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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</TABLE>
COMMISSION FILE NUMBER 0-14417
FIRST LIBERTY FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-1680650
(State of Incorporation) (I.R.S. Employer Identification Number)
</TABLE>
201 SECOND STREET
MACON, GEORGIA 31297
(Address of principal executive offices, including zip code)
(912) 743-0911
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $1.00 Par Value
Common Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant on December 15, 1998 was $196,519,672.
There were 13,556,629 shares of Common Stock outstanding as of December 15,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 27, 1999 are incorporated by reference in
Part III hereof. Exhibit index appears on page .
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FIRST LIBERTY FINANCIAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
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PART I
1. Business.................................................... 1
2. Properties.................................................. 17
3. Legal Proceedings........................................... 17
4. Submission of Matters to a Vote of Stockholders............. 17
4(A) Executive Officers of the Registrant........................ 17
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 19
6. Selected Financial Data..................................... 20
7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................... 23
8. Financial Statements and Supplementary Data................. 40
9. Disagreements on Accounting and Financial Disclosure........ 75
PART III
10. Directors and Executive Officers of the Registrant.......... 76
11. Executive Compensation...................................... 76
12. Stock Ownership of Certain Beneficial Owners and
Management.................................................. 76
13. Certain Relationships and Related Transactions.............. 76
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 77
Signatures.................................................. 79
Index of Exhibits........................................... 80
</TABLE>
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PART I
ITEM 1. BUSINESS
INTRODUCTION
First Liberty Financial Corp.("First Liberty") is a savings and loan
holding company headquartered in Macon, Georgia which owns and operates First
Liberty Bank ("Liberty Bank"), and its wholly-owned subsidiaries, Liberty
Mortgage Corporation ("Liberty Mortgage"), NewSouth Financial Services, Inc.
("NewSouth") and OFC Capital Corporation ("OFC Capital"). At September 30, 1998,
First Liberty had total assets of approximately $1.5 billion, total deposits of
approximately $1.1 billion and stockholders' equity of approximately $122
million.
Liberty Bank is a federally chartered stock savings bank headquartered in
Macon, Georgia which serves Macon, Savannah and other Georgia cities through its
home office and 36 full service branch offices. Liberty Bank operates as a
system of community banks under a single charter along with a residential
construction loan production office located in Atlanta, Georgia. Based on total
assets at September 30, 1998, Liberty Bank is the largest savings institution
headquartered in Georgia.
Throughout this document, reference to a year by number (i.e., not preceded
by a month and date) implies a fiscal year ended September 30.
Through Liberty Mortgage, Liberty Bank also operates a mortgage banking
business through correspondent relationships in all of its market areas and a
number of other states. Liberty Mortgage originates permanent first mortgage
loans on residential properties for Liberty Bank's portfolio and for sale in the
secondary market. During fiscal 1998, Liberty Mortgage originated approximately
$771 million of permanent residential mortgage loans. Liberty Mortgage's loan
servicing portfolio was approximately $1.3 billion at September 30, 1998,
including approximately $164 million of loans serviced for Liberty Bank. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Non-Interest Income" -- herein.
First Liberty organized NewSouth to engage in the consumer finance business
in selected Georgia market areas. NewSouth commenced operations in four offices
during the first quarter of fiscal 1997, three additional offices during the
fourth quarter of fiscal 1997, three additional offices acquired during 1998 and
one additional office opened during fiscal 1998.
In August 1998, First Liberty acquired OFC Capital. OFC Capital originates
commercial leases on a nationwide basis.
FIRST LIBERTY'S VISION AND STRATEGY STATEMENTS
First Liberty operates under a three-year strategic plan which is updated
annually. As a part of that plan, First Liberty has adopted a vision and
strategy statement to communicate to customers, employees and stockholders its
vision and strategic direction. The vision statement reads as follows:
"We will operate an independent, high quality system of community
institutions and affiliated businesses, with focus on serving consumers and
businesses with selected financial services."
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The strategy statement includes a strategic direction for customer
development, employee development, stockholders and acquisitions. The strategy
statement for stockholders reads as follows:
"We will continue to operate in a safe and sound manner. Our financial
targets are as follows:"
<TABLE>
<CAPTION>
MEASURE 2000 1999
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Return on Equity............................................ 16.00% 15.75%
Return on Assets............................................ 1.30 1.25
Efficiency Ratio............................................ 52.00 53.00
Earnings Per Share (diluted) annual growth.................. 10.00 10.00
Criticized Loans to Net Loans (less than)................... 4.00 4.00
Classified Loans to Net Loans (less than)................... 1.00 1.00
Nonperforming Assets Ratio (less than)...................... 1.00 1.00
</TABLE>
The major components of the strategic plan are as follows:
Safety. First Liberty plans to continue to conduct its operations
consistent with safe and prudent banking practices, in compliance with all
applicable laws and regulations.
Capital Adequacy. Liberty Bank is classified as a "well-capitalized"
institution for regulatory purposes. Liberty Bank will seek to maintain capital
adequacy primarily through the retention of earnings, supplemented as needed
through capital offerings. See "Acquisitions," herein.
Credit Quality. First Liberty currently operates at or near the
established target levels for credit quality and intends to maintain its level
of its nonperforming and other criticized and classified assets at or below
current levels. First Liberty will continue to commit significant resources to
the credit administration and credit review functions to facilitate continued
adherence to credit policies and underwriting standards.
Operating Efficiency. First Liberty will strive to be a low cost provider
of financial services by delivering its products and services in an "optimized"
environment. Operating/staff functions will be conducted on a centralized basis
while the business development functions will be decentralized to enhance
customer service. These efforts will be focused to absorb excess capacity of
existing resources, to promote profitable growth and to improve investment
returns.
Growth. Without compromising the above objectives, First Liberty will
strive to expand Liberty Bank's market share in its middle, south and coastal
Georgia market areas through internal growth and selected acquisitions. First
Liberty believes that acquisitions of thrifts or banks (or of their assets and
deposits) in existing or contiguous markets represent a low-cost method of
expanding Liberty Bank's market share, broadening its franchise and improving
its operating efficiencies. See "Acquisitions," herein.
