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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 June 30, 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
August 14, 1997.
Page 1 of 24
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FIRST LIBERTY FINANCIAL CORP.
-----------------------------
QUARTERLY REPORT ON FORM 10-Q
-----------------------------
FOR THE QUARTER ENDED JUNE 30, 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)
- -----------
June 30, September 30,
-------- -------------
1997 1996
- ------------------------------------------------------------------------------
(dollars in thousands)
Assets:
- -------
Cash and due from banks $ 43,489 $ 40,015
Federal funds sold and repurchase agreements 50,994 33,137
Securities available-for-sale, at market value 249,565 232,858
Loans available-for-sale, net, at market value 18,648 26,906
Loans, net 857,037 786,729
Accrued interest receivable 8,399 8,723
Premises and equipment, net 24,627 23,416
Real estate, net 3,053 3,060
Intangible assets 9,376 10,211
Mortgage servicing rights 7,433 6,132
Advances to attorneys for loans originated 9,279 1,729
Other assets 7,019 7,551
---------- ----------
Total assets $1,288,919 $1,180,467
========== ==========
Liabilities and Stockholders' Equity:
- -------------------------------------
Deposits $ 952,425 $ 858,784
Notes payable and other borrowed money 184,660 184,660
Subordinated debentures 12,310 12,155
Securities sold under agreements to repurchase 27,626 16,644
Checks payable on loans originated 1,962 4,450
Other liabilities 14,908 17,317
---------- ----------
Total liabilities 1,193,891 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 48,490 40,994
Net unrealized gain (loss) on securities
available-for-sale, net of taxes 598 (68)
Treasury stock at cost (33,510 shares) (269) (269)
---------- ----------
Total stockholders' equity 95,028 86,457
---------- ----------
Total liabilities and stockholders' equity $1,288,919 $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 Nine Months Ended
------------------ -----------------
June 30, June 30,
---------------------------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Interest Income:
- ----------------
Loans $20,260 $17,747 $58,637 $51,213
Securities 4,221 3,434 12,298 10,501
Federal funds sold and
repurchase agreements 293 158 816 696
------- ------- ------- -------
Total interest income 24,774 21,339 71,751 62,410
------- ------- ------- -------
Interest Expense:
- -----------------
Deposits 10,091 9,224 28,566 27,753
Short-term borrowings 1,445 1,629 5,190 4,458
Long-term borrowings 1,999 749 5,102 2,068
------- ------- ------- -------
Total interest expense 13,535 11,602 38,858 34,279
------- ------- ------- -------
Net interest income 11,239 9,737 32,893 28,131
Provision for estimated losses on loans 2,002 513 3,212 1,934
------- ------- ------- -------
Net interest income after provision
for estimated losses on loans 9,237 9,224 29,681 26,197
------- ------- ------- -------
Noninterest Income:
- -------------------
Loan servicing fees 530 600 1,654 1,851
Gain (loss) on sale of
investment securities - - 121 (7)
Gain on sale of loans and
mortgage-backed securities 463 410 1,413 1,232
Gain on sale of servicing - 246 721 791
Deposit account service charges 1,528 1,267 4,474 3,614
Other income 499 254 1,220 994
------- ------- ------- -------
Total noninterest income 3,020 2,777 9,603 8,475
------- ------- ------- -------
12,257 12,001 39,284 34,672
------- ------- ------- -------
Noninterest Expense:
- --------------------
Compensation, taxes and benefits 4,665 3,878 13,709 11,624
Occupancy and equipment 908 916 2,661 2,829
Advertising 413 235 1,075 710
Professional fees 187 236 1,021 547
Data processing 239 191 706 638
Federal deposit insurance premiums 151 353 598 1,059
Amortization of intangible assets 278 278 835 835
Net cost of operation of other real estate 101 110 180 469
Other expense 1,447 1,068 4,089 3,267
------- ------- ------- -------
Total noninterest expense 8,389 7,265 24,874 21,978
------- ------- ------- -------
Income before income tax expense 3,868 4,736 14,410 12,694
Income tax expense 372 1,661 4,546 4,401
------- ------- ------- -------
Net income 3,496 3,075 9,864 8,293
Dividends on preferred stock - 113 113 340
------- ------- ------- -------
Net income applicable to common
stockholders $ 3,496 $ 2,962 $ 9,751 $ 7,953
