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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER 0-14417
FIRST LIBERTY FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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GEORGIA 58-1680650
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
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201 SECOND STREET
MACON, GEORGIA 31297
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(912) 743-0911
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant on December 15, 1997 was $160,459,080.
There were 7,748,487 shares of Common Stock outstanding as of December 15, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 28, 1998 are incorporated by reference in
Part III hereof. Exhibit index appears on page 87.
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FIRST LIBERTY FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
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ITEM PAGE
NUMBER NUMBER
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PART I
1. Business.................................................... 3
2. Properties.................................................. 20
3. Legal Proceedings........................................... 20
4. Submission of Matters to a Vote of Stockholders............. 20
4(A) Executive Officers of the Registrant........................ 20
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 22
6. Selected Financial Data..................................... 23
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 25
8. Financial Statements and Supplementary Data................. 44
9. Disagreements on Accounting and Financial Disclosure........ 83
PART III
10. Directors and Executive Officers of the Registrant.......... 83
11. Executive Compensation...................................... 83
12. Stock Ownership of Certain Beneficial Owners and
Management.................................................. 83
13. Certain Relationships and Related Transactions.............. 83
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 83
Signatures.................................................. 86
Index of Exhibits........................................... 87
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PART I
ITEM 1. BUSINESS
INTRODUCTION
First Liberty Financial Corp. ("First Liberty") is a savings and loan
holding company headquartered in Macon, Georgia which owns and operates First
Liberty Bank ("Liberty Bank"), and its wholly-owned subsidiaries, Liberty
Mortgage Corporation ("Liberty Mortgage") and NewSouth Financial Services, Inc.
("NewSouth"). At September 30, 1997, First Liberty had total assets of
approximately $1.3 billion, total deposits of approximately $945 million and
stockholders' equity of approximately $94 million.
Liberty Bank is a federally chartered stock savings bank headquartered in
Macon, Georgia which serves Macon, Savannah and other Georgia cities through its
home office and 30 full service branch offices. Liberty Bank operates as a
system of community banks under a single charter along with a residential
construction loan production office located in Atlanta, Georgia. Based on total
assets at September 30, 1997, Liberty Bank is the largest savings institution
headquartered in Georgia.
Throughout this document, reference to a year by number (i.e., not preceded
by a month and date) implies a fiscal year ended September 30.
Through Liberty Mortgage, Liberty Bank also operates a mortgage banking
business through correspondent relationships in all of its market areas and a
number of other southeastern states. Liberty Mortgage originates permanent first
mortgage loans on residential properties for Liberty Bank's portfolio and for
sale in the secondary market. During fiscal 1997, Liberty Mortgage originated
approximately $305 million of permanent residential mortgage loans. Liberty
Mortgage's loan servicing portfolio was approximately $1.1 billion at September
30, 1997, including approximately $193 million of loans serviced for Liberty
Bank. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Non-Interest Income" -- herein.
During 1996, First Liberty organized NewSouth to engage in the consumer
finance business in selected Georgia market areas. NewSouth commenced operations
in four offices during the first quarter of fiscal 1997, and three additional
offices during the fourth quarter of fiscal 1997.
FIRST LIBERTY'S VISION AND STRATEGY STATEMENTS
First Liberty operates under a three-year strategic plan which is renewed
annually. As a part of that plan, First Liberty has adopted a vision and
strategy statement to communicate to customers, employees and stockholders its
vision and strategic direction. The vision statement reads as follows:
"We will operate an independent, high quality system of community
institutions and affiliated businesses, with focus on serving consumers and
businesses with selected financial services."
The strategy statement includes a strategic direction for customer
development, employee development, stockholders and acquisitions. The strategy
statement for stockholders reads as follows:
"We will continue to operate in a safe and sound manner. Our financial
targets are as follow:"
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MEASURE 1998 1999
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Return on Equity.......................................... 15.50% 16.00%
Return on Assets.......................................... 1.12% 1.16%
Efficiency Ratio.......................................... 54.00% 52.00%
Earnings Per Share (diluted) annual growth................ 15.00% 15.00%
Criticized Loans to Net Loans (less than)................. 4.00% 4.00%
Classified Loans to Net Loans (less than)................. 1.00% 1.00%
Nonperforming Assets Ratio (less than).................... 1.00% 1.00%
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The major components of the strategic plan are as follows:
Safety -- First Liberty plans to continue to conduct its operations
consistent with safe and prudent banking practices, in compliance with all
applicable laws and regulations.
Capital Adequacy -- Liberty Bank is classified as a "well-capitalized"
institution for regulatory purposes. Liberty Bank will seek to maintain capital
adequacy primarily through the retention of earnings, supplemented as needed
through capital offerings. See "Acquisitions," herein.
Credit Quality -- First Liberty currently operates within the established
target levels for credit quality and intends to maintain the level of its
nonperforming and other criticized and classified assets inside established
targets. First Liberty will continue to commit significant resources to the
credit administration and credit review functions to facilitate continued
adherence to credit policies and underwriting standards.
Operating Efficiency -- First Liberty will strive to be a low cost provider
of financial services by delivering its products and services in an "optimized"
environment. Operating/staff functions will be conducted on a centralized basis
while the business development functions will be decentralized to enhance
customer service. These efforts will be focused to absorb excess capacity of
existing resources, to promote profitable growth and to improve investment
returns.
Growth -- Without compromising the above objectives, First Liberty will
strive to expand Liberty Bank's market share in its middle, south and coastal
Georgia market areas through internal growth and selected acquisitions. First
Liberty believes that acquisitions of thrifts or banks (or of their assets and
deposits) in existing or contiguous markets represent a low-cost method of
expanding Liberty Bank's market share, broadening its franchise and improving
its operating efficiencies. See "Acquisitions," herein.
Liberty Mortgage will expand market share for retail loan originations
through Liberty Bank in middle, south and coastal Georgia market areas.
Additionally, Liberty Mortgage will expand its market share for wholesale loan
originations principally in the southeastern United States through correspondent
relationships. NewSouth plans to expand in selected market areas in Georgia to
include certain market areas of Liberty Bank.
From time to time, the Company may publish forward-looking statements, such
as the ones in the preceding paragraphs, relating to such matters as anticipated
financial performance, business prospects, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. Some of the
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include but are not limited to the
following.
a. Deterioration in local economic conditions;
b. Deterioration in national or global economic conditions;
c. Significant changes in laws and regulations affecting the financial
service industry; and
d. Significant changes in local competition.
ACQUISITIONS
In November 1996, the Company acquired by merger Middle Georgia Bank
("MGB"). MGB on the date of acquisition held the following approximate balances:
loans of $67 million, cash and investments of $58 million, premises and
equipment of $1 million and deposits of $117 million. This business combination
has been accounted for utilizing the pooling-of-interests method of accounting.
No intangible assets were recorded from the acquisition.
In September 1995, the Company acquired by merger Tifton Banks, Inc.
("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank & Trust Company
("Tifton Bank"). Tifton Bank on the date of acquisition
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held the following approximate balances: loans of $42 million, cash and
investments of $21 million, premises and equipment of $1 million and deposits of
$45 million. Intangible assets resulting from the acquisition amounted to
approximately $2 million.
In March 1995, the Company acquired three banking offices located in
Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets
acquired were approximately $3 million and total cash received and deposits
assumed were approximately $95 million. Intangible assets resulting from the
acquisition were approximately $4 million.
In December 1994, the Company acquired by merger Central Banking Company
("CBC") of Swainsboro, Georgia, and its subsidiary, The Central Bank ("Central
Bank"). Central Bank on the date of acquisition held the following approximate
balances: loans of $21 million, cash and investments of $34 million, premises
and equipment of $1 million and deposits of $52 million. Intangible assets
resulting from the acquisition amounted to approximately $2 million.
In March 1993, Liberty Bank acquired six branch offices, located in
supermarkets in Savannah, Georgia, from another institution. Liberty Bank
operated four branches in Savannah prior to the acquisition. Total assets
acquired by Liberty Bank were approximately $7 million and total deposits
assumed were approximately $38 million. Intangible assets resulting from the
acquisition amounted to approximately $1 million.
In December 1992, the Company acquired First Federal Savings and Loan
Association, Milledgeville, Georgia ("First Federal") in a supervisory
merger-conversion for a cash purchase price of $1,000. First Federal, on the
date of acquisition, held loans and mortgage-backed securities of approximately
$32 million, cash and investments of approximately $6 million, premises and
equipment with a value of approximately $1 million, deposits of approximately
$38 million, and other borrowings of approximately $3 million. Intangible assets
resulting from the acquisition amounted to approximately $449,000.
ISSUANCE AND REDEMPTION OF CONVERTIBLE PREFERRED STOCK
In December 1994 and September 1995, in connection with the respective
acquisitions of Tifton and CBC, the Company issued $7.6 million in Series B
6.00% Cumulative Convertible Preferred ("Series B") stock. The shares had a
liquidation preference of $25.00 per share. Dividends on the Series B stock were
cumulative at an annual rate of $1.50 per share and payable quarterly. Each
share of the Series B stock was convertible at the option of the holder into
1.79 shares of common stock, at a conversion price of $14.00 per share of common
stock, subject to adjustment in certain circumstances. The Company, at its
option, could redeem the Series B stock at any time on or after January 1, 1997.
On March 7, 1997, the Company redeemed 1,409 shares of Series B for $38,043,
plus accrued and unpaid dividends. The remaining 301,171 shares of the Series B
were converted in to 537,220 shares of the Company's common stock.
In February 1993, First Liberty issued 460,000 shares of Series A 7.75%
Cumulative Convertible Preferred ("Series A") stock which raised approximately
$10.5 million in equity. The Series A provided for cumulative cash dividends
payable quarterly at the rate of $1.9375 per share per annum. A share of Series
A was convertible at the option of the holder into three shares of First Liberty
Common Stock. In July 1995 the Company redeemed 2,537 shares of Series A for
$66,879, plus accrued and unpaid dividends. The remaining 457,463 shares of the
Series A were converted into 1,372,389 shares of the Company's common stock, at
a conversion price of $8.33 per share of common stock.
LENDING ACTIVITIES
General
Liberty Bank originates loans primarily in Macon, Savannah and the other
Georgia cities in which its offices are located, and through loan production
offices specializing in residential real estate construction lending located in
metropolitan Atlanta. Even though Liberty Bank is permitted by the Office of
Thrift Supervision ("OTS") to originate loans collateralized by real estate
located anywhere in the United States, it concentrates its lending activities in
the primary market areas in which it operates. Liberty Mortgage originates and
operates through correspondent relationships to purchase real estate loans in
Alabama,
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Colorado, Florida, Georgia, Kentucky, Mississippi, North Carolina, South
Carolina, Oklahoma, Tennessee, Texas and Virginia principally for sale into the
secondary market.
Federal laws and regulations prescribe the types and amounts of loans which
may be made by federal thrifts and generally permit such institutions to make
residential real estate loans, commercial real estate loans, business loans,
agricultural loans and consumer loans.
Economic conditions in First Liberty's banking markets are generally
consistent with Georgia markets other than metropolitan Atlanta. The following
table summarizes economic data relating to the Macon and Savannah markets.
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MACON MSA SAVANNAH MSA
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Population (1994)................................. 307,420 275,656
% Change (1990-1994).............................. 5.60% 6.90%
Households (1990)................................. 106,478 94,940
% Change (1980-1990).............................. 15.30% 18.20%
Personal income (1993)
% Earnings:
Goods producing industries.................... 23.60% 26.20%
Service producing industries.................. 49.50% 57.60%
Government.................................... 28.40% 17.80%
Unemployment rate (1993).......................... 5.80% 6.00%
Per capita personal income (1993)................. $ 17,886 $ 18,808
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Source: Selig Center for Economic Growth-The University of Georgia
First Liberty's local banking markets generally are served by major
interstate highways, rail and regional air service and in the case of Savannah,
a major Atlantic Ocean port facility. The employment base includes federal and
state government facilities, manufacturing, health care, wholesale, retail,
distribution and service industries.
Most of First Liberty's banking regions contain large military bases. In
Middle Georgia, Robins Air Force Base is the largest employer in the market
area. While there are no current indications of material reductions in personnel
relating to any of these bases, such developments could adversely affect First
Liberty.
Residential Real Estate Loans
First Liberty's principal lending operation traditionally has been the
origination of residential permanent mortgage loans, and these loans continue to
represent a significant part of First Liberty's lending activities. Both fixed
rate and adjustable rate permanent loans on residential properties currently are
originated either for sale in the secondary market or for the institution's loan
portfolio. The determination of whether loans originated are available-for-sale
or for portfolio is made at the time of borrower application. Some loans
originated for sale may be sold into Liberty Bank's portfolio at the lower of
cost or market. See "Loan Sales and Purchases" -- herein.
In the case of owner-occupied single-family residences, First Liberty may
make permanent residential mortgage loans for up to 95% of the appraised value
of the property. Loans on non-owner occupied real estate of not more than four
family units, generally are made for up to 75% of the appraised value. All
conventional loans with loan-to-value ratios in excess of 80% generally have
private mortgage insurance covering that portion of the loan in excess of 70% of
the appraised value. The borrower pays the cost of this insurance through a
single premium paid at the time of loan origination and/or through a monthly
payment during the term of the loan. The borrower also generally makes monthly
payments into an escrow account equal to 1/12 of the annual hazard insurance
premiums and property taxes on the property which secures the loan. Interest
rates and loan fees charged on loans originated are competitive with other
financial institutions in First Liberty's general market areas.
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First Liberty has offered, in addition to fixed rate residential loans, a
variety of loans on which the interest rate and payment may be adjusted provided
that the adjustments are tied to specified indices. These adjustable rate
mortgage loans ("ARMs") permit greater flexibility in adjusting loan yields to
changes in the cost of funds. ARMs generally have loan terms up to 30 years with
rate adjustments ranging from one to ten years during the term of the loan. Most
ARMs have caps on the maximum amount of change in the interest rate at any
adjustment period and over the life of the loan.
Liberty Bank also provides interim construction financing for single-family
residences and makes land acquisition and development loans on properties
intended for residential use. Liberty Bank's general policy is to grant single
family construction loans and land acquisition and development loans up to 80%
of the appraised value of the property. Residential construction loans are made
for periods of one year or less, and land acquisition and development loans are
made for periods of up to five years, both on an interest-only basis. These
periods may be extended subject to negotiation of terms. Typically, interest
rates on construction and acquisition and development loans are indexed to the
prime rate and are adjustable daily during the term of the loan.
Commercial Real Estate Loans
Federally chartered thrifts are permitted to invest in non-residential real
estate loans so long as such loans do not exceed 400% of capital. Liberty Bank
is conservative in making loans of this nature choosing to limit this type of
lending to its primary banking markets, to customers with proven track records
and strong credit histories, and to projects that are soundly underwritten.
Interim construction and permanent commercial real estate loans are secured
by owner-occupied businesses, commercial and industrial properties, apartment
projects, office buildings, shopping centers and other properties located in
Liberty Banks's primary banking markets. Construction and permanent commercial
real estate loans are underwritten with the primary analysis focusing on the
adequacy of net operating income and cash flow being available to provide debt
service. These loans are generally made for up to 80% of the appraised value of
the property in conformity with the guidelines found in the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA").
Consumer Loans and Indirect Lending
Federally chartered thrifts are authorized to make both secured and
unsecured consumer loans for personal or household purposes in amounts up to 30%
of the institution's total assets. At September 30, 1997, these types of
consumer loans constituted 16% of Liberty Bank's total assets. In addition,
these institutions have lending authority above the 30% limit for certain
consumer loans, such as home equity loans, property improvement loans, mobile
home loans and education loans.
Through October 1997, Liberty Bank purchased consumer loans secured by new
and used automobiles and recreational vehicles from approximately 100 select
dealers in its banking markets on a non-recourse basis ("indirect loans"). At
September 30, 1997, indirect loans constituted $172 million or 19% of the total
loan portfolio, or approximately 56% of Liberty Bank's consumer loan portfolio.
This compares to total indirect loans of $155 million or 19% of the total loan
portfolio, or 63% of the consumer loan portfolio at September, 30, 1996.
During October 1997, management made a decision to exit the indirect
lending business. This decision was the result of a review of the historical and
forecast prospects for indirect lending as a line of business. The indirect
business has historically been characterized as having thin margins and whose
consumers were generally transaction oriented and not relationship oriented.
Additionally, the growing success of the asset-backed securities market
continues to increase competitive pressure for indirect auto loan pricing, even
during a period of declining consumer credit quality. As First Liberty grows,
management must allocate capital and funding resources to lines of business
which hold the highest prospects for long term profitability and which best fit
the Company's business plan. Management believes First Liberty's community
banking, mortgage banking (other than Atlanta retail) and consumer finance
operations offer shareholders the highest potential for return on invested
capital.
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Liberty Bank intends to continue prudent expansion of its consumer lending
activities through its community banking operations, subject to market
conditions, as part of its strategy to provide a full range of banking products
and services to its customers.
Commercial/Business Loans
Liberty Bank makes various types of commercial loans to creditworthy
borrowers within Liberty Bank's primary banking market areas for financing
equipment purchases, capital projects, working capital and other legitimate
business needs. The terms of these loans range generally from three months to
fifteen years, with the longer maturities generally subject to balloon payments.
These loans normally carry interest rates indexed to the prime rate.
Liberty Bank is authorized by federal law to make secured and unsecured
loans for business or agricultural purposes in amounts aggregating no more than
10% of its total assets. Additionally, some business loans secured by
nonresidential real estate are subject to a separate limit, see "Commercial Real
Estate" -- herein. Commercial business loans subject to the 10% limitation
represented 6.6% of total assets.
Loan Originations and Processing
Liberty Mortgage actively solicits mortgage loan applications from existing
customers, local real estate agents, builders, developers and others.
Additionally, numerous loan applications are received as a result of media
advertising, customer referrals and from walk-in customers at loan production
offices.
Liberty Bank has a structured loan approval process in which lending
authority for various types and amounts of loans is delegated by the Board of
Directors to loan officers on a basis commensurate with seniority and lending
experience. Liberty Bank has a Senior Loan Committee which must approve loans in
amounts above $750,000 and up to $4 million. Liberty Bank's Board of Directors
regularly reviews and ratifies the actions of the Senior Loan Committee and must
approve any loan relationship of $4 million or more.
Loan Sales and Purchases
Permanent first mortgage loans on residential properties are originated for
sale to the secondary market and for investment. Liberty Mortgage originates and
purchases loans on residential properties through correspondent relationships
with lenders in Alabama, Arizona, Colorado, Florida, Georgia, Kentucky,
Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and
Virginia. These correspondents provide in excess of one-half of Liberty
Mortgage's total loan production. These correspondents are banks, savings
institutions and mortgage bankers and brokers.
Secondary market sales, which are without recourse, are made to the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") and other institutional investors. Such loan sales may be
made with servicing rights retained by Liberty Mortgage or with servicing rights
released. The FNMA and the FHLMC are government-sponsored agencies which
purchase residential mortgage loans from federally-insured financial
institutions and certain other approved lenders. As market conditions dictate,
Liberty Bank may elect to hold permanent mortgage loans in its portfolio, where
favorable spreads over the cost of funds make these investments advantageous.
While most loans in the portfolio are originated internally, conventional
loans and loan participations secured by residential real estate located within
and outside of the state of Georgia and mortgage-backed securities representing
interests in pools of mortgage loans guaranteed by the Government National
Mortgage Association ("GNMA"), the FNMA and the FHLMC are purchased by Liberty
Bank. Liberty Bank will from time to time sell other loans and mortgage-backed
securities which are available-for-sale when such investments become
inconsistent with its business strategies. See "Investment
Activities" -- herein.
Fee Income
In addition to interest earned on loans, Liberty Bank and Liberty Mortgage
receive loan fees for originating mortgage and non-mortgage loans and servicing
fees for continuing to service loans (i.e., collecting
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principal and interest payments on behalf of investors) after selling such loans
to the secondary market. Mortgage and loan fees generally are payable upon the
closing of the loan in amounts ranging from 1% to 3% of the principal amount of
the loan. Consumer and some commercial loan fees are based on a fixed rate per
loan ranging from $55 to $100. Servicing fees are payable monthly by the loan
purchaser in an amount equal to 1/4 to 1/2 of 1% per annum of the unpaid
principal balance of each loan. As of September 30, 1997, Liberty Mortgage
serviced loans for Liberty Bank and for others aggregating approximately $1.1
billion. Liberty Bank may also receive commitment fees in connection with
certain commitments on multi-family commercial and development loans. Other loan
fee income includes fees from late payment charges, prepayment premiums, loan
assumption fees, renewal fees, property transfer fees and miscellaneous services
related to its loans.
Credit Risk Management and Allowance for Loan Losses
Liberty Bank has a multi-faceted program designed to control and
continually monitor the credit risks inherent in its loan portfolio. This begins
with a structured loan approval process in which authority for various types and
amounts of loans is delegated by the Board of Directors to loan officers on a
basis commensurate with seniority and lending experience. See "Loan Originations
and Processing" -- herein.
Liberty Bank uses an asset classification system which is consistent with
OTS regulations, which apply to all assets of an insured institution and require
each institution to periodically classify its assets. There are four categories
of "criticized" assets: Special Mention, Sub-Standard, Doubtful and Loss. Assets
classified as substandard, doubtful or loss are considered "classified". The
classification of assets is subject to OTS review and re-classification.
Institutions must include aggregate totals of criticized assets, and general and
specific valuation reserves in quarterly reports to the OTS. Liberty Bank's loan
classification system utilizes both the account officer and an independent loan
review function to monitor the classification of Liberty Bank's loans. The
account officer is charged with the responsibility of monitoring changes in loan
quality within his or her loan portfolio and reporting changes directly to loan
review and senior management. Additionally, loan review performs an independent
review of Liberty Bank's loans to determine that the appropriate risk grade has
been assigned to each borrowing relationship.
Liberty Bank's policy requires an annual review of all borrowing
relationships exceeding $100,000 in aggregate debt. A report of the results of
these reviews on loans of $750,000 and greater are forwarded to the Board of
Directors for their review. Delinquencies are monitored on all loans as a basis
for potential inclusion in general valuation reserves or, ultimately, for
potential charge-off. Loans which are delinquent 90 days (four payments) or
longer generally are placed on nonaccrual status unless the collectibility of
principal and accrued interest is assured beyond a reasonable doubt. In certain
cases, loans less than 90 days (four payments) delinquent are placed on
nonaccrual where uncertainty exists as to their collectibility. Real estate
acquired through foreclosure is classified as sub-standard unless there is
sufficient evidence to indicate such classification is not warranted. A
portfolio of mortgage-backed securities are all guaranteed by either the GNMA,
the FNMA, the FHLMC, or investment grade private issuers and are therefore not
generally subject to any material risk of collateral loss. Similarly, the
portfolio of investment securities is comprised of U.S. Government obligations
of the Federal Home Loan Bank ("FHLB") of Atlanta and investment grade corporate
debt securities.
Loan loss reserves are determined based on management's internal review of
nonperforming loans, delinquency trends, the level of rated assets and
charge-off trends. Additionally, management assesses general and specific
economic trends both nationally and locally and regulatory information to
determine the impact of those external factors on loan loss reserve levels.
Based on the internal and external reviews, Liberty Bank segregates its
loan portfolio by type of loans and by loan classification within each loan
type. Reserve percentages are applied (based on historical and anticipated loss
rates) to each loan group to determine the required amount of allocated general
loan loss reserves. Additionally, an amount is provided for unallocated general
loan loss reserves, reflecting the potential for estimation errors in allocated
reserves.
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See Item 7 -- "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Loan Loss Provision and Allowance for Loan
Losses and Nonperforming Assets and Credit Risk" -- herein.
Interest Rate Risk
Interest rate risk is a measure of exposure to changes in net interest
income or the theoretical market value of portfolio equity due to changes in
market interest rates. The differential (known as "gap"), between interest rate
sensitive assets and interest rate sensitive liabilities over a specified period
of time represents a measure of sensitivity of net interest income to changes in
interest rates. A positive gap indicates an excess of rate sensitive assets over
rate sensitive liabilities, while a negative gap indicates an excess of rate
sensitive liabilities over rate sensitive assets.
Liberty Bank operates under an interest rate risk policy through an Asset
Liability Management Committee ("ALCO"). The policy outlines limits on interest
rate risk in terms of changes in net interest income and changes in the net
market values of assets and liabilities over certain changes in interest rate
environments. These measurements are made through a cash flow simulation model
which projects the impact of changes in interest rates on Liberty Bank's assets
and liabilities. Additionally, the committee may set other interest rate risk
objectives.
The policy also outlines responsibility for monitoring interest rate risk,
the process for the approval, implementation and monitoring of interest rate
risk strategies to achieve Liberty Bank's interest rate risk objectives.
Liberty Bank also operates under a hedging policy and Liberty Mortgage also
operates under a secondary marketing policy. The hedging policy applies to
Liberty Bank's use of forward commitments, interest rate swaps, interest rate
caps and floors and other similar hedging instruments. Liberty Bank's ALCO is
responsible for implementation of the policy. The policy outlines authorized
objectives, sets limits on activities, outlines the responsibilities for
approval, implementation and monitoring of hedging activities.
The secondary marketing policy applies to the use of forward commitments
("coverage") by Liberty Mortgage to hedge market exposure in the pipeline of
loans originated for sale. Liberty Mortgage's secondary marketing committee is
responsible for the implementation of the policy. The policy outlines acceptable
hedging instruments, sets limits on the maximum exposure to risk and outlines
authority and responsibilities for the implementation of the policy.
Both the hedging policy and the secondary marketing policy prohibit
speculation and prohibit the use of futures contracts and options on futures
contracts.
Investment Activities
Income from investments in securities provides the second largest source of
interest income after interest on loans. Federal regulations require Liberty
Bank to maintain a minimum amount of liquid assets which may be invested in
specified short-term securities but also permits certain other investments.
Investment decisions are made by authorized officers under the supervision
of Liberty Bank's Board of Directors pursuant to its investment policy. Brokers
("counterparties") approved by the ALCO are used to effect securities
transactions. The investment policy outlines the criteria for monitoring Liberty
Bank's counterparties.