Liberty Mortgage will expand market share for retail loan originations
through Liberty Bank in middle, south and coastal Georgia market areas.
Additionally, Liberty Mortgage will expand its market share for wholesale loan
originations principally in the southeastern United States through correspondent
relationships. NewSouth plans to expand in selected market areas in Georgia to
include certain market areas of Liberty Bank.
Finally, First Liberty will expand its business lines to increase service
offerings to current customers and will expand into other complementary business
lines that support growth and return thresholds.
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From time to time, the Company may publish forward-looking statements, such
as the ones in the preceding paragraphs, relating to such matters as anticipated
financial performance, business prospects, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. Some of the
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include but are not limited to the
following.
a. Deterioration in local economic conditions;
b. Deterioration in national or global economic conditions;
c. Significant changes in national or global financial markets;
d. Significant changes in laws and regulations affecting the financial
services industry; and
e. Significant changes in local competition.
ACQUISITIONS
In August 1998, First Liberty acquired OFC Capital Corporation ("OFC
Capital"), a commercial leasing company. This acquisition did not have a
significant impact on the Company's results of operations or its financial
condition. Management anticipates a growing contribution by OFC Capital towards
the results of operations of the Company.
In June 1998, the Company acquired by merger Southland Bank Corporation of
Georgia ("SBC"). On the date of acquisition, SBC held the following approximate
balances: loans of $94 million, cash and investments of $44 million, premises
and equipment of $3 million and deposits of $123 million. This acquisition has
been accounted for utilizing the pooling-of-interests method of accounting.
In November 1996, the Company acquired by merger Middle Georgia Bank
("MGB"). This business combination, which increased the assets of the Company by
approximately $126 million, was accounted for utilizing the pooling-of-interests
method of accounting.
In September 1995, the Company acquired by merger Tifton Banks, Inc.
("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank & Trust Company
("Tifton Bank"). The Tifton Bank acquisition increased the assets of the Company
by approximately $64 million. Intangible assets resulting from the acquisition
amounted to approximately $2 million.
In March 1995, the Company acquired three banking offices located in
Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets
acquired were approximately $3 million and total cash received and deposits
assumed were approximately $95 million. Intangible assets resulting from the
acquisition were approximately $4 million.
In December 1994, the Company acquired by merger Central Banking Company
("CBC") of Swainsboro, Georgia, and its subsidiary, The Central Bank ("Central
Bank"). Central Bank on the date of acquisition held approximately $56 million
in assets. Intangible assets resulting from the acquisition amounted to
approximately $2 million.
In March 1993, Liberty Bank acquired six branch offices, located in
supermarkets in Savannah, Georgia, from another institution. Liberty Bank
operated four branches in Savannah prior to the acquisition. Total assets
acquired by Liberty Bank were approximately $7 million and total deposits
assumed were approximately $38 million. Intangible assets resulting from the
acquisition amounted to approximately $1 million.
In December 1992, the Company acquired First Federal Savings and Loan
Association, Milledgeville, Georgia ("First Federal") in a supervisory
merger-conversion for a cash purchase price of $1,000. First Federal, on the
date of acquisition, held assets of approximately $39 million. Intangible assets
resulting from the acquisition amounted to approximately $449,000.
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ISSUANCE AND REDEMPTION OF CONVERTIBLE PREFERRED STOCK
In December 1994 and September 1995, in connection with the respective
acquisitions of Tifton and CBC, the Company issued $7.6 million in Series B
6.00% Cumulative Convertible Preferred ("Series B") stock. The shares had a
liquidation preference of $25.00 per share. Dividends on the Series B stock were
cumulative at an annual rate of $1.50 per share and payable quarterly. Each
share of the Series B stock was convertible at the option of the holder into
2.69 shares of common stock, at a conversion price of $9.33 per share of common
stock, subject to adjustment in certain circumstances. The Company, at its
option, could redeem the Series B stock at any time on or after January 1, 1997.
On March 7, 1997, the Company redeemed 1,409 shares of Series B for $38,043,
plus accrued and unpaid dividends. The remaining 301,171 shares of the Series B
were converted in to 805,830 shares of the Company's common stock.
In February 1993, First Liberty issued 460,000 shares of Series A 7.75%
Cumulative Convertible Preferred ("Series A") stock which raised approximately
$10.5 million in equity. The Series A provided for cumulative cash dividends
payable quarterly at the rate of $1.9375 per share per annum. A share of Series
A was convertible at the option of the holder into 4.50 shares of First Liberty
Common Stock. In July 1995 the Company redeemed 2,537 shares of Series A for
$66,879, plus accrued and unpaid dividends. The remaining 457,463 shares of the
Series A were converted into 2,058,583 shares of the Company's common stock, at
a conversion price of $5.55 per share of common stock.
LENDING ACTIVITIES
General
Liberty Bank originates loans primarily in Macon, Savannah and the other
Georgia cities in which its offices are located, and through loan production
offices specializing in residential real estate construction lending located in
metropolitan Atlanta. Even though Liberty Bank is permitted by the Office of
Thrift Supervision ("OTS") to originate loans collateralized by real estate
located anywhere in the United States, it concentrates its lending activities in
the primary market areas in which it operates. Liberty Mortgage originates and
operates through correspondent relationships to purchase real estate loans in
over twenty states throughout the United States principally for sale into the
secondary market. NewSouth originates consumer loans through offices in eleven
cities throughout Georgia, including four cities that Liberty Bank also has
offices.
Federal laws and regulations prescribe the types and amounts of loans which
may be made by federal thrifts and generally permit such institutions to make
residential real estate loans, commercial real estate loans, business loans,
agricultural loans and consumer loans.
Economic conditions in First Liberty's banking markets are generally
consistent with Georgia markets other than metropolitan Atlanta. The following
table summarizes economic data relating to the Macon and Savannah markets.
