<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
----------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
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 No.)
201 Second Street, Macon, Georgia 31297
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(912) 743-0911
- ------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Exhibit index appears on page 21.
There were 7,724,780 shares of Common Stock outstanding as of
May 12, 1997.
Page 1 of 24
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FIRST LIBERTY FINANCIAL CORP.
-----------------------------
QUARTERLY REPORT ON FORM 10-Q
-----------------------------
FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------
Table of Contents
PART I - FINANCIAL INFORMATION
- ------------------------------
Item Page
- ---- ----
1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Independent Accountants' Report 11
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
- ---------------------------
4. Submission of Matters to a Vote of Securities Holders 19
6. Exhibits and Reports on Form 8-K 19
Signatures 20
Index of Exhibits 21
2
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First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Financial Condition
- ----------------------------------------------
(Unaudited)
- -----------
March 31, September 30,
--------- -------------
1997 1996
- ------------------------------------------------------------------------------
(dollars in thousands)
Assets:
- -------
Cash and due from banks $ 43,019 $ 40,015
Federal funds sold and repurchase agreements 10,569 33,137
Securities available-for-sale, at market value 263,132 232,858
Loans available-for-sale, net, at market value 21,044 26,906
Loans, net 840,932 786,729
Accrued interest receivable 8,321 8,723
Premises and equipment, net 24,285 23,416
Real estate, net 3,511 3,060
Intangible assets 9,654 10,211
Mortgage servicing rights 6,870 6,132
Advances to attorneys for loans originated 10,826 1,729
Other assets 5,870 7,551
---------- ----------
Total assets $1,248,033 $1,180,467
========== ==========
Liabilities and Stockholders' Equity:
- -------------------------------------
Deposits $ 880,281 $ 858,784
Notes payable and other borrowed money 184,660 184,660
Subordinated debentures 12,238 12,155
Securities sold under agreements to repurchase
and federal funds purchased 63,657 16,644
Checks payable on loans originated 2,335 4,450
Other liabilities 13,201 17,317
---------- ----------
Total liabilities 1,156,372 1,094,010
---------- ----------
Commitments and contingencies - -
Stockholders' equity:
Series B, 6.00% Cumulative Convertible
Preferred stock ($25.00 stated value, 302,580
shares authorized, issued and outstanding in 1996) - 7,564
Common stock ($1.00 par value, 25,000,000
shares authorized, 7,758,290 and 7,144,216
shares issued, respectively, and 7,724,780 and
7,110,706 shares outstanding, respectively) 7,758 7,144
Additional paid-in capital 38,451 31,092
Retained earnings 45,766 40,994
Net unrealized loss on securities available-
for-sale, net of taxes (45) (68)
Treasury stock at cost (33,510 shares) (269) (269)
---------- ----------
Total stockholders' equity 91,661 86,457
---------- ----------
Total liabilities and stockholders' equity $1,248,033 $1,180,467
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
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First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Income
- ---------------------------------
(Unaudited)
- -----------
Three Months Ended Six Months Ended
------------------ ----------------
March 31, March 31,
--------------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------
(dollars in thousands, except per share data)
Interest Income:
- ----------------
Loans $19,412 $16,765 $38,378 $33,463
Securities 4,081 3,556 8,077 7,066
Federal funds sold and
repurchase agreements 137 157 522 538
------- ------- ------- -------
Total interest income 23,630 20,478 46,977 41,067
------- ------- ------- -------
Interest Expense:
- -----------------
Deposits 9,118 9,139 18,475 18,529
Short-term borrowings 1,751 1,451 3,745 2,829
Long-term borrowings 1,797 692 3,103 1,319
------- ------- ------- -------
Total interest expense 12,666 11,282 25,323 22,677
------- ------- ------- -------
Net interest income 10,964 9,196 21,654 18,390
Provision for estimated
losses on loans 616 794 1,210 1,421
------- ------- ------- -------
Net interest income after provision
for estimated losses on loans 10,348 8,402 20,444 16,969
------- ------- ------- -------
Noninterest Income:
- -------------------
Loan servicing fees 549 615 1,123 1,251
Gain on sale of investment securities 89 - 118 (7)
Gain (loss) on sale of loans and
mortgage-backed securities 534 440 953 823
Gain on sale of servicing 389 281 722 545
Deposit account service charges 1,493 1,151 2,946 2,347
Other income 450 450 721 743
------- ------- ------- -------
Total noninterest income 3,504 2,937 6,583 5,702
------- ------- ------- -------
13,852 11,339 27,027 22,671
------- ------- ------- -------
Noninterest Expense:
- --------------------
Compensation, taxes and benefits 4,854 3,802 9,044 7,747
Occupancy and equipment 887 981 1,753 1,912
Advertising 263 234 662 475
Professional fees 211 141 834 311
Data processing 234 214 466 447
Federal deposit insurance premiums 81 343 447 705
Amortization of intangible assets 278 278 557 557
Net cost of operation of
other real estate 20 255 79 359
Other expenses 1,399 1,046 2,642 2,199
------- ------- ------- -------
Total noninterest expense 8,227 7,294 16,484 14,712
------- ------- ------- -------
Income before income tax expense 5,625 4,045 10,543 7,959
Income tax expense 2,223 1,438 4,175 2,741
------- ------- ------- -------
Net income 3,402 2,607 6,368 5,218
Dividends on preferred stock - 113 113 227
------- ------- ------- -------
Net income applicable to common
stockholders $ 3,402 $ 2,494 $ 6,255 $ 4,991
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
4
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First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Income
- ---------------------------------
(Unaudited)
- -----------
Three Months Ended Six Months Ended
------------------ ----------------
March 31, March 31,
-------------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------
Earnings Per Common Share:
- --------------------------
Primary $ .45 $ .35 $ .85 $ .70
Fully diluted $ .44 $ .34 $ .82 $ .68
Dividends Per Common Share: $ .10 $ .09 $ .20 $ .17
- ---------------------------
Average Number of Shares Outstanding:
- -------------------------------------
Primary 7,489,629 7,122,798 7,334,586 7,106,258
Fully diluted 7,814,859 7,722,299 7,776,879 7,706,603
The accompanying notes are an integral part of the consolidated financial
statements.
