<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number _______________________________________
FIRST LIBERTY FINANCIAL CORP.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1680650
--------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
201 Second Street, Macon, Georgia 31201
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(912) 743-0911
--------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Exhibit index appears on page 22.
THERE WERE 13,368,840 SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 19, 1998.
<PAGE> 2
FIRST LIBERTY FINANCIAL CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
Table of Contents
PART I - FINANCIAL INFORMATION
- ------------------------------
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II - OTHER INFORMATION
- ----------------------------
Index of Exhibits 22
</TABLE>
<PAGE> 3
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30 September 30
--------- ------------
1998 1997
- -------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Assets:
- --------
Cash and due from banks $ 70,257 $ 39,323
Federal funds sold 1,915 26,187
Securities available-for-sale 311,275 280,146
Loans available-for-sale, net 67,136 29,560
Loans, net 943,753 967,237
Accrued interest receivable 10,125 10,173
Premises and equipment, net 27,918 27,922
Real estate, net 2,170 2,854
Intangible assets 9,899 10,794
Mortgage servicing rights 11,651 6,571
Advances to attorneys for loans originated 37,785 8,106
Other assets 17,892 9,222
---------- ----------
Total assets $1,511,776 $1,418,095
========== ==========
Liabilities and Stockholders' Equity:
- ------------------------------------
Deposits $1,078,210 $1,068,487
Notes payable and other borrowed money 229,675 197,399
Securities sold under agreements to repurchase 60,803 26,099
Checks payable on loans originated 3,351 1,709
Other liabilities 22,421 14,564
---------- ----------
Total liabilities 1,394,460 1,308,258
---------- ----------
Commitments and contingencies -- --
Stockholders' equity:
Common stock ($1.00 par value, 25,000,000
shares authorized, 13,391,180 and 13,471,618
shares issued, respectively, and 13,368,840
and 13,335,959 shares outstanding,
respectively) 13,391 13,472
Additional paid-in capital 38,483 38,435
Retained earnings 64,825 58,161
Net unrealized gain on securities available-
for-sale, net of taxes 886 1,246
Unearned compensation - restricted stock -- (47)
Treasury stock at cost (22,340 and 136,659
shares, respectively) (269) (1,430)
---------- ----------
Total stockholders' equity 117,316 109,837
---------- ----------
Total liabilities and stockholders' equity $1,511,776 $1,418,095
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
(Unaudited) Three Months Ended Nine Months Ended
- ------------ ------------------ ------------------
June 30 June 30
1998 1997 1998 1997
- -----------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest Income:
- -----------------
Loans $23,345 $22,524 $69,718 $65,270
Securities 5,269 4,762 14,942 13,903
Federal funds sold and
repurchase agreements 78 302 442 869
------- ------- ------- -------
Total interest income 28,692 27,588 85,102 80,042
------- ------- ------- -------
Interest Expense:
- -----------------
Deposits 11,669 11,152 35,075 31,659
Short-term borrowings 3,001 1,613 8,012 5,601
Long-term borrowings 521 1,999 2,019 5,102
------- ------- ------- -------
Total interest expense 15,191 14,764 45,106 42,362
------- ------- ------- -------
Net interest income 13,501 12,824 39,996 37,680
Provision for estimated
losses on loans 1,197 2,370 4,433 4,343
------- ------- ------- -------
Net interest income after
provision for estimated losses
on loans 12,304 10,454 35,563 33,337
------- ------- ------- -------
Non-interest Income:
- --------------------
Loan servicing fees 906 530 2,102 1,653
Gain on sale of investment securities 184 (2) 261 117
Gain on sale of loans and
mortgage-backed securities 1,706 617 3,119 1,792
Gain on sale of servicing - - 797 722
Deposit account service charges 1,829 1,737 5,378 5,088
Other income 981 701 2,914 1,773
------- ------- ------- -------
Total non-interest income 5,606 3,583 14,571 11,145
------- ------- ------- -------
17,910 14,037 50,134 44,482
------- ------- ------- -------
<CAPTION>
Non-interest Expense:
- --------------------
<S> <C> <C> <C> <C>
Compensation, taxes and benefits 6,566 5,347 17,508 15,745
Occupancy and equipment 1,267 1,066 3,539 3,103
Advertising 323 426 923 1,114
Professional fees 972 233 1,561 1,141
Data processing 1,880 329 2,781 984
Federal deposit insurance premiums 174 155 506 609
Amortization of intangible assets 309 308 926 925
Net cost of operation of
other real estate (27) 103 17 193
Other expenses 1,747 1,651 4,784 4,746
------- ------- ------- -------
Total non-interest expense 13,211 9,618 32,545 28,560
------- ------- ------- -------
Income before income tax expense 4,699 4,419 17,589 15,922
Income tax expense 2,054 513 6,802 4,993
------- ------- ------- -------
Net income 2,645 3,906 10,787 10,929
Dividends on preferred stock -- -- -- 113
------- ------- ------- -------
Net income applicable to common
stockholders $ 2,645 $ 3,906 $10,787 $10,816
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Income
<TABLE>
