UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Quarterly Period Ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from to
Commission File Number: 0-22445
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FIRSTSPARTAN FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Delaware 56-2015272
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
380 East Main Street, Spartanburg, South Carolina 29302
(Address of principal executive office)
(864) 582-2391
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock Outstanding: 3,787,970 shares as of February 8, 2000.
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Table of Contents
Page
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 1999 and June
30, 1999 1
Consolidated Statements of Income for the Three- and
Six-Month Periods Ended December 31, 1999 and 1998 2
Consolidated Statements of Stockholders' Equity for the
Six-Month Periods Ended December 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the Six-Month
Periods Ended December 31, 1999 and 1998 4-5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Default Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14-15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands)
(Unaudited)
December 31, June 30,
Assets 1999 1999
----------- -----------
Cash $ 12,948 $ 14,638
Federal funds sold and overnight interest-bearing deposits 4,802 43,782
----------- -----------
Total cash and cash equivalents 17,750 58,420
Investment securities available-for-sale - at fair value (amortized cost:
$33,725 and $23,489 at December 31, 1999 and June 30, 1999, respectively) 33,427 23,344
Mortgage-backed securities held-to-maturity - at amortized cost (fair value:
$40 and $55 at December 31, 1999 and June 30, 1999, respectively) 39 54
Loans receivable, net 472,917 435,181
Loans held-for-sale - at lower of cost or market (market value: $1,944
and $9,089 at December 31, 1999 and June 30 1999, respectively) 1,922 8,984
Office properties and equipment, net 10,426 10,370
Federal Home Loan Bank of Atlanta stock - at cost 3,612 3,612
Accrued interest receivable 3,847 3,203
Real estate acquired in settlement of loans 183 348
Other assets 7,258 2,209
----------- -----------
Total Assets $ 551,381 $ 545,725
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 407,531 $ 406,011
Advances from borrowers for taxes and insurance 411 1,004
Advances from Federal Home Loan Bank of Atlanta 61,000 34,000
Other borrowings 8,910 35,000
Other liabilities 5,156 3,669
----------- -----------
Total liabilities 483,008 479,684
----------- -----------
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized - 250,000 shares; none issued or outstanding
at December 31, 1999 and June 30, 1999 -- --
Common stock, $0.01 par value:
Authorized - 12,000,000 shares; issued: 4,430,375 at December 31,
1999 and June 30, 1999; outstanding: 3,787,970
at December 31, 1999 and June 30, 1999 44 44
Additional paid-in capital 42,802 42,648
Retained earnings 56,304 54,905
Treasury stock - at cost (642,405 shares at
December 31, 1999 and June 30, 1999) (20,955) (20,955)
Unearned restricted stock (4,081) (4,660)
Unallocated ESOP stock (5,556) (5,851)
Accumulated other comprehensive loss (185) (90)
----------- -----------
Total stockholders' equity 68,373 66,041
----------- -----------
Total Liabilities and Stockholders' Equity $ 551,381 $ 545,725
=========== ===========
See accompanying notes to consolidated financial statements.
