<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
----------------------
FORM 10-K
---------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number 0-14417
FIRST LIBERTY FINANCIAL CORP.
-----------------------------
(Exact name of Registrant as specified in its charter)
Georgia 58-1680650
------- ----------
(State of incorporation) (I.R.S. Employer
Identification Number)
201 Second Street
-----------------
Macon, Georgia 31297
--------------------
(Address of principal executive offices, including zip code)
(912) 743-0911
--------------
(Registrant's telephone number, including area code)
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
Series B 6.00% Cumulative Convertible Preferred Stock
-----------------------------------------------------
8 1/4% Convertible Subordinated Debentures Due August 1, 2005
-------------------------------------------------------------
Common Stock Purchase Rights
----------------------------
(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 and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Indicate by check mark if 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 registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
---
The aggregate market value of the Registrant's outstanding Common
Stock held by non-affiliates of the Registrant on December 3, 1996
was $98,128,645. There were 7,110,706 shares of Common Stock
outstanding as of December 3, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 29, 1997 are incorporated by
reference in Part III hereof. Exhibit index appears on page 104.
1
<PAGE> 2
FIRST LIBERTY FINANCIAL CORP.
-----------------------------
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 1996
Item Page
Number Number
- ------ ------
Part I
1. Business............................................ 3
2. Properties.......................................... 28
3. Legal Proceedings................................... 29
4. Submission of Matters to a Vote of Stockholders..... 29
4(A) Executive Officers of the Registrant................ 29
Part II
5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 31
6. Selected Financial Data............................. 32
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition............... 35
8. Financial Statements and Supplementary Data......... 58
9. Disagreements on Accounting and Financial Disclosure 99
Part III
10. Directors and Executive Officers of the Registrant.. 99
11. Executive Compensation.............................. 99
12. Stock Ownership of Certain Beneficial Owners and
Management.......................................... 99
13. Certain Relationships and Related Transactions...... 99
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................... 100
Signatures.......................................... 103
Index of Exhibits................................... 104
2
<PAGE> 3
PART I
------
ITEM 1. BUSINESS
- ------------------
Introduction
- ------------
First Liberty Financial Corp. ("First Liberty") is a savings and
loan holding company headquartered in Macon, Georgia which owns and
operates First Liberty Bank ("Liberty Bank"), and its wholly-owned
subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage") and
NewSouth Financial Services, Inc. ("NewSouth"). At September 30,
1996, First Liberty had total assets of approximately $1.1 billion,
total deposits of approximately $760 million and stockholders'
equity of approximately $76 million.
Liberty Bank is a federally chartered stock savings bank
headquartered in Macon, Georgia which serves Macon, Savannah and
other Georgia cities through its home office and 30 full service
branch offices. Liberty Bank operates as a system of community
banks under a single charter along with a residential construction
loan production office located in Atlanta, Georgia. Based on total
assets at September 30, 1996, Liberty Bank is the largest savings
institution headquartered in Georgia.
Throughout this document, reference to a year by number (i.e., not
preceded by a month and date) implies a fiscal year ended September
30.
Through Liberty Mortgage, Liberty Bank also operates a mortgage
banking business in all of its market areas and through
correspondent relationships in several southeastern states.
Liberty Mortgage originates permanent first mortgage loans on
residential properties for Liberty Bank's portfolio and for sale in
the secondary market. During fiscal 1996, Liberty Mortgage
originated approximately $378 million of permanent residential
mortgage loans. Liberty Mortgage's loan servicing portfolio was
approximately $1.0 billion at September 30, 1996, including
approximately $210 million of loans serviced for Liberty Bank. See
"Management's Discussion and Analysis of Results of Operations and
Financial Condition - Non-Interest Income" - herein.
During 1996, First Liberty organized NewSouth to engage in the
consumer finance business in selected Georgia market areas.
NewSouth commenced operations in four offices during the first
quarter of fiscal 1997.
First Liberty's Vision and Strategy Statements
- ----------------------------------------------
First Liberty operates under a three-year strategic plan which is renewed
annually. As a part of that plan, First Liberty has adopted a vision and
strategy statement to communicate to customers, employees and stockholders
its vision and strategic direction. The vision statement reads as follows:
"We will operate an independent, high quality system of
community banks and affiliated businesses, with focus on
serving consumers and businesses with selected financial
services."
3
<PAGE> 4
The strategy statement includes a strategic direction for customer
development, employee development, stockholders and acquisitions.
The strategy statement for stockholders reads as follows:
"We will continue to operate in a safe and sound manner. Our
financial targets are as follow:"
Measure Target
----------------------------- ------
Return on Equity 16.00%
Return on Assets 1.15%
Efficiency Ratio 55.00%
Criticized Loans to Net Loans 4.00%
Classified Loans to Net Loans 1.00%
Nonperforming Assets Ratio 1.00%
Management believes these financial targets are attainable within the
Company's current three-year strategic plan period. The major
components of the strategic plan are as follows:
Safety - First Liberty plans to continue to conduct its
------
operations consistent with safe and prudent banking practices,
in compliance with all applicable laws and regulations.
Capital Adequacy - Liberty Bank is classified as a "well-
----------------
capitalized" institution for regulatory purposes. Liberty
Bank will seek to maintain capital adequacy primarily through
the retention of earnings, supplemented as needed through
capital offerings. See "Acquisitions," herein.
Credit Quality - First Liberty currently operates within the
--------------
established target levels for credit quality and intends to maintain
the level of its nonperforming and other criticized and classified
assets inside established targets. First Liberty will continue to
commit significant resources to the credit administration and credit
review functions to insure continued adherence to credit policies and
underwriting standards.
Operating Efficiency - First Liberty will strive to be a low
--------------------
cost provider of financial services by delivering its products
and services in an "optimized" environment. Operating/staff
functions will be conducted on a centralized basis while the
business development functions will be decentralized to
enhance customer service. These efforts will be focused to
absorb excess capacity of existing resources, to promote
profitable growth and to improve investment returns.
Growth - Without compromising the above objectives, First
------
Liberty will strive to expand Liberty Bank's market share in
its middle, south and coastal Georgia market areas through
internal growth and selected acquisitions. First Liberty
believes that acquisitions of thrifts or banks (or of their
assets and deposits) in existing or contiguous markets
represent a low-cost method of expanding Liberty Bank's market
share, broadening its franchise and improving its operating
efficiencies. See "Acquisitions," herein.
4
<PAGE> 5
Liberty Mortgage will expand market share for retail loan
originations in metropolitan Atlanta and through Liberty Bank
in middle, south and coastal Georgia market areas.
Additionally, Liberty Mortgage will expand its market share
for wholesale loan originations in the southeastern United
States through correspondent relationships. NewSouth plans to
expand in selected market areas in Georgia to include certain
market areas of Liberty Bank.
From time to time, the Company may publish forward-looking statements, such
as the ones in the preceding paragraphs, relating to such matters as
anticipated financial performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. Some of the risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include but are not limited to the following:
a. Deterioration in local economic conditions;
b. Deterioration in national or global economic conditions;
c. Significant changes in laws and regulations affecting the
financial service industry; and
d. Significant changes in local competition.
Acquisitions
- ------------
On November 15, 1996, the Company acquired by merger Middle Georgia
Bank ("MGB"). MGB on the date of acquisition held the following
approximate balances: loans of $67 million, cash and investments
of $58 million, premises and equipment of $1 million and deposits
of $117 million. This business combination has been accounted for
utilizing the pooling-of-interests method of accounting. No
intangible assets were recorded from the acquisition.
In September 1995, the Company acquired by merger Tifton Banks,
Inc. ("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank
& Trust Company ("Tifton Bank"). Tifton Bank on the date of
acquisition held the following approximate balances: loans of $42
million, cash and investments of $21 million, premises and
equipment of $1 million and deposits of $45 million. Intangible
assets resulting from the acquisition amounted to approximately $2
million.
In March 1995, the Company acquired three banking offices located
in Sylvania, Vidalia and Waycross, Georgia from a commercial bank.
Total assets acquired were approximately $3 million and total cash
received and deposits assumed were approximately $95 million.
Intangible assets resulting from the acquisition were approximately
$4 million.
In December 1994, the Company acquired by merger Central Banking
Company ("CBC") of Swainsboro, Georgia, and its subsidiary, The
5
<PAGE> 6
Central Bank ("Central Bank"). Central Bank on the date of
acquisition held the following approximate balances: loans of $21
million, cash and investments of $34 million, premises and
equipment of $1 million and deposits of $52 million. Intangible
assets resulting from the acquisition amounted to approximately $2
million.
In March 1993, Liberty Bank acquired six branch offices, located in
supermarkets in Savannah, Georgia, from another institution.
Liberty Bank operated four branches in Savannah prior to the
acquisition. Total assets acquired by Liberty Bank were
approximately $7 million and total deposits assumed were
approximately $38 million. Intangible assets resulting from the
acquisition amounted to approximately $1 million.
In December 1992, the Company acquired First Federal Savings and
Loan Association, Milledgeville, Georgia ("First Federal") in a
supervisory merger-conversion for a cash purchase price of $1,000.
First Federal, on the date of acquisition, held loans and mortgage-
backed securities of approximately $32 million, cash and
investments of approximately $6 million, premises and equipment
with a value of approximately $1 million, deposits of approximately
$38 million, and other borrowings of approximately $3 million.
Intangible assets resulting from the acquisition amounted to
approximately $449,000.
Issuance and Redemption of Convertible Preferred Stock
- ------------------------------------------------------
In December 1994 and September 1995, in connection with the
respective acquisitions of Tifton and CBC, the Company issued $7.6
million in Series B 6.00% Cumulative Convertible Preferred ("Series
B") stock. The shares have a liquidation preference of $25.00 per
share. Dividends on the Series B stock are cumulative at an annual
rate of $1.50 per share and are payable quarterly. Each share of
the Series B stock is convertible at the option of the holder into
1.79 shares of common stock, at a conversion price of $14.00 per
share of common stock, subject to adjustment in certain
circumstances. The Company, at its option, may redeem the Series
B stock at any time on or after January 1, 1997.
In February 1993, First Liberty issued 460,000 shares of Series A
7.75% Cumulative Convertible Preferred ("Series A") stock which
raised approximately $10.5 million in equity. The Series A
provided for cumulative cash dividends payable quarterly at the
rate of $1.9375 per share per annum. A share of Series A was
convertible at the option of the holder into three shares of First
Liberty Common Stock. In July 1995 the Company redeemed 2,537
shares of Series A for $66,879, plus accrued and unpaid dividends.
The remaining 457,463 shares of the Series A were converted into
1,372,389 shares of the Company's common stock, at a conversion
price of $8.33 per share of common stock.
Lending Activities
- ------------------
General
- -------
Liberty Bank originates loans primarily in Macon, Savannah and the
other Georgia cities in which its offices are located, and through
6
<PAGE> 7
loan production offices specializing in residential real estate
construction lending located in metropolitan Atlanta. Even though
Liberty Bank is permitted by the Office of Thrift Supervision
("OTS") to originate loans collateralized by real estate located
anywhere in the United States, it concentrates its lending
activities in the primary market areas in which it operates.
Liberty Mortgage originates and operates through correspondent
relationships to purchase real estate loans in Alabama, Florida,
Georgia, Kentucky, Mississippi, North Carolina, South Carolina,
Tennessee and Virginia principally for sale into the secondary
market.
Federal laws and regulations prescribe the types and amounts of
loans which may be made by federal thrifts and generally permit
such institutions to make residential real estate loans, commercial
real estate loans, business loans, agricultural loans and consumer
loans.
Economic conditions in First Liberty's banking markets are
generally consistent with Georgia markets other than metropolitan
Atlanta. The following table summarizes economic data relating to
the Macon and Savannah markets.
Macon MSA Savannah MSA
------------- ------------
Population (1994) 307,420 275,656
% Change (1990-1994) 5.60% 6.90%
Households (1990) 106,478 94,940
% Change (1980-1990) 15.30% 18.20%
Personal income (1993)
% Earnings:
Goods producing industries 23.60% 26.20%
Service producing industries 49.50% 57.60%
Government 28.40% 17.80%
Unemployment rate (1993) 5.80% 6.00%
Per capita personal income (1993) $17,886 $18,808
Source: Selig Center for Economic Growth-The University of Georgia
First Liberty's local banking markets generally are served by major
interstate highways, rail and regional air service and in the case
of Savannah, a major Atlantic Ocean port facility. The employment
base includes federal and state government facilities,
manufacturing, health care, wholesale, retail, distribution and
service industries.
Most of First Liberty's banking regions contain large military
bases. In Middle Georgia, Robins Air Force Base is the largest
employer in the market area. While there are no current
indications of material reductions in personnel relating to any of
these bases, such developments could adversely affect First
Liberty.
Residential Real Estate Loans
- -----------------------------
First Liberty's principal lending operation traditionally has been
the origination of residential permanent mortgage loans, and these
loans continue to represent a significant part of First Liberty's
lending activities. Both fixed rate and adjustable rate permanent
loans on residential properties currently are originated either for
7
<PAGE> 8
sale in the secondary market or for the institution's loan
portfolio. The determination of whether loans originated are
available-for-sale or for portfolio is made at the time of borrower
application. Some loans originated for sale may be sold into
Liberty Bank's portfolio at the lower of cost or market. See "Loan
Sales and Purchases" - herein.
In the case of owner-occupied single-family residences, First
Liberty may make permanent residential mortgage loans for up to 95%
of the appraised value of the property. Loans on non-owner
occupied real estate of not more than four family units, generally
are made for up to 75% of the appraised value. All conventional
loans with loan-to-value ratios in excess of 80% generally have
private mortgage insurance covering that portion of the loan in
excess of 70% of the appraised value. The borrower pays the cost
of this insurance through a single premium paid at the time of loan
origination and/or through a monthly payment during the term of the
loan. The borrower also generally makes monthly payments into an
escrow account equal to 1/12 of the annual hazard insurance
premiums and property taxes on the property which secures the loan.
Interest rates and loan fees charged on loans originated are
competitive with other financial institutions in First Liberty's
general market areas.
First Liberty has offered, in addition to fixed rate residential
loans, a variety of loans on which the interest rate and payment
may be adjusted provided that the adjustments are tied to specified
indices. These adjustable rate mortgage loans ("ARMs") permit
greater flexibility in adjusting loan yields to changes in the cost
of funds. ARMs generally have loan terms up to 30 years with rate
adjustments ranging from one to ten years during the term of the
loan. Most ARMs have caps on the maximum amount of change in the
interest rate at any adjustment period and over the life of the
loan.
Liberty Bank also provides interim construction financing for
single-family residences and makes land acquisition and development
loans on properties intended for residential use. Liberty Bank's
general policy is to grant single family construction loans and
land acquisition and development loans up to 80% of the appraised
value of the property. Residential construction loans are made for
periods of one year or less, and land acquisition and development
loans are made for periods of up to five years, both on an
interest-only basis. These periods may be extended subject to
negotiation of terms. Typically, interest rates on construction
and acquisition and development loans are indexed to the prime rate
and are adjustable daily during the term of the loan.
Commercial Real Estate Loans
- ----------------------------
Federally chartered thrifts are permitted to invest in non-
residential real estate loans so long as such loans do not exceed
400% of capital. Liberty Bank is conservative in making loans of
this nature choosing to limit this type of lending to its primary
banking markets, to customers with proven track records and strong
credit histories, and to projects that are soundly underwritten.
Interim construction and permanent commercial real estate loans are
8
<PAGE> 9
secured by owner-occupied businesses, commercial and industrial
properties, apartment projects, office buildings, shopping centers
and other properties located in Liberty Banks's primary banking
markets. Construction and permanent commercial real estate loans
are underwritten with the primary analysis focusing on the adequacy
of net operating income and cash flow being available to provide
debt service. These loans are generally made for up to 80% of the
appraised value of the property in conformity with the guidelines
found in the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA").
Consumer Loans and Indirect Lending
- -----------------------------------
Federally chartered thrifts are authorized to make both secured and
unsecured consumer loans for personal or household purposes in
amounts up to 30% of the institution's total assets. At September
30, 1996, these types of consumer loans constituted 16% of Liberty
Bank's total assets. In addition, these institutions have lending
authority above the 30% limit for certain consumer loans, such as
home equity loans, property improvement loans, mobile home loans
and education loans.
Liberty Bank currently purchases consumer loans secured by new and
used automobiles and recreational vehicles from approximately 100
select dealers in its banking markets on a non-recourse basis
("indirect loans"). At September 30, 1996, indirect loans
constituted $155 million or 20% of the total loan portfolio, or
approximately 65% of Liberty Bank's consumer loan portfolio. This
compares to total indirect loans of $124 million or 19% of the
total loan portfolio, or 63% of the consumer loan portfolio at
September, 30, 1995. Liberty Bank intends to continue prudent
expansion of its consumer lending activities, including indirect
lending activities, subject to market conditions, as part of its
strategy to provide a full range of banking products and services
to its customers.
Commercial/Business Loans
- -------------------------
Liberty Bank makes various types of commercial loans to
creditworthy borrowers within Liberty Bank's primary banking market
areas for financing equipment purchases, capital projects, working
capital and other legitimate business needs. The terms of these
loans range generally from three months to fifteen years, with the
longer maturities generally subject to balloon payments. These
loans normally carry interest rates indexed to the prime rate.
Liberty Bank is authorized by federal law to make secured and
unsecured loans for business or agricultural purposes in amounts
aggregating no more than 10% of its total assets. Additionally,
some business loans secured by nonresidential real estate are
subject to a separate limit, see "Commercial Real Estate" - herein.
Commercial business loans subject to the 10% limitation represented
6.4% of total assets.
9
<PAGE> 10
Loan Originations and Processing
- --------------------------------
Liberty Mortgage actively solicits mortgage loan applications from
existing customers, local real estate agents, builders, developers
and others. Additionally, numerous loan applications are received
as a result of media advertising, customer referrals and from walk-
in customers at loan production offices.
Liberty Bank has a structured loan approval process in which
lending authority for various types and amounts of loans is
delegated by the Board of Directors to loan officers on a basis
commensurate with seniority and lending experience. Liberty Bank
has a Senior Loan Committee which must approve loans in amounts
above $500,000 and up to $4 million. Liberty Bank's Board of
Directors regularly reviews and ratifies the actions of the Senior
Loan Committee and must approve any loan relationship of $4 million
or more.
Loan Sales and Purchases
- ------------------------
Permanent first mortgage loans on residential properties are
originated for sale to the secondary market and for investment.
Liberty Mortgage originates and purchases loans on residential
properties through correspondent relationships with lenders in
Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia. These correspondents
provide approximately one-half of Liberty Mortgage's total loan
production. These correspondents are banks, savings institutions
and mortgage bankers and brokers.
Secondary market sales, which are without recourse, are made to the
Federal National Mortgage Association ("FNMA"), the Federal Home
Loan Mortgage Corporation ("FHLMC") and other institutional
investors. Such loan sales may be made with servicing rights
retained by Liberty Mortgage or with servicing rights released.
The FNMA and the FHLMC are government-sponsored agencies which
purchase residential mortgage loans from federally-insured
financial institutions and certain other approved lenders. As
market conditions dictate, Liberty Bank may elect to hold permanent
mortgage loans in its portfolio, where favorable spreads over the
cost of funds make these investments advantageous.
While most loans in the portfolio are originated internally,
conventional loans and loan participations secured by residential
real estate located within and outside of the state of Georgia and
mortgage-backed securities representing interests in pools of
mortgage loans guaranteed by the Government National Mortgage
Association ("GNMA"), the FNMA and the FHLMC are purchased by
Liberty Bank. Liberty Bank will from time to time sell other loans
and mortgage-backed securities which are available-for-sale when
such investments become inconsistent with its business strategies.
See "Investment Activities" - herein.
Fee Income
- ----------
In addition to interest earned on loans, Liberty Bank and Liberty
Mortgage receive loan fees for originating mortgage and non-
mortgage loans and servicing fees for continuing to service loans
10
<PAGE> 11
(i.e., collecting principal and interest payments on behalf of
investors) after selling such loans to the secondary market.
Mortgage and loan fees generally are payable upon the closing of
the loan in amounts ranging from 1% to 3% of the principal amount
of the loan. Consumer and some commercial loan fees are based on
a fixed rate per loan ranging from $55 to $100. Servicing fees are
payable monthly by the loan purchaser in an amount equal to 1/4 to
1/2 of 1% per annum of the unpaid principal balance of each loan.
As of September 30, 1996, Liberty Mortgage serviced loans for
Liberty Bank and for others aggregating approximately $1.0 billion.
Liberty Bank may also receive commitment fees in connection with
certain commitments on multi-family commercial and development
loans. Other loan fee income includes fees from late payment
charges, prepayment premiums, loan assumption fees, renewal fees,
property transfer fees and miscellaneous services related to its
loans.
Credit Risk Management and Allowance for Loan Losses
- ----------------------------------------------------
Liberty Bank has a multi-faceted program designed to control and
continually monitor the credit risks inherent in its loan
portfolio. This begins with a structured loan approval process in
which authority for various types and amounts of loans is delegated
by the Board of Directors to loan officers on a basis commensurate
with seniority and lending experience. See "Loan Originations and
Processing" - herein.
Liberty Bank uses an asset classification system which is
consistent with OTS regulations, which apply to all assets of an
insured institution and require each institution to periodically
classify its assets. There are four categories of "criticized"
assets: Special Mention, Sub-Standard, Doubtful and Loss. Assets
classified as substandard, doubtful or loss are considered
"classified". The classification of assets is subject to OTS
review and re-classification. Institutions must include aggregate
totals of criticized assets, and general and specific valuation
reserves in quarterly reports to the OTS. Liberty Bank's loan
classification system utilizes both the account officer and an
independent loan review function to monitor the classification of
Liberty Bank's loans. The account officer is charged with the
responsibility of monitoring changes in loan quality within his or
her loan portfolio and reporting changes directly to loan review
and senior management. Additionally, loan review performs an
independent review of Liberty Bank's loans to determine that the
appropriate risk grade has been assigned to each borrowing
relationship.
Liberty Bank's policy requires an annual review of all borrowing
relationships exceeding $100,000 in aggregate debt. A report of
the results of these reviews on loans of $500,000 and greater are
forwarded to the Board of Directors for their review. Delinquencies
are monitored on all loans as a basis for potential inclusion in
general valuation reserves or, ultimately, for potential charge-
off. Loans which are delinquent 90 days (four payments) or longer
generally are placed on nonaccrual status unless the collectibility
of principal and accrued interest is assured beyond a reasonable
doubt. In certain cases, loans less than 90 days (four payments)
delinquent are placed on nonaccrual where uncertainty exists as to
11
<PAGE> 12
their collectibility. Real estate acquired through foreclosure is
classified as sub-standard unless there is sufficient evidence to
indicate such classification is not warranted. A portfolio of
mortgage-backed securities are all guaranteed by either the GNMA,
the FNMA, the FHLMC, or investment grade private issuers and are
therefore not generally subject to any material risk of collateral
loss. Similarly, the portfolio of investment securities is
comprised of U.S. Government obligations of the Federal Home Loan
Bank ("FHLB") of Atlanta and investment grade corporate debt
securities.
Loan loss reserves are determined based on management's internal
review of nonperforming loans, delinquency trends, the level of
rated assets and charge-off trends. Additionally, management
assesses general and specific economic trends both nationally and
locally and regulatory information to determine the impact of those
external factors on loan loss reserve levels.
Based on the internal and external reviews, Liberty Bank segregates
its loan portfolio by type of loans and by loan classification
within each loan type. Reserve percentages are applied (based on
historical and anticipated loss rates) to each loan group to
determine the required amount of allocated general loan loss
reserves. Additionally, an amount is provided for unallocated
general loan loss reserves, reflecting the potential for estimation
errors in allocated reserves.
See Item 7 - "Management's Discussion and Analysis of Results of
Operations and Financial Condition - Loan Loss Provision and
Allowance for Loan Losses and Nonperforming Assets and Credit Risk"
- - herein.
Interest Rate Risk
- ------------------
Interest rate risk is a measure of exposure to changes in net
interest income or the theoretical market value of portfolio equity
due to changes in market interest rates. The differential (known
as "gap"), is the difference between interest rate sensitive assets
and interest rate sensitive liabilities over a specified period of
time and represents a measure of sensitivity of net interest income
to changes in interest rates. A positive gap indicates an excess
of rate sensitive assets over rate sensitive liabilities, while a
negative gap indicates an excess of rate sensitive liabilities over
rate sensitive assets.
Liberty Bank operates under an interest rate risk policy through an
Asset Liability Management Committee ("ALCO"). The policy outlines
limits on interest rate risk in terms of changes in net interest
income and changes in the net market values of assets and
liabilities over certain changes in interest rate environments.
These measurements are made through a cash flow simulation model
which projects the impact of changes in interest rates on Liberty
Bank's assets and liabilities. Additionally, the committee may set
additional interest rate risk objectives.
The policy also outlines responsibility for monitoring interest
rate risk, the process for the approval, implementation and
monitoring of interest rate risk strategies to achieve Liberty
12
<PAGE> 13
Bank's interest rate risk objectives.
Liberty Bank also operates under a hedging policy and Liberty
Mortgage also operates under a secondary marketing policy. The
hedging policy applies to Liberty Bank's use of forward
commitments, interest rate swaps, interest rate caps and floors and
other similar hedging instruments. Liberty Bank's ALCO is
responsible for implementation of the policy. The policy outlines
authorized objectives, sets limits on activities, outlines the
responsibilities for approval, implementation and monitoring of
hedging activities. For the three years ended September 30, 1996,
Liberty Bank did not engage in any transactions under its hedging
policy.
The secondary marketing policy applies to the use of forward
commitments ("coverage") by Liberty Mortgage to hedge market
exposure in the pipeline of loans originated for sale. Liberty
Mortgage's secondary marketing committee is responsible for the
implementation of the policy. The policy outlines acceptable
hedging instruments, sets limits on the maximum exposure to risk
and outlines authority and responsibilities for the implementation
of the policy.
Both the hedging policy and the secondary marketing policy prohibit
speculation and prohibit the use of futures contracts and options
on futures contracts.
Investment Activities
- ---------------------
Income from investments in securities provides the second largest
source of interest income after interest on loans. Federal
regulations require Liberty Bank to maintain a minimum amount of
liquid assets which may be invested in specified short-term
securities but also permits certain other investments.
Investment decisions are made by authorized officers under the
supervision of Liberty Bank's Board of Directors pursuant to its
investment policy. Brokers ("counterparties") approved by the ALCO
are used to effect securities transactions. The investment policy
outlines the criteria for monitoring Liberty Bank's counterparties.
Under the investment policy, assets held to meet Liberty Bank's
liquidity requirement are classified as available-for-sale due to
the reasonable possibility of liquidation prior to maturity.
Additionally, all other securities have also been classified as
available-for-sale based on management's determination that such
assets may be liquidated prior to maturity. Liberty Mortgage
classifies all loans originated as available-for-sale unless
originated pursuant to a specific portfolio commitment to Liberty
Bank. All other loans are considered held-for-investment unless
specifically classified otherwise. As of September 30, 1996, $257
million or 26% of First Liberty's earning assets were classified as
available-for-sale.
At September 30, 1996, Liberty Bank's investment portfolio,
consisted of government agency debt and equity securities of
investment grade and Federal Home Loan Bank stock. Additionally,
Liberty Bank holds investments in investment grade mortgage-backed
13
<PAGE> 14
securities. Liberty Bank does not invest in collateralized
mortgage obligations considered "high risk" as defined by the
Federal Financial Institutions Examination Council guidelines.
See Note 4 of Notes to First Liberty's Consolidated Financial
Statements contained in Item 8 - "Financial Statements and
Supplementary Data" - herein.
Sources of Funds
- ----------------
General
- -------
Savings accounts and other types of deposits are the major source
of funds for lending and other investment purposes. In addition to
deposits, Liberty Bank obtains funds from loan principal
repayments, proceeds from sales of loans and loan participations,
advances from the FHLB of Atlanta, and repurchase agreements. Loan
repayments are a relatively stable source of funds while deposit
inflows and outflows and sales of loans and investment securities
are significantly influenced by prevailing interest rates and
economic conditions. Borrowings may be used to compensate for
reductions in normal sources of funds or to support expanded
lending activities. Liberty Bank's unused borrowing capacity with
the FHLB of Atlanta at September 30, 1996 was approximately $32.4
million in advance and warehouse lines of credit. Additionally,
Liberty Bank had approximately $30.0 million in fed fund lines with
correspondent banks.
Deposits
- --------
Liberty Bank offers a variety of types of deposit accounts and
related services. Deposits are obtained primarily from the
communities in which its offices are located.