5
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First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------
(Unaudited)
- -----------
Six Months Ended
----------------
March 31,
---------------------------
1997 1996
- ---------------------------------------------------------------------------
(dollars in thousands)
Operating Activities:
- ---------------------
Cash flows from operating activities:
Net income $ 6,368 $ 5,218
Adjustments to reconcile net income
to cash provided by (used in) operations:
Depreciation 948 1,015
Amortization of loan fees, net 21 (20)
Provision for estimated losses
on loans and real estate 1,259 1,734
Amortization of intangibles 557 557
Dividends received on stock (143) (136)
Gain on sale of loans and securities (1,071) (816)
Loans available-for-sale:
Disbursements (49,360) (68,694)
Purchases (73,695) (115,189)
Sales 129,810 149,193
Repayments 88 172
Decrease(increase) in accrued interest receivable 402 (309)
Increase in accrued interest payable 108 73
Other, net (4,809) (4,357)
-------- --------
Total adjustments 4,115 (36,777)
-------- --------
Net cash provided by (used in)
operating activities 10,483 (31,559)
-------- --------
Investing Activities:
- ---------------------
Cash flows from investing activities:
Net decrease in federal funds
sold and repurchase agreements 22,568 21,252
Investment securities available-for-sale:
Purchases (39,927) (11,334)
Sales 6,322 3,192
Maturities 27,170 13,028
Mortgage-backed securities available-for-sale:
Purchases (51,028) (29,342)
Sales 194 -
Repayments 27,113 17,160
Net increase in loans (54,453) (26,698)
Purchases of premises and equipment (1,833) (641)
Proceeds from sales of real estate 282 2,288
Net increase in advances to attorneys
for loans originated (9,097) (16,033)
-------- --------
Net cash used in investing activities (72,689) (27,128)
-------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
6
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First Liberty Financial Corp. and Subsidiaries
- ----------------------------------------------
Consolidated Statements of Cash Flows, continued
- ------------------------------------------------
(Unaudited)
- -----------
Six Months Ended
----------------
March 31,
----------------------------
1997 1996
- -----------------------------------------------------------------------------
(dollars in thousands)
Financing Activities:
- ---------------------
Cash flows from financing activities:
Net increase in deposits 21,426 7,900
Notes payable and other borrowed money:
Proceeds 233,000 270,000
Repayments (233,000) (233,500)
Net increase in securities sold
under agreements to repurchase and fed
fund sold 47,013 8,945
Net increase (decrease) in checks payable
on loans originated (2,115) 10,127
Issuance of common stock 419 107
Redemption of preferred stock (38) -
Redemption of convertible subordinated debentures (32) -
Dividends paid on stock (1,463) (1,210)
-------- --------
Net cash provided by
financing activities 65,210 62,369
-------- --------
Net increase in cash and due from banks 3,004 3,682
Cash and due from banks beginning of period 40,015 27,103
-------- --------
Cash and due from banks end of period $ 43,019 $ 30,785
======== ========
Supplemental Disclosures of
- ---------------------------
Cash Flow Information:
----------------------
Cash paid during the year for:
Interest $ 25,215 $ 22,604
Income taxes 1,885 2,943
Noncash investing and financing activities:
Real estate foreclosed $ 1,283 $ 2,498
Financing of sales of foreclosed real estate 400 174
Dividends declared, unpaid on preferred stock - 113
Dividends declared, unpaid on common stock 771 518
The accompanying notes are an integral part of the consolidated financial
statements.
