<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
FIRST LIBERTY FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
FIRST LIBERTY FINANCIAL CORP.
201 SECOND STREET
MACON, GEORGIA 31297
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 28, 1998
NOTICE HEREBY IS GIVEN that the 1998 Annual Meeting of Stockholders of
First Liberty Financial Corp. (the "Company") will be held in the Ballroom of
the Crowne Plaza Hotel, 108 First Street, Macon, Georgia, on Wednesday, January
28, 1998, at 2:00 p.m., local time, for the purpose of considering and voting
upon:
1. A proposal to elect three directors.
2. A proposal to amend the First Liberty Financial Corp. 1992 Stock
Incentive Plan to increase by 330,000 the number of shares of Common Stock
authorized for issuance under the plan.
3. A proposal to amend the First Liberty Financial Corp. 1995 Director
Stock Option Plan to increase by 45,000 the number of shares of Common
Stock authorized for issuance under the plan.
4. Such other business as properly may come before the Annual Meeting
or any adjournments thereof.
Information relating to the above matters is set forth in the attached
Proxy Statement. Stockholders of record at the close of business on December 10,
1997 will be entitled to receive notice of and to vote at the Annual Meeting and
any adjournments thereof.
By Order of the Board of Directors.
/S/ RICHARD A. HILLS, JR.
RICHARD A. HILLS, JR.
Secretary
Macon, Georgia
December 29, 1997
PLEASE READ THE ATTACHED PROXY STATEMENT AND THEN PROMPTLY COMPLETE, SIGN, DATE
AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. IF
YOU ATTEND THE ANNUAL MEETING, YOU MAY REVOKE THE PROXY CARD AND VOTE IN PERSON
IF YOU WISH.
<PAGE> 3
FIRST LIBERTY FINANCIAL CORP.
201 SECOND STREET
MACON, GEORGIA 31297
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
JANUARY 28, 1998
This Proxy Statement is furnished to the stockholders of First Liberty
Financial Corp. (the "Company") in connection with the solicitation of proxies
by the Board of Directors of the Company to be voted at the 1998 Annual Meeting
of Stockholders and at any adjournments thereof (the "Annual Meeting"). The
Annual Meeting will be held on Wednesday, January 28, 1998, in the Ballroom of
the Crowne Plaza Hotel, 108 First Street, Macon, Georgia, at 2:00 p.m., local
time.
The approximate date on which this Proxy Statement and the accompanying
proxy card are first being sent or given to stockholders is December 29, 1997.
VOTING
GENERAL
The securities which can be voted at the Annual Meeting consist of common
stock of the Company, $1.00 par value per share (the "Common Stock"), with each
share entitling its owner to one vote on each matter submitted to the
stockholders. The record date for determining the holders of Common Stock who
are entitled to notice of and to vote at the Annual Meeting is December 10,
1997. On the record date, 7,742,462 shares of Common Stock were outstanding and
eligible to be voted at the Annual Meeting.
QUORUM AND VOTE REQUIRED
The presence, in person or by proxy, of a majority of the outstanding
shares of Common Stock is necessary to constitute a quorum at the Annual
Meeting. In determining whether a quorum exists at the Annual Meeting for
purposes of all matters to be voted on, all votes "for" or "against" as well as
all abstentions (including votes to withhold authority to vote) will be counted.
In voting for the proposal to elect directors (Proposal No. 1),
stockholders may vote in favor of all nominees or withhold their votes as to all
or as to specific nominees. The vote required to approve Proposal No. 1 is
governed by Georgia law and is a plurality of the votes cast by the holders of
shares entitled to vote, provided a quorum is present. Votes withheld and broker
non-votes will not be counted and will have no effect.
In voting for the other proposals (Proposal No. 2 and Proposal 3),
stockholders may vote in favor of the proposals or against the proposals or may
abstain from voting. The vote required to approve these proposals is governed by
federal law and is the affirmative vote of the holders of a majority of the
shares represented and entitled to vote at the Annual Meeting, provided a quorum
is present. Abstentions are considered in determining the number of votes
required to obtain a majority of the shares represented and entitled to vote at
the Annual Meeting and will have the same legal effect as a vote against such
proposal. However, broker non-votes are not considered as entitled to vote and
will have no effect.
The Company believes that a total of 2,393,826 shares held by directors and
executive officers of the Company, constituting approximately 31% of the
outstanding Common Stock, will be voted in favor of each proposal.
<PAGE> 4
PROXIES
All properly executed proxy cards delivered pursuant to this solicitation
and not revoked will be voted at the Annual Meeting in accordance with the
directions given. In voting by proxy with regard to the election of directors,
stockholders may vote in favor of all nominees, withhold their votes as to all
nominees or withhold their votes as to specific nominees. In voting by proxy
with regard to the other proposals, stockholders may vote for or against each
proposal or abstain from voting. Stockholders should specify their choices on
the accompanying proxy card. IF NO SPECIFIC INSTRUCTIONS ARE GIVEN WITH REGARD
TO THE MATTERS TO BE VOTED UPON, THE SHARES REPRESENTED BY A SIGNED PROXY CARD
WILL BE VOTED "FOR" THE PROPOSALS LISTED ON THE PROXY CARD. If any other matters
properly come before the Annual Meeting, the persons named as proxies will vote
upon such matters according to their judgment.
All proxy cards delivered pursuant to this solicitation are revocable at
any time at the option of the persons executing them by giving written notice to
the Secretary of the Company at First Liberty Financial Corp., 201 Second
Street, Macon, Georgia 31297, by delivering a later dated proxy card, or by
voting in person at the Annual Meeting.
All expenses incurred in connection with the solicitation of proxies will
be paid by the Company. Such costs include charges by brokers, fiduciaries and
custodians for forwarding proxy materials to beneficial owners of stock held in
their names. The Company has retained Corporate Investor Communications, Inc., a
proxy solicitation firm, to assist in the solicitation of proxies at a fee of
$3,000 plus reimbursement of out-of-pocket costs. Solicitation also may be
undertaken by mail, telephone and personal contact by directors and executive
officers of the Company without additional compensation.
STOCK OWNERSHIP
Principal Stockholders
The following table sets forth information as of December 1, 1997,
regarding the ownership of Common Stock by each person known to the Company to
be the beneficial owner of more than 5% of Common Stock. [Footnotes appear after
the second following table.]
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME AND ADDRESS OWNED(1) CLASS
---------------- ------------ -------
<S> <C> <C>
Thomas H. McCook............................................ 842,987(2) 10.88%
4848 Brittany Drive
Macon, Georgia 31210
Robert F. Hatcher........................................... 514,024(3) 6.57%
4870 Forsyth Road
Macon, Georgia 31210
Alfa Mutual Insurance Company............................... 409,875(4) 5.29%
C. Lee Ellis
P.O. Box 11000
Montgomery, Alabama 31698
</TABLE>
Directors and Executive Officers
The following table sets forth information as of December 1, 1997,
regarding the ownership of Common Stock by each director (including nominees for
director) of the Company and by the executive officers of the Company and its
subsidiaries, First Liberty Bank (the "Bank") and Liberty Mortgage Corporation
(the "Mortgage Company"), named in the Summary Compensation Table on pages 6 and
7, and by all directors
2
<PAGE> 5
and executive officers as a group. An asterisk (*) indicates less than one
percent (1%) of outstanding Common Stock.
<TABLE>
<CAPTION>
SHARES PERCENT
BENEFICIALLY OF
NAME AND POSITION OWNED(1) CLASS
----------------- ------------ -------
<S> <C> <C>
F. Don Bradford............................................. 123,096(5) 1.59%
Director and nominee
Richard W. Carpenter........................................ 115,341(6) 1.49%
Director and nominee
Charles G. Davis............................................ 75,946(7) *
Executive Officer
C. Lee Ellis................................................ 409,875(4) 5.29%
Director
Larry D. Flowers............................................ 46,729(8) *
Executive Officer
Robert F. Hatcher........................................... 514,024(3) 6.57%
Director and Executive officer
Melvin I. Kruger............................................ 14,236(9) *
Director
Thomas H. McCook............................................ 842,987(2) 10.88%
Director
George A. Molloy............................................ 25,822(10) *
Executive Officer
Harold W. Peavy, Jr......................................... 290,139(11) 3.75%
Director and nominee
Herbert M. Ponder, Jr....................................... 9,001(12) *
Director
J. Larry Wallace............................................ 67,717(13) *
Executive Officer
Jo Slade Wilbanks........................................... 10,425(14) *
Director
All directors and executive officers as a group............. 2,708,701(15) 33.62%
(18 persons)
</TABLE>
- ---------------
(1) The information shown above is based upon information furnished to the
Company by the named persons or by documents filed with the Securities and
Exchange Commission ("SEC"). Beneficial ownership as reported in the tables
has been determined in accordance with SEC regulations. Included are shares
of Common Stock which may be acquired within 60 days of December 1, 1997
upon the exercise of stock options ("Option Shares"). Also included are
shares allocated to the accounts of certain executive officers under the
Company's Employee Savings and Stock Ownership Plan ("ESSOP Shares"). Not
included are shares which may be acquired upon the exercise of stock
options not exercisable within 60 days of December 1, 1997 and shares
allocated to the accounts of certain directors and executive officers under
the Company's Nonqualified Deferred Compensation Plan, with respect to
which those directors and executive officers do not have voting and
investment power. The persons listed in the tables have sole voting and
investment power with regard to the shares shown as owned by such persons
unless otherwise indicated.