For further details as to the composition of Liberty Bank's savings
portfolio, see Item 7 - "Management's Discussions and Analysis of
Results of Operations and Financial Condition" - herein.
Borrowings
- ----------
Deposits are the primary source of funds for lending and investment
activities and for its general business purposes. However, Liberty
Bank periodically obtains additional funds by borrowing from the
FHLB of Atlanta and through repurchase agreements entered into with
various counterparties whose creditworthiness has been approved by
Liberty Bank's ALCO. These borrowing activities are conducted
pursuant to Liberty Bank's borrowed funds policy. The policy
outlines the responsibilities and limits of authority, the use of
collateral and safekeeping, and sets limits on Liberty Bank's
credit exposure to counterparties. Additionally, Liberty Bank has
outstanding approximately $16.6 million principal amount of
subordinated debt securities as of September 30, 1996.
See Item 7 - "Management's Discussion and Analysis of Results of
Operations and Financial Condition" - herein. Also see Notes 10,
11, and 12, of Notes to First Liberty's Consolidated Financial
Statements contained in Item 8 - "Financial Statements and
Supplementary Data" - herein.
14
<PAGE> 15
Competition
- -----------
Based on total assets of approximately $1.1 billion at September
30, 1996, Liberty Bank is the largest savings institution
headquartered in Georgia, as measured by total assets. Liberty
Mortgage, with total permanent mortgage originations of
approximately $378 million for the year ended September 30, 1996,
ranked as one of the larger mortgage banking companies in terms of
dollar volume in Georgia.
Liberty Bank and Liberty Mortgage face substantial competition for
deposits and loans throughout their market areas. Liberty Bank
considers Macon, Savannah, and the other smaller Georgia cities in
which its offices are located to be the primary market areas for
attracting deposits, while Liberty Mortgage considers those markets
and metropolitan Atlanta its primary market areas for originating
mortgage loans. Additionally, Liberty Mortgage offers mortgage
loans in Alabama, Florida, Kentucky, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia through its wholesale loan
origination operation. The most significant factors in competing
for deposits are interest rates, the quality and range of financial
services offered, convenience of office locations and office hours.
Competition for deposits comes primarily from commercial banks,
credit unions, money market funds and other investment
alternatives.
The primary factors in competing for loans are interest rates,
discount points, loan fees and the quality and range of lending
services offered. Competition for origination of mortgage loans
comes primarily from mortgage banking firms, mortgage brokers,
commercial banks, savings institutions and insurance companies.
Various states in the Southeastern region, including Georgia, have
enacted regional interstate banking laws which permit banks and, in
some states such as Georgia, savings institutions, to acquire
financial institutions in other states within the region. As a
result of such laws there have been major interstate acquisitions
involving Georgia financial institutions which have offices in
Liberty Bank's service area but are headquartered in other
Southeastern states. The effect of such acquisitions (and of the
possible increase in the size of the financial institutions in
Liberty Bank's market area) may be to further increase the
competition faced by Liberty Bank. Additionally, pursuant to OTS
policy, savings institutions are permitted to branch and merge
across state lines.
Employees
- ---------
At November 30, 1996, First Liberty had 482 full-time employees and
46 part-time employees. All officers and other personnel serving
First Liberty are employed and compensated by Liberty Bank, Liberty
Mortgage, or NewSouth. No employees are covered by a collective
bargaining agreement, and management considers its relations with
its employees to be good.
15
<PAGE> 16
Supervision and Regulation
- --------------------------
General
- -------
First Liberty is a savings and loan holding company subject to
regulation, examination, supervision and reporting requirements of
the OTS. As a federally chartered savings institution, Liberty
Bank is subject to extensive regulation by the OTS. The lending
activities and other investments of Liberty Bank must comply with
various federal regulatory requirements. The OTS periodically
examines Liberty Bank and Liberty Bank must file periodic reports
with the OTS describing its activities and financial condition.
Liberty Bank is also subject to examination by the FDIC and must
meet certain reserve requirements promulgated by the Federal
Reserve Board ("FRB"). This supervision and examination is
intended primarily to determine compliance with various regulatory
requirements and for the protection of depositors.
The description of laws and regulations applicable to savings
institutions set forth herein does not purport to be a complete
description of such laws and regulations and their effects on First
Liberty and Liberty Bank.
Legislation previously has been pending in Congress which could
result in the conversion of all savings institution charters to
bank charters and in the merger of the OTS into the Office of the
Comptroller of the Currency, the federal agency which supervises
national banks. It is likely that such legislation will again be
introduced but it is presently not possible to determine the
likelihood of enactment of such legislation or its effects upon
Liberty Bank.
Federal Savings and Loan Holding Company Regulation
- ---------------------------------------------------
As the owner of all of the stock of Liberty Bank, First Liberty is
a savings and loan holding company subject to regulation by the OTS
under the Home Owners' Loan Act (the "HOLA"). As a unitary savings
and loan holding company owning only one savings institution, First
Liberty generally is allowed to engage and invest in a broad range
of business activities not permitted to commercial bank holding
companies or multiple savings and loans holding companies; provided
that Liberty Bank continues to qualify as a "qualified thrift
lender." See "- Regulation of Liberty Bank - Qualified Thrift
Lender Test" herein. In the event of any acquisition by First
Liberty of another savings association subsidiary, except for a
supervisory acquisition, First Liberty would become a multiple
savings and loan holding company and would be subject to
limitations on the types of business activities in which it could
engage.
First Liberty is prohibited from directly or indirectly acquiring
control of any savings institution or savings and loan holding
company without prior approval from the OTS or from acquiring more
than 5% of the voting stock of any savings institution or savings
and loan holding company which is not a subsidiary. Control of a
savings institution or a savings and loan holding company is
conclusively presumed to exist if, among other things, a person
acquires more than 25% of any class of voting stock of the
16
<PAGE> 17
institution or holding company or controls in any manner the
election of a majority of the directors of the insured institution
or the holding company. Control is rebuttably presumed to exist
if, among other things, a person acquires 10% or more of any class
of voting stock (or 25% of any class of stock) and is subject to
any of certain specified "control factors."
Recent Legislation
- ------------------
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act which included, among other
provisions, the Deposit Insurance Funds Act of 1996 (the "DIFA").
The principal purpose of the DIFA was to recapitalize the Savings
Associate Insurance Fund (the "SAIF") so that over time its deposit
insurance assessments could be reduced to parity with those of the
Bank Insurance Fund (the "BIF"), and to provide for the eventual
merger of the SAIF and the BIF. Specifically, the DIFA requires,
in pertinent part, (i) a one-time special assessment of SAIF
members, calculated at 65.7 basis points, to recapitalize the SAIF;
(ii) full prorata sharing by BIF and SAIF member of the debt
service obligations of the Financing Corp. ("FICO") beginning no
later than January 1, 2000, and non-prorata sharing (with premiums
of 6.4 basis points for SAIF members and 1.3 basis points for SAIF
members) until that date; and (iii) a merger of the BIF and the
SAIF into a new Deposit Insurance Fund (the "DIF") on January 1,
1999, if bank and savings association charters have been combined
by that date. The latter requirement cannot be implemented without
further legislation requiring the combination of such charter
types.
The effects of the DIFA on Liberty Bank are significant. The
special assessment, which was paid to the FDIC on November 27,
1996, was $3.6 million, based upon Liberty Bank's SAIF-assessable
deposits as of March 31, 1995. Since the FDIC's non-FICO deposit
insurance assessments are presently at zero for well-capitalized
institutions such as Liberty Bank, it will pay only the FICO
premium beginning January 1, 1997. For the three-year period
beginning that date, Liberty Bank's deposit insurance expense is
expected to decrease by approximately $900,000 per year.
As was the case in the most recent session of Congress, it is
expected that legislation will be introduced in Congress which will
provide for the elimination of all federal savings association
charters as of varying dates. The effect of such legislative
proposals would be to require all savings associations to convert
to either a national bank or state bank charter by a specified
date, with any related holding company required to become a bank
holding company, subject to the limitations regarding permitted
activities of the Bank Holding Company Act of 1956. In addition,
other legislative proposals are pending, the effect of which would
reform the Glass-Stegall Act as well as to effect regulatory relief
for financial institutions. The likelihood of enactment of any
17
<PAGE> 18
such proposed legislation is unknown.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking Act") allows bank holding companies
to acquire existing banks across state lines, regardless of state
statutes. Further, under the Interstate Banking Act, effective
June 1, 1997, a bank holding company may consolidate interstate
bank subsidiaries into branches and a bank may merge with an
unaffiliated bank across state lines to the extent that the
applicable states have not "opted out" of interstate branching
prior to such effective date. States may elect to permit
interstate mergers prior to June 1, 1997. The Interstate Banking
Act also permits de novo branching to the extent that a particular
state "opts into" the de novo branching provisions. The Interstate
Banking Act generally prohibits an interstate acquisition (other
than an initial entry into a state by a bank holding company),
which would result in either the control of more than (i) 10% of
the total amount of insured deposits in the United States, or (ii)
30% of the total insured deposits in the home state of the target
bank unless such 30% limitation is waived by the home state on a
basis which does not discriminate against out of state
institutions.
Regulation of Liberty Bank
- --------------------------
Community Reinvestment Act
- --------------------------
The Community Reinvestment Act of 1977 ("CRA") requires the federal
bank regulatory agencies to encourage financial institutions to
meet the credit needs of low- and moderate-income borrowers in
their local communities. CRA regulations provide for certain
disclosure obligations. In accordance with the CRA, each
institution must prepare and make available a CRA Statement for
each of its local communities that includes a delineation of the
community served and a list of specified types of credit offered to
the community. Additionally, each lending institution must
maintain for public inspection, a public comment file that includes
written comments from the public on its CRA Statement or its
performance in meeting community credit needs.
In May 1995, the federal bank regulatory agencies published final
amended regulations promulgated pursuant to the CRA. The final
regulations eliminate the 12 assessment factors under the former
regulation and replace them with performance tests. Institutions
are no longer required to prepare CRA Statements or extensively
document director participation, marketing efforts or the
ascertainment of community credit needs. Under the final rule, an
institution's size and business strategy determines the type of
examination that it will receive. Large, retail-oriented
institutions will be examined using a performance-based lending,
investment and service test. Small institutions will be examined
using a streamlined approach. Wholesale and limited purpose
18
<PAGE> 19
institutions will be examined under a community development test.
All institutions have the option of being evaluated under a
strategic plan formulated with community input and pre-approved by
the applicable bank regulatory agency.
Public disclosure of written CRA evaluations of financial
institutions made by regulatory agencies is required under the CRA,
to promote enforcement of CRA requirements by providing the public
with the status of a particular institution's community
reinvestment record. Liberty Bank received an "outstanding" rating
on the most recent performance evaluation of its CRA efforts by the
OTS.
Congress and various federal agencies responsible for implementing
fair lending laws have been increasingly concerned with
discriminatory lending practices. In 1994, those federal agencies
announced a Joint Policy Statement detailing specific
discriminatory practices prohibited under the Equal Opportunity Act
and the Fair Housing Act. In the Policy Statement, three methods
of proving lending discrimination were identified: (i) overt
evidence of discrimination, where a lender blatantly discriminates
on a prohibited basis; (ii) evidence of disparate treatment, when
a lender treats applicants differently based upon a prohibited
factor, even where there is no showing that the treatment was
motivated by intention to discriminate; and (iii) evidence of
disparate impact, when a lender applies a practice uniformly to all
applicants, but the practice has a discriminatory effect, even
where such practices are neutral in appearance and applied equally.
Lenders are particularly uncertain about the application of the
"disparate impact" criteria by virtue of the vague nature of the
Policy Statement. The Policy Statement notes that "the precise
contours of the law on disparate impact as it applies to lending
discrimination are under development."
Federal Home Loan Bank System
- -----------------------------
General
- -------
Liberty Bank is a member of the FHLB System, which consists of 12
regional FHLBs subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The FHLBs maintain central credit
facilities primarily for member institutions.
Liberty Bank, as a member of the FHLB of Atlanta, is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in
an amount at least equal to the greater of: (i) 1% of the
aggregate outstanding principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations as
of the beginning of each year, (ii) 5% of its advances (borrowings)
from the FHLB of Atlanta, or (iii) $500. Additionally, during 1996
the FHLB of Atlanta imposed a maximum investment in its capital
stock equal to $500,000 over the required minimum. During the
19
<PAGE> 20
quarter ended September 30, 1996, Liberty Bank increased its
advances from the FHLB of Atlanta to avoid a forced redemption of
its excess capital stock in the FHLB of Atlanta. Liberty Bank is
in compliance with this requirement with an investment of $9.7
million in FHLB of Atlanta stock at September 30, 1996. See Item
7 - "Management's Discussion and Analysis of Results of Operations
and Financial Condition" - herein.
Advances from Federal Home Loan Bank
- ------------------------------------
Each FHLB serves as a reserve or central bank for its member
institutions within its assigned regions. It is funded primarily
from proceeds derived from the sale of obligations of the FHLB
System. The FHLB makes advances (i.e., loans) to members in
accordance with policies and procedures established by its Board of
Directors. Liberty Bank is authorized to borrow funds from the
FHLB of Atlanta to meet demands for withdrawals of savings
deposits, to meet seasonal requirements and for the expansion of
its loan portfolio. Advances may be made on a secured or unsecured
basis depending upon a number of factors, including the purpose for
which the funds are being borrowed and existing advances. Interest
rates charged for advances vary depending upon maturity, the cost
of funds to the regional FHLB and the purpose of the borrowing.
Liquidity Requirements
- ----------------------
Federal regulations require a savings institution to maintain an
average daily balance of liquid assets (which includes cash,
certain time deposits, certain bankers' acceptances, certain
corporate debt securities and highly-rated commercial paper,
securities of certain mutual funds, balances maintained in a
Federal Reserve Bank and specified United States Government, state
or federal agency obligations) equal to a monthly average of not
less than a specified percentage, currently 5%, of its net
withdrawable accounts plus short-term borrowings. These
regulations also require each institution to maintain an average
daily balance of short-term liquid assets at a specified minimum
percentage, currently 1%, of the total of its net withdrawable
accounts and borrowings payable in one year or less. Liberty Bank
complied with its requirements at September 30, 1996.
Insurance of Accounts
- ---------------------
Deposits at Liberty Bank are insured to a maximum of $100,000 for
each insured depositor by the FDIC. As an insurer, the FDIC issues
regulations, conducts examinations and generally supervises the
operations of its insured institutions (institutions insured by the
FDIC hereinafter are referred to as "insured institutions"). Any
insured institution which does not operate in accordance with or
conform to FDIC regulations, policies and directives may be
sanctioned for non-compliance.
20
<PAGE> 21
The FDIC has the authority to suspend or terminate insurance of
deposits upon the finding that the institution has engaged in
unsafe or unsound practices, is operating in an unsafe or unsound
condition, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC. If insurance of accounts
is terminated by the FDIC, the deposits in the institution will
continue to be insured by the FDIC for a period of two years
following the date of termination. The FDIC requires an annual
audit by independent accountants and also periodically makes its
own examinations of insured institutions.
As an insurer, the FDIC issues regulations, conducts examinations
and generally supervises the operations of its insured members.
FDICIA directed the FDIC to establish a risk-based premium system
under which each premium assessed against Liberty Bank would
generally depend upon the amount of Liberty Bank's deposits and the
risk that it poses to the SAIF. The FDIC was further directed to
set semiannual assessments for insured depository institutions to
maintain the reserve ratio of the SAIF at 1.25% of estimated
insured deposits. The FDIC may designate a higher reserve ratio if
it determines there is a significant risk of substantial future
loss to the particular fund. Under the FDIC's risk-related
insurance regulations, an institution is classified according to
capital and supervisory factors. Institutions are assigned to one
of three capital groups: well capitalized, adequately capitalized
or under capitalized. Within each capital group, institutions are
assigned to one of three supervisory subgroups. There are nine
combinations of groups and subgroups (or assessment risk
classifications) to which varying assessment rates are applicable.
The rate assessed for SAIF insured deposits range from $.23 per
$100 of domestic deposits to $.31 per $100 of domestic deposits.
Deposits insured by the Bank Insurance Fund such as the deposits of
MGB are subject to significantly lower premium assessment. See
"Recent Legislation" - herein.
In addition to the payment of deposit insurance premiums to the
FDIC, savings institutions also must bear a portion of the
administrative costs of the OTS through an assessment based on the
level of total assets of each insured institution and which
differentiates between troubled and nontroubled savings
institutions. In 1996, Liberty Bank paid $188,000 to the OTS for
such assessments. Additionally, the OTS assesses fees for the
processing of various applications.
Qualified Thrift Lender Test
- ----------------------------
Historically, the amount of advances which might be obtained by a
member institution from the FHLB has been subject to the
institution's compliance with a qualified thrift lender ("QTL")
test. The QTL test generally requires that an institution maintain
65% of its total portfolio assets in qualified thrift investments.
This level must be maintained on a monthly average basis in nine
21
<PAGE> 22
out of every twelve months. For purposes of the QTL test,
"portfolio assets" equal total assets minus (i) goodwill and other
intangible assets, (ii) the value of property used by an
institution in the conduct of its business and (iii) assets of the
type used to meet liquidity requirements in an amount not exceeding
20% of the savings institution's total assets. Qualified thrift
investments include (i) loans made to purchase, refinance,
construct, improve or repair domestic residential or manufactured
housing, (ii) home equity loans, (iii) securities backed by or
representing an interest in mortgages on domestic residential or
manufactured housing, (iv) obligations issued by the federal
deposit insurance agencies and (v) shares of FHLB stock owned by
the savings institution. Subject to a 20%-of-portfolio assets
limitation, qualified thrift investments also include 50% of the
dollar amount of domestic residential mortgage loans originated and
sold within 90 days of origination, consumer loans (up to a maximum
of 10% of portfolio assets), investments in certain subsidiaries,
loans for the purchase or construction of schools, churches,
nursing homes and hospitals, shares of stock issued by the FHLMC or
the FNMA and 200% of investments in loans for low-to-moderate
income housing and certain other community oriented investments.
A savings institution that does not meet the QTL test must either
convert to a bank charter or comply with the restrictions imposed
for noncompliance. If the institution converts to a bank charter,
it will continue to pay SAIF insurance assessments and any
applicable exit and entrance fees before converting to BIF
insurance. If the institution does not convert to a bank charter,
it must comply with the following additional restrictions on the
operations of the institution: (i) the institution may not engage
in any new activity or make any new investment, directly or
indirectly, unless such activity or investment is permissible for
both a national bank and a savings institution; (ii) the branching
powers of the institution shall be restricted to those of a
national bank; (iii) the institution generally will not be eligible
to obtain any advances from its FHLB; and (iv) payment of dividends
by the institution shall be subject to the rules regarding payment
of dividends by a national bank. A savings institution that has
not converted to a bank charter within three years after failing to
qualify as a QTL may not retain any investment or engage in any
activity not permitted for both a national bank and a savings
institution and must also repay all FHLB System advances. Liberty
Bank's qualified thrift investments as of September 30, 1996 were
$694 million, or 69% of its portfolio assets at that date. Liberty
Bank expects to remain in compliance with the QTL test.
Capital Requirements
- --------------------
Since 1989, OTS capital regulations have set capital standards
applicable to all savings institutions, including a core capital
requirement, a tangible capital requirement and a risk-based
capital requirement. The OTS also has established, pursuant to
22
<PAGE> 23
FDICIA, five classifications for institutions based upon the
capital requirements: well capitalized, adequately capitalized,
under capitalized, significantly under capitalized and critically
under capitalized. At September 30, 1996, Liberty Bank was well
capitalized. Failure to maintain that status could result in
greater regulatory oversight or restrictions on Liberty Bank's
activities.
The OTS requires a savings institution to maintain core capital in
an amount not less than 3% of the savings institution's total
assets. Core capital includes, generally, common stockholders'
equity, noncumulative perpetual preferred stock and related
surplus, nonwithdrawable accounts and pledged deposits of mutual
savings associations, and minority interests in fully-consolidated
subsidiaries, less (i) investments in certain "non-includable"
subsidiaries (as determined by regulation) and (ii) certain
intangible assets (except for mortgage servicing rights and
purchased credit card relationships).
The tangible capital requirement requires a savings institution to
maintain tangible capital in a amount not less than 1.5% of its
adjusted total assets. Tangible capital means core capital less
any intangible assets (except for mortgage servicing rights
included in core capital).
Most national banks will be required to maintain a level of core
capital of at least 100 to 200 basis points above the 3% minimum
level. Because OTS capital standards for savings institutions may
not be less stringent than capital standards established for
national banks, savings institutions will be required to maintain
core capital levels at least as high as national banks.
The OTS capital regulations require savings institutions to
maintain a ratio of total capital to total risk-weighted assets of
8%. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary
capital, which includes cumulative preferred stock, mandatory
convertible securities, subordinated debt, and the allowance for
loan and lease losses of up to 1.25% of total risk-weighted assets.
In determining total risk-weighted assets for purposes of the risk-
based capital requirements, (i) each off-balance sheet item must be
converted to an on-balance sheet credit equivalent amount by
multiplying the face amount of each such item by a credit
conversion factor ranging from 0% to 100% (depending upon the
nature of the item); (ii) the credit equivalent amount of each off-
balance sheet item and each on-balance sheet asset must be
multiplied by a risk factor ranging from 0% to 100% (again
depending on the nature of the item); and (iii) the resulting
amounts are added together and constitute total risk-weighted
assets.
In addition, the OTS requires institutions with an above-normal
23
<PAGE> 24
degree of interest rate risk to maintain an additional amount of
capital. The test of above-normal is determined by postulating a
200 basis point shift (increase or decrease) in interest rates and
determining the effect on the market values of an institution's
portfolio equity. If the decline is less than 2%, no addition to
risk-based capital is required (i.e., an institution has only a
normal degree of interest rate risk). If the decline is greater
than 2%, the institution must add additional capital equal to one-
half the difference between its measured interest rate risk and 2%
multiplied by the market value of its assets. Management believes
that Liberty Bank's interest rate risk is within the normal range.
The following table reflects Liberty Bank's compliance with its
regulatory capital requirements at September 30, 1996 (dollars in
thousands):
Actual Required Excess
------------- ------------ ------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
Core capital $62,673 5.89 $31,915 3.00 $30,758 2.89
Tangible capital 61,003 5.74 15,933 1.50 45,070 4.24
Risk-based capital 82,676 10.75 61,520 8.00 21,156 2.75
Capital Distributions
- ---------------------
Capital distributions also are regulated by the OTS. Capital
distributions are defined to include, in part, dividends, stock
repurchases and cash-out mergers. An association is categorized as
either a Tier 1, Tier 2, or Tier 3 association. A Tier 1
association is defined as an association that has, on a pro forma
basis after the proposed distribution, capital equal to or greater
than the OTS fully phased-in capital requirements. A Tier 2
association is an association that has, on a pro forma basis after
the proposed distribution, capital equal to or in excess of its
minimum capital requirement but does not meet the fully phased-in
capital requirement. A Tier 3 association is defined as an
association that has current capital less than its minimum capital
requirement.
Liberty Bank currently is in compliance with the regulatory capital
requirements and therefore is a Tier 1 association. A Tier 1
association is permitted to make capital distributions during a
calendar year up to the higher of (i) 100% of its net income to
date plus the amount that would reduce by one-half its surplus
capital ratio at the beginning of the calendar year, or (ii) 75% of
its net income over the most recent four-quarter period. Any
distribution in excess of that amount requires prior OTS notice,
with the opportunity for the OTS to object to the distribution. In
addition, a savings association must provide the OTS with a 30-day
advance written notice of all proposed capital distributions,
whether or not advance approval is required by OTS regulations.
Currently, Liberty Bank periodically notifies the OTS of the gross
amount of dividends it intends to pay First Liberty as the sole
stockholder of Liberty Bank. Liberty Bank's ability to pay
24
<PAGE> 25
dividends to First Liberty is subject to the financial performance
of Liberty Bank which is dependent upon, among other things, the
local economy, the success of Liberty Bank's lending activities,
compliance by Liberty Bank with applicable regulations, investment
performance and the ability to generate fee income.
Federal Reserve System Requirements
- -----------------------------------
The FRB requires depository institutions to maintain noninterest-
bearing reserves against their deposit transaction accounts, non-
personal time deposits (transferrable or held by a person other
than a natural person) with an original maturity of less than one
and one-half years and certain money market deposit accounts.
Federal Reserve regulations currently require financial
institutions to maintain average daily reserves equal to 3% on all
amounts from $4.3 million to $52.0 million of net transactions,
plus 10% on the remainder. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS. Members of the FHLB
System also are authorized to borrow from the FRB "discount window"
subject to restrictions imposed by FRB regulations. However,
Federal Reserve policy generally requires that a savings
institution exhaust its FHLB resources before borrowing from the
Federal Reserve.
Transactions with Affiliates
- ----------------------------
Liberty Bank is also subject to certain transactions with
affiliates rules applicable to banks and savings institutions which
are set forth in Sections 23A, 23B and 22(h) of the Federal Reserve
Act as well as additional limitations imposed by OTS regulations.
Such regulations generally impose quantitative and qualitative
limitations on loans and other transactions between an institution
and its affiliates, including loans to insiders.
Consumer Protection and Other Laws and Regulations
- --------------------------------------------------
Liberty Bank, Liberty Mortgage and NewSouth are also subject to
various laws and regulations dealing generally with consumer
protection matters including without limitation the Equal Credit
Opportunity Act and Regulation B, the Electronic Funds Transfer Act
and Regulation E, the Truth in Lending Act and Regulation Z, the
Truth in Savings Act and Regulation DD, the Expedited Funds
Availability Act and Regulation CC, the Bank Secrecy Act and fair
housing laws. Liberty Bank, Liberty Mortgage and NewSouth may be
subject to potential liability under these laws and regulations for
material violations.
State Regulation
- ----------------
As a federally chartered savings institution, Liberty Bank
generally is not subject to those provisions of Georgia law
25
<PAGE> 26
governing state chartered financial institutions or to the
jurisdiction of the Department of Banking and Finance ("DBF").
However, the DBF interprets the Georgia Bank Holding Company Act to
require the prior approval of the DBF for any acquisition of
control of any savings institution (whether chartered by state or
federal authority) located in Georgia.
The DBF also interprets the Georgia Bank Holding Company Act to
include savings and loan holding companies as "bank holding
companies", thus giving the DBF the authority to make examinations
of First Liberty and any subsidiaries and to require periodic and
other reports. Existing DBF regulations do not restrict the
business activities or investments of First Liberty or Liberty
Bank.
State usury laws are applicable to federally insured institutions
with regard to loans made within Georgia. Generally speaking,
Georgia law does not establish ceilings on interest rates although
certain specialized types of lending in which Liberty Bank and
NewSouth engage, such as making loans of $3,000 or less, are
subject to interest rate limitations.
Taxation
- --------
Federal Taxation
- ----------------
First Liberty files a consolidated federal income tax return, which
has the effect of eliminating intercompany distributions, including
dividends, in the computation of consolidated taxable income.
Thrift institutions that meet certain definitional tests and other
conditions prescribed by the Internal Revenue Code of 1986 ("the
Code") are allowed to establish a bad debt reserve and to make
annual additions to the reserve that may be taken as a deduction in
computing taxable income for federal income tax purposes. One of
the tests is prescribed in Code Section 7701(a)(19) and requires
that at least 60 percent of a thrift institution's assets be
"qualifying" assets, as defined in that Section. Failure to meet
this test would result in recapture into taxable income the
thrift's tax bad debt reserve. Due to the significance of this
test, First Liberty monitors this test periodically to ensure that
its assets meet the 60 percent test. At September 30, 1996 Liberty
Bank's qualified assets were $696 million or 64.3% of includable
assets.
The amount of the bad debt reserve deduction is based upon either
(i) actual loss experience, or (ii) a percentage of taxable income
before such deduction. Under the taxable income method, thrift
institutions are permitted to deduct 8% of taxable income if used
for annual additions to their bad debt reserves established for
federal income tax purposes. For the tax years ended September 30,
1995 and 1994, Liberty Bank determined its bad debt reserve
26
<PAGE> 27
deduction based on the actual loss experience method. For the tax
year ended September 30, 1996, Liberty Bank determined its bad debt
reserve deduction based on the percentage of taxable income method.
The bad debt reserve deduction is available only to the extent that
total amounts accumulated in the bad debt reserve for qualifying
real property loans do not exceed 6% of such loans at year-end. In
addition, the deduction is further limited to the amount by which
12% of savings accounts exceeds the sum of retained earnings and
reserves at the beginning of the year. The bad debt reserve
deductions have not been limited by these restrictions during the
three fiscal years ended September 30, 1996, 1995 and 1994.