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<TABLE>
<CAPTION>
MACON MSA SAVANNAH MSA
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Population (1995)........................................... 309,756 279,468
% Change (1990-1995)........................................ 6.40% 8.40%
Households (1990)........................................... 106,478 94,940
% Change (1980-1990)........................................ 15.30% 18.20%
Personal income (1995)
% Earnings:
Goods producing industries............................. 24.90% 24.90%
Service producing industries........................... 49.30 58.00
Government............................................. 25.80 17.10
Average annual unemployment rate (1996)..................... 4.80 4.80
Per capita personal income (1995)........................... $19,674 $21,351
</TABLE>
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Source: Selig Center for Economic Growth -- The University of Georgia
First Liberty's local banking markets generally are served by major
interstate highways, rail and regional air service and in the case of Savannah,
a major Atlantic Ocean port facility. The employment base includes federal and
state government facilities, manufacturing, health care, wholesale, retail,
distribution and service industries.
Most of First Liberty's banking regions contain large military bases. In
Middle Georgia, Robins Air Force Base is the largest employer in the market
area. While there are no current indications of material reductions in personnel
relating to any of these bases, such developments could adversely affect First
Liberty.
Residential Real Estate Loans
First Liberty's principal lending operation traditionally has been the
origination of residential permanent mortgage loans, and these loans continue to
represent a significant part of First Liberty's lending activities. Both fixed
rate and adjustable rate permanent loans on residential properties currently are
originated either for sale in the secondary market or for the institution's loan
portfolio. The determination of whether loans originated are available-for-sale
or for portfolio is made at the time of borrower application. Some loans
originated for sale may be sold into Liberty Bank's portfolio at the lower of
cost or market. See "Loan Sales and Purchases" -- herein.
In the case of owner-occupied single-family residences, First Liberty may
make permanent residential mortgage loans for up to 95% of the appraised value
of the property. Loans on non-owner occupied real estate of not more than four
family units, generally are made for up to 75% of the appraised value. All
conventional loans with loan-to-value ratios in excess of 80% generally have
private mortgage insurance covering that portion of the loan in excess of 70% of
the appraised value. The borrower pays the cost of this insurance through a
single premium paid at the time of loan origination and/or through a monthly
payment during the term of the loan. The borrower also generally makes monthly
payments into an escrow account equal to 1/12 of the annual hazard insurance
premiums and property taxes on the property which secures the loan. Interest
rates and loan fees charged on loans originated are competitive with other
financial institutions in First Liberty's general market areas.
First Liberty has offered, in addition to fixed rate residential loans, a
variety of loans on which the interest rate and payment may be adjusted provided
that the adjustments are tied to specified indices. These adjustable rate
mortgage loans ("ARMs") permit greater flexibility in adjusting loan yields to
changes in the cost of funds. ARMs generally have loan terms up to 30 years with
rate adjustments ranging from one to ten years during the term of the loan. Most
ARMs have caps on the maximum amount of change in the interest rate at any
adjustment period and over the life of the loan.
Liberty Bank also provides interim construction financing for single-family
residences and makes land acquisition and development loans on properties
intended for residential use. Liberty Bank's general policy is to grant single
family construction loans and land acquisition and development loans up to 80%
of the
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appraised value of the property. Residential construction loans are made for
periods of one year or less, and land acquisition and development loans are made
for periods of up to five years, both on an interest-only basis. These periods
may be extended subject to negotiation of terms. Typically, interest rates on
construction and acquisition and development loans are indexed to the prime rate
and are adjustable daily during the term of the loan.
Commercial Real Estate Loans
Federally chartered thrifts are permitted to invest in non-residential real
estate loans so long as such loans do not exceed 400% of capital. Liberty Bank
is conservative in making loans of this nature choosing to limit this type of
lending to its primary banking markets, to customers with proven track records
and strong credit histories, and to projects that are soundly underwritten.
Liberty Bank's investment in commercial real estate loans does not exceed the
current federal limitations.
Interim construction and permanent commercial real estate loans are secured
by owner-occupied businesses, commercial and industrial properties, apartment
projects, office buildings, shopping centers and other properties located in
Liberty Bank's primary banking markets. Construction and permanent commercial
real estate loans are underwritten with the primary analysis focusing on the
adequacy of net operating income and cash flow being available to provide debt
service. These loans are generally made for up to 80% of the appraised value of
the property in conformity with the guidelines found in the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA").
Consumer Loans and Indirect Lending
Federally chartered thrifts are authorized to make both secured and
unsecured consumer loans for personal or household purposes in amounts up to 35%
of the institution's total assets. At September 30, 1998, these types of
consumer loans constituted 11% of Liberty Bank's total assets. In addition,
these institutions have lending authority above the 35% limit for certain
consumer loans, such as home equity loans, property improvement loans, mobile
home loans and education loans.
Through October 1997, Liberty Bank purchased consumer loans secured by new
and used automobiles and recreational vehicles from approximately 100 select
dealers in its banking markets on a non-recourse basis ("indirect loans"). At
September 30, 1998, indirect loans constituted $99 million or 10% of the total
loan portfolio or approximately 31% of Liberty Bank's consumer loan portfolio.
This compares to indirect loans of $172 million or 18% of the total loan
portfolio, or approximately 53% of Liberty Bank's consumer loan portfolio
September 30, 1997, and $155 million or 17% of the total loan portfolio, or 59%
of the consumer loan portfolio at September, 30, 1996.
During October 1997, management decided to discontinue its indirect lending
business. This decision was the result of a review of the historical and
forecast prospects for indirect lending as a line of business. The indirect
business has historically been characterized as having thin margins and whose
consumers were generally transaction oriented and not relationship oriented.
Additionally, the growing success of the asset-backed securities market
continues to increase competitive pressure for indirect auto loan pricing, even
during a period of declining consumer credit quality. As First Liberty grows,
management must allocate capital and funding resources to lines of business
which hold the highest prospects for long term profitability and which best fit
the Company's business plan. Management believes First Liberty's community
banking, mortgage banking (other than Atlanta retail), consumer finance and
commercial equipment leasing operations offer shareholders the highest potential
for return on invested capital.