1
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Income
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Investment Income:
Interest on loans $ 9,166 $ 8,791 $ 18,003 $ 17,328
Interest and dividends on investment securities,
mortgage-backed securities, and other 883 893 1,833 1,984
---------- ---------- ---------- ----------
Total investment income 10,049 9,684 19,836 19,312
---------- ---------- ---------- ----------
Interest Expense:
Deposit accounts 4,173 4,273 8,367 8,588
Other borrowings 104 -- 231 --
Federal Home Loan Bank of Atlanta advances 807 365 1,505 647
---------- ---------- ---------- ----------
Total interest expense 5,084 4,638 10,103 9,235
---------- ---------- ---------- ----------
Net Interest Income 4,965 5,046 9,733 10,077
Provision for Loan Losses 167 200 267 400
---------- ---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 4,798 4,846 9,466 9,677
---------- ---------- ---------- ----------
Non-interest Income:
Service charges and fees 742 496 1,466 966
Gain on sale of mortgage loans 79 366 178 659
Other, net 206 108 406 249
---------- ---------- ---------- ----------
Total non-interest income, net 1,027 970 2,050 1,874
---------- ---------- ---------- ----------
Non-interest Expense:
Employee compensation and benefits 1,858 1,718 3,767 3,494
Federal deposit insurance premium 86 81 170 163
Occupancy and equipment expense 376 397 779 727
Computer services 142 132 296 195
Advertising and promotions 94 116 249 286
Office supplies, postage, printing, etc 179 180 357 362
Other 588 466 1,105 856
---------- ---------- ---------- ----------
Total non-interest expense 3,323 3,090 6,723 6,083
---------- ---------- ---------- ----------
Income Before Income Taxes 2,502 2,726 4,793 5,468
Provision for Income Taxes 977 1,130 1,898 2,186
---------- ---------- ---------- ----------
Net Income $ 1,525 $ 1,596 $ 2,895 $ 3,282
========== ========== ========== ==========
Basic and Diluted Earnings Per Share $ 0.45 $ 0.44 $ 0.86 $ 0.86
========== ========== ========== ==========
Weighted Average Shares Outstanding 3,363,135 3,622,344 3,357,562 3,831,541
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
2
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For Six Months Ended December 31, 1999 and 1998
(In Thousands Except Share Data)
Common Stock Additional Unearned
------------------------- Paid-In Retained Treasury Restricted
Shares Amount Capital Earnings Stock Stock
---------- ---------- ---------- ---------- ----------- ----------
Balance, June 30, 1998 4,253,160 $ 44 $ 87,624 $ 52,662 $ (8,113) $ --
---------- ---------- ---------- ---------- ---------- ----------
Net income -- -- -- 3,282 -- --
Unrealized loss on securities 0
available-for-sale, net of taxes -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 3,282 -- --
---------- ---------- ---------- ---------- ---------- ----------
Issuance of treasury stock to MRDP 177,215 -- (670) -- 8,113 (7,443)
ESOP stock committed for release -- -- 205 -- -- --
Purchase of treasury stock (642,405) -- -- -- (20,955) --
Dividends ($0.35 per share) -- -- -- (1,340) -- --
Prorata vesting of restricted stock -- -- -- -- -- 714
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 3,787,970 $ 44 $ 87,159 $ 54,604 $ (20,955) $ (6,729)
========== ========== ========== ========== ========== ==========
Balance, June 30, 1999 3,787,970 $ 44 $ 42,648 $ 54,905 $ (20,955) $ (4,660)
---------- ---------- ---------- ---------- ---------- ----------
Net income -- -- -- 2,895 -- --
Unrealized loss on securities
available-for-sale, net of taxes -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income -- -- -- 2,895 -- --
---------- ---------- ---------- ---------- ---------- ----------
ESOP stock committed for release -- -- 154 -- -- --
Dividends ($0.45 per share) -- -- -- (1,496) -- --
Prorata vesting of restricted stock -- -- -- -- -- 579
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 3,787,970 $ 44 $ 42,802 $ 56,304 $ (20,955) $ (4,081)
========== ========== ========== ========== ========== ==========
Accumulated
Other
Comprehen-
Unallocated sive Total
ESOP (Loss) Stockholders'
Stock Income Equity
---------- ---------- ----------
Balance, June 30, 1998 $ (6,442) $ (14) $ 125,761
---------- ---------- ----------
Net income -- -- 3,282
Unrealized loss on securities
available-for-sale, net of taxes -- (5) (5)
---------- ---------- ----------
Total comprehensive income -- (5) 3,277