Earnings appropriated to bad debt reserves established for income
tax purposes cannot be used for any purpose other than to absorb
bad debt losses without recognition of taxable income. Dividends
may be paid out of unappropriated retained earnings without the
imposition of any tax to the extent that the amounts paid as
dividends do not exceed earnings and profits as calculated for
federal income tax purposes. First Liberty has a taxable temporary
difference relating to its bad debt reserves for which Liberty Bank
has not provided a deferred tax liability. The temporary
difference is the amount of the base year tax bad debt reserve
(i.e., tax bad debt reserves that arose in tax years beginning
before December 31, 1987). At September 30, 1996, the cumulative
amount of this temporary difference for which First Liberty is not
required to recognize a deferred tax liability is approximately
$12.0 million. The amount of the unrecognized deferred tax
liability related to this temporary difference is $4.2 million.
The Small Business Job Protection Act of 1996 repealed the reserve
method of accounting for bad debts utilized by thrift institutions
effective for taxable years beginning after December 31, 1995.
Pre-1988 bad debt reserves will generally not be recaptured while
post-1987 reserves would be recaptured ratably over a six-year
period beginning with the tax year ended September 30, 1997, unless
Liberty Bank meets a special residential loan requirement which
will suspend the start of the recapture for two years.
Substantially all of Liberty Bank's reserves are pre-1988 reserves.
As a result of this repeal, Liberty Bank will be required to use
the specific charge-off method of accounting for bad debts for tax
years ending after September 30, 1996. In addition, for years
ending after September 1996, Liberty Bank will no longer be subject
to the 60% asset test described in Code Section 7701(a)(19).
First Liberty's income tax returns are periodically examined by
various taxing authorities. During the fiscal year ended September
30, 1996, First Liberty and the Internal Revenue Service ("IRS")
reached a settlement in connection with the IRS's examination of
First Liberty's federal income tax returns for the tax years ended
September 30, 1986 through 1989. This settlement is reflected in
the financial statements for the year ending September 30, 1996 and
27
<PAGE> 28
did not have a material impact on the consolidated financial
statements.
State Taxation
- --------------
First Liberty's federal taxable income with certain adjustments is
subject to the Georgia corporate income tax at a rate of 6%. The
primary difference between taxable income for State and Federal
income tax purposes is interest income on United States Government
obligations, which is not taxable for state income tax purposes.
Accounting for Income Taxes
- ---------------------------
First Liberty adopted Statement of Financial Accounting Standard
("SFAS") No. 109, "Accounting for Income Taxes" effective October
1, 1991. SFAS No. 109 allows First Liberty to record an income tax
benefit related to its book reserve, but recognize no deferred tax
liability with respect to its base year tax bad debt reserve,
unless it becomes apparent that this temporary difference will
reverse in the foreseeable future. Future reversal of the base
year tax bad debt reserve would occur if Liberty Bank ceases to be
in the banking business. The cumulative amount of this temporary
difference for which First Liberty is not required to recognize a
deferred tax liability is approximately $12.0 million. See
"Federal Taxation" - herein.
ITEM 2. PROPERTIES
- --------------------
First Liberty neither owns nor leases any real property, and uses
the premises, equipment and furniture of Liberty Bank without
payment of any rental fees to Liberty Bank. First Liberty's
headquarters is located at 201 Second Street, Macon, Georgia, where
it occupies space owned by Liberty Bank.
At November 30, 1996 Liberty Bank operated 31 banking offices. All
facilities are owned by Liberty Bank, with the exception of five
supermarket branches in Savannah and three permanent branches in
Milledgeville, Sylvania and Vidalia. The total net book value at
September 30, 1996 of the offices owned by Liberty Bank on that
date, including improvements, furniture, fixtures and equipment,
was approximately $22 million. All significant data processing
services for deposits, loan servicing, accounting and other
operations of Liberty Bank currently are provided by an in-house
data processing center. The investment in in-house data processing
equipment has been included as equipment above. See Note 8 of the
Notes to First Liberty's Financial Statements as contained in Item
8 - "Financial Statements and Supplementary Data" - herein.
Liberty Bank currently is unaware of any potential environmental
liability that may be incurred by Liberty Bank in connection with
any properties owned by Liberty Bank.
28
<PAGE> 29
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are no material pending legal proceedings to which First
Liberty is a party or to which any of their property is subject.
From time to time First Liberty is a party to legal proceedings
which arise in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
- ---------------------------------------------------------
No matter was submitted by First Liberty to a vote of its
stockholders during the fourth quarter of the fiscal year ended
September 30, 1996.
ITEM 4.(A) EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------
Set forth below, in accordance with General Instruction G(3) of
Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, is
certain information as of September 30, 1996, regarding the
executive officers of First Liberty and other individuals having
key policy making roles with respect to First Liberty.
Directors
- ---------
F. DON BRADFORD, 69, is the retired former owner of Macon Janitor
Service in Macon, Georgia. He has served as a director of First
Liberty since 1984 and as a director of Liberty Bank since 1966.
RICHARD W. CARPENTER, 59, is President of Realmark Holding Corp. in
Atlanta, Georgia. He has served as a director of First Liberty and
as a director of Liberty Bank since 1984.
C. LEE ELLIS, 45, is Executive Vice President, Investments, of Alfa
Mutual Insurance Company in Montgomery, Alabama. Mr. Ellis has
served as a director of First Liberty and Liberty Bank since 1986.
ROBERT F. HATCHER, 54, joined Liberty Bank in 1988 as a director
and as President of its Middle Georgia Region. He was elected
President of Liberty Bank in 1989 and was elected Chief Executive
Officer of Liberty Bank and President and Chief Executive Officer
of First Liberty in 1990. He was previously Senior Vice President
of Trust Company Bank of Middle Georgia in Macon, Georgia, where he
had served for 27 years.
MELVIN I. KRUGER, 67, is President of L. E. Schwartz & Son, Inc.,
a commercial roofing contractor in Macon, Georgia. He has served
as a director of First Liberty since 1993 and as a director of
Liberty Bank since July 1995.
THOMAS H. McCOOK, 57, is Vice President of Cherokee Culvert
Company, Inc. in Macon, Georgia. Mr. McCook has served as a
director of First Liberty since 1984, as a director of Liberty Bank
since 1978 and as Chairman of the Boards of Directors of both
29
<PAGE> 30
entities since 1990.
HERBERT M. PONDER, JR., 60, was the president of Bank South, Macon,
in Macon, Georgia where he had served from 1985 until his
retirement in 1993.
JO SLADE WILBANKS, 49, is Manager of the Central Region of Georgia
Power Company. She has served as a director of First Liberty since
1994 and as a director of Liberty Bank since July 1995.
Executive Officers Who Are Not Directors
- ----------------------------------------
ROBERT W. AIKEN, 33, joined First Liberty in August 1996, and
serves as President and Chief Executive Officer of NewSouth
Financial Services, Inc. He previously was employed by Fleet
Finance, Inc. for ten years.
CHARLES G. DAVIS, 49, joined Liberty Bank in 1976, and serves as
Executive Vice President in charge of operations. Before joining
Liberty Bank, he was employed by American Broadcasting Company.
LARRY D. FLOWERS, 46, joined Liberty Bank in 1993. He is Executive
Vice President in charge of marketing and retail banking. He
previously was employed by Citibank in various capacities.
DAVID L. HALL, 37, joined First Liberty and Liberty Bank in 1985.
He is Executive Vice President and Chief Financial Officer of both
entities, having previously served as Senior Vice President and
Controller. Before joining First Liberty, he was employed by
Coopers & Lybrand, Certified Public Accountants, Atlanta, Georgia.
RICHARD A. HILLS, JR., 56, serves as Executive Vice President and
General Counsel of First Liberty, and as Senior Vice President and
General Counsel of Liberty Bank and Liberty Mortgage. He also
serves as Secretary of First Liberty, Liberty Bank and Liberty
Mortgage. Prior to joining First Liberty in 1987, he was a partner
in the law firm of Aiken & Ward, Atlanta, Georgia.
GEORGE A. MOLLOY, 48, joined Liberty Mortgage in 1995 and serves as
its President and Chief Executive Officer. He previously was
President of S B & T Mortgage in Atlanta.
LEE B. MURPHEY 52, joined Liberty Bank in June 1991 as Executive
Vice President and Chief Credit Officer. He previously was Senior
Vice President of Trust Company Bank of Middle Georgia in Macon,
Georgia, where he had served for 21 years.
J. LARRY WALLACE, 45, joined Liberty Bank in 1983. He is Executive
Vice President in charge of residential construction lending and
the disposition of foreclosed properties. Before joining Liberty
Bank he was employed by Cameron Brown Company.
30
<PAGE> 31
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
- ----------------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
The Common Stock is listed and traded on The Nasdaq Stock Market
under the symbol "FLFC." The following table sets forth the high
and low last sale prices per share of the Common Stock as reported
on The Nasdaq Stock Market, and the dividends paid per share of
Common Stock for the periods indicated. On August 28, 1996, the
Board of Directors of First Liberty declared a three-for-two stock
split payable on October 1, 1996 in the form of a 50% stock
dividend. The financial data presented below has been restated to
give retroactive effect to that stock split.
Fiscal Year Ended Last Sale Prices Dividends
September 30, Per Share Paid Per Share
- ----------------- ------------------ ----------------
High Low
------- -------
1996
First Quarter $15.00 $13.17 $ .08
Second Quarter 15.00 14.00 .08
Third Quarter 15.17 13.50 .09
Fourth Quarter 17.17 13.67 .09
1995
First Quarter $ 9.50 $ 8.50 $ .07
Second Quarter 9.17 8.67 .07
Third Quarter 12.33 8.67 .07
Fourth Quarter 13.67 10.67 .07
On December 3, 1996, the last sale price of the Common Stock, as
reported on The Nasdaq Stock Market was $20.25. On December 3,
1996, there were 7,110,106 shares of Common Stock outstanding and
approximately 660 record holders of the Common Stock.
For discussion on dividend restrictions see Item 7 - "Management's
Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources" - herein.
31
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
Selected financial data for First Liberty for each year of the
five-year period ended September 30, 1996 are set forth below (in
thousands, except per share data).
September 30,
--------------------------------------------
1996 1995(1) 1994 1993(1) 1992
-------- -------- -------- -------- --------
Statements of income data:
- --------------------------
Interest income $ 75,082 $ 61,490 $ 48,562 $ 51,241 $ 57,933
Interest expense 40,812 32,733 25,117 29,012 37,919
-------- -------- -------- -------- --------
Net interest income 34,270 28,757 23,445 22,229 20,014
Provision for loan losses 1,788 1,440 1,500 1,979 3,950
-------- -------- -------- -------- --------
Net interest income after
provision for loan
losses 32,482 27,317 21,945 20,250 16,064
Noninterest income,
excluding gains and
losses on asset sales 7,536 6,605 6,437 5,081 4,322
Gain (loss) on sale of
loans and securities 1,781 (173) 461 1,190 (1,319)
Gain on sale of servicing
rights 790 2,353 3,367 3,321 5,424
Noninterest expense 30,917 24,824 23,411 22,490 22,158
-------- -------- -------- -------- --------
Income before income taxes,
accounting change and
extraordinary item 11,672 11,278 8,799 7,352 2,333
Income taxes 3,902 3,207 2,750 2,619 719
-------- -------- -------- -------- --------
Income before accounting
change and
extraordinary item 7,770 8,071 6,049 4,733 1,614
Accounting change (2) - - - - 1,217
Extraordinary item (3) - - - (521) -
-------- -------- -------- -------- --------
Net income 7,770 8,071 6,049 4,212 2,831
Dividends on preferred
stock 454 864 891 557 -
-------- -------- -------- -------- --------
Net income applicable
to common stockholders $ 7,316 $ 7,207 $ 5,158 $ 3,655 $ 2,831
======== ======== ======== ======== ========
Per common share data: (4)
- --------------------------
Income before accounting
changes and extra-
ordinary items (5) $ 1.17 $ 1.29 $ 1.00 $ .86 $ .36
Accounting changes (5) - - - - .27
Extraordinary items (5) - - - (.09) -
-------- -------- -------- -------- --------
Net income (5) $ 1.17 $ 1.29 $ 1.00 $ .77 $ .63
======== ======== ======== ======== ========
Book value $ 11.35 $ 10.62 $ 9.95 $ 9.39 $ 8.61
Tangible book value 9.67 8.72 9.17 8.53 7.89
Dividends paid .34 .28 .21 - -
Dividend payout ratio (5) 29.06% 21.71% 21.00% - -
Average number of shares
outstanding (5) 6,673 6,307 6,074 5,531 4,559
32
<PAGE> 33
September 30,
------------------------------------------------
1996 1995(1) 1994 1993(1) 1992
-------- -------- -------- -------- --------
(Dollars in thousands, except per share, ratio and percentage data)
Core income data: (4) (6)
- -------------------------
Net income $ 7,770 $ 8,071 $ 6,049 $ 4,212 $ 2,831
SAIF assessment,
net of tax 2,341 - - - -
--------- -------- -------- -------- --------
Core income $ 10,111 $ 8,071 $ 6,049 $ 4,212 $ 2,831
========= ======== ======== ======== ========
Net income per share (5) $ 1.17 $ 1.29 $ 1.00 $ .77 $ .63
SAIF assessment, net of
tax per share (5) .35 - - - -
--------- -------- -------- -------- --------
Core income per share (5) $ 1.52 $ 1.29 $ 1.00 $ .77 $ .63
========= ======== ======== ======== ========
Core return on average asset 1.05% 1.01% .86% .60% .40%
Core return on average equity 13.42% 12.93% 10.98% 8.96% 7.60%
Balance sheet data:
- -------------------
Total assets $1,071,191 $919,274 $693,205 $728,248 $679,376
Earning assets 976,808 838,188 632,427 647,681 604,516
Loans (7) 720,178 625,641 487,315 465,491 469,207
Nonperforming assets
(excluding troubled debt
restructurings) 6,591 6,793 14,951 20,460 22,647
Loans and securities
available-for- sale (8) 294,555 237,157 161,405 195,668 125,147
Deposits 760,494 719,226 561,616 546,379 494,734
Long-term borrowings 32,366 20,501 29,319 49,560 78,996
Stockholders' equity 76,450 70,669 56,391 53,884 38,453
Performance ratios:
- -------------------
Return on average assets .81% 1.01% .86% .60% .40%
Return on average equity 10.32 12.93 10.98 8.96 7.60
Interest rate spread 3.91 3.92 3.70 3.58 3.21
Net interest margin (9) 3.93 3.95 3.76 3.57 3.15
Efficiency (10) 61.11 65.58 66.98 68.81 73.41
Ratio of earnings to fixed
charges (11):
Excluding interest on
deposits 2.31x 2.72x 2.65x 1.99x 1.23x
Including interest on
deposits 1.29x 1.34x 1.35x 1.25x 1.06x
Asset quality ratios:
- ---------------------
Allowance for loan losses
to period end loans (7)(12) 1.18% 1.23% 1.15% 1.30% 1.19%
Allowance for loan losses
to period end non-
performing loans 241.61 323.64 124.51 97.55 158.06
Nonperforming assets to
period end loans and
foreclosed properties (7)(12) .90 1.07 2.97 4.21 4.58
Nonperforming assets to
period end total assets .62 .74 2.16 2.81 3.33
Net charge-offs to average
loans .14 .03 .39 .60 .57
33
<PAGE> 34
September 30,
------------------------------------------------
1996 1995(1) 1994 1993(1) 1992
-------- -------- -------- -------- --------
(Dollars in thousands, except per share, ratio and percentage data)
Capital and liquidity:
- ----------------------
Tangible capital to total
adjusted assets (13) 5.74% 5.69% 6.26% 5.34% 5.07%
Core capital to total
adjusted assets (13) 5.89 5.89 6.57 5.59 5.36
Core capital to risk-based
assets (13) 8.15 8.18 9.14 7.66 6.95
Risk-based capital to risk-
based assets (13) 10.75 11.07 12.61 10.92 10.32
Average equity to average
assets 7.83 7.88 7.82 6.70 5.26
Loans to deposits (7) 94.70 86.99 86.77 85.20 94.84
(1) During 1995 and 1993, the Company completed acquisitions of
financial institutions with assets of approximately $107
million and $48 million, respectively. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" - herein. Also see Note 3 of Notes to First
Liberty's Consolidated Financial statements contained in Item
8 - "Financial Statements and Supplementary Data" - herein.
(2) Adoption of SFAS No. 109, "Accounting for Income Taxes".
(3) Loss on extinguishment of debt, net of income tax benefit of
$269,000.
(4) All information has been restated to give retroactive effect
to the three-for two stock split effective October 1, 1996 in
the form of a dividend.
(5) Fully diluted.
(6) Core income represents income exclusive of the one time SAIF
assessment in the amount of $2.3 million after tax recorded as
of September 30, 1996.
(7) Excludes loans available-for-sale.
(8) Includes loans and securities available-for-sale, fed funds
sold, repurchase agreements and cash and cash equivalents.
(9) Net interest income divided by average earning assets.
(10) Computed by dividing non-interest expense excluding provisions
for real estate losses and nonrecurring items by the sum of
net interest income before provisions for loan losses and non-
interest income excluding nonrecurring items. Excludes the one
time SAIF assessment recorded September 30, 1996.
(11) The ratio of earnings to fixed charges has been determined by
dividing (a) income before taxes and fixed charges by (b)
total fixed charges. Fixed charges consist of interest
expense (both excluding and including interest on deposits)
and amortization of debt expense. No portion of rental
expense could be demonstrated to be representative of the
interest factor, and therefore none is included in fixed
charges.
(12) Loans before allowance for losses.
(13) Includes only capital held by Liberty Bank.
34
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
- ------------------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
- ----------------------------------
Background
- ----------
First Liberty Financial Corp.'s ("First Liberty") financial results
of operations continued favorable trends during fiscal 1996. The
positive trends reflect the results of an ongoing plan which
focuses on (1) maintaining a low level of interest rate risk, (2)
improving operating efficiency, (3) reductions in the levels of
nonperforming and classified assets, (4) maintaining a strong
regulatory capital position and (5) continued growth.
In February 1993, First Liberty issued 460,000 shares of Series A
7.75% Cumulative Convertible Preferred ("Series A") stock. These
shares had a liquidation preference of $25 per share. Dividends on
the Series A stock were cumulative at an annual rate of $1.9375 per
share and were payable quarterly. In July 1995 the Company
redeemed 2,537 shares of Series A for $66,879, plus accrued and
unpaid dividends. The remaining 457,463 shares of the Series A
were converted into 1,372,389 shares of the Company's common stock,
at a conversion price of $8.33 per share of common stock.
In December 1994, the Company acquired by merger Central Banking
Company ("CBC") of Swainsboro, Georgia and its subsidiary, The
Central Bank ("Central Bank"). Central Bank on the date of
acquisition, held the following approximate balances: loans of $21
million, cash and investments of $34 million, premises and
equipment of $1 million and deposits of $52 million. Intangible
assets resulting from the acquisition amounted to approximately $2
million.
In March 1995, the Company acquired three banking offices located
in Sylvania, Vidalia and Waycross, Georgia from a commercial bank.
Total assets acquired were approximately $3 million and total cash
received and deposits assumed were approximately $95 million.
Intangible assets resulting from the acquisition were approximately
$4 million.
In September 1995, the Company acquired by merger Tifton Banks,
Inc. ("Tifton") of Tifton, Georgia and its subsidiary, Tifton Bank
& Trust Company ("Tifton Bank"). Tifton Bank on the date of
acquisition, held the following approximate balances: loans of $42
million, cash and investments of $21 million, premises and
equipment of $1 million and deposits of $59 million. Intangible
assets resulting from the acquisition amounted to approximately $2
million.
On November 15, 1996, the Company acquired by merger Middle Georgia
Bank ("MGB"). MGB on the date of acquisition held the following
approximate balances: loans of $67 million, cash and investments
of $58 million, premises and equipment of $1 million and deposits
of $117 million. This business combination has been accounted for
utilizing the pooling-of-interests method of accounting.
In December 1994 and September 1995, in connection with the
respective acquisitions of Tifton and CBC, the Company issued $7.6
35
<PAGE> 36
million in Series B 6.00% Cumulative Convertible Preferred ("Series
B") stock. The shares have a liquidation preference of $25.00 per
share. Dividends on the Series B are cumulative at an annual rate
of $1.50 per share and are payable quarterly.
In August 1996, First Liberty announced a three-for-two stock
split. The split was effective October 1, 1996 and paid in the
form of a stock dividend.
In September 1996, First Liberty issued a redemption notice for the
Company's 8.25% convertible debentures. As of September 30, 1996
$62,000 plus accrued interest was payable to holders on the
redemption date of October 7, 1996. The remaining holders elected
to convert into common stock at the conversion price of $10.89 per
share.
In October 1996, First Liberty commenced operations at NewSouth
Financial Services, Inc. ("NewSouth"), a consumer finance
subsidiary. NewSouth will provide consumer finance services in
select communities throughout Georgia.
Net Income
- ----------
First Liberty's core income was $10.1 million compared to $8.1
million a year earlier. Core income per fully diluted share
increased 18% to $1.52 for fiscal 1996 from $1.29 per share for
fiscal 1995. Core earnings represent earnings exclusive of a one-
time Federal Deposit Insurance Corporation ("FDIC") assessment of
$3.6 million ($2.3 million net of tax) to recapitalize the Savings
Association Insurance Fund ("SAIF"), recorded September 30, 1996
pursuant to a law enacted on that date.
First Liberty's net income for the year ended September 30, 1996
was $7.8 million compared to $8.1 million for the year ended
September 30, 1995 and $6.0 million for the year ended September
30, 1994. First Liberty's income before income taxes was $11.7
million for the year ended September 30, 1996 compared to $11.3
million in 1995 and $8.8 million in 1994.
For the year ended September 30, 1996, First Liberty Bank ("Liberty
Bank") (excluding contributions of Liberty Mortgage Corporation)
contributed $12.6 million of core income before taxes, compared to
core income of $9.1 million in 1995 and core income of $4.7 million
in 1994. These amounts represent 83%, 81% and 54% of First
Liberty's income before income taxes for 1996, 1995 and 1994,
respectively. These trends are indicative of (i) improved margins,
which resulted in increased net interest income, and reductions in
nonperforming assets, (ii) improved internal operating efficiency
and (iii) the contributions of acquisitions.
For the year ended September 30, 1996, Liberty Mortgage Corporation
("Liberty Mortgage") contributed $2.5 million of income before
income taxes, compared to $2.0 million in 1995 and $3.9 million in
1994. These amounts represent 17%, 18% and 44% of First Liberty's
core income before income taxes for 1996, 1995 and 1994,
respectively.
36
<PAGE> 37
Included in Liberty Mortgage's income before income taxes are net
gains on sale of loans, securities and loan servicing rights of
approximately $2.6 million, $2.0 million and $3.8 million for the
fiscal years ended September 30, 1996, 1995, and 1994,
respectively. The decrease in these net gains from 1994 thru 1995
was largely attributable to a lower volume of loan originations,
which resulted primarily from a rising interest rate environment
which generally had a negative impact on the mortgage banking
industry as a whole.
Net Interest Income
- -------------------
Net interest income increased by $5.5 million or 19% during fiscal
1996 as compared to 1995 due to growth in earning assets. Net
interest income increased by $5.3 million or 23% during fiscal 1995
as compared to 1994 due to a $8.2 million reduction in
nonperforming assets, growth in earning assets and an expansion of
the net interest margin to 3.95% in 1995 from 3.76% in 1994. See
"Nonperforming Assets and Credit Risk" - herein.
37
<PAGE> 38
Summary of Average Assets and Liabilities
- -----------------------------------------
(for the fiscal year ended)
The following table reflects the average balances, the actual interest
income or expense and the average yields and costs of funds of First
Liberty's interest-earning assets and interest-bearing liablilites.
Average balances for 1995 and 1994 have been restated to reflect the
conversion from month-end to daily balances in computing averages
(dollars in thousands).
1996
-----------------------------------
Average Rate/
Balance Interest Yield
-----------------------------------
Loans (1) $ 687,673 $ 62,021 9.02%
Mortgage-backed securities 144,583 10,543 7.29%
Investments 36,551 2,391 6.54%
----------- -----------
Total interest-earning assets 868,807 $ 74,955 8.62%
===========
Other assets 93,059
-----------
Total assets $ 961,866
===========
Savings deposits $ 48,183 $ 1,211 2.51%
Time deposits 444,897 25,670 5.77%
Other deposits 239,279 5,000 2.09%
Short-term borrowings 106,239 6,108 5.75%
Long-term borrowings (2) 27,345 2,823 10.32%
----------- -----------
Total interest-bearing liabilities 865,943 $ 40,812 4.71%
===========
Other liabilities 20,600
Equity 75,323
-----------
Total liabilities and equity $ 961,866
===========
Interest rate spread 3.91%
===========
Net interest margin 3.93%
===========
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
1995
----------------------------------
Average Rate/
Balance Interest Yield
----------------------------------
Loans (1) $ 556,971 $ 49,990 8.98%
Mortgage-backed securities 134,500 9,103 6.77%
Investments 34,872 2,320 6.65%
----------- -----------
Total interest-earning assets 726,343 $ 61,413 8.46%
===========
Other assets 72,048
-----------
Total assets $ 798,391
===========
Savings deposits $ 45,695 $ 1,226 2.68%
Time deposits 395,705 20,792 5.25%
Other deposits 196,328 4,149 2.11%
Short-term borrowings 58,746 3,785 4.10%
Long-term borrowings (2) 25,206 2,781 11.03%
----------- -----------
Total interest-bearing liabilities 721,680 $ 32,733 4.54%
===========
Other liabilities 13,796
Equity 62,915
-----------
Total liabilities and equity $ 798,391
===========
Interest rate spread 3.92%
===========
Net interest margin 3.95%
===========
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
1994
-----------------------------------
Average Rate/
Balance Interest Yield
-----------------------------------
Loans (1) $ 500,023 $ 41,827 8.37%
Mortgage-backed securities 99,704 5,629 5.65%
Investments 23,360 1,106 4.73%
----------- -----------
Total interest-earning assets 623,087 $ 48,562 7.79%
===========
Other assets 81,761
-----------
Total assets $ 704,848
===========
Savings deposits $ 42,688 $ 1,090 2.55%
Time deposits 347,203 15,558 4.48%
Other deposits 166,412 3,148 1.89%
Short-term borrowings 32,620 1,470 4.51%
Long-term borrowings (2) 41,283 3,851 9.33%
----------- -----------
Total interest-bearing liabilities 630,206 $ 25,117 3.98%
===========
Other liabilities 19,000
Equity 55,642
-----------
Total liabilities and equity $ 704,848
===========
Interest rate spread 3.81%
===========
Net interest margin 3.76%
===========
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
38
<PAGE> 39
Rate/Volume Analysis
- --------------------
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected First Liberty's interest income and expense during
the periods indicated. For each category, information is provided on changes
attributable to (1) changes in volume (changes in volume multiplied by old
rate), (2) changes in rate (changes in rate multiplied by old volume), and
(3) changes in rate/volume (changes in rate multiplied by changes in volume)
(dollars in thousands).
<TABLE>
<CAPTION> Years ended September 30,
----------------------------------------------------------------------------------------
1996 vs 1995 1995 vs 1994
Increase/(Decrease) Increase/(Decrease)
----------------------------------------- -----------------------------------------
Due to Due to
Due to Due to Rate/ Due to Due to Rate/
Rate Volume Volume Total Rate Volume Volume Total
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Changes in:
Interest income:
Loans (1) $ 243 $ 11,731 $ 57 $ 12,031 $ 3,052 $ 4,764 $ 347 $ 8,163
Mortgage-backed securities 704 682 53 1,439 1,119 1,964 391 3,474
Investments (38) 112 (2) 72 448 545 221 1,214
-------- -------- -------- -------- -------- -------- -------- --------
Total interest income 909 12,525 108 13,542 4,619 7,273 959 12,851
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense:
Savings deposits (77) 67 (4) (14) 55 77 4 136
Time deposits 2,040 2,585 253 4,878 2,686 2,173 375 5,234
Other deposits (47) 907 (10) 850 369 566 66 1,001
Short-term borrowings (408) 3,060 (329) 2,323 632 1,177 506 2,315
Long-term borrowings (2) (178) 235 (15) 42 704 (1,500) (274) (1,070)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest expense 1,330 6,854 (105) 8,079 4,446 2,493 677 7,616
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income $ (421) $ 5,671 $ 213 $ 5,463 $ 173 $ 4,780 $ 282 $ 5,235
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
39
<PAGE> 40
Interest Rate Risk
- ------------------
Interest rate risk is a measure of exposure to changes in net
interest income and theoretical market value of net assets due to
changes in market interest rates. The differential (known as
"gap"), is the difference between interest-earning assets and interest-
bearing liabilities over a specified period of time and represents
a measure of sensitivity of net interest income to changes in
interest rates. A positive gap indicates an excess of interest-
earning assets over interest-bearing liabilities, while a negative
gap indicates an excess of interest-bearing liabilities over
interest-earning assets. Gap analysis does not consider the
effects of principal amortization, estimated prepayments, the
velocity of interest rate changes, competitive factors or consumer
preferences, and as such may not be a reliable indicator of
interest rate risk. First Liberty's interest rate risk will
generally be more positive or asset sensitive than depicted through
gap analysis.