======= ======= ======= =======
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, continued
- --------------------------------------------
(Unaudited)
- -----------
Three Months Ended Nine Months Ended
----------------------------------------
June 30, June 30,
----------------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------
Earnings Per Common Share:
- --------------------------
Primary $ .45 $ .42 $ 1.30 $ 1.12
Fully diluted $ .45 $ .40 $ 1.27 $ 1.08
Dividends Per Common Share: $ .10 $ .09 $ .30 $ .26
- ---------------------------
Average Number of Shares Outstanding:
- -------------------------------------
Primary 7,837,485 7,127,530 7,501,785 7,098,230
Fully diluted 7,837,485 7,726,395 7,797,803 7,699,203
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)
- -----------
Nine Months Ended
-----------------
June 30,
---------------------------
1997 1996
- -----------------------------------------------------------------------------
(dollars in thousands)
Operating Activities:
- ---------------------
Cash flows from operating activities:
Net income $ 9,864 $ 8,293
Adjustments to reconcile net income
to cash provided by (used in) operations:
Depreciation 1,413 1,534
Amortization of loan fees 69 58
Provision for estimated losses
on loans and real estate 3,342 2,393
Amortization of intangibles 835 835
Dividends received on stock (216) (203)
Gain on sale of loans and securities (1,534) (1,225)
Loans available-for-sale:
Disbursements (71,175) (105,249)
Purchases (121,152) (190,016)
Sales 201,872 276,352
Repayments 123 415
Decrease (increase) in accrued interest receivable 324 (415)
Increase in accrued interest payable 615 236
Other, net (6,791) (2,790)
-------- --------
Total adjustments 7,725 (18,075)
-------- --------
Net cash provided by (used in)
operating activities 17,589 (9,782)
-------- --------
Investing Activities:
- ---------------------
Cash flows from investing activities:
Net decrease (increase) in federal funds
sold and repurchase agreements (17,857) 20,571
Investment securities available-for-sale:
Purchases (39,932) (15,310)
Sales 6,322 3,192
Maturities 29,908 16,127
Mortgage-backed securities available-for-sale:
Purchases (51,028) (35,723)
Sales 194 2,763
Repayments 38,884 28,586
Net increase in loans (71,129) (64,609)
Purchases of premises and equipment (2,667) (1,425)
Proceeds from sales of real estate 549 2,841
Net increase in advances to
attorneys for loans originated (7,550) (6,253)
-------- --------
Net cash provided by (used in)
investing activities (114,306) (49,240)
-------- --------
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)
- -----------
Nine Months Ended
-----------------
June 30,
----------------------------
1997 1996
- -------------------------------------------------------------------------------
(dollars in thousands)
Financing Activities:
- ---------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 93,582 34,214
Notes payable and other borrowed money:
Proceeds 233,000 390,569
Repayments (233,000) (385,600)
Net increase in securities
sold under agreements to repurchase 10,982 25,087
Net increase (decrease) in checks
payable on loans originated (2,488) 2,956
Issuance of common stock 419 214
Redemption of preferred stock (38) -
Redemption of convertible subordinated debentures (32) -
Dividends paid on stock (2,234) (1,842)
-------- --------
Net cash provided by (used in)
financing activities 100,191 65,598
-------- --------
Net increase in cash and due from banks 3,474 6,576
Cash and due from banks beginning of period 40,015 27,103
-------- --------
Cash and due from banks end of period $ 43,489 $ 33,679
======== ========
Supplemental Disclosures of
- ---------------------------
Cash Flow Information:
----------------------
Cash paid during the period for:
Interest $ 38,243 $ 34,043
Income taxes 4,009 4,137
Noncash investing and financing activities:
Real estate foreclosed $ 1,311 $ 2,028
Financing of sales of foreclosed real estate 558 245
Dividends declared, unpaid on preferred stock - 114
Dividends declared, unpaid on common stock 772 520
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 nine months ended June 30, 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 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 June 30 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 (or date of issue), with the elimination of
dividends declared.