(Unaudited) Three Months Ended Nine Months Ended
- ---------- ------------------ ----------------
June 30 June 30
-------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings Per Common Share:
- -------------------------
Basic $ .20 $ .29 $ .81 $ .83
Diluted $ .19 $ .29 $ .79 $ .79
Dividends Per Common Share: $ .07 $ .06 $ .21 $ .19
- --------------------------
Average Number of Shares Outstanding:
- ------------------------------------
Basic 13,365,342 13,326,436 13,356,607 12,883,267
Diluted 13,669,707 13,495,494 13,657,796 13,463,851
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
June 30,
--------------------------
1998 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Operating Activities:
- ----------------------
Cash flows from operating activities:
Net income $ 10,787 $ 10,929
Adjustments to reconcile net income
to cash provided by(used in) operations:
Depreciation 1,753 1,614
Deferred Income tax benefit(expense) (244) (328)
Amortization of loan fees, net 341 69
Provision for estimated losses
on loans and real estate 4,626 4,473
Amortization of intangibles 926 926
Dividends received on stock (23) (233)
Gain on sale of loans and securities (3,380) (1,909)
Loss on the sale of other real estate -- 14
Loans available-for-sale:
Disbursements (100,760) (71,175)
Purchases (407,374) (124,552)
Sales 474,238 205,647
Repayments 532 123
Increase in accrued interest receivable 1,300 (320)
Increase(decrease) in accrued interest payable 156 669
Other, net (7,801) (4,666)
--------- ---------
Total adjustments (35,710) 21,937
--------- ---------
Net cash provided by(used in)
operating activities (24,923) 21,281
--------- ---------
Investing Activities:
- --------------------
Cash flows from investing activities:
Net decrease in federal funds
sold and repurchase agreements 24,272 16,007
Investment securities available-for-sale:
Purchases (53,503) (48,942)
Sales 11,622 8,805
Maturities 66,819 31,009
Investment securities held-to-maturity:
Purchases (500) (1,588)
Sales -- --
Maturities 1,076 1,953
Mortgage-backed securities available-for-sale:
Purchases (132,874) (51,028)
Sales -- 1,686
Repayments 92,011 39,424
Net decrease(increase)in loans 31,547 (78,931)
Purchases of premises and equipment (1,174) (3,699)
Purchases of assets held for sale (2) (73)
Proceeds from sales of real estate 2,177 622
Cash surrender value of life insurance 13 --
Net increase in advances to attorneys
for loans originated (29,679) (7,550)
--------- ---------
Net cash used in investing activities 11,805 (124,319)
--------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows, continued
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------
June 30
---------------------
1998 1997
- -----------------------------------------------------------------------------
(dollars in thousands)
Financing Activities:
- ----------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 19,007 94,653
Notes payable and other borrowed money:
Proceeds 188,344 233,179
Repayments (198,357) (233,236)
Net increase in securities sold
under agreements to repurchase and fed
funds sold 36,059 19,339
Net increase (decrease) in checks payable
on loans originated 1,642 (2,488)
Issuance of common stock 81 494
Redemption of preferred stock -- (38)
Redemption of convertible subordinated debentures -- (32)
Sale(purchase) of treasury stock -- (1,073)
Dividends paid on stock (2,724) (2,486)
--------- ---------
Net cash provided by financing activities 44,052 108,312
--------- ---------
Net increase in cash and due from banks 30,934 5,274
Cash due from banks, beginning of period 39,323 130,848
--------- ---------
Cash due from banks, end of period $ 70,257 $ 136,122
========= =========
Supplemental Disclosures of
- ---------------------------
Cash Flow Information:
----------------------
Cash paid during the year for:
Interest $ 42,253 $ 40,731
Income taxes 7,242 4,826
Noncash investing and financing activities:
Real estate foreclosed $ 3,128 $ 1,413
Financing of sales of foreclosed real estate 1,645 558
Dividends declared, unpaid on common stock 872 772
Mortgage loans securitized into mortgage-
backed securities 13,427 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 8
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accounting and reporting policies of First Liberty Financial Corp. and
Subsidiaries ("First Liberty" or "the Company") conform to generally accepted
accounting principles and to general practices within the savings and loan
industry. The interim consolidated financial statements included herein are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows for the interim periods presented. All
adjustments reflected in the interim financial statements are of a normal
recurring nature. Such financial statements should be read in conjunction with
the financial statements and notes thereto and the report of independent
accountants included in the Company's Form 10-K Annual Report for the fiscal
year ended September 30, 1997. The year end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results of operations for the
three and nine months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
All references to numbers 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 which was effective April 27, 1998.