In addition to gap analysis, management also employs a cash flow
simulation model to estimate changes in net interest income and
theoretical market values under various interest rate scenarios.
The cash flow simulation model considers the impact of principal
amortization, estimated prepayments and the velocity of interest
rate changes. As such, the cash flow simulation will generally
provide a better indication of interest rate risk.
During the first quarter of fiscal 1996, short term interest rates
generally decreased and fluctuated through the remainder of the
year. First Liberty's asset sensitivity contributed to a slight
compression to interest rate spreads during the first half of
fiscal 1996. Throughout fiscal 1996, management has continued a
plan to reduce the level of asset sensitivity to hedge against
declining rate environments. As of September 30, 1996, in
management's opinion, First Liberty's interest rate risk position
was basically neutral.
During 1996 the interest rate sensitivity of First Liberty's
balance sheet increased. Management considers interest-earning
assets and interest-bearing liabilities which reprice or mature
within one year to be interest sensitive. At September 30, 1996
interest-sensitive assets were $543 million or 51% of total assets
compared to interest-sensitive liabilities of $631 million or 59%
of total assets. A year ago interest-sensitive assets were $501
million or 54% of total assets compared to interest-sensitive
liabilities of $440 million or 48% of total assets.
40
<PAGE> 41
Interest Rate Sensitivity Short Term Analysis
- ---------------------------------------------
The following table summarizes the repricing of First Liberty's interest-
earning assets and interest-bearing liabilities at September 30, 1996. The
information presented may not be indicative of actual future trends of net
interest income in rising or declining interest rate environments (dollars
in thousands).
<TABLE>
<CAPTION> Less than 1 Month 2 Months 3 Months 6 Months 1 Year Over
1 Month to 2 Months to 3 Months to 6 Months to 1 Year to 2 Years 2 Years Total
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2) $ 238,530 $ 15,473 $ 18,675 $ 36,959 $ 77,855 $ 41,155 $ 327,048 $ 755,695
Securities 33,449 5,926 20,774 33,993 31,889 27,134 46,852 200,017
Fed funds sold and repurchase 8,707 21,000 - - - - - 29,707
--------- --------- --------- --------- --------- --------- --------- ---------
agreements
Total financial assets $ 280,686 $ 42,399 $ 39,449 $ 70,952 $ 109,744 $ 68,289 $ 373,900 $ 985,419
========= ========= ========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
Savings (3) $ 638 $ 629 $ 620 $ 1,811 $ 3,404 $ 6,018 $ 33,289 $ 46,409
Money Market 70,268 - - - - - - 70,268
Interest-bearing deposits (3) 1,870 1,836 1,804 5,222 9,635 16,415 63,134 99,916
Time 44,767 36,567 24,188 93,497 145,066 77,058 41,619 462,762
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 117,543 39,032 26,612 100,530 158,105 99,491 138,042 679,355
Other borrowings 137,286 20,000 - 31,033 1,000 9,774 14,366 213,459
--------- --------- --------- --------- --------- --------- --------- ---------
Total financial liabilities $ 254,829 $ 59,032 $ 26,612 $ 131,563 $ 159,105 $ 109,265 $ 152,408 $ 892,814
========= ========= ========= ========= ========= ========= ========= =========
Current period gap $ 25,857 $ (16,633) $ 12,837 $ (60,611) $ (49,361) $ (40,976) $ 221,492 $ 92,605
Cumulative gap $ 25,857 $ 9,224 $ 22,061 $ (38,550) $ (87,911) $(128,887) $ 92,605
Cumulative gap as a % of total assets 2.4% 0.9% 2.1% -3.6% -8.2% -12.0% 8.6%
</TABLE>
(1) The portfolio of loans available-for-sale are included in the less than
three months repricing periods as all these assets are assigned to
optional or mandatory commitments to sell.
(2) The repricing of loans does not include amounts attributable to the
amortization and estimated repayment of principal.
(3) The estimated repricing of savings and interest-bearing checking
accounts was based on the Office of Thrift Supervision decay rates.
41
<PAGE> 42
Interest Rate Sensitivity Long Term Analysis
- --------------------------------------------
The following table summarizes the repricing of First Liberty's interest-
earning assets and interest-bearing liabilities at September 30, 1996. The
information presented may not be indicative of actual future trends of net
interest income in rising or declining interest rate environments (dollars
in thousands).
<TABLE>
<CAPTION> Less than 3 Months 6 Months 1 Year 3 Years 5 Years 10 Years Over
3 to to to to to to 20
Months 6 Months 1 Year 3 Years 5 Years 10 Years 20 Years Years Total
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2) $ 272,678 $ 36,959 $ 77,855 $ 102,400 $ 157,218 $ 49,154 $ 41,832 $ 17,599 $ 755,695
Securities 60,149 33,993 31,889 40,802 12,765 8,949 8,030 3,440 200,017
Fed fund solds and repurchase 29,707 - - - - - - - 29,707
--------- --------- --------- --------- --------- --------- --------- --------- ---------
agreements
Total financial assets $ 362,534 $ 70,952 $ 109,744 $ 143,202 $ 169,983 $ 58,103 $ 49,862 $ 21,039 $ 985,419
========= ========= ========= ========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
Savings (3) $ 1,887 $ 1,811 $ 3,404 $ 11,572 $ 7,954 $ 11,639 $ 7,881 $ 261 $ 46,409
Money Market 70,268 - - - - - - - 70,268
Interest-bearing deposits(3) 5,510 5,222 9,635 30,840 19,119 24,244 5,346 - 99,916
Time 105,522 93,497 145,066 102,209 16,468 - - - 462,762
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 183,187 100,530 158,105 144,621 43,541 35,883 13,227 261 679,355
Other borrowings 157,286 31,033 1,000 9,774 - 14,366 - - 213,459
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total financial liabilities $ 340,473 $ 131,563 $ 159,105 $ 154,395 $ 43,541 $ 50,249 $ 13,227 $ 261 $ 892,814
========= ========= ========= ========= ========= ========= ========= ========= =========
Current period gap $ 22,061 $($60,611)$ (49,361)$ (11,193)$ 126,442 $ 7,854 $ 36,635 $ 20,778 $ 92,605
Cumulative gap $ 22,061 $($38,550)$ (87,911)$ (99,104)$ 27,338 $ 35,192 $ 71,827 $ 92,605
Cumulative gap as a % of total assets 2.1% -3.6% -8.2% -9.3% 2.6% 3.3% 6.7% 8.6%
</TABLE>
(1) The portfolio of loans available-for-sale are included in the less than
three months repricing period as all these assets are assigned to
optional or mandatory commitments to sell.
(2) The repricing of loans does not include amounts attributable to the
amortization and estimated repayment of principal.
(3) The estimated repricing of savings and interest-bearing checking
accounts was based on the Office of Thrift Supervision decay rates.
42
<PAGE> 43
Loan Loss Provision and Allowance for Loan Losses
- -------------------------------------------------
During fiscal 1996, the provision for estimated losses on loans was
$1.8 million compared to $1.4 million during 1995 and $1.5 million
during 1994. During 1996, total loans held-for-investment
increased by 15% while nonperforming loans increased somewhat.
Additionally, net charge-offs have increased due to a decrease in
the level of recoveries. Accordingly, the provision for estimated
losses on loans increased by 24% during 1996. During 1995, total
loans held-for-investment (net of acquisitions) increased by 16%,
while nonperforming loans and net charge-offs declined
significantly. The provision for estimated losses on loans during
1995 dropped by 4% from 1994.
Loan loss reserves are determined based on management's internal
review of nonperforming loans, delinquency trends, the level of
rated assets and charge-off trends. Additionally, management
assesses general and specific economic trends both nationally and
locally and regulatory information to determine the impact of those
external factors on loan loss reserve levels.
Based on the internal and external reviews, Liberty Bank segregates
its loan portfolio by type of loans and by loan classification
within each loan type. Reserve percentages are applied (based on
historical and anticipated loss rates) to each loan group to
determine the required amount of allocated general loan loss
reserves. Additionally, an amount is provided for unallocated
general loan loss reserves reflecting the potential for estimation
errors in allocated reserves. The provision for loan losses during
1992 was elevated as economic conditions were relatively weak. The
allocation of the allowance for estimated losses for the years
indicated was as follows (dollars in thousands):
September 30,
--------------------------------------------------------------
1996 (1) 1995 (1) 1994 (1) 1993 (1) 1992 (1)
----------- ----------- ----------- ----------- -----------
Amt % Amt % Amt % Amt % Amt %
------ --- ------ --- ------ --- ------ --- ------ ---
First mortgage:
Residential $ 244 20 $ 313 25 $ 240 26 $ 379 25 $ 350 34
Commercial (2) 525 9 775 12 1,434 19 1,139 22 1,470 23
Residential
construction 305 12 402 11 209 11 157 9 161 8
Commercial
business 2,145 26 1,507 21 1,130 12 1,494 11 1,513 10
Consumer (3) 3,625 33 2,654 31 1,357 32 1,366 33 1,232 25
Unallocated 1,767 - 2,165 - 1,310 - 1,606 - 915 -
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $8,611 100% $7,816 100% $5,680 100% $6,141 100% $5,641 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
(1) Loan categories as a percentage of total loans held-for-investment.
(2) Includes commercial construction first mortgage loans.
(3) Includes consumer mortgage loans (such as second mortgage loans and home
equity lines of credit).
43
<PAGE> 44
Changes in the allowance for estimated losses on loans for the
five years ended September 30, 1996 are as follows (dollars in
thousands):
September 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Balance, beginning of
year $ 7,816 $ 5,680 $ 6,141 $ 5,641 $ 4,864
Provision for
estimated losses 1,788 1,440 1,500 1,979 3,950
Acquisitions - 879 - 1,675 -
Recoveries 1,467 2,415 2,318 1,544 1,440
Charge-offs (2,460) (2,598) (4,279) (4,698) (4,613)
------- ------- ------- ------- -------
Balance, end of year $ 8,611 $ 7,816 $ 5,680 $ 6,141 $ 5,641
======= ======= ======= ======= =======
Allowance for loan
losses to non-
performing loans 241.6% 323.6% 124.5% 97.6% 158.1%
Allowance for loan
losses to total loans
held-for-investment 1.2% 1.2% 1.2% 1.3% 1.2%
The following table summarizes charge-offs and recoveries by loan
type (dollars in thousands):
September 30,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Charge-Offs:
Residential real estate $ 76 $ 193 $ 116 $ 381 $ 876
Commercial real estate - 426 205 559 846
Commercial business 161 587 715 1,651 1,213
Consumer 2,223 1,392 3,243 2,107 1,678
------- ------- ------- ------- -------
2,460 2,598 4,279 4,698 4,613
------- ------- ------- ------- -------
Recoveries:
Residential real estate 22 31 185 216 207
Commercial real estate - 3 - 141 278
Commercial business 115 810 271 217 397
Consumer 1,330 1,571 1,862 970 558
------- ------- ------- ------- -------
1,467 2,415 2,318 1,544 1,440
------- ------- ------- ------- -------
Net charge-offs $ 993 $ 183 $ 1,961 $ 3,154 $ 3,173
======= ======= ======= ======= =======
Percentage of average
loans .14% .03% 0.39% 0.60% .57%
======= ======= ======= ======= =======
Nonperforming Assets and Credit Risk
- ------------------------------------
The table below summarizes nonperforming assets and troubled debt
restructurings at the dates indicated. Nonperforming assets
consist of nonaccrual loans, foreclosed properties and insubstance
foreclosures, as well as loans past due 90 days or more as to
interest or principal and still accruing. Material potential
problem loans, (i.e., those with respect to which management has
serious doubts regarding the ability of the borrowers to comply
with present loan repayment terms) have been classified as
44
<PAGE> 45
nonaccrual loans regardless of payment status, and therefore are
included in Liberty Bank's nonperforming assets (dollars in
thousands).
September 30,
---------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Nonaccrual loans $ 3,564 $ 2,415 $ 4,362 $ 6,295 $ 3,569
Loans past due 90 days or
more and still accruing - - 200 - -
------- ------- ------- ------- -------
Total nonperforming loans 3,564 2,415 4,562 6,295 3,569
Real estate acquired through
foreclosure 2,751 4,185 10,189 9,342 10,849
Insubstance foreclosures - - 32 4,665 8,117
Other repossessed assets 276 193 168 158 112
------- ------- ------- ------- -------
Total nonperforming assets $ 6,591 $ 6,793 $14,951 $20,460 $22,647
======= ======= ======= ======= =======
Total nonperforming assets as a
percentage of total assets .62% .74% 2.16% 2.81% 3.33%
======= ======= ======= ======= =======
Troubled debt restructurings $ 5,252 $10,817 $12,199 $12,554 $13,723
======= ======= ======= ======= =======
At the time of foreclosure all properties are valued at fair value.
Fair value is evaluated in light of a current appraisal and an
assessment of market conditions. The evaluation results in a
disposition plan including a financial plan designed to monitor the
net realizable values of the properties during the marketing
period. The plan is regularly monitored and amended as necessary
to accommodate changing market conditions. At times, some
properties' net carrying values may be reduced to facilitate near
term liquidation, particularly if the marketing period has been
extended beyond the original plan.
At September 30, 1996 foreclosed properties included three
commercial properties with aggregate investments (net of reserves)
of approximately $1.3 million. The remaining balance of foreclosed
properties consisted of residential properties.
During fiscal 1995, management elected to writedown six commercial
properties in the amount of $3.0 million, which were reserved for
in prior years, as discussed below, due to the permanent impairment
of such assets. During fiscal 1996 and 1995, five of the six
properties were sold.
During the fourth quarter of fiscal 1994, all remaining commercial
properties were reevaluated in light of current economic
conditions. In several cases, management elected to reduce the net
carrying value of certain properties (by increasing reserves) to
facilitate near term liquidation. As a result of the reductions,
Liberty Bank recorded a provision of approximately $852,000.
On October 1, 1995 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
45
<PAGE> 46
Disclosures, an Amendment of SFAS No. 114". As a result, the
following loans were considered impaired as of September 30, 1996.
See Notes 1 and 6 to First Liberty's Consolidated Financial
Statements contained in Item 8 - "Financial Statements and
Supplementary Data" - herein.
Carrying
Balance Reserve Value
------- ------- --------
(dollars in thousands)
Residential first mortgage $ 566 $ 57 $ 509
Commercial first mortgage 354 35 319
Commercial business 752 296 456
Consumer (1) 3,055 1,465 1,590
------ ------ ------
$4,727 $1,853 $2,874
====== ====== ======
(1) Includes consumer mortgage loans (such as second mortgage loans
and home equity lines of credit).
Noninterest Income
- ------------------
Liberty Mortgage originates loans with marketing (price)
concessions which are offset by the value of the loan servicing
rights originated. Liberty Mortgage will sell a portion of the
loan servicing rights relating to loans originated to recover its
marketing concessions. Additionally, Liberty Mortgage may sell
servicing rights during favorable market conditions as a part of
its portfolio management process.
The following table illustrates the contributions to operating
results and to Liberty Mortgage's loan servicing portfolio in each
of the last three fiscal years (dollars in thousands):
Years ended September 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
Loan activity:
Loans originated $377,994 $161,344 $374,673
Loan servicing rights sold 104,761 249,502 254,120
-------- -------- --------
Loan servicing contributed to
(withdrawn from) portfolio $273,233 $(88,158) $120,553
======== ======== ========
Percentage sold 28% 155% 68%
======== ======== ========
Operating results:
Gain(loss) on sale of
loans and securities $ 1,770 $ (354) $ 453
Gain on sale of loan
servicing rights 790 2,353 3,367
-------- -------- --------
Net gain on sale of loans
and securities and loan
servicing rights $ 2,560 $ 1,999 $ 3,820
======== ======== ========
Net gain as a percentage
of loans originated .68% 1.24% 1.02%
======== ======== ========
46
<PAGE> 47
During 1996, improving business conditions resulted in increased
loan originations as compared to 1995. Additionally, the
accounting change which allows for recognition of the value of
mortgage servicing rights allowed for a reduction in the percentage
of servicing rights sold. As such, the loan servicing portfolio
increased by $147 million during 1996. During 1995 soft business
conditions existed in the mortgage banking industry. These
conditions resulted in lower loan originations as compared to 1994.
Due to reduced loan originations, the portfolio of loans serviced
for others decreased $275 million during fiscal 1995 resulting in
a decrease to loan service fee income (excluding amortization of
servicing fees) of $851,000 over 1994 levels.
Liberty Bank also may sell investments, loans and mortgage-backed
securities from time to time from its portfolio. The following
table summarizes investment activity from Liberty Bank's portfolio
(dollars in thousands:)
Years ended September 30,
----------------------------------
1996 1995 1994
-------- -------- --------
Net book value sold:
Assets available-for-sale $ 3,581 $58,689 $ 5,699
Net gain on sale 11 181 8
During 1995, investment activity consisted principally of the
liquidation of securities acquired in bank acquisitions during the
year. As of September 30, 1996, Liberty Bank's investments and
mortgage-backed securities available-for-sale totalled $200 million
and represented 100% of total investments and mortgage-backed
securities.
Deposit account service charges increased by $1.0 million during
1996 as compared to 1995, and $632,000 during 1995 as compared to
1994 principally due to average transaction accounts increasing 20%
and 21% for the same periods principally as a result of acquisition
activity and internal growth.
Other income in fiscal 1996 was $673,000 compared to $716,000 and
$708,000 during fiscal 1995 and 1994, respectively.
Noninterest Expense
- -------------------
On September 30, 1996 First Liberty recorded a SAIF deposit
insurance expense of $3.6 million as a result of the one-time SAIF
assessment. The amount was $2.3 million after tax and represented
$.35 per fully diluted share.
Total noninterest expense increased by $6.1 million or 24.5% during
fiscal 1996 compared to fiscal 1995 and increased $1.4 million or
6.0% during fiscal 1995 compared to fiscal 1994. The principal
factor contributing to increased noninterest expense was the $3.6
47
<PAGE> 48
million SAIF assessment explained above (1996 only) and the
incremental cost of acquired operations.
During 1995, three acquisitions were completed which increased
noninterest expense by direct incremental costs of approximately
$1.2 million in 1996 as compared to 1995 and $2.0 million in 1995
as compared to 1994. The breakdown of direct incremental costs in
1996 and 1995 related to acquired operations were as follows
(dollars in thousands).
Years ended
September 30,
-------------
1996 1995
---- ----
Compensation, payroll taxes and fringe benefits $ 654 $ 826
Occupancy and equipment 138 246
Federal deposit insurance premiums 69 233
Amortization of intangible assets 152 325
Other 233 372
------ ------
$1,246 $2,002
====== ======
During 1996 Liberty Bank recorded $413,000 for possible losses on
sales of foreclosed real estate as compared to $507,000 and $1.1
million in 1995 and 1994, respectively. The ending allowance for
losses on foreclosed real estate for 1996, 1995 and 1994 was
$382,000, $302,000 and $2.9 million, respectively. See
"Nonperforming Assets and Credit Risk" - herein.
The following table summarizes the significant components of other
expense (dollars in thousands:)
Years ended September 30,
---------------------------------------
1996 1995 1994
------------ ----------- ------------
Postage and freight $ 914 $ 776 $ 716
Insurance and bonds 189 189 223
Telephone 698 597 532
Stationery and supplies 602 559 436
Losses 435 760 437
Other 1,274 1,358 1,012
-------- -------- --------
$ 4,112 $ 4,239 $ 3,356
======== ======== ========
Income Taxes
- ------------
Income tax expense for the years ended September 30, 1995 and 1994
reflects a variation from the statutory federal income tax rate of
34% primarily due to the difference between the deduction of bad
debt provisions for financial reporting and income tax purposes.
First Liberty's effective tax rate after such item for the years
ended September 30, 1996, 1995 and 1994 was 33.4%, 28.4% and 31.3%,
respectively.
48
<PAGE> 49
At September 30, 1996 First Liberty had gross deferred tax assets
of approximately $4.3 million. First Liberty's management has
determined that it is more likely than not that its deferred tax
asset will be realized. This is based on the existence of taxable
income in the form of future reversals of existing taxable
temporary differences and taxable income in prior carryback years
that is sufficient to allow realization of the tax benefit of First
Liberty's existing deductible temporary differences. First Liberty
is not aware of any material uncertainties existing at September
30, 1996 that may affect the realization of First Liberty's
deferred tax assets. First Liberty evaluates the realizability of
deferred tax assets quarterly by assessing the need for a valuation
allowance.
During the fiscal year ended September 30, 1996, First Liberty and
the Internal Revenue Service ("IRS") reached a settlement in
connection with the IRS's examination of First Liberty's federal
income tax returns for the tax years ended September 30, 1986
through 1989. The settlement is reflected in the financial
statements for the year ending September 30, 1996 and did not have
a material impact on the consolidated financial statements.
49
<PAGE> 50
Loans
- -----
The following table states the composition of Liberty Bank's loan portfolio
at the indicated dates (dollars in thousands).
<TABLE>
<CAPTION> SEPTEMBER 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential permanent
first mortgages:
Held-for-investment:
Fixed rate $ 47,098 6 $ 43,930 7 $ 48,396 10 $ 65,762 12 $ 95,945 17
Adjustable rate 95,907 13 113,601 17 77,407 15 48,964 9 63,598 12
-------- --- -------- --- -------- --- -------- --- -------- ---
143,005 19 157,531 24 125,803 25 114,726 21 159,543 29
-------- --- -------- --- -------- --- -------- --- -------- ---
Available-for-sale:
Fixed rate 25,637 3 21,307 3 8,005 2 60,398 11 60,656 11
Adjustable rate 1,269 1 975 - 1,978 - 9,649 2 8,074 2
-------- --- -------- --- -------- --- -------- --- -------- ---
26,906 4 22,282 3 9,983 2 70,047 13 68,730 13
-------- --- -------- --- -------- --- -------- --- -------- ---
Residential construction 88,416 12 69,579 11 53,167 11 43,533 8 36,918 7
Commercial construction 24,185 3 18,301 3 18,298 4 12,967 2 14,640 3
Commercial permanent (1) 44,797 6 60,730 9 78,036 15 89,889 17 96,084 17
-------- --- -------- --- -------- --- -------- --- -------- ---
157,398 21 148,610 23 149,501 30 146,389 27 147,642 27
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer (2) 237,398 31 195,353 30 156,112 31 157,420 29 118,600 22
Commercial (3) 190,988 25 131,963 20 61,579 12 53,097 10 49,063 9
-------- --- -------- --- -------- --- -------- --- -------- ---
428,386 56 327,316 50 217,691 43 210,517 39 167,663 31
-------- --- -------- --- -------- --- -------- --- -------- ---
755,695 100% 655,739 100% 502,978 100% 541,679 100% 543,578 100%
=== === === === ===
Allowance for estimated (8,611) (7,816) (5,680) (6,141) (5,641)
-------- -------- -------- -------- --------
losses
Total $747,084 $647,923 $497,298 $535,538 $537,937
======== ======== ======== ======== ========
</TABLE>
(1) Includes construction loans converted to permanent loans.
(2) Includes consumer mortgage loans (such as second mortgage loans and
home equity lines of credit).
(3) Includes commercial business loans collateralized by mortgages.
50
<PAGE> 51
During 1996, the commercial loan portfolio increased by $59
million, or 45%, as a part of Liberty Bank's strategic plan to
emphasize commercial loans as a targeted line. Management would
anticipate a continued expansion of commercial loans in 1997, but
at a slower rate of growth.
The following table sets forth the scheduled contractual repayments
of Liberty Bank's construction and commercial business loans at
September 30, 1996. Adjustable rate loans are included in their
respective principal repayment date categories (dollars in
thousands).
Construction Commercial
------------ ----------
Amounts due:
Within 1 year (1) $ 94,171 $ 77,557
After 1 year through 5 years 18,082 89,575
After 5 years 348 23,856
-------- --------
$112,601 $190,988
======== ========
(1) Includes demand loans, loans having no stated schedule of
repayment and no stated maturity.
The following table summarizes the total amount of construction and
commercial loans at September 30, 1996 due after one year by fixed
and adjustable rates (dollars in thousands).
Fixed Adjustable
Rate Rate
--------- ------------
Construction $ 3,443 $14,987
Commercial 82,546 30,885
------- -------
$85,989 $45,872
======= =======
Investments and Mortgage-backed Securities
- ------------------------------------------
The following table summarizes securities available-for-sale
(dollars in thousands):
September 30,
-----------------------------
Types of Investments 1996 1995 1994
- -----------------------------------------------------------------------
Investment securities:
- ----------------------
U.S. government agencies $ 9,792 $ 14,591 $ 5,116
Investment grade corporate debt and
equity securities 4,666 4,394 4,079
Federal Home Loan Bank of Atlanta stock 9,733 9,733 9,733
Other 90 80 -
Mortgage-backed securities:
- ---------------------------
Federal National Mortgage Corporation 76,628 40,738 30,829
Federal Home Loan Mortgage Association 82,985 78,721 71,977
Government National Mortgage Association 2,376 2,835 3,212
Other 13,747 16,521 5,368
-------- -------- --------
Total securities available-for-sale $200,017 $167,613 $130,314
======== ======== ========
51
<PAGE> 52
The stated contractual maturities and weighted average yield of
securities available-for-sale at September 30, 1996 are as follows
(dollars in thousands):
1 year 5 years
1 year through through After
Types of Investment or less 5 years 10 years 10 years Total
- -----------------------------------------------------------------------
Investment securities:
- ----------------------
Federal Home Loan Bank
of Atlanta stock $ 9,733 $ - $ - $ - $ 9,733
Investment grade corporate
equity securities 4,666 - - - 4,666
U.S. government agencies 4,101 5,691 - - 9,792
Other 90 - - - 90
------- ------- ------- -------- -------
18,590 5,691 - - 24,281
------- ------- ------- -------- -------
Weighted average yield 6.60% 6.40% - - 6.55%
------- ------- ------- -------- -------
Mortgage-backed securities:
- ---------------------------
Federal National
Mortgage Association - 12,190 25,236 39,202 76,628
Federal Home Loan
Mortgage Corporation 2,211 11,333 11,380 58,061 82,985
Government National
Mortgage Association - - 454 1,922 2,376
Other - 1,121 - 12,626 13,747
------- ------- ------- -------- --------
2,211 24,644 37,070 111,811 175,736
------- ------- ------- -------- --------
Weighted average yield 5.29% 6.27% 6.84% 7.14% 6.93%
------- ------- ------- -------- --------
Total securities
available-for-sale $20,801 $30,335 $37,070 $111,811 $200,017
======= ======= ======= ======== ========
Weighted average yield 6.46% 6.29% 6.84% 7.14% 6.88%
======= ======= ======= ======== ========
Collateralized mortgage obligations of $124 million are included in
mortgage-backed securities and have anticipated weighted average
effective maturities of less than five years.
In the third quarter of fiscal 1996 First Liberty undertook a
portfolio investment strategy to address the need to proactively
manage several situations. Among the primary situations was that
the Federal Home Loan Bank of Atlanta ("FHLB") exercised their
legislative authority to force redemption of the Company's FHLB
stock in excess of required minimums. A forced redemption of FHLB
stock would result in the liquidation of a deferred tax liability
related to untaxed dividend income which would reduce future net
interest income. Additionally, Liberty Bank sought to reduce
interest rate risk due to declining interest rate environments.
The portfolio investment strategy implemented during 1996 involved
the purchase of $45 million in short term average life (one to two
years) collateralized mortgage obligations funded with adjustable
rate FHLB advances.