3. Sale of Servicing
- ---------------------
During the nine months ended June 30, 1997, Liberty Mortgage Corporation
("Liberty Mortgage"), the Company's mortgage banking subsidiary, sold bulk
loan servicing rights with aggregate principal balances of $72 million as
compared to $67 million for the same period a year earlier. This resulted in
a gain on the sale of servicing of $721,000 and $791,000 for the nine months
ended June 30, 1997 and 1996, respectively. The servicing rights sold
generally related to loans originated for sale and sold within the last six
months. There were no servicing sales during the quarters ended June 30,
1997 and 1996. The servicing sale during the nine months ended June 30, 1996
included principal balances of $21 million in
8
<PAGE> 9
servicing rights which Liberty Mortgage had granted recourse to the seller.
Accordingly, the deferred gain related to such rights of $246,000 was
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 nine month periods ended June 30, 1997 and 1996 (dollars in
thousands).
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
-------------------------------------
1997 1996 1997 1996
-------------------------------------
Capitalized $946 $1,633 $2,655 $3,592
Sold - - 294 45
Amortized 383 211 1,060 433
Net Investment at June 30, 7,433 5,190
The estimated combined fair value of these assets exceeded the book value at
June 30, 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 approximately $129 million in total assets, $119 million in total
liabilities and $10 million in stockholders' equity. 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.
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 Nine Months
------------ ------------ -----------
October 1, 1996 Ended Ended
--------------- ----- -----
Through November 15, 1996 June 30, 1996 June 30, 1996
------------------------- ------------- -------------
Total Revenue:
- --------------
First Liberty $11,721 $21,509 $63,054
MGB 1,277 2,607 7,831
------- ------- -------
Combined $12,998 $24,116 $70,885
======= ======= =======
Net Income:
- -----------
First Liberty $ 1,438 $ 2,585 $ 7,439
MGB 134 490 854
------- ------- -------
Combined $ 1,572 $ 3,075 $ 8,293
======= ======= =======
9
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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 ("FASB") 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.
In February 1997, FASB issued SFAS No. 129 "Disclosure of Information About
Capital Structure" which consolidates the existing requirement to disclose
certain information about and entity's capital structure and is not expected
to change the Company's current capital structure disclosures. SFAS No. 129
is required for financial statements issued after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to present a measure of all changes in equity that result from
recognized transactions and other economic events of the period other than
investments by owner and distributions to owners. The FASB believes that
SFAS No. 130 should help investors, creditors and others in assessing a
company's activities and the timing and magnitude of its future cash flows.
For the Company, the primary difference between net income and comprehensive
income is the change in unrealized gains and losses on securities available-
for-sale. SFAS No. 130 is not expected to have a materially adverse impact
on the consolidated financial position of the Company and is effective for
years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information" which establishes new standards for
public companies to report information about operating segments in annual
financial statements and also requires that those companies report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Management has
not yet determined the impact of SFAS No. 131 on the Company's future
disclosures. SFAS No. 131 is required for financial statements issued after
December 15, 1997.
8. Subsequent Events
- ---------------------
On August 4, 1997 the Company redeemed its 11% and 8 1/4% subordinated
debentures due August, 2004. The bonds were redeemed at a 1% premium plus
accrued interest. Resulting from the redemption, the Company recorded an
extraordinary loss on the extinguishment of debt in the amount of $2.8
million or $.36 per fully diluted share, net of related income taxes totaling
$1.5 million.