Liberty Bank intends to continue prudent expansion of its consumer lending
activities through its community banking operations, subject to market
conditions, as part of its strategy to provide a full range of banking products
and services to its customers.
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Commercial/Business Loans
Liberty Bank makes various types of commercial loans to creditworthy
borrowers within Liberty Bank's primary banking market areas for financing
equipment purchases, capital projects, working capital and other legitimate
business needs. The terms of these loans range generally from three months to
fifteen years, with the longer maturities generally subject to balloon payments.
These loans normally carry interest rates indexed to the prime rate.
Liberty Bank is authorized by federal law to make secured and unsecured
loans for business or agricultural purposes in amounts aggregating no more than
20% of its total assets provided that amounts in excess of 10% may be used only
for small business loans. Additionally, some business loans secured by
nonresidential real estate are subject to a separate limit, see "Commercial Real
Estate" -- herein. At September 30, 1998, Liberty Bank was in compliance with
the Federal limitation.
Loan Originations and Processing
Liberty Mortgage actively solicits mortgage loan applications from existing
customers, local real estate agents, builders, developers and others.
Additionally, numerous loan applications are received as a result of media
advertising, customer referrals and from walk-in customers at loan production
offices.
Liberty Bank has a structured loan approval process in which lending
authority for various types and amounts of loans is delegated by the Board of
Directors to loan officers on a basis commensurate with seniority and lending
experience. Liberty Bank has a Senior Loan Committee who must approve loans in
amounts above $1 million and up to $5 million. Liberty Bank's Board of Directors
regularly reviews and ratifies the actions of the Senior Loan Committee and must
approve any loan relationship of $5 million or more.
Loan Sales and Purchases
Permanent first mortgage loans on residential properties are originated for
sale to the secondary market and for investment. Liberty Mortgage originates and
purchases loans on residential properties through correspondent relationships
with lenders in over twenty states throughout the United States. These
correspondents provide in excess of one-half of Liberty Mortgage's total loan
production. These correspondents are banks, savings institutions and mortgage
bankers and brokers.
Secondary market sales, which are without recourse, are made to the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") and other institutional investors. Such loan sales may be
made with servicing rights retained by Liberty Mortgage or with servicing rights
released. The FNMA and the FHLMC are government-sponsored agencies which
purchase residential mortgage loans from federally-insured financial
institutions and certain other approved lenders. As market conditions dictate,
Liberty Bank may elect to hold permanent mortgage loans in its portfolio, where
favorable spreads over the cost of funds make these investments advantageous.
While most loans in the portfolio are originated internally, conventional
loans and loan participations secured by residential real estate located within
and outside of the state of Georgia and mortgage-backed securities representing
interests in pools of mortgage loans guaranteed by the Government National
Mortgage Association ("GNMA"), the FNMA and the FHLMC are purchased by Liberty
Bank. Liberty Bank will from time to time sell other loans and mortgage-backed
securities which are available-for-sale when such investments become
inconsistent with its business strategies. See "Investment
Activities" -- herein.
Fee Income
In addition to interest earned on loans, Liberty Bank and Liberty Mortgage
receive loan fees for originating mortgage and non-mortgage loans and servicing
fees for continuing to service loans (i.e., collecting principal and interest
payments on behalf of investors) after selling such loans to the secondary
market. Mortgage and loan fees generally are payable upon the closing of the
loan in amounts ranging from 1% to 3% of the principal amount of the loan.
Consumer and some commercial loan fees are based on a fixed rate per loan
ranging from $55 to $100. Servicing fees are payable monthly by the loan
purchaser in an amount equal
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to 1/4 to 1/2 of 1% per annum of the unpaid principal balance of each loan. As
of September 30, 1998, Liberty Mortgage serviced loans for Liberty Bank and for
others aggregating approximately $1.3 billion. Liberty Bank may also receive
commitment fees in connection with certain commitments on multi-family
commercial and development loans. Other loan fee income includes fees from late
payment charges, prepayment premiums, loan assumption fees, renewal fees,
property transfer fees and miscellaneous services related to its loans.
Credit Risk Management and Allowance for Loan Losses
Liberty Bank has a multi-faceted program designed to control and
continually monitor the credit risks inherent in its loan portfolio. This begins
with a structured loan approval process in which authority for various types and
amounts of loans is delegated by the Board of Directors to loan officers on a
basis commensurate with seniority and lending experience. See "Loan Originations
and Processing" -- herein.
Liberty Bank uses an asset classification system consistent with OTS
regulations, which apply to all assets of an insured institution and require
each institution to periodically classify its assets. There are four categories
of "criticized" assets: Special Mention, Substandard, Doubtful and Loss. Assets
classified as substandard, doubtful or loss are considered "classified". The
classification of assets is subject to OTS review and re-classification.
Institutions must include aggregate totals of criticized assets, and general and
specific valuation reserves in quarterly reports to the OTS. Liberty Bank's loan
classification system utilizes both the account officer and an independent loan
review function to monitor the classification of Liberty Bank's loans. The
account officer is charged with the responsibility of monitoring changes in loan
quality within his or her loan portfolio and reporting changes directly to loan
review and senior management. Additionally, loan review performs an independent
review of Liberty Bank's loans to determine that the appropriate risk grade has
been assigned to each borrowing relationship.
Liberty Bank's policy requires an annual review of all borrowing
relationships exceeding $750,000 in aggregate debt, and requires annual reviews
of some loans between $100,000 and $750,000. A report of the results of these
reviews on loans of $1 million and greater are forwarded to the Board of
Directors for their review. Delinquencies are monitored on all loans as a basis
for potential inclusion in general valuation reserves or, ultimately, for
potential charge-off. Loans which are delinquent 90 days (four payments) or
longer generally are placed on nonaccrual status unless the collectibility of
principal and accrued interest is assured beyond a reasonable doubt. In certain
cases, loans less than 90 days (four payments) delinquent are placed on
nonaccrual where uncertainty exists as to their collectibility. Real estate
acquired through foreclosure is classified as substandard unless there is
sufficient evidence to indicate such classification is not warranted. A
portfolio of mortgage-backed securities are all guaranteed by either the GNMA,
the FNMA, the FHLMC, or investment grade private issuers and are therefore not
generally subject to any material risk of collateral loss. Similarly, the
portfolio of investment securities is comprised of U.S. Government obligations
of the FHLB of Atlanta and investment grade corporate debt securities.