Under the investment policy, assets held to meet Liberty Bank's liquidity
requirement are classified as available-for-sale due to the reasonable
possibility of liquidation prior to maturity. Additionally, all other securities
have also been classified as available-for-sale based on management's
determination that such assets may be liquidated prior to maturity. Liberty
Mortgage classifies all loans originated as available-for-sale unless originated
pursuant to a specific portfolio commitment to Liberty Bank. All other loans are
considered held-for-investment unless specifically classified otherwise. As of
September 30, 1997, $306 million or 26% of First Liberty's earning assets were
classified as available-for-sale.
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At September 30, 1997, Liberty Bank's investment portfolio, consisted of
government agency debt and equity securities of investment grade and Federal
Home Loan Bank stock. Additionally, Liberty Bank holds investments in investment
grade mortgage-backed securities. Liberty Bank does not invest in collateralized
mortgage obligations considered "high risk" as defined by the Federal Financial
Institutions Examination Council guidelines.
See Note 4 of Notes to First Liberty's Consolidated Financial Statements
contained in Item 8 -- "Financial Statements and Supplementary Data" -- herein.
SOURCES OF FUNDS
General
Savings accounts and other types of deposits are the major source of funds
for lending and other investment purposes. In addition to deposits, Liberty Bank
obtains funds from loan principal repayments, proceeds from sales of loans and
loan participations, advances from the FHLB of Atlanta, and repurchase
agreements. Loan repayments are a relatively stable source of funds while
deposit inflows and outflows and sales of loans and investment securities are
significantly influenced by prevailing interest rates and economic conditions.
Borrowings may be used to compensate for reductions in normal sources of funds
or to support expanded lending activities. Liberty Bank's unused borrowing
capacity with the FHLB of Atlanta at September 30, 1997 was approximately $75
million in advance and warehouse lines of credit. Additionally, Liberty Bank had
approximately $65 million in fed fund lines with correspondent banks.
Deposits
Liberty Bank offers a variety of types of deposit accounts and related
services. Deposits are obtained primarily from the communities in which its
offices are located.
For further details as to the composition of Liberty Bank's savings
portfolio, see Item 7 -- "Management's Discussions and Analysis of Results of
Operations and Financial Condition" -- herein.
Borrowings
Deposits are the primary source of funds for lending and investment
activities and for its general business purposes. However, Liberty Bank
periodically obtains additional funds by borrowing from the FHLB of Atlanta and
through repurchase agreements entered into with various counterparties whose
creditworthiness has been approved by Liberty Bank's ALCO. These borrowing
activities are conducted pursuant to Liberty Bank's borrowed funds policy. The
policy outlines the responsibilities and limits of authority, the use of
collateral and safekeeping, and sets limits on Liberty Bank's credit exposure to
counterparties.
See Item 7 -- "Management's Discussion and Analysis of Results of
Operations and Financial Condition" -- herein. Also see Notes 10, 11, and 12, of
Notes to First Liberty's Consolidated Financial Statements contained in Item
8 -- "Financial Statements and Supplementary Data" -- herein.
Competition
Based on total assets of approximately $1.3 billion at September 30, 1997,
Liberty Bank is the largest savings institution headquartered in Georgia, as
measured by total assets. Liberty Mortgage, with total permanent mortgage
originations of approximately $305 million for the year ended September 30,
1997, ranked as one of the larger mortgage banking companies in terms of dollar
volume in Georgia.
Liberty Bank and Liberty Mortgage face substantial competition for deposits
and loans throughout their market areas. Liberty Bank considers Macon, Savannah,
and the other smaller Georgia cities in which its offices are located to be the
primary market areas for attracting loans and deposits. Additionally, Liberty
Mortgage offers mortgage loans in Alabama, Arizona, Florida, Georgia, Kentucky,
Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and
Virginia through its wholesale loan origination operation. The most significant
factors in competing for deposits are interest rates, the quality and range of
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<PAGE> 12
financial services offered, convenience of office locations and office hours.
Competition for deposits comes primarily from commercial banks, credit unions,
money market funds and other investment alternatives.
The primary factors in competing for loans are interest rates, discount
points, loan fees and the quality and range of lending services offered.
Competition for origination of mortgage loans comes primarily from mortgage
banking firms, mortgage brokers, commercial banks, savings institutions and
insurance companies.
Various states in the Southeastern region, including Georgia, have enacted
regional interstate banking laws which permit banks and, in some states such as
Georgia, savings institutions, to acquire financial institutions in other states
within the region. As a result of such laws there have been major interstate
acquisitions involving Georgia financial institutions which have offices in
Liberty Bank's service area but are headquartered in other Southeastern states.
The effect of such acquisitions (and of the possible increase in the size of the
financial institutions in Liberty Bank's market area) may be to further increase
the competition faced by Liberty Bank. Additionally, pursuant to OTS policy,
savings institutions are permitted to branch and merge across state lines.
Employees
At November 30, 1997, First Liberty had 525 full-time employees and 36
part-time employees. All officers and other personnel serving First Liberty are
employed and compensated by Liberty Bank, Liberty Mortgage, or NewSouth. No
employees are covered by a collective bargaining agreement, and management
considers its relations with its employees to be good.
SUPERVISION AND REGULATION
General
First Liberty is a savings and loan holding company subject to regulation,
examination, supervision and reporting requirements of the OTS. As a federally
chartered savings institution, Liberty Bank is subject to extensive regulation
by the OTS. The lending activities and other investments of Liberty Bank must
comply with various federal regulatory requirements. The OTS periodically
examines Liberty Bank and Liberty Bank must file periodic reports with the OTS
describing its activities and financial condition. Liberty Bank is also subject
to examination by the FDIC and must meet certain reserve requirements
promulgated by the Federal Reserve Board ("FRB"). This supervision and
examination is intended primarily to determine compliance with various
regulatory requirements and for the protection of depositors.
The description of laws and regulations applicable to savings institutions
set forth herein does not purport to be a complete description of such laws and
regulations and their effects on First Liberty and Liberty Bank.
Legislation previously is pending in Congress which could result in the
conversion of all savings institution charters to bank charters and in the
merger of the OTS into the Office of the Comptroller of the Currency, the
federal agency which supervises national banks. It is presently not possible to
determine the likelihood of enactment of such legislation or its effects upon
Liberty Bank.
Federal Savings and Loan Holding Company Regulation
As the owner of all of the stock of Liberty Bank, First Liberty is a
savings and loan holding company subject to regulation by the OTS under the Home
Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company
owning only one savings institution, First Liberty generally is allowed to
engage and invest in a broad range of business activities not permitted to
commercial bank holding companies or multiple savings and loans holding
companies; provided that Liberty Bank continues to qualify as a "qualified
thrift lender." See "-- Regulation of Liberty Bank -- Qualified Thrift Lender
Test" herein. In the event of any acquisition by First Liberty of another
savings association subsidiary, except for a supervisory acquisition, First
Liberty would become a multiple savings and loan holding company and would be
subject to limitations on the types of business activities in which it could
engage.
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First Liberty is prohibited from directly or indirectly acquiring control
of any savings institution or savings and loan holding company without prior
approval from the OTS or from acquiring more than 5% of the voting stock of any
savings institution or savings and loan holding company which is not a
subsidiary. Control of a savings institution or a savings and loan holding
company is conclusively presumed to exist if, among other things, a person
acquires more than 25% of any class of voting stock of the institution or
holding company or controls in any manner the election of a majority of the
directors of the insured institution or the holding company. Control is
rebuttably presumed to exist if, among other things, a person acquires 10% or
more of any class of voting stock (or 25% of any class of stock) and is subject
to any of certain specified "control factors."
Recent Legislation
On September 30, 1996, the President signed into law the Omnibus
Consolidated Appropriations Act which included, among other provisions, the
Deposit Insurance Funds Act of 1996 (the "DIFA"). The principal purpose of the
DIFA was to recapitalize the Savings Associate Insurance Fund (the "SAIF") so
that over time its deposit insurance assessments could be reduced to parity with
those of the Bank Insurance Fund (the "BIF"), and to provide for the eventual
merger of the SAIF and the BIF. Specifically, the DIFA requires, in pertinent
part, (i) a one-time special assessment of SAIF members, calculated at 65.7
basis points, to recapitalize the SAIF; (ii) full prorata sharing by BIF and
SAIF member of the debt service obligations of the Financing Corp. ("FICO")
beginning no later than January 1, 2000, and non-prorata sharing (with premiums
of 6.4 basis points for SAIF members and 1.3 basis points for SAIF members)
until that date; and (iii) a merger of the BIF and the SAIF into a new Deposit
Insurance Fund (the "DIF") on January 1, 1999, if bank and savings association
charters have been combined by that date. The latter requirement cannot be
implemented without further legislation requiring the combination of such
charter types.
The effects of the DIFA on Liberty Bank are significant. The special
assessment, which was paid to the FDIC on November 27, 1996, was $3.6 million,
based upon Liberty Bank's SAIF-assessable deposits as of March 31, 1995. Since
the FDIC's non-FICO deposit insurance assessments are presently at zero for
well-capitalized institutions such as Liberty Bank, it will pay only the FICO
premium beginning January 1, 1997. For the three-year period beginning that
date, Liberty Bank's deposit insurance expense is expected to decrease by
approximately $600,000 per year.
Legislation has been introduced in Congress which provides for the
elimination of all federal savings association charters. The effect of such
legislative proposals would be to require all savings associations to convert to
either a national bank or state bank charter by a specified date, with any
related holding company required to become a bank holding company, subject to
the limitations regarding permitted activities of the Bank Holding Company Act
of 1956. In addition, other legislative proposals are pending, the effect of
which would reform the Glass-Stegall Act as well as to effect regulatory relief
for financial institutions. The likelihood of enactment of any such proposed
legislation is unknown.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") allows bank holding companies to acquire existing
banks across state lines, regardless of state statutes. Further, under the
Interstate Banking Act, which was effective June 1, 1997, a bank holding company
may consolidate interstate bank subsidiaries into branches and a bank may merge
with an unaffiliated bank across state lines to the extent that the applicable
states have not "opted out" of interstate branching prior to such effective
date. The Interstate Banking Act also permits de novo branching to the extent
that a particular state "opts into" the de novo branching provisions. The
Interstate Banking Act generally prohibits an interstate acquisition (other than
an initial entry into a state by a bank holding company), which would result in
either the control of more than (i) 10% of the total amount of insured deposits
in the United States, or (ii) 30% of the total insured deposits in the home
state of the target bank unless such 30% limitation is waived by the home state
on a basis which does not discriminate against out of state institutions.
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REGULATION OF LIBERTY BANK
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") requires the federal bank
regulatory agencies to encourage financial institutions to meet the credit needs
of low- and moderate-income borrowers in their local communities. In May 1995,
the federal bank regulatory agencies published final amended regulations
promulgated pursuant to the CRA. The final regulations eliminate the 12
assessment factors under the former regulation and replace them with performance
tests. Institutions are no longer required to prepare CRA Statements or
extensively document director participation, marketing efforts or the
ascertainment of community credit needs. Under the final rule, an institution's
size and business strategy determines the type of examination that it will
receive. Large, retail-oriented institutions will be examined using a
performance-based lending, investment and service test. Small institutions will
be examined using a streamlined approach. Wholesale and limited purpose
institutions will be examined under a community development test. All
institutions have the option of being evaluated under a strategic plan
formulated with community input and pre-approved by the applicable bank
regulatory agency. While Liberty Bank has not been examined under the amended
regulations, it will be examined as a large, retail-oriented institution.
CRA regulations provide for certain disclosure obligations. In accordance
with the CRA, each institution must post a CRA notice advising the public of the
right to comment to the institution and its regulator on the institution's CRA
performance and to review the CRA public file. Each lending institution must
maintain for public inspection a public file that includes a listing of branch
locations and services, a summary of lending activity, a map of its communities,
and any written comments from the public on its performance in meeting community
credit needs. Large institutions also are required to collect certain data
including the amount and location of, originated and purchased small business,
small farm, community development, and home mortgage loans, and to report this
data to their regulatory agencies.
Public disclosure of written CRA evaluations of financial institutions made
by regulatory agencies is required under the CRA. This promotes enforcement of
CRA requirements by providing the public with the status of a particular
institution's community reinvestment record. Liberty Bank received an
"outstanding" rating on the most recent performance evaluation of its CRA
efforts by the OTS.
Congress and various federal agencies responsible for implementing fair
lending laws have been increasingly concerned with discriminatory lending
practices. In 1994, those federal agencies announced a Joint Policy Statement
detailing specific discriminatory practices prohibited under the Equal
Opportunity Act and the Fair Housing Act. In the Policy Statement, three methods
of proving lending discrimination were identified: (i) overt evidence of
discrimination, where a lender blatantly discriminates on a prohibited basis;
(ii) evidence of disparate treatment, when a lender treats applicants
differently based upon a prohibited factor, even where there is no showing that
the treatment was motivated by intention to discriminate; and (iii) evidence of
disparate impact, when a lender applies a practice uniformly to all applicants,
but the practice has a discriminatory effect, even where such practices are
neutral in appearance and applied equally. Lenders are particularly uncertain
about the application of the "disparate impact" criteria by virtue of the vague
nature of the Policy Statement. The Policy Statement notes that "the precise
contours of the law on disparate impact as it applies to lending discrimination
are under development."
FEDERAL HOME LOAN BANK SYSTEM
General
Liberty Bank is a member of the FHLB System, which consists of 12 regional
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs maintain central credit facilities primarily for member
institutions.
Liberty Bank, as a member of the FHLB of Atlanta, is required to acquire
and hold shares of capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of: (i) 1% of the aggregate outstanding principal amount of
its unpaid residential mortgage loans, home purchase contracts and similar
obligations as of the beginning of each year, (ii) 5% of its advances
(borrowings) from the FHLB of Atlanta, or (iii) $500.
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Additionally, during 1996 the FHLB of Atlanta imposed a maximum investment in
its capital stock equal to $500,000 over the required minimum. During the
quarter ended September 30, 1996, Liberty Bank increased its advances from the
FHLB of Atlanta to avoid a forced redemption of its excess capital stock in the
FHLB of Atlanta. Liberty Bank is in compliance with this requirement with an
investment of $9.7 million in FHLB of Atlanta stock at September 30, 1997. See
Item 7 -- "Management's Discussion and Analysis of Results of Operations and
Financial Condition" -- herein.
Advances from Federal Home Loan Bank
Each FHLB serves as a reserve or central bank for its member institutions
within its assigned regions. It is funded primarily from proceeds derived from
the sale of obligations of the FHLB System. The FHLB makes advances (i.e.,
loans) to members in accordance with policies and procedures established by its
Board of Directors. Liberty Bank is authorized to borrow funds from the FHLB of
Atlanta to meet demands for withdrawals of savings deposits, to meet seasonal
requirements and for the expansion of its loan portfolio. Advances may be made
on a secured or unsecured basis depending upon a number of factors, including
the purpose for which the funds are being borrowed and existing advances.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the regional FHLB and the purpose of the borrowing.
Liquidity Requirements
Federal regulations require a savings institution to maintain an average
daily balance of liquid assets (which includes cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly-rated
commercial paper, securities of certain mutual funds, balances maintained in a
Federal Reserve Bank and specified United States Government, state or federal
agency obligations) equal to a monthly average of not less than a specified
percentage, currently 5%, of its net withdrawable accounts plus short-term
borrowings. These regulations also require each institution to maintain an
average daily balance of short-term liquid assets at a specified minimum
percentage, currently 1%, of the total of its net withdrawable accounts and
borrowings payable in one year or less. Liberty Bank complied with its
requirements at September 30, 1997. Effective November 24, 1997, the OTS lowered
its liquidity requirement for savings institutions from 5% to 4%, and eliminated
the requirement that institutions hold assets equal to 1% of the liquidity base
in cash or short-term liquid assets.
Insurance of Accounts
Deposits at Liberty Bank are insured by the FDIC to a maximum of $100,000
for each insured depositor. As an insurer, the FDIC issues regulations, conducts
examinations and generally supervises the operations of its insured institutions
(institutions insured by the FDIC hereinafter are referred to as "insured
institutions"). Any insured institution which does not operate in accordance
with or conform to FDIC regulations, policies and directives may be sanctioned
for non-compliance.
The FDIC has the authority to suspend or terminate insurance of deposits
upon the finding that the institution has engaged in unsafe or unsound
practices, is operating in an unsafe or unsound condition, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. If
insurance of accounts is terminated by the FDIC, deposits in the institution
will continue to be insured by the FDIC for a period of two years following the
date of termination. The FDIC requires an annual audit by independent
accountants and also periodically makes its own examinations of insured
institutions.
As an insurer, the FDIC issues regulations, conducts examinations and
generally supervises the operations of its insured members. FDICIA directed the
FDIC to establish a risk-based premium system under which each premium assessed
against Liberty Bank would generally depend upon the amount of Liberty Bank's
deposits and the risk that it poses to the SAIF. The FDIC was further directed
to set semiannual assessments for insured depository institutions to maintain
the reserve ratio of the SAIF at 1.25% of estimated insured deposits. The FDIC
may designate a higher reserve ratio if it determines there is a significant
risk of substantial future loss to the particular fund. Under the FDIC's
risk-related insurance regulations, an institution is classified according to
capital and supervisory factors. Institutions are assigned to one of three
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capital groups: well capitalized, adequately capitalized or under capitalized.
Within each capital group, institutions are assigned to one of three supervisory
subgroups. There are nine combinations of groups and subgroups (or assessment
risk classifications) to which varying assessment rates are applicable. The rate
assessed for insured deposits range from zero to $.27 per $100 of domestic
deposits. Additionally, on May 20, 1997, the FDIC Board of Directors voted to
collect on behalf of the FICO assessments sufficient to meet the funding
requirements of the FICO for the remainder of 1997. The FICO rate on BIF- and
SAIF-assessable deposits is $.0126 and $.063, respectively, per $100 on an
annual basis. See "Recent Legislation" -- herein.
In addition to the payment of deposit insurance premiums to the FDIC,
savings institutions also must bear a portion of the administrative costs of the
OTS through an assessment based on the level of total assets of each insured
institution and which differentiates between troubled and nontroubled savings
institutions. In 1997, Liberty Bank paid $217,000 to the OTS for such
assessments. Additionally, the OTS assesses fees for the processing of various
applications.
Qualified Thrift Lender Test
Historically, the amount of advances which might be obtained by a member
institution from the FHLB has been subject to the institution's compliance with
a qualified thrift lender ("QTL") test. The QTL test generally requires that an
institution maintain 65% of its total portfolio assets in qualified thrift
investments. This level must be maintained on a monthly average basis in nine
out of every twelve months. For purposes of the QTL test, "portfolio assets"
equal total assets minus (i) goodwill and other intangible assets, (ii) the
value of property used by an institution in the conduct of its business and
(iii) assets of the type used to meet liquidity requirements in an amount not
exceeding 20% of the savings institution's total assets. Qualified thrift
investments include (i) loans made to purchase, refinance, construct, improve or
repair domestic residential or manufactured housing, (ii) home equity loans,
(iii) securities backed by or representing an interest in mortgages on domestic
residential or manufactured housing, (iv) obligations issued by the federal
deposit insurance agencies and (v) shares of FHLB stock owned by the savings
institution. Subject to a 20%-of-portfolio assets limitation, qualified thrift
investments also include 50% of the dollar amount of domestic residential
mortgage loans originated and sold within 90 days of origination, consumer loans
(up to a maximum of 10% of portfolio assets), investments in certain
subsidiaries, loans for the purchase or construction of schools, churches,
nursing homes and hospitals, shares of stock issued by the FHLMC or the FNMA and
200% of investments in loans for low-to-moderate income housing and certain
other community oriented investments.
A savings institution that does not meet the QTL test must either convert
to a bank charter or comply with the restrictions imposed for noncompliance. If
the institution converts to a bank charter, it will continue to pay SAIF
insurance assessments and any applicable exit and entrance fees before
converting to BIF insurance. If the institution does not convert to a bank
charter, it must comply with the following additional restrictions on the
operations of the institution: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for both a national bank and a savings
institution; (ii) the branching powers of the institution shall be restricted to
those of a national bank; (iii) the institution generally will not be eligible
to obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. A savings institution that has not converted to a bank charter
within three years after failing to qualify as a QTL may not retain any
investment or engage in any activity not permitted for both a national bank and
a savings institution and must also repay all FHLB System advances. Liberty
Bank's qualified thrift investments as of September 30, 1997 were $796 million,
or 67% of its portfolio assets at that date. Liberty Bank expects to remain in
compliance with the QTL test.
Capital Requirements
Since 1989, OTS capital regulations have set capital standards applicable
to all savings institutions, including a core capital requirement, a tangible
capital requirement and a risk-based capital requirement. The OTS also has
established, pursuant to FDICIA, five classifications for institutions based
upon the capital requirements: well capitalized, adequately capitalized, under
capitalized, significantly under capitalized and
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critically under capitalized. At September 30, 1997, Liberty Bank was well
capitalized. Failure to maintain that status could result in greater regulatory
oversight or restrictions on Liberty Bank's activities.
The OTS requires a savings institution to maintain core capital in an
amount not less than 3% of the savings institution's total assets. Core capital
includes, generally, common stockholders' equity, noncumulative perpetual
preferred stock and related surplus, nonwithdrawable accounts and pledged
deposits of mutual savings associations, and minority interests in
fully-consolidated subsidiaries, less (i) investments in certain
"non-includable" subsidiaries (as determined by regulation) and (ii) certain
intangible assets (except for mortgage servicing rights and purchased credit
card relationships).
The tangible capital requirement requires a savings institution to maintain
tangible capital in a amount not less than 1.5% of its adjusted total assets.
Tangible capital means core capital less any intangible assets (except for
mortgage servicing rights included in core capital).
Most national banks are required to maintain a level of core capital of at
least 100 to 200 basis points above the 3% minimum level. Because OTS capital
standards for savings institutions may not be less stringent than capital
standards established for national banks, savings institutions are required to
maintain core capital levels at least as high as national banks.
The OTS capital regulations require savings institutions to maintain a
ratio of total capital to total risk-weighted assets of 8%. Total capital, for
purposes of the risk-based capital requirement, equals the sum of core capital
plus supplementary capital, which includes cumulative preferred stock, mandatory
convertible securities, subordinated debt, and the allowance for loan and lease
losses of up to 1.25% of total risk-weighted assets. In determining total
risk-weighted assets for purposes of the risk-based capital requirements, (i)
each off-balance sheet item must be converted to an on-balance sheet credit
equivalent amount by multiplying the face amount of each such item by a credit
conversion factor ranging from 0% to 100% (depending upon the nature of the
item); (ii) the credit equivalent amount of each offbalance sheet item and each
on-balance sheet asset must be multiplied by a risk factor ranging from 0% to
100% (again depending on the nature of the item); and (iii) the resulting
amounts are added together and constitute total risk-weighted assets.
In addition, the OTS requires institutions with an above-normal degree of
interest rate risk to maintain an additional amount of capital. The test of
above-normal is determined by postulating a 200 basis point shift (increase or
decrease) in interest rates and determining the effect on the market values of
an institution's portfolio equity. If the decline is less than 2%, no addition
to risk-based capital is required (i.e., an institution has only a normal degree
of interest rate risk). If the decline is greater than 2%, the institution must
add additional capital equal to one-half the difference between its measured
interest rate risk and 2% multiplied by the market value of its assets.
Management believes that Liberty Bank's interest rate risk is within the normal
range.
The following table reflects Liberty Bank's compliance with its regulatory
capital requirements at September 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
----------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Core capital........................ $ 92,523 7.34 $37,833 3.00 $54,690 4.34
Tangible capital.................... 91,178 7.24 18,896 1.50 72,282 5.74
Risk-based capital.................. 102,944 11.21 73,452 8.00 29,492 3.21
</TABLE>
Capital Distributions
Capital distributions also are regulated by the OTS. Capital distributions
are defined to include, in part, dividends, stock repurchases and cash-out
mergers. An association is categorized as either a Tier 1, Tier 2, or Tier 3
association. A Tier 1 association is defined as an association that has, on a
pro forma basis after the proposed distribution, capital equal to or greater
than the OTS requirements. A Tier 2 association is an association that has, on a
pro forma basis after the proposed distribution, capital equal to or in excess
of its
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minimum capital requirement. A Tier 3 association is defined as an association
that has current capital less than its minimum capital requirement.
Liberty Bank currently is in compliance with the regulatory capital
requirements and therefore is a Tier 1 association. A Tier 1 association is
permitted to make capital distributions during a calendar year up to the higher
of (i) 100% of its net income to date plus the amount that would reduce by
one-half its surplus capital ratio at the beginning of the calendar year, or
(ii) 75% of its net income over the most recent four-quarter period. Any
distribution in excess of that amount requires prior OTS notice, with the
opportunity for the OTS to object to the distribution. In addition, a savings
association must provide the OTS with a 30-day advance written notice of all
proposed capital distributions, whether or not advance approval is required by
OTS regulations. Currently, Liberty Bank periodically notifies the OTS of the
gross amount of dividends it intends to pay First Liberty as the sole
stockholder of Liberty Bank. Liberty Bank's ability to pay dividends to First
Liberty is subject to the financial performance of Liberty Bank which is
dependent upon, among other things, economic conditions in the markets in which
Liberty Bank operates, the success of Liberty Bank's lending activities,
compliance by Liberty Bank with applicable regulations, investment performance
and the ability to generate fee income.
Federal Reserve System Requirements
The FRB requires depository institutions to maintain noninterest-bearing
reserves against their deposit transaction accounts, non-personal time deposits
(transferrable or held by a person other than a natural person) with an original
maturity of less than one and one-half years and certain money market deposit
accounts. Federal Reserve regulations currently require financial institutions
to maintain average daily reserves equal to 3% on all amounts from $4.4 million
to $49.3 million of net transactions, plus 10% on the remainder. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements imposed by the OTS. Members of the FHLB System
also are authorized to borrow from the FRB "discount window" subject to
restrictions imposed by FRB regulations. However, Federal Reserve policy
generally requires that a savings institution exhaust its FHLB resources before
borrowing from the Federal Reserve.
Transactions with Affiliates
Liberty Bank is also subject to certain transactions with affiliates rules
applicable to banks and savings institutions which are set forth in Sections
23A, 23B and 22(h) of the Federal Reserve Act as well as additional limitations
imposed by OTS regulations. Such regulations generally impose quantitative and
qualitative limitations on loans and other transactions between an institution
and its affiliates, including loans to insiders.