10
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COOPERS & LYBRAND L.L.P.
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 June 30, 1997 and for the
three-month and nine-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 reviews, 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.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
August 13, 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
June 30, 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 June 30, 1997 (dollars in thousands):
- ------------------------------------------------------------------------
Actual for Liberty Bank RegulatoryRequirement
- ------------------------------------------------------------
% of % of
Capital Adjusted Adjusted Excess
Standard Amount Assets Amount Assets Amount
- ------------------------------------------------------------------------
Tangible $81,836 6.40% $19,192 1.50% $62,644
- ------------------------------------------------------------------------
Core $83,262 6.50% $38,427 3.00% $44,835
- ------------------------------------------------------------------------
Risk-based $105,025 11.48% $73,173 8.00% $31,852
- ------------------------------------------------------------------------
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.
12
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Commitments
- -----------
Commitments to originate 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 $118
million, including $12 million to be held in portfolio and $47 million on
which the interest rate had not been locked-in at June 30, 1997. Commitments to
sell residential mortgage loans and mortgage-backed securities for mandatory
delivery at June 30, 1997 were approximately $44 million. Also at June 30,
1997, the Company bought $5.0 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 $125 million at June 30, 1997.
Results of Operations
- ---------------------
The Company's consolidated net income for the three and nine months ended
June 30, 1997 was $3.5 million and $9.9 million, respectively, compared to
$3.1 million and $8.3 million for the three and nine months ended June 30,
1996, respectively. Included in the Company's net income for the nine months
ended June 30, 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 and
consumer finance 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. The following tables
reflect the effective yields and costs of funds for the three and nine month
periods ended June 30, 1997 and 1996 (dollars in thousands).
Average Balance Rate/Yield
--------------- ----------
Three Months Ended Three Months Ended
------------------ ------------------
June 30, June 30,
-------- --------
1997 1996 1997 1996
----------------------- --------------------
Interest-Earning Assets:
- ------------------------
Loans $ 868,037 $778,533 9.34% 9.12%
Securities 255,927 198,738 6.60% 6.91%
Federal funds sold and
repurchase agreements 21,413 12,650 5.48% 5.00%
---------- -------- ---- ----
All interest-earning assets $1,145,377 $989,921 8.65% 8.62%
========== ======== ---- ----
Interest-Bearing Liabilities:
- -----------------------------
Deposits $ 919,408 $841,679 4.39% 4.38%
Borrowings 228,038 149,062 6.04% 6.38%
---------- -------- ---- ----
All interest-bearing liabilities $1,147,446 $990,741 4.72% 4.68%
========== ======== ---- ----
Interest rate spread 3.93% 3.94%
- -------------------- ==== ====
Interest income as a percentage
- -------------------------------
of average earning assets 3.93% 3.93%
------------------------- ==== ====
13
<PAGE> 14
Average Balance Rate/Yield
--------------- ----------
Nine Months Ended Nine Months Ended
--------------------- ------------------
June 30, June 30,
-------- --------
1997 1996 1997 1996
---------------------- ------------------
Interest-Earning Assets:
- ------------------------
Loans $ 843,727 $737,767 9.27% 9.26%
Securities 249,759 202,102 6.57% 6.93%
Federal fund sold and
repurchase agreements 21,048 15,781 5.17% 5.88%
---------- -------- ---- ----
All interest-earning assets $1,114,534 $955,650 8.58% 8.71%
========== ======== ---- ----
Interest-Bearing Liabilities:
- -----------------------------
Deposits $ 883,907 $825,815 4.31% 4.48%
Borrowings 226,901 128,007 6.05% 6.80%
---------- -------- ---- ----
All interest-bearing liabilities $1,110,808 $953,822 4.66% 4.79%
========== ======== ---- ----