Loan loss reserves are determined based on management's internal review of
nonperforming loans, delinquency trends, the level of rated assets and
charge-off trends. Additionally, management assesses general and specific
economic trends both nationally and locally and regulatory information to
determine the impact of those external factors on loan loss reserve levels.
Based on the internal and external reviews, Liberty Bank segregates its
loan portfolio by type of loans and by loan classification within each loan
type. Reserve percentages are applied (based on historical and anticipated loss
rates) to each loan group to determine the required amount of allocated general
loan loss reserves. Additionally, an amount is provided for unallocated general
loan loss reserves, reflecting the potential for estimation errors in allocated
reserves.
See Item 7 -- "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Loan Loss Provision and Allowance for Loan
Losses and Nonperforming Assets and Credit Risk" -- herein.
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Interest Rate Risk
Interest rate risk is a measure of exposure to changes in net interest
income or the theoretical market value of portfolio equity due to changes in
market interest rates. The differential (known as "gap"), between interest rate
sensitive assets and interest rate sensitive liabilities over a specified period
of time represents a measure of sensitivity of net interest income to changes in
interest rates. A positive gap indicates an excess of rate sensitive assets over
rate sensitive liabilities, while a negative gap indicates an excess of rate
sensitive liabilities over rate sensitive assets.
Liberty Bank operates under an interest rate risk policy through an Asset
Liability Management Committee ("ALCO"). The policy outlines limits on interest
rate risk in terms of changes in net interest income and changes in the net
market values of assets and liabilities over certain changes in interest rate
environments. These measurements are made through a cash flow simulation model
which projects the impact of changes in interest rates on Liberty Bank's assets
and liabilities. Additionally, the ALCO may set other interest rate risk
objectives.
The policy also outlines responsibility for monitoring interest rate risk,
the process for the approval, implementation and monitoring of interest rate
risk strategies to achieve Liberty Bank's interest rate risk objectives.
Liberty Bank also operates under a hedging policy and Liberty Mortgage also
operates under a secondary marketing policy. The hedging policy applies to
Liberty Bank's use of forward commitments, interest rate swaps, interest rate
caps and floors and other similar hedging instruments. Liberty Bank's ALCO is
responsible for implementation of the policy. The policy outlines authorized
objectives, sets limits on activities, outlines the responsibilities for
approval, implementation and monitoring of hedging activities.
The secondary marketing policy applies to the use of forward commitments
("coverage") by Liberty Mortgage to hedge market exposure in the pipeline of
loans originated for sale. Liberty Mortgage's secondary marketing committee is
responsible for the implementation of the policy. The policy outlines acceptable
hedging instruments, sets limits on the maximum exposure to risk and outlines
authority and responsibilities for the implementation of the policy.
Both the hedging policy and the secondary marketing policy prohibit
speculation and prohibit the use of futures contracts and options on futures
contracts.
Investment Activities
Income from investments in securities provides the second largest source of
interest income after interest on loans. Federal regulations require Liberty
Bank to maintain a minimum amount of liquid assets which may be invested in
specified short-term securities but also permits certain other investments.
Investment decisions are made by authorized officers under the supervision
of Liberty Bank's Board of Directors pursuant to its investment policy. Brokers
("counterparties") approved by the ALCO are used to effect securities
transactions. The investment policy outlines the criteria for monitoring Liberty
Bank's counterparties.
Under the investment policy, assets held to meet Liberty Bank's liquidity
requirement are classified as available-for-sale due to the reasonable
possibility of liquidation prior to maturity. Additionally, all other securities
have also been classified as available-for-sale based on management's
determination that such assets may be liquidated prior to maturity. Liberty
Mortgage classifies all loans originated as available-for-sale unless originated
pursuant to a specific portfolio commitment to Liberty Bank. All other loans are
considered held-for-investment unless specifically classified otherwise. As of
September 30, 1998, $407 million or 30% of First Liberty's earning assets were
classified as available-for-sale.
At September 30, 1998, Liberty Bank's investment portfolio consisted of
government agency debt and equity securities of investment grade and FHLB stock.
Additionally, Liberty Bank holds investments in investment grade mortgage-backed
securities.
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See Note 4 of Notes to First Liberty's Consolidated Financial Statements
contained in Item 8 -- "Financial Statements and Supplementary Data" -- herein.
SOURCES OF FUNDS
General
Deposits obtained from retail customers are the major source of funds for
lending and other investment purposes. In 1997, Liberty Bank began obtaining
wholesale deposits from a national network of brokers and other deposit
gatherers. At September 30, 1998, such deposits totalled approximately $138
million, including $34 million in brokered deposits. In addition to deposits,
Liberty Bank obtains funds from loan principal repayments, proceeds from sales
of loans and loan participations, advances from the Federal Home Loan Bank
("FHLB") of Atlanta, and repurchase agreements. Loan repayments are a relatively
stable source of funds while deposit inflows and outflows and sales of loans and
investment securities are significantly influenced by prevailing interest rates
and economic conditions. Borrowings may be used to compensate for reductions in
normal sources of funds or to support expanded lending activities. Liberty
Bank's unused borrowing capacity with the FHLB of Atlanta at September 30, 1998
was approximately $52 million in advance and warehouse lines of credit.
Additionally, Liberty Bank had approximately $55 million in fed fund lines with
correspondent banks.
Deposits
Liberty Bank offers a variety of types of deposit accounts and related
services. Deposits are obtained primarily from the communities in which its
offices are located.
For further details as to the composition of Liberty Bank's savings
portfolio, see Item 7 -- "Management's Discussions and Analysis of Results of
Operations and Financial Condition" -- herein.