Consumer Protection and Other Laws and Regulations
Liberty Bank, Liberty Mortgage and NewSouth are also subject to various
laws and regulations dealing generally with consumer protection matters
including without limitation the Equal Credit Opportunity Act and Regulation B,
the Electronic Funds Transfer Act and Regulation E, the Truth in Lending Act and
Regulation Z, the Truth in Savings Act and Regulation DD, the Expedited Funds
Availability Act and Regulation CC, the Bank Secrecy Act and fair housing laws.
Liberty Bank, Liberty Mortgage and NewSouth may be subject to potential
liability for material violations of these laws and regulations.
State Regulation
As a federally chartered savings institution, Liberty Bank generally is not
subject to those provisions of Georgia law governing state chartered financial
institutions or to the jurisdiction of the Department of Banking and Finance
("DBF"). However, the DBF interprets the Georgia Bank Holding Company Act to
require the prior approval of the DBF for any acquisition of control of any
savings institution (whether chartered by state or federal authority) located in
Georgia.
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<PAGE> 19
The DBF also interprets the Georgia Bank Holding Company Act to include
savings and loan holding companies as "bank holding companies", thus giving the
DBF the authority to make examinations of First Liberty and any subsidiaries and
to require periodic and other reports. Existing DBF regulations do not restrict
the business activities or investments of First Liberty or Liberty Bank.
State usury laws are applicable to federally insured institutions with
regard to loans made within Georgia. Generally speaking, Georgia law does not
establish ceilings on interest rates although certain specialized types of
lending in which Liberty Bank and NewSouth engage, such as making loans of
$3,000 or less, are subject to state interest rate limitations.
TAXATION
Federal Taxation
First Liberty files a consolidated federal income tax return, which has the
effect of eliminating intercompany distributions, including dividends, in the
computation of consolidated taxable income.
Earnings appropriated to bad debt reserves established for income tax
purposes cannot be used for any purpose other than to absorb bad debt losses
without recognition of taxable income. Dividends may be paid out of
unappropriated retained earnings without the imposition of any tax to the extent
that the amounts paid as dividends do not exceed earnings and profits as
calculated for federal income tax purposes.
The Small Business Job Protection Act of 1996 repealed the reserve method
of accounting for bad debts utilized by thrift institutions effective for
taxable years beginning after December 31, 1996. The bad debt reserve for tax
purposes that arose in tax years beginning before December 31, 1987 ("Base-Year
Reserve") will generally not be recaptured while post-1987 bad debt tax reserves
would be recaptured as taxable income ratably over a six-year period beginning
with the tax year ended September 30, 1997, unless Liberty Bank meets a special
residential loan requirement which will suspend the start of the recapture for
two years. Substantially all of Liberty Bank's reserves are Base-Year Reserves.
For the tax year ended September 30, 1997, Liberty Bank determined its tax bad
debt deduction based on the specific charge-off method of accounting.
State Taxation
First Liberty's federal taxable income with certain adjustments is subject
to the Georgia corporate income tax at a rate of 6 percent. The primary
difference between taxable income for Georgia and federal income tax purposes is
interest income on United States government obligations, which is not taxable
for Georgia income tax purposes.
Accounting for Income Taxes
First Liberty adopted Statement of Financial Accounting Standard ("SFAS")
No. 109, "Accounting for Income Taxes" effective October 1, 1991. The two
components of First Liberty's income tax provision are the current and deferred
provisions.
Current income tax provisions approximate taxes to be paid or refunded for
the fiscal year. Balance sheet amounts of deferred taxes are recognized related
to the temporary differences between the bases of assets and liabilities as
measured by tax laws and their bases as reported in the financial statements.
Deferred tax expense or benefit is then recognized for the change in deferred
tax liabilities or assets between fiscal years.
Under SFAS No. 109, a deferred tax liability is not recognized with respect
to thrift institutions for the Base-Year Reserve, unless it becomes apparent
that this temporary difference will reverse in the foreseeable future. Future
reversal of the Base-Year Reserve would occur if Liberty Bank ceases to be in
the banking business. At September 30, 1997, First Liberty's Base-Year Reserve
for which no deferred tax liability is recognized is approximately $12.0
million.
19
<PAGE> 20
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain temporary
differences will be realized. A valuation allowance is recorded for those
deferred tax items for which it is more likely than not that realization will
not occur.
ITEM 2. PROPERTIES
First Liberty neither owns nor leases any real property, and uses the
premises, equipment and furniture of Liberty Bank without payment of any rental
fees to Liberty Bank. First Liberty's headquarters is located at 201 Second
Street, Macon, Georgia, where it occupies space owned by Liberty Bank.
At November 30, 1997 Liberty Bank operated 31 banking offices. All
facilities are owned by Liberty Bank, with the exception of five supermarket
branches in Savannah and three permanent branches in Milledgeville, Sylvania and
Vidalia. The total net book value at September 30, 1997 of the offices owned by
Liberty Bank on that date, including improvements, furniture, fixtures and
equipment, was approximately $25 million. NewSouth leases their facilities
consisting of seven operating offices and one administrative office. All
significant data processing services for deposits, loan servicing, accounting
and other operations of Liberty Bank currently are provided by an in-house data
processing center. The investment in in-house data processing equipment has been
included as equipment above. See Note 8 of the Notes to First Liberty's
Financial Statements as contained in Item 8 -- "Financial Statements and
Supplementary Data" -- herein.
Liberty Bank currently is unaware of any potential environmental liability
that may be incurred by Liberty Bank in connection with any properties owned by
Liberty Bank.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which First Liberty is a
party or to which any of their property is subject. From time to time First
Liberty is a party to legal proceedings which arise in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted by First Liberty to a vote of its stockholders
during the fourth quarter of the fiscal year ended September 30, 1997.
ITEM 4.(A) EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) of Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, is certain information as of
September 30, 1997, regarding the executive officers of First Liberty and other
individuals having key policy making roles with respect to First Liberty.
DIRECTORS
F. DON BRADFORD, 70, is the retired former owner of Macon Janitor Service
in Macon, Georgia. He has served as a director of First Liberty since 1984 and
as a director of Liberty Bank since 1966.
RICHARD W. CARPENTER, 60, is President of Realmark Holding Corp. in
Atlanta, Georgia. He has served as a director of First Liberty and as a director
of Liberty Bank since 1984.
C. LEE ELLIS, 46, is Executive Vice President, Investments, of Alfa Mutual
Insurance Company in Montgomery, Alabama. Mr. Ellis has served as a director of
First Liberty and Liberty Bank since 1986.
ROBERT F. HATCHER, 56, joined Liberty Bank in 1988 as a director and as
President of its Middle Georgia Region. He was elected President of Liberty Bank
in 1989 and was elected Chief Executive Officer of Liberty Bank and President
and Chief Executive Officer of First Liberty in 1990. He was previously Senior
Vice President of Trust Company Bank of Middle Georgia in Macon, Georgia, where
he had served for 27 years.
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<PAGE> 21
MELVIN I. KRUGER, 68, is President of L. E. Schwartz & Son, Inc., a
commercial roofing contractor in Macon, Georgia. He has served as a director of
First Liberty since 1993 and as a director of Liberty Bank since 1995.
THOMAS H. McCOOK, 58, is Vice President of Cherokee Culvert Company, Inc.
in Macon, Georgia. Mr. McCook has served as a director of First Liberty since
1984, as a director of Liberty Bank since 1978 and as Chairman of the Boards of
Directors of both entities since 1990.
HAROLD W. PEAVY, JR., 61, is the retired founder and former president of
Middle Georgia Bank in Byron, Georgia. Mr. Peavy has served as a director of
First Liberty and Liberty Bank since November 1996.
HERBERT M. PONDER, JR., 62, was the president of Bank South, Macon, in
Macon, Georgia where he had served from 1985 until his retirement in 1993. Mr.
Ponder has served as a director of First Liberty and Liberty Bank since March
1996.
JO SLADE WILBANKS, 50, is Manager of the Central Region of Georgia Power
Company. She has served as a director of First Liberty since 1994 and as a
director of Liberty Bank since 1995.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
ROBERT W. AIKEN, 34, joined First Liberty in August 1996, and serves as
President and Chief Executive Officer of NewSouth Financial Services, Inc. He
previously was employed by Fleet Finance, Inc. for ten years.
CHARLES G. DAVIS, 50, joined Liberty Bank in 1976, and serves as Executive
Vice President in charge of operations. Before joining Liberty Bank, he was
employed by American Broadcasting Company.
LARRY D. FLOWERS, 47, joined Liberty Bank in 1993. He is Executive Vice
President in charge of marketing and retail banking. He previously was employed
by Citibank in various capacities.
DAVID L. HALL, 38, joined First Liberty and Liberty Bank in 1985. He is
Executive Vice President and Chief Financial Officer of both entities, having
previously served as Senior Vice President and Controller. Before joining First
Liberty, he was employed by Coopers & Lybrand, Certified Public Accountants,
Atlanta, Georgia.
RICHARD A. HILLS, JR., 57, serves as Executive Vice President and General
Counsel of First Liberty, and as Senior Vice President and General Counsel of
Liberty Bank and Liberty Mortgage. He also serves as Secretary of First Liberty,
Liberty Bank and Liberty Mortgage. Prior to joining First Liberty in 1987, he
was a partner in the law firm of Aiken & Ward, Atlanta, Georgia.
MARIAN M. MACKLE, 42, joined Liberty Bank in 1995 and serves as Senior Vice
President in charge of risk management. She previously was Executive Vice
President of Nova Financial Corporation.
GEORGE A. MOLLOY, 49, joined Liberty Mortgage in 1995 and serves as its
President and Chief Executive Officer. He previously was President of S B & T
Mortgage in Atlanta.
LEE B. MURPHEY 53, joined Liberty Bank in June 1991 as Executive Vice
President and Chief Credit Officer. He previously was Senior Vice President of
Trust Company Bank of Middle Georgia in Macon, Georgia, where he had served for
21 years.
J. LARRY WALLACE, 46, joined Liberty Bank in 1983. He is Executive Vice
President in charge of residential construction lending and the disposition of
foreclosed properties. Before joining Liberty Bank he was employed by Cameron
Brown Company.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed and traded on The Nasdaq Stock Market under the
symbol "FLFC." The following table sets forth the high and low last sale prices
per share of the Common Stock as reported on The Nasdaq Stock Market, and the
dividends paid per share of Common Stock for the periods indicated.
<TABLE>
<CAPTION>
LAST SALE PRICES
PER SHARE
FISCAL YEAR ENDED ---------------- DIVIDENDS
SEPTEMBER 30, HIGH LOW PAID PER SHARE
----------------- ------ ------ --------------
<S> <C> <C> <C>
1997
First Quarter............................................. $21.50 $16.25 $.10
Second Quarter............................................ 22.50 18.25 .10
Third Quarter............................................. 22.75 21.00 .10
Fourth Quarter............................................ 25.00 21.50 .10
1996
First Quarter............................................. $15.00 $13.17 $.07
Second Quarter............................................ 15.00 14.00 .07
Third Quarter............................................. 15.17 13.50 .07
Fourth Quarter............................................ 17.17 13.67 .08
</TABLE>
On December 15, 1997, the last sale price of the Common Stock, as reported
on The Nasdaq Stock Market was $30.00. On December 15, 1997, there were
7,748,487 shares of Common Stock outstanding and approximately 980 record
holders of the Common Stock.
For discussion on dividend restrictions see Item 7 -- "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources" -- herein.
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for First Liberty for each year of the five-year
period ended September 30, 1997 are set forth below (in thousands, except per
share data).
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Interest income......................... $ 96,847 $ 84,319 $ 70,341 $ 55,414 $ 57,226
Interest expense........................ 52,843 46,050 37,779 28,819 32,321
---------- ---------- ---------- -------- --------
Net interest income..................... 44,004 38,269 32,562 26,595 24,905
Provision for loan losses............... 6,317 3,106 2,365 2,187 2,565
---------- ---------- ---------- -------- --------
Net interest income after provision for
loan losses........................... 37,687 35,163 30,197 24,408 22,340
Noninterest income, excluding gains and
losses on asset sales................. 10,260 8,780 7,755 7,684 6,108
Gain (loss) on sale of loans and
securities............................ 1,874 1,754 (237) 403 1,298
Gain on sale of servicing rights........ 1,397 790 2,353 3,367 3,321
Noninterest expense..................... 34,319 33,193 27,128 25,524 24,614
---------- ---------- ---------- -------- --------
Income before income taxes, accounting
change and extraordinary items........ 16,899 13,294 12,940 10,338 8,453
Income taxes............................ 5,189 4,374 3,595 3,138 2,897
---------- ---------- ---------- -------- --------
Income before accounting change and
extraordinary items................... 11,710 8,920 9,345 7,200 5,556
Accounting change(2).................... -- -- -- -- 154
Extraordinary items(3).................. (2,811) -- -- -- (521)
---------- ---------- ---------- -------- --------
Net income.............................. 8,899 8,920 9,345 7,200 5,189
Dividends on preferred stock............ 113 454 864 891 557
---------- ---------- ---------- -------- --------
Net income applicable to common
stockholders.......................... $ 8,786 $ 8,466 $ 8,481 $ 6,309 $ 4,632
========== ========== ========== ======== ========
PER COMMON SHARE DATA:
Income before accounting change and
extraordinary items(4)................ $ 1.50 $ 1.16 $ 1.27 $ 1.01 $ .86
Accounting change(4).................... -- -- -- -- .02
Extraordinary items(4).................. (.36) -- -- -- (.08)
---------- ---------- ---------- -------- --------
Net income(4)........................... $ 1.14 $ 1.16 $ 1.27 $ 1.01 $ .80
========== ========== ========== ======== ========
Book value.............................. $ 12.15 $ 11.09 $ 10.38 $ 9.48 $ 8.93
Tangible book value..................... 10.97 9.66 8.76 8.85 8.23
Dividends paid.......................... .40 .29 .26 .20 .03
Dividend payout ratio(4)................ 35.09% 25.00% 20.47% 19.80% 3.75%
Average number of shares
outstanding(4)........................ 7,823 7,713 7,348 7,115 6,571
CORE INCOME DATA:(5)
Income before accounting change and
extraordinary items................... $ 11,710 $ 8,920 $ 9,345 $ 7,200 $ 5,556
MGB related expenses.................... 312 -- -- -- --
Discontinued business lines............. 1,708 -- -- -- --
SAIF assessment......................... -- 2,341 -- -- --
---------- ---------- ---------- -------- --------
Core income............................. $ 13,730 $ 11,261 $ 9,345 $ 7,200 $ 5,556
========== ========== ========== ======== ========
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
EARNINGS PER SHARE:(4)(5)
Income before accounting change and
extraordinary items................... $ 1.50 $ 1.16 $ 1.27 $ 1.01 $ .86
MGB related expenses.................... .04 -- -- -- --
Discontinued business lines............. .21 -- -- -- --
SAIF assessment......................... -- .30 -- -- --
---------- ---------- ---------- -------- --------
Core income............................. $ 1.75 $ 1.46 $ 1.27 $ 1.01 $ .86
========== ========== ========== ======== ========
Core return on average:
Assets................................ 1.12% 1.05% 1.03% .90% .71%
Equity................................ 14.86 13.23 13.14 11.47 10.30
BALANCE SHEET DATA:
Total assets.......................... $1,269,137 $1,180,467 $1,029,693 $792,159 $815,050
Earning assets........................ 1,169,743 1,079,630 941,266 723,863 730,104
Loans(6).............................. 864,044 786,729 686,515 546,207 520,990
Nonperforming assets (excluding
troubled debt restructurings)...... 9,199 9,654 9,359 17,133 21,998
Loans and securities
available-for-sale(7).............. 336,896 332,916 283,286 197,949 224,162
Deposits.............................. 945,322 858,784 819,860 652,269 626,127
Long-term borrowings.................. 102,188 32,366 20,501 29,319 49,560
Stockholders' equity.................. 93,914 86,457 80,048 64,167 61,082
PERFORMANCE RATIOS:
Return on average assets.............. .72% .83% 1.03% .90% .66%
Return on average equity.............. 9.63 10.48 13.14 11.47 9.62
Interest rate spread.................. 3.88 3.95 3.89 3.61 3.53
Net interest margin(8)................ 3.90 3.95 3.94 3.69 3.57
Efficiency(9)......................... 57.32 59.10 62.59 64.15 65.72
Ratio of earnings to fixed
charges(10):
Excluding interest on deposits..... 2.25x 2.49x 2.97x 2.94x 2.14x
Including interest on deposits..... 1.32x 1.29x 1.34x 1.36x 1.26x
ASSET QUALITY RATIOS:
Allowance for loan losses to period
end loans(6,11).................... 1.36% 1.30% 1.38% 1.27% 1.37%
Allowance for loan losses to period
end nonperforming loans............ 226.03 184.85 219.75 119.04 99.72
Nonperforming assets to period end
loans and repossessed
assets(6,11)....................... 1.05 1.21 1.33 3.04 4.05
Nonperforming assets to period end
total assets....................... .72 .82 .91 2.16 2.70
Net charge-offs to average loans...... .56 .31 .11 .42 .63
CAPITAL AND LIQUIDITY:
Tangible capital to total adjusted
assets(12)......................... 7.24% 6.08% 5.98% 6.46% 5.66%
Core capital to total adjusted
assets(12)......................... 7.34 6.21 6.17 6.73 5.88
Core capital to risk-based
assets(12)......................... 10.08 8.65 8.70 9.49 8.08
Risk-based capital to risk-based
assets(12)......................... 11.21 11.35 11.80 12.99 11.41
Average equity to average assets...... 7.50 7.93 7.84 7.86 6.87
Loans to deposits(6).................. 91.40 91.61 83.74 83.74 83.21
</TABLE>
- ---------------
(1) During 1997 the Company acquired by merger MGB. 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. During 1995 and 1993, the Company completed
24
<PAGE> 25
acquisitions of financial institutions with assets of approximately $107
million and $48 million, respectively. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" -- herein. Also
see Note 3 of Notes to First Liberty's Consolidated Financial statements
contained in Item 8 -- "Financial Statements and Supplementary
Data" -- herein.
(2) Adoption of SFAS No. 109, "Accounting for Income Taxes".
(3) Loss on extinguishment of debt, net of income tax benefits of $1.5 million
in 1997 and $269,000 in 1993.
(4) Fully diluted.
(5) Core income represents income exclusive of after tax expenses related to
the MGB pooling and charges associated with discontinued business lines
recorded in 1997 and a one time SAIF assessment recorded in 1996.
(6) Excludes loans available-for-sale.
(7) Includes loans and securities available-for-sale, fed funds sold,
repurchase agreements and cash and cash equivalents.
(8) Net interest income divided by average earning assets.
(9) Computed by dividing noninterest expense excluding provisions for real
estate losses and nonrecurring items by the sum of net interest income
before provisions for loan losses and noninterest income excluding
nonrecurring items. Excludes the MGB pooling expenses and discontinued
business lines charges in 1997 and the one time SAIF assessment recorded in
1996.
(10) The ratio of earnings to fixed charges has been determined by dividing (a)
income before taxes and fixed charges by (b) total fixed charges. Fixed
charges consist of interest expense (both excluding and including interest
on deposits) and amortization of debt expense. No portion of rental expense
could be demonstrated to be representative of the interest factor, and
therefore none is included in fixed charges.
(11) Loans before allowance for losses.
(12) Includes only capital held by Liberty Bank.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
BACKGROUND
First Liberty Financial Corp.'s ("First Liberty") financial results of
operations continued favorable trends during fiscal 1997. The positive trends
reflect the results of an ongoing plan which focuses on (1) maintaining a low
level of interest rate risk, (2) improving operating efficiency, (3) reductions
in the levels of nonperforming and classified assets, (4) maintaining a strong
regulatory capital position and (5) continued growth.
In February 1993, First Liberty issued 460,000 shares of Series A 7.75%
Cumulative Convertible Preferred ("Series A") stock. These shares had a
liquidation preference of $25 per share. Dividends on the Series A stock were
cumulative at an annual rate of $1.9375 per share and were payable quarterly. In
July 1995 the Company redeemed 2,537 shares of Series A for $66,879 plus accrued
and unpaid dividends. The remaining 457,463 shares of the Series A were
converted into 1,372,389 shares of the Company's common stock at a conversion
price of $8.33 per share of common stock.
In December 1994, the Company acquired by merger Central Banking Company
("CBC") of Swainsboro, Georgia and its subsidiary, The Central Bank ("Central
Bank"). Central Bank on the date of acquisition, held the following approximate
balances: loans of $21 million, cash and investments of $34 million, premises
and equipment of $1 million and deposits of $52 million. Intangible assets
resulting from the acquisition amounted to approximately $2 million.
In March 1995, the Company acquired three banking offices located in
Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets
acquired were approximately $3 million and total cash received and deposits
assumed were approximately $95 million. Intangible assets resulting from the
acquisition were approximately $4 million.
In September 1995, the Company acquired by merger Tifton Banks, Inc.
("Tifton") of Tifton, Georgia and its subsidiary, Tifton Bank & Trust Company
("Tifton Bank"). Tifton Bank on the date of acquisition, held the following
approximate balances: loans of $42 million, cash and investments of $21 million,
premises
25
<PAGE> 26
and equipment of $1 million and deposits of $45 million. Intangible assets
resulting from the acquisition amounted to approximately $2 million.
On November 15, 1996, the Company acquired by merger Middle Georgia Bank
("MGB"). MGB on the date of acquisition held the following approximate balances:
loans of $67 million, cash and investments of $58 million, premises and
equipment of $1 million and deposits of $117 million. This business combination
was accounted for utilizing the pooling-of-interests method of accounting.
Accordingly, all financial information has been retroactively restated to
reflect the MGB acquisition.
In December 1994 and September 1995, in connection with the respective
acquisitions of Tifton and CBC, the Company issued $7.6 million in Series B
6.00% Cumulative Convertible Preferred ("Series B") stock. The shares had a
liquidation preference of $25.00 per share. Dividends on the Series B were
cumulative at an annual rate of $1.50 per share and payable quarterly. In March
1997, the Company redeemed 1,409 shares of its 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 1.79 shares of common stock.
In August 1996, First Liberty announced a three-for-two stock split. The
split was effective October 1, 1996 and paid in the form of a stock dividend.
In September 1996, First Liberty issued a redemption notice for the
Company's 8.25% convertible debentures. As of September 30, 1996 $62,000 plus
accrued interest was paid to holders on the redemption date of October 7, 1996.
The remaining holders elected to convert into common stock at the conversion
price of $10.89 per share.
In October 1996, First Liberty commenced operations at NewSouth Financial
Services, Inc. ("NewSouth"), a consumer finance subsidiary. NewSouth provides
consumer finance services in select communities throughout Georgia.
During August 1997, Liberty Bank redeemed $16.5 million of its 11% and
8 1/4% debentures due August 1, 2004. As a result of the redemption an
extraordinary charge of $2.8 million (net of related income taxes) was recorded.
The redemption is expected to increase future net interest income by
approximately $1.1 million annually.
NET INCOME
First Liberty's core income was $13.7 million compared to $11.3 million a
year earlier. Core income per fully diluted share increased 20% to $1.75 for
fiscal 1997 from $1.46 per share for fiscal 1996. During 1997 and 1996, several
events occurred which resulted in non-recurring charges which have been excluded
from core operating results. During 1997, the following non-recurring charges
were excluded from core operating results:
- merger related expenses of approximately $312,000 (or $.04 per fully
diluted share) after-tax incurred in the first fiscal quarter associated
with the MGB merger;
- an extraordinary charge of $2.8 million (or $.36 per fully diluted share)
after-tax reflecting the loss on the redemption of subordinated debt;
- costs relating to discontinued business lines in Liberty Mortgage
Corporation's ("Liberty Mortgage") retail mortgage offices in Atlanta and
First Liberty Bank's ("Liberty Bank") auto dealer indirect lending
operations of $1.7 million (or $.21 per fully diluted share) after-tax.
This included $1.3 million after-tax in additional loan loss provisions
and $400,000 after-tax in other costs (including severance expenses) of
discontinued business lines.
Core earnings represent earnings exclusive of a one-time Federal Deposit
Insurance Corporation ("FDIC") assessment of $3.6 million ($2.3 million net of
tax) to recapitalize the Savings Association Insurance Fund ("SAIF"), recorded
September 30, 1996 pursuant to a law enacted on that date.
First Liberty's net income for the year ended September 30, 1997 was $8.9
million compared to $8.9 million for the year ended September 30, 1996 and $9.3
million for the year ended September 30, 1995. First
26
<PAGE> 27
Liberty's income before income taxes and extraordinary item was $16.9 million
for the year ended September 30, 1997 compared to $13.3 million in 1996 and
$12.9 million in 1995.
For the year ended September 30, 1997, Liberty Bank (excluding
contributions of Liberty Mortgage) contributed $19.1 million of core income
before taxes, compared to $14.4 million in 1996 and $10.9 million in 1995. These
amounts represent 95%, 85% and 84% of First Liberty's core income before income
taxes for 1997, 1996 and 1995, respectively. These trends are indicative of (i)
improved margins, which resulted in increased net interest income, and
reductions in nonperforming assets, (ii) improved internal operating efficiency,
(iii) internal growth, and (iv) the contributions of acquisitions.
For the year ended September 30, 1997, Liberty Mortgage contributed $1.4
million of income before income taxes, compared to $2.5 million in 1996 and $2.0
million in 1995. These amounts represent 7%, 15% and 15% of First Liberty's core
income before income taxes for 1997, 1996 and 1995, respectively.
Included in Liberty Mortgage's income before income taxes are net gains on
sale of loans, securities and loan servicing rights of approximately $3.2
million, $2.6 million and $2.0 million for the fiscal years ended September 30,
1997, 1996, and 1995, respectively.
During 1997, NewSouth commenced operations and did not significantly affect
1997 operating results, but is expected to significantly affect 1998 operating
results.
NET INTEREST INCOME
Net interest income increased by $5.7 million or 15% during fiscal 1997 as
compared to 1996 due to growth in earning assets. Net interest income increased
by $5.7 million or 18% during fiscal 1996 as compared to 1995 also due to growth
in earning assets.