Interest rate spread 3.92% 3.92%
- -------------------- ==== ====
Interest income as a percentage
- -------------------------------
of average earning assets 3.94% 3.92%
------------------------- ==== ====
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
nine month period ended June 30, 1997 and the nine month period ended June 30,
1996 (dollars in thousands):
June 30, 1997 vs June 30, 1996
---------------------------------------------
Due To
---------------------------------------------
Rate/
Rate Volume Volume Total
--------- --------- -------- ---------
Changes in Interest Income:
- ---------------------------
Loans $ 60 $ 7,355 $ 9 $ 7,424
Securities (550) 2,476 (129) 1,797
Federal funds sold and
repurchase agreements (84) 232 (28) 120
------- ------- ------- -------
Total interest income (574) 10,063 (148) 9,341
------- ------- ------- -------
Changes in Interest Expense:
- ----------------------------
Deposits (1,064) 1,952 (75) 813
Borrowings (720) 5,042 (556) 3,766
------- ------- ------- -------
Total interest expense (1,784) 6,994 (631) 4,579
------- ------- ------- -------
Net interest income $ 1,210 $ 3,069 $ 483 $ 4,762
======= ======= ======= =======
The Company's provision for estimated losses on loans was $2.0 million and
$3.2 million for the three and nine months ended June 30, 1997, respectively,
as compared to $513,000 and $1.9 million during the same periods a year
earlier. There were net charge-offs to the loan loss reserve of $1.3 million
and $2.9 million during the three and nine months ended June 30, 1997,
respectively, compared to net charge-offs of $461,000 and $1.2 million for
the same periods a year earlier. Loan loss reserves at June 30, 1997 were
$11.5 million, or 175% of nonperforming loans, or 1.32% of loans held for
investment, compared to $10.4 million, or 215% of nonperforming loans, or
1.36% of loans held for investment at June 30, 1996.
During the three and nine months ended June 30, 1997, the level of net
charge-offs increased from prior years. This trend related to (i) growth
of the loan portfolio,
14
<PAGE> 15
(ii) losses in loans acquired in the MGB merger and (iii) an increase in the
losses related to consumer bankruptcy and indirect auto loans. During the
nine months ended June 30, 1997, average loans increased by 14% from prior
year levels. Additionally, net charge-offs from loans acquired in the MGB
merger were approximately $259,000 and $554,000 during the three and nine
months ended June 30, 1997, respectively, which represented 20% and 19% of
total net charge-offs while MGB loans only consisted of 7% of total loans
held for investment. As of June 30, 1997 MGB's rated loans were $10 million
or 25% of total rated loans. Management anticipates an accelerated
resolution for MGB loans which could increase charge-offs of MGB loans in
future quarters. Management will continue to assess the adequacy of the
allowance for loan losses relating to MGB loans in light of these possible
developments. During the second and third quarters of fiscal 1997, the level
of consumer bankruptcy and indirect auto loans, and their related losses
increased. Annualized net charge-offs to outstanding balances on this
portfolio of consumer loans for the three and nine months ended June 30, 1997
were 1.63% and 1.32%, respectively, as compared to .55% and .59% for the same
periods a year earlier. 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.
The table below summarizes nonperforming assets at June 30, 1997 and June 30,
1996. Nonperforming assets consist of nonaccrual loans, foreclosed real
estate, other repossessed assets, and loans past due 90 days or more which
are still accruing (dollars in thousands).
June 30,
----------------------------------
1997 1996
----------------------------------
Nonaccrual loans $ 6,550 $4,265
Loans past due 90 days or more
and still accruing - 560
Real estate acquired through foreclosure 3,513 4,421
Other repossessed assets 275 496
------- ------
Total nonperforming assets $10,338 $9,742
======= ======
Total nonperforming assets as
a percentage of total assets .80% .88%
======= ======
Real estate owned before allowance for estimated losses decreased $215,000 to
$3.5 million at June 30, 1997 from $3.7 million at September 30, 1996
representing foreclosures and gross sales of approximately $1.3 million and
1.4 million, respectively.