Borrowings
Deposits are the primary source of funds for lending and investment
activities and for its general business purposes. However, Liberty Bank
periodically obtains additional funds by borrowing from the FHLB of Atlanta and
through repurchase agreements entered into with various counterparties whose
creditworthiness has been approved by Liberty Bank's ALCO. These borrowing
activities are conducted pursuant to Liberty Bank's borrowed funds policy. The
policy outlines the responsibilities and limits of authority, the use of
collateral and safekeeping, and sets limits on Liberty Bank's credit exposure to
counterparties.
See Item 7 -- "Management's Discussion and Analysis of Results of
Operations and Financial Condition" -- herein. Also see Notes 10 and 11 of Notes
to First Liberty's Consolidated Financial Statements contained in Item
8 -- "Financial Statements and Supplementary Data" -- herein.
COMPETITION
Based on total assets of approximately $1.5 billion at September 30, 1998,
Liberty Bank is the largest savings institution headquartered in Georgia, as
measured by total assets. Liberty Mortgage, with total permanent mortgage
originations of approximately $771 million for the year ended September 30,
1998, ranked as one of the larger mortgage banking companies in Georgia in terms
of dollar volume.
Liberty Bank, Liberty Mortgage and NewSouth face substantial competition
for deposits and loans throughout their market areas. Liberty Bank considers
Macon, Savannah, and the other smaller Georgia cities in which its offices are
located to be the primary market areas for attracting loans and deposits.
Additionally, Liberty Mortgage offers mortgage loans in over twenty states
throughout the United States through its wholesale loan origination operation.
NewSouth offers consumer loans through offices in eleven cities in Georgia,
including four cities that Liberty Bank also has offices. The most significant
factors in competing for deposits are interest rates, the quality and range of
financial services offered, convenience of office locations and office hours.
Competition for deposits comes primarily from commercial banks, credit unions,
money market funds and other investment alternatives.
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The primary factors in competing for loans are interest rates, discount
points, loan fees and the quality and range of lending services offered.
Competition for origination of loans comes primarily from mortgage banking
firms, mortgage brokers, commercial banks, savings institutions, consumer
finance companies and insurance companies.
Various states in the Southeastern region, including Georgia, have enacted
regional interstate banking laws which permit banks and, in some states such as
Georgia, savings institutions, to acquire financial institutions in other states
within the region. As a result of such laws there have been major interstate
acquisitions involving Georgia financial institutions which have offices in
Liberty Bank's service area but are headquartered in other Southeastern states.
The effect of such acquisitions (and of the possible increase in the size of the
financial institutions in Liberty Bank's market area) may be to further increase
the competition faced by Liberty Bank. Additionally, pursuant to OTS policy,
savings institutions are permitted to branch and merge across state lines.
Employees
At September 30, 1998, First Liberty had 593 full-time employees and 22
part-time employees. All officers and other personnel serving First Liberty are
employed and compensated by Liberty Bank, Liberty Mortgage, NewSouth or OFC. No
employees are covered by a collective bargaining agreement, and management
considers its relations with its employees to be good.
BANK REGULATION
General
Liberty Bank is a federally chartered savings bank and a member of the
Federal Home Loan Bank of Atlanta. Liberty Bank's deposits are insured by the
FDIC through the Savings Association Insurance Fund ("SAIF"), and it is subject
to examination and regulation by the OTS and the FDIC with respect to most of
its business activities. These activities include, among others, lending
activities, capital standards, general investment authority, deposit taking and
borrowing authority, mergers and other business combinations, establishment of
branch offices, and permitted subsidiary investments and activities. The
operations of the OTS, including its examination activities, are funded by
assessments levied on its regulated institutions.
Liberty Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits and certain other matters. Financial
institutions, including Liberty Bank, may also be subject, under certain
circumstances, to potential liability under various statutes and regulations
applicable to property owners generally, including statutes and regulations
relating to the environmental condition of real property and the remediation
thereof.
The descriptions of the statutes and regulations applicable to First
Liberty and Liberty Bank set forth below and elsewhere herein do not purport to
be complete descriptions of such statutes and regulations and their effects on
First Liberty and Liberty Bank. Such descriptions also do not purport to
identify every statute and regulation that may apply to First Liberty or Liberty
Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation or order or any condition imposed in writing by the FDIC. In
addition, FDIC regulations provide that any insured institution that falls below
a 2% minimum leverage ratio will be subject to FDIC deposit insurance
termination proceedings unless it has submitted, and is in compliance with, a
capital plan with its primary federal regulator and the FDIC. The FDIC may also
suspend deposit insurance temporarily during the hearing process if the
institution has no tangible capital.
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Federal Home Loan Bank System
As a member of the FHLB System, Liberty Bank is required to own capital
stock in its regional FHLB, the FHLB of Atlanta, in an amount at least equal to
the greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLB of Atlanta. Liberty
Bank was in compliance with this requirement, with an investment of $12 million
in FHLB of Atlanta stock at September 30, 1998. The FHLB of Atlanta serves as a
reserve or central bank for the member institutions within its assigned region.
It is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in accordance with
policies and procedures established by the Federal Housing Finance Board and the
Board of Directors of the FHLB of Atlanta.
Current law requires each FHLB to transfer a certain portion of its
reserves and undivided profits to the Resolution Funding Corporation
("REFCORP"), the entity established to raise funds to resolve troubled thrift
cases, to fund the principal and a portion of the interest on bonds issued by
the REFCORP and certain other obligations. In addition, each FHLB is required to
transfer 5% of its annual net earnings to fund certain affordable housing
programs.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds. Generally, the
Bank Insurance Fund (the "BIF") insures the deposits of commercial banks and the
SAIF insures the deposits of savings institutions.