27
<PAGE> 28
SUMMARY OF AVERAGE ASSETS AND LIABILITIES (FOR THE FISCAL YEAR ENDED)
The following table reflects the average balances, the actual interest
income or expense and the average yields and costs of funds of First Liberty's
interest-earning assets and interest-bearing liabilities (dollars in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- --------------------------------- --------
AVERAGE RATE/ AVERAGE RATE/ AVERAGE
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE
---------- --------- ------ ---------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Loan(1).................................... $ 851,728 $79,125 9.29% $ 751,322 $68,860 9.17% $618,294
Mortgage-backed securities................. 201,999 13,260 6.56% 154,007 11,165 7.25% 142,025
Investments................................ 74,553 4,462 5.99% 62,401 4,294 6.88% 66,700
---------- ------- ---------- ------- --------
Total interest-earning assets............ 1,128,280 $96,847 8.58% 967,730 $84,319 8.71% 827,019
======= =======
Other assets............................... 102,680 105,440 78,527
---------- ---------- --------
Total assets........................... $1,230,960 $1,073,170 $905,546
========== ========== ========
Savings deposits........................... $ 52,587 $ 1,344 2.56% $ 58,102 $ 1,637 2.82% $ 56,915
Time deposits.............................. 564,011 31,994 5.67% 499,670 29,214 5.85% 449,364
Other deposits............................. 283,267 5,983 2.11% 274,973 6,258 2.28% 228,693
Short-term borrowings...................... 118,485 6,548 5.53% 106,239 6,118 5.76% 58,746
Long-term borrowings(2).................... 104,311 6,974 6.69% 27,345 2,823 10.32% 25,206
---------- ------- ---------- ------- --------
Total interest-bearing liabilities....... 1,122,661 $52,843 4.71% 966,329 $46,050 4.77% 818,924
======= =======
Other liabilities.......................... 15,921 21,710 14,867
Equity..................................... 92,378 85,131 71,755
---------- ---------- --------
Total liabilities and equity........... $1,230,960 $1,073,170 $905,546
========== ========== ========
Interest rate spread....................... 3.88% 3.95%
==== =====
Net interest margin........................ 3.90% 3.95%
==== =====
<CAPTION>
1995
-------------------
RATE/
INTEREST YIELD
--------- ------
<S> <C> <C>
Loan(1).................................... $56,489 9.14%
Mortgage-backed securities................. 9,602 6.76%
Investments................................ 4,250 6.37%
-------
Total interest-earning assets............ $70,341 8.51%
=======
Other assets...............................
Total assets...........................
Savings deposits........................... $ 1,716 3.02%
Time deposits.............................. 24,133 5.37%
Other deposits............................. 5,352 2.34%
Short-term borrowings...................... 3,797 6.46%
Long-term borrowings(2).................... 2,781 11.03%
-------
Total interest-bearing liabilities....... $37,779 4.61%
=======
Other liabilities..........................
Equity.....................................
Total liabilities and equity...........
Interest rate spread....................... 3.89%
=====
Net interest margin........................ 3.94%
=====
</TABLE>
- ---------------
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
28
<PAGE> 29
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected First Liberty's interest income and expense during the
periods indicated. For each category, information is provided on changes
attributable to (1) changes in volume (changes in volume multiplied by old
rate), (2) changes in rate (changes in rate multiplied by old volume), and (3)
changes in rate/volume (changes in rate multiplied by change in volume) (dollars
in thousands).
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
1997 VS 1996 1996 VS 1995
INCREASE/(DECREASE) INCREASE/(DECREASE)
---------------------------------------- --------------------------------------
DUE TO DUE TO
DUE TO DUE TO RATE/ DUE TO DUE TO RATE/
RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL
------- ------- ------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Changes in:
Interest income:
Loans(1)............................... $ 937 $ 9,203 $ 125 $10,265 $ 179 $12,154 $ 38 $12,371
Mortgage-backed securities............. (1,055) 3,479 (329) 2,095 694 810 59 1,563
Investments............................ (559) 836 (109) 168 340 (274) (22) 44
------- ------- ------- ------- ------ ------- ----- -------
Total interest income.................... (677) 13,518 (313) 12,528 1,213 12,690 75 13,978
------- ------- ------- ------- ------ ------- ----- -------
Interest expense:
Savings deposits....................... (152) (155) 14 (293) (113) 36 (2) (79)
Time deposits.......................... (870) 3,762 (112) 2,780 2,140 2,702 239 5,081
Other deposits......................... (450) 189 (14) (275) (147) 1,083 (30) 906
Short-term borrowings.................. (247) 705 (28) 430 (414) 3,070 (335) 2,321
Long-term borrowings(2)................ (995) 7,946 (2,800) 4,151 (179) 236 (15) 42
------- ------- ------- ------- ------ ------- ----- -------
Total interest expense................... (2,714) 12,447 (2,940) 6,793 1,287 7,127 (143) 8,271
------- ------- ------- ------- ------ ------- ----- -------
Net interest income...................... $ 2,037 $ 1,071 $ 2,627 $ 5,735 $ (74) $ 5,563 $ 218 $ 5,707
======= ======= ======= ======= ====== ======= ===== =======
</TABLE>
- ---------------
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
29
<PAGE> 30
INTEREST RATE RISK
Interest rate risk is a measure of exposure to changes in net interest
income and theoretical market value of net assets due to changes in market
interest rates. The differential (known as "gap"), is the difference between
interest-earning assets and interest-bearing liabilities over a specified period
of time and represents a measure of sensitivity of net interest income to
changes in interest rates. A positive gap indicates an excess of
interest-earning assets over interest-bearing liabilities, while a negative gap
indicates an excess of interest-bearing liabilities over interest-earning
assets. Gap analysis does not consider the effects of the velocity of interest
rate changes, competitive factors or consumer preferences, and as such may not
be a reliable indicator of interest rate risk. First Liberty's interest rate
risk will generally be more positive or asset sensitive than depicted through
gap analysis.
In addition to gap analysis, management also employs a cash flow simulation
model to estimate changes in net interest income and theoretical market values
under various interest rate scenarios. The cash flow simulation model considers
the impact of principal amortization, estimated prepayments and the velocity of
interest rate changes and can be used to model the effects of competitive
factors and consumer preferences. As such, the cash flow simulation will
generally provide a better indication of interest rate risk.
First Liberty measures interest rate risk from several sources including
repricing risk, option risk, basis risk and liquidity risk. However, the two
principal measures used to monitor risk are the volatility of net interest
income and the interest sensitivity of assets and liabilities.
The interest sensitivity of financial instruments measures how quickly each
instrument reprices or matures. A balance sheet which has a relatively short
effective life generally has less interest rate risk. Management considers
assets and liabilities which mature or reprice within one year to be interest
rate sensitive. As of September 30, 1997, $693 million or 59% of interest
earning assets were interest sensitive and $737 million or 69% of interest
bearing liabilities were interest sensitive. A year earlier, 51% of interest
earning assets and 59% of interest bearing liabilities were interest sensitive,
before restatement for MGB pooling.
The volatility of net interest income reflects how the interest rate
characteristics of financial instruments will work together in various interest
rate environments over a fairly short period (generally one to two years). To
evaluate risk of net interest income volatility, management must not only assess
current financial attributes, but also forecast future business activity,
consumer behavior and future economic trends. During 1997, interest rates were
generally stable except for a Federal Reserve tightening by increasing the
targeted fed funds rate from 5.25% to 5.50% in March 1997 which was promptly
followed by an increase in the prime lending rate. Despite First Liberty's asset
sensitivity (which indicates a bias toward rising rates), the interest rate
spread remained relatively stable as the slight benefit from interest rates was
offset by a slight compression in earning asset yields and funding rates.
Loan demand remained robust during 1997 requiring the acquisition of
deposits from wholesale sources to supplement retail deposit growth. Wholesale
deposits are generally less labor intensive than retail deposits but may carry a
higher interest rate. Management uses such funding sources when they represent
the lowest "all-in" cost of funds. Wholesale deposits represent 13% of total
deposits at September 30, 1997.
Management measures the risk of net interest income volatility by the
percentage exposure of forecasted net interest income under stable rates to
various rate scenarios. During 1995, management initiated a plan to reduce the
level of bias toward rising interest rates. During 1997, management completed
this plan. As of September 30, 1997, management estimates that First Liberty is
slightly more at risk to declining interest rate environments than rising
interest rate environments reflecting a slightly asset sensitive position, but
the relative level of risk was essentially neutral.
30
<PAGE> 31
INTEREST RATE SENSITIVITY SHORT TERM ANALYSIS
The following table summarizes the repricing of First Liberty's
interest-earning assets and interest-bearing liabilities at September 30, 1997.
The information presented may not be indicative of actual future trends of net
interest income in rising or declining interest rate environments (dollars in
thousands).
<TABLE>
<CAPTION>
LESS 6
THAN 1 MONTH 2 MONTHS 3 MONTHS MONTHS 1 YEAR
1 TO 2 TO 3 TO 6 TO 1 TO 2 OVER
MONTH MONTHS MONTHS MONTHS YEAR YEARS 2 YEARS
---------- ------------ ------------ ------------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)(2)...................... $297,942 $30,770 $22,860 $ 69,035 $143,662 $134,982 $206,256
Securities....................... 42,682 5,723 5,888 26,094 27,869 38,382 109,264
Fed funds sold and repurchase
agreements..................... 20,237 -- -- -- -- -- --
-------- ------- ------- -------- -------- -------- --------
Total financial assets........... $360,861 $36,493 $28,748 $ 95,129 $171,531 $173,364 $315,520
======== ======= ======= ======== ======== ======== ========
Interest-bearing liabilities:
Deposits:
Savings(3)..................... $ 487 $ 487 $ 487 $ 1,461 $ 2,924 $ 5,846 $ 37,623
Money Market................... 74,984 571 588 -- -- -- --
Interest-bearing deposits(3)... 5,352 953 953 2,859 5,722 11,442 71,535
Time........................... 50,258 36,382 33,692 124,809 189,297 146,469 47,257
-------- ------- ------- -------- -------- -------- --------
Total interest-bearing
deposits................... 131,081 38,393 35,720 129,129 197,943 163,757 156,415
Other borrowings................. 201,165 1,033 1,033 1,033 -- 8,000 2,188
-------- ------- ------- -------- -------- -------- --------
Total financial liabilities...... $332,246 $39,426 $36,753 $130,162 $197,943 $171,757 $158,603
======== ======= ======= ======== ======== ======== ========
Current period gap............... $ 28,615 $(2,933) $(8,005) $(35,033) $(26,412) $ 1,607 $156,917
Cumulative gap................... $ 28,615 $25,682 $17,677 $(17,356) $(43,768) $(42,161) $114,756
Cumulative gap as a % of total
assets......................... 2.3% 2.0% 1.4% -1.4% -3.4% -3.3% 9.0%
<CAPTION>
TOTAL
----------
<S> <C>
Interest-earning assets:
Loans(1)(2)...................... $ 905,507
Securities....................... 255,902
Fed funds sold and repurchase
agreements..................... 20,237
----------
Total financial assets........... $1,181,646
==========
Interest-bearing liabilities:
Deposits:
Savings(3)..................... $ 49,315
Money Market................... 76,143
Interest-bearing deposits(3)... 98,816
Time........................... 628,164
----------
Total interest-bearing
deposits................... 852,438
Other borrowings................. 214,452
----------
Total financial liabilities...... $1,066,890
==========
Current period gap............... $ 114,756
Cumulative gap...................
Cumulative gap as a % of total
assets.........................
</TABLE>
- ---------------
(1) The portfolio of loans available-for-sale are included in the less than
three months repricing periods as all these assets are assigned to optional
or mandatory commitments to sell.
(2) The repricing of loans does not include amounts attributable to the
amortization and estimated repayment of principal.
(3) The estimated repricing of savings and interest-bearing checking accounts
was based on the Office of Thrift Supervision decay rates.
LOAN LOSS PROVISION AND ALLOWANCE FOR LOAN LOSSES
During fiscal 1997, the provision for estimated losses on loans was $6.3
million compared to $3.1 million during 1996 and $2.4 million during 1995.
During 1997, total loans held-for-investment increased by 10% while
nonperforming loans decreased by 6%. During 1997, the level of consumer
bankruptcies and consumer charge-offs increased. During fiscal 1997, net
charge-offs were $4.8 million or .56% of total loans compared to $2.3 million or
.31% of total loans in fiscal 1996. Substantially all of the increase in net
charge-offs related to consumer loans. Net charge-offs on consumer bankruptcies
were $1.2 million or 25% of net charge-offs for 1997. Net charge-offs on
indirect auto loans were $1.7 million in 1997 or 36% of net charge-offs.
Excluding consumer loans in bankruptcy and indirect auto loans, the net
charge-offs would have been $1.9 million or .22% of average loans for 1997. This
trend experienced by First Liberty is believed to be indicative of trends in
most financial institutions.
Considering the growth in loans and the overall trends in the level of
credit risk, the provision for estimated losses on loans increased $3.2 million
in 1997 (inclusive of $2.0 million in non-core charges) as compared to 1996. As
the concentration of indirect auto loans decreases, the level of consumer
bankruptcies and consumer loans charge-offs should also decline. However,
management estimates the core provision in
31
<PAGE> 32
1997 to be reflective of recurring portfolio risk and would anticipate that the
level of future loan loss provisions would continue to increase consistent with
the level of loan growth.
Loan loss reserves are determined based on management's internal review of
nonperforming loans, delinquency trends, the level of rated assets and
charge-off trends. Additionally, management assesses general and specific
economic trends both nationally and locally and regulatory information to
determine the impact of those external factors on loan loss reserve levels.
Based on the internal and external reviews, Liberty Bank segregates its
loan portfolio by type of loans and by loan classification within each loan
type. Reserve percentages are applied (based on historical and anticipated loss
rates) to each loan group to determine the required amount of allocated general
loan loss reserves. Additionally, an amount is provided for unallocated general
loan loss reserves reflecting the potential for estimation errors in allocated
reserves. The allocation of the allowance for estimated losses for the years
indicated was as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
------------- ------------- ------------ ------------ ------------
AMT % AMT % AMT % AMT % AMT %
------- --- ------- --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage:
Residential.............. $ 292 16 $ 926 20 $1,032 25 $ 784 26 $ 813 25
Commercial(2)............ 540 8 817 11 1,083 13 1,667 19 1,325 22
Residential
construction.......... 377 11 305 12 402 11 209 11 157 9
Commercial business...... 2,955 30 2,536 26 1,913 21 1,411 14 1,743 12
Consumer(3).............. 5,688 35 3,999 31 3,039 30 1,670 30 1,604 32
Unallocated.............. 2,051 -- 1,767 -- 2,165 -- 1,310 -- 1,606 --
------- --- ------- --- ------ --- ------ --- ------ ---
Total............ $11,903 100% $10,350 100% $9,634 100% $7,051 100% $7,248 100%
======= === ======= === ====== === ====== === ====== ===
</TABLE>
- ---------------
(1) Loan categories as a percentage of total loans held-for-investment.
(2) Includes commercial construction first mortgage loans.
(3) Includes consumer mortgage loans (such as second mortgage loans and home
equity lines of credit).
Changes in the allowance for estimated losses on loans for the five years
ended September 30, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year............... $10,350 $ 9,634 $ 7,051 $ 7,248 $ 6,727
Provision for estimated losses......... 6,317 3,106 2,365 2,187 2,565
Acquisitions........................... -- -- 879 -- 1,675
Adjustment for MGB pooling............. -- (43) -- -- --
Recoveries............................. 1,212 2,491 2,483 2,381 1,599
Charge-offs............................ (5,976) (4,838) (3,144) (4,765) (5,318)
------- ------- ------- ------- -------
Balance, end of year..................... $11,903 $10,350 $ 9,634 $ 7,051 $ 7,248
======= ======= ======= ======= =======
Allowance for loan losses to
nonperforming loans.................... 226.03% 184.85% 219.75% 119.04% 99.72%
Allowance for loan losses to total loans
held-for-investment.................... 1.36% 1.30% 1.38% 1.27% 1.37%
</TABLE>
32
<PAGE> 33
The following table summarizes charge-offs and recoveries by loan type
(dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Charge-offs:
Residential real estate..................... $ 260 $ 76 $ 223 $ 210 $ 455
Commercial real estate...................... -- -- 426 205 559
Commercial business......................... 1,278 1,871 855 965 1,967
Consumer.................................... 4,438 2,891 1,640 3,385 2,337
------ ------ ------ ------ ------
5,976 4,838 3,144 4,765 5,318
------ ------ ------ ------ ------
Recoveries:
Residential real estate..................... 36 22 68 198 237
Commercial real estate...................... -- -- 3 -- 141
Commercial business......................... 119 1,049 835 292 236
Consumer.................................... 1,057 1,420 1,577 1,891 985
------ ------ ------ ------ ------
1,212 2,491 2,483 2,381 1,599
------ ------ ------ ------ ------
Net charge-offs............................... $4,764 $2,347 $ 661 $2,384 $3,719
====== ====== ====== ====== ======
Percentage of average loans................... .56% .31% 0.11% 0.42% .63%
====== ====== ====== ====== ======
</TABLE>
NONPERFORMING ASSETS AND CREDIT RISK
The table below summarizes nonperforming assets and troubled debt
restructurings at the dates indicated. Nonperforming assets consist of
nonaccrual loans, foreclosed properties and insubstance foreclosures, as well as
loans past due 90 days or more as to interest or principal and still accruing.
Material potential problem loans, (i.e., those with respect to which management
has serious doubts regarding the ability of the borrowers to comply with present
loan repayment terms) have been classified as nonaccrual loans regardless of
payment status, and therefore are included in Liberty Bank's nonperforming
assets (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........................... $5,266 $5,160 $ 3,391 $ 5,347 $ 7,055
Loans past due 90 days or more and still
accruing................................. -- 439 993 576 213
------ ------ ------- ------- -------
Total nonperforming loans.................. 5,266 5,599 4,384 5,923 7,268
Real estate acquired through foreclosure... 3,332 3,460 4,755 10,982 9,791
Insubstance foreclosures................... -- -- -- 32 4,665
Other repossessed assets................... 601 595 220 196 274
------ ------ ------- ------- -------
Total nonperforming assets................. $9,199 $9,654 $ 9,359 $17,133 $21,998
====== ====== ======= ======= =======
Total nonperforming assets as a percentage
of total assets.......................... .72% .82% .91% 2.16% 2.70%
====== ====== ======= ======= =======
Troubled debt restructurings............... $ -- $5,252 $10,817 $12,199 $12,554
====== ====== ======= ======= =======
</TABLE>
At the time of foreclosure all properties are valued at fair value. Fair
value is evaluated in light of a current appraisal and an assessment of market
conditions. The evaluation results in a disposition plan including a financial
plan designed to monitor the net realizable values of the properties during the
marketing period. The plan is regularly monitored and amended as necessary to
accommodate changing market conditions. At times, some properties' net carrying
values may be reduced to facilitate near term liquidation, particularly if the
marketing period has been extended beyond the original plan.
33
<PAGE> 34
At September 30, 1997 foreclosed properties included five commercial
properties with aggregate investments (net of reserves) of approximately
$366,000. The remaining balance of foreclosed properties consisted of
residential properties.
During fiscal 1995, management elected to writedown six commercial
properties in the amount of $3.0 million, which were reserved for in prior
years, as discussed below, due to the permanent impairment of such assets.
During fiscal 1996 and 1995, five of the six properties were sold.
During the fourth quarter of fiscal 1994, all remaining commercial
properties were reevaluated in light of current economic conditions. In several
cases, management elected to reduce the net carrying value of certain properties
(by increasing reserves) to facilitate near term liquidation. As a result of the
reductions, Liberty Bank recorded a provision of approximately $852,000.
On October 1, 1995 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures, an Amendment of SFAS No. 114". As a
result, the following loans were considered impaired as of September 30, 1997
and 1996 (dollars in thousands). See Notes 1 and 6 to First Liberty's
Consolidated Financial Statements contained in Item 8 -- "Financial Statements
and Supplementary Data" -- herein.
<TABLE>
<CAPTION>
CARRYING
SEPTEMBER 30, 1997 BALANCE RESERVE VALUE
------------------ ------- ------- --------
<S> <C> <C> <C>
Residential first mortgage............................... $1,125 $ 112 $1,013
Commercial first mortgage................................ 576 58 518
Commercial business...................................... 853 445 408
Consumer(1).............................................. 3,848 1,610 2,238
------ ------ ------
$6,402 $2,225 $4,177
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
CARRYING
SEPTEMBER 30, 1996 BALANCE RESERVE VALUE
------------------ ------- ------- --------
<S> <C> <C> <C>
Residential first mortgage............................... $ 566 $ 57 $ 509
Commercial first mortgage................................ 354 35 319
Commercial business...................................... 2,180 439 1,741
Consumer(1).............................................. 3,662 1,526 2,136
------ ------ ------
$6,762 $2,057 $4,705
====== ====== ======
</TABLE>
- ---------------
(1) Includes consumer mortgage loans (such as second mortgage loans and home
equity lines of credit).
NONINTEREST INCOME
Liberty Mortgage originates loans with marketing (price) concessions which
are offset by the value of the loan servicing rights originated. Liberty
Mortgage will sell a portion of the loan servicing rights relating to loans
originated to recover its marketing concessions. Additionally, Liberty Mortgage
may sell servicing rights during favorable market conditions as a part of its
portfolio management process.
34
<PAGE> 35
The following table illustrates the contributions to operating results and
to Liberty Mortgage's loan servicing portfolio in each of the last three fiscal
years (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loan activity:
Loans originated......................................... $305,461 $377,994 $161,344
Loan servicing rights sold............................... 181,833 104,761 249,502
-------- -------- --------
Loan servicing contributed to (withdrawn from)
portfolio............................................. $123,628 $273,233 $(88,158)
======== ======== ========
Percentage sold.......................................... 60% 28% 155%
======== ======== ========
Operating results:
Gain(loss) on sale of loans and securities............... $ 1,815 $ 1,770 $ (354)
Gain on sale of loan servicing rights.................... 1,397 790 2,353
-------- -------- --------
Net gain on sale of loans and securities and loan
servicing rights...................................... $ 3,212 $ 2,560 $ 1,999
======== ======== ========
Net gain as a percentage of loans originated............. 1.05% .68% 1.24%
======== ======== ========
</TABLE>
During 1996, improving business conditions resulted in increased loan
originations as compared to 1995. Additionally, the accounting change which
allows for recognition of the value of mortgage servicing rights allowed for a
reduction in the percentage of servicing rights sold. As such, the loan
servicing portfolio increased by $147 million during 1996.
Liberty Bank also may sell investments, loans and mortgage-backed
securities from time to time from its portfolio. The following table summarizes
investment activity from Liberty Bank's portfolio (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Net book value sold:
Assets available-for-sale............................ $12,441 $8,282 $73,040
Net gain on sale..................................... 32 (16) 117
</TABLE>
During 1995, investment activity consisted principally of the liquidation
of securities acquired in bank acquisitions during the year. As of September 30,
1997 and 1996, Liberty Bank's investments and mortgage-backed securities
available-for-sale totalled $256 million and $233 million, respectively and
represented 100% of total investments and mortgage-backed securities.
Deposit account service charges increased by $1.2 million during 1997 as
compared to 1996, and $1.0 million during 1996 as compared to 1995 principally
due to average transaction accounts increasing 3% and 20% for the same periods
principally as a result of acquisition activity and internal growth.
Other income in fiscal 1997 was $1.8 million compared to $1.4 million
during fiscal 1996 and 1995.
NONINTEREST EXPENSE
Total noninterest expense increased by $1.1 million or 34% during fiscal
1997 compared to fiscal 1996 and increased $6.1 million or 22% during fiscal
1996 compared to fiscal 1995. The principal factors contributing to increased
noninterest expense were merger related expenses of $423,000 in 1997 and the
$3.6 million SAIF assessment plus incremental costs of acquired operations in
1996. During 1995, three acquisitions were completed which increased noninterest
expense by direct incremental costs of approximately $1.2 million in 1996 as
compared to 1995.
During 1997, one acquisition was completed and was accounted for as a
pooling-of-interests. Accordingly, historical information was restated and the
incremental operating costs were included in all historical periods.
35
<PAGE> 36
During 1997 Liberty Bank recorded $396,000 for possible losses on sales of
foreclosed real estate as compared to $510,000 and $686,000 in 1996 and 1995,
respectively. The ending allowance for losses on foreclosed real estate for
1997, 1996 and 1995 was $693,000, $543,000 and $481,000, respectively. See
"Nonperforming Assets and Credit Risk" -- herein.
The following table summarizes the significant components of other expense
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Postage and freight...................................... $1,116 $ 978 $ 842
Telephone................................................ 996 719 619
Stationery and supplies.................................. 816 663 621
Losses................................................... 876 435 760
Other.................................................... 2,153 1,697 1,827
------ ------ ------
$5,957 $4,492 $4,669
====== ====== ======
</TABLE>
INCOME TAXES
Income tax expense for the year ended September 30, 1995 reflects a
variation from the statutory federal income tax rate of 34% primarily due to the
difference between the deduction of bad debt provisions for financial reporting
and income tax purposes. Income tax expense for the year ended September 30,
1997, reflects a variation from the statutory federal income tax rate of 34%
primarily due to the resolution of certain tax contingencies. First Liberty's
effective tax rate after such items for the years ended September 30, 1997, 1996
and 1995 was 29.2%, 32.9% and 27.8%, respectively.
At September 30, 1997 First Liberty had gross deferred tax assets of
approximately $4.0 million. First Liberty's management has determined that it is
more likely than not that its deferred tax asset will be realized. This is based
on the existence of taxable income in the form of future reversals of existing
taxable temporary differences and taxable income in prior carryback years that
is sufficient to allow realization of the tax benefit of First Liberty's
existing deductible temporary differences. First Liberty is not aware of any
material uncertainties existing at September 30, 1997 that may affect the
realization of First Liberty's deferred tax assets. First Liberty evaluates the
realizability of deferred tax assets quarterly by assessing the need for a
valuation allowance.