Liberty Mortgage originated loans during the three and nine months ended
June 30, 1997 totaling $78 million and $214 million, respectively, compared
to $114 million and $304 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 nine month periods ended June 30, 1997 and 1996 (dollars in
thousands).
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
-------------------------------------
1997 1996 1997 1996
-------------------------------------
Capitalized $946 $1,633 $2,655 $3,592
Sold - - 294 45
Amortized 383 211 1,060 433
Net Investment at June 30, 7,433 5,190
15
<PAGE> 16
The estimated combined fair value of these assets exceeded the book value at
June 30, 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 nine months ended June 30, 1997, Liberty Mortgage sold bulk loan
servicing rights with aggregate principal balances of $72 million as compared
to $67 million for the same period a year earlier. This resulted in a gain
on the sale of servicing of $721,000 and $791,000 for the nine months ended
June 30, 1997 and 1996, respectively. The servicing rights sold generally
related to loans originated for sale and sold within the last six months.
There were no servicing sales during the quarters ended June 30, 1997 and
1996. The servicing sale during the nine months ended June 30, 1996 included
principal balances of $21 million in servicing rights which Liberty Mortgage
had granted recourse to the seller. Accordingly, the deferred gain related
to such rights of $246,000 was recognized in the third quarter of fiscal 1996
when the recourse expired. The Company is anticipating a servicing sale
during the fourth quarter of fiscal 1997.
Approximate nonrecurring expenses directly related to the MGB merger (see
"Acquisitions" - herein) which decreased noninterest income, and increased
noninterest expense for the nine months ended June 30, 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 $436,000 or 21% and $983,000 or 15% during the three and
nine months ended June 30, 1997, respectively, as compared to the same
periods a year earlier. The following table shows the dollar and percentage
of change (dollars in thousands).
June 30, 1997 vs June 30, 1996
---------------------------------------------
Three Months Ended Nine Months Ended
---------------------------------------------
Dollar Percentage Dollar Percentage
--------- ---------- -------- ----------
Loan servicing fees $(70) (16)% $(197) (20%)
Deposit account service charges 261 60 895 91
Other income 245 56 285 29
---- --- ----- ---
Total $436 100% $ 983 100%
==== === ===== ===
The increases in deposit account service charges and other income are largely
attributable to increased checking account activity and other fee income,
respectively.
16
<PAGE> 17
Noninterest expense (net of other real estate operations and MGB merger
related expenses) for the three and nine months ended June 30, 1997 increased
$1.1 million or 16% and $2.8 million or 13%, respectively, over the same
periods a year ago. Approximately 70% of the increase in both periods
related to 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 were significant.
The net cost of operations of other real estate decreased by $9,000 and
$289,000 for the three and nine months ended June 30, 1997, respectively, as
compared to the same periods a year ago. Contributing to this variance were
the following (dollars in thousands).
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
-------------------------------------
1997 1996 1997 1996
-------------------------------------
Provisions for estimated losses $ 81 $146 $130 $459
Net loss (gain) on sales (6) 3 (19) (21)
Net expense (income) from operations 26 (39) 69 31
---- ---- ---- ----
Net cost of operation of other
real estate $101 $110 $180 $469
==== ==== ==== ====
Accounting for Income Taxes
- ---------------------------
The Company's effective income tax rate for the three and nine months ended
June 30, 1997 was 10% and 32%, respectively, compared to 35% for both the
three and nine months ended June 30, 1996. The reduction in the effective
rates in 1997 were due to (i) a reduction to federal income tax expense in
the amount of $650,000 resulting from the conclusion of contingencies related
to various tax matters, and (ii) the recovery of the Company's fiscal 1997
year-to-date accrued state income tax expense (totaling $386,000 net of
federal income tax) due to the increase in estimated state net operating
loss carry forwards.