On June 19, 1998, the Company consummated the merger with Southland Banking
Corporation of Georgia ("SBC") and is utilizing the pooling-of-interests method
to record the transaction. Accordingly, the financial statements and related
notes have been restated to give retroactive effect to the merger.
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year consolidated financial
statements presentation.
2. Earnings Per Share
In December 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", which sets forth new rules
concerning the calculation and presentation of earnings per share information in
financial statements. SFAS No. 128 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. Diluted
earnings per share assumes
<PAGE> 9
(i) the exercise of all stock options below the market price at June 30 or the
average market price for the quarter and (ii) the conversion, if dilutive, of
all convertible preferred stock as of the beginning of the year with the
elimination of dividends declared. Additionally, the earnings per share
calculations for the three and nine months ended June 30, 1997 have been
restated to reflect the adoption of SFAS No. 128.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
June 30, 1998 June 30, 1997
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME $2,645,000 3,906,000
Less: preferred Dividend - -
---------- ----------
BASIC EARNINGS PER SHARE:
Net income applicable to
common stockholders $2,645,000 13,365,342 $0.20 $3,906,000 13,326,436 $0.29
========== ==========
EFFECT OF DILUTIVE SECURITIES:
Options 304,365 169,058
Convertible preferred stock - -
---------- ----------
DILUTED EARNINGS PER SHARE
Net income applicable to common
stockholders plus assumed conversions $2,645,000 13,669,707 $0.19 $3,906,000 13,495,494 $0.29
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
June 30, 1998 June 30, 1997
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME $10,786,715 10,816,000
Less: preferred Dividend - 113,000
----------- -----------
BASIC EARNINGS PER SHARE:
Net income applicable to
common stockholders $10,786,715 13,356,607 $0.81 $10,703,000 12,883,267 0.83
=========== ===========
EFFECT OF DILUTIVE SECURITIES:
Options 301,189 151,275
Convertible preferred stock - 429,309
---------- ---------
DILUTED EARNINGS PER SHARE
Net income applicable to common
stockholders plus assumed conversions $10,786,715 13,657,796 $0.79 $10,703,000 13,463,851 $0.79
</TABLE>
3. Sale of Servicing
During the nine months ended June 30, 1998, Liberty Mortgage Corporation
("Liberty Mortgage"), the Company's mortgage banking subsidiary, sold bulk loan
servicing rights with aggregate principal balances of $101 million compared to
$72 million a year earlier. This resulted in the recognition of a gain on the
sale of servicing $797,000 for the nine months ended June 30, 1998 compared to
$722,000 for the same period a year ago. No servicing rights were sold during
the three months ended June 30, 1998 or June 30, 1997. The servicing rights sold
generally related to loans originated for sale and sold within the last nine
months.
4. Mortgage Servicing Rights
Liberty Mortgage invests in mortgage servicing rights ("MSRs") resulting from
loans originated or purchased through correspondent relationships. The
investment in MSRs has the effect of reducing the basis in the loans purchased
or originated, and increasing the gain (or reducing the loss) on sales of loans.