(2) Includes 173,000 shares held by Mr. McCook as trustee for his children and
9,000 Option Shares.
(3) Includes 20,224 ESSOP Shares, 60,000 shares held in other retirement plans,
97,500 shares owned by two corporations with respect to which Mr. Hatcher
has shared voting and investment power, 4,025
3
<PAGE> 6
shares owned by or for the benefit of his wife, 11,775 shares held in a
fiduciary capacity, and 80,125 Option Shares. See also
"Proposal -- Election of Directors -- Executive Employment Agreements."
(4) The shares shown as owned beneficially by Alfa Mutual Insurance Company
("Alfa") include shares held by certain Alfa affiliates and 8,250 shares
held by C. Lee Ellis, a director of the Company who serves as Executive
Vice President, Investments, of Alfa, and 9,000 Option Shares under stock
options granted to Mr. Ellis. Mr. Ellis is deemed to beneficially own the
shares owned by Alfa by virtue of his position with Alfa.
(5) Includes 12,590 shares owned by Mr. Bradford's wife, 1,294 shares held in a
retirement plan, 52,500 shares owned by a family partnership of which Mr.
Bradford is the general partner, and 9,000 Option Shares.
(6) Includes 37,641 shares owned by a family partnership of which Mr. Carpenter
is the general partner, 62,100 shares owned by a profit-sharing plan of
which he is the beneficial owner, and 9,000 Option Shares.
(7) Includes 14,007 ESSOP shares, 675 shares held in another retirement plan,
and 24,000 Option Shares.
(8) Includes 1,729 ESSOP Shares and 27,000 Option Shares.
(9) Includes 5,236 shares owned by Mr. Kruger jointly with his wife and 9,000
Option Shares.
(10) Includes 1,447 ESSOP Shares and 24,375 Option Shares.
(11) Includes 283,664 shares owned by a corporation with respect to which Mr.
Peavy has sole voting and investment power and 1,500 Option Shares.
(12) Includes 3,000 Option Shares.
(13) Includes 19,080 ESSOP Shares, 2,250 shares held in trust for Mr. Wallace's
children, and 24,000 Option Shares.
(14) Includes 9,000 Option Shares.
(15) Includes 90,220 ESSOP Shares, 392,625 shares owned by Alfa, and 314,875
Option Shares.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of nine members, eight of
whom are non-employee directors. The other director is the Company's President
and Chief Executive Officer. The Company's Amended and Restated Articles of
Incorporation provide that the Board shall be divided into three classes, as
nearly equal in number as possible, and that the Board shall consist of not less
than six members and not more than fifteen members, with the exact number to be
fixed from time to time by the Board. The Board has fixed that number at nine.
The term of office of one of the classes of directors expires each year, and a
new class of directors is elected each year by the stockholders for a term of
three years and until their successors are elected and qualified.
The following nominees have been recommended by a nominating committee of
the Board and nominated by the Board for submission to the stockholders for
election to a three-year term expiring at the 2001 annual meeting: F. Don
Bradford, Richard W. Carpenter, and Harold W. Peavy, Jr. Mr. Bradford and Mr.
Carpenter were elected to the Board for two-year terms at the 1996 annual
meeting. Mr. Peavy was elected to the Board for a one-year term at the 1997
annual meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE
"FOR" THE PROPOSAL TO ELECT THE THREE NOMINEES NAMED ABOVE TO SERVE FOR THE
TERMS INDICATED.
Each of the nominees has consented to serve if elected. If any nominee
should be unavailable to serve for any reason, the Board may designate a
substitute nominee (in which event the persons named as proxies will vote the
shares represented by all valid proxy cards for the election of such substitute
nominee), allow the vacancy to remain open until a suitable candidate is
located, or determine to reduce the number of directors.
Information as of December 1, 1997 about each of the nominees and each
director serving an unexpired term is set forth below. Their respective
ownership of common stock is set forth in the table on pages 2 and 3.
4
<PAGE> 7
NOMINEES FOR ELECTION TO A TERM EXPIRING IN 2001:
F. Don Bradford. Mr. Bradford is the retired Chairman of the Board and
owner of Macon Janitor Service, Inc., Macon, Georgia. He has served as a
director of the Company since 1984 and as a director of the Bank since 1966. Mr.
Bradford is 70.
Richard W. Carpenter. Mr. Carpenter is President of Realmark Holdings
Corp., Atlanta, Georgia. He has served as a director of the Company and of the
Bank since 1984. Mr. Carpenter is 60.
Harold W. Peavy, Jr. Mr. Peavy is the retired founder and president of
Middle Georgia Bank in Byron, Georgia. He has served as a director of the
Company and of the Bank since November 1996. Mr. Peavy is 61.
DIRECTORS WHOSE TERMS CONTINUE UNTIL 1999:
C. Lee Ellis. Mr. Ellis is executive Vice President, Investments, of Alfa
Mutual Insurance Company, Montgomery, Alabama. Mr. Ellis has served as a
director of the Company and of the Bank since 1986. Mr. Ellis is 46.
Robert F. Hatcher. Mr. Hatcher has served as President and Chief Executive
Officer of the Company and as a director of the Company since 1990. He served as
President of the Bank's Middle Georgia Division from 1988 until 1989, when he
was elected President of the Bank. In 1990, he assumed the additional title of
Chief Executive Officer of the Bank. Previously, Mr. Hatcher was Senior Vice
President of Trust Company Bank of Middle Georgia, where he had been employed
for 27 years. Mr. Hatcher is 56.
Thomas H. McCook. Mr. McCook is Vice President of Cherokee Culvert
Company, Inc., Macon, Georgia. He has served as a director of the Company since
1984, as a director of the Bank since 1978, and as Chairman of the Boards of
Directors of both entities since 1990. Mr. McCook is 58.
DIRECTORS WHOSE TERMS CONTINUE UNTIL 2000:
Melvin I. Kruger. Mr. Kruger is President and Chief Executive Officer of
L.E. Schwartz & Son, Inc., Macon, Georgia. He has served as a director of the
Company since 1993 and as a director of the Bank since 1995. Mr. Kruger is 68.
Herbert M. Ponder, Jr. Mr. Ponder is the retired President of Bank South,
Macon, in Macon, Georgia. He has served as a director of the Company and of the
Bank since March 1996. Mr. Ponder is 62.
Jo Slade Wilbanks. Ms. Wilbanks is Central Region Manager of Georgia Power
Company, Macon, Georgia. She has served as a director of the Company since 1994
and as a director of the Bank since 1995. Ms. Wilbanks is 50.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS; DIRECTOR COMPENSATION
The Board of Directors of the Company conducts regular meetings, generally
on a monthly basis, and also conducts some of its business through meetings of
the three committees described below. Additionally, all of the directors are
members of the Bank's Board of Directors. The Board of Directors of the Company
met 14 times during the fiscal year ended September 30, 1997. All of the
directors attended at least 75% of the Board meetings.
The Audit Committee is responsible for reviewing with the Company's
independent accountants the scope and results of their audit engagement and
management letter, consulting with management with regard to the Company's
accounting methods and the adequacy of its internal controls, and overseeing and
reviewing the Company's internal auditing procedures. Mr. Bradford, Mr.
Carpenter, Mr. Kruger, and Mr. Peavy were members of this committee during the
fiscal year. The committee met 5 times during the year.
The Corporate Strategy Committee is responsible for reviewing and
evaluating the Company's strategic alternatives and its proposed acquisitions as
recommended by the Company's management. Mr. Bradford, Mr. Carpenter, Mr. Ellis,
Mr. Hatcher, Mr. Kruger, Mr. McCook, Mr. Peavy, Mr. Ponder and Ms. Wilbanks were
members of this committee during the fiscal year. The committee met 14 times
during the year.
5
<PAGE> 8
The Compensation and Benefits Committee is responsible for determining the
compensation levels of the Company's executive officers, reviewing and
evaluating the Company's various benefit programs, and reviewing and setting the
level of fees paid to directors. Mr. Ellis, Mr. McCook, Mr. Ponder and Ms.
Wilbanks were members of this committee during the fiscal year. The committee
met 5 times during the year.