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 June 30, 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 approximately $129 million in total assets, $119 million in total
liabilities and $10 million in stockholders' equity. 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.
17
<PAGE> 18
Recently Issued Accounting Standards
- ------------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") 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.
In February 1997, FASB issued SFAS No. 129 "Disclosure of Information About
Capital Structure" which consolidates the existing requirement to disclose
certain information about and entity's capital structure and is not expected
to change the Company's current capital structure disclosures. SFAS No. 129
is required for financial statements issued after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The purpose of reporting comprehensive
income is to present a measure of all changes in equity that result from
recognized transactions and other economic events of the period other than
investments by owner and distributions to owners. The FASB believes that
SFAS No. 130 should help investors, creditors and others in assessing a
company's activities and the timing and magnitude of its future cash flows.
For the Company, the primary difference between net income and comprehensive
income is the change in unrealized gains and losses on securities available-
for-sale. SFAS No. 130 is not expected to have a materially adverse impact
on the consolidated financial position of the Company and is effective for
years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information" which establishes new standards for
public companies to report information about operating segments in annual
financial statements and also requires that those companies report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Management has
not yet determined the impact of SFAS No. 131 on the Company's future
disclosures. SFAS No. 131 is required for financial statements issued after
December 15, 1997.
Subsequent Events
- -----------------
On August 4, 1997 the Company redeemed its 11% and 8 1/4% subordinated
debentures due August, 2004. The bonds were redeemed at a 1% premium plus
accrued interest. Resulting from the redemption, the Company recorded an
extraordinary loss on the extinguishment of debt in the amount of $2.8
million or $.36 per fully diluted share, net of related income taxes totaling
$1.5 million.
18
<PAGE> 19
PART II - Other information
- ---------------------------
Item 4. Submission of Matters to a Vote of Securities Holders
-----------------------------------------------------
There were no matters submitted to a vote of securities holders during
the quarter ended June 30, 1997.
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
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: August 14, 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 24
27 Financial Data Schedule -
21
<PAGE> 22
Exhibit 11
----------
Statements of Computation of Earnings Per Share
-----------------------------------------------
Three Months Ended Nine Months Ended
---------------------------------------------------
June 30, June 30,
---------------------------------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------
Primary Earnings Per Share:
- ---------------------------
Average shares outstanding 7,724,780 7,037,520 7,410,747 7,011,484
---------- ---------- ---------- ----------
Average options outstanding 274,527 173,850 241,725 164,133
Average exercise price $ 12.75 $ 6.97 $ 12.53 $ 6.78
---------- ---------- ---------- ----------
Proceeds from the assumed exercise
of options outstanding $3,500,219 $1,212,314 $3,028,814 $1,112,822
Average market price per share $ 21.63 $ 14.46 $ 20.10 $ 14.38
---------- ---------- ---------- ----------
Assumed shares repurchased 161,822 83,840 150,687 77,387
---------- ---------- ---------- ----------
Common stock equivalents of options
outstanding 112,705 90,010 91,038 86,746
---------- ---------- ---------- ----------
Average shares outstanding (including
common stock equivalents) 7,837,485 7,127,530 7,501,785 7,098,230
========== ========== ========== ==========
Net income $3,496,337 $3,075,154 $9,864,495 $8,293,391
Preferred stock dividend - 113,468 113,151 340,405
---------- ---------- ---------- ----------
Net income applicable to
common stockholders $3,496,337 $2,961,686 $9,751,344 $7,952,986