7
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FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
-----------
1. Summary of Significant Accounting Policies
- -- ------------------------------------------
The accounting and reporting policies of First Liberty Financial Corp. and
Subsidiaries ("First Liberty" or "the Company") conform to generally accepted
accounting principles and to general practices within the savings and loan
industry. The interim consolidated financial statements included herein are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows for the interim periods presented. All
adjustments reflected in the interim financial statements are of a normal
recurring nature. Such financial statements should be read in conjunction
with the financial statements and notes thereto and the report of independent
accountants included in the Company's Form 10-K Annual Report for the fiscal
year ended September 30, 1996. The year end balance sheet data was derived
from audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The results of
operations for the three and six months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
All financial information has been retroactively restated to reflect (i) the
Middle Georgia Bank ("MGB") merger which closed November 15, 1996 and was
accounted for utilizing the pooling-of-interests method of accounting, and
(ii) the three-for-two stock split in the form of a stock dividend which was
effective October 1, 1996.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year consolidated financial
statements presentation.
2. Earnings Per Share
- -- ------------------
Earnings per share are computed based 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, 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 March 31 or the
average market price for the quarter, and (iii) the conversion, if dilutive,
of all convertible preferred stock as of the beginning of the year, with the
elimination of dividends declared.
3. Sale of Servicing
- -- -----------------
During the three and six months ended March 31, 1997, Liberty Mortgage
Corporation ("Liberty Mortgage"), the Company's mortgage banking subsidiary,
sold bulk loan servicing rights with aggregate principal balances of $48
million and $72 million, respectively, compared to $24 million and $67 million,
respectively, a year earlier. This resulted in the recognition of a gain on
the sale of servicing of $389,000 and $722,000 for the three and six months
ended
8
<PAGE> 9
March 31, 1997 compared to $281,000 and $545,000, respectively, for the same
periods a year ago. The servicing rights sold generally related to loans
originated for sale and sold within the last six months. The servicing sale
during the six months ended March 31, 1996 included principal balances of $21
million in which Liberty Mortgage granted recourse to the buyer. Accordingly,
the gain related to such rights of $246,000 was deferred and recognized in the
third quarter of fiscal 1996 when the recourse expired.
4. Mortgage Servicing Rights
- -- -------------------------
Liberty Mortgage invests in mortgage servicing rights ("MSRs") resulting from
loans originated or purchased through correspondent relationships. The
investment in MSRs has the effect of reducing the basis in the loans purchased
or originated, and increasing the gain (or reducing the loss) on sales of
loans. The following table outlines the activity in MSRs for the three and
six month periods ended March 31, 1997 and 1996 (dollars in thousands).
Three Months Ended Six Months Ended
------------------ ----------------
March 31, March 31,
--------------------------------------------
1997 1996 1997 1996
--------------------------------------------
Capitalized $939 $1,217 $1,709 $1,959
Sold 294 13 294 45
Amortized 348 128 677 222
Recovered (Reserved) 8 - - -
Net Investment at March 31, 6,870 3,768
The estimated combined fair value of these assets exceeded the book value at
March 31, 1997 and 1996. When determining fair value the Company considers the
date of origination, the average note rate, the average remaining term and
estimated prepayment speed. The fair value is calculated by estimating the
present value of future net servicing income.
5. Acquisitions
- -- ------------
On November 15, 1996 the Company acquired by merger MGB. On the merger date
MGB had total assets of approximately $129 million, total liabilities of $119
million and total stockholders' equity of $10 million. This business
combination was accounted for utilizing the pooling-of-interests method of
accounting, and accordingly, all financial information prior to the merger
has been retroactively restated.
9
<PAGE> 10
The following table shows the effect of the above transaction on results of
operations for the periods prior to the merger (dollars in thousands).
Period Ended Three Months Six Months
------------ ------------ ----------
October 1, 1996 Ended Ended
--------------- ----- -----
Through November 15, 1996 March 31, 1996 March 31, 1996
------------------------- -------------- --------------
Total Revenue:
- --------------
First Liberty $11,721 $20,798 $41,545
MGB 1,277 2,617 5,224
------- ------- -------
Combined $12,998 $23,415 $46,769
======= ======= =======
Net Income:
- -----------
First Liberty $ 1,438 $ 2,366 $ 4,627
MGB 134 128 364
------- ------- -------
Combined $ 1,572 $ 2,494 $ 4,991
======= ======= =======
6. Redemption of Convertible Preferred Stock
- -- -----------------------------------------
On March 7, 1997, the Company redeemed 1,409 shares of its Series B 6.00%
Cumulative Convertible Preferred ("Series B") stock for $38,043, plus accrued
and unpaid dividends. The remaining 301,171 shares of the Series B were
converted into 537,220 shares of the Company's common stock, at a conversion
price of $14.00 per share, or 1.7857 shares of common stock.