In addition to these committees of the Board of Directors, certain
directors served during the year as members of the Bank's Senior Loan Committee
and its Community Reinvestment Act Committee.
Outside directors, i.e., those not employed by the Company or the Bank, are
paid the following fees: (i) Board of Directors -- Annual retainer of $6,000
paid in quarterly installments and $500 (Chairman $800) per meeting attended or
excused absence; (ii) Corporate Strategy Committee -- $250 per meeting; (iii)
other committees -- $250 (committee chairmen $350) per meeting. During the
fiscal year ended September 30, 1997, those directors received total fees of
$139,950, in the aggregate.
The First Liberty Financial Corp. 1995 Director Stock Option Plan (the
"DSOP") was adopted by the Board in November 1995 and approved by the
stockholders in January 1996. The DSOP is intended to further the growth and
development of the Company by encouraging non-employee directors of the Company
to expand their ownership interests in the Company by purchasing its Common
Stock. It is intended that the DSOP will provide such persons with an added
incentive to continue to serve as directors and will stimulate their efforts in
promoting the growth, efficiency and profitability of the Company, thereby more
closely aligning their interests with those of stockholders generally. A total
of 75,000 shares of Common Stock is authorized for issuance under the DSOP. The
DSOP is a "formula plan" which specifies when and in what amounts options are to
be granted to eligible directors. In addition to providing for initial option
grants to the directors in office at the time the DSOP was approved by the
stockholders and initial grants to new directors, the DSOP provides for annual
grants of 1,500 shares to each director if the Company's net income equals or
exceeds 10% of stockholders' equity. In fiscal year 1997, Mr. Peavy received an
initial grant of 1,500 shares at a price of $20.50 per share upon his
appointment to the Board in November 1996, and each director other than Mr.
Peavy received an annual grant of 1,500 shares at a price of $20.25 per share
based upon the Company's return on equity for fiscal year 1996. No options were
granted under the DSOP based upon the Company's return on equity for fiscal year
1997. As of September 30, 1997, options with respect to 58,500 shares of Common
Stock had been granted and were still exercisable, no options had been
exercised, and options with respect to 16,500 shares were available for grant.
See Proposal No. 3, Amendment of First Liberty Financial Corp. 1995 Director
Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth the total annual compensation paid to the
Company's chief executive officer and the Company's other four most highly
compensated executive officers who received an annual salary and bonus in excess
of $100,000 (collectively, the "Named Executive Officers") for each of the
Company's last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
----------------------- OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) (NO.)(2) ($)(3)
--------------------------- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert F. Hatcher......................... 1997 260,000 62,400 30,000 5,400
President and Chief Executive Officer 1996 247,008 98,803 37,500 6,250
of the Company and the Bank 1995 235,000 82,250 -0- 5,998
Charles G. Davis.......................... 1997 139,286 16,080 7,500 5,350
Executive Vice President 1996 132,375 25,500 15,000(5) 6,146
of the Bank 1995 126,125 24,400 -0- 5,805
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING ALL OTHER
----------------------- OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) (NO.)(2) ($)(3)
--------------------------- ---- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
J. Larry Wallace.......................... 1997 136,308 15,720 7,500 4,969
Executive Vice President 1996 129,339 24,800 15,000(5) 5,298
of the Bank 1995 122,563 23,600 -0- 5,010
George A. Molloy.......................... 1997 136,036 15,600 7,500 5,295
President and Chief Executive Officer 1996 128,750 25,000 7,500(5) 3,788
of the Mortgage Company(6) 1995 45,032 8,333 22,500(5) 1,188
Larry D. Flowers.......................... 1997 135,350 15,000 9,000 4,989
Executive Vice President 1996 115,939 20,900 18,000 5,317
of the Bank 1995 103,451 20,000 -0- 4,117
</TABLE>
- ---------------
(1) Payments under the Company's Officer Profit Sharing Plan -- See Other
Compensation and Benefit Plans.
(2) Grants of incentive stock options under the Company's 1992 Stock Incentive
Plan (the "1992 Plan") -- See Proposal No. 2, Amendment of First Liberty
Financial Corp. 1992 Stock Incentive Plan.
(3) Contributions by the Company under the ESSOP -- See Other Compensation and
Benefit Plans.
(4) The options granted to Mr. Hatcher in fiscal years 1996 and 1997 vest in
equal amounts on the date of grant and on the first, second and third
anniversaries of that date. All unvested options vest in the event of a
"change of control" of the Company.
(5) The options granted to Mr. Molloy in fiscal year 1995 vest in equal amounts
on the first, second and third anniversaries of the date of grant. The
options granted to Mr. Davis, Mr. Wallace, Mr. Molloy and Mr. Flowers in
fiscal years 1996 and 1997 vest in equal amounts on the date of grant and on
the first, second and third anniversaries of that date. All unvested options
vest in the event of a "change of control" of the Company.
(6) Mr. Molloy was employed by the Mortgage Company in May 1995.
EXECUTIVE EMPLOYMENT AGREEMENTS
Mr. Hatcher. Robert F. Hatcher was employed as President of the Bank's
Middle Georgia Region effective February 1988, and was elected President of the
Bank in October 1989. On September 28, 1990, Mr. Hatcher was elected President
and Chief Executive Officer of the Company and the Bank. Effective as of
November 1, 1990, the Company and the Bank entered into an Executive Employment
Agreement with Mr. Hatcher, which provided for (a) Mr. Hatcher's employment at
the pleasure of the Board of Directors, (b) a salary subject to annual review by
the Board, (c) the grant to Mr. Hatcher of stock options, (d) the payment to him
of one year's salary if his employment is terminated for any reason other than
cause, and (e) the payment of two years' salary in the event of a "change of
control" of the Company or the Bank unless he is offered a comparable position
with an acquiring company. Additionally, Mr. Hatcher is entitled to other
employment benefits made available to other officers of the Company generally.
The agreement has been amended in each successive year to provide for salary
increases and the grant of additional stock options as disclosed in this and
prior proxy statements. On October 29, 1997, the Board authorized an increase in
Mr. Hatcher's annual salary to $275,000 (effective as of October 1, 1997) and
granted to him options to purchase 22,000 shares of Common Stock at a price of
$23.75 per share, vesting as to 5,500 shares each on the date of grant and one,
two and three years from that date, subject to an acceleration of vesting in the
event of a "change of control" of the Company.
Mr. Davis. Charles G. Davis was employed by the Bank in 1976 and presently
serves as Executive Vice President in charge of operations. The Bank entered
into an agreement with Mr. Davis on August 1, 1990, which provides for the
payment to him of one year's salary if his employment is terminated for any
reason other than cause or in the event of a "change in control" of the Company
or the Bank.
7
<PAGE> 10
Mr. Wallace. J. Larry Wallace was employed by the Bank in 1983 and
presently serves as Executive Vice President in charge of construction lending.
The Bank entered into an agreement with Mr. Wallace on June 28, 1995, which
provides for the payment to him of six months salary if his employment is
terminated in the event of a "change in control" of the Company or the Bank
unless he is offered a comparable position with an acquiring company.
Mr. Flowers. Larry D. Flowers was employed by the Bank in 1993 and
presently serves as Executive Vice President in charge of retail banking. The
Bank entered into a pre-employment agreement with Mr. Flowers on December 14,
1992, which provides for the payment to him of six months salary if his
employment is terminated in the event of a "change of control" of the Company or
the Bank unless he is offered a comparable position with an acquiring company.
Mr. Molloy. George A. Molloy was employed as President and Chief Executive
Officer of the Mortgage Company in May 1995. The Mortgage Company entered into
an agreement with Mr. Molloy on May 23, 1995, which provides for the payment to
him of six months salary if his employment is terminated in the event of a
"change in control" of the Company or the Bank or the Mortgage Company unless he
is offered a comparable position with an acquiring company.
STOCK OPTION PLANS
1983 Plans. In 1983, the Company established two stock option plans, the
1983 Incentive Stock Option Plan (the "ISO Plan") and the 1983 Restricted Stock
Purchase Plan (the "Restricted Plan"), to attract key executive personnel and to
encourage their continued employment. The ISO Plan provided for the grant of
options intended to qualify as "incentive stock options" under the Internal
Revenue Code, while the Restricted Plan was intended to supplement the ISO Plan
as an "overflow" mechanism should any incentive stock option granted pursuant to
the ISO Plan fail for any reason to qualify as such. Both plans were
administered by the Compensation and Benefits Committee of the Company (the
"Compensation Committee"). Prior to the expiration of the plans in 1993, options
with respect to 171,000 shares of Common Stock had been granted and were still
exercisable and, as of September 30, 1997, options with respect to all of those
shares had been exercised.