36
<PAGE> 37
LOANS
The following table states the composition of Liberty Bank's loan portfolio
at the indicated dates (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential permanent
first mortgages:
Held-for-investment:
Fixed rate........... $ 47,591 5 $ 53,299 7 $ 50,412 7 $ 53,839 10 $ 69,028 12
Adjustable rate...... 94,084 11 108,359 13 127,900 18 92,873 16 62,585 10
-------- --- -------- --- -------- --- -------- --- -------- ---
141,675 16 161,658 20 178,312 25 146,712 26 131,613 22
-------- --- -------- --- -------- --- -------- --- -------- ---
Available-for-sale:
Fixed rate........... 26,198 3 25,637 3 21,307 3 8,005 1 60,398 10
Adjustable rate...... 3,362 -- 1,269 -- 975 -- 1,978 -- 9,649 2
-------- --- -------- --- -------- --- -------- --- -------- ---
29,560 3 26,906 3 22,282 3 9,983 1 70,047 12
-------- --- -------- --- -------- --- -------- --- -------- ---
Residential
construction........... 100,867 11 96,505 12 75,023 10 59,202 11 48,680 8
Commercial
construction........... 29,712 3 24,185 3 18,301 3 18,298 3 12,967 2
Commercial
permanent(1)........... 36,179 4 59,200 7 72,608 10 87,846 16 99,799 17
-------- --- -------- --- -------- --- -------- --- -------- ---
166,758 18 179,890 22 165,932 23 165,346 30 161,446 27
-------- --- -------- --- -------- --- -------- --- -------- ---
Consumer(2).............. 306,851 34 247,511 30 206,292 29 166,240 30 170,311 28
Commercial(3)............ 260,663 29 208,020 25 145,613 20 74,960 13 64,868 11
-------- --- -------- --- -------- --- -------- --- -------- ---
567,514 63 455,531 55 351,905 49 241,200 43 235,179 39
-------- --- -------- --- -------- --- -------- --- -------- ---
905,507 100% 823,985 100% 718,431 100% 563,241 100% 598,285 100%
=== === === === ===
Allowance for estimated
losses................. (11,903) (10,350) (9,634) (7,051) (7,248)
-------- -------- -------- -------- --------
Total.................... $893,604 $813,635 $708,797 $556,190 $591,037
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes construction loans converted to permanent loans.
(2) Includes consumer mortgage loans (such as second mortgage loans and home
equity lines of credit).
(3) Includes commercial business loans collateralized by mortgages.
During 1997, the commercial loan portfolio increased by $53 million, or
25%, as a part of Liberty Bank's strategic plan to emphasize commercial loans as
a targeted line. Management would anticipate a continued expansion of commercial
loans in 1998.
The following table sets forth the scheduled contractual repayments of
Liberty Bank's construction and commercial business loans at September 30, 1997.
Adjustable rate loans are included in their respective principal repayment date
categories (dollars in thousands).
<TABLE>
<CAPTION>
CONSTRUCTION COMMERCIAL
------------ ----------
<S> <C> <C>
Amounts due:
Within 1 year(1)................................... $115,235 $ 95,357
After 1 year through 5 years....................... 14,275 132,132
After 5 years...................................... 1,069 33,174
-------- --------
$130,579 $260,663
======== ========
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated schedule of repayment and no
stated maturity.
37
<PAGE> 38
The following table summarizes the total amount of construction and
commercial loans at September 30, 1997 due after one year by fixed and
adjustable rates (dollars in thousands).
<TABLE>
<CAPTION>
FIXED ADJUSTABLE
RATE RATE
-------- ----------
<S> <C> <C>
Construction........................................... $ 3,668 $11,676
Commercial............................................. 127,716 37,590
-------- -------
$131,384 $49,266
======== =======
</TABLE>
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The following table summarizes securities available-for-sale (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
TYPES OF INVESTMENTS 1997 1996 1995
-------------------- -------- -------- --------
<S> <C> <C> <C>
Investment securities:
U.S. government agencies......................... $ 40,920 $ 21,126 $ 32,404
Investment grade corporate debt and equity
securities.................................... 345 5,000 4,739
Federal Home Loan Bank of Atlanta stock.......... 9,733 9,733 9,733
State, county and municipal...................... -- 5,951 6,799
Certificates of deposit.......................... 891 5,795 4,572
Other............................................ 113 157 147
Mortgage-backed securities:
Federal National Mortgage Corporation............ 80,338 82,075 46,463
Federal Home Loan Mortgage Association........... 78,810 84,779 80,668
Government National Mortgage Association......... 27,141 4,495 5,261
Other............................................ 17,611 13,747 16,521
-------- -------- --------
Total securities available-for-sale................ $255,902 $232,858 $207,307
======== ======== ========
</TABLE>
38
<PAGE> 39
The stated contractual maturities and weighted average yield of securities
available-for-sale at September 30, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1 YEAR 5 YEARS
1 YEAR THROUGH THROUGH AFTER
TYPES OF INVESTMENT OR LESS 5 YEARS 10 YEARS 10 YEARS TOTAL
------------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Investment securities:
Federal Home Loan Bank of Atlanta
stock............................. $ 9,733 $ -- $ -- $ -- $ 9,733
Investment grade corporate equity
securities........................ 345 -- -- -- 345
U.S. government agencies............. 500 35,632 4,788 -- 40,920
Certificates of deposit.............. 891 -- -- -- 891
Other................................ 113 -- -- -- 113
------- ------- ------- -------- --------
11,582 35,632 4,788 -- 52,002
------- ------- ------- -------- --------
Weighted average yield................. 6.95% 6.50% 6.91% -- 6.64%
------- ------- ------- -------- --------
Mortgage-backed securities:
Federal National Mortgage
Association....................... 39 22,318 6,131 51,850 80,338
Federal Home Loan Mortgage
Corporation....................... 165 10,530 10,080 58,035 78,810
Government National Mortgage
Association....................... -- -- 371 26,770 27,141
Other................................ 1,270 999 4,867 10,475 17,611
------- ------- ------- -------- --------
1,474 33,847 21,449 147,130 203,900
------- ------- ------- -------- --------
Weighted average yield................. 6.03% 6.63% 6.61% 6.88% 6.81%
------- ------- ------- -------- --------
Total securities available-for-sale.... $13,056 $69,479 $26,237 $147,130 $255,902
======= ======= ======= ======== ========
Weighted average yield................. 6.85% 6.57% 6.66% 6.88% 6.77%
======= ======= ======= ======== ========
</TABLE>
Collateralized mortgage obligations of $132 million are included in
mortgage-backed securities and have anticipated weighted average effective
maturities of less than five years.
In the third quarter of fiscal 1996 First Liberty undertook a portfolio
investment strategy to address the need to proactively manage several
situations. Among the primary situations was that the Federal Home Loan Bank of
Atlanta ("FHLB") exercised their legislative authority to force redemption of
the Company's FHLB stock in excess of required minimums. A forced redemption of
FHLB stock would result in the liquidation of a deferred tax liability related
to untaxed dividend income which would reduce future net interest income.
Additionally, Liberty Bank sought to reduce interest rate risk due to declining
interest rate environments.
The portfolio investment strategy implemented during 1996 involved the
purchase of $45 million in short term average life (one to two years)
collateralized mortgage obligations funded with adjustable rate FHLB advances.
(see "Borrowings")
39
<PAGE> 40
DEPOSITS
The following table sets forth the composition of deposits, excluding
accrued interest payable and discounts on deposits acquired, by type of account
and interest rate category at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
% OF % OF % OF
TYPE OF ACCOUNT AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total savings:
Regular(1)...................... $ 49,315 5% $ 56,421 6% $ 59,513 7%
Money market(2)................. 76,143 8 94,260 11 90,513 11
-------- ---- -------- ---- -------- ----
Total savings................... 125,458 13 150,681 17 150,026 18
-------- ---- -------- ---- -------- ----
Demand deposits:
Consumer Interest-earning(3).... 86,603 10 91,061 11 86,106 11
Non-interest-earning............ 22,469 2 23,489 3 21,894 3
Commercial...................... 69,965 8 67,982 8 51,787 6
Custodial accounts.............. 12,663 1 12,969 1 11,344 1
-------- ---- -------- ---- -------- ----
Total demand deposits........ 191,700 21 195,501 23 171,131 21
-------- ---- -------- ---- -------- ----
Time deposits:
1.00%-3.00%..................... 234 -- 241 -- 856 --
3.01%-5.00%..................... 15,622 2 38,022 5 55,028 7
5.01%-7.00%..................... 596,311 63 452,946 53 403,249 49
7.01%-9.00%..................... 14,479 1 19,936 2 37,626 5
9.01%-11.00%.................... 1,518 -- 1,457 -- 1,944 --
-------- ---- -------- ---- -------- ----
Total time deposits.......... 628,164 66 512,602 60 498,703 61
-------- ---- -------- ---- -------- ----
Total deposits............... $945,322 100% $858,784 100% $819,860 100%
======== ==== ======== ==== ======== ====
Weighted average rate at year
end............................. 4.57% 4.40% 4.57%
======== ======== ========
Contractual maturities of time
deposits:
Within 1 year................... $437,311 $372,675 $286,065
1 to 5 years.................... 190,847 139,927 212,610
Over 5 years.................... 6 -- 28
-------- -------- --------
$628,164 $512,602 $498,703
======== ======== ========
</TABLE>
- ---------------
(1) The range of nominal interest rates were 2.00% to 3.25% at September 30,
1997 and September 30, 1996 and 2.50% to 3.50% at September 30, 1995.
(2) The range of nominal interest rates were 2.45% to 4.60% at September 30,
1997, 2.45% to 4.00% at September 30, 1996, and 2.45% to 3.75% at September
30, 1995.
(3) The range of nominal interest rates were 1.75% to 3.15% at September 30,
1997, 1.75% to 3.25% at September 30, 1996 and 2.40% to 3.25% at September
30, 1995.
As of September 30, 1997 the amount and remaining term to maturity for time
deposits in the amount of $100,000 or greater is as follows; approximately $43.2
million in three months or less, approximately $30.7 million in over three
months through six months, approximately $40.0 million in over six months
through twelve months, and approximately $28.0 million in over twelve months.
Included in total deposits are accounts having balances in excess of
$100,000 totalling approximately $155 million, $147 million and $118 million at
September 30, 1997, 1996 and 1995, respectively.
40
<PAGE> 41
Certain deposits are collateralized by mortgage-backed and investment
securities aggregating approximately $38.2 million and $26.7 million at
September 30, 1997 and 1996, respectively.
In the second quarter of fiscal 1996, First Liberty began a wholesale and
brokered certificate of deposit program as part of their overall funding
strategy. Since 1995 brokered deposits have grown to $17.4 million and wholesale
deposits have grown to $103 million. These deposits represent 13% of total
deposits. The wholesale and brokered program provides a source of funds that can
be utilized as an attractive alternative to other borrowing lines and
competitive deposit pricing.
BORROWINGS
The following table sets forth the outstanding, maximum month-end and
average balances of FHLB advances and other borrowings and the associated
weighted average interest rates at the dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Outstanding balance, end of period......................... $194,637 $184,660 $ 88,500
Maximum month end balance.................................. 220,660 184,660 107,500
Average balance............................................ 190,213 106,047 62,091
Weighted average interest rate, end of period............ 5.98% 5.45% 6.14%
Weighted average interest rate, during the period........ 5.58% 5.71% 6.07%
</TABLE>
Advances from the FHLB are collateralized by residential first mortgage
loans and mortgage-backed and government agency securities with unpaid principal
balances aggregating approximately $190 million, $195 million and $140 million
at September 30, 1997, 1996 and 1995, respectively. At September 30, 1997,
Liberty Bank was required to collateralize its advances with acceptable
collateral with a lendable collateral value equal to 100% of advances
outstanding. The lendable collateral value of the residential first mortgage
loans and mortgage-backed securities pledged to the advances was 85% and 97% of
their fair market value, respectively.
During 1996 the FHLB of Atlanta imposed a maximum investment in its capital
stock equal to $500,000 over the required minimum. During the quarter ended
September 30, 1996, Liberty Bank increased its advances from the FHLB of Atlanta
to avoid a forced redemption of its excess FHLB of Atlanta stock. (see
"Investments and Mortgage-backed Securities")
LIQUIDITY AND CAPITAL RESOURCES
First Liberty's primary sources of funds are deposits, loan repayments,
sales and maturities of securities, loan sales, repurchase agreements, advances
from the FHLB of Atlanta and various other borrowings. Deposits provide a source
of funds that are highly dependent on market and other conditions, while loan
repayments are a relatively stable source of funds.
The liquidity of First Liberty's operation is measured by the ratio of cash
and short-term investments (as defined by federal regulations) to the sum of
withdrawable deposits and borrowings maturing within one year. As of September
30, 1997, the minimum liquidity ratio was at least 5%. Federal regulations
currently require institutions to maintain a liquidity ratio of at least 4%.
Liberty Bank met its liquidity requirement at September 30, 1997.
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.
41
<PAGE> 42
The following table reflects Liberty Bank's compliance with its regulatory
capital requirements at September 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
--------------------- ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Core capital.................. $ 92,523 7.34 $37,833 3.00 $54,690 4.34
Tangible capital.............. 91,178 7.24 18,896 1.50 72,282 5.74
Risk-based capital............ 102,944 11.21 73,452 8.00 29,492 3.21
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
establishes five classifications for institutions based upon the capital
requirements. Each appropriate federal banking agency, such as the OTS for
Liberty Bank, must establish by regulation the parameters of each such
classification. Based on final regulations promulgated by the OTS, Liberty Bank
is considered well capitalized. Failure to maintain that status could result in
greater regulatory oversight or restrictions on Liberty Bank's activities.
Liberty Bank is prohibited from declaring or paying cash dividends on its
common stock if the payment thereof would cause a reduction in its regulatory
capital below either the liquidation account or the capital requirements set by
the OTS or, without the prior approval of the OTS, if the amount of dividends to
be paid in any year would exceed 50% of its net income for the fiscal year in
which the dividend is declared (except that permitted dividends may be deferred
and paid in a subsequent year). No dividends were declared during fiscal 1997
and 1996. During fiscal 1995 Liberty Bank declared and paid dividends to First
Liberty in the amounts of $6.3 million and $3.2 million, respectively. Liberty
Bank paid dividends in the amount of $3.6 million to First Liberty during fiscal
1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
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 replaces
primary earnings per share with basic earnings per share which excludes dilution
and is computed by dividing net income by the weighted average number of common
shares outstanding for the period. SFAS No. 128 replaces fully diluted earnings
per share with diluted earnings per share which reflects the potential dilution
that would occur if securities or other contracts to issue common stock were
exercised. SFAS No. 128 is required for financial statements issued after
December 15, 1997. Earlier adoption is prohibited.
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.
42
<PAGE> 43
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.
In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of FASB No. 125." SFAS No. 127 defers until January
1, 1998, certain provisions of SFAS No. 125.
YEAR 2000
The Company has adopted a plan to ensure a smooth transition of the
systems, products and vendors which First Liberty relies on into the twentieth
century. Additionally, Liberty Bank will work with its loan customers to monitor
potential credit exposure which might result from a lack of their systems'
readiness for Year 2000.
Substantially all of First Liberty's software systems are licensed from
outside vendors. First Liberty's primary exposure emanates from the ability of
its technology vendors to implement the necessary changes for Year 2000
compliance. The Company has received commitments from its major vendors to
provide the required systems modifications to ensure compliance and management
believes those commitments will be met.
Many systems and some hardware will need to be modified or replaced for
Year 2000 compliance. To the extent possible, those changes will be incorporated
into the normal replacement or upgrade of hardware and systems.
Management believes it will be successful in the achievement of its plans
and does not believe that the execution of the plan will have a material adverse
effect on future operating results.
43
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 45
Consolidated Statements of Financial Condition as of
September 30, 1997 and 1996............................... 46
Consolidated Statements of Income for each of the three
years in the period ended September 30, 1997.............. 47
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1997.... 49
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1997.............. 50
Notes to Consolidated Financial Statements.................. 53
</TABLE>
44
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
First Liberty Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of First Liberty Financial Corp. and Subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Liberty Financial Corp. and Subsidiaries as of September 30, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company changed its method of accounting for impaired loans and mortgage
servicing rights in 1996.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
November 6, 1997
45
<PAGE> 46
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 31,197 $ 40,015
Federal funds sold and repurchase agreements................ 20,237 33,137
Securities available-for-sale, at market value.............. 255,902 232,858
Loans available-for-sale, net, at market value.............. 29,560 26,906
Loans, net.................................................. 864,044 786,729
Accrued interest receivable................................. 8,534 8,723
Premises and equipment, net................................. 24,789 23,416
Real estate, net............................................ 2,639 3,060
Intangible assets........................................... 9,098 10,211
Mortgage servicing rights................................... 6,571 6,132
Advances to attorneys for loans originated.................. 8,106 1,729
Deferred federal income taxes............................... 318 945
Other assets................................................ 8,142 6,606
---------- ----------
Total assets...................................... $1,269,137 $1,180,467
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................................ $ 92,884 $ 89,242
Interest-bearing demand................................... 98,816 106,259
Savings................................................... 125,458 150,681
Time...................................................... 628,164 512,602
---------- ----------
Total deposits......................................... 945,322 858,784
Notes payable and other borrowed money...................... 194,637 184,660
Subordinated debentures..................................... -- 12,155
Securities sold under agreements to repurchase.............. 19,815 16,644
Checks payable on loans originated.......................... 1,709 4,450
Other liabilities........................................... 13,740 17,317
---------- ----------
Total liabilities................................. 1,175,223 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, 37,500,000 shares
authorized, 7,763,972 and 7,144,216 shares issued,
respectively, and 7,730,462 and 7,110,706 shares
outstanding, respectively)............................. 7,764 7,145
Additional paid-in capital................................ 38,505 31,091
Retained earnings......................................... 46,752 40,994
Net unrealized gain(loss) on securities
available-for-sale, net of taxes....................... 1,162 (68)
Treasury stock at cost (33,510 shares).................... (269) (269)
---------- ----------
Total stockholders' equity............................. 93,914 86,457
---------- ----------
Total liabilities and stockholders' equity........ $1,269,137 $1,180,467
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 47
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Loans..................................................... $79,125 $68,860 $56,489
Securities................................................ 16,532 14,606 13,121
Federal funds sold and repurchase agreements.............. 1,190 853 731
------- ------- -------
Total interest income............................. 96,847 84,319 70,341
------- ------- -------
Interest Expense:
Deposits.................................................. 39,321 37,109 31,201
Short-term borrowings..................................... 6,548 6,118 3,797
Long-term borrowings...................................... 6,974 2,823 2,781
------- ------- -------
Total interest expense................................. 52,843 46,050 37,779
------- ------- -------
Net interest income.................................... 44,004 38,269 32,562
Provision for estimated losses on loans................... 6,317 3,106 2,365
------- ------- -------
Net interest income after provision for estimated
losses on loans...................................... 37,687 35,163 30,197
------- ------- -------
Noninterest Income:
Loan servicing fees....................................... 2,310 2,445 2,398
Gain (loss) on sale of investment securities.............. 118 (16) (30)
Gain (loss) on sale of loans and mortgage-backed
securities............................................. 1,756 1,770 (207)
Gain on sale of servicing................................. 1,397 790 2,353
Deposit account service charges........................... 6,132 4,956 3,932
Other income.............................................. 1,818 1,379 1,425
------- ------- -------
Total noninterest income.......................... 13,531 11,324 9,871
------- ------- -------
51,218 46,487 40,068
------- ------- -------
Noninterest Expense:
Compensation, taxes and benefits.......................... 18,304 15,653 13,606
Occupancy and equipment................................... 3,685 3,824 3,299
Advertising............................................... 1,440 942 892
Professional fees......................................... 1,419 1,002 821
Data processing........................................... 1,193 829 718
Federal deposit insurance premiums........................ 754 5,013 1,845
Amortization of intangible assets......................... 1,113 1,113 729
Net cost of operation of other real estate................ 454 325 549
Other expenses............................................ 5,957 4,492 4,669
------- ------- -------
Total noninterest expense......................... 34,319 33,193 27,128
------- ------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE> 48
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Income before income tax expense........................ 16,899 13,294 12,940
------- ------- -------
Income Tax Expense(Benefit):
Current............................................... 6,008 6,330 4,000
Deferred.............................................. (819) (1,956) (405)
------- ------- -------
5,189 4,374 3,595
------- ------- -------
Income before extraordinary loss........................ 11,710 8,920 9,345
Extraordinary loss on extinguishment of debt (net of
related income tax benefit of $1,514)................. 2,811 -- --
------- ------- -------
Net income............................................ 8,899 8,920 9,345
Dividends on preferred stock............................ 113 454 864
------- ------- -------
Net income applicable to common stockholders.......... $ 8,786 $ 8,466 $ 8,481
======= ======= =======
Earnings Per Common Share:
Income before extraordinary loss:
Primary............................................ $ 1.53 $ 1.19 $ 1.44
Fully diluted...................................... $ 1.50 $ 1.16 $ 1.27
Extraordinary loss on extinguishment of debt, net of
related income tax:
Primary............................................ $ (.37) -- --
Fully diluted...................................... $ (.36) -- --
Net income:
Primary............................................ $ 1.16 $ 1.19 $ 1.44
Fully diluted...................................... $ 1.14 $ 1.16 $ 1.27
Dividends Per Common Share:............................. $ .40 $ .29 $ .26
Average Number of Shares Outstanding:
Primary............................................ 7,584,594 7,097,136 5,883,811
Fully diluted...................................... 7,823,385 7,713,444 7,348,102
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
48
<PAGE> 49
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL NET UNREALIZED TOTAL
PREFERRED COMMON PAID-IN RETAINED GAIN(LOSS) ON TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS SECURITIES STOCK EQUITY
--------- ------ ---------- -------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994.......... $11,500 $5,587 $20,168 $28,489 $(1,309) $(269) $64,166
Series B, 6.00% Cumulative Convertible
Preferred stock issued --
$25.00 stated value -- 302,580
shares.............................. 7,564 -- (545) -- -- -- 7,019
Series A, 7.75% Cumulative Convertible
Preferred stock dividends declared,
$1.45 per share....................... -- -- -- (669) -- -- (669)
Series B, 6.00% Cumulative Convertible
Preferred stock dividends declared,
$0.64 per share....................... -- -- -- (195) -- -- (195)
Common stock dividends declared, $0.26
per share............................. -- -- -- (1,597) -- -- (1,597)
Conversion of 457,463 shares of Series
A, 7.75% Cumulative Convertible
Preferred stock into 1,372,389 shares
of Common stock, and 2,537 shares
redeemed for $26.20 per share......... (11,500) 1,371 10,519 (456) -- -- (66)
Common stock issued for exercise of
stock options -- 55,500 shares........ -- 56 193 (19) -- -- 230
Net unrealized gain on securities
available-for-sale, net of taxes...... -- -- -- -- 1,814 -- 1,814
Net income.............................. -- -- -- 9,345 -- -- 9,345
------- ------ ------- ------- ------- ----- -------
Balances at September 30, 1995.......... 7,564 7,014 30,335 34,898 505 (269) 80,047
Series B, 6.00% Cumulative Convertible
Preferred stock dividends declared,
$1.50 per share....................... -- -- -- (454) -- -- (454)
Common stock dividends declared, $0.29
per share............................. -- -- -- (2,106) -- -- (2,106)
Conversion of $602,000 in 8.25%
Convertible Debentures into 55,261
shares of Common stock................ -- 55 536 (2) -- -- 589
Common stock issued for exercise of
stock options -- 74,400 shares........ -- 75 220 (25) -- -- 270
Dividends paid for fractional shares in
three-for-two stock split effective
October 1, 1996....................... -- -- -- (2) -- -- (2)
Net unrealized loss on securities
available-for-sale, net of taxes...... -- -- -- -- (573) -- (573)
Adjustment for difference in year ends
relating to Middle Georgia Bank
pooling............................... (235) (235)
Net income.............................. -- -- -- 8,920 -- -- 8,920
------- ------ ------- ------- ------- ----- -------
Balances at September 30, 1996.......... 7,564 7,144 31,091 40,994 (68) (269) 86,456
Series B, 6.00% Cumulative Convertible
Preferred stock dividends declared,
$0.75 per share....................... -- -- -- (113) -- -- (113)
Common stock dividends declared, $0.40
per share............................. -- -- -- (3,028) -- -- (3,028)
Conversion of 301,171 shares of Series
B, 6.00% Cumulative Convertible
Preferred stock into 537,220 shares of
Common stock, and 1,409 shares
redeemed for $27.00 per share......... (7,564) 537 6,988 -- -- -- (39)
Conversion of $30,000 in 8.25%
Convertible Debentures into 2,754
shares of Common stock................ -- 3 27 -- -- -- 30
Common stock issued for exercise of
stock options -- 81,600 shares........ -- 82 345 -- -- -- 427
Shares cancelled........................ -- (2) (6) -- -- -- (8)
Nonqualified stock options exercised.... -- -- 60 -- -- -- 60
Net unrealized gain on securities
available-for-sale, net of taxes...... -- -- -- -- 1,230 -- 1,230
Net income.............................. -- -- -- 8,899 -- -- 8,899
------- ------ ------- ------- ------- ----- -------
Balances at September 30, 1997.......... $ -- $7,764 $38,505 $46,752 $ 1,162 $(269) $93,914
======= ====== ======= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
49
<PAGE> 50
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Cash flows from operating activities:
Net income.......................................... $ 8,899 $ 8,920 $ 9,345
Loss on extinguishment of debt...................... 4,324 -- --
Adjustments to reconcile net income to cash used in
operations:
Depreciation...................................... 1,892 2,064 1,846
Deferred income tax benefit....................... (819) (1,956) (405)
Amortization of loan fees (costs), net............ 152 113 (623)
Provision for estimated losses on loans and real
estate......................................... 6,713 3,616 3,051
Amortization of intangibles....................... 1,113 1,113 729
Dividends received on stock....................... (241) (272) (254)
Loss(gain) on sales of loans, and securities...... (1,874) (1,754) 237
Loans available-for-sale:
Disbursements..................................... (100,988) (140,618) (57,020)
Purchases......................................... (172,097) (228,087) (69,590)
Sales............................................. 271,954 365,341 113,053
Repayments........................................ 372 600 791
Decrease(increase) in accrued interest receivable... 189 (965) (1,753)
Increase(decrease) in accrued interest payable...... (63) (47) 326
Other, net.......................................... (9,231) (4,377) 9,008
--------- --------- --------
Total adjustments.............................. (2,928) (5,229) (604)
--------- --------- --------
Net cash provided by operating activities...... 10,295 3,691 8,741
--------- --------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
50
<PAGE> 51
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investing Activities:
Cash flows from investing activities:
Net decrease(increase) in fed funds sold and
repurchase agreements............................... 12,900 (7,975) (17,087)
Investment securities available-for-sale:
Purchases........................................... (50,957) (9,226) (37,436)
Sales............................................... 12,125 5,520 45,312
Maturities.......................................... 35,402 14,299 7,176
Mortgage-backed securities available-for-sale:
Purchases........................................... (74,724) (77,187) (64,450)
Sales............................................... 456 2,763 19,478
Principal repayments................................ 56,494 37,652 23,041
Net increase in loans................................. (79,689) (103,848) (79,796)
Purchases of premises and equipment................... (3,323) (1,911) (1,614)
Proceeds from sales of real estate.................... 1,048 3,921 2,170
Net decrease(increase) in advances to attorneys for
loans originated.................................... (6,377) 1,491 (1,956)
Cash received in acquisitions, net.................... -- -- 86,220
-------- -------- --------
Net cash used in investing activities................. (96,645) (134,501) (18,942)
-------- -------- --------
Financing Activities:
Cash flows from financing activities:
Net increase(decrease) in deposits.................... 86,458 38,778 (23,318)
Notes payable & other borrowed money:
Proceeds............................................ 367,449 605,762 380,000
Repayments.......................................... (357,472) (509,675) (342,473)
Net increase in securities sold under agreements to
repurchase.......................................... 3,171 12,329 2,655
Net increase(decrease) in checks payable on loans
originated.......................................... (2,741) (2,669) 3,295
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
51
<PAGE> 52
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
-------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Redemption of subordinated debentures................... (16,707) -- --
Redemption of preferred stock........................... (38) -- (66)
Issuance of common stock................................ 419 270 230
Dividends paid on stock................................. (3,007) (2,505) (1,880)
-------- -------- ---------
Net cash provided by financing activities............... 77,532 142,290 18,443
-------- -------- ---------
Net increase(decrease) in cash and due from banks....... (8,818) 11,480 8,242
Cash and due from banks beginning of period............. 40,015 28,535 20,293
-------- -------- ---------
Cash and due from banks end of period................... $ 31,197 $ 40,015 $ 28,535
======== ======== =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest............................................. $ 52,906 $ 46,097 $ 37,454
Income taxes......................................... 5,735 5,687 3,300
Noncash Investing and Financing Activities:
Real estate foreclosed.................................. $ 1,803 $ 2,524 $ 1,801
Financing of sales of foreclosed real estate............ 733 350 3,678
Dividends declared but not paid on preferred stock...... -- 114 66
Dividends declared but not paid on common stock......... 772 524 515
Acquisitions:
Fair value of assets acquired........................... -- -- $(113,176)
Fair value of liabilities assumed....................... -- -- 199,396
---------
Net cash received....................................... -- -- $ 86,220
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
52
<PAGE> 53
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
First Liberty Financial Corp. ("First Liberty") is a savings and loan
holding company which owns and operates First Liberty Bank ("Liberty Bank") and
its wholly-owned subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage")
and NewSouth Financial Services, Inc. ("NewSouth"). Liberty Bank operates as a
system of community banks throughout Georgia. Liberty Mortgage originates first
mortgage loans throughout Georgia and the southeastern states.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Liberty
and its wholly-owned subsidiaries, Liberty Bank, Liberty Mortgage and NewSouth
(collectively known as "the Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included in the
statement of financial condition caption "Cash and Due From Banks."