The following table outlines the activity in MSRs for the three and nine month
periods ended June 30, 1998 and 1997 (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
June 30 June 30
------------------ ------------------
1998 1997 1998 1997
------------------ ------------------
<S> <C> <C> <C> <C>
Capitalized $3,704 $946 $ 7,171 $ 2,655
Sold -- -- 1,118 294
Amortized 380 383 972 1,060
Recovered -- -- -- --
Net Investment at June 30, 11,651 7,433
</TABLE>
The estimated combined fair value of these assets exceeded the book value at
June 30, 1998 and 1997. When determining fair value the Company considers the
date of origination, the average note rate, the average remaining term and
estimated prepayment speed. The fair value is calculated by estimating the
present value of future net servicing income.
<PAGE> 10
5. Recently Issued Accounting Standards
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", which revises employers' disclosures about pension and other
postretirement benefit plans. SFAS No. 132 does not change the measurement or
recognition of those plans. SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when SFAS Statements No. 87, "Employers' Accounting for Pensions", No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions", were issued. Management has
not yet determined the impact of SFAS No. 132 on the Company's future
disclosures. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (October 1,
1999 for the Company.) SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
6. Acquisitions
On June 25, 1998, the Company announced that it had signed a letter of intent to
acquire OFC Capital Corporation ("OFC"), an equipment leasing company in
Roswell, Georgia. OFC provides equipment leasing and financing programs for
dealers, vendors and manufacturers of capital equipment. The transaction is
expected to close during the late summer, subject to regulatory approval.
On June 19, 1998, having obtained the necessary regulatory and shareholder
approvals, the Company completed an agreement to merge with SBC, as previously
disclosed. SBC is the holding company for Coffee County Bank, which has three
offices in Douglas, Georgia, and Southland Bank, which has two offices, one each
in Butler and Roberta, Georgia. SBC, with approximately $146 million in assets,
$123 million in deposits and $94 million in loans, was merged into First Liberty
Bank, a wholly owned subsidiary of the Company. The merger is being accounted
for utilizing the pooling-of-interests method.
On June 19, 1998, the Company announced an agreement to acquire a portion of the
loan portfolio of First Credit Corporation. The portfolio consists primarily of
consumer loans with principal balances of approximately $10 million. The
transaction is expected to close during the Company's fourth fiscal quarter.
<PAGE> 11
On April 28, 1998, the Company announced an agreement to acquire Peoples Banking
Corporation ("PBC") in Blackshear, Georgia. PBC is the holding company for
Peoples Bank which has two offices, one each in Blackshear and Waycross,
Georgia. PBC has approximately $90 million in assets and $80 million in
deposits. This transaction is expected to close in early 1999, subject to
regulatory approval.
With the exception of the First Credit Corporation transaction, these
transactions, if approved, are expected to be accounted for utilizing the
pooling-of-interests method of accounting.
7. Subsequent Events
On August 6, 1998, Vidalia Bankshares, Inc. ("VBI") agreed to merge with the
Company. VBI operates two banking offices, both in Vidalia, Georgia, under the
name of First Community Bank. First Community has assets of approximately $60
million and deposits of approximately $55 million. The transaction will be
accounted for as a pooling-of-interests and is expected to close early in 1999,
subject to regulatory approval.
<PAGE> 12
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Overview
- --------
First Liberty Financial Corp. is a unitary savings and loan holding company
which owns and operates First Liberty Bank ("Liberty Bank") and its wholly owned
subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage"), and NewSouth
Financial Services, Inc. ("NewSouth"), collectively known as "the Company".
Liquidity
- ---------
The Company's primary sources of funds are deposits, loan repayments, sales and
maturities of securities, loan sales, repurchase agreements, advances from the
Federal Home Loan Bank of Atlanta and various other borrowings. Deposits provide
a source of funds that are highly dependent on market and other conditions,
while loan repayments are a relatively stable source of funds.
The liquidity of Liberty Bank's operation is measured by the ratio of cash and
short-term investments (as defined by federal regulations) to the sum of
withdrawable deposits and borrowings maturing within one year. Federal
regulations currently require institutions to maintain a liquidity ratio of at
least 4%. Liberty Bank was in compliance with its requirements at June 30, 1998.