1992 Plan. In 1992, the Company adopted a new stock option plan, the First
Liberty Financial Corp. 1992 Stock Incentive Plan (the "1992 Plan"), which was
approved by the Company's stockholders in 1993. The 1992 Plan was amended in
1995 to increase by 331,500 the number of shares of Common Stock available for
grant, and to extend the exercise period for newly granted options to ten years,
and that amendment was approved by the Company's stockholders in 1996. This plan
was intended to further the growth and development of the Company by encouraging
key officers of the Company or its subsidiaries to obtain a proprietary interest
in the Company by purchasing its Common Stock. The 1992 Plan provides for both
incentive stock options ("ISOs") and non-incentive options ("Non-ISOs"). The
1992 Plan is administered by the Compensation Committee.
A total of 573,000 shares of Common Stock is reserved for issuance under
the 1992 Plan, as amended. As of September 30, 1997, options with respect to
375,250 shares of Common Stock had been granted and were still exercisable, and
options with respect to 48,000 shares of Common Stock had been exercised. The
exercise price of each option is determined by the Compensation Committee,
although the exercise price for ISOs may not be less than 100% of fair market
value of the Common Stock as of the date of grant.
During the fiscal year ended September 30, 1997, options with respect to
95,500 shares of Common Stock were granted under that plan to the Named
Executive Officers and five other executive officers of the Company. Such
options vest in equal amounts on the date of grant and on the first, second, and
third anniversaries of that date, subject to an acceleration of vesting in the
event of a "change of control" of the Company. The Company did not "re-price"
any options during the year.
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<PAGE> 11
The following table lists all grants of options under the 1992 Plan to the
Named Executive Officers, for the fiscal year ended September 30, 1997, and
contains certain information about the potential realizable value of those
options.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL
SECURITIES OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Hatcher................ 30,000 31.41% 17.25 10/23/06 325,453 824,762
Charles G. Davis................. 7,500 7.85% 18.75 1/29/07 88,438 224,120
J. Larry Wallace................. 7,500 7.85% 18.75 1/29/07 88,438 224,120
George A. Molloy................. 7,500 7.85% 18.75 1/29/07 88,438 224,120
Larry D. Flowers................. 9,000 9.42% 18.75 1/29/07 106,126 268,944
</TABLE>
- ---------------
(1) Assumes a ten-year option term.
The following table summarizes the aggregate number of options exercised
during fiscal year 1997 by the Named Executive Officers and the aggregated
values of all options held by the Named Executive Officers as of September 30,
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS
ACQUIRED ON (NO.) AT FISCAL YEAR-END(1)($)
EXERCISE VALUE --------------------------- ---------------------------
NAME (NO.) REALIZED(1)($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Hatcher......... 37,500 468,750 74,625 24,375 889,418 214,688
Charles G. Davis.......... 7,500 140,625 18,375 13,125 221,224 112,631
J. Larry Wallace.......... 12,000 166,733 18,375 13,125 221,224 112,631
George A. Molloy.......... -0- -0- 32,250 15,750 469,103 135,158
Larry D. Flowers.......... -0- -0- 20,625 16,875 226,669 181,369
</TABLE>
- ---------------
(1) Such value is computed by subtracting the option exercise price from the
then current market price of the Common Stock and multiplying that result
by the applicable number of shares.
OTHER COMPENSATION AND BENEFIT PLANS
Officer Profit Sharing Plan. The Company adopted the Officer Profit
Sharing Plan (the "OPSP") in 1990. Generally, all officers of the Company and
its subsidiaries are eligible to participate in the OPSP, which is designed to
reward them for their collective effort in maximizing the Company's "core
earnings," i.e., the Company's net income from recurring operations. The OPSP
provides that if core earnings for the fiscal year in question 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. If the Company's
minimum core earnings goal for the fiscal year in question is not attained, no
payments are made under the OPSP for that year. If the minimum core earnings
goal is attained, there is a "base payment" for all participants, a portion of
which is allocated to a performance component for participants other than the
Company's executive officers. Payment of the full performance component is
dependent upon each participant's performance of certain pre-determined goals
for the year. The Company's executive officers other than Mr. Hatcher are
entitled to receive two times the applicable base payment and Mr. Hatcher is
entitled to receive between three and five times the applicable base payment, as
determined annually by the Compensation and Benefits Committee (the
"Committee"). For the fiscal year
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<PAGE> 12
ended September 30, 1997, minimum core earnings for the purpose of the OPSP was
set at $1.56 per share, which would have entitled each participant to a base
payment of 5% of salary. The minimum core earnings per share goal was exceeded
by $0.03 per share and the base payment was accordingly increased to 6% of
salary under the OPSP. The OPSP is administered by the Committee, which annually
establishes the minimum level of core earnings for the OPSP and the salary
percentages applicable thereto.
The Company recently adopted a new performance-based profit sharing plan,
the Performance Excellence Plan ("PEP"), which will be effective on January 1,
1998, and will replace the OPSP at that time. All full-time and part-time
employees (including officers) of the Company, except those who are compensated
on a commission basis, will be eligible to participate in the PEP. The PEP will
allow each participant to earn additional compensation based upon the Company's
profitability and the scoring of predetermined "scorecard" components.
Employee Savings and Stock Ownership Plan. The First Liberty Financial
Corp. Employee Savings and Stock Ownership Plan ("ESSOP") combines in one plan a
Section 401(k) cash-or-deferred plan with an employee stock ownership plan. All
employees of the Company and its subsidiaries who meet certain criteria as to
hours of service are eligible to participate in the ESSOP. An ESSOP participant
may elect to contribute on a before-tax basis up to 10% of his or her
compensation per year, subject to a maximum dollar limitation which is adjusted
for inflation from time to time. The ESSOP offers five investment alternatives,
including Common Stock, in which a participant may invest the funds allocated to
his or her account.
The Company is required to make Employer Matching Contributions of 50% of
the participants' net before-tax contributions, up to a maximum of 6% of each
participant's compensation for each plan year. Additionally, the Company may
make Employer Discretionary Contributions to the ESSOP in an amount equal to not
more than 10% of the total compensation paid to each participant during the plan
year. The Company's contributions to the ESSOP with respect to any participant
become 20% vested after three years of service and vest in increments of 20% for
each year of service thereafter, generally becoming 100% vested after seven
years of service. Effective January 1, 1997, those contributions become 100%
vested after five years of service.
Nonqualified Deferred Compensation Plan. In 1994, the Company adopted the
First Liberty Financial Corp. Executive Deferred Compensation Plan renamed the
Nonqualified Deferred Compensation Plan (the "NDCP"). The NDCP is an unfunded
plan maintained for the purpose of allowing compensation payable to a select
group of highly compensated officers and directors (including members of the
Bank's numerous community boards of directors) to be deferred, based upon an
election. The Company has limited the officer eligibility to participate in the
NDCP to those officers having the title of First Vice President or above, a
group presently comprising approximately twenty officers.
The NDCP enables its officer participants to defer up to 20% of the amount
they would otherwise receive as total compensation and have those funds invested
by an independent trustee in one or more of five investment alternatives,
including Common Stock. Director participants are permitted to have their funds
invested only in Common Stock.
Additionally, to the extent that officer participants in the NDCP do not
receive their full entitlement of Employer Matching Contributions or Employer
Discretionary Contributions under the ESSOP due to limitations imposed on their
maximum contributions by required discrimination tests, those participants are
eligible to defer such amounts under the NDCP. The Company's contributions of
such amounts to the NDCP have the same vesting as under the ESSOP.
TRANSACTIONS WITH THE COMPANY
Loans. The Bank has a policy of offering loans to its directors, officers
and employees (who in some cases also are directors, officers and employees of
the Company) for the financing and improvement of their personal residences as
well as consumer loans. If to directors and certain executive officers and if
required by applicable Banking regulations, all such loans are approved in
advance by the Bank's Board of Directors and are made on substantially the same
terms, including interest rates and collateral, as those for comparable
10
<PAGE> 13
transactions prevailing at the time with unrelated persons and do not involve
more than the normal risk of collectibility or contain other unfavorable
features.
During the fiscal year ended September 30, 1997, there were no executive
officers or directors of the Company who had loans from the Bank in excess of an
aggregate amount of $60,000 per person.
Loans as a Percentage of Stockholders' Equity. As of September 30, 1997,
the aggregate outstanding balance of the Bank's loans to executive officers and
directors of the Company and the Bank was approximately $88,000 or 0.1% of
stockholders' equity.
Other Transactions. During the fiscal year ended September 30, 1997, there
were no transactions with the Company or any of its subsidiaries in which the
amount involved exceeded $60,000 and in which any director or executive officer
of the Company, any nominee for election as a director, any principal
stockholder, or any member of the immediate family of any of them had a direct
or indirect material interest. See Proposal No. 1, Election of Directors.
REPORT ON EXECUTIVE COMPENSATION
The First Liberty Financial Corp. Compensation and Benefits Committee (the
"Committee") makes this report on executive compensation for the fiscal year
ended September 30, 1997.