52
<PAGE> 53
Deposits
- --------
The following table sets forth the composition of deposits,
excluding accrued interest payable and discounts on deposits
acquired, by type of account and interest rate category at the
dates indicated (dollars in thousands):
September 30,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
% of % of % of
Type of Account Amount Total Amount Total Amount Total
- --------------- -------- ----- -------- ----- -------- -----
Total savings:
Regular (1) $ 46,409 6% $ 49,914 7% $ 41,320 8%
Money market (2) 70,268 9 70,098 10 57,648 10
-------- ----- -------- ----- -------- -----
Total savings 116,677 15 120,012 17 98,968 18
-------- ----- -------- ----- -------- -----
Demand deposits:
Consumer
Interest-earning (3) 84,718 11 81,005 11 59,945 11
Non-interest-earning 15,386 2 13,876 2 8,090 1
Commercial 67,982 9 51,787 7 25,049 4
Custodial accounts 12,969 2 11,344 2 14,410 3
-------- ----- -------- ----- -------- -----
Total demand deposits 181,055 24 158,012 22 107,494 19
-------- ----- -------- ----- -------- -----
Time deposits:
1.00%-3.00% 203 - 812 - 112 -
3.01%-5.00% 37,508 5 54,435 8 235,412 42
5.01%-7.00% 416,239 55 360,899 50 97,170 17
7.01%-9.00% 7,355 1 23,112 3 20,510 4
9.01%-11.00% 1,457 - 1,944 - 1,947 -
11.01%-13.00% - - - - 3 -
-------- ----- -------- ----- -------- -----
Total time deposits 462,762 61 441,202 61 355,154 63
-------- ----- -------- ----- -------- -----
Total deposits $760,494 100% $719,226 100% $561,616 100%
======== ===== ======== ===== ======== =====
Weighted average rate
at year end 4.32% 4.49% 3.84%
======== ======== ========
Contractual maturities
of time deposits:
Within 1 year $340,126 $257,701 $180,403
1 to 5 years 122,636 183,473 174,751
over 5 years - 28 -
-------- -------- --------
$462,762 $441,202 $355,154
======== ======== ========
(1) The range of nominal interest rates was 2.00% to 3.25% at
September 30, 1996, 2.50 to 3.50% at September 30, 1995 and
3.00% at September 30, 1994.
(2) The range of nominal interest rates was 2.45% to 4.00% at
September 30, 1996 and 2.45% to 3.75% at September 30, 1995
and 1994.
(3) The range of nominal interest rates was 1.75% to 3.25% at
September 30, 1996, 2.40% to 3.25% at September 30, 1995 and
2.50% to 2.95% at September 30, 1994.
53
<PAGE> 54
As of September 30, 1996 the amount and remaining term to maturity
for time deposits in the amount of $100,000 or greater is as
follows; approximately $30.1 million in three months or less,
approximately $19.4 million in over three months through six
months, approximately $23.7 million in over six months through
twelve months, and approximately $11.6 million in over twelve
months.
Included in total deposits are accounts having balances in excess
of $100,000 totalling approximately $136 million, $103 million and
$60.2 million at September 30, 1996, 1995 and 1994, respectively.
Certain deposits are collateralized by mortgage-backed and
investment securities aggregating approximately $26.7 million and
$19.5 million at September 30, 1996 and 1995, respectively.
In the second quarter of fiscal 1996, First Liberty began a
wholesale and brokered certificate of deposit program as part of
their overall funding strategy. Since 1995 brokered deposits have
grown to $16.0 million and wholesale deposits have grown to $20.9
million. These deposits represent 4.9% of total deposits. The
wholesale and brokered program provides a source of funds that can
be utilized as an attractive alternative to other borrowing lines
and competitive deposit pricing.
Borrowings
- ----------
The following table sets forth the outstanding, maximum month-end
and average balances of FHLB advances and the associated weighted
average interest rates at the dates indicated (dollars in
thousands).
September 30,
--------------------------------
1996 1995 1994
-------- -------- --------
Outstanding balance, end of period $184,660 $ 88,500 $ 50,250
Maximum month end balance 184,660 107,500 83,250
Average balance 106,047 62,091 57,809
Weighted average interest rate,
end of period 5.45% 6.14% 6.16%
Weighted average interest rate,
during the period 5.71% 6.07% 5.52%
Advances from the FHLB are collateralized by residential first
mortgage loans and mortgage-backed and government agency securities
with unpaid principal balances aggregating approximately $195
million, $140 million and $88 million at September 30, 1996, 1995
and 1994, respectively. At September 30, 1996, Liberty Bank was
required to collateralize its advances with acceptable collateral
with a lendable collateral value equal to 100% of advances
outstanding. The lendable collateral value of the residential
first mortgage loans and mortgage-backed securities pledged to the
54
<PAGE> 55
advances was 85% and 90% of their fair market value, respectively.
During 1996 the FHLB of Atlanta imposed a maximum investment in its
capital stock equal to $500,000 over the required minimum. During
the quarter ended September 30, 1996, Liberty Bank increased its
advances from the FHLB of Atlanta to avoid a forced redemption of
its excess FHLB of Atlanta stock.
Recently Issued Accounting Standards
- ------------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No. 125
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial-
components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS
No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December
31, 1996, and is to be applied prospectively. Management is
currently reviewing the provisions of SFAS No. 125 and does not
believe that the Company's financial statements will be materially
negatively impacted by the adoption.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used at the entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. If the future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition are
less than the carrying amount of the asset, an impairment loss is
recognized. Otherwise, an impairment loss is not recognized. This
statement also requires that long-lived assets and certain
intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for assets that are
covered by Accounting Principles Board Opinion No. 30 "Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". Assets that are covered by
Opinion No. 30 will continue to be reported at the lower of
carrying amount or net realizable value. SFAS No. 121 is effective
for the Company beginning October 1, 1996. Management believes that the
adoption of SFAS No. 121 will not have a material impact on the Company's
financial statements.
55
<PAGE> 56
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 establishes accounting and
reporting standards for stock-based employee compensation plans
including stock purchase plans, stock options, restricted stock and
stock appreciation rights. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure
compensation cost using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued To Employees". Entities electing
to remain with the accounting in Opinion No. 25 must make pro forma
disclosures of net income and earnings per share as if the fair
value method of accounting defined in SFAS No. 123 had been
applied. SFAS No. 123 is effective for the Company for the year
ending September 30, 1997. As such, SFAS No. 123 was adopted
effective October 1, 1996 for disclosure purposes only and did not
impact the Company's financial position or results of operations.
Liquidity and Capital Resources
- -------------------------------
First Liberty's primary sources of funds are deposits, loan
repayments, sales and maturities of securities, loan sales,
repurchase agreements, advances from the FHLB of Atlanta and
various other borrowings. Deposits provide a source of funds that
are highly dependent on market and other conditions, while loan
repayments are a relatively stable source of funds.
The liquidity of First Liberty's operation is measured by the ratio
of cash and short-term investments (as defined by federal
regulations) to the sum of withdrawable deposits and borrowings
maturing within one year. Federal regulations currently require
institutions to maintain a liquidity ratio of at least 5%. Liberty
Bank met its liquidity requirement at September 30, 1996.
The Office of Thrift Supervision ("OTS") capital regulations
include a core capital requirement, a tangible capital requirement
and a risk-based capital requirement. Subject to certain
exceptions, each of these capital standards must be no less
stringent than the capital standards applicable to national banks,
although the risk-based capital requirement for savings
institutions may deviate from the risk-based capital standards
applicable to national banks to reflect interest rate risk or other
risks if the deviations in the aggregate do not result in
materially lower levels of capital being required of savings
institutions than would be required of national banks.
The following table reflects Liberty Bank's compliance with its
regulatory capital requirements at September 30, 1996 (dollars in
thousands):
56
<PAGE> 57
Actual Required Excess
-------------- -------------- --------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
Core capital $62,673 5.89 $31,915 3.00 $30,758 2.89
Tangible capital 61,003 5.74 15,933 1.50 45,070 4.24
Risk-based capital 82,676 10.75 61,520 8.00 21,156 2.75
The Federal Deposit Insurance Corporation Improvement Act of 1991
establishes five classifications for institutions based upon the
capital requirements. Each appropriate federal banking agency,
such as the OTS for Liberty Bank, must establish by regulation the
parameters of each such classification. Based on final regulations
promulgated by the OTS, Liberty Bank is considered well
capitalized. Failure to maintain that status could result in
greater regulatory oversight or restrictions on Liberty Bank's
activities.
Liberty Bank is prohibited from declaring or paying cash dividends
on its common stock if the payment thereof would cause a reduction
in its regulatory capital below either the liquidation account or
the capital requirements set by the OTS or, without the prior
approval of the OTS, if the amount of dividends to be paid in any
year would exceed 50% of its net income for the fiscal year in
which the dividend is declared (except that permitted dividends may
be deferred and paid in a subsequent year). No dividends were
declared during fiscal 1994 and 1996. During fiscal 1995 Liberty
Bank declared and paid dividends to First Liberty in the amounts of
$6.3 million and $3.2 million, respectively. Liberty Bank paid
dividends in the amount of $3.6 million to First Liberty during
fiscal 1996.
57
<PAGE> 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Page
----
Report of Independent Accountants.......................... 59
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1995.............................. 60
Consolidated Statements of Income for each of the three
years in the period ended September 30, 1996............. 61
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1996... 63
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1996............. 64
Notes to Consolidated Financial Statements................. 67
58
<PAGE> 59
Coopers & Lybrand L.L.P.
1100 Campanile Building
1155 Peachtree Street
Atlanta, GA 30309-3630
Report of Independent Accountants
---------------------------------
The Board of Directors
First Liberty Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of First Liberty Financial Corp. and Subsidiaries as of September
30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
First Liberty Financial Corp. and Subsidiaries as of September 30, 1996 and
1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 1996 in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 6 to the consolidated financial statements,
the Company changed its method of accounting for impaired loans and mortgage
servicing rights in 1996.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
November 5, 1996, except as to the information presented in the first
paragraph of Note 3, for which the date is November 15, 1996.
59
<PAGE> 60
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Financial Condition
- ----------------------------------------------
September 30,
--------------------------------
1996 1995
- -----------------------------------------------------------------------------
(Dollars in Thousands)
Assets:
- -------
Cash and due from banks $ 37,925 $ 24,610
Federal funds sold and repurchase agreements 29,707 22,652
Securities available-for-sale, at market value 200,017 167,613
Loans available-for-sale, net, at market value 26,906 22,282
Loans, net 720,178 625,641
Accrued interest receivable 7,312 6,406
Premises and equipment, net 22,151 22,194
Real estate, net 2,512 4,053
Intangible assets 10,211 11,315
Mortgage servicing rights 6,132 2,076
Advances to attorneys for loans originated 1,729 3,220
Deferred federal income taxes 450 -
Other assets 5,961 7,212
---------- --------
Total assets $1,071,191 $919,274
========== ========
Liabilities and Stockholders' Equity:
- -------------------------------------
Deposits:
Noninterest-bearing demand $ 81,139 $ 63,323
Interest-bearing demand 99,916 94,689
Savings 116,677 120,012
Time 462,762 441,202
---------- --------
Total deposits 760,494 719,226
Notes payable and other borrowed money 184,660 88,500
Subordinated debentures 12,155 12,501
Securities sold under agreements to repurchase 16,644 4,315
Checks payable on loans originated 4,450 7,119
Deferred federal income taxes - 1,264
Other liabilities 16,338 15,680
---------- --------
Total liabilities 994,741 848,605
---------- --------
Commitments and contingencies - -
Stockholders' equity:
Series B, 6.00% Cumulative Convertible
Preferred stock ($25.00 stated value,
302,580 shares authorized, issued
and outstanding) 7,564 7,564
Common stock ($1.00 par value, 37,500,000
shares authorized, 6,103,452 and 5,973,924
shares issued, respectively, and 6,069,942 and
5,940,414 shares outstanding, respectively) 6,104 5,974
Additional paid-in capital 26,132 25,376
Retained earnings 36,804 31,593
Net unrealized gain on securities available-
for-sale, net of taxes 115 431
Treasury stock at cost (33,510 shares) (269) (269)
---------- --------
Total stockholders' equity 76,450 70,669
---------- --------
Total liabilities and stockholders' equity $1,071,191 $919,274
========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
60
<PAGE> 61
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Income
- ---------------------------------
Years Ended September 30,
------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
(Dollars in Thousands)
Interest Income:
- ----------------
Loans $62,021 $49,990 $41,827
Securities 12,263 10,957 6,481
Federal funds sold and
repurchase agreements 671 466 254
Other interest income 127 77 -
------- ------- -------
Total interest income 75,082 61,490 48,562
------- ------- -------
Interest Expense:
- -----------------
Deposits 31,881 26,167 19,796
Short-term borrowings 6,108 3,785 1,470
Long-term borrowings 2,823 2,781 3,851
------- ------- -------
Total interest expense 40,812 32,733 25,117
------- ------- -------
Net interest income 34,270 28,757 23,445
Provision for estimated
losses on loans 1,788 1,440 1,500
------- ------- -------
Net interest income after
provision for estimated
losses on loans 32,482 27,317 21,945
------- ------- -------
Noninterest Income:
- -------------------
Loan servicing fees 2,354 2,398 2,870
Gain on sale of
investment securities 11 34 -
Gain (loss) on sale of loans
and mortgage-backed securities 1,770 (207) 461
Gain on sale of servicing 790 2,353 3,367
Deposit account service charges 4,509 3,491 2,859
Other income 673 716 708
------- ------- -------
Total noninterest income 10,107 8,785 10,265
------- ------- -------
42,589 36,102 32,210
------- ------- -------
Noninterest Expense:
- --------------------
Compensation, taxes and benefits 14,449 12,442 11,960
Occupancy and equipment 3,499 2,965 2,765
Advertising 904 856 854
Professional fees 820 765 815
Data processing 772 718 655
Federal deposit insurance premiums 5,019 1,740 1,551
Amortization of intangible assets 1,113 729 375
Net cost of operation of other
real estate 229 370 1,080
Other expenses 4,112 4,239 3,356
------- ------- -------
Total noninterest expense 30,917 24,824 23,411
------- ------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
61
<PAGE> 62
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Income, continued
- --------------------------------------------
Years Ended September 30,
----------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Income before income tax expense 11,672 11,278 8,799
-------- -------- --------
Income Tax Expense(Benefit):
- ----------------------------
Current 5,858 3,394 2,557
Deferred (1,956) (187) 193
-------- -------- --------
3,902 3,207 2,750
-------- -------- --------
Net income 7,770 8,071 6,049
Dividends on preferred stock 454 864 891
-------- -------- --------
Net income applicable to common
stockholders $ 7,316 $ 7,207 $ 5,158
======== ======== ========
Earnings Per Common Share:
- --------------------------
Primary $ 1.21 $ 1.48 $ 1.11
Fully diluted $ 1.17 $ 1.29 $ 1.00
Dividends Per Common Share: $ .34 $ .28 $ .21
- ---------------------------
Average Number of Shares
- ------------------------
Outstanding:
------------
Primary 6,056,372 4,843,047 4,633,242
Fully diluted 6,672,680 6,307,338 6,074,234
The accompanying notes are an integral part of the consolidated financial
statements.
62
<PAGE> 63
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Stockholders' Equity
- -----------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION> Obligations
Under
Employee
Additional Net Unrealized Stock Total
Preferred Common Paid-in Retained Gain(Loss) on Treasury Ownership Stockholders'
Stock Stock Capital Earnings Securities Stock Plan Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1993 $ 11,500 $ 4,547 $ 15,209 $ 22,083 $ 998 $ (269) $ (184) $ 53,884
Series A, 7.75% Cumulative Convertible Preferred
stock dividends declared, $1.94 per share - - - (891) - - - (891)
Common stock dividends declared, $0.21 per share - - - (963) - - - (963)
Repayment of obligations under Employee
Stock Ownership Plan - - - - - - 184 184
Net unrealized loss on securities available-
for-sale, net of taxes - - - - (1,872) - - (1,872)
Net income - - - 6,049 - - - 6,049
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1994 11,500 4,547 15,209 26,278 (874) (269) - 56,391
Series B, 6.00% Cumulative Convertible Preferred
stock issued-$25.00 stated value-302,580 shares7,564 - (545) - - - - 7,019
Series A, 7.75% Cumulative Convertible Preferred
stock dividends declared, $1.45 per share - - - (669) - - - (669)
Series B, 6.00% Cumulative Convertible Preferred
stock dividends declared, $0.64 per share - - - (195) - - - (195)
Common stock dividends declared, $0.28 per share - - - (1,417) - - - (1,417)
Conversion of 457,463 shares of Series A, 7.75%
Cumulative Convertible Preferred stock into 1,372,389
shares of Common stock, and 2, 537 shares
redeemed for $26.20 per share (11,500) 1,371 10,519 (456) - - - (66)
Common stock issued for exercise
of stock options - 55,500 shares - 56 193 (19) - - - 230
Net unrealized gain on securities available-
for-sale, net of taxes - - - - 1,305 - - 1,305
Net income - - - 8,071 - - - 8,071
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1995 7,564 5,974 25,376 31,593 431 (269) - 70,669
Series B, 6.00% Cumulative Convertible Preferred
stock dividends declared, $0.64 per share - - - (454) - - - (454)
Common stock dividends declared, $0.34 per share - - - (2,076) - - - (2,076)
Conversion of $602,000 in 8.25% Convertible
Debentures into 55,261 shares of Common stock - 55 536 (2) - - - 589
Common stock issued for exercise
of stock options - 74,400 shares - 75 220 (25) - - - 270
Dividends paid for fractional shares in three-for-
two stock split effective October 1, 1996 - - - (2) - - - (2)
Net unrealized loss on securities available-
for-sale, net of taxes - - - - (316) - - (316)
Net income - - - 7,770 - - - 7,770
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1996 $ 7,564 $ 6,104 $ 26,132 $ 36,804 $ 115 $ (269) $ - $ 76,450
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
63
<PAGE> 64
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------
Years Ended September 30,
---------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
Operating Activities: (Dollars in Thousands)
- ---------------------
Cash flows from operating
activities:
Net income $ 7,770 $ 8,071 $ 6,049
Adjustments to reconcile
net income to cash provided
by(used in) operations:
Depreciation 1,936 1,727 1,618
Deferred income tax expense
(benefit) (1,956) (187) 193
Amortization of loan fees
(costs), net 113 (623) (776)
Provision for estimated
losses on loans and real
estate 2,201 1,947 2,597
Amortization of intangibles 1,113 729 375
Dividends received on stock (272) (254) (416)
Loss(gain) on sales of loans,
mortgage-backed and
investment securities (1,781) 173 (461)
Loans available-for-sale:
Disbursements (140,618) (57,020) (160,060)
Purchases (228,087) (69,590) (190,758)
Sales 365,341 113,053 402,506
Repayments 600 791 8,079
Increase in accrued
interest receivable (906) (1,475) (431)
Increase(decrease) in accrued
interest payable 33 170 (26)
Other, net (2,750) 9,328 (1,399)
---------- ---------- ----------
Total adjustments (5,033) (1,231) 61,041
---------- ---------- ----------
Net cash provided by
operating activities 2,737 6,840 67,090
---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
64
<PAGE> 65
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Cash Flows, continued
- ------------------------------------------------
Years Ended September 30,
---------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
Investing Activities: (Dollars in Thousands)
- ---------------------
Cash flows from investing
activities:
Net increase in federal funds sold
and repurchase agreements (7,055) (15,917) (3,309)
Investment securities available-
for-sale:
Purchases (10) (11,211) (5,176)
Sales 819 30,960 74
Maturities 4,000 3,000 2,843
Mortgage-backed securities
available-for-sale:
Purchases (77,187) (64,450) (59,864)
Sales 2,763 19,478 6,205
Principal repayments 36,959 23,041 33,891
Net increase in loans (97,754) (76,552) (19,800)
Purchases of premises
and equipment (1,899) (1,447) (1,743)
Proceeds from sales of real estate 3,714 1,612 1,821
Net decrease(increase) in advances to
attorneys for loans originated 1,491 (1,956) 17,448
Cash received in acquisitions,net - 86,220 -
--------- --------- ---------
Net cash used in
investing activities (134,159) (7,222) (27,610)
--------- --------- ---------
Financing Activities:
- ---------------------
Cash flows from financing
activities:
Net increase(decrease) in
deposits 41,122 (33,300) 15,656
Notes payable and other borrowed
money:
Proceeds 605,762 380,000 176,000
Repayments (509,602) (342,415) (197,008)
Net increase(decrease) in
securities sold under agreements
to repurchase 12,329 2,655 (6,814)
Net increase(decrease) in checks
payable on loans originated (2,669) 3,295 (22,422)
The accompanying notes are an integral part of the consolidated financial
statements.
65
<PAGE> 66
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Cash Flows, continued
- ------------------------------------------------
Years Ended September 30,
----------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
(Dollars in Thousands)
Redemption of preferred stock - (66) -
Issuance of common stock 270 230 -
Dividends paid on stock (2,475) (1,700) (2,077)
--------- --------- ---------
Net cash provided by(used in)
financing activities 144,737 8,699 (36,665)
--------- --------- ---------
Net increase in
cash and due from banks 13,315 8,317 2,815
Cash and due from banks
beginning of period 24,610 16,293 13,478
--------- --------- ---------
Cash and due from banks
end of period $ 37,925 $ 24,610 $ 16,293
======== ======== ========
Supplemental Disclosures of
- ---------------------------
Cash Flow Information:
----------------------
Cash paid during the year for:
Interest $ 40,780 $ 32,564 $ 25,144
Income taxes 5,687 2,665 3,688
Noncash Investing and Financing
Activities:
Real estate foreclosed $ 2,028 $ 1,462 $ 1,492
Financing of sales of foreclosed
real estate 350 3,678 3,339
Conversion of mortgage loans into
mortgage-backed securities - - 596
Dividends declared but not paid
on preferred stock 114 66 -
Dividends declared but not paid
on common stock 524 515 -
Acquisitions:
Fair value of assets acquired - $(113,176) -
Fair value of liabilities assumed - 199,396 -
---------
Net cash received - $ 86,220 -
=========
The accompanying notes are an integral part of the consolidated financial
statements.
66
<PAGE> 67
First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Notes to Consolidated Financial Statements
- ------------------------------------------
1. Summary of Significant Accounting Policies
- ----------------------------------------------
Description of Business
- -----------------------
First Liberty Financial Corp. ("First Liberty") is a savings and loan holding
company which owns and operates First Liberty Bank ("Liberty Bank") and its
wholly-owned subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage")
and NewSouth Financial Services, Inc. ("NewSouth"). Liberty Bank operates as
a system of community banks throughout Georgia. Liberty Mortgage originates
first mortgage loans throughout Georgia and the southeastern states.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of First Liberty
and its wholly-owned subsidiaries, Liberty Bank and Liberty Mortgage
(collectively known as "the Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the
statement of financial condition caption "Cash and Due From Banks."
Debt and Equity Securities
- --------------------------
Held-to-maturity securities are debt and equity securities that the Company
has the positive intent and ability to hold to maturity. Held-to-maturity
securities are reported at amortized cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method
over the period to maturity.
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 that are not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale and
represent those securities intended to be held for an indefinite period of
time, including securities that management intends to use as part of its
asset/liability strategy, or that may be sold in response to interest rates,
change in prepayment risk, the need to increase regulatory capital or other
similar factors. Available-for-sale securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity until realized. This amount is
reported net of income taxes. As of September 30, 1996 and 1995, the
Company's entire portfolio of debt and equity securities was classified as
67
<PAGE> 68
available-for-sale.
Gains or losses on sales of securities are determined based upon the specific
identification method.
Loans Available-for-Sale
- ------------------------
Loans available for sale are stated at the lower of cost or market and gains
and losses on sales of first mortgage loans are recognized at the time of
sale. Gains and losses are determined as the difference between the net
sales proceeds (including fees paid to the Company to release servicing
rights) and the book value of the loans or securities sold, as adjusted by
the estimated present value associated with excess or deficient servicing
fees. The present value of excess and deficient servicing fees is amortized
on the level-yield method over the estimated lives of the related loans.
Loans
- -----
Loans are generally recorded at the contractual amounts owed by borrowers,
less unearned discounts, deferred origination fees, the undisbursed portion
of any loans in process, and the allowance for loan losses. Interest on
loans is credited to income as earned to the extent it is deemed collectible.
Discounts on loans purchased are accreted into interest income using the
level-yield method over the contractual lives of the loans, adjusted for
actual prepayments.
Loans which are delinquent 90 days (four payments) or over generally are
placed on non-accrual status unless the collectibility of principal and
accrued interest is assured beyond a reasonable doubt. In some cases, loans
less than 90 days (four payments) delinquent are placed on non-accrual where
material uncertainty exists as to their collectibility. When loans are
placed on non-accrual, all previously accrued interest is charged against
interest income and further accruals are discontinued, unless a part of the
previously accrued interest is considered collectible beyond a reasonable
doubt. In such cases, the amount of accrued interest considered collectible
is not charged off.
Allowance for Estimated Loan Losses
- -----------------------------------
On October 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a
Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures, an Amendment of SFAS No. 114".
Under these new standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement.
The Company uses several factors in determining if a loan is impaired under
SFAS No. 114. Quarterly asset classification procedures generally include a
review of significant loans and lending data, including loan payment status
and borrowers' financial data and operation factors, such as cash flows and
68
<PAGE> 69
operating income or loss. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at the
historical effective interest rate of the loan, except that collateral
dependent loans are measured for impairment at the fair value of the
collateral. The adoption of SFAS No. 114 resulted in no additional provision
for loan losses at October 1, 1995.
The allowance for estimated loan losses is established and maintained through
a periodic review and evaluation of various factors which affect the loans'
collectibility and results in provisions for loan losses which are charged to
expense. Numerous factors are considered in the evaluation including: (1)
a review of certain borrowers' current financial status, credit standing, and
available collateral; (2) historical loan loss experience in relation to
outstanding loans; (3) the diversification and size of the loan portfolio;
(4) the results of the most recent regulatory examinations available to the
Company; (5) the overall loan portfolio quality; (6) management's judgement
regarding prevailing and anticipated economic conditions; and (7) other
relevant factors.
Mortgage Servicing Rights
- -------------------------
The Company adopted SFAS No. 122 "Accounting for Mortgage Servicing Rights",
effective October 1, 1995. SFAS No. 122 requires that the right to service
mortgage loans for others be recognized as an asset, whether that servicing
right is acquired or originated. The total cost of mortgage loans sold or
securitized is allocated to the loans and to the mortgage servicing rights
based upon their relative fair values. Mortgage servicing rights are
amortized using a method approximating the level-yield method over
management's best estimate of the remaining loan lives.
When loans sold have an average contractual interest rate, adjusted for
normal servicing fees, that differs from the agreed yield to the purchaser,
gains or losses are recognized equal to the present value of such
differential over the estimated remaining life of such loans. The resulting
"excess (deficient) servicing fees receivable (payable)" is amortized over
the estimated life using a method approximating the level-yield method over
management's best estimate of the remaining loan lives.
The carrying value of mortgage servicing rights, and the excess (deficient)
servicing fees receivable (payable) are evaluated for impairment based on
their fair value. Fair values of servicing rights are determined by
estimating the present value of future net servicing income considering the
average interest rate and the average remaining lives of the related loans
being serviced. The Company evaluates the carrying value of its excess
(deficient) servicing fee receivable (payable) by determining the present
value of the amount by which the actual monthly servicing fees collected
exceed "normal" servicing fees. Periodically, the Company uses an
independent party to evaluate the present value of its portfolio of mortgage
servicing. Both evaluations are principally determined using discounted cash
flows of disaggregated groups of mortgage servicing rights.
69
<PAGE> 70
Loan Fees and Origination Costs
- -------------------------------
Loan origination fees, commitment fees, and certain direct loan origination
costs are deferred and recognized over the lives of the related loans as an
adjustment of the loans' yields using the level-yield method. Calculation of
the level-yield is based upon weighted average contractual payment terms
which are adjusted for actual prepayments.
Financial Options and Commitments Transactions
- ----------------------------------------------
Fees paid to purchase rights to sell loans at future dates at specified
prices ("options") and commitment fees paid to secure markets to sell first
mortgage loans are deferred and amortized over the term of the commitment.
Upon determination that commitments will not be utilized, the related fees
are charged to expense.
Securities Sold Under Agreements to Repurchase
- ----------------------------------------------
The Company enters into sales of securities under agreements to repurchase
identical or substantially similar securities in the future ("repurchase
agreements"). Obligations under repurchase agreements are reflected as
liabilities and securities sold continue to be reflected as assets in the
financial statements. All repurchase agreements mature within one year.