7. Recently Issued Accounting Standards
- -- ------------------------------------
In February 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which sets
forth new rules concerning the calculation and presentation of earnings per
share information in financial statements. SFAS No. 128 is required for
financial statements issued after December 15, 1997. Earlier adoption is
prohibited. Adoption of the standard by First Liberty is not expected to
have a material impact on earnings per share or the financial statements
taken as a whole.
10
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Coopers & Lybrand L.L.P.
1100 Campanile Building
1155 Peachtree Street
Atlanta, Georgia 30309
Report of Independent Accountants
To the Board of Directors
First Liberty Financial Corp.
We have reviewed the accompanying consolidated financial statements of First
Liberty Financial Corp. and Subsidiaries as of March 31, 1997 and for the
three-month and six-month periods then ended. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Atlanta, Georgia
May 9, 1997
11
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FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
----------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
Overview
- --------
First Liberty Financial Corp. is a unitary 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"), collectively known as "the
Company".
Liquidity
- ---------
The Company's primary sources of funds are deposits, loan repayments, sales
and maturities of securities, loan sales, repurchase agreements, advances
from the Federal Home Loan Bank 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 Liberty Bank'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 was in compliance with its requirements at March 31,
1997.
Capital Resources
- -----------------
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 regulatory capital
requirements at March 31, 1997 (dollars in thousands):
Actual for Liberty Bank Regulatory Requirement
- ---------------------------------------------------------------
% of % of
Capital Adjusted Adjusted Excess
Standard Amount Assets Amount Assets Amount
- -----------------------------------------------------------------------------
Tangible $ 78,067 6.29% $18,611 1.50% $59,456
- -----------------------------------------------------------------------------
Core $ 79,574 6.41% $37,267 3.00% $42,307
- -----------------------------------------------------------------------------
Risk-based $100,640 11.28% $71,347 8.00% $29,293
- -----------------------------------------------------------------------------
12
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The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes
five classifications for institutions based upon the capital requirements.
Each appropriate 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.
Commitments
- -----------
Commitments to originate or purchase loans are generally made at the market
rate prevailing at the time of issuance. The Company had open commitments to
originate or purchase residential mortgage loans of approximately $109 million,
including $10 million to be held in portfolio and $43 million on which the
interest rate had not been locked-in at March 31, 1997. Commitments to sell
residential mortgage loans and mortgage-backed securities for mandatory
delivery were approximately $51 million at March 31, 1997. Also at March 31,
1997, the Company bought $2.0 million of optional commitments to sell
residential mortgage loans. Loans in process (which represent undisbursed
loan commitments related to construction loans) and unused lines of credit
amounted to $114 million at March 31, 1997.
Results of Operations
- ---------------------
The Company's consolidated net income for the three and six months ended March
31, 1997 was $3.4 million and $6.4 million, respectively, compared to $2.6
million and $5.2 million for the three and six months ended March 31, 1996,
respectively. Included in the Company's net income for the six months ended
March 31, 1997 were nonrecurring expenses related to the Middle Georgia Bank
("MGB") merger which closed on November 15, 1996 totaling approximately
$312,000, net of taxes.
The Company's net income is affected by the level of its noninterest income,
noninterest expense and the level of earnings of its mortgage banking
operations. However, the Company's net income is most significantly affected
by the difference between interest income on its loan and investment
portfolios and the interest expense of its deposits and borrowings ("net
interest income"). Net interest income is affected by several factors, but
is most affected by the volume of and interest rates on interest-earning
assets and interest-bearing liabilities.