One of the Committee's responsibilities is to determine the compensation of
the executive officers of First Liberty Financial Corp. and its subsidiaries
(the "Company"), including those named in the Summary Compensation Table which
appears elsewhere in this proxy statement. The components of executive
compensation are salary, incentive stock options, bonus awards under the
Company's Officer Profit Sharing Plan (the "OPSP"), and contributions by the
Company to its retirement plan, the Employee Savings and Stock Ownership Plan
(the "ESSOP") and, under certain circumstances, the Nonqualified Deferred
Compensation Plan (the "NDCP"). Since the basis for determining the ESSOP and
NDCP components of compensation was no different for executive officers than it
was for other participants in those plans during fiscal 1997, those plans will
not separately be discussed in this report.
It is the policy of the Committee to determine the salary components of
executive compensation principally upon the basis of corporate performance,
although the elements of corporate performance may vary from year to year and
among the various executive officers. Among the performance factors which the
Committee considers are corporate profitability, capital levels, and corporate
performance relative to such industry standards as problem asset levels, loan
production, regulatory compliance, and asset-liability management. The Committee
does not have a formula by which it calculates the relative weight of these
performance factors, but it gives significant subjective weight to the increase
in the overall value of the Company from year to year. The Committee also
considers how the overall level of the Company's executive compensation compares
with the executive compensation levels of similar-sized bank and thrift holding
companies in the Southeastern United States.
In order to better carry out its responsibilities, the Committee has
continued its prior practice of employing a professional compensation and
benefits consultant to conduct an annual executive compensation review for the
Company and to make recommendations to the Committee based upon that review. In
general, the consultant found that the salary component of executive
compensation within the Company was generally within competitive market limits
and that the chief executive officer's salary was within competitive limits. The
consultant also determined that the bonus component of executive compensation
was within competitive limits. All other employment benefits of the executive
officer group were found to be generally within competitive limits.
In setting the fiscal 1997 compensation of Robert F. Hatcher, the Company's
President and Chief Executive Officer, which included a salary increase of
approximately 5% and a continuation of the level of his OPSP bonus award within
a range of from 30% to 50% of salary, the Committee did not apply an objective
11
<PAGE> 14
formula but did take into account the factors listed below. It should, however,
be noted that the amount of the base OPSP bonus award is objectively determined
for all officers of the Company, including Mr. Hatcher.
1. During fiscal 1996, the Company continued to increase in value, as
reflected by an approximate 8% increase in stockholders' equity from fiscal
1995. During that same period, the market value of the Company's common
stock increased by approximately 22%.
2. The Company continued to be profitable for the seventh consecutive
year following two years of losses. Net income for fiscal 1996 increased by
approximately 33% from fiscal 1995.
3. The Company's total assets increased by approximately 17% from
fiscal 1995 to fiscal 1996.
4. The Company's non-performing assets declined by approximately 3%
during fiscal 1996.
Early in fiscal 1997, the Committee granted to all of the Company's
executive officers, including Mr. Hatcher, options to acquire an aggregate of
95,500 shares of common stock as an additional element of compensation for a job
well done in fiscal 1996. In doing so, the Committee took into consideration the
amount of other options previously granted to that group.
The Committee had no interlocks or relationships requiring disclosure under
applicable SEC rules during fiscal 1997.
FIRST LIBERTY FINANCIAL CORP.
COMPENSATION AND BENEFITS COMMITTEE:
C. Lee Ellis, Chairman
Thomas H. McCook
Herbert M. Ponder, Jr.
Jo Slade Wilbanks
PROPOSAL NO. 2
AMENDMENT OF FIRST LIBERTY FINANCIAL CORP. 1992 STOCK INCENTIVE PLAN
General. The Board adopted the First Liberty Financial Corp. 1992 Stock
Incentive Plan (the "1992 Plan") on November 24, 1992, and it was approved by
the Company's stockholders on March 4, 1993. It is intended to further the
growth and development of the Company by encouraging key officers of the Company
or its subsidiaries to expand their ownership interests in the Company by
purchasing its Common Stock. The Company believes that the plan aids in
attracting and retaining key officers and in stimulating their efforts for the
success of the Company. ISOs and Non-ISOs may be granted under the plan
(collectively, "Stock Rights"). Initially 241,500 shares of Common Stock were
authorized for issuance under the 1992 Plan. On October 26, 1995, the 1992 Plan
was amended to (i) increase by 331,500 the number of shares of Common Stock
authorized for issuance thereunder, and (ii) permit the grant of options
exercisable for up to ten years. Those amendments were approved by the Company's
stockholders on January 31, 1996. The following summary of the principal
features and effects of the plan does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the plan itself. A copy of
the 1992 Plan will be furnished to stockholders without charge upon request in
writing to Richard A. Hills, Jr., Secretary, First Liberty Financial Corp., 201
Second Street, Macon, Georgia 31297.
Proposed Amendments. On October 29, 1997, The Board adopted an amendment
to the 1992 Plan which provides that the number of shares of Common Stock
authorized for issuance under the plan will be increased by 330,000 shares, or
4.07% of pro forma shares outstanding. Of the 573,000 shares previously
authorized for issuance under the 1992 Plan, options granted with respect to
48,000 had been exercised and options granted with respect to 375,250 had not
been exercised and remained outstanding as of September 30, 1997.
Administration. The 1992 Plan is administered by the Compensation and
Benefits Committee (the "Committee"). The members of the Committee cannot
participate in the 1992 Plan and must be
12
<PAGE> 15
"disinterested persons" within the meaning of Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and must be "outside
directors" within the meaning of Section 162(m)(4)(c)(i) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Committee has full authority to (i)
determine the key officers to whom Stock Rights will be granted, as well as the
terms of the Stock Rights and the number of shares of Common Stock awarded or
offered pursuant to such Stock Rights, (ii) determine whether an option will
constitute an ISO intended to qualify under Section 422, of the Code or a
Non-ISO not intended to qualify under Code Section 422 and (iii) interpret the
provisions of, and prescribe, amend and rescind any rules and regulations
relating to the plan.
Eligibility. Pursuant to the 1992 Plan, key officers are eligible for
consideration for the granting of Stock Rights by the Committee. Presently there
are ten key officers who are eligible to participate in the plan.
Shares Available. The stock granted under the 1992 Plan is Common Stock.
As of September 30, 1997, only 149,750 shares of Common Stock, in the aggregate,
were available to be granted under the 1992 Plan, provided that the unexercised
portion of shares of Common Stock allocable to expired or terminated options may
become subject to options under the 1992 Plan. On December 15, 1997, the closing
price of the Common Stock on the Nasdaq Stock Market was $30.00 per share.
The purchase price of the Common Stock underlying each option is determined
by the Committee. However, the option price for ISOs may not be less than 100%
(110% for shares subject to an option held by an option holder who owns more
than ten percent of the total combined voting power of all classes of stock of
the Company) of the fair market value of Common Stock at the time an ISO is
granted.
Each option granted under the 1992 Plan may be exercised on such dates,
during such periods and for such number of shares as determined by the
Committee. The term of any option will be determined by the Committee, but the
term may not exceed ten years from the date of grant. Generally, no option may
be exercised for at least six months after the date of grant. An option granted
may be exercised for less than the full number of shares of Common Stock subject
to such option. Upon exercise of an option, an option holder must pay for the
Common Stock subject to the exercise. Payment may be made in cash, with Common
Stock or by a combination of cash and Common Stock.
The 1992 Plan does not permit an optionee to sell, assign or otherwise
transfer options except at death. Options are exercisable during the optionee's
life only by the optionee. An optionee's personal representative, heirs or
legatees may exercise options after the death of the optionee.
Options must be exercised within the earlier of: (i) three months after the
optionee ceases to be in the employ of the Company or one of its subsidiaries
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 in the
employ of the Company or one of its subsidiaries, (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-ISOs it grants.
Adjustments. In the event of changes in the number of outstanding shares
of Common Stock by reason of stock dividends, splits or recapitalization, an
appropriate and equitable adjustment will be made by the Committee to the number
and kind of shares subject to options and to the number and kind of shares
remaining available for issuance under the 1992 Plan. Additionally, in the event
that the Company is involved in a reorganization involving a merger,
consolidation, acquisition of the Common Stock or acquisition of the assets of
the Company, the Committee, in its discretion, may declare that (i) outstanding
options are nonforfeitable and exercisable; (ii) outstanding options apply to
the securities of the resulting corporation; and/or (iii) outstanding options
are nonforfeitable and are to be terminated after giving at least thirty days
notice to the option holders. If the Company is dissolved, all rights of all
optionees become immediately nonforfeitable and exercisable.