Premises and Equipment
- ----------------------
Premises and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated
useful lives of the related assets (33 to 40 years for buildings and 3 to 10
years for equipment). Expenditures for maintenance and repairs are charged
against earnings as incurred. Costs of major additions and improvements are
capitalized. Upon disposition or retirement of property, the cost and the
related accumulated depreciation are removed from the accounts. Any
resulting gain or loss is reflected in current income.
Real Estate
- -----------
Real estate is carried at the lower of fair value less estimated selling
costs or cost. Any write-down from the cost to fair value required at the
time of foreclosure is charged to the allowance for estimated loan losses.
Subsequent write-downs and gains or losses recognized on the sale of real
estate are included in non-interest income or expense.
Intangible Assets
- -----------------
Intangible assets are stated at cost less accumulated amortization and are
amortized over periods ranging from 10 to 25 years on the straight-line
basis. The recoverability of the intangible assets are reviewed periodically
to determine if adjustments to carrying value or amortization periods are
necessary. Accumulated amortization as of September 30, 1996 and 1995 was
$4.6 million and $3.5 million, respectively.
70
<PAGE> 71
Fair Value of Financial Instruments
- -----------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value. These fair values are provided for disclosure purposes only, and
do not impact carrying values of financial statement amounts.
Cash, Due From Banks and Federal Funds Sold and Repurchase Agreements.
----------------------------------------------------------------------
The carrying amount reported in the balance sheet for cash, due from
banks and federal funds sold approximates those assets' fair values.
Investment Securities (Including Mortgage-backed Securities). Fair
-------------------------------------------------------------
values for investment securities are based on quoted market prices where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans Receivable. For variable-rate loans held-for-investment, fair
-----------------
values are based on carrying values. The fair values for loans
available-for-sale are based on quoted market prices of similar loans
sold including the value of servicing rights. The fair values for all
other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Mortgage Servicing Rights and Excess Servicing Fees. The fair value is
----------------------------------------------------
estimated by discounting future cash flows from servicing fees using
discount rates that approximate current market rates.
Deposit Liabilities. The fair values disclosed for deposits (i.e.,
--------------------
interest and non-interest checking), regular savings, and money market
accounts are equal to the amount payable on demand at the reporting
date. Fair values for fixed-rate certificates are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated monthly
maturities on time deposits.
Short-term Borrowings. The carrying amounts of federal funds purchased,
----------------------
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
Long-term Borrowings. The fair values of the Company's long-term
---------------------
borrowings (other than deposits) are estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing
rates for similar types of borrowing agreements.
Subordinated Debt. The fair values of Liberty Bank's subordinated debt
------------------
is based on the optional redemption price of 102.0% at September 30,
1996 and 103.0% at September 30, 1995.
Off-balance-sheet Instruments. Liberty Bank has commitments to extend
------------------------------
standby letters of credit and to purchase and sell loans and mortgage-
backed securities. These types of credit are made at market rates;
71
<PAGE> 72
therefore, there would be no market risk associated with these credits
which would create a significant fair value liability.
Liberty Mortgage has commitments to originate loans for borrowers as
well as commitments to sell loans to investors. The fair value of
commitments to originate loans, on which a rate commitment has been
made, is based on current market value. On commitments to originate
loans, where no rate commitments have been made, fair value equals
carrying amount. The fair value of mandatory commitments to sell loans
is based on current market values. The fair value of optional
commitments to sell loans is based on carrying value. The carrying
value of optional commitments to sell loans equals the net notional
amount of optional commitments to sell and of optional commitments to
buy loans or mortgage-backed securities.
Advertising
- -----------
Advertising costs are expensed as incurred.
Income Taxes
- ------------
The Company follows the liability method of accounting for income taxes.
Deferred tax balances are regularly adjusted through the consolidated
statements of income to reflect current estimates of future taxes payable or
refundable. First Liberty files a consolidated income tax return; however,
income taxes are computed by each subsidiary on a separate basis, and taxes
currently payable are remitted to First Liberty.
Earnings Per Common Share
- -------------------------
Earnings per share are computed on the weighted average number of shares
outstanding including common stock equivalents, if dilutive. For computing
primary earnings per share, stock options exercisable at a price less than
average market price during the period are considered common stock
equivalents. Fully diluted earnings per share assumes: (i) the conversion,
if dilutive, of all convertible debt as of the beginning of the year (or date
of issue), with the elimination of the related interest expense net of
applicable income taxes, (ii) the exercise of all stock options below the
market price at September 30 or the average market price for the year, and
(iii) the conversion, if dilutive, of all convertible preferred stock as of
the beginning of the year (or date of issue), with the elimination of
dividends declared.
Reclassifications and Restatements
- ----------------------------------
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements to conform to the 1996 presentation.
All references to number of shares, per share amounts, stock option data and
market prices have been restated to give retroactive effect to the three-for-
two stock split in the form of a stock dividend effective on October 1, 1996.
72
<PAGE> 73
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures 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.
2. Recently Issued Accounting Standards
- ----------------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Management is currently reviewing the provisions of SFAS No.
125 and does not believe that the Company's financial statements will be
materially negatively impacted by the adoption.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used at the entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition are less than the
carrying amount of the asset, an impairment loss is recognized. Otherwise,
an impairment loss is not recognized. This statement also requires that
long-lived assets and certain intangibles to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell, except for
assets that are covered by Accounting Principles Board ("APB") Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". Assets that are covered by Opinion No. 30 will
continue to be reported at the lower of carrying amount or net realizable
value. SFAS No. 121 is effective for the Company beginning October 1, 1996.
Management believes that the adoption of SFAS No. 121 will not have a material
impact on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes accounting and reporting standards
for stock-based employee compensation plans including stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123
defines a fair value based method of accounting for an employee stock option
73
<PAGE> 74
or similar equity instrument and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued To Employees". Entities electing to remain with
the accounting in Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if the fair value method of accounting
defined in SFAS No. 123 had been applied. SFAS No. 123 is effective for the
Company for the year ending September 30, 1997. As such, SFAS No. 123 was
adopted effective October 1, 1996 for disclosure purposes only and did not
impact the Company's financial position or results of operations.
3. Acquisitions
- ----------------
On November 15, 1996, the Company acquired by merger Middle Georgia Bank
("MGB"). On the merger date MGB had total assets of approximately $129
million, total liabilities of $119 million and total stockholders' equity of
$10.1 million. This business combination has been accounted for utilizing
the pooling-of-interests method of accounting. The following table shows the
pro forma effect of the above transaction on results of operations for the
periods prior to the combination. The results listed are not necessarily
indicative of future operations and they exclude the pro forma effects of
prior year acquisitions accounted for under the purchase method (dollars in
thousands).
(Unaudited)
September 30,
--------------------------------------
1996 1995 1994
-------- -------- --------
Total Revenue:
--------------
First Liberty $85,189 $70,275 $58,827
MGB 10,664 10,081 8,184
Combined $95,853 $80,356 $67,011
Net Income:
-----------
First Liberty $ 7,770 $ 8,071 $ 6,049
MGB 1,167 1,274 1,151
Combined $ 8,937 $ 9,345 $ 7,200
Earnings Per Common Share:
--------------------------
First Liberty
Primary $ 1.21 $ 1.48 $ 1.11
Fully diluted 1.17 1.29 1.00
MGB
Primary 5.84 6.37 5.75
Fully diluted 5.84 6.37 5.75
Combined
Primary 1.20 1.42 1.09
Fully diluted 1.16 1.26 1.01
In September 1995, the Company acquired by merger Tifton Banks, Inc.
("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank & Trust
Company ("Tifton Bank"). Tifton Bank, on the date of acquisition, held the
following approximate balances: loans of $42 million, cash and investments
of $21 million, premises and equipment of $1 million and deposits of $45
million. Intangible assets resulting from the acquisition amounted to
approximately $2 million.
74
<PAGE> 75
In March 1995, the Company acquired three banking offices located in
Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets
acquired were approximately $3 million and total cash received and deposits
assumed were approximately $95 million. Intangible assets resulting from the
acquisition were approximately $4 million.
In December 1994, the Company acquired by merger Central Banking Company
("CBC") of Swainsboro, Georgia, and its subsidiary, The Central Bank ("The
Central Bank"). Central Bank on the date of acquisition, held the following
approximate balances: loans of $21 million, cash and investments of $34
million, premises and equipment of $1 million and deposits of $52 million.
Intangible assets resulting from the acquisition amounted to approximately $2
million.
The financial institutions acquired prior to 1996 were accounted for as
purchases and accordingly, income and expenses of such institutions are
included in the consolidated statements of the Company from the date of
acquisition.
The following table presents unaudited proforma results of operations for the
year ended September 30, 1995, after giving effect to the amortization of
intangibles and other proforma adjustments, as if the purchase acquisitions
previously discussed had occurred at the beginning of the 1995 period. The
proforma adjustments do not include any operating efficiencies which have
been realized in the combined operations. Accordingly, the proforma summary
information does not necessarily reflect the results of operations as they
actually would have been, if the acquisitions had occurred at the beginning
of the year presented (dollars and shares outstanding in thousands).
(Unaudited)
September 30,
---------------
1995
------
Net interest income before provision for
estimated losses on loans $31,674
Net income 8,309
Earnings Per Common Share:
--------------------------
Primary $ 1.45
Fully diluted 1.26
Average Shares Outstanding:
---------------------------
Primary 4,844
Fully diluted 6,617
75
<PAGE> 76
4. Securities Available-for-Sale
- ---------------------------------
Investment and mortgage-backed securities available-for-sale are summarized
as follows (dollars in thousands):
September 30,
---------------------------
1996 1995
------------- ------------
Investment Securities:
- ----------------------
U.S. government agencies $ 9,792 $ 14,591
Investment grade corporate
equity securities 4,666 4,394
Federal Home Loan Bank of
Atlanta stock 9,733 9,733
Other 90 80
Mortgage-backed Securities:
- ---------------------------
Federal National Mortgage
Association 76,628 40,738
Federal Home Loan
Mortgage Corporation 82,985 78,721
Government National Mortgage
Corporation 2,376 2,835
Other 13,747 16,521
-------- --------
$200,017 $167,613
======== ========
Mortgage-backed securities at September 30, 1996 and 199$124 million and
$85.3 million, respectively, of investments collateralized by mortgage
obligations and mortgage pass-through securities. Liberty Bank does not
invest in collateralized mortgage obligations which are considered "high
risk" as defined by the Federal Financial Institutions Examination Council
guidelines.
At September 30, 1996 and 1995, all mortgage-backed securities were
available-for-sale. Adjustable rate pass-through securities are
subject to interest rate adjustments indexed to the one year or
three year constant maturity treasury, the one to six month London
Inter-Bank Offered Rate, or the 11th District Cost of Funds Index.
At September 30, 1996, the Company had no open futures contracts or
option contracts as interest rate hedges related to investment or
mortgage-backed securities.
76
<PAGE> 77
The amortized cost and estimated market value of all investments in
debt and equity securities are summarized as follows (dollars in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
At September 30,1996: Cost Gains Losses Value
- --------------------- ----------- ------------ ------------ ------------
U.S. government agencies $ 9,824 $ 24 $ 56 $ 9,792
Investment grade corporate
equity securities 4,688 - 22 4,666
Federal Home Loan Bank
of Atlanta stock 9,733 - - 9,733
Other 90 - - 90
Mortgage-backed securities 175,508 1,073 845 175,736
-------- -------- -------- --------
$199,843 $ 1,097 $ 923 $200,017
======== ======== ======== ========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
At September 30,1995: Cost Gains Losses Value
- --------------------- ------------ ------------ ----------- ------------
U.S. government agencies $ 14,526 $ 94 $ 29 $ 14,591
Investment grade corporate
equity securities 4,416 - 22 4,394
Federal Home Loan Bank
of Atlanta stock 9,733 - - 9,733
Other 80 - - 80
Mortgage-backed securities 138,205 1,288 678 138,815
-------- -------- -------- --------
$166,960 $ 1,382 $ 729 $167,613
======== ======== ======== ========
The change to stockholders' equity for the net unrealized gain or
loss on debt and equity securities during fiscal 1996 was a net
loss of $316,000 (net of related tax benefit of $163,000) and a net
gain of $1.3 million (net of related taxes of $672,000) during
fiscal 1995.
The amortized cost and estimated market value of debt and equity
securities at September 30, 1996, by contractual maturity, are
shown below. Expected maturity will differ from contractual
maturities because borrowers may have the right to prepay
obligations with or without call or prepayment penalties (dollars
in thousands):
Estimated
Amortized Market
Cost Value
---------- ----------
Due in one year or less $ 8,887 $ 8,857
Due after one year through five years 5,715 5,691
-------- --------
14,602 14,548
Federal Home Loan Bank of Atlanta stock 9,733 9,733
Mortgage-backed securities 175,508 175,736
-------- --------
$199,843 $200,017
======== ========
77
<PAGE> 78
Proceeds, gross realized gains and losses on the sale of debt and
equity securities for the three years ended September 30, 1996 are
as follows (dollars in thousands):
September 30,
-------------------------------
1996 1995 1994
-------- ------- -------
Proceeds $ 3,581 $50,438 $ 6,279
Gross realized gains 13 255 13
Gross realized losses 2 74 20
5. Loans Available-for-Sale and Mortgage Banking Operations
- -----------------------------------------------------------
Loans originated for sale to the secondary market, principally
residential first mortgage loans, are typically sold within ninety
days of origination. The Company had commitments to originate or
purchase residential mortgage loans of approximately $76 million,
including $1.6 million to be held in Liberty Bank's portfolio and
$43 million on which the interest rate had not been locked-in at
September 30, 1996. Commitments to buy and sell, respectively,
residential mortgage loans and mortgage-backed securities for
mandatory delivery were approximately $500,000 and $43 million at
September 30, 1996. Also, at September 30, 1996, the Company
bought $2.0 million of optional commitments to sell residential
mortgage loans. The Company had no open futures contracts as
interest rate hedges related to loans available-for-sale or
commitments to originate residential mortgage loans at September
30, 1996.
The following summarizes the principal balance of whole loans and
participations which the Company was servicing for its portfolio
and investors (dollars in thousands):
September 30,
----------------------------------------
1996 1995 1994
------------ ------------- -------------
Loans serviced for investors $ 788,624 $ 617,549 $ 837,926
Loans sub-serviced for
others 2,324 2,744 57,857
Loans serviced for Liberty
Bank's portfolio 210,003 233,436 208,172
---------- ---------- ----------
Total loans serviced $1,000,951 $ 853,729 $1,103,955
========== ========== ==========
Number of loans serviced 13,873 12,326 15,142
========== ========== ==========
In connection with loans serviced, there were no off-balance sheet
escrow accounts.
78
<PAGE> 79
Changes in the amounts capitalized in connection with mortgage
servicing rights are as follows (dollars in thousands):
September 30,
----------------------------------
1996 1995 1994
----------- ---------- -----------
Balance, beginning of year $ 2,076 $ 2,915 $ 1,491
Capitalized 4,812 337 2,138
Sold (46) (692) (156)
Amortization (710) (484) (558)
------- ------- -------
Balance, end of year $ 6,132 $ 2,076 $ 2,915
======= ======= =======
The Company capitalized $1.8 million and amortized $151,000 in
originated mortgage servicing rights during fiscal 1996.
The following table summarizes the Company's financial data with
respect to its mortgage banking operations (dollars in thousands):
September 30,
--------------------------------
1996 1995 1994
--------- --------- ----------
Total revenues $ 7,743 $ 6,602 $ 9,222
Total expenses 5,212 4,575 5,354
------- ------- -------
Income before income taxes $ 2,531 $ 2,027 $ 3,868
======= ======= =======
Total assets $19,410 $19,884 $18,191
======= ======= =======
Depreciation expense $ 215 $ 193 $ 120
======= ======= =======
Capital expenditures for office
premises and equipment $ 146 $ 112 $ 356
======= ======= =======
6. Loans
- --------
Loans are summarized as follows (dollars in thousands):
September 30,
---------------------------
1996 1995
----------- -----------
Loans collateralized by real estate:
Residential first mortgage $ 143,005 $ 157,531
Commercial first mortgage 44,797 60,730
Consumer mortgage (1) 61,400 51,786
Construction loans:
Residential real estate 88,416 69,579
Commercial real estate 24,185 18,301
Commercial business 190,988 131,963
Consumer-indirect auto loans 154,869 123,750
Consumer-other loans 21,129 19,817
--------- ---------
728,789 633,457
Allowance for estimated losses (8,611) (7,816)
--------- ---------
$ 720,178 $ 625,641
========= =========
(1) Loans collateralized by the equity in the borrower's
residence.
The above balances exclude undisbursed loan commitments
representing loans in process and unused lines of credit amounting
to approximately $104 million and $80.1 million at September 30,
79
<PAGE> 80
1996 and 1995, respectively.
Liberty Bank's loans to one borrower ("LTOB") limitation is 15% of
unimpaired capital and surplus (as defined by the Office of
Comptroller of the Currency) unless the loans are collateralized by
readily marketable assets, in which case the limitation is 25%.
For loans in excess of this limitation, Liberty Bank is restricted
from extending additional credit and options to renew such credits
are limited. Liberty Bank's limitation at September 30, 1996 was
approximately $12.4 million based on the 15% limitation and $20.7
million based on the 25% limitation. At September 30, 1996,
Liberty Bank had no relationships in excess of the LTOB limitation.
Liberty Bank's aggregate investment in loans collateralized by non-
residential real estate may not exceed 400% of its risk-based
capital. Liberty Bank had excess capacity to originate loans
collateralized by non-residential real estate of approximately $167
million at September 30, 1996.
The Company's exposure to credit loss in the event of non-
performance by the borrower is represented by the outstanding
principal balance of the respective loans plus the amount of
undisbursed committed funds, if any. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if any, is based on management's credit
evaluation pursuant to the Company's lending and underwriting
policy. Collateral held varies but may include real estate and
improvements, inventory, accounts receivable and equipment or
personal property.
The loan portfolio does not contain any material concentrations of
credit risk within any one industry. Most credits are located
within Georgia, the Company's primary market area.
At September 30, 1996, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114
totaled $4.7 million, with a corresponding valuation allowance of
$1.9 million. For the period ended September 30, 1996, the average
recorded investment in impaired loans was approximately $3.9
million. Interest income recognized by the Company on impaired
loans, not placed on nonaccrual, (during the portion of the year
that they were impaired) was not significant.
All restructured loans were performing at September 30, 1996. The
average yield on restructured loans was 8.37% at that date and was
not materially below the market rate of interest for such loans.
The following table sets forth the interest income that would have
been recorded under the original terms and the actual interest
income recorded for nonaccrual and for troubled debts restructured
for the year ended September 30, 1996 (dollars in thousands).
80
<PAGE> 81
Troubled
Nonaccrual Debts
Loans Restructured
---------- ------------
Interest income that would have
been recorded under the original terms $ 334 $ 499
====== ======
Interest income recorded $ 165 $ 440
====== ======
7. Allowance for Estimated Loan Losses
- ---------------------------------------
Changes in the allowance for estimated loan losses for the three
years ended September 30, 1996 are as follows (dollars in
thousands):
September 30,
------------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of year $7,816 $5,680 $6,141
Provision for estimated losses 1,788 1,440 1,500
Acquisitions - 879 -
Charge-offs (2,460) (2,598) (4,279)
Recoveries 1,467 2,415 2,318
------ ------ ------
Balance end of year $8,611 $7,816 $5,680
====== ====== ======
8. Premises and Equipment
- --------------------------
Premises and equipment are summarized as follows (dollars in
thousands):
September 30,
---------------------
1996 1995
-------- --------
Land $ 3,602 $ 3,596
Office buildings 22,984 22,528
Furniture, fixtures and equipment 13,240 11,885
-------- --------
39,826 38,009
Less accumulated depreciation 17,675 15,815
-------- --------
$ 22,151 $ 22,194
======== ========
Certain office facilities are occupied under operating lease
arrangements with future annual rentals as follows (dollars in
thousands):
Year ended September 30,:
1997 $ 279
1998 281
1999 283
2000 281
2001 228
Thereafter 722
--------
$ 2,074
========
Total rent expense was approximately $452,000, $360,000, and
$256,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
81
<PAGE> 82
9. Real Estate
- ----------------
Investments in real estate are summarized as follows (dollars in
thousands):
September 30,
------------------------
1996 1995
---------- ----------
Acquired through foreclosure $ 2,751 $ 4,185
Allowance for estimated losses (382) (302)
-------- --------
2,369 3,883
-------- --------
Acquired for development 268 312
Allowance for estimated losses (125) (142)
-------- --------
143 170
-------- --------
$ 2,512 $ 4,053
======== ========
Sales of real estate owned (gross of gains and losses) during fiscal 1996 and
1995 were $4.2 million and $5.1 million, respectively, of which, Liberty Bank
provided financing for $350,000 and $3.7 million during the same periods.
Changes in the allowance for estimated losses on real estate for
the years ended September 30, 1996, 1995, and 1994 are as follows
(dollars in thousands):
September 30,
--------------------------------
1996 1995 1994
----------- ---------- ---------
Acquired through foreclosure:
- -----------------------------
Balance, beginning of year $ 302 $ 2,908 $ 2,277
Provision for estimated losses 413 507 1,097
Charge-offs, net (333) (3,113) (466)
------- ------- -------
Balance, end of year $ 382 $ 302 $ 2,908
======= ======= =======
Acquired for development:
- -------------------------
Balance, beginning of year $ 142 $ 158 $ 177
Charge-offs, net (17) (16) (19)
------- ------- -------
Balance, end of year $ 125 $ 142 $ 158
======= ======= =======
10. Notes Payable and Other Borrowed Money
- -------------------------------------------
Notes payable and other borrowed money are summarized as follows
(dollars in thousands):
September 30,
-------------------
1996 1995
-------- -------
Advances from the Federal Home
- ------------------------------
Loan Bank of Atlanta:
---------------------
Short term (interest rates ranging
from 5.42% to 6.05% and 5.91% to
to 8.95% at September 30, 1996 and
1995, respectively) $164,449 $80,500
Long term (interest rates
ranging from 4.64% to 7.14% and
5.05% to 5.09% at September 30,
1996 and 1995, respectively) 20,211 8,000
-------- -------
$184,660 $88,500
======== =======
82
<PAGE> 83
Liberty Bank's unused borrowing capacity with the Federal Home Loan
Bank ("FHLB") of Atlanta at September 30, 1996 was approximately
$32.4 million in advance and warehouse lines of credit.
Additionally, Liberty Bank has approximately $30.0 million in fed
fund lines with correspondent banks.
At September 30, 1996, contractual principal maturities of long-
term notes payable and other borrowed money are as follows (dollars
in thousands):
1997 $ -
1998 8,000
1999 10,000
2000 -
2001 -
2002 and thereafter 2,211
-------
$20,211
=======
The following table sets forth the outstanding, maximum month-end
and average balances of short-term FHLB advances and other short-
term borrowings and the associated weighted average interest rates
at the dates indicated (dollars in thousands).
September 30,
-------------------------------
1996 1995 1994
---------- --------- ----------
Outstanding balance, end of period $164,449 $ 80,500 $ 33,250
Maximum month end balance 164,449 92,500 47,250
Average balance outstanding
during the year 91,298 49,279 28,668
Weighted average interest rate,
end of period 5.50% 6.25% 5.91%
Weighted average interest rate,
during the period 5.81% 6.11% 4.48%
Advances from the FHLB of Atlanta are collateralized by residential
first mortgage loans and mortgage-backed and government agency
securities with unpaid principal balances aggregating approximately
$195 million and $140 million at September 30, 1996 and 1995,
respectively. At September 30, 1996, Liberty Bank was required to
collateralize its advances with acceptable collateral with a
lendable collateral value equal to 100% of advances outstanding.
The lendable collateral value of the residential first mortgage
loans and mortgage-backed securities pledged to the advances was
85% and 90% of their fair market value, respectively.
83
<PAGE> 84
11. Subordinated Debentures
- ----------------------------
Subordinated debentures are summarized as follows (dollars in
thousands):
September 30,
-------------------------------
1996 1995
------------- -------------
8 1/4% Convertible subordinated
debentures due August 1, 2005 $ 62 $ 664
11% Subordinated debentures
due August 1, 2004 16,116 16,116
8 1/4% Subordinated debentures
due August 1, 2004 379 379
---------- ----------
16,557 17,159
Discounts and capitalized
issuance costs (4,402) (4,658)
---------- ----------
$ 12,155 $ 12,501
========== ==========
Accretion of discounts and
amortization of issuance costs $ 244 $ 206
========== ==========
On September 5, 1996 the Company issued a redemption notice for the
Company's 8 1/4% convertible debentures due August 1, 2005. As of
September 30, 1996, $62,000 plus accrued interest was payable to
holders on the redemption date of October 7, 1996. The remaining
holders elected to convert into common stock at the conversion
price of $10.89 per share.
In 1991, the Company issued $16.2 million and $379,000 principal
amount of 11.00% and 8 1/4% subordinated debentures due August 1,
2004, respectively. Both of these issues are not convertible and
may be redeemed at the option of the Company, in whole or in part,
after August 1, 1993 at the principal amount plus accrued interest
and at a premium if redeemed before August 1, 1998. Periodic
interest and principal payments on the debentures are made directly
by Liberty Bank. The initial premium was 5.00% and declines
annually each August 1 beginning in 1994. The premium at September
30, 1996 was 2.00%. There is no mandatory redemption of these
debentures prior to maturity.
The following provisions apply to all subordinated debentures. The
indentures provide, among other things, that the Company will not
dispose of the capital stock of Liberty Bank nor will it permit
Liberty Bank to issue securities that are convertible into the
capital stock of Liberty Bank if the Company would own less than
80% of the outstanding shares of any voting class of stock. The
liability of the Company on the indebtedness is subordinated to all
senior indebtedness as defined in the indentures. At September 30,
1996, the Company had approximately $962 million of outstanding
indebtedness (including approximately $760 million in deposits)
that would constitute senior indebtedness under the indentures.
12. Securities Sold Under Agreements to Repurchase
- ---------------------------------------------------
Liberty Bank enters into financing arrangements with approved
brokers, dealers and individuals whereby securities are sold under
agreements to repurchase identical or substantially identical
84
<PAGE> 85
securities at a future date ("repurchase agreements"). These
arrangements are reflected as financing transactions in that the
securities sold are reported as assets in the accompanying
financial statements with the proceeds of sale reflected as
borrowings. These financing arrangements generally have maturities
ranging from 30 to 180 days. Generally, securities sold under
agreements to repurchase are under the control of the counterparty
during the term of the agreement. Selected data concerning
repurchase agreements is presented below (dollars in thousands).
September 30,
--------------------------------------
1996 1995 1994
----------- ----------- -----------
Mortgage-backed securities
sold under agreements to
repurchase at year end:
Book value $23,088 $ 4,287 $ 1,773
Market value $23,010 $ 4,344 $ 1,781
Obligations under repurchase
agreements at year end:
Identical securities $16,644 $ 4,315 $ 1,660
Maximum borrowings under
repurchase agreements for
the year:
Identical securities $29,402 $24,839 $ 9,493
Average borrowings under
repurchase agreements for
the year:
Identical securities $14,941 $ 9,463 $ 3,898
Weighted average interest
rate on repurchase
agreements at year end: 4.89% 6.07% 4.47%
13. Income Taxes
- -----------------
The Company files a consolidated federal income tax return. The
Company is allowed to determine its bad debt deductions for tax
purposes under either the percentage of taxable income method
(limited to 8% of taxable income before such deduction), or the
experience method. Generally, the experience method is based on
actual loss experience. For the tax years ended September 30, 1995
and 1994, Liberty Bank determined its bad debt reserve deduction
based on the actual loss experience method. For the tax year ended
September 30, 1996, Liberty Bank determined its bad debt reserve
deduction based on the percentage of taxable income method.
