
380 E. Main Street
Spartanburg, South Carolina 29302
First Citizens Bancorporation of 219,500 5.9%
South Carolina, Inc. (2)
1230 Main Street
Columbia, South Carolina 29201
</TABLE>
---------------------
(1) Under the terms of the ESOP, the trustee, subject to the exercise of its
fiduciary duties, will vote unallocated shares and allocated shares for
which no timely voting instructions are received in the same proportion as
shares for which it has received timely voting instructions from
participants. As of August 31, 2000, 114,830 shares have been allocated to
participants' accounts and 419,279 shares remain unallocated. The trustee
of the ESOP is The Southeastern Trust Company.
(2) The information shown is based on a Schedule 13D filed with the Securities
and Exchange Commission on October 27, 1998.
85
<PAGE>
(b) Security Ownership of Management
The following table provides information as of August 31, 2000
about the shares of FirstSpartan common stock that may be considered to be
beneficially owned by each director or nominee for director of the Company, by
the executive officers named in the summary compensation table appearing later
in this proxy statement, and by all directors and executive officers of the
Company as a group. A person may be considered to beneficially own any shares of
common stock over which he or she has, directly or indirectly, sole or shared
voting or investment power. Unless otherwise indicated, each of the named
individuals has sole voting and investment power with respect to the shares
shown.
<TABLE>
<CAPTION>
Number of Shares
That May Be
Number of Acquired Within Percent of
Shares 60 Days By Common Stock
Name/Title Owned Exercising Options Outstanding (1)
------------------------------------- -------------- ----------------------- --------------------
<S> <C> <C> <C>
Hugh H. Brantley 40,884(2) 20,676 1.65
R. Wesley Hammond 13,111(3) 14,768 *
Robert R. Odom 17,060(4) 14,768 *
Billy L. Painter 75,977(5) 47,258 3.28
E. Lea Salter 14,886(6) 14,768 *
E.L. Sanders 27,635(7) 14,768 1.14
R. Lamar Simpson 16,008(8) 20,676 *
J. Stephen Sinclair 52,292(9) 20,676 1.95
David E. Tate 14,980(10) 14,768 *
All Executive Officers and 272,833 183,126 11.64
Directors as a Group (10 persons)
</TABLE>
----------------------
* Less than 1% of shares outstanding.
(1) Based on 3,720,270 shares of FirstSpartan common stock outstanding and
entitled to vote as of August 31, 2000, plus the number of shares that may
be acquired within 60 days by each individual (or group of individuals) by
exercising stock options.
(2) Includes 9,569 shares of unvested restricted stock as to which Mr.
Brantley exercises voting but not investment power and 3,982 shares owned
indirectly through the ESOP.
(3) Includes 5,317 shares of unvested restricted stock as to which Mr. Hammond
exercises voting but not investment power.
(4) Includes 5,316 shares of unvested restricted stock as to which Mr. Odom
exercises voting but not investment power and 1,200 shares held by Mr.
Odom's spouse.
(5) Includes 18,076 shares of unvested restricted stock as to which Mr.
Painter exercises voting but not investment power, 5,715 shares owned
indirectly through the ESOP, 10 shares held by Mr. Painter's child and
1,117 shares held by Mr. Painter's spouse.
(6) Includes 5,317 shares of unvested restricted stock as to which Mr. Salter
exercises voting but not investment power.
(7) Includes 5,317 shares of unvested restricted stock as to which Mr. Sanders
exercises voting but not investment power.
(8) Includes 5,316 shares of unvested restricted stock as to which Mr. Simpson
exercises voting but not investment power, 4,221 shares owned indirectly
through the ESOP and 136 shares held by Mr. Simpson's spouse.
(9) Includes 9,569 shares of unvested restricted stock as to which Mr.
Sinclair exercises voting but not investment power and 3,968 shares owned
indirectly through the ESOP.
(10) Includes 5,317 shares of unvested restricted stock as to which Mr. Tate
exercises voting but not investment power.
86
<PAGE>
Item 13. Certain Relationships and Related Transactions
Federal regulations require that all loans or extensions of
credit to executive officers and directors must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and does not involve more than the normal risk of repayment or present
other unfavorable features. The Bank, therefore, is prohibited from making any
new loans or extensions of credit to the Bank's executive officers and directors
with different rates or terms than those offered to the general public and has
adopted a policy to this effect. The aggregate amount of loans granted by the
Bank to its executive officers and directors was approximately $600,000 at June
30, 2000. These loans (i) were made in the ordinary course of business, (ii)
were made on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with the Bank's other customers, and (iii) did not involve more
than the normal risk of collectibility or present other unfavorable features
when made.
Robert R. Odom, Chairman of the Board of the Company and the
Bank, is a senior partner with the law firm of Odom, Terry & Cantrell,
Spartanburg, South Carolina, which serves as general counsel to the Bank. The
Bank paid a retainer of $18,000 and legal fees of approximately $73,000 to the
firm during the fiscal year ended June 30, 2000 for services rendered to the
Bank.
87
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) The following are filed as a part of Item 8
of this report:
o Independent Auditors' Report
o Consolidated Balance Sheets as of June 30, 2000
and 1999
o Consolidated Statements of Income for the Years
Ended June 30, 2000, 1999, and 1998
o Consolidated Statements of Changes in Equity for
the Year Ended June 30, 2000, 1999, and 1998
o Consolidated Statements of Cash Flows for the
Years Ended June 30, 2000, 1999, and 1998
o Notes to Consolidated Financial
Statements
(2) All financial statement schedules are omitted because
they are not required or applicable, or the required
information is shown in the consolidated financial
statements or the notes thereto.
(3) 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) Severance Agreement with J. Timothy
Camp*****
(23) Consent of Deloitte & Touche LLP
(21) Subsidiaries of the Registrant**
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No Forms 8-K were filed during the quarter ended June 30, 2000.
--------------------
* 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 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.
***** Filed as an exhibit to the Registrant's Form 10-Q for the quarter ended
December 31, 1999 and incorporated herein by reference.
****** Filed as an exhibit to the Registrant's Form 10-Q for the quarter ended
March 31, 2000 and incorporated herein by reference.
88
<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 26, 2000 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 26, 2000
---------------------------------------------
Billy L. Painter
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ R. Lamar Simpson September 26, 2000
--------------------------------------------
R. Lamar Simpson
Treasurer, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Robert R. Odom September 26, 2000
---------------------------------------------
Robert R. Odom
Chairman of the Board
By: /s/ E. Lea Salter September 26, 2000
---------------------------------------------
E. Lea Salter
Director
By: /s/ David E. Tate September 26, 2000
---------------------------------------------
David E. Tate
Director
By: /s/ E.L. Sanders September 26, 2000
---------------------------------------------
E.L. Sanders
Director
By: /s/ R. Wesley Hammond September 26, 2000
----------------------------------------
R. Wesley Hammond
Director