Termination and Amendment. The 1992 Plan became effective November 24,
1992, and will terminate on the later of (i) the complete exercise or lapse of
the last outstanding option, or (ii) on the last date upon
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<PAGE> 16
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 of the Company at any time. The Board of
Directors of the Company may amend the 1992 Plan at any time, provided that (i)
no amendment may be effected without the approval of the option holders if such
amendment would affect, in any way, the rights of such option holders under the
1992 Plan, and (ii) no amendment may be effected without the approval of the
stockholders of the Company if the amendment would cause the applicable portions
of the 1992 Plan to fail to qualify as an "incentive stock option plan" pursuant
to Code Section 422, or such shareholder approval is required under Code Section
422, Section 16 of the 1934 Act, Code Section 162(m), the rules of Nasdaq, or
any other applicable law or regulation.
Federal Income Tax Consequences. The Company intends that part of the plan
qualify as an incentive stock option plan, and that any option granted in
accordance with such portion of the 1992 Plan qualify as an ISO, all within the
meaning of Code Section 422. The tax effects of any other stock option granted
under the plan should be determined under Section 83 of the Code. The following
is a brief description of the consequences under the Code of the receipt of
Stock Rights under the plan.
An option holder has no tax consequences upon issuance or, generally, upon
exercise of an ISO. An option holder will recognize income when he sells or
exchanges the shares acquired upon exercise of an ISO. This income will be taxed
at the applicable capital gains rate if the sale or exchange occurs after the
expiration of the requisite holding periods. Generally, the requisite holding
periods expire two years after the date of grant of the ISO and one year after
the date of acquisition of the Common Stock pursuant to the exercise of the ISO.
If an option holder disposes of the Common Stock acquired pursuant to
exercise of an ISO before the expiration of the requisite holding periods, the
option holder will recognize compensation income in an amount equal to the
difference between the option price and the lesser of (i) the fair market value
of the shares on the date of exercise and (ii) the price at which the shares are
sold. This amount will be taxed at ordinary income rates. If the sale price of
the shares is greater than their fair market value on the date of exercise, the
difference will be recognized as gain by the option holder and taxed at the
applicable capital gains rate. If the sale price of the shares is less than the
option price, the option holder will recognize a capital loss equal to the
excess of the option price over the sales price.
For these purposes, the use of shares acquired upon exercise of an ISO to
pay the option price of another option (whether or not it is an ISO) will be
considered a disposition of the shares. If this disposition occurs before the
expiration of the requisite holding periods, the option holder will have the
same tax consequences as are described above in the preceding paragraph. If the
option holder transfers any such shares after holding them for the requisite
holding periods or transfer shares acquired pursuant to exercise of a Non-ISO or
on the open market, he generally will not recognize any income upon the
exercise. Whether or not the transferred shares were acquired pursuant to an ISO
and regardless of how long the option holder has held such shares, the basis of
the new shares received pursuant to the exercise will be computed in two steps.
In the first step, a number of new shares equal to the number of older shares
tendered (in payment of the option's exercise) is considered exchanged under
Section 1036 of the Code and the rulings thereunder; these new shares receive
the same holding period and the same basis the option holder had in the old
tendered shares, if any, plus the amount included in income from the deemed sale
of the old shares and the amount of cash or other nonstock consideration paid
for the new shares, if any. In the second step, the number of new shares
received by the option holder in excess of the old tendered shares receives a
basis of zero, and the option holder's holding period with respect to such
shares commences upon exercise.
An option holder may have tax consequences upon exercise of an ISO if the
aggregate fair market value of shares of the Common Stock subject to ISOs which
first become exercisable by an option holder if any one calendar year exceeds
$100,000. If this occurs, the excess shares will be treated as though they are
subject to Non-ISO instead of an ISO. Upon exercise of an option with respect to
these shares, the option holder will have the tax consequences described below
with respect to the exercise of Non-ISOs.
Finally, except to the extent that an option holder has recognized income
with respect to the exercise of an ISO (as described in the preceding
paragraphs), the amount by which the fair market value of a share of
14
<PAGE> 17
the Common Stock at the time of exercise of the ISO exceeds the option price
will be included in determining an option holder's alternative minimum taxable
income and may cause the option holder to incur an alternative minimum tax
liability in the year of exercise.
There will be no tax consequences to the Company upon issuance or,
generally, upon exercise of an ISO. However, to the extent that an option holder
recognizes ordinary income upon exercise, as described above, the Company will
have a deduction in the same amount.
Neither the Company nor the option holder has income tax consequences from
the issuance of Non-ISOs. Generally, in the tax year when an option holder
exercises Non-ISOs, the option holder recognizes ordinary income in the amount
by which the fair market value of the shares at the time of exercise exceeds the
option price for such shares. The Company will have a deduction in the same
amount as the ordinary income recognized by the option holder in the Company's
tax year in which or with which the option holder's tax year (of exercise) ends.
If an option holder exercises a Non-ISO by paying the option price with
previously acquired Common Stock, the option holder will recognize income
(relative to the new shares he is receiving) in two steps. In the first step, a
number of new shares equivalent to the number of older shares tendered (in
payment of the Non-ISO exercised) is considered to have been exchanged in
accordance with Section 1036 of the Code and the rulings thereunder, and no gain
or loss is recognized. In the second step, with respect to the number of new
shares acquired in excess of the number of old shares tendered, the option
holder will recognize income on those new shares equal to their fair market
value less any nonstock consideration tendered.
The new shares equal to the number of the older shares tendered will
receive the same basis the option holder had in the older shares and the option
holder's holding period with respect to the tendered older shares will apply to
those new shares. The excess new shares received will have a basis equal to the
amount of income recognized by the option holder by exercise, increased by any
nonstock consideration tendered. Their holding period will commence upon the
exercise of the option.
No federal income tax deduction is allowed for compensation paid to a
"covered employee" in any taxable year of the Company beginning on or after
January 1, 1994, to the extent that such compensation exceeds $1,000,000. For
this purpose, "covered employees" are generally the chief executive officer of
the Company and the four highest compensated officers of the Company whose
annual salary and bonus exceed $100,000.00, and the term "compensation"
generally includes amounts includable in gross income as a result of the
exercise of stock options. This deduction limitation does not apply to
compensation that is (1) commission-based compensation, (2) performance-based
compensation, (3) compensation which would not be includable in an employee's
gross income, and (4) compensation payable under a written binding contract in
existence on February 17, 1993, and not materially modified thereafter.
The Plan is not, and is not intended to be, an employee benefit plan or
qualified retirement plan. Therefore, the Plan is not subject to the Employee
Retirement Income Security Act of 1994, as amended, or Section 401(a) of the
Code.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE PROPOSAL TO AMEND THE FIRST LIBERTY FINANCIAL CORP. 1992 STOCK INCENTIVE
PLAN.
PROPOSAL NO. 3
AMENDMENT OF FIRST LIBERTY FINANCIAL CORP.
1995 DIRECTOR STOCK OPTION PLAN
General. On November 21, 1995, the Board of Directors of the Company
adopted the First Liberty Financial Corp. 1995 Director Stock Option Plan (the
"DSOP") and it was approved by the Company's stockholders on January 31, 1996.
The DSOP is intended to further the growth and development of the Company by
encouraging directors of the Company who are not employees of the Company to
expand their ownership interests in the Company by purchasing its Common Stock.
The Company believes that the DSOP provides such persons with an added incentive
to continue to serve as directors and stimulates their efforts in
15
<PAGE> 18
promoting the growth, efficiency and profitability of the Company, thereby more
closely aligning their interests with those of stockholders generally. Initially
75,000 shares of Common Stock were authorized for issuance under the DSOP, of
which 17,000 shares remain available for grant under the plan.
The following summary of the principal features and effects of the plan
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the plan itself. A copy of the 1992 Plan will be
furnished to stockholders without charge upon request in writing to Richard A.
Hills, Jr., Secretary, First Liberty Financial Corp., 201 Second Street, Macon,
Georgia 31297.
Proposed Amendment. On October 29, 1997, the Board adopted an amendment to
the DSOP which provides that the number of shares of Common Stock authorized for
issuance under the plan will be increased by 45,000, or 0.6% of pro forma shares
outstanding. Of the 75,000 shares previously authorized for issuance under the
DSOP, options with respect to 58,000 shares had been granted as of September 30,
1997, and none had been exercised.
Type of Awards. Only nonqualified stock options may be granted under the
DSOP ("DSOP Options").
Administration. The DSOP is administered by a committee consisting of two
or more individuals appointed by the Board of Directors of the Company from
among its members and is made up of the members of the Compensation and Benefits
Committee of the Board of Directors (the "DSOP Committee"). The Board from time
to time may remove members from, or add members to, the DSOP Committee, and
vacancies will be filled by the Board.
The DSOP committee has authority (to the extent that such authority does
not disqualify the DSOP from being "formula plan" within the meaning of Rule
16b-3 of the 1934 Act) (i) to determine the terms and provisions of the
agreements by which DSOP Options shall be evidenced, (ii) to interpret the
provisions of, and prescribe, amend and rescind any rules and regulations
relating to, the DSOP, and (iii) to make all determinations necessary or
advisable for the administration of the DSOP.