The provision for federal income taxes consists of the following
(dollars in thousands):
September 30,
----------------------------
1996 1995 1994
--------- --------- --------
Current $ 5,858 $ 3,394 $ 2,557
Deferred (1,956) (187) 193
------- ------- -------
Total $ 3,902 $ 3,207 $ 2,750
======= ======= =======
85
<PAGE> 86
Actual income taxes (including income tax (benefit) on
extraordinary items) differ from income taxes computed at the
federal corporate statutory rate of 34% as shown below:
September 30,
-------------------------------
1996 1995 1994
----------- --------- ---------
Statutory federal
income tax rate 34.7% 34.0% 34.0%
Bad debt deduction - (8.9) 2.2
Amortization of intangible assets 1.8 1.3 1.0
Tax exempt interest (.8) (.9) (1.6)
Other, net (2.3) 2.9 (4.3)
------ ------ ------
Effective federal income tax rate 33.4% 28.4% 31.3%
====== ====== ======
Deferred income taxes included in the consolidated statements of
financial condition is presented net. Gross deferred tax assets
and deferred tax liabilities as of September 30, 1996 and 1995 are
as follows (dollars in thousands):
September 30,
--------------------
1996 1995
--------- --------
Deferred Tax Assets:
- --------------------
Allowance for estimated loan losses $ 1,970 $ 1,652
Deferred loan fees 51 136
Real estate owned loss allowance 44 346
Reserve for uncollected late fees 89 102
Purchase accounting adjustments, net 155 211
Other reserves 236 249
Unrealized loss on securities available-
for-sale 91 248
SAIF recapitalization assessment 1,261 -
Other 359 283
------- -------
Total deferred tax assets 4,256 3,227
------- -------
Deferred Tax Liabilities:
- -------------------------
Section 481 mark-to-market adjustment 264 384
Depreciation 280 497
Cancellation of indebtedness 346 353
Loan swap 116 140
Loan discounts 437 466
FHLB stock 1,313 1,275
Loan origination fees 370 358
Purchase accounting adjustments, net 172 251
Unrealized gain on securities available-
for-sale 152 470
Other, net 356 297
------- -------
Total deferred tax liabilities 3,806 4,491
------- -------
Total net deferred tax asset(liability) $ 450 $(1,264)
======= =======
The Company's management has determined that it is more likely than
not that its net deferred tax asset will be realized. This is
based on the existence of taxable income in the form of future
reversals of existing taxable temporary differences and taxable
income in prior carryback years that is sufficient to allow
86
<PAGE> 87
realization of the tax benefit of the Company's existing deductible
temporary differences. The Company is not aware of any material
uncertainties existing at September 30, 1996 that may affect the
realization of the Company's deferred tax assets. The Company
evaluates the realizability of deferred tax assets quarterly by
assessing the need for a valuation allowance.
Earnings appropriated to bad debt reserves established for income
tax purposes cannot be used for any purpose other than to absorb
bad debt losses without recognition of taxable income. Dividends
may be paid out of unappropriated retained earnings without the
imposition of any tax to the extent that the amounts paid as
dividends do not exceed earnings and profits as calculated for
federal income tax purposes. The Company has a taxable temporary
difference relating to its bad debt reserves for which Liberty Bank
has not provided a deferred tax liability. The temporary
difference is the amount of the base year tax bad debt reserve
(i.e., tax bad debt reserves that arose in tax years beginning
before December 31, 1987). As of the year ended September 30,
1996, the cumulative amount of this temporary difference for which
the Company is not required to recognize a deferred tax liability
is approximately $12.0 million. The amount of the unrecognized
deferred tax liability related to this temporary difference is $4.2
million.
The Company's income tax returns are periodically examined by
various taxing authorities. During the fiscal year ended September
30, 1996, First Liberty and the Internal Revenue Service ("IRS")
reached a settlement in connection with the IRS's examination of
the Company's federal income tax returns for the tax years ended
September 30, 1986 through 1989. This settlement is reflected in
the financial statements for the year ending September 30, 1996 and
did not have a material impact on the consolidated financial
statements.
The Company and other financial institutions in Georgia are subject
to the same taxes, state and local, as any other corporation in
Georgia. The Georgia corporate income tax rate is 6% and is based
on federal taxable income, with certain adjustments. The primary
difference between taxable income for state and federal income tax
purposes is interest income on United States Government
obligations, which is not taxable for state income tax purposes.
14. Preferred Stock
- --------------------
In September 1995 and December 1994, in connection with the
respective acquisitions of Tifton and CBC, the Company issued $7.6
million in Series B 6.00% Cumulative Convertible Preferred ("Series
B") stock. The shares have a liquidation preference of $25.00 per
share. Dividends on the Series B stock are cumulative at an annual
rate of $1.50 per share and are payable quarterly. Each share of
the Series B stock is convertible at the option of the holder into
1.79 shares of common stock, at a conversion price of $14.00 per
share of common stock, subject to adjustment in certain
circumstances. The Company, at its option, may redeem the Series
87
<PAGE> 88
B stock at any time on or after January 1, 1997.
In July 1995 the Company redeemed 2,537 shares of its Series A
7.75% Cumulative Convertible Preferred (Series "A") stock for
$66,879, plus accrued and unpaid dividends. Each share of the
Series A was convertible into three shares of the Company's common
stock. The remaining 457,463 shares of the Series A stock were
converted into 1,372,389 shares of the Company's common stock on
that date.
Prior to July 1995, the Series A stock had a liquidation preference
of $25 per share. Dividends on the stock were cumulative at an
annual rate of $1.9375 per share and were payable quarterly. Each
share of Series A stock was convertible at the option of the holder
into three shares of common stock, at a conversion price of $8.33.
Dividends declared during 1996 and 1995 were $454,000 and $864,000,
respectively. Dividends paid during 1996 and 1995 were $406,000
and $798,000, respectively.
As required by APB Opinion No. 15, supplementary primary earnings
per share data is presented for each of the years effected in the
three-year period ended September 30, 1996. For the computation of
supplementary primary earnings per share, shares issued in July
1995 for the conversion of preferred stock originally issued in
February 1993, are included in the weighted average shares
outstanding from the beginning of each period and, accordingly, net
income has not been reduced by preferred dividends.
Supplementary primary earnings per share is as follows:
Years ended September 30,
----------------------------
1995 1994
------------ ------------
Net income per share of common stock $ 1.31 $ 1.01
Average number of shares outstanding 5,982,318 6,005,631
15. Regulatory Restrictions
- ----------------------------
Liberty Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The regulations
require Liberty Bank to meet specific capital adequacy guidelines
that involve quantitative measures of Liberty Bank's assets,
liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Liberty Bank's capital
amounts and classifications are also subject to qualitative
judgements by the regulators about components, risk weightings and
other factors. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary
actions by regulators that could have a direct material effect on
the Company's financial statements.
Quantitative measures established by regulation to ensure capital
adequacy require Liberty Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and core capital (as
defined in the regulations) to risk-weighted assets (as defined),
88
<PAGE> 89
and of tangible capital (as defined) to assets (as defined). As of
September 30, 1996 Liberty Bank met all capital adequacy
requirements to which it is subject.
As of September 30, 1996, the most recent notification from the
Office of Thrift Supervision ("OTS"), Liberty Bank was categorized
as well capitalized under the regulatory framework for prompt
corrective action.
The following table reflects Liberty Bank's compliance with its
regulatory capital requirements at September 30, 1996 (dollars in
thousands):
Actual Required Excess
-------------- ------------- -------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
Core capital $62,673 5.89 $31,915 3.00 $30,758 2.89
Tangible capital 61,003 5.74 15,933 1.50 45,070 4.24
Risk-based capital 82,676 10.75 61,520 8.00 21,156 2.75
As required by regulations, Liberty Bank, at the time of its
conversion to a stock institution, established a liquidation
account and maintains the account for the benefit of its depositors
at that time who continue to have funds on deposit. The initial
balance of this liquidation account was equal to the institution's
net worth prior to conversion of $15,722,000. In the event of a
complete liquidation of the institution (and only in such event),
each such depositor who continues to be a depositor at the time of
such liquidation shall be entitled to receive a liquidation
distribution from this account in the amount of the then current
adjusted balance for deposits held, before any liquidation
distribution may be made to shareholders. This account is reduced
annually in proportion to the reduction of eligible savings account
balances measured on each fiscal year end.
Liberty Bank is prohibited from declaring or paying cash dividends
on its common stock if the payment thereof would cause a reduction
in its regulatory capital below either the liquidation account or
the capital requirements set by the OTS or, without the prior
approval of the OTS, if the amount of dividends to be paid in any
year would exceed 50% of its net income for the fiscal year in
which the dividend is declared (except that permitted dividends may
be deferred and paid in a subsequent year). No dividends were
declared during fiscal 1994 and 1996. During fiscal 1995 Liberty
bank declared and paid dividends to First Liberty in the amounts of
$6.3 million and $3.2 million, respectively. Liberty Bank paid
dividends to the Company during fiscal 1996 in the amount of $3.6
million.
The Federal Reserve Board requires depository institutions to
maintain noninterest-bearing reserves against their deposit
transaction accounts, non-personal time deposits (transferrable or
held by a person other than a natural person) with an original
maturity of less than one and one-half years and certain money
market deposit accounts. Federal Reserve regulations currently
require financial institutions to maintain average daily reserves
89
<PAGE> 90
equal to 3% on all amounts from $4.3 million to $52.0 million of
net transactions, plus 10% on the remainder. Liberty Bank
maintained $4.7 million in reserves at September 30, 1996.
16. Employee Benefit Plans
- ---------------------------
The First Liberty Financial Corp. Employee Savings and Stock
Ownership Plan (the "ESSOP") is both a qualified retirement plan
and an employee stock ownership plan. The Company may make
discretionary contributions of the Company common stock to the
employee stock ownership plan portion of the ESSOP in an amount not
more than 10% of the total compensation of participants for the
plan year. Under the 401(k) portion of the ESSOP, the Company will
make matching contributions of the Company common stock in amounts
determined annually by its Board of Directors. Dividends earned on
the Company common stock are retained in the ESSOP.
The Company also has an Officer Profit Sharing Plan (the "OPSP"),
which was designed to reward the Company's officers for their
collective effort in maximizing the Company's "core earnings," (as
defined in the OPSP agreement). The OPSP provides that if core
earnings for the fiscal year equal or exceed a predetermined
minimum core earnings, the OPSP participants will receive
additional cash compensation based upon a percentage of annual
salary, with the percentage increasing as the amount of core
earnings increases.
The contributions to the ESSOP and the OPSP included in the
accompanying financial statements are as follows (dollars in
thousands):
September 30,
-------------------------------------------
1996 1995 1994
------------ ------------ -----------
ESSOP $ 211 $ 201 $ 302
OPSP $ 710 $ 501 $ 450
The Company also has a Nonqualified Deferred Compensation Plan (the
"NDCP") (formerly known as the Executive Deferred Compensation
Plan) established in 1995, in which directors and officers holding
the title of First Vice President or above may participate. The
NDCP provides a means of enabling participating officers to defer
portions of their compensation in excess of the amounts which they
contribute to the ESSOP and participating directors to defer the
fees received for their services. The amount which a participant
presently may defer under the NDCP is ten percent of total annual
compensation.
17. Stock Options
- ------------------
The Company granted options to purchase its common stock to certain
officers and key employees under an Incentive Stock Option Plan
("ISOP") which was approved by the Company's stockholders in 1984.
The options are exercisable for a period of up to five years from
the date of issuance under the Plan. The ISOP expired in 1993.
The First Liberty Financial Corp. 1992 Stock Incentive Plan (the
90
<PAGE> 91
"1992 Plan") was adopted by the Board of Directors of the Company
in November 1992 and approved by the stockholders in March 1993.
The stock granted under the 1992 Plan is the $1.00 par value common
stock. The Company has been authorized to issue up to 573,000
shares of common stock, in the aggregate, under the 1992 Plan, and
unexercised option shares of common stock allocable to expired or
terminated options may again be granted under that plan. As of
September 30, 1996, there were 245,250 shares available for grant.
The 1992 Plan is administered by the Compensation and Benefits
Committee of the Company's Board of Directors ("the Committee").
Incentive stock options and other stock options granted under the
1992 Plan must be at a price not less than the fair market value of
the shares at the date of grant. Options granted under the plan
must be exercised within the earlier of: (i) three months after
the optionee ceases to be employed by the Company for any reason
other than death or disability; (ii) the expiration date as
determined by the Committee, listed in the option agreement; (iii)
immediately upon termination of employment for cause; (iv) one year
after termination of employment because of disability unless the
optionee dies within this one year period; or (v) one year after
the death of an optionee who dies (a) while employed by the
Company, (b) within three months after termination of employment,
or (c) within one year after employment terminated due to
disability. The Committee may extend the above expiration dates
for any non-incentive stock options it grants.
The 1992 Plan will terminate on the later of (i) the complete
exercise or lapse of the last outstanding option, or (ii) on the
last date upon which options may be granted under the plan (which
may not be later than ten years after the date on which the plan is
adopted), subject to its earlier termination by the Board of
Directors at any time.
Information with regard to options issued under the ISOP during
each of the three fiscal years in the period ended September 30,
1996 and under the 1992 plan during the years then ended is as
follows:
ISOP 1992 Plan
------------------- --------------------
Option Average Option Average
Shares Price Shares Price
--------- -------- ---------- --------
Options outstanding at
September 30, 1993 171,000 $ 4.23 105,000 $ 7.39
Issued - - 85,500 10.15
------- --------
Options outstanding at
September 30, 1994 171,000 4.23 190,500 8.63
Issued - - 22,500 10.67
Exercised (45,000) 3.76 (10,500) 5.83
Canceled - - (45,000) 9.33
------- -------
Options outstanding at
September 30, 1995 126,000 4.39 157,500 8.91
Issued - - 152,250 14.59
Exercised (74,400) 3.62 - -
------- -------
Options outstanding at
September 30, 1996 51,600 5.50 309,750 11.70
======= =======
91
<PAGE> 92
Under the 1992 Plan, the number of shares exercisable at September
30, 1996 and 1995 was 152,000 and 78,000, respectively. All
options under the ISOP were exercisable during the above periods.
On October 26, 1995, the Board of Directors of First Liberty (the
"Board") approved an amendment to the 1992 Plan to provide that
options granted on and after that date will be exercisable over a
period of ten years from date of grant rather than five years from
date of grant and to increase the number of shares available for
grant under that plan. This amendment was approved by First
Liberty's stockholders at the 1996 Annual Meeting of Stockholders
(the "1996 Annual Meeting").
On November 21, 1995, the Board adopted the First Liberty Financial
Corp. 1995 Director Stock Option Plan (the "DSOP"), which was
approved by First Liberty's stockholders at the 1996 Annual
Meeting. The DSOP is intended to further the growth and
development of First Liberty by encouraging its directors who are
not employees of First Liberty to obtain proprietary interest in
First Liberty by acquiring its stock. Up to 75,000 shares of
common stock, in the aggregate, may be granted to non-employee
directors under the DSOP.
Information with regard to options issued under the DSOP during the
fiscal year ended September 30, 1996 is as follows:
DSOP
----------------
Option Average
Shares Price
------ -------
Options outstanding at September 30, 1995 - $ -
Issued 46,500 14.66
------
Options outstanding at September 30, 1996 46,500 14.66
======
18. Financial Instruments With Off Balance Sheet Risk
- ------------------------------------------------------
The Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments
include loan commitments and standby letters of credit. The
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
financial statements.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
loan commitments and standby letters of credit is represented by
the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The
Company has no significant concentrations of credit risk with any
individual counterparty to originate loans. The Company's lending
is concentrated in Georgia, its primary market area. The contract
or notional amounts of financial instruments with off-balance sheet
92
<PAGE> 93
risk at September 30, 1996 and 1995 are as follows (dollars in
thousands):
September 30,
--------------------------
1996 1995
---------- ----------
Commitments to originate loans:
Fixed rate $86,163 $ 47,236
Adjustable rate 35,607 19,299
Standby letters of credit 240 945
Delivery forward placement contracts:
Mandatory 43,164 35,781
Optional 2,000 4,000
Since many of the loan commitments may expire without being drawn
upon, the total commitment amount does not necessarily represent
future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include real estate
and improvements, marketable securities, accounts receivable,
inventory, equipment and personal property.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities
to customers.
Mandatory and optional forward placement contracts (which are held
for purposes other than trading) are used by the Company to hedge
its interest rate exposure during the period from when the Company
extends an interest rate lock to a loan applicant until the time in
which the loan is sold. Realized gains and losses on the mandatory
and optional forward contracts are recognized in gain (loss) from
sales of loans in the period settlement occurs. Unrealized gains
and losses on these contracts are included in the lower of cost or
market valuation adjustment to loans available-for-sale. The
mandatory and optional forward contracts above covered the market
risk associated with the pipeline loans less predicted fallout at
September 30, 1996 and 1995 of $45,310 and $40,129, respectively.
The Company has not recorded specific liabilities for credit risk
associated with off-balance sheet financial instruments. Credit
risk associated with commitments to originate loans is mitigated
through the purchase of commitments to sell such loans generally
within 90 days of origination. Credit risk associated with standby
letters of credit is considered in the assessment of the allowance
for estimated loan losses.
Liberty Bank's risk with respect to mortgage servicing losses
results from unrecoverable advances of delinquent principal,
interest and tax payments made on behalf of mortgagors. Liberty's
mortgage servicing department controls the risk of this portfolio
on an ongoing basis. Liberty Bank has not suffered significant
losses from its mortgage servicing activities.
93
<PAGE> 94
19. Fair Values of Financial Instruments
- -----------------------------------------
The estimated fair values of the Company's financial instruments
were as follows (dollars in thousands).
September 30, 1996 September 30, 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ------- ---------- -------
Financial Assets:
- -----------------
Cash, due from banks,
fed funds sold and
repurchase agreements $ 67,632 $ 67,632 $ 47,262 $ 47,262
Securities available-
for-sale 200,017 200,017 167,613 167,613
Loans, net 720,178 719,380 625,641 629,306
Loans available-for-sale 26,906 26,906 22,282 22,282
Mortgage servicing rights 6,132 7,959 2,076 3,463
Financial Liabilities:
- ----------------------
Deposits $ 760,494 $ 760,136 $719,226 $719,343
Federal Home Loan Bank
advances 184,660 184,812 88,500 88,353
Subordinated debentures 12,155 16,887 12,501 17,654
Securities sold under
agreements to repurchase 16,644 16,644 4,315 4,315
Off-Balance-Sheet Financial
- ---------------------------
Instruments:
------------
Standby letters of credit $ 240 $ 240 $ 945 $ 945
Commitments to originate
loans 76,452 76,624 66,535 66,611
Mandatory commitments to
sell loans 43,164 43,298 35,781 35,708
Optional commitments to
sell loans 2,000 2,007(1) 4,000 4,003(1)
Loan servicing rights - 5,034 - 6,397
(1) Excludes net unamortized option fees of $17,369 at September
30, 1996, and $23,240 at September 30, 1995.
The fair value disclosures provided exclude certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. The disclosures also do not include certain
intangible assets, such as customer relationships, deposit base
intangible and goodwill. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company.
20. Contingencies
- ------------------
The Company is from time to time a defendant in legal actions from
normal business activities. Management does not anticipate that
the ultimate liability arising from litigation outstanding at
September 30, 1996, will have a materially adverse effect on the
Company's financial position, results of operations or liquidity.
94
<PAGE> 95
21. Financial Information of First Liberty Financial Corp. (Parent
- -------------------------------------------------------------------
Only)
- -----
First Liberty's statements of financial condition (parent only) as
of September 30, 1996 and 1995 and the related statements of income
and cash flows for each of the three years in the period ended
September 30, 1996 are as follows:
Statements of Financial Condition
---------------------------------
September 30,
--------------------------
1996 1995
----------- -----------
(Dollars in Thousands)
Assets:
- -------
Cash $ 92(1) $ 75(1)
Other investments 6,850(1) 8,050(1)
Real estate, net 142 170
Dividends receivable from Liberty Bank - 3,555(1)
Investment in Liberty Bank 71,341(1) 63,375(1)
Other assets 1 65
------- -------
Total assets $78,426 $75,290
======= =======
Liabilities and Stockholders' Equity:
- -------------------------------------
Dividends payable $ 638 $ 581
Other liabilities 1,338 4,040
------- -------
Total liabilities 1,976 4,621
------- -------
Stockholders' equity:
Series B Preferred stock 7,564 7,564
Common stock 6,104 5,974
Additional paid-in capital 26,132 25,376
Retained earnings 36,804 31,593
Net unrealized gain on securities
available-for-sale, net of taxes 115 431
Treasury stock at cost (269) (269)
------- -------
Total stockholders' equity 76,450 70,669
------- -------
Total liabilities and stockholders'
equity $78,426 $75,290
======= =======
(1) Eliminates in consolidation.
95
<PAGE> 96
First Liberty Financial Corp. (Parent Only)
- -------------------------------------------
Statements of Income
- --------------------
Years Ended September 30,
----------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
Income:
- -------
Interest income on
other investments $ 233(1) $ 302(1) $ 282(2)
Cash dividends from Liberty Bank (2) 3,555 3,198 -
Other income 1 1 -
------ ------ ------
Total income 3,789 3,501 282
------ ------ ------
Expense:
- --------
Directors fees - 30 18
Other expense 117 106 79
------ ------ ------
Total expense 117 136 97
------ ------ ------
Income before income tax expense
and equity in undistributed net
income of Liberty Bank 3,672 3,365 185
Income tax expense 40 57 63
------ ------ ------
Income before equity in
undistributed net income of
Liberty Bank 3,632 3,308 122
Equity in undistributed net
income of Liberty Bank (2) 4,138 4,763 5,927
------ ------ ------
Net income 7,770 8,071 6,049
Dividends on preferred stock 454 864 891
------ ------ ------
Net income applicable to
common stockholders $7,316 $7,207 $5,158
====== ====== ======
(1) $231,000 in 1996 and $297,000 in 1995 eliminates in consolidation.
(2) Eliminates in consolidation.
96
<PAGE> 97
First Liberty Financial Corp. (Parent Only)
- --------------------------------------------
Statements of Cash Flow
- -----------------------
Years Ended September 30,
--------------------------------
1996 1995 1994
------ ------ ------
(Dollars in Thousands)
Operating Activities:
- ---------------------
Cash flows from operating activities:
Net income $ 7,770 $ 8,071 $ 6,049
Equity in undistributed earnings
of Liberty Bank (4,138) (4,763) (5,927)
Other, net 917 (28) 198
------- ------- -------
Total adjustments (3,221) (4,791) (5,729)
------- ------- -------
Net cash provided by
operating activities 4,549 3,280 320
------- ------- -------
Investing Activities:
- ---------------------
Cash flows from investing activities:
Net decrease in
other investments 1,200 1,490 1,733
Cash paid in acquisitions (3,555) (3,198) -
Sale of real estate 28 28 27
------- ------- -------
Net cash provided by (used in)
investing activities (2,327) (1,680) 1,760
------- ------- -------
Financing Activities:
- ---------------------
Cash flows from financing
activities:
Issuance of common stock 270 230 -
Redemption of preferred stock - (66) -
Dividends paid on stock (2,475) (1,700) (2,077)
------- ------- -------
Net cash used in
financing activities (2,205) (1,536) (2,077)
------- ------- -------
Net increase in cash 17 64 3
Cash beginning of period 75 11 8
------- ------- -------
Cash end of period $ 92 $ 75 $ 11
======= ======= =======
Supplemental Disclosures of
- ---------------------------
Cash Flow Information:
----------------------
Cash paid during the year for:
Income taxes $ 5,687 $ 2,665 $ 3,688
97
<PAGE> 98
22. Consolidated Condensed Quarterly Results of Income (Unaudited)
- -------------------------------------------------------------------
The following summarizes the consolidated condensed quarterly results of
income (unaudited) for the year ended September 30, 1996 (dollars in
thousands, except per share data):
Quarters Ended,
------------------------------------------------------
December 31 March 31 June 30 September 30(1)
----------- ----------- ----------- ---------------
Total interest income $18,259 $18,159 $18,985 $19,679
Net interest income 8,225 8,196 8,674 9,175
Provision for estimated
losses on loans 300 300 300 888
Net income 2,375 2,479 2,585 331
Dividends on preferred
stock 113 113 113 115
------- ------- ------- -------
Net income applicable to
common stockholders $ 2,262 $ 2,366 $ 2,472 $ 216
======= ======= ======= =======
Earnings per common share:
Primary $ .37 $ .39 $ .41 $ .04
Fully diluted $ .36 $ .37 $ .39 $ .04
Dividends per common
share: $ .08 $ .08 $ .09 $ .09
(1) The fourth quarter included a one-time FDIC assessment to recapitalize
the SAIF in the amount of $3.6 million pre tax, equaling $2.3 million and
$.35 per fully diluted share after tax.
The following summarizes the consolidated condensed quarterly results of
income (unaudited) for the year ended September 30, 1995 (dollars in
thousands, except per share data):
Quarters Ended,
---------------------------------------------------
December 31 March 31 June 30 September 30
----------- ----------- ----------- ------------
Total interest income $13,498 $15,159 $16,022 $16,811
Net interest income 6,468 7,044 7,583 7,662
Provision for estimated
losses on loans 300 300 300 540
Net income 1,765 2,027 2,086 2,193
Dividends on preferred
stock 240 279 278 67
------- ------- ------- -------
Net income applicable to
common stockholders $ 1,525 $ 1,748 $ 1,808 $ 2,126
======= ======= ======= =======
Earnings per common share:
Primary $ .33 $ .37 $ .39 $ .39
Fully diluted $ .29 $ .32 $ .33 $ .35
Dividends per common
share: $ .07 $ .07 $ .07 $ .07
98
<PAGE> 99
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
For the three year period ended September 30, 1996, there has been
no disagreement between First Liberty and any accountants on any
matter of accounting principles or practices or financial statement
disclosure.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information relating to the directors of First Liberty is set forth
under the caption "Proposal No. 1 - Election of Directors -
Nominees" in First Liberty's definitive Proxy Statement for its
Annual Meeting of Stockholders to be held on January 29, 1997.
Such information is incorporated herein by reference. The
definitive Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after First Liberty's fiscal
year end. Pursuant to instruction 3 of Item 401(b) of Regulation
S-K and General Instruction G(3) of Form 10-K, information relating
to the executive officers of First Liberty is set forth at Part I,
Item 4(A) of this Report under the caption "Executive Officers of
the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information relating to executive compensation is set forth under
the caption "Proposal No. 1 - Election of Directors - Executive
Compensation" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ----------------------------------------------------------
MANAGEMENT
- ----------
Information regarding ownership of First Liberty's $1.00 par value
Common Stock by certain persons is set forth under the captions
"Voting - Principal Stockholders" and "Proposal 1 - Election of
Directors - Nominees" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information regarding certain transactions between Liberty Bank and
affiliates of First Liberty and Liberty Bank is set forth under the
caption "Proposal 1 - Election of Directors - Transactions With
First Liberty" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.
99
<PAGE> 100
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K
- --------
(a) Documents Filed as Part of This Report:
1. Financial Statement Schedules
The Company's financial statements, the notes thereto and the
report of the independent accountants are set forth on pages 59
through 98 of this Form 10-K.
3. Exhibits
The following exhibits are filed as part of or incorporated by
reference in the Report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses.
Exhibit No. Description
3(a) Amended and Restated Articles of Incorporation
(Exhibit 3(a) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996)
3(b) By-laws, as amended (Exhibit 3(b) to
Registrant's Annual Report on Form 10-K for
the year ended September 30, 1986)
3(b)1 By-Laws, as amended (Exhibit 3(b)1 to
Registrant's Annual Report on Form 10-K for
the year ended September 30, 1990)
3(b)2 By-Laws, as amended (Exhibit 3(b)2 to
Registrant's Annual Report on Form 10-K for
the year ended September 30, 1990)
4(a) Form of Registrant's 8-1/4% Convertible
Subordinated Debenture Due August 1, 2005 and
related Indenture (Exhibit E to Registrant's
Registration Statement on Form S-1, No. 2-
98803)
4(b) Forms of Registrant's 8-1/4% Subordinated
Debenture Due August 1, 2004 and 11%
Subordinated Debenture Due August 1, 2004 and
related Indenture (Exhibit T3C to Amendment
No. 2 to Form T-3 to Registrant's Application
for Qualification of Indentures under the
Trust Indenture Act of 1939)
10(a) Plan of Conversion of Liberty Bank (Exhibit
10(a) to Registrant's Annual Report on Form
10-K for the year ended September 30, 1986)
100
<PAGE> 101
Exhibit No. Description
10(b) Registrant's Employee Savings and Stock
Ownership Plan (Exhibit 4 to Registrant's
Registration Statement on Form S-8, No. 33-
24733)
10(c) Registrant's Shareholder Rights Plan dated as
of August 2, 1989 (Exhibit 4.1 to Registrant's
Current Report on Form 8-K dated August 14,
1989)
10(d) Executive Employment Agreement dated as of
November 1, 1990, among Liberty Bank,
Registrant and Robert F. Hatcher
10(e) First Amendment to Executive Employment
Agreement dated as of November 1, 1991, among
Liberty Bank, Registrant and Robert F. Hatcher
10(f) Second Amendment to Executive Employment
Agreement dated as of October 21, 1992, among
Liberty Bank, Registrant and Robert F. Hatcher
10(g) Third Amendment to Executive Employment
Agreement dated as of January 26, 1994, among
Liberty Bank, Registrant and Robert F. Hatcher
10(h) Employment Agreement dated November 5, 1987
among Registrant, Liberty Bank and Richard A.