13
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The following tables reflect the effective yields and costs of funds for the
three and six month periods ended March 31, 1997 and 1996 (dollars in
thousands):
Average Balance Rate/Yield
--------------- ----------
Three Months Ended Three Months Ended
------------------ ------------------
March 31, March 31,
--------- ---------
1997 1996 1997 1996
--------------------- --------------------
Interest-Earning Assets:
- ------------------------
Loans $ 849,496 $730,833 9.14% 9.18%
Securities 249,042 206,124 6.55% 6.90%
Federal funds sold and
repurchase agreements 10,714 11,456 5.12% 5.48%
---------- -------- ----- -----
All interest-earning assets $1,109,252 $948,413 8.52% 8.64%
========== ======== ----- -----
Interest-Bearing Liabilities:
- -----------------------------
Deposits $ 863,108 $817,860 4.23% 4.47%
Borrowings 238,742 128,988 5.94% 6.65%
---------- -------- ----- -----
All interest-bearing liabilities $1,101,850 $946,848 4.60% 4.77%
========== ======== ----- -----
Interest rate spread 3.92% 3.87%
- -------------------- ===== =====
Interest income as a percentage
- -------------------------------
of average earning assets 3.95% 3.88%
------------------------- ===== =====
Average Balance Rate/Yield
--------------- ----------
Six Months Ended Six Months Ended
---------------- ----------------
March 31, March 31,
--------- ---------
1997 1996 1997 1996
--------------------- ------------------
Interest-Earning Assets:
- ------------------------
Loans $ 831,572 $717,493 9.23% 9.33%
Securities 246,675 203,726 6.55% 6.94%
Federal funds sold and
repurchase agreements 20,866 17,341 5.01% 6.20%
---------- -------- ----- -----
All interest-earning assets $1,099,113 $938,560 8.55% 8.75%
========== ======== ----- -----
Interest-Bearing Liabilities:
- -----------------------------
Deposits $ 866,249 $817,895 4.27% 4.53%
Borrowings 226,332 117,794 6.05% 7.04%
---------- -------- ----- -----
All interest-bearing liabilities $1,092,581 $935,689 4.64% 4.85%
========== ======== ----- -----
Interest rate spread 3.91% 3.90%
- -------------------- ===== =====
Interest income as a percentage
- -------------------------------
of average earning assets 3.94% 3.92%
------------------------- ===== =====
14
<PAGE> 15
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's interest income and expense for the six month
period ended March 31, 1997 to the six month period ended March 31, 1996
(dollars in thousands):
March 31, 1997 vs March 31, 1996
----------------------------------------
Due To
----------------------------------------
Rate/
Rate Volume Volume Total
------- ------- ------- -------
Changes in Interest Income:
- ---------------------------
Loans $ (350) $5,321 $ (56) $4,915
Securities (396) 1,490 (83) 1,011
Federal funds sold and
repurchase agreements (104) 109 (21) (16)
------ ------ ------ ------
Total interest income (850) 6,920 (160) 5,910
------ ------ ------ ------
Changes in Interest Expense:
- ----------------------------
Deposits (1,085) 1,095 (64) (54)
Borrowings (584) 3,822 (538) 2,700
------ ------ ------ ------
Total interest expense (1,669) 4,917 (602) 2,646
------ ------ ------ ------
Net interest income $ 819 $2,003 $ 442 $3,264
====== ====== ====== ======
The Company's provision for estimated losses on loans was $616,000 and $1.2
million for the three and six months ended March 31, 1997, respectively, as
compared to $794,000 and $1.4 million for the same periods a year earlier.
Loan loss reserves at March 31, 1997 were $10.7 million (187% of
nonperforming loans or 1.26% of loans held for investment) compared to $9.9
million (183% of nonperforming loans or 1.38% of loans held for investment)
at March 31, 1996.
During the quarter ended March 31, 1997, the Company recorded $212,000 in
charge-offs that related to properties foreclosed during the quarter ended
December 31, 1996. If those charge-offs had been recorded in the quarter ended
December 31, 1996, net charge-offs for the quarter would have been $693,000
instead of $481,000 as originally reported. After excluding the effects of
the above mentioned first quarter foreclosure related charge-offs, net
charge-offs during the three months ended March 31, 1997 were $980,000 as
compared to $270,000 during the three months ended March 31, 1996. During
the six months ended March 31, 1997, net charge-offs were $1.7 million as
compared to $653,000 a year earlier.
During the three and six months ended March 31, 1997, the level of net charge-
offs increased from prior years. The increased charge-offs related to (i)
expansion of the loan portfolio, (ii) increased losses in loans acquired in the
MGB merger and (iii) an increase in the losses related to consumer bankruptcies
and other consumer loans. During the six months ended March 31, 1997, average
loans increased by 16% from prior year levels. Additionally, net charge-offs
from loans acquired in the MGB merger were approximately $235,000 and $295,000
during the three and six months ended March 31, 1997, respectively, as compared
to $3,000 and $241,000 for the same periods a year earlier. As of
September 30, 1996 MGB's allowance for loan loss was approximately $2.5
million. During the quarter ended March 31, 1997, the level of consumer loans
in bankruptcy, and losses on loans in bankruptcy and other consumer loans
increased. Management believes such trends are indicative of both national
and local market conditions for consumer credit. It is possible that increased
charge-offs from prior year levels may continue to occur during the remainder
of fiscal 1997. If such trends continue, the level of loan loss provisions
may be increased.
15
<PAGE> 16
The table below summarizes nonperforming assets at March 31, 1997 and March 31,
1996. Nonperforming assets consist of nonaccrual loans, foreclosed real
estate, other repossessed assets, and loans with interest or principal past
due 90 days or more which are still accruing (dollars in thousands).
March 31,
---------------------------
1997 1996
---------------------------
Nonaccrual loans $ 5,763 $ 3,760
Loans past due 90 days and still accruing - 1,682
Foreclosed real estate 4,059 5,099
Other repossessed assets 296 516
------- -------
Total nonperforming assets $10,118 $11,057
======= =======
Total nonperforming assets as
a percentage of total assets .81% 1.01%
======= =======
Real estate owned before allowance for estimated losses increased $400,000 to
$4.1 million at March 31, 1996 from $3.7 million at September 30, 1996.