---------- ---------- ----------
Issuance of treasury stock to MRDP -- -- --
ESOP stock committed for release 295 -- 500
Purchase of treasury stock -- -- (20,955)
Dividends ($0.35 per share) -- -- (1,340)
Prorata vesting of restricted stock -- -- 714
---------- ---------- ----------
Balance, December 31, 1998 $ (6,147) $ (19) $ 107,957
========== ========== ==========
Balance, June 30, 1999 $ (5,851) $ (90) $ 66,041
---------- ---------- ----------
Net income -- -- 2,895
Unrealized loss on securities
available-for-sale, net of taxes -- (95) (95)
---------- ---------- ----------
Total comprehensive income -- (95) 2,800
---------- ---------- ----------
ESOP stock committed for release 295 -- 449
Dividends ($0.45 per share) -- -- (1,496)
Prorata vesting of restricted stock -- -- 579
---------- ---------- ----------
Balance, December 31, 1999 $ (5,556) $ (185) $ 68,373
========== ========== ==========
3
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
Six Months Ended
December 31,
----------------------
1999 1998
-------- --------
Cash Flows from Operating Activities:
Net income $ 2,895 $ 3,282
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 267 400
Deferred income tax provision (benefit) 60 (339)
Amortization of deferred income (85) (237)
Amortization of loan servicing assets 95 50
(Accretion) amortization of (discounts) premiums on
investment and mortgage-backed securities (21) 4
Depreciation 415 378
Allocation of ESOP stock at fair value 449 500
Prorata vesting of restricted stock 579 714
Loss on disposal of property and equipment -- 13
Gain on sale of real estate acquired in settlement of loans (20) --
Decrease in loans held-for-sale 7,062 675
Increase in other assets (5,788) (781)
Increase (decrease) in other liabilities 892 (1,790)
-------- --------
Net cash provided by operating activities 6,800 2,869
-------- --------
Cash Flows from Investing Activities:
Net loan originations and principal collections (4,103) 2,225
Purchases of loans (33,979) (31,424)
Purchases of investment securities available-for-sale (10,216) (627)
Proceeds from maturities of investment securities available-for-sale -- 2,000
Principal repayments and proceeds from maturities of mortgage-
backed securities 16 17
Proceeds from sale of real estate acquired in settlement of loans 349 --
Purchases of property and equipment (471) (1,880)
Proceeds from sale of property and equipment -- 3
-------- --------
Net cash used in investing activities (48,404) (29,686)
-------- --------
Cash Flows from Financing Activities:
Net increase in deposits 1,520 23,333
Dividends paid (1,496) (1,340)
Advances from Federal Home Loan Bank of Atlanta 37,000 10,000
Repayment of Advances from Federal Home Loan Bank of Atlanta (10,000) --
Other borrowings 8,910 --
Principal payments on other borrowings (35,000) --
Purchases of treasury stock -- (20,955)
-------- --------
Net cash provided by financing activities $ 934 $ 11,038
-------- --------
4
FirstSpartan Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
Six Months Ended
December 31,
1999 1998
------------- -------------
Net Decrease in Cash and Cash Equivalents $ (40,670) $ (15,779)
Cash and Cash Equivalents at Beginning of Period 58,420 48,968
------------- -------------
Cash and Cash Equivalents at End of Period $ 17,750 $ 33,189
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 9,477 $ 9,102
============= =============
Income taxes $ 722 $ 3,184
============= =============
Transfers from loans to real estate acquired in settlement of loans $ 164 $ 2
============= =============
Change in unrealized loss on investment securities available-for-sale $ (153) $ (8)
============= =============
Change in deferred taxes related to unrealized loss on investment
securities available-for-sale $ 58 $ 3
============= =============
Issuance of common stock to MRDP $ -- $ 7,443
============= =============
See accompanying notes to consolidated financial statements.
5
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
FirstSpartan Financial Corp. ("FirstSpartan" or the "Company"), a
Delaware corporation, is the holding company for First Federal Bank
("First Federal" or the "Bank") which is a federally chartered stock
savings bank.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods. Also, certain June 30, 1999 balance
sheet amounts have been reclassified to conform to the December 31,
1999 presentation.