Hills, Jr.
10(i) Employment Agreement dated August 1, 1990
between Liberty Bank and Charles G. Davis
10(j) Employment Agreement dated June 30, 1992 among
Registrant, Liberty Bank and David L. Hall
10(k) Agreement and Plan of Merger dated as of June
3, 1992, among Liberty Bank, Registrant and
First Federal Savings and Loan Association of
Milledgeville, as amended
10(l) Purchase and Assumption Agreement dated as of
September 30, 1992, between Liberty Bank and
Bankers First Savings Bank, FSB, as amended
10(m) First Liberty Financial Corp. 1992 Stock
Incentive Plan dated as of November 24, 1992
10(n) Employment Agreement dated June 28, 1995
between Liberty Bank and J. Larry Wallace
10(o) Registrant's Officer Profit Sharing Plan as
amended and restated effective October 1, 1993
101
<PAGE> 102
Exhibit No. Description
10(p) Amended and Restated Agreement and Plan of
Merger as of July 15, 1994 among Registrant,
Liberty Bank, Central Banking Company and The
Central Bank (Appendix A to Registrant's
Registration Statement on Form S-4, No. 33-
83108)
10(q) Purchase and Assumption Agreement as of
October 4, 1994 between Liberty Bank and First
Union National Bank of Georgia, as amended as
of October 31, 1994, and November 29, 1994
10(r) Agreement and Plan of Merger as of May 10,
1995 among Registrant, Liberty Bank, Tifton
Banks, Inc. and Tifton Bank & Trust Company
(Appendix to Registrant's Registration
Statement on Form S-4, No. 33-60207)
10(s) Registrant's 1995 Director Stock Option Plan
as of November 21, 1995
10(t) Registrant's Annual Report on Form 11-K for
the First Liberty Financial Corp. Employee
Savings and Stock Ownership Plan for the year
ended September 30, 1992
10(u) Employment Agreement dated May 23, 1995
between Liberty Mortgage and George A. Molloy
10(v) Employment Agreement dated August 5, 1996
between NewSouth and Robert W. Aiken
11 Statements of Computation of Earnings Per
Share
12 Statements of Computation of Ratio of Earnings
to Combined Fixed Charges and Preferred Stock
Dividends
21 Subsidiaries of Registrant (Exhibit 22 to
Registrant's Annual Report on Form 10-K for
the year ended September 30, 1990)
23(a) Consent of Independent Certified Public
Accountants
23(b) Consent of KPMG Peat Marwick to incorporation
by reference of financial statements in First
Liberty's Registration Statement No. 33-24733
on Form S-8
27 Financial Data Schedule
(b) Reports on Form 8-K
102
<PAGE> 103
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,
thereunto duly authorized.
FIRST LIBERTY FINANCIAL CORP.
(Registrant)
Date: December 17, 1996 By: /s/ Robert F. Hatcher
----------------------- ---------------------------
Principal Executive Officer
Pursuant to the requirements of 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.
Signature Title Date
/s/ Thomas H. McCook Chairman of the Board December 17, 1996
-------------------- --------------------
Thomas H. McCook and Director
/s/ Robert F. Hatcher President December 17, 1996
-------------------- --------------------
Robert F. Hatcher Chief Executive Officer
and Director
/s/ F. Don Bradford Director December 17, 1996
-------------------- --------------------
F. Don Bradford
/s/ Richard W. Carpenter Director December 17, 1996
-------------------- --------------------
Richard W. Carpenter
/s/ C. Lee Ellis Director December 17, 1996
-------------------- --------------------
C. Lee Ellis
/s/ Melvin I. Kruger Director December 17, 1996
-------------------- --------------------
Melvin I. Kruger
/s/ Jo Slade Wilbanks Director December 17, 1996
-------------------- --------------------
Jo Slade Wilbanks
/s/ H.M. Ponder, Jr. Director December 17, 1996
-------------------- --------------------
H.M. Ponder, Jr.
/s/ David L. Hall Executive Vice President December 17, 1996
-------------------- --------------------
David L. Hall and Chief Financial
Officer (Duly authorized
principal financial
officer)
/s/ Laura B. Cross Vice President and December 17, 1996
-------------------- --------------------
Laura B. Cross Controller (Duly
authorized principal
accounting officer)
103
<PAGE> 104
FIRST LIBERTY FINANCIAL CORP.
-----------------------------
Index of Exhibits
The following exhibits are filed as part of or incorporated by reference in
the Report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration
statement or report is identified in parentheses.
Exhibit No. Description Page
3(a) Amended and Restated Articles of Incorporation (Exhibit 3(a)
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996)
3(b) By-laws, as amended (Exhibit 3(b) to Registrant's Annual
Report on Form 10-K for the year ended September 30,
1986)
3(b)1 By-Laws, as amended (Exhibit 3(b)1 to Registrant's Annual
Report on Form 10-K for the year ended September 30,
1990)
3(b)2 By-Laws, as amended (Exhibit 3(b)2 to Registrant's Annual
Report on Form 10-K for the year ended September 30,
1990)
4(a) Form of Registrant's 8 1/4% Convertible Subordinated
Debenture and related Indenture (Exhibit E to
Registrant's Registration Statement on Form S-1, No. 2-
98803)
4(b) Forms of Registrant's 8-1/4% Subordinated Debenture Due
August 1, 2004 and 11% Subordinated Debenture Due August
1, 2004 and related Indenture (Exhibit T3C to Amendment
No. 2 to Form T-3 to Registrant's Application for
Qualification of Indentures under the Trust Indenture Act
of 1939)
10(a) Plan of Conversion of Liberty Bank (Exhibit 10(a) to
Registrant's Annual Report on Form 10-K for the year
ended September 30, 1986)
10(b) Registrant's Employee Savings and Stock Ownership Plan
(Exhibit 4 to Registrant's Registration Statement on Form
S-8, No. 33-24733)
10(c) Registrant's Shareholder Rights Plan dated as of August
2, 1989 (Exhibit 4.1 to Registrant's Current Report on
Form 8-K dated August 14, 1989)
10(d) Executive Employment Agreement dated as of November 1,
1990, among Liberty Bank, Registrant and Robert F.
Hatcher
10(e) First Amendment to Executive Employment Agreement dated
as of November 1, 1991, among Liberty Bank, Registrant
and Robert F. Hatcher
104
<PAGE> 105
Exhibit No. Description Page
10(f) Second Amendment to Executive Employment Agreement dated
as of October 21, 1992, among Liberty Bank, Registrant
and Robert F. Hatcher
10(g) Third Amendment to Executive Employment Agreement dated
as of January 26, 1994, among Liberty Bank, Registrant
and Robert F. Hatcher
10(h) Employment Agreement dated November 5, 1987 among
Registrant, Liberty Bank and Richard A. Hills, Jr.
10(i) Employment Agreement dated August 1, 1990 between Liberty
Bank and Charles G. Davis
10(j) Employment Agreement dated June 30, 1992 among
Registrant, Liberty Bank and David L. Hall
10(k) Agreement and Plan of Merger dated as of June 3, 1992,
among Liberty Bank, Registrant and First Federal Savings
and Loan Association of Milledgeville, as amended
10(l) Purchase and Assumption Agreement dated as of September
30, 1992, between Liberty Bank and Bankers First Savings
Bank, FSB, as amended
10(m) First Liberty Financial Corp. 1992 Stock Incentive Plan
dated as of November 24, 1992
10(n) Employment Agreement dated June 28, 1993 between Liberty
Bank and J. Larry Wallace
10(o) Registrant's Officer Profit Sharing Plan as amended and
restated effective October 1, 1994
10(p) Amended and Restated Agreement and Plan of Merger as of
July 15, 1994 among Registrant, Liberty Bank, Central
Banking Company and The Central Bank (Appendix A to
Registrant's Registration Statement on Form S-4, No. 33-
83108)
10(q) Purchase and Assumption Agreement as of October 4, 1994
between Liberty Bank and First Union National Bank of
Georgia, as amended as of October 31, 1994, and November
29, 1994
10(r) Agreement and Plan of Merger as of May 10, 1995 among
Registrant, Liberty Bank, Tifton Banks, Inc. and Tifton
Bank & Trust Company (Appendix to Registrant's
Registration Statement on Form S-4, No. 33-60207)
10(s) Registrant's 1995 Director Stock Option Plan as of
November 21, 1995
10(t) Registrant's Annual Report on Form 11-K for the First
Liberty Financial Corp. Employee Savings and Stock
Ownership Plan for the Year ended September 30, 1992
105
<PAGE> 106
Exhibit No. Description Page
10(u) Employment Agreement dated May 23, 1995 between
Liberty Mortgage and George A. Molloy 107
10(v) Employment Agreement dated August 5, 1996
between NewSouth and Robert W. Aiken 113
11 Statements of Computation of Earnings Per Share 119
12 Statements of Computation of Ratio of Earnings
to Combined Fixed Charges and Preferred Stock Dividends 121
21 Subsidiaries of Registrant (Exhibit 22 to Registrant's
Annual Report on Form 10-K for the year ended September
30, 1990
23(a) Consent of Independent Certified Public Accountants 122
23(b) Consent of KPMG Peat Marwick to incorporation by
reference of financial statements in First Liberty's
Registration Statement No. 33-24733 on Form S-8
27 Financial Data Schedule
<PAGE> 107
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Executive Employment Agreement (the "Agreement") is made as of this
23rd day of May, 1995, by and among LIBERTY MORTGAGE CORPORATION, a Georgia
----------------------------
corporation (the "Company"), and GEORGE A. MOLLOY (the "Executive").
----------------
AGREEMENT
---------
The parties wish to set forth the terms of the Executive's employment
by the Company. Therefore, in consideration of the mutual covenants and
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and accepted, the
parties agree as follows:
1. Term of Employment.
-------------------
1.1 Employment. The Company hereby employs the Executive and
-----------
the Executive hereby accepts employment by Company on the terms and
conditions provided for herein.
1.2 The employment term shall be at the pleasure of the Company.
2. Duties of Executive. For the duration of the term of employment,
--------------------
except as otherwise provided for in this Agreement, the Executive shall have
the duties set forth in this Section 2.
2.1 General Duties. The Executive will serve as President and
---------------
Chief Executive Officer of the Company and in such other capacities as the
Company may from time to time designate with any affiliate of the Company.
107
<PAGE> 108
2.2 Devotion of Entire Time to Company Business. The Executive
--------------------------------------------
shall devote his entire productive time, ability and attention during normal
business hours to the business of the Company.
3. Compensation and Benefits. For the duration of the term of
--------------------------
employment, the Company shall provide the Executive with the compensation
and other benefits set forth in this Section 3.
3.1 Base Salary. As compensation for his services hereunder,
------------
the Executive shall receive a base annual salary of $125,000, which shall be
payable in accordance with the general payroll practices of the Company.
The Executive's salary shall be reviewed annually by the Company.
3.2 Stock Options. The Company shall cause to be granted to
--------------
the Executive options to purchase 15,000 shares of the common stock of First
Liberty Financial Corp. ("FLFC") at the price determined in accordance with
FLFC's stock option plan. The date of the grant shall be May 23, 1995, and
the options shall vest (i) as to 5,000 shares, on May 23, 1996, (ii) as to
5,000 additional shares, on May 23, 1997, and (iii) as to 5,000
additional shares, on May 23, 1998.
3.3 Executive Benefit Programs. The Executive shall be eligible
---------------------------
to participate in all applicable employee benefit, bonus, profit sharing,
automobile allowance, and similar programs of the Company.
3.4 Vacation. The Executive shall be eligible for three (3)
---------
weeks of vacation in each full calendar year of employment, subject to the
Company's vacation policy guidelines.
3.5 Club Membership. The Company shall pay the cost of the
----------------
Executive's initiation and membership in a private dining club to be used for
business entertainment, with costs to be within FLFC guidelines.
108
<PAGE> 109
4.0 Termination of Employment.
--------------------------
4.1 Termination for Cause. The Executive shall have no right to
----------------------
receive compensation or other benefits set forth in this Agreement for any
period after termination for cause. For the purposes of this Agreement,
"cause" shall mean termination for personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic or similar offenses) or final cease and desist
order, or material breach by the Executive of any provision of this
Agreement. The Executive shall have no further duties pursuant to Section 2
hereof following the effective date of termination hereunder.
4.2 Termination for Reason Other Than Cause. If the Executive's
----------------------------------------
employment is terminated for any reason other than for cause (except as
provided in Section 4.3 hereof), the Executive shall receive severance
compensation in accordance with then prevailing Company policy.
4.3 Effect of Merger, Change of Control, Transfer or Assets or
----------------------------------------------------------
Dissolution. In the event of any (a) merger or consolidation where the
- ------------
Company or FLFC or First Liberty Bank (the "Bank") is not the consolidated or
surviving entity, (b) any acquisition of more than 24.9% of the stock of the
Company or the Bank or FLFC by a third party, or (c) transfer of all or
substantially all of the assets of the Company or FLFC or the Bank to a third
party, then in such event the Executive may, in his sole and uncontrolled
discretion, elect to treat this Agreement as having been terminated by the
Company other than for cause, effective immediately, and the Executive shall
be entitled to receive from the Company six (6) months salary at the then
current rate in such event. Provided, however, that if the Executive is
offered a position of comparable responsibility, salary, benefits and
authority, and with reasonable assurances of continued employment, with the
entity (or any subsidiary
109
<PAGE> 110
thereof) with which the Company or FLFC or the Bank is merged or
consolidated or to which all or substantially all of their
respective assets of the Company are transferred, then the
Executive shall not be entitled to receive the payment provided
for above. This provision for salary continuation in the event
of "change of control" shall terminate after the Executive has
been employed by the Company for three (3) years.
5. Miscellaneous.
--------------
5.1 Entire Agreement. This Agreement supersedes any and all other
-----------------
agreements between the parties hereto with respect to the employment of the
Executive by the Company and contains all of the covenants and agreement
between the parties with respect to such employment in any manner whatsoever.
Each party to this Agreement acknowledges that no representations,
inducements, promises, or agreements, orally or otherwise, have been made by
any party, or anyone acting on behalf of any party, which are not embodied
herein, and that no other agreement shall be valid or binding. Any
modification of this Agreement will be effective only if it is in writing
signed by the party to be charged.
5.2 Partial Invalidity. If any provision in this Agreement is
-------------------
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remaining provisions shall nevertheless continue in full force without
being impaired or invalidated in any way.
5.3 Law Governing Agreement. This Agreement shall be governed by
------------------------
and construed in accordance with the laws of the State of Georgia.
5.4 Miscellaneous. Failure or delay of either party to insist
--------------
upon compliance with any provision hereof will not operate as and is not
construed to be a waiver or amendment of the
110
<PAGE> 111
provisions or the right of the aggrieved party to insist upon compliance
with such provision or to take remedial steps to recover damages or other
relief for noncompliance. This Agreement shall be binding upon the
successor to the business of the Company, but neither this Agreement nor any
rights hereunder shall be assignable by the Executive.
[THIS SPACE INTENTIONALLY BLANK]
111
<PAGE> 112
IN WITNESS WHEREOF, the Executive has hereunto affixed his hand and
seal, and the Company has caused this Agreement to be executed by its duly
authorized officers and its corporate seal to be affixed thereto, as of the
day and year first above written.
LIBERTY MORTGAGE CORPORATION
BY:
------------------------
Robert F. Hatcher,
Sole Director
ATTEST:
--------------------
Secretary
[CORPORATE SEAL]
(SEAL)
---------------------
GEORGE A. MOLLOY
112
<PAGE> 113
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Executive Employment Agreement (the "Agreement") is made as of this
5th day of August, 1996, by and among NEW SOUTH FINANCIAL SERVICES, INC. a
----------------------------------
Georgia corporation (the "Company"), and ROBERT W. AIKEN (the "Executive").
---------------
AGREEMENT
---------
The parties wish to set forth the terms of the Executive's employment by
the Company. Therefore, in consideration of the mutual covenants and
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged and accepted, the
parties agree as follows:
1. Term of Employment.
-------------------
1.1 Employment. The Company hereby employs the Executive and
-----------
the Executive hereby accepts employment by Company on the terms and conditions
provided for herein.
1.2 Unless extended by mutual agreement of the parties, the
employment term shall be three (3) years from the date of this Agreement.
2. Duties of Executive. For the duration of the term of employment,
--------------------
except as otherwise provided for in this Agreement, the Executive shall have
the duties set forth in this Section 2.
2.1 General Duties. The Executive will serve as President and
---------------
Chief Executive Officer of the Company and in such other capacities as the
Company may from time to time designate
113
<PAGE> 114
with any affiliate of the Company.
2.2 Devotion of Entire Time to Company Business. The Executive
--------------------------------------------
shall devote his entire productive time, ability and attention during normal
business hours to the business of the Company.
3. Compensation and Benefits. For the duration of the term of
--------------------------
employment, the Company shall provide the Executive with the compensation and
other benefits set forth in this Section 3.
3.1 Base Salary. As compensation for his services hereunder,
------------
the Executive shall receive a base annual salary of $110,000, which shall be
payable in accordance with the general payroll practices of the Company. The
Executive's salary shall be reviewed annually by the Company.
3.2 Special Compensation. As a special additional compensation,
---------------------
the Executive shall receive a bonus of $20,000, which shall be payable on
August 15, 1996.
3.3 Stock Options. The Company shall cause to be granted to the
--------------
Executive options to purchase 12,500 shares of the common stock of First
Liberty Financial Corp. ("FLFC") at the price determined in accordance with
FLFC's stock option plan. The date of the grant shall be the date of the
meeting of FLFC's Compensation and Benefits Committee at which the grant of
options is approved (the Grant Date), and the options shall vest (i) as to
3,125 shares, on the Grant Date, (ii) as to 3,125 additional shares, on the
first anniversary of the Grant Date, and (iii) as to 3,125 additional shares,
on the second anniversary of the Grant Date, and (iv) as to 3,125 additional
shares, on the third anniversary of the Grant Date.
114
<PAGE> 115
3.4 Executive Benefit Programs. The Executive shall be eligible
---------------------------
to participate in all applicable employee benefit, bonus, profit sharing,
automobile allowance, and similar programs of the Company.
3.5 Vacation. The Executive shall be eligible for three (3)
---------
weeks of vacation in each full calendar year of employment, subject to the
Company's vacation policy guidelines.
4.0 Termination of Employment.
--------------------------
4.1 Termination for Cause. The Executive shall have no right to
----------------------
receive compensation or other benefits set forth in this Agreement for any
period after termination for cause. For the purposes of this Agreement,
"cause" shall mean termination for personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic or similar offenses) or final cease and desist
order, or material breach by the Executive of any provision of this Agreement.
The Executive shall have no further duties pursuant to Section 2 hereof
following the effective date of termination hereunder.
4.2 Termination for Reason Other Than Cause. If the Executive's
----------------------------------------
employment is terminated for any reason other than for cause (except as
provided in Section 4.3 hereof), the Executive shall receive severance
compensation in accordance with then prevailing Company policy.
4.3 Effect of Merger, Change of Control, Transfer or Assets or
----------------------------------------------------------
Dissolution. In the event of any (a) merger or consolidation where the
- ------------
Company or FLFC or First Liberty Bank (the "Bank") is not the consolidated or
surviving entity, (b) any acquisition of more than 24.9% of the stock of the
Company or the Bank or FLFC by a third party, or (c) transfer of all or
substantially all
115
<PAGE> 116
of the assets of the Company or FLFC or the Bank to a third party, then in
such event the Executive may, in his sole and uncontrolled discretion, elect
to treat this Agreement as having been terminated by the Company other than
for cause, effective immediately, and the Executive shall be entitled to
receive from the Company six (6) months salary at the then current rate in
such event. Provided, however, that if the Executive is offered a position
of comparable responsibility, salary, benefits and authority, and with
reasonable assurances of continued employment, with the entity (or any
subsidiary thereof) with which the Company or FLFC or the Bank is merged or
consolidated or to which all or substantially all of their respective assets
of the Company are transferred, then the Executive shall not be entitled to
receive the payment provided for above. This provision for salary
continuation in the event of "change of control" shall terminate after the
Executive has been employed by the Company for three (3) years.
4.4 OTS Regulatory Provisions. Since the Company is an operating
--------------------------
subsidiary of a federal savings bank, this Agreement and the rights of the
Executive hereunder are subject to the provisions of 12 C.F.R. Section 563.39,
the text of which is attached hereto and incorporated herein by reference.
The term association as used therein shall mean First Liberty Bank for
purposes of this Agreement.
5. Miscellaneous.
--------------
5.1 Entire Agreement. This Agreement supersedes any and all
-----------------
other agreements between the parties hereto with respect to the employment of
the Executive by the Company and contains all of the covenants and agreement
between the parties with respect to such employment in any manner whatsoever.
Each party to this Agreement acknowledges that no representations,
116
<PAGE> 117
inducements, promises, or agreements, orally or otherwise, have been made by
any party, or anyone acting on behalf of any party, which are not embodied
herein, and that no other agreement shall be valid or binding. Any
modification of this Agreement will be effective only if it is in writing
signed by the party to be charged.
5.2 Partial Invalidity. If any provision in this Agreement is
-------------------
held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions shall nevertheless continue in full
force without being impaired or invalidated in any way.
5.3 Law Governing Agreement. This Agreement shall be governed
------------------------
by and construed in accordance with the laws of the State of Georgia.
5.4 Miscellaneous. Failure or delay of either party to insist
--------------
upon compliance with any provision hereof will not operate as and is not
construed to be a waiver or amendment of the provisions or the right of the
aggrieved party to insist upon compliance with such provision or to take
remedial steps to recover damages or other relief for noncompliance. This
Agreement shall be binding upon the successor to the business of the Company,
but neither this Agreement nor any rights hereunder shall be assignable by
the Executive.
[THIS SPACE INTENTIONALLY LEFT BLANK]
117
<PAGE> 118
IN WITNESS WHEREOF, the Executive has hereunto affixed his hand and
seal, and the Company has caused this Agreement to be executed by its duly
authorized officers and its corporate seal to be affixed thereto, as of the
day and year first above written.
NEW SOUTH FINANCIAL SERVICES, INC.
BY:
-------------------------------
Robert F. Hatcher,
Sole Director
ATTEST:
---------------------------
Secretary
[CORPORATE SEAL]
--------------------------- (SEAL)
ROBERT W. AIKEN
118
<PAGE> 119
Exhibit 11
Statements of Computation of Earnings Per Share
September 30,
-------------------------------
1996 1995
-------------------------------
Primary earnings per share:
- ---------------------------
Average shares outstanding 5,980,247 4,750,616
----------- -----------
Average options outstanding 209,562 196,706
Average exercise price $ 9.22 $ 5.40
----------- -----------
Proceeds from the assumed exercise
of options outstanding $ 1,932,162 $ 1,062,210
Average market price per share 14.48 10.19
----------- -----------
Assumed shares repurchased 133,437 104,275
----------- -----------
Common stock equivalents of options
outstanding 76,125 92,431
----------- -----------
Weighted average shares outstanding
(including common stock
equivalents) 6,056,372 4,843,047
=========== ===========
Net income $ 7,769,626 $ 8,070,995
Preferred stock dividend (453,873) (863,869)
----------- -----------
Net income applicable to
common stockholders $ 7,315,753 $ 7,207,126
=========== ===========
Earnings per common share $ 1.21 $ 1.48
=========== ===========
Fully diluted earnings per share:
- ---------------------------------
Average shares outstanding 5,980,247 4,750,616
----------- -----------
Average options outstanding 209,562 196,706
Average exercise price $ 9.22 $ 5.40
----------- -----------
Proceeds from the assumed exercise
of options outstanding $ 1,932,162 $ 1,062,210
Average market price per share 16.67 13.67
----------- -----------
Assumed shares repurchased 115,907 77,705
----------- -----------
Common stock equivalents of options
outstanding 93,655 119,001
Assumed conversion of outstanding
convertible debentures (1) 58,456 60,973
Assumed conversion of outstanding
preferred stock (2) 540,322 1,376,748
----------- -----------
Weighted average shares outstanding
(including common stock
equivalents) 6,672,680 6,307,338
=========== ===========
119
<PAGE> 120
Exhibit 11
Statements of Computation of Earnings Per Share, Continued
September 30,
--------------------------------
1996 1995
--------------------------------
Net income $ 7,769,626 $ 8,070,995
Interest expenses associated with
the convertible debentures (3) 45,537 55,356
Income taxes (4) (15,482) (18,821)
----------- -----------
Net income adjusted $ 7,799,681 $ 8,107,530
=========== ===========
Earnings per common share $ 1.17 $ 1.29
=========== ===========
(1) Potential dilution relating to convertible debentures is
calculated as follows:
Average debentures outstanding 636,586 664,000
Conversion price 10.89 10.89
----------- -----------
Potentially dilutive shares 58,456 60,973
=========== ===========
(2) Potential dilution relating to preferred stock is calculated
as follows:
Average Series A Preferred stock
outstanding - 9,546,575
Conversion price - 8.33
-----------
Potentially dilutive shares - 1,145,589
===========
Average Series B Preferred stock
outstanding 7,564,500 3,236,226
Conversion price 14.00 14.00
----------- -----------
Potentially dilutive shares 540,322 231,159
=========== ===========
(3) This amount includes interest expense and the amortization of
issuance costs associated with the convertible debentures.
(4) Income taxes have been computed at the Company's marginal tax
rate of 34%.
120
<PAGE> 121
Exhibit 12
Statements of Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends
September 30,
----------------------------------------
1996 1995 1994
----------------------------------------
Computation of Earnings:
Income before income taxes
and extraordinary item $11,672,117 $11,278,362 $ 8,798,522
Add:
Interest expense 40,812,748 32,732,917 25,116,914
----------- ----------- -----------
Earnings as adjusted $52,484,865 $44,011,279 $33,915,436
=========== =========== ===========
Computation of Fixed Charges:(a)
Interest expense (including
amortization of debt
expense) $40,812,748 $32,732,917 $25,116,914
Preferred stock dividends(b) 681,842 1,207,166 1,296,372
----------- ----------- -----------
$41,494,590 $33,940,083 $26,413,286
=========== =========== ===========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.26x 1.30x 1.28x
=========== =========== ===========
(a) No portion of rental expense could be demonstrated to be
representative of the interest factor, and therefore none is
included in fixed charges.
(b) Preferred stock dividends have been increased to an amount
representing the pre-tax earnings which would be required to cover
such dividend requirements.
121
<PAGE> 122
Exhibit 23 (a)
Coopers & Lybrand L.L.P.
1100 Campanile Building
1155 Peachtree Street
Atlanta, GA 30309-3630
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the registration statements
of First Liberty Financial Corp. and Subsidiaries on Forms S-8 (File Nos. 33-
24733 and 333-00385) of our report, which includes an explanatory paragraph
concerning a change in the method of accounting for impaired loans and
mortgage servicing rights in 1996, dated November 5, 1996, except as to the
information presented in the first paragraph of Note 3, for which the date is
November 15, 1996, on our audits of the consolidated financial statements of
First Liberty Financial Corp. and Subsidiaries as of September 30, 1996 and
1995, and for the years ended September 30, 1996, 1995 and 1994, which report
is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
December 17, 1996
122
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1996, FORM 10-K AND THRIFT FINANCIAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 37,925
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 29,707
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 200,017
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 755,695
<ALLOWANCE> 8,611
<TOTAL-ASSETS> 1,071,191
<DEPOSITS> 760,494
<SHORT-TERM> 181,093
<LIABILITIES-OTHER> 20,788
<LONG-TERM> 32,366
7,564
0
<COMMON> 6,104
<OTHER-SE> 62,782
<TOTAL-LIABILITIES-AND-EQUITY> 1,071,191
<INTEREST-LOAN> 62,021
<INTEREST-INVEST> 12,934
<INTEREST-OTHER> 127
<INTEREST-TOTAL> 75,082
<INTEREST-DEPOSIT> 31,881
<INTEREST-EXPENSE> 40,812
<INTEREST-INCOME-NET> 34,270
<LOAN-LOSSES> 1,788
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 30,917
<INCOME-PRETAX> 11,672
<INCOME-PRE-EXTRAORDINARY> 11,672
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,770
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 8.62
<LOANS-NON> 3,564
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,252
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,816
<CHARGE-OFFS> 2,460
<RECOVERIES> 1,467
<ALLOWANCE-CLOSE> 8,611
<ALLOWANCE-DOMESTIC> 6,844
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,767
</TABLE>