Activity in real estate owned during the six months ended March 31, 1997
reflected foreclosures of $1.3 million and gross sales of $848,000.
Liberty Mortgage originated loans during the three and six months ended
March 31, 1997 totaling $67 million and $136 million, respectively, compared
to $113 million and $190 million for the same periods a year earlier.
Liberty Mortgage invests in mortgage servicing rights ("MSRs") resulting from
loans originated or purchased through correspondent relationships. The
investment in MSRs has the effect of reducing the basis in the loans purchased
or originated, and increasing the gain (or reducing the loss) on sales of
loans. The following table outlines the activity in MSRs for the three and
six month periods ended March 31, 1997 and 1996 (dollars in thousands).
Three Months Ended Six Months Ended
------------------ ----------------
March 31, March 31,
---------------------------------------
1997 1996 1997 1996
---------------------------------------
Capitalized $939 $1,217 $1,709 $1,959
Sold 294 13 294 45
Amortized 348 128 677 222
Recovered (Reserved) 8 - - -
Net Investment at March 31, 6,870 3,768
The estimated combined fair value of these assets exceeded the book value at
March 31, 1997 and 1996. When determining fair value the Company considers the
date of origination, the average note rate, the average remaining term and
estimated prepayment speed. The fair value is calculated by estimating the
present value of future net servicing income.
During the three and six months ended March 31, 1997, Liberty Mortgage sold
bulk loan servicing rights with aggregate principal balances of $48 million
and $72 million, respectively, compared to $24 million and $67 million,
respectively, a year earlier. This resulted in the recognition of a gain on
the sale of servicing of $389,000 and $722,000 for the three and six months
ended March 31, 1997 compared to $281,000 and $545,000, respectively, for the
same periods a year ago. The servicing rights sold generally related to
loans originated for sale and sold within the last six months. The servicing
sale during the six months ended March 31, 1996 included principal balances
of $21 million in which Liberty Mortgage granted recourse to the buyer.
Accordingly, the gain related to such
16
<PAGE> 17
rights of $246,000 was deferred and recognized in the third quarter of fiscal
1996 when the recourse expired.
Approximate nonrecurring expenses directly related to the MGB merger (see
"Acquisitions" - herein) which decreased noninterest income, and increased
noninterest expense for the six months ended March 31, 1997 are as follows
(dollars in thousands, except per share data).
Deposit account service charges $ (35)
Other income (59)
-----
Total noninterest income (94)
-----
Compensation, taxes and benefits 7
Occupancy and equipment 18
Advertising 3
Professional fees 346
Data processing 32
Other 17
-----
Total noninterest expense 423
-----
Total expense before income tax benefit 517
Income tax benefit (205)
-----
Net expense $(312)
=====
Impact on earnings per common share:
Primary $(.05)
Fully Diluted $(.04)
Noninterest income (net of gains on the sale of assets and MGB merger related
items) increased $276,000 (or 12%) and $543,000 (or 13%) during the three and
six months ended March 31, 1997, respectively, as compared to the same
periods a year earlier. The significant contributor was deposit account
service charges increasing $342,000 (or 30%) and $634,000 (or 27%) for the
three and six months ended March 31, 1997, respectively, as compared to the
same periods a year ago, largely due to increased checking account activity.
Noninterest expense (net of other real estate operations and MGB merger related
expenses) for the three and six months ended March 31, 1997 increased $1.2
million (or 17%) and $1.6 million (or 11%), respectively, over the same periods
a year ago. One notable increase was in compensation and benefits, reflecting
the continued growth in the Company's community banking operations plus its new
consumer finance subsidiary, NewSouth. Other expenses also increased resulting
from several items, none of which was significant.
The net cost of operations of other real estate decreased by $235,000 and
$280,000 for the three months and six months ended March 31, 1997 as compared
to the same periods a year earlier. The following table summarizes these
variances (dollars in thousands).
Three Months Ended Six Months Ended
------------------ ----------------
March 31, March 31,
------------------------------------
1997 1996 1997 1996
------------------------------------
Provisions for estimated losses $ 40 $213 $ 49 $313
Net gains on sales (36) (4) (13) (24)
Net expense from operations 16 46 43 70
---- ---- ---- ----
Net cost of operation of other
real estate $ 20 $255 $ 79 $359
==== ==== ==== ====
17
<PAGE> 18
Accounting for Income Taxes
- ---------------------------
The Company's effective income tax rate for the three and six months ended
March 31, 1997 was 39.5% and 39.6%, respectively compared to 35.6% and 34.4%,
respectively, a year earlier. The increase in the effective tax rates related
principally to the effect of state income taxes, which is the result of the
exhaustion of state net operating loss carry forwards. Management continues
to review opportunities to reduce income taxes which, if successful, might
reduce the company's effective tax rate later in fiscal 1997.