Capital Resources
- -----------------
The Office of Thrift Supervision ("OTS") capital regulations include a core
capital requirement, a tangible capital requirement and a risk-based capital
requirement. Subject to certain exceptions, each of these capital standards must
be no less stringent than the capital standards applicable to national banks,
although the risk-based capital requirement for savings institutions may deviate
from the risk-based capital standards applicable to national banks to reflect
interest rate risk or other risks if the deviations in the aggregate do not
result in materially lower levels of capital being required of savings
institutions than would be required of national banks.
<PAGE> 13
The following table reflects Liberty Bank's compliance with regulatory capital
requirements at June 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Actual for Liberty Bank Regulatory Requirement
----------------------- ----------------------
% of % of
Capital Adjusted Adjusted Excess
Standard Amount Assets Amount Assets Amount
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible $107,257 7.14% $22,525 1.50% $84,732
- -----------------------------------------------------------------------
Core $108,358 7.21% $60,110 4.00% $48,248
- -----------------------------------------------------------------------
Risk-based $121,834 11.22% $86,898 8.00% $34,936
- -----------------------------------------------------------------------
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes
five classifications for institutions based upon the capital requirements. Each
appropriate banking agency, such as the OTS for Liberty Bank, must establish by
regulation the parameters of each such classification. Based on final
regulations promulgated by the OTS, Liberty Bank is considered
well-capitalized. Failure to maintain that status could result in greater
regulatory oversight or restrictions on Liberty Bank's activities.
Commitments
- -----------
Commitments to originate or purchase loans are generally made at the market rate
prevailing at the time of issuance. The Company had open commitments to
originate or purchase residential mortgage loans of approximately $226 million,
including $4.4 million to be held in portfolio and $70 million on which the
interest rate had not been locked-in at June 30, 1998. Commitments to sell
residential mortgage loans and mortgage-backed securities for mandatory delivery
were approximately $150 million at June 30, 1998. Also at June 30, 1998, the
Company bought $3.0 million of optional commitments to sell residential mortgage
loans. Loans in process (which represent undisbursed loan commitments related to
construction loans) and unused lines of credit amounted to $155 million at June
30, 1998.
Results of Operations
- ---------------------
The Company's consolidated net income for the three and nine months ended June
30, 1998 was $2.6 million and $10.8 million, respectively, compared to $3.9
million and $10.9 million for the three and nine months ended June 30, 1997,
respectively. Included in the Company's net income for the three and nine months
ended June 30, 1998 were nonrecurring expenses related to the Southland Bank
Corporation of Georgia ("SBC") merger which closed on June 19, 1998 totaling
approximately $1.9 million, net of taxes. Included in the Company's net income
for the nine months ended June 30, 1997 were nonrecurring expenses related to
the Middle Georgia Bank ("MGB") merger which closed on November 15, 1996
totaling approximately $312,000, net of taxes.
<PAGE> 14
The level of its non-interest income, non-interest expenses and the level of
earnings of its mortgage banking operations significantly affects the Company's
net income. However, the Company's net income is most significantly affected by
the difference between interest income on its loan and investment portfolios and
the interest expense of its deposits and borrowings ("net interest income"). Net
interest income is affected by several factors, but is most affected by the
volume of and interest rates on interest-earning assets and interest-bearing
liabilities.