The FDIC is authorized to increase deposit insurance premiums if it
determines such increases are appropriate to maintain the reserves of either the
SAIF or BIF or to fund the administration of the FDIC. In addition, the FDIC is
authorized to levy emergency special assessments on BIF and SAIF members.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires each savings institution,
as well as commercial banks and certain other lenders, to identify the
communities served by the institution and assess the credit needs of those
communities. The CRA also requires the OTS to assess an institution's
performance in meeting the credit needs of its identified communities as part of
its examination of the institution, and to take such assessments into
consideration in reviewing applications with respect to branches, mergers and
other business combinations, and savings and loan holding company acquisitions.
An unsatisfactory CRA rating may be the basis for denying such an application
and community groups have successfully protested applications on CRA grounds.
The OTS assigns CRA ratings of "outstanding, satisfactory, need to improve, or
substantial noncompliance". Liberty Bank was rated "outstanding" in its last CRA
examination in November 1998.
Regulatory Capital Requirements
The following table reflects Liberty Bank's compliance with its regulatory
capital requirements at September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
---------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Core capital....................... $111,660 7.47 $59,787 4.00 $51,873 3.47
Tangible capital................... 110,640 7.41 22,405 1.50 88,235 5.91
Risk-based capital................. 125,185 11.56 86,655 8.00 38,530 3.56
</TABLE>
OTS regulated institutions are required to maintain additional risk-based
capital equal to one-half of the amount by which the decline in its "net
portfolio value" that would result from a hypothetical 200 basis point change
(up or down, depending on which would result in the greater reduction in net
portfolio value) in interest rates on its assets and liabilities exceeds 2% of
the estimated "economic value" of its assets. The one exception to this general
rule is that if the three-month Treasury bond equivalent yield falls below 4%,
an institution would measure the hypothetical downward change at one-half of
that Treasury yield. An institution's "net portfolio value" is defined for this
purpose as the difference between the aggregate expected
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future cash inflows from an institution's assets and the aggregate expected cash
outflows on its liabilities, plus the net expected cash flows from existing
off-balance sheet contract, each discounted to present value. The estimated
"economic value" of an institution's assets is defined as the discounted present
value of the estimated future cash flows from its assets. Both the "net
portfolio value" and the "economic value" include, as specified in the
regulation, the book value of assets and liabilities that are not interest rate
sensitive. The OTS has stated that implementation of this amendment to its
regulations will require additional capital to be maintained only by
institutions having "above normal" interest rate risk. Based on the assets and
liabilities comprising Liberty Bank's statement of financial condition as of
September 30, 1998, there was no additional increase required in Liberty Bank's
minimum capital requirement.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1989
("FDICIA"), among other things, established a system of prompt corrective action
to resolve problems of undercapitalized institutions. Under this system, banking
regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS final rule implementing
the prompt corrective action provisions, an institution shall be deemed to be
(i) "well capitalized" if it has total (risk-based) capital of 10.0% or more,
has a Tier I (risk-based) capital ratio of 6.0% or more, has Tier 1 (core)
capital of 5.0% or more and is not subject to any order or final capital
directive to meet and maintain a specific capital level for any capital measure,
(ii) "adequately capitalized" if it has a total (risk-based) capital ratio of
8.0% or more, Tier 1 (risk-based) ratio of 4.0% or more and a Tier 1 (core)
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of well capitalized, (iii) "undercapitalized" if it has a
total (risk-based) capital ratio that is less than 6.0%, a Tier I (risk-based)
capital ratio that is less than 4.0% or a Tier 1 (core) capital ratio that is
less than 4.0% (3.0% in certain circumstances), (iv) "significantly
undercapitalized" if it has a total (risk-based) capital ratio that is less than
6.0%, a Tier 1 (risk-based) capital ratio that is less than 3.0% or a Tier 1
(core) capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the OTS may not reclassify a significantly
undercapitalized institution as critically undercapitalized). At September 30,
1998 Liberty Bank was a "well capitalized institution" as defined in the prompt
corrective action regulations and as such is not subject to any prompt
corrective action measures.
Dividend and Other Capital Distribution Limitations
OTS regulations require Liberty Bank to give the OTS 30 days advance notice
of any proposed declaration of dividends to the Holding Company, and the OTS has
the authority under its supervisory powers to prohibit the payment of dividends
to the Holding Company. In addition, Liberty Bank may not declare or pay a cash
dividend on its capital stock if the effect thereof would be to reduce the
regulatory capital of Liberty Bank below the amount required for the liquidation
account established in connection with its conversion from a mutual to a stock
institution.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without approval of the
OTS, make capital distributions during a calendar year equal to the greater of
100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (ii) 75% of its net income over the most recent four quarter period. Any
additional capital distributions
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require prior regulatory approval. An institution is further limited in its
ability to pay dividends as its capital levels decrease below its regulatory
requirement. As of September 30, 1998, Liberty Bank was a Tier 1 institution.
The OTS retains the authority to prohibit any capital distribution
otherwise authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation also
states that the capital distribution limitations apply to direct and indirect
distributions to affiliates, including those occurring in connection with
corporate reorganizations.
Qualified Thrift Lender Test
The Home Owners' Loan Act, as amended ("HOLA"), requires savings
institutions to meet a Qualified Thrift Lender ("QTL") test. If an institution
maintains an appropriate level of Qualified Thrift Investments (primarily
residential mortgages and related investments, including mortgage-backed
securities) ("QTIs") on a monthly basis in nine out of every 12 months and
otherwise qualifies as a QTL, it will continue to enjoy full borrowing
privileges from the FHLB of Atlanta. The required percentage of QTIs is 65% of
portfolio assets (defined as all assets minus intangible assets, property used
by the institution in conducting its business and liquid assets equal to 10% of
total assets). Certain assets are subject to a percentage limitation of 20% of
portfolio assets. In addition, savings associations may include shares of stock
of the FHLBs, FNMA and FHLMC as qualifying QTIs. As of September 30, 1998,
Liberty Bank was in compliance with its QTL requirement with 73.3% of assets
invested in QTIs.
Loans-to-One Borrower
See Note 6 of the notes to First Liberty's Consolidated Financial
Statements as contained in Item 8 -- "Financial Statements and Supplementary
Data" -- herein.