DEBT AND EQUITY SECURITIES
Held-to-maturity securities are debt and equity securities that the Company
has the positive intent and ability to hold to maturity. Held-to-maturity
securities are reported at amortized cost, adjusted for premiums and discounts
that are recognized in interest income using the interest method over the period
to maturity.
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings.
Debt and equity securities that are not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale and represent those securities intended to be held for an
indefinite period of time, including securities that management intends to use
as part of its asset/liability strategy, or that may be sold in response to
interest rates, change in prepayment risk, the need to increase regulatory
capital or other similar factors. Available-for-sale securities are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity until realized. This amount is
reported net of income taxes. As of September 30, 1997 and 1996, the Company's
entire portfolio of debt and equity securities was classified as
available-for-sale.
Gains or losses on sales of securities are determined based upon the
specific identification method.
LOANS AVAILABLE-FOR-SALE
Loans available for sale are stated at the lower of cost or market and
gains and losses on sales of first mortgage loans are recognized at the time of
sale. Gains and losses are determined as the difference between the net sales
proceeds (including fees paid to the Company to release servicing rights) and
the book value of the loans or securities sold, as adjusted by the estimated
present value associated with excess or deficient servicing fees. The present
value of excess and deficient servicing fees is amortized on the level-yield
method over the estimated lives of the related loans.
53
<PAGE> 54
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOANS
Loans are generally recorded at the contractual amounts owed by borrowers,
less unearned discounts, deferred origination fees, the undisbursed portion of
any loans in process, and the allowance for loan losses. Interest on loans is
credited to income as earned to the extent it is deemed collectible. Discounts
on loans purchased are accreted into interest income using the level-yield
method over the contractual lives of the loans, adjusted for actual prepayments.
Loans which are delinquent 90 days (four payments) or over generally are
placed on non-accrual status unless the collectibility of principal and accrued
interest is assured beyond a reasonable doubt. In some cases, loans less than 90
days (four payments) delinquent are placed on non-accrual where material
uncertainty exists as to their collectibility. When loans are placed on
non-accrual, all previously accrued interest is charged against interest income
and further accruals are discontinued, unless a part of the previously accrued
interest is considered collectible beyond a reasonable doubt. In such cases, the
amount of accrued interest considered collectible is not charged off.
ALLOWANCE FOR ESTIMATED LOAN LOSSES
On October 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures, an Amendment of SFAS No. 114". Under
these new standards, a loan is considered impaired, based on current information
and events, if it is probable that the Company will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement.
The Company uses several factors in determining if a loan is impaired under
SFAS No. 114. Quarterly asset classification procedures generally include a
review of significant loans and lending data, including loan payment status and
borrowers' financial data and operation factors, such as cash flows and
operating income or loss. The measurement of impaired loans is generally based
on the present value of expected future cash flows discounted at the historical
effective interest rate of the loan, except that collateral dependent loans are
measured for impairment at the fair value of the collateral. The adoption of
SFAS No. 114 resulted in no additional provision for loan losses at October 1,
1995.
The allowance for estimated loan losses is established and maintained
through a periodic review and evaluation of various factors which affect the
loans' collectibility and results in provisions for loan losses which are
charged to expense. Numerous factors are considered in the evaluation including:
(1) a review of certain borrowers' current financial status, credit standing,
and available collateral; (2) historical loan loss experience in relation to
outstanding loans; (3) the diversification and size of the loan portfolio; (4)
the results of the most recent regulatory examinations available to the Company;
(5) the overall loan portfolio quality; (6) management's judgement regarding
prevailing and anticipated economic conditions; and (7) other relevant factors.
MORTGAGE SERVICING RIGHTS
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 125 supersedes, but generally retains, the requirements of SFAS No.
122, "Accounting for Mortgage Servicing Rights", which the Company adopted on
October 1, 1995. Both Statements require the recognition of originated and
purchased mortgage servicing rights ("MSRs") as assets by allocating total costs
incurred between the loan and the servicing rights retained based on their
relative fair value. In addition, SFAS No. 125 eliminates the distinction
between normal and excess servicing to the extent the servicing fee does not
exceed that specified in the contract. The adoption of
54
<PAGE> 55
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 125 did not have a material impact on the Company's financial position
or results of operations for the year ended September 30, 1997.
Amortization of MSRs is based on the ratio of net servicing income received
in the current period to total net servicing income projected to be realized
from the MSRs. Projected net servicing income is in turn determined on the basis
of the estimated future balance of the underlying mortgage loan portfolio, which
declines over time from prepayments and scheduled loan amortization. The Company
estimates future prepayment rates based on current interest rate levels, other
economic conditions and market forecasts, as well as relevant characteristics of
the servicing portfolio, such as loan types, interest rate stratification and
recent prepayment experience.
SFAS No. 125 also requires that all MSRs be evaluated for impairment based
on the excess of the carrying amount of the MSRs over their fair value. Fair
values of servicing rights are determined by estimating the present value of
future net servicing income considering the average interest rate and the
average remaining lives of the related loans being serviced. Periodically, the
Company uses an independent party to evaluate the present values of its
portfolio of mortgage servicing. This evaluation is principally determined using
discounted cash flows of disaggregated groups of mortgage servicing rights.
LOAN FEES AND ORIGINATION COSTS
Loan origination fees, commitment fees, and certain direct loan origination
costs are deferred and recognized over the lives of the related loans as an
adjustment of the loans' yields using the level-yield method. Calculation of the
level-yield is based upon weighted average contractual payment terms which are
adjusted for actual prepayments.
FINANCIAL OPTIONS AND COMMITMENTS TRANSACTIONS
Fees paid to purchase rights to sell loans at future dates at specified
prices ("options") and commitment fees paid to secure markets to sell first
mortgage loans are deferred and amortized over the term of the commitment. Upon
determination that commitments will not be utilized, the related fees are
charged to expense.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company enters into sales of securities under agreements to repurchase
identical or substantially similar securities in the future ("repurchase
agreements"). Obligations under repurchase agreements are reflected as
liabilities and securities sold continue to be reflected as assets in the
financial statements. All repurchase agreements mature within one year. The
Company's policy for requiring collateral for repurchase agreements states that
borrowings will be limited by available collateral and that the Company will
only transact with Brokers/Dealers authorized by the borrowed funds policy
within established credit exposure guidelines.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
lives of the related assets (33 to 40 years for buildings and 3 to 10 years for
equipment). Expenditures for maintenance and repairs are charged against
earnings as incurred. Costs of major additions and improvements are capitalized.
Upon disposition or retirement of property, the cost and the related accumulated
depreciation are removed from the accounts. Any resulting gain or loss is
reflected in current income.
55
<PAGE> 56
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REAL ESTATE
Real estate is carried at the lower of fair value less estimated selling
costs or cost. Any write-down from the cost to fair value required at the time
of foreclosure is charged to the allowance for estimated loan losses. Subsequent
write-downs and gains or losses recognized on the sale of real estate are
included in non-interest income or expense.
INTANGIBLE ASSETS
Intangible assets are stated at cost less accumulated amortization and are
amortized over periods ranging from 10 to 25 years on the straight-line basis.
The recoverability of the intangible assets are reviewed periodically to
determine if adjustments to carrying value or amortization periods are
necessary. Accumulated amortization as of September 30, 1997 and 1996 was $5.7
million and $4.6 million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. These fair values are provided for disclosure purposes only, and do
not impact carrying values of financial statement amounts.
Cash, Due From Banks and Federal Funds Sold and Repurchase Agreements. The
carrying amount reported in the balance sheet for cash, due from banks and
federal funds sold approximates those assets' fair values.
Investment Securities (Including Mortgage-backed Securities). Fair values
for investment securities are based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans Receivable. For variable-rate loans held-for-investment, fair values
are based on carrying values. The fair values for loans available-for-sale are
based on quoted market prices of similar loans sold including the value of
servicing rights. The fair values for all other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
Mortgage Servicing Rights and Excess Servicing Fees. The fair value is
estimated by discounting future cash flows from servicing fees using discount
rates that approximate current market rates.
Deposit Liabilities. The fair values disclosed for deposits (i.e.,
interest and non-interest checking), regular savings, and money market accounts
are equal to the amount payable on demand at the reporting date. Fair values for
fixed-rate certificates are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated monthly maturities on time deposits.
Short-term Borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
Long-term Borrowings. The fair values of the Company's long-term
borrowings (other than deposits) are estimated using discounted cash flow
analyses, based on the Company's current incremental borrowing rates for similar
types of borrowing agreements.
Subordinated Debt. The fair values of Liberty Bank's subordinated debt was
based on the optional redemption price of 102.0% at September 30, 1996.
Off-balance-sheet Instruments. Liberty Bank has commitments to extend
standby letters of credit and to purchase and sell loans and mortgage-backed
securities. These types of credit are made at market rates;
56
<PAGE> 57
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
therefore, there would be no market risk associated with these credits which
would create a significant fair value liability.
Liberty Mortgage has commitments to originate loans for borrowers as well
as commitments to sell loans to investors. The fair value of commitments to
originate loans, on which a rate commitment has been made, is based on current
market value. On commitments to originate loans, where no rate commitments have
been made, fair value equals carrying amount. The fair value of mandatory
commitments to sell loans is based on current market values. The fair value of
optional commitments to sell loans is based on carrying value. The carrying
value of optional commitments to sell loans equals the net notional amount of
optional commitments to sell and of optional commitments to buy loans or
mortgage-backed securities.
STOCK-BASED COMPENSATION
Effective October 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS No. 123 establishes a fair value based
method of accounting for stock-based compensation. SFAS No. 123 allows for the
continued use of the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees". The Company
continues to account for stock-based compensation under the provisions of
Opinion No. 25.
ADVERTISING
Advertising costs are expensed as incurred.
INCOME TAXES
The Company follows the liability method of accounting for income taxes.
Deferred tax balances are regularly adjusted through the consolidated statements
of income to reflect current estimates of future taxes payable or refundable.
First Liberty files a consolidated income tax return; however, income taxes are
computed by each subsidiary on a separate basis, and taxes currently payable are
remitted to First Liberty.
EARNINGS PER COMMON SHARE
Earnings per share are computed on the weighted average number of shares
outstanding including common stock equivalents, if dilutive. For computing
primary earnings per share, stock options exercisable at a price less than
average market price during the period are considered common stock equivalents.
Fully diluted earnings per share assumes: (i) the conversion, if dilutive, of
all convertible debt as of the beginning of the year (or date of issue), with
the elimination of the related interest expense net of applicable income taxes,
(ii) the exercise of all stock options below the market price at September 30 or
the average market price for the year, and (iii) the conversion, if dilutive, of
all convertible preferred stock as of the beginning of the year (or date of
issue), with the elimination of dividends declared.
RECLASSIFICATIONS AND RESTATEMENTS
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
All financial information has been retroactively restated to reflect the
Middle Georgia Bank ("MGB") merger which closed November 15, 1996 and was
accounted for utilizing the pooling-of-interests method of accounting.
All references to number of shares, per share amounts, stock option data
and market prices have been restated to give retroactive effect to the
three-for-two stock split in the form of a stock dividend effective on October
1, 1996.
57
<PAGE> 58
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
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 replaces primary earnings per share with basic earnings
per share which excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. SFAS No.
128 replaces fully diluted earnings per share with diluted earnings per share
which reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised. SFAS No. 128 is required for
financial statements issued after December 15, 1997. Earlier adoption is
prohibited. The following presents earnings per share for the years ended
September 30, 1997, 1996 and 1995 if SFAS No. 128 had been in effect:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Basic earnings per share............................ $1.17 $1.21 $1.46
Diluted earnings per share.......................... $1.14 $1.16 $1.27
</TABLE>
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.
In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of FASB No. 125". SFAS No. 127 defers until January
1, 1998, certain provisions of SFAS No. 125.
58
<PAGE> 59
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. 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 $10.1 million. This business
combination has been accounted for utilizing the pooling-of-interests method of
accounting. The following table shows the pro forma effect of the above
transaction on results of operations for the periods prior to the combination.
The results listed are not necessarily indicative of future operations and they
exclude the pro forma effects of prior year acquisitions accounted for under the
purchase method (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1996 1995
------- -------
<S> <C> <C>
Total Revenue:
First Liberty.......................................... $85,189 $70,275
MGB.................................................... 10,454 9,937
------- -------
Combined............................................ $95,643 $80,212
======= =======
Net Income:
First Liberty.......................................... $ 7,770 $ 8,071
MGB.................................................... 1,150 1,274
------- -------
Combined............................................ $ 8,920 $ 9,345
======= =======
Earnings Per Common Share:
First Liberty
Primary............................................. $ 1.21 $ 1.48
Fully diluted....................................... 1.17 1.29
MGB
Primary............................................. 5.75 6.37
Fully diluted....................................... 5.75 6.37
Combined
Primary............................................. 1.19 1.44
Fully diluted....................................... 1.16 1.27
</TABLE>
In September 1995, the Company acquired by merger Tifton Banks, Inc.
("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank & Trust Company
("Tifton Bank"). Tifton Bank, on the date of acquisition, held the following
approximate balances: loans of $42 million, cash and investments of $21 million,
premises and equipment of $1 million and deposits of $45 million. Intangible
assets resulting from the acquisition amounted to approximately $2 million.
In March 1995, the Company acquired three banking offices located in
Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets
acquired were approximately $3 million and total cash received and deposits
assumed were approximately $95 million. Intangible assets resulting from the
acquisition were approximately $4 million.
In December 1994, the Company acquired by merger Central Banking Company
("CBC") of Swainsboro, Georgia, and its subsidiary, The Central Bank ("The
Central Bank"). Central Bank on the date of acquisition, held the following
approximate balances: loans of $21 million, cash and investments of $34 million,
premises and equipment of $1 million and deposits of $52 million. Intangible
assets resulting from the acquisition amounted to approximately $2 million.
59
<PAGE> 60
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The financial institutions acquired prior to 1996 were accounted for as
purchases and accordingly, income and expenses of such institutions are included
in the consolidated statements of the Company from the date of acquisition.
The following table presents unaudited proforma results of operations for
the year ended September 30, 1995, after giving effect to the amortization of
intangibles and other proforma adjustments, as if the purchase acquisitions
previously discussed had occurred at the beginning of the 1995 period. The
proforma adjustments do not include any operating efficiencies which have been
realized in the combined operations. Accordingly, the proforma summary
information does not necessarily reflect the results of operations as they
actually would have been, if the acquisitions had occurred at the beginning of
the year presented (dollars and shares outstanding in thousands).
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30,
1995
-------------
<S> <C>
Net interest income before provision for estimated losses on
loans..................................................... $35,556
Net income.................................................. 9,583
Earnings Per Common Share:
Primary................................................... $ 1.41
Fully diluted............................................. 1.25
Average Shares Outstanding:
Primary................................................... 5,885
Fully diluted............................................. 7,658
</TABLE>
4. SECURITIES AVAILABLE-FOR-SALE
Investment and mortgage-backed securities available-for-sale are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
INVESTMENT SECURITIES:
U.S. government agencies............................. $ 40,920 $ 21,126
Investment grade corporate equity securities......... 345 5,000
Federal Home Loan Bank of Atlanta stock.............. 9,733 9,733
State, county and municipal.......................... -- 5,951
Certificates of deposit.............................. 891 5,795
Other................................................ 113 157
MORTGAGE-BACKED SECURITIES:
Federal National Mortgage Association................ 80,338 82,075
Federal Home Loan Mortgage Corporation............... 78,810 84,779
Government National Mortgage Corporation............. 27,141 4,495
Other................................................ 17,611 13,747
-------- --------
$255,902 $232,858
======== ========
</TABLE>
Mortgage-backed securities at September 30, 1997 and 1996 included $132
million and $128 million, respectively, of investments collateralized by
mortgage obligations and mortgage pass-through securities. Liberty Bank does not
invest in collateralized mortgage obligations which are considered "high risk"
as defined by the Federal Financial Institutions Examination Council guidelines.
60
<PAGE> 61
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1997 and 1996, all mortgage-backed securities were
available-for-sale. Adjustable rate pass-through securities are subject to
interest rate adjustments indexed to the one year or three year constant
maturity treasury, the one to six month London Inter-Bank Offered Rate, or the
11th District Cost of Funds Index.
At September 30, 1997, the Company had no open futures contracts or option
contracts as interest rate hedges related to investment or mortgage-backed
securities.
The amortized cost and estimated market value of all investments in debt
and equity securities are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
AT SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE
- --------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government agencies........................ $ 40,810 $ 132 $ 22 $ 40,920
Investment grade corporate equity securities.... 375 -- 30 345
Federal Home Loan Bank of Atlanta stock......... 9,733 -- -- 9,733
Certificates of deposit......................... 891 -- -- 891
Other........................................... 113 -- -- 113
Mortgage-backed securities...................... 202,191 1,921 212 203,900
-------- ------ ------ --------
$254,113 $2,053 $ 264 $255,902
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
AT SEPTEMBER 30, 1996: COST GAINS LOSSES VALUE
- ---------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government agencies........................ $ 21,372 $ 28 $ 274 $ 21,126
Investment grade corporate equity securities.... 5,063 -- 63 5,000
Federal Home Loan Bank of Atlanta stock......... 9,733 -- -- 9,733
State, county and municipal..................... 5,929 57 35 5,951
Certificates of deposit......................... 5,795 -- -- 5,795
Other........................................... 157 -- -- 157
Mortgage-backed securities...................... 184,890 1,170 964 185,096
-------- ------ ------ --------
$232,939 $1,255 $1,336 $232,858
======== ====== ====== ========
</TABLE>
The change to stockholders' equity for the net unrealized gain or loss on
debt and equity securities during fiscal 1997 was a net gain of $1.2 million
(net of related taxes of $639,000) and a net loss of $573,000 (net of related
tax benefit of $289,000) during fiscal 1996.
61
<PAGE> 62
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated market value of debt and equity securities
at September 30, 1997, by contractual maturity, are shown below. Expected
maturity will differ from contractual maturities because borrowers may have the
right to prepay obligations with or without call or prepayment penalties
(dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less................................ $ 1,875 $ 1,849
Due after one year through five years.................. 35,515 35,632
Due after five years through ten years................. 4,799 4,788
-------- --------
42,189 42,269
Federal Home Loan Bank of Atlanta stock................ 9,733 9,733
Mortgage-backed securities............................. 202,191 203,900
-------- --------
$254,113 $255,902
======== ========
</TABLE>
Proceeds, gross realized gains and losses on the sale of debt and equity
securities for the three years ended September 30, 1997 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Proceeds....................................... $12,580 $8,282 $73,040
Gross realized gains........................... 130 50 315
Gross realized losses.......................... 8 66 198
</TABLE>
5. LOANS AVAILABLE-FOR-SALE AND MORTGAGE BANKING OPERATIONS
Loans originated for sale to the secondary market, principally residential
first mortgage loans, are typically sold within ninety days of origination.
Liberty Mortgage had open commitments to originate or purchase residential
mortgage loans of approximately $137 million, including $13 million to be held
in Liberty Bank's portfolio and $46 million on which the interest rate had not
been locked-in at September 30, 1997. Commitments to buy and sell, respectively,
residential mortgage loans and mortgage-backed securities for mandatory delivery
were approximately $2.0 million and $58 million at September 30, 1997. Also, at
September 30, 1997, the Company bought $4.0 million of optional commitments to
sell residential mortgage loans. The Company had no open futures contracts as
interest rate hedges related to loans available-for-sale or commitments to
originate residential mortgage loans at September 30, 1997.
The following summarizes the principal balance of whole loans and
participations which the Company was servicing for its portfolio and investors
(dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Loans serviced for investors............ $ 726,054 $ 788,624 $617,549
Loans sub-serviced for others........... 132,348 2,324 2,744
Loans serviced for Liberty Bank's
portfolio............................. 191,876 210,003 233,436
---------- ---------- --------
Total loans serviced.................... $1,050,278 $1,000,951 $853,729
========== ========== ========
Number of loans serviced................ 13,958 13,873 12,326
========== ========== ========
</TABLE>
In connection with loans serviced, there were no off-balance sheet escrow
accounts.
62
<PAGE> 63
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the amounts capitalized in connection with mortgage servicing
rights are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 6,132 $2,076 $2,915
Capitalized................................... 3,480 4,812 337
Sold.......................................... (1,671) (46) (692)
Amortization.................................. (1,370) (710) (484)
------- ------ ------
Balance, end of year............................ $ 6,571 $6,132 $2,076
======= ====== ======
</TABLE>
The Company capitalized $1.8 million and amortized $151,000 in originated
mortgage servicing rights during fiscal 1996.
The following table summarizes the Company's financial data with respect to
its mortgage banking operations (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Total revenues................................ $ 7,071 $ 7,743 $ 6,602
Total expenses................................ 5,685 5,212 4,575
------- ------- -------
Income before income taxes.................... $ 1,386 $ 2,531 $ 2,027
======= ======= =======
Total assets.................................. $17,268 $19,410 $19,884
======= ======= =======
Depreciation expense.......................... $ 188 $ 215 $ 193
======= ======= =======
Capital expenditures for office premises and
equipment................................... $ 175 $ 146 $ 112
======= ======= =======
</TABLE>
6. LOANS
Loans are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Loans collateralized by real estate:
Residential first mortgage........................... $141,675 $161,658
Commercial first mortgage............................ 36,179 59,200
Consumer mortgage(1)................................. 96,483 62,879
Construction loans:
Residential real estate.............................. 100,867 96,505
Commercial real estate............................... 29,712 24,185
Commercial business.................................... 260,663 208,020
Consumer -- indirect auto loans........................ 171,990 154,869
Consumer -- other loans................................ 38,378 29,763
-------- --------
875,947 797,079
Allowance for estimated losses......................... (11,903) (10,350)
-------- --------
$864,044 $786,729
======== ========
</TABLE>
- ---------------
(1) Loans collateralized by the equity in the borrower's residence.
63
<PAGE> 64
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above balances exclude undisbursed loan commitments representing loans
in process and unused lines of credit amounting to approximately $122 million
and $114 million at September 30, 1997 and 1996, respectively.
Liberty Bank's loans to one borrower ("LTOB") limitation is 15% of
unimpaired capital and surplus (as defined by the Office of Comptroller of the
Currency) unless the loans are collateralized by readily marketable assets, in
which case the limitation is 25%. For loans in excess of this limitation,
Liberty Bank is restricted from extending additional credit and options to renew
such credits are limited. Liberty Bank's limitation at September 30, 1997 was
approximately $15.4 million based on the 15% limitation and $25.7 million based
on the 25% limitation. At September 30, 1997, Liberty Bank had no relationships
in excess of the LTOB limitation.
Liberty Bank's aggregate investment in loans collateralized by
non-residential real estate may not exceed 400% of its risk-based capital.