The following tables reflect the effective yields and costs of funds for the
three and nine month periods ended June 30, 1998 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
Average Balance Rate/Yield
--------------- ----------
Three Months Ended Three Months Ended
------------------ ------------------
June 30 June 30
--------- ---------
1998 1997 1998 1997
---------------------- --------------------
Interest-Earning Assets:
- ------------------------
<S> <C> <C> <C> <C>
Loans $1,020,714 $ 963,485 9.15% 9.35%
Securities 325,292 256,912 6.48% 7.41%
Federal funds sold and
repurchase agreements 5,871 21,588 5.31% 5.60%
---------- ---------- ----- -----
All interest-earning assets $1,351,877 $1,241,985 8.49% 8.89%
========== ========== ----- -----
Interest-Bearing Liabilities:
- -----------------------------
Deposits $1,111,787 $1,031,518 4.20% 4.32%
Borrowings 255,180 238,710 5.52% 6.05%
---------- ---------- ----- -----
All interest-bearing liabilities $1,366,967 $1,270,228 4.45% 4.65%
========== ========== ----- -----
Interest rate spread 4.04% 4.24%
===== =====
Interest income as a percentage
of average earning assets 3.99% 4.13%
- ------------------------- ===== =====
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Average Balance Rate/Yield
--------------- ----------
Nine Months Ended Nine Months Ended
---------------- ------------------
June 30 June 30
--------- ---------
1998 1997 1998 1997
---------------------- -------------------
<S> <C> <C> <C> <C>
Interest-Earning Assets:
- -----------------------
Loans $ 991,094 $ 936,664 9.38% 9.29%
Securities 314,106 250,990 6.34% 7.39%
Federal funds sold and
repurchase agreements 6,282 21,262 9.38% 5.46%
---------- ---------- ----- -----
All interest-earning assets $1,311,482 $1,208,916 8.65% 8.83%
========== ========== ----- -----
Interest-Bearing Liabilities:
- -----------------------------
Deposits $1,085,944 $ 995,904 4.31% 4.24%
Borrowings 232,028 235,656 5.76% 6.28%
---------- ---------- ----- -----
All interest-bearing liabilities $1,317,972 $1,231,560 4.56% 4.63%
========== ========== ----- -----
Interest rate spread 4.09% 4.20%
===== =====
Interest income as a percentage
of average earning assets 4.07% 4.11%
- ------------------------- ===== =====
</TABLE>
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's interest income and expense for the nine month
period ended June 30, 1998 to the nine month period ended June 30, 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
June 30, 1998 vs June 30, 1997
-------------------------------------------
Due To
-------------------------------------------
Rate/
Rate Volume Volume Total
------- -------- -------- -------
<S> <C> <C> <C> <C>
Changes in Interest Income:
- --------------------------
Loans $ 620 $3,793 $ 36 $ 4,449
Securities (1,963) 3,496 (494) 1,039
Federal funds sold and
repurchase agreements 626 (613) (441) (428)
------ ------ ------ -------
Total interest income (717) 6,676 (899) 5,060
------ ------ ------ -------
Changes in Interest Expense:
- ---------------------------
Deposits 508 2,862 46 3,416
Borrowings (515) (165) 8 (672)
------ ------ ------ -------
Total interest expense (7) 2,697 54 (2,744)
------ ------ ------ -------
Net interest income $ (710) $3,979 $ (953) $ 2,316
====== ====== ====== =======
</TABLE>
Loans held for investment decreased by $23 million to $944 million at June 30,
1998 from $967 million at September 30, 1997 principally representing (i) $57
million in
<PAGE> 16
run-off of the Company's indirect auto loan portfolio (a line of business which
it exited in November, 1997) and (ii) increased prepayments in real estate
loans.
Changes in the allowance for estimated losses on loans for the three and nine
months ended June 30, 1998 and 1997 are as follows (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
--------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Provision for estimated losses $1,197 $2,370 $ 4,433 $ 4,343
Charge-offs, net of recoveries 1,242 908 3,019 2,280
Allowance for loan losses June 30, -- -- 15,487 13,668
Allowance for loan losses as a
percentage of:
Non-performing loans -- -- 185.54% 176.70%
Loans held-for-investment -- -- 1.61% 1.40%
</TABLE>
Management estimates the provision to be reflective of portfolio risk and would
anticipate the level of future loan loss provisions to be consistent with the
recent level of net charge-offs.
The table below summarizes non-performing assets at June 30, 1998 and June 30,
1997. Non-performing assets consist of non-accrual loans, foreclosed real
estate, other repossessed assets, and loans with interest or principal past due
90 days or more which are still accruing (dollars in thousands).
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
------------------------
<S> <C> <C>
Non-accrual loans $ 8,347 $ 7,735
Foreclosed real estate 2,904 3,718
Other repossessed assets 457 274
------- -------
Total non-performing assets $11,708 $11,727
======= =======
Total non-performing assets as
a percentage of total assets .77% .83%
</TABLE>
Liberty Mortgage originated loans during the three and nine months ended June
30, 1998 totaling $229 million and $521 million, respectively, compared to $67
million and $136 million for the same periods a year earlier.
Liberty Mortgage invests in mortgage servicing rights ("MSRs") resulting from
loans originated or purchased through correspondent relationships. The
investment in MSRs has the effect of reducing the basis in the loans purchased
or originated, and increasing the gain (or reducing the loss) on sales of loans.