Eligibility for and Grants of DSOP Options. Under the terms of the DSOP,
directors of the Company who are not employees of the Company and who are not
and never have been officers of the Company or any of its subsidiaries are
eligible to receive DSOP Options ("Eligible Director"). On the effective date of
the DSOP, each Eligible Director was granted a DSOP Option to purchase 7,500
shares of Common Stock (collectively, the "Initial Grants"). Each Eligible
Director who becomes eligible after the Effective Date and who has not
previously served as a director of the Company shall be granted a DSOP Option to
purchase 1,500 shares of Common Stock as of the date he or she becomes a
director.
Thereafter, each Eligible Director shall receive, on an annual basis, an
additional grant of DSOP Options for the purchase of 1,500 shares of Common
Stock if the Company's net income equals or exceeds 10% of stockholders' equity
for the preceding fiscal year.
Shares Available. The stock underlying the DSOP Options is the Common
Stock of the Company. Prior to the proposed amendment, up to 75,000 shares of
Common Stock, in the aggregate, may be granted under the DSOP. Shares of Common
Stock allocable to the unexercised portion of expired or terminated DSOP Options
may again become subject to DSOP Options.
Option Price. The purchase price of the Common Stock underlying each DSOP
Stock Option will be the fair market value of Common Stock on the date the
option is granted, which was January 31, 1996, the date of stockholder approval
of the DSOP, in the case of the Initial Grants.
Vesting. Each DSOP Stock Option shall be fully vested as of the date it is
granted.
Term and Exercise of Options. Each DSOP Stock Option may be exercised on
such dates, during such periods and for such number of shares as determined by
the DSOP Committee and as specified in each option agreement. The terms of any
DSOP Stock Option will be determined by the DSOP Committee, but the term may not
exceed ten years from the date of grant. No DSOP Stock Option may be granted
after ten years from the Effective Date. A DSOP Stock Option may be exercised
for less than the full number of shares of Common Stock subject to such option,
provided that no option may be exercised for less than (i) 1,000 shares
16
<PAGE> 19
or (ii) the total remaining shares subject to the option, if less than 1,000
shares. Upon exercise of a DSOP Stock Option, an option holder must pay for the
Common Stock subject to the exercise. Payment may be made in cash, in Common
Stock, or a combination of the two.
Transfer. The DSOP does not permit an optionee to sell, assign or
otherwise transfer options except at death. Options are exercisable during the
optionee's life only by the optionee. An optionee's personal representative,
heirs or legatees may exercise options after the death of the optionee.
Termination of Service as Director. DSOP Options generally must be
exercised within the earlier of (i) 12 months after the optionee ceases to be in
the service of the Company as a director for any reason other than death or
disability; (ii) the expiration date of the DSOP Option; (iii) immediately upon
the removal of the optionee as a director of the Company for cause; (iv) one
year after termination of service with the Company as a director 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 in the service of the Company
as a director, (b) within 12 months after termination of service with the
Company as a director (for any reason other than cause; or (c) within one year
after service as a director with the Company is terminated due to disability.
However, the DSOP Committee may provide different exercise expiration periods
with respect to DSOP Options.
Amendment and Termination. The Board may amend or terminate the DSOP at
any time, provided that (i) no amendment may be effected without the approval of
the option holders if such amendment would affect, in any way, the rights of
such option holders under the DSOP, and (ii) no amendment may be effected
without the approval of the stockholders of the Company if (1) the amendment
would materially increase the benefits accruing to participants under the DSOP,
(2) the amendment would materially increase the number of shares which may be
issued under the DSOP, or (3) the amendment would materially modify the
requirements as to eligibility for participation in the DSOP. Additionally, no
amendment may be made to the DSOP more than once every six months, other than to
comport with changes in the Code, ERISA, or the rules and regulations
promulgated thereunder.
The DSOP will terminate on the later of (a) the complete exercise or lapse
of the last outstanding DSOP Stock Option granted under the DSOP, or (b) the
last date upon which options may be granted under the DSOP (which may not be
later than five years after the date on which the DSOP is approved by
stockholders of the Company), subject to its earlier termination by the Board at
any time.
Adjustments. In the event of changes in the number of outstanding shares
of Common Stock by reason of stock dividends, splits or recapitalization, an
appropriate and equitable adjustment will be made by the DSOP Committee to the
number and kind of shares subject to DSOP Options and to the number and kind of
shares remaining available for issuance pursuant to DSOP Options. Additionally,
in the event that the Company is involved in a reorganization involving a
merger, consolidation, transfer of Common Stock or transfer of the assets of the
Company, the DSOP Committee may, in its discretion, declare that (i) outstanding
options are nonforfeitable and exercisable; (ii) outstanding options apply to
the securities of the resulting corporation; and/or (ii) outstanding options are
nonforfeitable and are to be terminated after giving at least 30 days notice to
the option holder. If the Company is dissolved, all of the rights of all
optionees will become immediately nonforfeitable and exercisable through the
date of dissolution.
Federal Income Tax Consequences. The Company intends that the tax effects
of any stock option granted under the DSOP should be determined under Section 83
of the Code. The following is a brief description of the consequences under the
Code of the receipt or exercise of DSOP Options.
Because DSOP Options are non-qualified stock options, neither the Company
nor the option holder has income tax consequences from the issuance of DSOP
Options. Generally, in the tax year when an option holder exercises DSOP
Options, the option holder recognizes ordinary income in the amount by which the
fair market value of the shares at the time of exercise exceeds the option price
of such shares. The Company will have a deduction in the same amount as the
ordinary income recognized by the option holder in the Company's tax year in
which or with which the option holder's tax year (of exercise) ends.
If an option holder exercises a DSOP Option by paying the option price with
previously acquired Common Stock, the option holder will recognize income
(relative to the new shares he is receiving) in two
17
<PAGE> 20
steps. In the first step, a number of new shares equivalent to the number of
older shares tendered (in payment of the DSOP exercised) is considered to have
been exchanged in accordance with Section 1036 of the Code and the rulings
thereunder, and no gain or loss is recognized. In the second step, with respect
to the number of new shares acquired in excess of the number of old shares
tendered, the option holder will recognize income on those new shares equal to
their fair market value less any non-stock consideration tendered.
The new shares equal to the number of the older shares tendered will
receive the same basis the option holder had in the older shares, and the option
holder's holding period with respect to the tendered older shares will apply to
those new shares. The excess new shares received will have a basis equal to the
amount of income recognized by the option holder by exercise, increased by any
nonstock consideration tendered. Their holding period will commence upon the
exercise of the option.
ERISA. The DSOP is not, and is not intended to be, an employee benefit
plan or qualified retirement plan. The DSOP is not, therefore, subject to the
Employee Retirement Income Security Act of 1974, as amended, or Section 401(a)
of the Code.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE PROPOSAL TO AMEND THE FIRST LIBERTY FINANCIAL CORP. 1995 DIRECTOR STOCK
OPTION PLAN.
18
<PAGE> 21
PERFORMANCE GRAPH
The following graph shows the comparison of five-year cumulative total
return among (i) the Company's Common Stock, (ii) the Standard & Poor's 500
Stock Index, and (iii) the NASDAQ Bank Index.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG FIRST LIBERTY FINANCIAL CORP., THE S&P 500 INDEX
AND THE NASDAQ BANK INDEX
<TABLE>
<CAPTION>
MEASUREMENT PERIOD FIRST LIBERTY
(FISCAL YEAR COVERED) FINL CORP S & P 500 NASDAQ BANK
<S> <C> <C> <C>
9/92 100 100 100
9/93 183 113 135
9/94 161 117 142
9/95 246 152 179
9/96 307 183 228
9/97 470 257 381
</TABLE>
- ---------------
* $100 INVESTED ON 09/30/92 IN STOCK OR INDEX --
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING SEPTEMBER 30.
COMPLIANCE WITH SECTION 16(A) OF THE 1934 ACT
Section 16(a) of the 1934 Act and regulations of the SEC require the
Company's executive officers and directors and persons who beneficially own more
than ten percent of any class of equity securities of the Company, as well as
certain affiliates of such persons, to file initial reports of ownership of any
equity securities of the Company and subsequent reports of changes in ownership
of such securities with the SEC and the National Association of Securities
Dealers, Inc. Such persons also are required by SEC regulations to furnish the
Company with copies of all Section 16(a) reports they file. Based solely on its
review of the copies of such reports received by it and written representations
from such reporting persons that no other reports were required for those
persons, the Company believes that, during the fiscal year ended September 30,
1997, all filing requirements applicable to its directors and executive officers
were complied with in a timely manner.