========== ========== ========== ==========
Earnings per common share $ .45 $ .42 $ 1.30 $ 1.12
========== ========== ========== ==========
Fully Diluted Earnings Per Share:
- ---------------------------------
Average shares outstanding 7,724,780 7,037,520 7,410,747 7,011,484
---------- ---------- ---------- ----------
Average options outstanding 274,527 173,850 241,725 164,133
Average exercise price $ 12.75 $ 6.97 $ 12.53 $ 6.78
---------- ---------- ---------- ----------
Proceeds from the assumed exercise
of options outstanding $3,500,219 $1,212,314 $3,028,814 $1,112,822
Average market price per share $ 21.63 $ 14.67 $ 21.50 $ 14.67
---------- ---------- ---------- ----------
Assumed shares repurchased 161,822 82,658 140,875 75,874
---------- ---------- ---------- ----------
Common stock equivalents of options
outstanding 112,705 91,192 100,850 88,259
Assumed conversion of outstanding
convertible debentures (1) - 57,362 - 59,139
Assumed conversion of outstanding
preferred stock (2) - 540,321 286,206 540,321
---------- ---------- ---------- ----------
Average shares outstanding (including
common stock equivalents) 7,837,485 7,726,395 7,797,803 7,699,203
========== ========== ========== ==========
Net income $3,496,337 $3,075,154 $9,864,495 $8,293,391
Interest expenses associated with
the convertible debentures (3) - 13,055 - 40,216
Income taxes (4) - (4,439) - (13,673)
---------- ---------- ---------- ----------
Net income adjusted $3,496,337 $3,083,770 $9,864,495 $8,319,934
========== ========== ========== ==========
Earnings per common share $ .45 $ .40 $ 1.27 $ 1.08
========== ========== ========== ==========
22
<PAGE> 23
Exhibit 11
----------
Statements of Computation of Earnings Per Share, Continued
----------------------------------------------------------
Three Months Ended Nine Months Ended
---------------------------------------------------
June 30, June 30,
---------------------------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------
(1) Potential dilution relating to convertible debentures is calculated as
follows:
Average debentures outstanding - 624,475 - 643,826
Conversion price - $ 10.89 - $ 10.89
---------- ----------
Potentially dilutive shares - 57,362 - 59,139
========== ==========
(2) Potential dilution relating to preferred stock is calculated as follows:
Average Series B Preferred stock
outstanding - 7,564,500 4,006,884 7,564,500
Conversion price - $ 14.00 $ 14.00 $ 14.00
---------- ---------- ----------
Potentially dilutive shares - 540,321 286,206 540,321
========== ========== ==========
(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.
August 13, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: First Liberty Financial Corp.
Registration on Form S-8
We are aware that our report dated August 13, 1997 on our review of interim
financial information of First Liberty Financial Corp. and Subsidiaries for
the three-month and nine-month periods ended June 30, 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 registration statements on
Form S-8 (File Nos. 33-247333 and 333-00385). Pursuant to Rule 436(c) under
the Securities Act of 1933, this report should not be considered a part of
the registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P.
24
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 43,489
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 50,994
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 249,565
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 887,154
<ALLOWANCE> 11,469
<TOTAL-ASSETS> 1,288,919
<DEPOSITS> 952,425
<SHORT-TERM> 102,075
<LIABILITIES-OTHER> 16,870
<LONG-TERM> 122,521
0
0
<COMMON> 7,758
<OTHER-SE> 87,270
<TOTAL-LIABILITIES-AND-EQUITY> 1,288,919
<INTEREST-LOAN> 58,637
<INTEREST-INVEST> 13,114
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 71,751
<INTEREST-DEPOSIT> 28,566
<INTEREST-EXPENSE> 38,858
<INTEREST-INCOME-NET> 32,893
<LOAN-LOSSES> 3,212
<SECURITIES-GAINS> 121
<EXPENSE-OTHER> 24,874
<INCOME-PRETAX> 14,410
<INCOME-PRE-EXTRAORDINARY> 9,864
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,864
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.27
<YIELD-ACTUAL> 8.58
<LOANS-NON> 6,550
<LOANS-PAST> 0
<LOANS-TROUBLED> 88
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,151
<CHARGE-OFFS> 3,790
<RECOVERIES> 896
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<ALLOWANCE-DOMESTIC> 9,921
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</TABLE>