The following table outlines the activity in MSRs for the three and nine month
periods ended June 30, 1998 and 1997 (dollars in thousands).
<PAGE> 17
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
June 30 June 30
----------------------------------------
1998 1997 1998 1997
----------------------------------------
<S> <C> <C> <C> <C>
Capitalized $3,704 $946 $7,171 $2,655
Sold -- -- 1,118 294
Amortized 380 383 972 1,060
Net Investment at June 30, -- -- 11,651 7,433
</TABLE>
The estimated combined fair value of these assets exceeded the book value at
June 30, 1998 and 1997. When determining fair value the Company considers the
date of origination, the average note rate, the average remaining term and
estimated prepayment speed. The fair value is calculated by estimating the
present value of future net servicing income.
During the nine months ended June 30, 1998, Liberty Mortgage sold bulk loan
servicing rights with aggregate principal balances of $101 million compared to
$72 million a year earlier.
This resulted in the recognition of a gain on the sale of servicing of $797,000
for the nine months ended June 30, 1997 compared to $721,000 for the same
period a year ago. No servicing rights were sold during the three months ended
June 30, 1998 or June 30, 1997. The servicing rights sold generally related to
loans originated for sale and sold within the last nine months.
Non-interest income net of gains on the sale of assets (and MGB merger related
items totaling $94,000 in fiscal 1997) increased $1.8 million (or 21%) during
the nine months ended June 30, 1998 as compared to the same period a year
earlier and $748,000 or (25%) for the quarter ended June 30, 1998 as compared to
the quarter ended June 30, 1997. The significant contributor in both the three
and nine month comparisons was in other income resulting in float revenue from
increased official check volume at Liberty Mortgage and increased fee income
from the sale of various services in the community bank operation.
Non-interest expense (net of SBC merger related expenses totaling $2.4 million
in the three and nine months of fiscal 1998 and MGB merger related expenses
totaling $423,000 in the nine months of fiscal 1997) for the nine months ended
June 30, 1998 increased $2.0 million (or 7%) over the same period a year ago,
and $1.2 million (or 13%) for the quarter ended June 30, 1998 as compared to the
quarter ended June 30, 1997. Compensation and benefits (net of merger related
expense) increased $895,000 and $1.4 million for the three and nine months ended
June 30, 1998 compared to a year ago. That increase (as well as the other
increases in expenses and revenues) reflects nine months operations of NewSouth
in fiscal 1998 as compared to seven months operations in fiscal 1997 and the
operations of seven offices in fiscal 1998 compared to four in fiscal 1997. Core
data processing expense increased $743,000 and $1.4 million for the three and
nine months ended June 30, 1998 compared to a year earlier, reflecting costs to
upgrade systems to software and hardware which is compliant with year 2000
requirements. Management expects the increase in data processing expenses will
continue through the remainder of fiscal 1998 and into fiscal 1999, but the rate
of increase should substantially decrease in fiscal 1999.
Accounting for Income Taxes
- ---------------------------
The Company's effective income tax rate for the three and nine months ended June
30, 1998 was 43.7% and 38.7%, respectively, compared to 11.6% and 31.4%,
respectively, a
<PAGE> 18
year earlier. During fiscal 1998, pretax income for the three and nine months
include approximately $900,000 in merger related expenses that are not
deductible for income tax purposes. The reduction in the effective tax rates in
fiscal 1997 were due to (i) the reduction in federal income tax expense in the
amount of $650,000 resulting from the conclusion of contingencies related to
various tax matters, and (ii) the recovery of the Company's fiscal 1997
year-to-date accrued state income tax expense (totaling $386,000 net of federal
Fincome tax) due to the increase in estimated state net operating loss carry
forwards.
The Company's management has determined that it is more likely than not that its
deferred tax assets will be realized. This is based on the existence of taxable
income in the form of future reversals of existing taxable temporary differences
and taxable income in prior carryback years that is sufficient to allow
realization of the tax benefit of the Company's existing deductible temporary
differences.
The Company is not aware of any material uncertainties existing at June 30, 1998
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.
Recently Issued Accounting Standards
- ------------------------------------
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans. SFAS
No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when FASB Statements No. 87, "Employers'
Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", were issued. Management has not yet determined the impact of SFAS No.