The results of operations for the three- and six-month periods ended
December 31, 1999 are not necessarily indicative of the results to be
expected for the year ending June 30, 2000. The consolidated financial
statements and notes thereto should be read in conjunction with the
audited financial statements and notes thereto contained in the Annual
Report to Stockholders for the year ended June 30, 1999.
2. Earnings Per Share
Earnings per share ("EPS") has been computed based upon weighted
average common shares outstanding of 3,363,135 and 3,622,344,
respectively, for the three months ended December 31, 1999 and 1998 and
weighted average common shares outstanding of 3,357,562 and 3,831,541,
respectively, for the six months ended December 31, 1999. The Company
had no dilutive securities outstanding during the three- and six-month
periods ended December 31, 1999 and 1998; therefore, diluted EPS is the
same as basic EPS for all periods presented.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
This Quarterly Report contains forward-looking statements within the
meaning of the federal securities laws. These statements are not
historical facts, rather statements based on the Company's current
expectations regarding its business strategies and their intended
results and its future performance. Forward-looking statements are
preceded by terms such as "expects," "believes," "anticipates,"
"intends," and similar expressions.
Forward-looking statements are not guarantees of future performance.
Numerous risks and uncertainties could cause the Company's actual
results, performance, and achievements to be materially different from
those expressed or implied by the forward-looking statements. Factors
that may cause or contribute to these differences include, without
limitation, general economic conditions, including changes in market
interest rates and changes in monetary and fiscal policies of the
federal government; legislative and regulatory changes; and other
factors disclosed periodically in the Company's filings with the
Securities and Exchange Commission.
Because of the risks and uncertainties inherent in forward-looking
statements, readers are cautioned not to place undue reliance on them,
whether included in this report or made elsewhere from time to time by
the Company or on its behalf. The Company assumes no obligation to
update any forward-looking statements.
Comparison of Financial Condition at December 31, 1999 and June 30, 1999
Total assets were $551.4 million at December 31, 1999 and $545.7
million at June 30, 1999, an increase of $5.7 million or 1%. The
primary components of this increase are $37.7 million, or 9%, in loans
receivable, net, $10.1 million, or 43%, in investment securities
available-for-sale, and $5.1 million in other assets offset by
decreases of $40.7 million, or 70%, in cash and cash equivalents and
$7.1 million in loans held-for-sale. The majority of the decrease in
cash and cash equivalents was attributable to uses of cash in investing
activities of $48.4 million. A more detailed reconciliation may be
found in the Consolidated Statements of Cash Flows for the six months
ended December 31, 1999. Loans receivable, net, increased primarily as
a result of an increase of $24.6 million in mortgage loans since June
30, 1999. Included in the $24.6 million increase were increases of
$10.3 million in commercial mortgage loans, $8.8 million in one- to
four-family mortgage loans, $3.4 million in construction loans, and
$2.1 million in land development loans. Loans receivable, net, also
increased due to a $7.4 million increase in non-mortgage commercial
loans and a $5.6 million increase in home equity loans.
7
Deposit accounts increased $1.5 million to $407.5 million at December
31, 1999 from $406.0 million at June 30, 1999. Advances from the FHLB
of Atlanta increased $27.0 million to $61.0 million at December 31,
1999 from $34.0 million at June 30, 1999 and were used principally to
fund repayment of other borrowings.
Stockholders' equity increased by $2.4 million to $68.4 million at
December 31, 1999 from $66.0 million at June 30, 1999. Items that
increased stockholders' equity were the allocation of shares in the
amount of $1.0 million under the Bank's Employee Stock Ownership Plan
("ESOP") and restricted stock plan and net income of $2.9 million for
the six months ended December 31, 1999. Offsetting these increases to
stockholders' equity was the payment of dividends of $1.5 million.