The Company's management has determined that it is more likely than not that
its deferred tax assets 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 the Company's existing deductible
temporary differences. The Company is not aware of any material
uncertainties existing at March 31, 1997 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.
Acquisitions
- ------------
On November 15, 1996 the Company acquired by merger MGB. On the merger date
MGB had total assets of approximately $129 million, total liabilities of $119
million and total stockholders' equity of $10 million. This business
combination was accounted for utilizing the pooling-of-interests method of
accounting, and accordingly, all financial information prior to the merger
has been retroactively restated. See Note 5 to "First Liberty Financial
Corp. and Subsidiaries Notes to Consolidated Financial Statements" - herein.
Redemption of Convertible Preferred Stock
- -----------------------------------------
On March 7, 1997, the Company redeemed 1,409 shares of its Series B 6.00%
Cumulative Convertible Preferred ("Series B") stock for $38,043, plus accrued
and unpaid dividends. The remaining 301,171 shares of the Series B were
converted into 537,220 shares of the Company's common stock, at a conversion
price of $14.00 per share, or 1.7857 shares of common stock.
Recently Issued Accounting Standards
- ------------------------------------
In February 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which sets
forth new rules concerning the calculation and presentation of earnings per
share information in financial statements. SFAS No. 128 is required for
financial statements issued after December 15, 1997. Earlier adoption is
prohibited. Adoption of the standard by the Company is not expected to have
a material impact on earnings per share or the financial statements taken as a
whole.
18
<PAGE> 19
PART II - Other information
- ---------------------------
Item 4. Submission of Matters to a Vote of Securities Holders
- ------- -----------------------------------------------------
The Registrant's 1997 Annual Meeting of Stockholders was held on January
29, 1997. The following director was elected for a term expiring at the
1998 annual meeting - Harold W. Peavy, Jr. The following directors were
elected for terms expiring at the 2000 annual meeting - Melvin I.
Kruger, Herbert M. Ponder, Jr. and Jo Slade Wilbanks. The votes for
each nominees were as follows:
For Withhold
--------- --------
Harold W. Peavy, Jr. 5,872,964 12,833
Melvin I. Kruger 5,874,624 11,173
Herbert M. Ponder, Jr. 5,874,624 11,173
Jo Slade Wilbanks 5,873,675 12,122
Item 6. Exhibits and Reports Filed on Form 8-K
- ------- --------------------------------------
(a) Exhibits
Exhibit 11 - Statements of Computation of Earnings Per Share
Exhibit 15 - Awareness Letter of Coopers & Lybrand L.L.P.
Exhibit 27 - Financial Data Schedule
(b) Reports Filed on Form 8-K
None
19
<PAGE> 20
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST LIBERTY FINANCIAL CORP.
-----------------------------
DATE: May 12, 1997 /s/ David L. Hall
------------------------ ------------------------
David L. Hall
Executive Vice President and
Chief Financial Officer
(Duly authorized, principal
financial and principal accounting
officer)
20
<PAGE> 21
FIRST LIBERTY FINANCIAL CORP.
-----------------------------
Index of Exhibits
-----------------
The following exhibits are filed as part of the Report.
Exhibit No. Description Page
- ----------- ----------------------------------------------- ----
11 Statements of Computation of Earnings Per Share 22
15 Awareness Letter of Coopers & Lybrand L.L.P. 24
27 Financial Data Schedule -
21
<PAGE> 22
Exhibit 11
----------
Statements of Computation of Earnings Per Share
-----------------------------------------------
Three Months Ended Six Months Ended
----------------------------------------------------
March 31, March 31,
----------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------
Primary Earnings Per Share:
- ---------------------------
Average shares outstanding 7,394,663 7,011,516 7,253,731 6,998,538
---------- ---------- ---------- ----------
Average options outstanding 253,996 198,905 225,323 189,302
Average exercise price $ 12.66 $ 6.37 $ 12.40 $ 6.18
---------- ---------- ---------- ----------
Proceeds from the assumed exercise
of options outstanding $3,215,589 $1,267,025 $2,794,005 $1,169,886
Average market price per share 20.22 14.46 19.34 14.34
---------- ---------- ---------- ----------
Assumed shares repurchased 159,030 87,623 144,468 81,582
---------- ---------- ---------- ----------
Common stock equivalents of options
outstanding 94,966 111,282 80,855 107,720
---------- ---------- ---------- ----------
Average shares outstanding (including
common stock equivalents) 7,489,629 7,122,798 7,334,586 7,106,258