132 on the Company's future disclosures. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997.
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999 (October 1,
1999 for the Company.) SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Management of
the Company anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS No. 133 will not have a significant effect on the Company's
results of operations or its financial position.
<PAGE> 19
Acquisitions
- ------------
On June 25, 1998, the Company announced that it had signed a letter of intent to
acquire OFC Capital Corporation ("OFC"), an equipment leasing company in
Roswell, Georgia. OFC provides equipment leasing and financing programs for
dealers, vendors and manufacturers of capital equipment. The transaction is
expected to close during the late summer, subject to regulatory approval.
On June 19, 1998, having obtained the necessary regulatory and shareholder
approvals, the Company completed an agreement to merge with SBC, as previously
disclosed. SBC is the holding company for Coffee County Bank, which has three
offices in Douglas, Georgia, and Southland Bank, which has two offices, one each
in Butler and Roberta, Georgia. SBC, with approximately $146 million in assets,
$123 million in deposits and $94 million in loans, becomes a consolidated
subsidiary of First Liberty Bank, a wholly owned subsidiary of the Company. The
transaction is being accounted for utilizing the pooling-of-interests method.
On June 21, 1998, the Company announced an agreement to acquire a portion of the
loan portfolio of First Credit Corporation. The portfolio consists primarily of
consumer loans with principal balances of approximately $10 million. The
transaction is expected to close during the Company's fourth fiscal quarter.
On April 28, 1998, the Company announced an agreement to acquire Peoples Banking
Corporation ("PBC") in Blackshear, Georgia. PBC is the holding company for
Peoples Bank which has two offices, one each in Blackshear and Waycross,
Georgia. PBC has approximately $90 million in assets and $80 million in
deposits. This transaction is expected to close in the fall of 1998, subject to
regulatory approval.
With the exception of the First Credit Corporation transaction, these
transactions, if approved, are expected to be accounted for utilizing the
pooling-of-interests method of accounting.
Subsequent Events
- -----------------
On August 6, 1998, Vidalia Bankshares, Inc. ("VBI") agreed to merge with the
Company. VBI operates two banking offices, both in Vidalia, Georgia, under the
name of First Community Bank. First Community has assets of approximately $60
million and deposits of approximately $55 million. The transaction will be
accounted for as a pooling-of-interests and is expected to close early in 1999,
subject to regulatory approval.
PART II - Other information
- - ---------------------------
A) Exhibit 27, Financial Data Schedule
none
<PAGE> 20
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST LIBERTY FINANCIAL CORP.
DATE: August 19, 1998 /s/ David L. Hall
----------------------- ---------------------------------------
David L. Hall
Executive Vice President
and Chief Financial Officer (Duly
authorized, principal financial and
principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1998, FORM 10-Q AND THRIFT FINANCIAL REPORT IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 70,257
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,915
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 311,275
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,010,889
<ALLOWANCE> 13,898
<TOTAL-ASSETS> 1,511,776
<DEPOSITS> 1,078,210
<SHORT-TERM> 225,646
<LIABILITIES-OTHER> 25,772
<LONG-TERM> 64,832
0
0
<COMMON> 13,391
<OTHER-SE> 103,925
<TOTAL-LIABILITIES-AND-EQUITY> 1,511,776
<INTEREST-LOAN> 69,718
<INTEREST-INVEST> 15,384
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 85,102
<INTEREST-DEPOSIT> 35,072
<INTEREST-EXPENSE> 45,106
<INTEREST-INCOME-NET> 39,996
<LOAN-LOSSES> 4,433
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 32,545
<INCOME-PRETAX> 17,589
<INCOME-PRE-EXTRAORDINARY> 17,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,787
<EPS-PRIMARY> .81<F1>
<EPS-DILUTED> .79<F1>
<YIELD-ACTUAL> 8.49
<LOANS-NON> 8,347
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,251
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,423
<CHARGE-OFFS> 4,135
<RECOVERIES> 1,116
<ALLOWANCE-CLOSE> 15,487
<ALLOWANCE-DOMESTIC> 12,299
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,188
<FN>
<F1>A THREE-FOR-TWO STOCK SPLIT IN THE FORM OF A STOCK DIVIDEND OCCURRED,
EFFECTIVE APRIL 27, 1998. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED.
</FN>
</TABLE>