Liberty Bank had excess capacity to originate loans collateralized by non-
residential real estate of approximately $215 million at September 30, 1997.
The Company's exposure to credit loss in the event of non-performance by
the borrower is represented by the outstanding principal balance of the
respective loans plus the amount of undisbursed committed funds, if any. The
Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if any, is based on management's credit
evaluation pursuant to the Company's lending and underwriting policy. Collateral
held varies but may include real estate and improvements, inventory, accounts
receivable and equipment or personal property.
The loan portfolio does not contain any material concentrations of credit
risk within any one industry. Most credits are located within Georgia, the
Company's primary market area.
At September 30, 1997 and 1996, the recorded investment in loans for which
impairment had been recognized in accordance with SFAS No. 114 totaled $6.4
million and $6.8 million, respectively, with a corresponding valuation allowance
of $2.2 million and $2.1 million, respectively. For the periods ended September
30, 1997 and 1996, the average recorded investment in impaired loans was
approximately $6.6 million and $6.0 million, respectively. Interest income
recognized by the Company on impaired loans, not placed on nonaccrual, (during
the portion of the year that they were impaired) was not significant. There were
no restructured loans at September 30, 1997.
The following table sets forth the interest income that would have been
recorded under the original terms and the actual interest income recorded for
nonaccrual loans for the year ended September 30, 1997 (dollars in thousands).
<TABLE>
<S> <C>
Interest income that would have been recorded under the
original terms............................................ $341
====
Interest income recorded.................................... $244
====
</TABLE>
64
<PAGE> 65
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ALLOWANCE FOR ESTIMATED LOAN LOSSES
Changes in the allowance for estimated loan losses for the three years
ended September 30, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year.................. $10,350 $ 9,634 $ 7,051
Provision for estimated losses................ 6,317 3,106 2,365
Adjustment for MGB pooling.................... -- (43) --
Acquisitions.................................. -- -- 879
Charge-offs................................... (5,976) (4,838) (3,144)
Recoveries.................................... 1,212 2,491 2,483
------- ------- -------
Balance end of year........................... $11,903 $10,350 $ 9,634
======= ======= =======
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Land..................................................... $ 4,456 $ 4,088
Office buildings......................................... 24,500 24,002
Furniture, fixtures and equipment........................ 16,160 13,821
------- -------
45,116 41,911
Less accumulated depreciation............................ 20,327 18,495
------- -------
$24,789 $23,416
======= =======
</TABLE>
Certain office facilities are occupied under operating lease arrangements
with future annual rentals as follows (dollars in thousands):
<TABLE>
<S> <C>
Year ended September 30,:
1998...................................................... $ 409
1999...................................................... 428
2000...................................................... 415
2001...................................................... 329
2002...................................................... 148
Thereafter................................................ 619
------
$2,348
======
</TABLE>
Total rent expense was approximately $535,000, $452,000, and $360,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.
65
<PAGE> 66
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. REAL ESTATE
Investments in real estate are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------ ------
<S> <C> <C>
Acquired through foreclosure............................... $3,332 $3,460
Allowance for estimated losses............................. (693) (543)
------ ------
$2,639 2,917
====== ------
Acquired for development................................... 268
Allowance for estimated losses............................. (125)
------
143
------
$3,060
======
</TABLE>
Sales of real estate owned (gross of gains and losses) during fiscal 1997
and 1996 were $2.1 million and $4.4 million, respectively, of which, Liberty
Bank provided financing for $733,000 and $350,000 during the same periods.
Changes in the allowance for estimated losses on real estate for the years
ended September 30, 1997, 1996, and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1997 1996 1995
----- ----- -------
<S> <C> <C> <C>
Acquired through foreclosure:
Balance, beginning of year..................... $ 543 $ 481 $ 2,908
Provision for estimated losses................. 396 510 686
Charge-offs, net............................... (246) (448) (3,113)
----- ----- -------
Balance, end of year........................... $ 693 $ 543 $ 481
===== ===== =======
Acquired for development:
Balance, beginning of year..................... $ 125 $ 142 $ 158
Charge-offs, net............................... (125) (17) (16)
----- ----- -------
Balance, end of year........................... $ -- $ 125 $ 142
===== ===== =======
</TABLE>
10. NOTES PAYABLE AND OTHER BORROWED MONEY
Notes payable and other borrowed money are summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Line of Credit (interest rate of 6.66% at September 30,
1997)................................................ $ 10,000 $ --
Advances from the Federal Home Loan Bank of Atlanta:
Short term (interest rates ranging from 5.05% to
6.55% and 5.42% to 6.05% at September 30, 1997
and 1996, respectively)......................... 82,449 164,449
Long term (interest rates ranging from 5.51% to
7.14% and 4.64% to 7.14% at September 30, 1997
and 1996, respectively)......................... 102,188 20,211
-------- --------
$194,637 $184,660
======== ========
</TABLE>
66
<PAGE> 67
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liberty Bank's unused borrowing capacity with the Federal Home Loan Bank
("FHLB") of Atlanta at September 30, 1997 was approximately $75 million in
advance and warehouse lines of credit. Additionally, Liberty Bank has
approximately $65 million in fed fund lines with correspondent banks.
At September 30, 1997, contractual principal maturities of long-term notes
payable and other borrowed money are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998...................................... $ --
1999...................................... 75,000
2000...................................... --
2001...................................... 25,000
2002...................................... --
2003 and thereafter....................... 2,188
--------
$102,188
========
</TABLE>
The following table sets forth the outstanding, maximum month-end and
average balances of short-term FHLB advances and other short-term borrowings and
the associated weighted average interest rates at the dates indicated (dollars
in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Outstanding balance, end of period.......... $ 92,449 $164,449 $80,500
Maximum month end balance................... 164,449 164,449 92,500
Average balance outstanding during the
year...................................... 96,183 91,298 49,279
Weighted average interest rate, end of
period.................................... 6.40% 5.50% 6.25%
Weighted average interest rate, during the
period.................................... 5.62% 5.81% 6.11%
</TABLE>
Advances from the FHLB of Atlanta are collateralized by residential first
mortgage loans and mortgage-backed and government agency securities with unpaid
principal balances aggregating approximately $190 million and $195 million at
September 30, 1997 and 1996, respectively. At September 30, 1997, Liberty Bank
was required to collateralize its advances with acceptable collateral with a
lendable collateral value equal to 100% of advances outstanding. The lendable
collateral value of the residential first mortgage loans and mortgage-backed
securities pledged to the advances was 85% and 90% of their fair market value,
respectively.
11. SUBORDINATED DEBENTURES
Subordinated debentures are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1997 1996
---- -------
<S> <C> <C>
8 1/4% Convertible subordinated debentures due August 1,
2005..................................................... $ 62
11% Subordinated debentures due August 1, 2004............. 16,116
8 1/4% Subordinated debentures due August 1, 2004.......... 379
-------
16,557
Discounts and capitalized issuance costs................... (4,402)
-------
$12,155
=======
Accretion of discounts and amortization of issuance
costs.................................................... $243 $ 244
==== =======
</TABLE>
On July 3, 1997, the Company issued a redemption notice for the Company's
11% and 8 1/4% debentures due August 1, 2004. As of August 4, 1997, the Company
paid $16.7 million to holders of the debentures
67
<PAGE> 68
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including $16.5 million in unpaid principal, $15,000 in accrued interest and a
premium of $165,000. On that date, the unamortized discounts and capitalized
issuance costs were $4.3 million. As a result of the redemption, the Company
recorded an extraordinary charge of $2.8 million (net of $1.5 million in related
income taxes).
On September 5, 1996 the Company issued a redemption notice for the
Company's 8 1/4% convertible debentures due August 1, 2005. As of September 30,
1996, $62,000 plus accrued interest was payable to holders on the redemption
date of October 7, 1996. The remaining holders elected to convert into common
stock at the conversion price of $10.89 per share.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Liberty Bank enters into financing arrangements with approved brokers,
dealers and individuals whereby securities are sold under agreements to
repurchase identical or substantially identical securities at a future date
("repurchase agreements"). These arrangements are reflected as financing
transactions in that the securities sold are reported as assets in the
accompanying financial statements with the proceeds of sale reflected as
borrowings. These financing arrangements generally have maturities ranging from
30 to 180 days. Generally, securities sold under agreements to repurchase are
under the control of the counterparty during the term of the agreement. Selected
data concerning repurchase agreements is presented below (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Mortgage-backed securities sold under agreements to
repurchase at year end:
Book value................................................ $19,081 $23,088 $ 4,287
Market value.............................................. $19,279 $23,010 $ 4,344
Obligations under repurchase agreements at year end:
Identical securities...................................... $19,815 $16,644 $ 4,315
Maximum borrowings under repurchase agreements for the year:
Identical securities...................................... $27,703 $29,402 $24,839
Average borrowings under repurchase agreements for the year:
Identical securities...................................... $22,303 $14,941 $ 9,463
Weighted average interest rate on repurchase agreements at
year end:................................................. 5.30% 4.89% 6.07%
</TABLE>
13. INCOME TAXES
The Company files a consolidated federal income tax return. Prior to the
Small Business Job Protection Act of 1996, the Company was allowed to determine
its bad debt deductions for tax purposes under either the percentage of taxable
income method (limited to 8 percent of taxable income before such deduction) or
the experience method. For the tax year ended September 30, 1995, Liberty Bank
determined its bad debt reserve deduction based on the actual loss experience
method. For the tax year ended September 30, 1996, Liberty Bank determined its
bad debt reserve deduction based on the percentage of taxable income method. For
the tax year ended September 30, 1997, Liberty Bank determined its tax bad debt
deduction based on the specific charge-off method of accounting.
68
<PAGE> 69
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for federal income taxes consists of the following (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Current......................................... $4,494 $ 6,330 $4,000
Deferred........................................ (819) (1,956) (405)
------ ------- ------
Total................................. $3,675 $ 4,374 $3,595
====== ======= ======
</TABLE>
Actual income taxes (including income tax (benefit) on extraordinary items)
differ from income taxes computed at the federal corporate statutory rate of 34%
as shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate...................... 34.2% 34.7% 34.0%
Bad debt deduction..................................... -- -- (8.9)
Amortization of intangible assets...................... 1.6 1.8 1.3
Tax exempt interest.................................... (1.1) (1.3) (1.5)
Resolution of tax contingencies........................ (7.5) -- --
Other, net............................................. 2.0 (2.3) 2.9
---- ---- ----
Effective federal income tax rate...................... 29.2% 32.9% 27.8%
==== ==== ====
</TABLE>
Deferred income taxes included in the consolidated statements of financial
condition is presented net. Gross deferred tax assets and deferred tax
liabilities as of September 30, 1997 and 1996 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------ ------
<S> <C> <C>
Deferred Tax Assets:
Allowance for estimated loan losses...................... $2,974 $2,375
Deferred loan fees....................................... -- 51
Real estate owned loss allowance......................... -- 44
Reserve for uncollected late fees........................ 118 89
Purchase accounting adjustments, net..................... 137 155
Other reserves........................................... 212 236
Unrealized loss on securities available-for-sale......... 11 181
SAIF recapitalization assessment......................... -- 1,261
Core deposits............................................ 160 101
Benefits................................................. 254 158
Other.................................................... 106 100
------ ------
Total deferred tax assets........................ 3,972 4,751
------ ------
</TABLE>
69
<PAGE> 70
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------ ------
<S> <C> <C>
Deferred Tax Liabilities:
Section 481 mark-to-market adjustment.................... 132 264
Depreciation............................................. 254 280
Cancellation of indebtedness............................. -- 346
Loan swap................................................ 87 116
Loan discounts........................................... 390 437
FHLB stock............................................... 1,313 1,313
Loan origination fees.................................... 381 370
Purchase accounting adjustments, net..................... 119 172
Unrealized gain on securities available-for-sale......... 636 152
Deferred loan fees....................................... 57 --
Benefits................................................. 119 95
Other, net............................................... 166 261
------ ------
Total deferred tax liabilities........................ 3,654 3,806
------ ------
Total net deferred tax asset..................... $ 318 $ 945
====== ======
</TABLE>
The Company's management has determined that it is more likely than not
that its net deferred tax asset will be realized. This is based on the existence
of taxable income in the form of future reversals of existing taxable temporary
differences and taxable income in prior carryback years that is sufficient to
allow realization of the tax benefit of the Company's existing deductible
temporary differences. The Company is not aware of any material uncertainties
existing at September 30, 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.
Earnings appropriated to bad debt reserves established for income tax
purposes cannot be used for any purpose other than to absorb bad debt losses
without recognition of taxable income. Dividends may be paid out of
unappropriated retained earnings without the imposition of any tax to the extent
that the amounts paid as dividends do not exceed earnings and profits as
calculated for federal income tax purposes.
Under SFAS No. 109, "Accounting for Income Taxes," a deferred tax liability
is not recognized with respect to thrift institutions for the bad debt reserve
for tax purposes that arose in tax years beginning before December 31, 1987
("BaseYear Reserve"), unless it becomes apparent that this temporary difference
will reverse in the foreseeable future. Future reversal of the Base-Year Reserve
would occur if the Company ceases to be in the banking business. At September
30, 1997, the Company's Base-Year Reserve for which no deferred tax liability is
recognized is approximately $12.0 million. The amount of the unrecognized
deferred tax liability related to this temporary difference is $4.2 million.
The Company and other financial institutions in Georgia are subject to the
same taxes, state and local, as any other corporation in Georgia. The Georgia
corporate income tax rate is 6 percent and is based on federal taxable income,
with certain adjustments. The primary difference between taxable income for
state and federal income tax purposes is interest income on United States
government obligations, which is not taxable for state income tax purposes.
14. PREFERRED STOCK
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
70
<PAGE> 71
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Prior to March 1997, Series B stock had a liquidation preference of $25.00
per share. Dividends on the Series B stock were cumulative at an annual rate of
$1.50 per share and were payable quarterly. Each share of the Series B stock was
convertible at the option of the holder into 1.7857 shares of common stock, at a
conversion price of $14.00.
In July 1995 the Company redeemed 2,537 shares of its Series A 7.75%
Cumulative Convertible Preferred (Series "A") stock for $66,879 plus accrued and
unpaid dividends. Each share of the Series A was convertible into three shares
of the Company's common stock. The remaining 457,463 shares of the Series A
stock were converted into 1,372,389 shares of the Company's common stock on that
date.
Prior to July 1995, the Series A stock had a liquidation preference of $25
per share. Dividends on the stock were cumulative at an annual rate of $1.9375
per share and were payable quarterly. Each share of Series A stock was
convertible at the option of the holder into three shares of common stock, at a
conversion price of $8.33.
Dividends declared during 1997 and 1996 were $113,000 and $454,000,
respectively. Dividends paid during 1997 and 1996 were $227,000 and $406,000,
respectively.
As required by APB Opinion No. 15, supplementary primary earnings per share
data is presented for each of the years effected in the three-year period ended
September 30, 1997. For the computation of supplementary primary earnings per
share, shares issued in March 1997 and July 1995 for the conversion of preferred
stock are included in the weighted average shares outstanding from the beginning
of each period and, accordingly, net income has not been reduced by preferred
dividends. Supplementary primary earnings per share is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1995
----------- -----------
<S> <C> <C>
Net income per share of common stock.................. $1.14 $1.33
Average number of shares outstanding.................. 7,796,994 7,023,082
</TABLE>
15. REGULATORY RESTRICTIONS
Liberty Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The regulations require Liberty
Bank to meet specific capital adequacy guidelines that involve quantitative
measures of Liberty Bank's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Liberty Bank's
capital amounts and classifications are also subject to qualitative judgements
by the regulators about components, risk weightings and other factors. Failure
to meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that could have a direct material
effect on the Company's financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require Liberty Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and core capital (as defined in the regulations) to
riskweighted assets (as defined), and of tangible capital (as defined) to assets
(as defined). As of September 30, 1997 Liberty Bank met all capital adequacy
requirements to which it is subject.
As of September 30, 1996, the date of the most recent notification from the
Office of Thrift Supervision ("OTS"), Liberty Bank was categorized as well
capitalized under the regulatory framework for prompt corrective action.
71
<PAGE> 72
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects Liberty Bank's compliance with its regulatory
capital requirements at September 30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
-------------- -------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Core capital........................ $62,673 5.89 $31,915 3.00 $30,758 2.89
Tangible capital.................... 61,003 5.74 15,933 1.50 45,070 4.24
Risk-based capital.................. 82,676 10.75 61,520 8.00 21,156 2.75
</TABLE>
The following table reflects Liberty Bank's compliance with its regulatory
capital requirements at September 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
--------------- -------------- -------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Core capital....................... $ 92,523 7.34 $37,833 3.00 $54,690 4.34
Tangible capital................... 91,178 7.24 18,896 1.50 72,282 5.74
Risk-based capital................. 102,944 11.21 73,452 8.00 29,492 3.21
</TABLE>
As required by regulations, Liberty Bank, at the time of its conversion to
a stock institution, established a liquidation account and maintains the account
for the benefit of its depositors at that time who continue to have funds on
deposit. The initial balance of this liquidation account was equal to the
institution's net worth prior to conversion of $15,722,000. In the event of a
complete liquidation of the institution (and only in such event), each such
depositor who continues to be a depositor at the time of such liquidation shall
be entitled to receive a liquidation distribution from this account in the
amount of the then current adjusted balance for deposits held, before any
liquidation distribution may be made to shareholders. This account is reduced
annually in proportion to the reduction of eligible savings account balances
measured on each fiscal year end.
Liberty Bank is prohibited from declaring or paying cash dividends on its
common stock if the payment thereof would cause a reduction in its regulatory
capital below either the liquidation account or the capital requirements set by
the OTS or, without the prior approval of the OTS, if the amount of dividends to
be paid in any year would exceed 50% of its net income for the fiscal year in
which the dividend is declared (except that permitted dividends may be deferred
and paid in a subsequent year). No dividends were declared during fiscal 1997 or
1996. During fiscal 1995 Liberty bank declared and paid dividends to First
Liberty in the amounts of $6.3 million and $3.2 million, respectively. Liberty
Bank paid dividends to the Company during fiscal 1996 in the amount of $3.6
million.
The Federal Reserve Board requires depository institutions to maintain
noninterest-bearing reserves against their deposit transaction accounts,
non-personal time deposits (transferrable or held by a person other than a
natural person) with an original maturity of less than one and one-half years
and certain money market deposit accounts. Federal Reserve regulations currently
require financial institutions to maintain average daily reserves equal to 3% on
all amounts from $4.4 million to $49.3 million of net transactions, plus 10% on
the remainder. Liberty Bank held no additional reserves at September 30, 1997
due to an adequate amount of qualifying assets.
16. EMPLOYEE BENEFIT PLANS
The First Liberty Financial Corp. Employee Savings and Stock Ownership Plan
(the "ESSOP") is both a qualified retirement plan and an employee stock
ownership plan. The Company may make discretionary contributions of the Company
common stock to the employee stock ownership plan portion of the ESSOP in an
amount not more than 10% of the total compensation of participants for the plan
year. Under the 401(k) portion of the ESSOP, the Company will make matching
contributions of the Company common stock in
72
<PAGE> 73
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts determined annually by its Board of Directors. Dividends earned on the
Company common stock are retained in the ESSOP.
The Company also has an Officer Profit Sharing Plan (the "OPSP"), which was
designed to reward the Company's officers for their collective effort in
maximizing the Company's "core earnings," (as defined in the OPSP agreement).
The OPSP provides that if core earnings for the fiscal year equal or exceed a
predetermined minimum core earnings, the OPSP participants will receive
additional cash compensation based upon a percentage of annual salary, with the
percentage increasing as the amount of core earnings increases. The OPSP will be
terminated at the end of the first quarter of fiscal 1998. Beginning January 1,
1998, the Company's officers and employees will participate in a new Performance
Excellence Plan ("PEP") under which all participants will be eligible to earn
additional compensation based in part upon the Company's core earnings per share
and in part upon each participant's individual performance.
The contributions to the ESSOP and the OPSP included in the accompanying
financial statements are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
ESSOP....................................................... $377 $339 $426
OPSP........................................................ $433 $710 $501
</TABLE>
The Company also has a Nonqualified Deferred Compensation Plan (the "NDCP")
(formerly known as the Executive Deferred Compensation Plan), established in
1995, in which directors and officers holding the title of First Vice President
or above may participate. The NDCP provides a means of enabling participating
officers to defer portions of their compensation in excess of the amounts which
they contribute to the ESSOP and participating directors to defer the fees
received for their services. The amount which a participant presently may defer
under the NDCP is twenty percent of total annual compensation.
17. STOCK OPTIONS
The Company granted options to purchase its common stock to certain
officers and key employees under an Incentive Stock Option Plan ("ISOP") which
was approved by the Company's stockholders in 1984. The options are exercisable
for a period of up to five years from the date of issuance under the Plan. The
ISOP expired in 1993, and all options granted under the ISOP have been
exercised.
The First Liberty Financial Corp. 1992 Stock Incentive Plan (the "1992
Plan") was adopted by the Board of Directors of the Company in November 1992 and
approved by the stockholders in March 1993. The stock granted under the 1992
Plan is the $1.00 par value common stock. The Company has been authorized to
issue up to 573,000 shares of common stock, in the aggregate, under the 1992
Plan, and unexercised option shares of common stock allocable to expired or
terminated options may again be granted under that plan. As of September 30,
1997, there were 149,750 shares available for grant. The 1992 Plan is
administered by the Compensation and Benefits Committee of the Company's Board
of Directors ("the Committee").
Incentive stock options and other stock options granted under the 1992 Plan
must be at a price not less than the fair market value of the shares at the date
of grant. Options granted under the plan must be exercised within the earlier
of: (i) three months after the optionee ceases to be employed by the Company for
any reason other than death or disability; (ii) the expiration date as
determined by the Committee, listed in the option agreement; (iii) immediately
upon termination of employment for cause; (iv) one year after termination of
employment because of disability unless the optionee dies within this one year
period; or (v) one year after the death of an optionee who dies (a) while
employed by the Company, (b) within three months after termination of
employment, or (c) within one year after employment terminated due to
disability. The Committee may extend the above expiration dates for any
non-incentive stock options it grants.
73
<PAGE> 74
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1992 Plan will terminate on the later of (i) the complete exercise or
lapse of the last outstanding option, or (ii) on the last date upon which
options may be granted under the plan (which may not be later than ten years
after the date on which the plan is adopted), subject to its earlier termination
by the Board of Directors at any time.
Information with regard to options issued under the ISOP during each of the
three fiscal years in the period ended September 30, 1997 and under the 1992
plan during the years then ended is as follows:
<TABLE>
<CAPTION>
ISOP 1992 PLAN
----------------- -----------------
OPTION AVERAGE OPTION AVERAGE
SHARES PRICE SHARES PRICE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Options outstanding at September 30, 1994......... 171,000 4.23 190,500 8.63
Issued.......................................... -- -- 22,500 10.67
Exercised....................................... (45,000) 3.76 (10,500) 5.83
Canceled........................................ -- -- (45,000) 9.33
------- ---- ------- -----
Options outstanding at September 30, 1995......... 126,000 4.39 157,500 8.91
Issued.......................................... -- -- 152,250 14.59
Exercised....................................... (74,400) 3.62 -- --
------- ---- ------- -----
Options outstanding at September 30, 1996......... 51,600 5.50 309,750 11.70
Issued.......................................... -- -- 95,500 18.28
Exercised....................................... (51,600) 5.50 (30,000) 6.00
------- ---- ------- -----
Options outstanding at September 30, 1997......... -- -- 375,250 13.83
======= =======
</TABLE>
Under the 1992 Plan, the number of shares exercisable at September 30, 1997
and 1996 was 220,000 and 152,000, respectively. All options under the ISOP were
exercisable during the above periods.
On October 26, 1995, the Board of Directors of First Liberty (the "Board")
approved an amendment to the 1992 Plan to provide that options granted on and
after that date will be exercisable over a period of ten years from date of
grant rather than five years from date of grant and to increase the number of
shares available for grant under that plan. This amendment was approved by First
Liberty's stockholders at the 1996 Annual Meeting of Stockholders (the "1996
Annual Meeting").
On November 21, 1995, the Board adopted the First Liberty Financial Corp.
1995 Director Stock Option Plan (the "DSOP"), which was approved by First
Liberty's stockholders at the 1996 Annual Meeting. The DSOP is intended to
further the growth and development of First Liberty by encouraging its directors
who are not employees of First Liberty to obtain proprietary interest in First
Liberty by acquiring its stock. Up to 75,000 shares of common stock, in the
aggregate, may be granted to non-employee directors under the DSOP.
Information with regard to options issued under the DSOP during each of the
two fiscal years that the plan has been in effect in the period ended September
30, 1997 is as follows:
<TABLE>
<CAPTION>
DSOP
-----------------
OPTION AVERAGE
SHARES PRICE
------ -------
<S> <C> <C>
Options outstanding at September 30, 1995.................. -- --
Issued................................................... 46,500 $14.66
------
Options outstanding at September 30, 1996.................. 46,500 14.66
Issued................................................... 12,000 20.28
------
Options outstanding at September 30, 1997.................. 58,500 15.82
======
</TABLE>
74
<PAGE> 75
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has elected the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997 and 1996, consistent with the provisions of SFAS
No. 123, the Company's net income and earnings per share amounts would have been
reduced to the pro forma amounts indicated below (dollars in thousands, except
per share data),
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Net income -- as reported.................................. $8,899 $8,920
Net income -- pro forma.................................... 8,665 8,757
Earnings per share -- as reported.......................... 1.14 1.16
Earning per share -- pro forma............................. 1.11 1.14
</TABLE>
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options granted
typically do not vest for several years and additional awards are generally made
each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions.
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Expected dividend yield.................................. 1.4% 2.4%
Expected stock price volatility.......................... 35.4 36.5
Risk-free interest rate.................................. 6.1 5.9
Expected life of options................................. 8.5 years 7.4 years
</TABLE>
The weighted average fair value of options granted during 1997 and 1996 was
$.27 and $.20 per share, respectively.
18. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include loan commitments and standby letters of credit.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company has no
significant concentrations of credit risk with any individual counterparty to
originate loans. The Company's lending is concentrated in
75
<PAGE> 76
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Georgia, its primary market area. The contract or notional amounts of financial
instruments with off-balance sheet risk at September 30, 1997 and 1996 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
-------- -------
<S> <C> <C>
Commitments to originate loans:
Fixed rate............................................ $123,277 $90,785
Adjustable rate....................................... 54,315 35,607
Standby letters of credit............................... 1,026 240
Delivery forward placement contracts:
Mandatory............................................. 58,304 43,164
Optional.............................................. 4,000 2,000
</TABLE>
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include real estate and
improvements, marketable securities, accounts receivable, inventory, equipment
and personal property.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Mandatory and optional forward placement contracts (which are held for
purposes other than trading) are used by the Company to hedge its interest rate
exposure during the period from when the Company extends an interest rate lock
to a loan applicant until the time in which the loan is sold. Realized gains and
losses on the mandatory and optional forward contracts are recognized in gain
(loss) from sales of loans in the period settlement occurs. Unrealized gains and
losses on these contracts are included in the lower of cost or market valuation
adjustment to loans available-for-sale. The mandatory and optional forward
contracts above covered the market risk associated with the pipeline loans less
predicted fallout at September 30, 1997 and 1996 of $40,728 and $25,645,
respectively.
The Company has not recorded specific liabilities for credit risk
associated with off-balance sheet financial instruments. Credit risk associated
with commitments to originate loans is mitigated through the purchase of
commitments to sell such loans generally within 90 days of origination. Credit
risk associated with standby letters of credit is considered in the assessment
of the allowance for estimated loan losses.
Liberty Bank's risk with respect to mortgage servicing losses results from
unrecoverable advances of delinquent principal, interest and tax payments made
on behalf of mortgagors. Liberty's mortgage servicing department controls the
risk of this portfolio on an ongoing basis. Liberty Bank has not suffered
significant losses from its mortgage servicing activities.
76
<PAGE> 77
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash, due from banks, fed funds sold and
repurchase agreements...................... $ 51,434 $ 51,434 $ 73,152 $ 73,152
Securities available-for-sale................. 255,902 255,902 232,858 232,858
Loans, net.................................... 864,044 869,164 786,729 785,851
Loans available-for-sale...................... 29,506 29,506 26,906 26,906
Mortgage servicing rights..................... 6,571 8,053 6,132 7,959
Financial Liabilities:
Deposits...................................... $945,322 $946,520 $858,784 $859,723
Notes payable and other borrowed money........ 194,637 194,670 184,660 184,812
Subordinated debentures....................... -- -- 12,155 16,887
Securities sold under agreements to
repurchase................................. 19,815 19,815 16,644 16,644
Off-Balance-Sheet Financial Instruments:
Standby letters of credit..................... $ 1,026 $ 1,026 $ 240 $ 240
Commitments to originate loans................ 123,094 123,313 81,074 81,246
Mandatory commitments to sell loans........... 59,888 60,088 43,164 43,298
Optional commitments to sell loans............ 4,000 3,996 2,000 2,007(1)
Loan servicing rights......................... -- 5,661 -- 5,034
</TABLE>
- ---------------
(1) Excludes net unamortized option fees of $17,369 at September 30, 1996.
The fair value disclosures provided exclude certain financial instruments
and all nonfinancial instruments from its disclosure requirements. The
disclosures also do not include certain intangible assets, such as customer
relationships, deposit base intangible and goodwill. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
20. CONTINGENCIES
The Company is from time to time a defendant in legal actions from normal
business activities. Management does not anticipate that the ultimate liability
arising from litigation outstanding at September 30, 1997, will have a
materially adverse effect on the Company's financial position, results of
operations or liquidity.
77
<PAGE> 78
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. FINANCIAL INFORMATION OF FIRST LIBERTY FINANCIAL CORP. (PARENT ONLY)
First Liberty's statements of financial condition (parent only) as of
September 30, 1997 and 1996 and the related statements of income and cash flows
for each of the three years in the period ended September 30, 1997 are as
follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1997 1996
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash(1)..................................................... $ 3,595 $ 92
Other investments(1)........................................ -- 6,850
Real estate, net............................................ -- 142
Investment in Liberty Bank(1)............................... 101,458 81,348
Other assets................................................ 250 1
-------- -------
Total assets...................................... $105,303 $88,433
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable........................................... $ 772 $ 638
Line of credit.............................................. 10,000 --
Other liabilities........................................... 617 1,338
-------- -------
Total liabilities...................................... 11,389 1,976
-------- -------
Stockholders' equity:
Series B Preferred stock.................................... -- 7,564
Common stock................................................ 7,764 7,145
Additional paid-in capital.................................. 38,505 31,091
Retained earnings........................................... 46,752 40,994
Net unrealized gain on securities available-for-sale, net of
taxes..................................................... 1,162 (68)
Treasury stock at cost...................................... (269) (269)
-------- -------
Total stockholders' equity............................. 93,914 86,457
-------- -------
Total liabilities and stockholders' equity........ $105,303 $88,433
======== =======
</TABLE>
- ---------------
(1) Eliminates in consolidation.
78
<PAGE> 79
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST LIBERTY FINANCIAL CORP. (PARENT ONLY)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income:
Interest income on other investments(1)................... $ 169 $ 233 $ 302
Cash dividends from Liberty Bank(2)....................... -- 3,555 3,198
Gain on sale of securities................................ 90 -- --
Other income.............................................. -- 1 1
------ ------ ------
Total income...................................... 259 3,789 3,501
------ ------ ------
Expense:
Interest expense on line of credit........................ 4 -- --
Directors fees............................................ -- -- 30
Loss on sale of real estate............................... 23 -- --
Other expense............................................. 155 117 106
------ ------ ------
Total expense..................................... 182 117 136
------ ------ ------
Income before income tax expense and equity in undistributed
net income of Liberty Bank................................ 77 3,672 3,365
Income tax expense.......................................... 27 40 57
------ ------ ------
Income before equity in undistributed net income of Liberty
Bank...................................................... 50 3,632 3,308
Equity in undistributed net income of Liberty Bank(2)....... 8,849 5,288 6,037
------ ------ ------
Net income.................................................. 8,899 8,920 9,345
Dividends on preferred stock................................ 113 454 864
------ ------ ------
Net income applicable to common stockholders................ $8,786 $8,466 $8,481
====== ====== ======
</TABLE>
- ---------------
(1) $168,000 in 1997, $231,000 in 1996 and $297,000 in 1995 eliminates in
consolidation.
(2) Eliminates in consolidation.
79
<PAGE> 80
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST LIBERTY FINANCIAL CORP. (PARENT ONLY)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Cash flows from operating activities:
Net income............................................. $ 8,899 $ 8,920 $ 9,345
Equity in undistributed earnings of Liberty Bank....... (8,849) (5,288) (6,037)
Other, net............................................. (890) 947 152
-------- ------- -------
Total adjustments........................................... (9,739) (4,341) (5,885)
-------- ------- -------
Net cash provided by (used in) operating activities......... (840) 4,579 3,460
-------- ------- -------
Investing Activities:
Cash flows from investing activities:
Net decrease in other investments...................... 6,850 1,200 1,490
Cash paid in acquisitions.............................. -- (3,555) (3,198)
Sale of real estate.................................... 119 28 28
-------- ------- -------
Net cash provided by (used in) investing activities......... 6,969 (2,327) (1,680)
-------- ------- -------
Financing Activities:
Cash flows from financing activities:
Proceeds from line of credit........................... 10,000 -- --
Capital infusion to Liberty Bank....................... (10,000) -- --
Issuance of common stock............................... 419 270 230
Redemption of preferred stock.......................... (38) -- (66)
Dividends paid on stock................................ (3,007) (2,505) (1,880)
-------- ------- -------
Net cash used in financing activities....................... (2,626) (2,235) (1,716)
-------- ------- -------
Net increase in cash........................................ 3,503 17 64
Cash beginning of period.................................... 92 75 11
-------- ------- -------
Cash end of period.......................................... $ 3,595 $ 92 $ 75
======== ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes.............................................. $ 5,735 $ 5,687 $ 3,300
</TABLE>
80
<PAGE> 81
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. CONSOLIDATED CONDENSED QUARTERLY RESULTS OF INCOME (UNAUDITED)
The following summarizes the consolidated condensed quarterly results of
income (unaudited) for the year ended September 30, 1997 (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1997 QUARTERS
-------------------------------------
1ST 2ND 3RD 4TH(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income.................................. $23,347 $23,630 $24,774 $25,096
Net interest income.................................... 10,690 10,964 11,239 11,111
Provision for estimated losses on loans................ 593 616 2,002 3,106
Income before extraordinary item....................... 2,966 3,402 3,496 1,846
Extraordinary loss on extinguishment of debt, net of
related taxes........................................ -- -- -- 2,811
------- ------- ------- -------
Net income (loss)...................................... 2,966 3,402 3,496 (965)
Dividends on preferred stock........................... 113 -- -- --
------- ------- ------- -------
Net income (loss) applicable to common stockholders.... $ 2,853 $ 3,402 $ 3,496 $ (965)
======= ======= ======= =======
Earnings per common share:
Income before extraordinary item
Primary.............................................. $ .39 $ .45 $ .45 $ .24
Fully diluted........................................ $ .38 $ .44 $ .45 $ .24
Extraordinary loss on extinguishment of debt, net of
related taxes
Primary.............................................. -- -- -- $ (.36)
Fully diluted........................................ -- -- -- $ (.36)
Net income (loss)
Primary.............................................. $ .39 $ .45 $ .45 $ (.12)
Fully diluted........................................ $ .38 $ .44 $ .45 $ (.12)
Dividends per common share:............................ $ .10 $ .10 $ .10 $ .10
</TABLE>
- ---------------
(1) The fourth quarter of fiscal 1997 included the costs relating to
discontinued business lines in Liberty Mortgage's retail mortgage offices in
Atlanta and Liberty Bank's auto dealer indirect lending operations of $1.7
million (or $.21 per fully diluted share) after-tax. This included $1.3
million after-tax in additional loan loss provisions and $408,000 after-tax
in other costs (including severance expenses) of discontinued business
lines. Additionally, the quarter included an extraordinary charge of $2.8
million (or $.36 per fully diluted share) after-tax reflecting the loss on
redemption of $16.5 million principal balance of subordinated debt.
81
<PAGE> 82
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the consolidated condensed quarterly results of
income (unaudited) for the year ended September 30, 1996 (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1996 QUARTERS
-------------------------------------
1ST 2ND 3RD 4TH(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income.................................. $20,590 $20,478 $21,339 $21,912
Net interest income.................................... 9,195 9,196 9,737 10,141
Provision for estimated losses on loans................ 627 794 513 1,172
Net income............................................. 2,611 2,607 3,075 627
Dividends on preferred stock........................... 113 113 113 115
------- ------- ------- -------
Net income applicable to common stockholders........... $ 2,498 $ 2,494 $ 2,962 $ 512
======= ======= ======= =======
Earnings per common share:
Primary.............................................. $ .35 $ .35 $ .42 $ .07
Fully diluted........................................ $ .34 $ .34 $ .40 $ .07
Dividends per common share:............................ $ .07 $ .07 $ .07 $ .08
</TABLE>
- ---------------
(1) The fourth quarter included a one-time FDIC assessment to recapitalize the
SAIF in the amount of $3.6 million pre tax, equaling $2.3 million and $.30
per fully diluted share after tax.
82
<PAGE> 83
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
For the three year period ended September 30, 1997, there has been no
disagreement between First Liberty and any accountants on any matter of
accounting principles or practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of First Liberty is set forth under
the caption "Proposal No. 1 -- Election of Directors -- Nominees" in First
Liberty's definitive Proxy Statement for its Annual Meeting of Stockholders to
be held on January 28, 1998. Such information is incorporated herein by
reference. The definitive Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after First Liberty's fiscal year end.
Pursuant to instruction 3 of Item 401(b) of Regulation S-K and General
Instruction G(3) of Form 10-K, information relating to the executive officers of
First Liberty is set forth at Part I, Item 4(A) of this Report under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
caption "Proposal No. 1 -- Election of Directors -- Executive Compensation" in
the Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference.
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of First Liberty's $1.00 par value Common
Stock by certain persons is set forth under the captions "Voting -- Principal
Stockholders" and "Proposal 1 -- Election of Directors -- Nominees" in the Proxy
Statement referred to in Item 10 above. Such information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain transactions between Liberty Bank and
affiliates of First Liberty and Liberty Bank is set forth under the caption
"Proposal 1 -- Election of Directors -- Transactions With First Liberty" in the
Proxy Statement referred to in Item 10 above. Such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report:
1. Financial Statement Schedules
The Company's financial statements, the notes thereto and the report of the
independent accountants are set forth on pages 45 through 82 of this Form 10-K.
83
<PAGE> 84
3. Exhibits
The following exhibits are filed as part of or incorporated by reference in
the Report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3(a) Amended and Restated Articles of Incorporation (Exhibit 3(a)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
3(b) By-laws, as amended (Exhibit 3(b) to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1986)
3(b)1 By-Laws, as amended (Exhibit 3(b)1 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
3(b)2 By-Laws, as amended (Exhibit 3(b)2 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
10(a) Plan of Conversion of Liberty Bank (Exhibit 10(a) to
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1986)
10(b) Registrant's Employee Savings and Stock Ownership Plan
(Exhibit 4 to Registrant's Registration Statement on Form
S-8, No. 33-24733)
10(c) Registrant's Shareholder Rights Plan dated as of August 2,
1989 (Exhibit 4.1 to Registrant's Current Report on Form 8-K
dated August 14, 1989)
10(d) Executive Employment Agreement dated as of November 1, 1990,
among Liberty Bank, Registrant and Robert F. Hatcher
10(e) First Amendment to Executive Employment Agreement dated as
of November 1, 1991, among Liberty Bank, Registrant and
Robert F. Hatcher
10(f) Second Amendment to Executive Employment Agreement dated as
of October 21, 1992, among Liberty Bank, Registrant and
Robert F. Hatcher
10(g) Third Amendment to Executive Employment Agreement dated as
of January 26, 1994, among Liberty Bank, Registrant and
Robert F. Hatcher
10(h) Employment Agreement dated November 5, 1987 among
Registrant, Liberty Bank and Richard A. Hills, Jr.
10(i) Employment Agreement dated August 1, 1990 between Liberty
Bank and Charles G. Davis
10(j) Employment Agreement dated June 30, 1992 among Registrant,
Liberty Bank and David L. Hall
10(k) First Liberty Financial Corp. 1992 Stock Incentive Plan
dated as of November 24, 1992
10(l) Employment Agreement dated June 28, 1995 between Liberty
Bank and J. Larry Wallace
10(m) Registrant's Officer Profit Sharing Plan as amended and
restated effective October 1, 1993
10(n) Agreement and Plan of Merger as of June 11, 1996, among
Registrant, Liberty Bank, and Middle Georgia Bank (Appendix
A to Registrant's Registration Statement on Form S-4, No.
333-10617)
10(o) Registrant's 1995 Director Stock Option Plan as of November
21, 1995
10(p) Registrant's Annual Report on Form 11-K for the First
Liberty Financial Corp. Employee Savings and Stock Ownership
Plan for the year ended September 30, 1992
10(q) Employment Agreement dated May 23, 1995 between Liberty
Mortgage and George A. Molloy
10(r) Employment Agreement dated August 5, 1996 between NewSouth
and Robert W. Aiken
</TABLE>
84
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
11 Statements of Computation of Earnings Per Share
12 Statements of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
21 Subsidiaries of Registrant (Exhibit 22 to Registrant's
Annual Report on Form 10-K for the year ended September 30,
1990)
23(a) Consent of Independent Certified Public Accountants
23(b) Consent of KPMG Peat Marwick to incorporation by reference
of financial statements in First Liberty's Registration
Statement No. 33-24733 on Form S-8
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
</TABLE>
85
<PAGE> 86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST LIBERTY FINANCIAL CORP.
(Registrant)
Date: December 23, 1997 By: /s/ ROBERT F. HATCHER
------------------------------------
Robert F. Hatcher
Principal Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS H. MCCOOK Chairman of the Board and December 23, 1997
- ------------------------------------------------ Director
Thomas H. McCook
/s/ ROBERT F. HATCHER President, Chief Executive December 23, 1997
- ------------------------------------------------ Officer and Director
Robert F. Hatcher
/s/ F. DON BRADFORD Director December 23, 1997
- ------------------------------------------------
F. Don Bradford
/s/ RICHARD W. CARPENTER Director December 23, 1997
- ------------------------------------------------
Richard W. Carpenter
/s/ C. LEE ELLIS Director December 23, 1997
- ------------------------------------------------
C. Lee Ellis
/s/ MELVIN I. KRUGER Director December 23, 1997
- ------------------------------------------------
Melvin I. Kruger
/s/ HAROLD W. PEAVY, JR. Director December 23, 1997
- ------------------------------------------------
Harold W. Peavy, Jr.
/s/ HERBERT M. PONDER, JR. Director December 23, 1997
- ------------------------------------------------
Herbert M. Ponder, Jr.
/s/ JO SLADE WILBANKS Director December 23, 1997
- ------------------------------------------------
Jo Slade Wilbanks
/s/ DAVID L. HALL Executive Vice President and December 23, 1997
- ------------------------------------------------ Chief Financial Officer (Duly
David L. Hall authorized principal financial
and accounting officer)
</TABLE>
86
<PAGE> 87
FIRST LIBERTY FINANCIAL CORP.
INDEX OF EXHIBITS
The following exhibits are filed as part of or incorporated by reference in
the Report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
3(a) Amended and Restated Articles of Incorporation (Exhibit 3(a)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
3(b) By-laws, as amended (Exhibit 3(b) to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1986)
3(b)1 By-Laws, as amended (Exhibit 3(b)1 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
3(b)2 By-Laws, as amended (Exhibit 3(b)2 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
10(a) Plan of Conversion of Liberty Bank (Exhibit 10(a) to
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1986)
10(b) Registrant's Employee Savings and Stock Ownership Plan
(Exhibit 4 to Registrant's Registration Statement on Form
S-8, No. 33-24733)
10(c) Registrant's Shareholder Rights Plan dated as of August 2,
1989 (Exhibit 4.1 to Registrant's Current Report on Form 8-K
dated August 14, 1989)
10(d) Executive Employment Agreement dated as of November 1, 1990,
among Liberty Bank, Registrant and Robert F. Hatcher
10(e) First Amendment to Executive Employment Agreement dated as
of November 1, 1991, among Liberty Bank, Registrant and
Robert F. Hatcher
10(f) Second Amendment to Executive Employment Agreement dated as
of October 21, 1992, among Liberty Bank, Registrant and
Robert F. Hatcher
10(g) Third Amendment to Executive Employment Agreement dated as
of January 26, 1994, among Liberty Bank, Registrant and
Robert F. Hatcher
10(h) Employment Agreement dated November 5, 1987 among
Registrant, Liberty Bank and Richard A. Hills, Jr.
10(i) Employment Agreement dated August 1, 1990 between Liberty
Bank and Charles G. Davis
10(j) Employment Agreement dated June 30, 1992 among Registrant,
Liberty Bank and David L. Hall
10(k) First Liberty Financial Corp. 1992 Stock Incentive Plan
dated as of November 24, 1992
10(l) Employment Agreement dated June 28, 1993 between Liberty
Bank and J. Larry Wallace
10(m) Registrant's Officer Profit Sharing Plan as amended and
restated effective October 1, 1994
10(n) Agreement and Plan of Merger as of June 11, 1996, among
Registrant, Liberty Bank, and Middle Georgia Bank (Appendix
A to Registrant's Registration Statement on Form S-4, No.
333-10617)
10(o) Registrant's 1995 Director Stock Option Plan as of November
21, 1995
10(p) Registrant's Annual Report on Form 11-K for the First
Liberty Financial Corp. Employee Savings and Stock Ownership
Plan for the Year ended September 30, 1992
</TABLE>
87
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<S> <C> <C>
10(q) Employment Agreement dated May 23, 1995 between Liberty
Mortgage and George A. Molloy
10(r) Employment Agreement dated August 5, 1996 between NewSouth
and Robert W. Aiken
11 Statements of Computation of Earnings Per Share 89
12 Statements of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends 90
21 Subsidiaries of Registrant (Exhibit 22 to Registrant's
Annual Report on Form 10-K for the year ended September 30,
1990
23(a) Consent of Independent Certified Public Accountants 91
23(b) Consent of KPMG Peat Marwick to incorporation by reference
of financial statements in First Liberty's Registration
Statement No. 33-24733 on Form S-8
27 Financial Data Schedule (for SEC use only)
</TABLE>
88
<PAGE> 1
EXHIBIT 11
STATEMENTS OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Primary earnings per share:
Average shares outstanding................................ 7,490,041 7,021,011
---------- ----------
Average options outstanding............................... 244,222 209,562
Average exercise price.................................... $ 12.79 $ 9.22
---------- ----------
Proceeds from the assumed exercise of options
outstanding............................................ $3,123,599 $1,932,162
Average market price per share............................ 20.87 14.48
---------- ----------
Assumed shares repurchased................................ 149,669 133,437
---------- ----------
Common stock equivalents of options outstanding........... 94,553 76,125
---------- ----------
Weighted average shares outstanding (including common
stock equivalents)..................................... 7,584,594 7,097,136
========== ==========
Net income................................................ $8,898,868 $8,919,626
Preferred stock dividend.................................. (113,151) (453,873)
---------- ----------
Net income applicable to common stockholders................ $8,785,717 $8,465,753
========== ==========
Earnings per common share................................... $ 1.16 $ 1.19
========== ==========
Fully diluted earnings per share:
Average shares outstanding................................ 7,490,041 7,021,011
---------- ----------
Average options outstanding............................... 244,222 209,562
Average exercise price.................................... $ 12.79 $ 9.22
---------- ----------
Proceeds from the assumed exercise of options
outstanding............................................ $3,123,599 $1,932,162
Average market price per share............................ 25.00 16.67
---------- ----------
Assumed shares repurchased................................ 124,944 115,906
---------- ----------
Common stock equivalents of options outstanding........... 119,278 93,656
Assumed conversion of outstanding convertible
debentures(1).......................................... -- 58,456
Assumed conversion of outstanding preferred stock(2)...... 214,066 540,321
---------- ----------
Weighted average shares outstanding (including common
stock equivalents)..................................... 7,823,385 7,713,444
========== ==========
Net income.................................................. $8,898,868 $8,919,626
Interest expenses associated with the convertible
debentures(3)............................................. -- 45,537
Income taxes(4)............................................. -- (15,482)
---------- ----------
Net income adjusted......................................... $8,898,868 $8,949,681
========== ==========
Earnings per common share................................... $ 1.14 $ 1.16
========== ==========
</TABLE>
- ---------------
(1) Potential dilution relating to convertible debentures is calculated as
follows:
<TABLE>
<S> <C> <C>
Average debentures outstanding.................... -- 636,586
Conversion price.................................. $ -- $ 10.89
---------- ----------
Potentially dilutive shares....................... -- 58,456
========== ==========
</TABLE>
(2) Potential dilution relating to preferred stock is calculated as follows:
<TABLE>
<S> <C> <C>
Average Series B Preferred stock outstanding...... 2,996,924 7,564,500
Conversion price.................................. $ 14.00 $ 14.00
---------- ----------
Potentially dilutive shares....................... 214,066 540,321
========== ==========
</TABLE>
(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%.
89
<PAGE> 1
EXHIBIT 12
STATEMENTS OF COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Computation of Earnings:
Income before income taxes and extraordinary item..... $16,898,299 $13,294,117 $12,940,362
Add:
Interest expense...................................... 52,842,964 46,050,748 37,778,917
----------- ----------- -----------
Earnings as adjusted.................................... $69,741,263 $59,344,865 $50,719,279
=========== =========== ===========
Computation of Fixed Charges:(a)
Interest expense (including amortization of debt
expense)........................................... $52,842,964 $46,050,748 $37,778,917
Preferred stock dividends(b).......................... 163,288 676,468 1,196,232
----------- ----------- -----------
$53,006,252 $46,727,216 $38,975,149
=========== =========== ===========
Ratio of earnings to combined fixed charges and
preferred stock dividends............................. 1.32x 1.27x 1.30x
==== ==== ====
</TABLE>
(a) No portion of rental expense could be demonstrated to be representative of
the interest factor, and therefore none is included in fixed charges.
(b) Preferred stock dividends have been increased to an amount representing the
pre-tax earnings which would be required to cover such dividend
requirements.
90
<PAGE> 1
EXHIBIT 23.A
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of First Liberty Financial Corp. and Subsidiaries on Forms S-8 (File Nos.
33-24733 and 333-00385) of our report, which includes an explanatory paragraph
concerning a change in the method of accounting for impaired loans and mortgage-
servicing rights in 1996, dated November 6, 1997, on our audits of the
consolidated financial statements of First Liberty Financial Corp. and
Subsidiaries as of September 30, 1997 and 1996 and for the years ended September
30, 1997, 1996 and 1995, which report is included in this Annual Report on Form
10-K.
Coopers & Lybrand LLP
Atlanta, Georgia
December 19, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1997, FORM 10-K AND THRIFT FINANCIAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 31,197
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 20,237
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 255,902
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 905,507
<ALLOWANCE> 11,903
<TOTAL-ASSETS> 1,269,137
<DEPOSITS> 945,322
<SHORT-TERM> 112,264
<LIABILITIES-OTHER> 15,449
<LONG-TERM> 102,188
0
0
<COMMON> 7,764
<OTHER-SE> 86,150
<TOTAL-LIABILITIES-AND-EQUITY> 1,269,137
<INTEREST-LOAN> 79,125
<INTEREST-INVEST> 17,722
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 96,847
<INTEREST-DEPOSIT> 39,321
<INTEREST-EXPENSE> 52,843
<INTEREST-INCOME-NET> 44,004
<LOAN-LOSSES> 6,317
<SECURITIES-GAINS> 118
<EXPENSE-OTHER> 34,319
<INCOME-PRETAX> 16,899
<INCOME-PRE-EXTRAORDINARY> 11,710
<EXTRAORDINARY> (2,811)
<CHANGES> 0
<NET-INCOME> 8,899
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 8.58
<LOANS-NON> 5,266
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,350
<CHARGE-OFFS> 5,976
<RECOVERIES> 1,212
<ALLOWANCE-CLOSE> 11,903
<ALLOWANCE-DOMESTIC> 9,852
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,051
</TABLE>