========== ========== ========== ==========
Net income $3,402,421 $2,607,787 $6,368,158 $5,218,253
Preferred stock dividend 388 113,468 113,151 226,937
---------- ---------- ---------- ----------
Net income applicable to
common stockholders $3,402,033 $2,494,319 $6,255,007 $4,991,316
========== ========== ========== ==========
Earnings per common share $ .45 $ .35 $ .85 $ .70
========== ========== ========== ==========
Fully Diluted Earnings Per Share:
- ---------------------------------
Average shares outstanding 7,394,663 7,011,516 7,253,731 6,998,538
---------- ---------- ---------- ----------
Average options outstanding 253,996 198,905 225,323 189,302
Average exercise price $ 12.66 $ 6.37 $ 12.40 $ 6.18
---------- ---------- ---------- ----------
Proceeds from the assumed exercise
of options outstanding $3,215,589 $1,267,025 $2,794,005 $1,169,886
Average market price per share 21.25 14.46 21.25 14.34
---------- ---------- ---------- ----------
Assumed shares repurchased 151,322 87,623 131,483 81,582
---------- ---------- ---------- ----------
Common stock equivalents of options
outstanding 102,674 111,282 93,840 107,720
Assumed conversion of outstanding
convertible debentures (1) - 59,180 - 60,024
Assumed conversion of outstanding
preferred stock (2) 317,522 540,321 429,308 540,321
---------- ---------- ---------- ----------
Average shares outstanding (including
common stock equivalents) 7,814,859 7,722,299 7,776,879 7,706,603
========== ========== ========== ==========
Net income $3,402,421 $2,607,787 $6,368,158 $5,218,253
Interest expenses associated with
the convertible debentures (3) - 13,323 - 27,677
Income taxes (4) - 4,530 - 9,410
---------- ---------- ---------- ----------
Net income adjusted $3,402,421 $2,616,580 $6,368,158 $5,236,520
========== ========== ========== ==========
Earnings per common share $ .44 $ .34 $ .82 $ .68
========== ========== ========== ==========
22
<PAGE> 23
Exhibit 11
----------
Statements of Computation of Earnings Per Share, Continued
----------------------------------------------------------
Three Months Ended Six Months Ended
---------------------------------------------------
March 31, March 31,
---------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------
(1) Potential dilution relating to convertible debentures is calculated as
follows:
Average debentures outstanding - 644,470 - 653,661
Conversion price - $ 10.89 - $ 10.89
---------- ----------
Potentially dilutive shares - 59,180 - 60,024
========== ==========
(2) Potential dilution relating to preferred stock is calculated as follows:
Average Series B Preferred stock
outstanding 4,445,300 7,564,500 6,010,312 7,564,500
Conversion price $ 14.00 $ 14.00 $ 14.00 $ 14.00
---------- ---------- ---------- ----------
Potentially dilutive shares 317,522 540,321 429,308 540,321
========== ========== ========== ==========
(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%.
23
<PAGE> 24
Coopers & Lybrand L.L.P.
1100 Campanile Building
1155 Peachtree Street
Atlanta, Georgia 30309
May 9, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: First Liberty Financial Corp.
Registration on Form S-8
We are aware that our report dated May 9, 1997 on our review of interim
financial information of First Liberty Financial Corp. and Subsidiaries for
the three-month and six-month periods ended March 31, 1997, and included in
the Company's quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference into the Company's Form S-8 (File No. 33-24733).
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statement prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
/s/ Coopers & Lybrand L.L.P.
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1997, FORM 10-Q AND THRIFT FINANCIAL REPORT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 43,019
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,569
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 263,132
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 872,724
<ALLOWANCE> 10,748
<TOTAL-ASSETS> 1,248,033
<DEPOSITS> 880,281
<SHORT-TERM> 138,106
<LIABILITIES-OTHER> 15,536
<LONG-TERM> 122,449
0
0
<COMMON> 7,758
<OTHER-SE> 83,903
<TOTAL-LIABILITIES-AND-EQUITY> 1,248,033
<INTEREST-LOAN> 38,378
<INTEREST-INVEST> 8,599
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,977
<INTEREST-DEPOSIT> 18,475
<INTEREST-EXPENSE> 25,325
<INTEREST-INCOME-NET> 21,654
<LOAN-LOSSES> 1,210
<SECURITIES-GAINS> 118
<EXPENSE-OTHER> 16,484
<INCOME-PRETAX> 10,543
<INCOME-PRE-EXTRAORDINARY> 6,368
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,368
<EPS-PRIMARY> .85
<EPS-DILUTED> .82
<YIELD-ACTUAL> 8.55
<LOANS-NON> 5,763
<LOANS-PAST> 0
<LOANS-TROUBLED> 88
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,151
<CHARGE-OFFS> 2,168
<RECOVERIES> 555
<ALLOWANCE-CLOSE> 10,748
<ALLOWANCE-DOMESTIC> 9,377
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,371
</TABLE>