Non-performing assets increased by $1.9 million to $3.8 million, or
0.68% of total assets, at December 31, 1999 from $1.9 million, or 0.34%
of total assets, at June 30, 1999. The increase was due primarily to
the placement of $2.5 million in speculative construction loans
outstanding to several partnerships with a common general
partner/builder on non-accrual status. All of the partnerships declared
chapter 11 bankruptcy in December 1999. Although the loans were less
than 90 days past due on December 31, 1999, the Bank placed the loans
in non-accrual status because of management's belief that the loans
will reach 90 days past due before the bankruptcy is resolved. Although
no assurances can be given, based on an evaluation of the collateral,
management of the Bank believes that all principal amounts will be
collected on the loans.
Comparison of Operating Results for the Three Months Ended December 31, 1999 and
December 31, 1998
Net Income. Net income decreased $100,000 to $1.5 million for the three
months ended December 31, 1999 from $1.6 million for the three months
ended December 31, 1998. The principal item decreasing earnings for the
quarter was the expected reduction in net interest income on the funds
used to pay the cash distribution of $12.00 per share last June. Other
items decreasing net income for the quarter were a decrease in the
provision for loan losses and increased non-interest expense. Earnings
per share for the current quarter did not decrease in the same
proportion as net income due to a reduction in average shares
outstanding. Share repurchases in the prior year quarter decreased
average shares outstanding by approximately 275,000 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 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 Interest Income. Net interest income was flat at $5.0 million for
both the three months ended December 31, 1999 and the three months
ended December 31, 1998. As discussed above, net interest income was
reduced due to the payment of the cash distribution in June and the
repurchase of stock during the first and second quarters of fiscal year
1999. The total cash outlay for the distribution was approximately
$45.5 million and its effect is estimated to have decreased net income
by approximately $385,000, or 24%, when comparing the current and prior
year quarters. The impact of the stock repurchases is estimated to have
decreased net income by approximately $45,000, or 3%,
8
when comparing the current and prior year quarters.
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 did increase 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. This was due to the funding of a
portion of the cash distribution and share repurchases with borrowings.
Since interest-earning assets did increase (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 the share repurchases.
The average balance of interest-earning assets was $522.5 million
during the quarter ended December 31, 1999 compared to $505.4 million
during the quarter ended December 31, 1998. The average yield increased
to 7.69% from 7.66% for the prior year quarter due to higher market
interest rates in recent quarters.
The average balance of interest-bearing liabilities increased to $480.4
million during the three months ended December 31, 1999 from $410.9
million during the three months ended December 31, 1998, more than
offsetting a decrease in the average cost of interest-bearing
liabilities to 4.20% from 4.48%. The decrease in the average cost is
attributable to deposits that repriced during lower market 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. Due to the inability to predict
interest rates, the amount of increase in the cost of deposits, if any,
cannot be quantified.
Net yield on interest-earning assets decreased to 3.80% for the quarter
ended December 31, 1999 from 3.99% for the quarter ended December 31,
1998 due primarily to the above mentioned increase in the average
balance of interest-bearing liabilities.
Provision for Loan Losses. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level
considered by management as adequate to provide for estimated loan
losses based on management's evaluation of the collectibility of the
loan portfolio. The allowance for loan losses represents an amount that
management believes will be adequate to absorb estimated losses
inherent in the total loan portfolio which may become uncollectible.
Factors considered in assessing the adequacy of the allowance include
historical loss experience, delinquency trends, characteristics of
specific loan types, growth and composition of the loan portfolios,
loans classified under OTS regulations, and other factors. Management
also considers the level of problem assets that the Company classifies
in accordance with regulatory requirements. The Company gives greater
weight to the level of classified assets than to the level of
non-performing assets (non-accrual loans, accruing loans contractually
past due 90 days or more, and real estate acquired in settlement of
loans) because classified assets include not only non-performing assets
but also performing assets that otherwise exhibit, in management's
judgment, potential credit weaknesses.