SPECIAL NOTE CONCERNING INDEPENDENT ACCOUNTANTS
The firm of Coopers & Lybrand L.L.P. has served as independent accountants
of the Company or the Bank each year since 1977 and is considered by management
of the Company to be well qualified. The Board
19
<PAGE> 22
of Directors has selected Coopers & Lybrand L.L.P. to serve as the Company's
independent accountants for the fiscal year ending September 30, 1998.
Representatives of Coopers & Lybrand L.L.P. will be present at the Annual
Meeting. They will have an opportunity to make a statement if they desire to do
so and will be available to respond to appropriate questions from stockholders.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Stockholder proposals intended to be presented at the 1998 Annual Meeting
of Stockholders of the Company must be received by the Company at its
headquarters at 201 Second Street, Macon, Georgia 31297, addressed to the
attention of the Secretary, on or before August 22, 1998 to be eligible for
inclusion in the Company's proxy statement and form of proxy relating to that
meeting.
OTHER MATTERS WHICH MAY COME BEFORE THE ANNUAL MEETING
The Board of Directors of the Company knows of no matters other than those
referred to in the accompanying Notice of Annual Meeting of Stockholders which
may properly come before the Annual Meeting. However, if any other matter should
be properly presented for consideration and voting at the Annual Meeting or any
adjournments thereof, it is the intention of the persons named as proxies on the
enclosed form of proxy card to vote the shares represented by all valid proxy
cards in accordance with their judgment of what is in the best interest of the
Company.
ANNUAL REPORTS
A copy of the Summary Annual Report to Stockholders is being mailed to each
stockholder of record together with these proxy materials. The audited financial
statements of the Company for the year ended September 30, 1997, together with
Management's Discussion and Analysis of Financial Conditions and Results of
Operations, are included in Appendix A to this Proxy Statement. The Company has
filed with the Securities and Exchange Commission its Annual Report on Form 10-K
for the fiscal year ended September 30, 1997. This Annual Report on Form 10-K
contains detailed information concerning the Company and its operations which is
not included in the Summary Annual Report to Stockholders, or in Appendix A to
this Proxy Statement. A COPY OF THIS REPORT WILL BE FURNISHED TO STOCKHOLDERS
WITHOUT CHARGE UPON REQUEST IN WRITING TO: Richard A. Hills, Jr., Secretary,
First Liberty Financial Corp., 201 Second Street, Macon, Georgia 31297. THE
ANNUAL REPORT ON FORM 10-K, THE SUMMARY ANNUAL REPORT AND APPENDIX A ARE NOT A
PART OF THE COMPANY'S SOLICITING MATERIAL.
20
<PAGE> 23
APPENDIX A
---------------------
FIRST LIBERTY FINANCIAL CORP.
FINANCIAL INFORMATION
---------------------
THE ANNUAL REPORT ON FORM 10-K, THE SUMMARY ANNUAL REPORT AND THIS APPENDIX A
ARE NOT A PART OF FIRST LIBERTY FINANCIAL CORP.'S SOLICITING MATERIAL.
<PAGE> 24
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 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.
A-1
<PAGE> 25
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 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.
A-2
<PAGE> 26
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.
A-3
<PAGE> 27
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.
A-4
<PAGE> 28
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.
A-5
<PAGE> 29
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.
A-6
<PAGE> 30
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
A-7
<PAGE> 31
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>
A-8
<PAGE> 32
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.
A-9
<PAGE> 33
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.
A-10
<PAGE> 34
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.
A-11
<PAGE> 35
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.
A-12
<PAGE> 36
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.
A-13
<PAGE> 37
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>
A-14
<PAGE> 38
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")
A-15
<PAGE> 39
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.
A-16
<PAGE> 40
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.
A-17
<PAGE> 41
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.
A-18
<PAGE> 42
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.
A-19
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... A-21
Consolidated Statements of Financial Condition as of
September 30, 1997 and 1996............................... A-22
Consolidated Statements of Income for each of the three
years in the period ended September 30, 1997.............. A-23
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1997.... A-25
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1997.............. A-26
Notes to Consolidated Financial Statements.................. A-29
</TABLE>
A-20
<PAGE> 44
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
A-21
<PAGE> 45
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.
A-22
<PAGE> 46
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.
A-23
<PAGE> 47
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.
A-24
<PAGE> 48
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.
A-25
<PAGE> 49
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.
A-26
<PAGE> 50
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.
A-27
<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>
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.
A-28
<PAGE> 52
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.
A-29
<PAGE> 53
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
A-30
<PAGE> 54
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.
A-31
<PAGE> 55
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;
A-32
<PAGE> 56
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.
A-33
<PAGE> 57
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.
A-34
<PAGE> 58
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.
A-35
<PAGE> 59
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.
A-36
<PAGE> 60
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.
A-37
<PAGE> 61
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.
A-38
<PAGE> 62
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.
A-39
<PAGE> 63
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>
A-40
<PAGE> 64
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.
A-41
<PAGE> 65
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>
A-42
<PAGE> 66
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
A-43
<PAGE> 67
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.
A-44
<PAGE> 68
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>
A-45
<PAGE> 69
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
A-46
<PAGE> 70
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.
A-47
<PAGE> 71
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
A-48
<PAGE> 72
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.
A-49
<PAGE> 73
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>
A-50
<PAGE> 74
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................................. 8.5years 7.4years
</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
A-51
<PAGE> 75
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.
A-52
<PAGE> 76
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.
A-53
<PAGE> 77
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.
A-54
<PAGE> 78
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.
A-55
<PAGE> 79
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>
A-56
<PAGE> 80
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.
A-57
<PAGE> 81
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.
A-58
<PAGE> 82
FIRST LIBERTY FINANCIAL CORP (LOGO)
<PAGE> 83
APPENDIX B
REVOCABLE PROXY
FIRST LIBERTY FINANCIAL CORP.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE 1998 ANNUAL MEETING OF
STOCKHOLDERS
The undersigned hereby acknowledges receipt of the enclosed Notice of Annual
Meeting (the "Notice") and Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "Annual Meeting") of First Liberty Financial Corp. (the
"Company"), and hereby appoints THOMAS H. McCOOK, ROBERT F. HATCHER, and RICHARD
A. HILLS, JR., and each of them, proxies with full powers of substitution, to
act for and in the name of the undersigned to vote all shares of Common Stock of
the Company which the undersigned is entitled to vote on all matters which may
come before the Annual Meeting, to be held in the Ballroom of the Crowne Plaza
Hotel, 108 First Street, Macon, Georgia, on the date and at the time specified
in the Notice, and at any and all adjournments thereof, as indicated below.
1. ELECTION OF DIRECTORS. Elect as directors the three nominees listed below to
serve until the 2001 Annual Meeting of Stockholders and until their
successors are elected and qualified (except as marked to the contrary
below):
<TABLE>
<C> <S> <C>
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for
(except as marked to the contrary below) all nominees listed below
</TABLE>
(INSTRUCTION: TO WITHHOLD YOUR VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE
THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
F. Don Bradford, Richard W. Carpenter, and Harold W. Peavy, Jr.
2. AMENDMENT OF STOCK INCENTIVE PLAN. Amend the First Liberty Financial Corp.
1992 Stock Incentive Plan to increase by 330,000 the number of shares of
Common Stock authorized for issuance under the plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. AMENDMENT OF DIRECTOR STOCK OPTION PLAN. Amend the First Liberty Financial
Corp. 1995 Director Stock Option Plan to increase by 45,000 the number of
shares of Common Stock authorized for issuance under the plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4.In their discretion, the proxies are authorized to vote upon such other
business as properly may come before the Annual Meeting and any adjournments
thereof.
(Continued and to be signed on other side)
(Continued from other side)
THIS PROXY CARD WILL BE VOTED AS DIRECTED. IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY CARD WILL BE VOTED IN THE DISCRETION OF THE PROXIES "FOR" THE
PROPOSAL LISTED ON THE REVERSE SIDE OF THIS PROXY CARD. IF ANY OTHER BUSINESS IS
PRESENTED AT THE ANNUAL MEETING, THIS PROXY CARD WILL BE VOTED BY THE PROXIES IN
THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED TO A VOTE OF THE STOCKHOLDERS AT THE ANNUAL
MEETING.
If the undersigned is present and elects to withdraw this proxy card and vote
in person at the Annual Meeting or any adjournments thereof and notifies the
Secretary of the Company at the Annual Meeting of the decision of the
undersigned to withdraw this proxy card, then the power of said proxies shall be
deemed terminated and of no further force and effect.
Please mark, date and sign exactly as
your name appears on this proxy card.
When shares are held jointly, both
holders should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give your
full title. If the holder is a
corporation or partnership, the full
corporate or partnership name should
be signed by a duly authorized
officer.
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SIGNATURE
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SIGNATURE, IF SHARES HELD JOINTLY
DATE:
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