9
The provision for loan losses was largely unchanged at $167,000 for the
three months ended December 31, 1999 compared to $200,000 for the three
months ended December 31, 1998. Non-performing assets increased
primarily because of a related group of construction loans. See
Comparison of Financial Condition at December 31, 1999 and June 30,
1999. Since the increase in non-performing assets is related to a group
of related loans and management believes that no losses will be
realized on these loans, the increase in non-performing assets had no
impact on the provision for loan losses. Management deemed the
allowance for loan losses to be adequate at December 31, 1999. Based on
the uncertainty in the estimation process, however, management's
estimate of the allowance for loan losses may change in the near term.
Further, the allowance for loan losses is subject to periodic
evaluation by various regulatory authorities and could be adjusted as a
result of their examinations.
The allowance for loan losses increased to $3.1 million at December 31,
1999 from $2.9 million at June 30, 1999 and was 0.61% of gross loans
receivable at December 31, 1999 and June 30, 1999. Also, the ratio of
allowance for loan losses to non-performing loans decreased to 87.1% at
December 31, 1999 from 190.4% at June 30, 1999 due primarily to the
increase in non-performing loans described above.
Non-interest Income. Non-interest income was $1.0 million for both the
three months ended December 31, 1999 and the three months ended
December 31, 1998. Although total non-interest income was unchanged
there were changes in the components of non-interest income. Fee income
increased to $742,000 from $496,000 principally due to the growth in
checking accounts. Gains from the sale of mortgage loans decreased to
$79,000 in the three months ended December 31, 1999 from $366,000 in
the three months ended December 31, 1998, primarily due to the larger
number of loan refinancings occurring during the period of lower market
interest rates in the prior year quarter. The loan refinancings
resulted in a large amount of fixed-rate (principally 30-year term)
loans that were sold for interest rate risk management. The Bank
periodically sells fixed-rate loans in response to interest rate
changes, liquidity needs, and other factors. Management cannot predict
whether there will be any such gains in the future.
Non-interest Expense. Non-interest expense was $3.3 million for the
three months ended December 31, 1999 compared to $3.1 million for the
same period in 1998. The increase consisted principally of increased
personnel costs and various other operating expenses associated with
the growth of the Company.
Income Taxes. The provision for income taxes decreased $153,000 to
$977,000 for the three months ended December 31, 1999 compared to the
three months ended December 31, 1998, primarily as a result of lower
income before income taxes.
10
Comparison of Operating Results for the Six Months Ended December 31, 1999 and
December 31, 1998
Net Income. Net income decreased $400,000 to $2.9 million for the six
months ended December 31, 1999 from $3.3 million for the six months
ended December 31, 1998. The principal item decreasing earnings for the
six-month period was the expected reduction in net interest income on
the funds used to pay the cash distribution of $12.00 per share last
June. Other items affecting net income for the six-month period were a
decrease in the provision for loan losses, increased non-interest
income, and increased non-interest expense. Earnings per share for the
current six-month period did not decrease in the same proportion as net
income due to a reduction in average shares outstanding. Share
repurchases in the prior year period decreased average shares
outstanding during the current year period by approximately 277,000
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 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 Interest Income. Net interest income decreased $300,000 to $9.7
million for the six months ended December 31, 1999 from $10.0 million
for the six months ended December 31, 1998. As discussed above, net
interest income was reduced due to the payment of the cash distribution
in June and the repurchase of stock during the first and second
quarters of fiscal year 1999. The total cash outlay for the
distribution was approximately $45.5 million and its effect is
estimated to have decreased net income by approximately $775,000, or
24%, when comparing the current and prior year six-month periods. The
impact of the stock repurchases is estimated to have decreased net
income by approximately $195,000, or 6%, when comparing the current and
prior year periods.
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 did increase 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. This was due to the funding of a
portion of the cash distribution and share repurchases with borrowings.
Since interest-earning assets did increase (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 the share repurchases.
The average balance of interest-earning assets was $519.3 million
during the six months ended December 31, 1999 compared to $504.2
million during the six months ended December 31, 1998. The average
yield decreased to 7.64% from 7.66% for the prior year period due to
lower market interest rates.
The average balance of interest-bearing liabilities increased to $475.7
million during the six months ended December 31, 1999 from $402.0
million during the six months ended December 31, 1998, more than
offsetting a decrease in the average cost of interest-bearing
liabilities to 4.21% from 4.60%. The decrease in the average cost is
attributable to deposits that repriced during lower market 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.
11
Net yield on interest-earning assets decreased to 3.75% for the six
months ended December 31, 1999 from 4.00% for the six months ended
December 31, 1998 due primarily to the above mentioned increase in the
average balance of interest-bearing liabilities and decrease in the
average yield on interest-earning assets.
Provision for Loan Losses. The provision for loan losses was $267,000
for the six months ended December 31, 1999 compared to $400,000 for the
six months ended December 31, 1998. See Comparison of Operating Results
for the Three Months Ended December 31, 1999 and December 31, 1998 -
Provision for Loan Losses for a discussion of management's process for
determining the provision for loan losses.
Non-interest Income. Non-interest income increased by $200,000 to $2.1
million for the six months ended December 31, 1999 from $1.9 million
for the six months ended December 31, 1998, primarily as a result of an
increase in fee income to $1.5 million from $1.0 million principally
due to the growth in checking accounts. The growth in fee income,
however, was offset by a decrease in gains from the sale of mortgage
loans to $178,000 in the six months ended December 31, 1999 from
$659,000 in the six months ended December 31, 1998 which was due
primarily to the larger number of loan refinancings occurring during
the period of lower market interest rates in the prior year period. The
Bank periodically sells fixed-rate loans in response to interest rate
changes, liquidity needs, and other factors. Management cannot predict
whether there will be any such gains in the future.
Non-interest Expense. Non-interest expense was $6.7 million for the six
months ended December 31, 1999 compared to $6.1 million for the same
period in 1998. The increase consisted principally of increased
personnel costs and various other operating expenses associated with
the growth of the Company.
Income Taxes. The provision for income taxes decreased $288,000 to $1.9
million for the six months ended December 31, 1999 compared to the six
months ended December 31, 1998, primarily as a result of lower income
before income taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are customer deposits, proceeds
from principal and interest payments from loans, the sale of loans,
maturing securities, FHLB of Atlanta advances, and other borrowings.
While maturities and scheduled amortization of loans are a predictable
source of funds, deposit flows and mortgage prepayments are influenced
greatly by general interest rates, other economic conditions, and
competition. Federal regulations require the Bank to maintain an
adequate level of liquidity to ensure the availability of sufficient
funds to fund loan originations, deposit withdrawals and to satisfy
other financial commitments. Currently, the federal regulatory
liquidity requirement for the Bank is the maintenance of an average
daily balance of liquid assets (cash and eligible investments) equal to
at least 4% of the average daily balance of net withdrawable deposits
and short-term borrowings. This liquidity requirement is subject to
periodic change. The Company and the Bank generally maintain sufficient
cash and short-term investments to meet short-term liquidity needs. At
December 31, 1999, cash and cash equivalents totaled $17.8 million, or
3% of total assets, and investment securities classified as
available-for-sale with maturities of one year or less totaled $16.8
million, or 3% of total assets. At December 31, 1999, the Bank also
maintained an
12
uncommitted credit facility with the FHLB of Atlanta, which provides
for immediately available advances up to an aggregate amount of
approximately $93.3 million of which $61.0 million had been advanced.
FirstSpartan is not subject to any separate regulatory capital
requirements. As of December 31, 1999, the Bank's regulatory capital
was in excess of all applicable regulatory requirements. At December
31, 1999, under applicable regulations, the Bank's actual tangible,
core and risk-based capital ratios were 11.0%, 11.0% and 16.9%,
respectively, compared to requirements of 1.5%, 3.0% and 8.0%,
respectively.
At December 31, 1999, the Company had loan commitments (excluding
undisbursed portions of interim construction loans) of approximately
$5.6 million ($770,000 at fixed rates ranging from 7.625% to 9.125%).
In addition, at December 31, 1999, the unused portion of lines of
credit (principally variable-rate home equity lines of credit) extended
by the Company was approximately $54.1 million. Furthermore, at
December 31, 1999, the Company had certificates of deposit scheduled to
mature in one year or less of $218.7 million. Based on historical
experience, the Company anticipates that a majority of such
certificates of deposit will be renewed at maturity.
Year 2000
Before January 1, 2000, the Company had implemented and satisfactorily
tested a comprehensive plan to address the effect of the Year 2000 date
change on the Company's mission critical computer systems. While there
can be no assurances that the Company's Year 2000 plan has effectively
addressed the Year 2000 issue, the Company has not been notified, and
it is unaware of, any vendor or service provider problems related to
Year 2000, and all of the Company's systems have performed properly
since January 1, 2000. Likewise, the Company is unaware of any Year
2000 issues that have impaired the ability of its borrowers to repay
their debts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 1999, there have been no material changes in the
quantitative and qualitative disclosures about market risks presented
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1999.
13
FIRSTSPARTAN FINANCIAL CORP. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings
other than routine legal proceedings occurring in the ordinary
course of business. Management believes that such routine
legal proceedings, in the aggregate, are not material to the
Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
On October 20, 1999, the Company held an annual meeting of
shareholders for the following purposes:
1. To elect three directors to serve for a term of three
years;
2. To ratify the appointment of Deloitte & Touche LLP as
independent auditors for the fiscal year ending June
30, 2000; and
3. To act upon such other matters as may properly come
before the meeting or any adjournment's thereof.
The results of the voting are set forth below:
1. Election of Directors:
Name For Withheld
---- --- --------
Billy L. Painter 3,023,974 43,008
Robert L. Handell 3,030,548 36,434
Robert R. Odom 3,028,355 38,627
Directors continuing in office (and date of
expiration of term) are: E. Lea Salter (2000), R.
Wesley Hammond (2000), E.L. Sanders (2001), and David
E. Tate (2001).
2. Ratification of Deloitte & Touche LLP as independent
auditors for the fiscal year ending June 30, 2000:
For Against Abstain
--------- ------- -------
3,055,517 9,122 2,343
14
3. Other matters:
No other matters came before the meeting.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) (a) Certificate of Incorporation of the Registrant*
(3) (b) Bylaws of the Registrant*
(10) (a) Employment Agreement with Billy L. Painter**
(10) (b) Employment Agreement with Hugh H. Brantley**
(10) (c) Employment Agreement with J. Stephen Sinclair**
(10) (d) Employment Agreement with R. Lamar Simpson***
(10) (e) Severance Agreement with Rand Peterson**
(10) (f) Severance Agreement with Thomas Bridgeman**
(10) (g) Severance Agreement with Katherine A. Dunleavy***
(10) (h) Employee Severance Compensation Plan**
(10) (i) Employee Stock Ownership Plan**
(10) (j) Registrant's 1997 Stock Option Plan****
(10) (k) Registrant's Management Recognition and Development Plan****
(10) (l) Loan Agreement with Central Carolina Bank and Trust Company*****
(10) (m) Severance Agreement with J. Timothy Camp
(21) Subsidiaries of the Registrant**
(27) Financial Data Schedule
(b)Reports on Form 8-K:
None.
- ---------------------
*Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (333-23015) and incorporated herein by reference. **Filed as an
exhibit to the Registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 2000 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, 1998 and incorporated herein by
reference. ****Filed as an exhibit to the Registrant's Annual Meeting
Definitive Proxy Statement dated December 12, 1997 and incorporated
herein by reference.
*****Filed as an exhibit to the Registrant's Form 8-K dated June 9,
1999 and incorporated herein by reference.
15
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FirstSpartan Financial Corp.
Date:
By: /s/Billy L. Painter
-------------------
Billy L. Painter
President and Chief Executive Officer
Date:
By: /s/R. Lamar Simpson
-------------------
R. Lamar Simpson
Treasurer, Secretary and Chief
Financial Officer
16