Generally, restrictions on transactions with affiliates require that
transactions between a savings association or its subsidiaries and its
affiliates be on terms as favorable to Liberty Bank as comparable transactions
with non-affiliates. In addition, certain of these transactions are restricted
to an aggregate percentage of Liberty Bank's capital; collateral in specified
amounts must usually be provided by affiliates to receive loans from Liberty
Bank. Affiliates of Liberty Bank include First Liberty and any company that
would be under common control with Liberty Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of any affiliate that is
not a subsidiary. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case-by-case basis.
Branching by Federal Associations
OTS policy permits interstate branching to the fullest extent permitted by
statute (which is essentially unlimited). This permits savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
federal associations. However, the OTS will evaluate a branch's record of
compliance with the CRA. A poor CRA record may be the basis for denial of a
branching application. Liberty Bank presently has no branches outside of
Georgia.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy the
liquidity requirements that are imposed by the OTS. At September 30, 1998, the
Bank was in compliance with all applicable requirements.
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Savings associations have authority to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve policy generally requires savings
associations to exhaust all other sources before borrowing from the Federal
Reserve System.
HOLDING COMPANY REGULATION
General
The Company is registered with the OTS as a unitary savings and loan
holding company. As such, First Liberty is required to register and file reports
with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over First Liberty and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of First Liberty. First Liberty also is
required to file certain reports with, and otherwise comply with, the rules and
regulations of the Securities and Exchange Commission ("SEC").
QTL Test
As a unitary savings and loan holding company, First Liberty generally is
not subject to activity restrictions, provided the Bank satisfies the QTL test.
If First Liberty acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of First Liberty and any subsidiaries (other than the Bank or any
other SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition.
Restrictions on Acquisitions
First Liberty must obtain approval from the OTS before acquiring control of
any SAIF-insured association. Such acquisitions are generally prohibited if they
result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (a) the acquisition would substantially lessen competition; (b) the
financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interest of its
depositors; or (c) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Subject to appropriate regulatory approvals, a bank holding company can
acquire control of a savings association, and it controls a savings association,
merge or consolidate the assets and liabilities of the savings association with,
or transfer assets and liabilities to, any subsidiary bank which is a member of
the BIF with the approval of the appropriate federal banking agency and the
Federal Reserve Board. Generally, federal savings associations can acquire or be
acquired by any insured depository institution.
CONSUMER PROTECTION AND OTHER LAWS AND REGULATIONS
Liberty Bank, Liberty Mortgage and NewSouth are also subject to various
laws and regulations dealing generally with consumer protection matters
including without limitation the Equal Credit Opportunity Act and Regulation B,
the Electronic Funds Transfer Act and Regulation E, the Truth in Lending Act and
Regulation Z, the Truth in Savings Act and Regulation DD, the Expedited Funds
Availability Act and
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Regulation CC, the Bank Secrecy Act and fair housing laws. Liberty Bank, Liberty
Mortgage and NewSouth may be subject to potential liability for material
violations of these laws and regulations.
STATE REGULATION
As a federally chartered savings institution, Liberty Bank generally is not
subject to those provisions of Georgia law governing state chartered financial
institutions or to the jurisdiction of the Department of Banking and Finance
("DBF"). However, the DBF interprets the Georgia Bank Holding Company Act to
require the prior approval of the DBF for any acquisition of control of any
savings institution (whether chartered by state or federal authority) located in
Georgia.
The DBF also interprets the Georgia Bank Holding Company Act to include
savings and loan holding companies as "bank holding companies", thus giving the
DBF the authority to make examinations of First Liberty and any subsidiaries and
to require periodic and other reports. Existing DBF regulations do not restrict
the business activities or investments of First Liberty or Liberty Bank.
State usury laws are applicable to federally insured institutions with
regard to loans made within Georgia. Generally speaking, Georgia law does not
establish ceilings on interest rates although certain specialized types of
lending in which Liberty Bank and NewSouth engage, such as making loans of
$3,000 or less, are subject to state interest rate limitations.
TAXATION
Federal Taxation
First Liberty files a consolidated federal income tax return, which has the
effect of eliminating intercompany distributions, including dividends, in the
computation of consolidated taxable income.
Earnings appropriated to bad debt reserves established for income tax
purposes cannot be used for any purpose other than to absorb bad debt losses
without recognition of taxable income. Dividends may be paid out of
unappropriated retained earnings without the imposition of any tax to the extent
that the amounts paid as dividends do not exceed earnings and profits as
calculated for federal income tax purposes.
The Small Business Job Protection Act of 1996 repealed the reserve method
of accounting for bad debts utilized by thrift institutions effective for
taxable years beginning after December 31, 1995. The bad debt reserve for tax
purposes that arose in tax years beginning before December 31, 1987 ("Base-Year
Reserve") will generally not be recaptured while post-1987 bad debt tax reserves
would be recaptured as taxable income ratably over a six-year period beginning
with the tax year ended September 30, 1997. If Liberty Bank meets a special
residential loan requirement, the start of the recapture will be suspended up to
two years. Substantially all of Liberty Bank's reserves are Base-Year Reserves.
For the tax year ended September 30, 1998, Liberty Bank determined its tax bad
debt deduction based on the specific charge-off method of accounting.
State Taxation
First Liberty's federal taxable income with certain adjustments is subject
to the Georgia corporate income tax at a rate of 6 percent. The primary
difference between taxable income for Georgia and federal income tax purposes is
interest income on United States government obligations, which is not taxable
for Georgia income tax purposes.
Accounting for Income Taxes
The two components of First Liberty's income tax provision are the current
and deferred provisions. Current income tax provisions approximate taxes to be
paid or refunded for the fiscal year. Balance sheet amounts of deferred taxes
are recognized related to the temporary differences between the bases of assets
and liabilities as measured by tax laws and their bases as reported in the
financial statements. Deferred tax expense or benefit is then recognized for the
change in deferred tax liabilities or assets between fiscal years.
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A deferred tax liability is not recognized with respect to thrift
institutions for the Base-Year Reserve, unless it becomes apparent that this
temporary difference will reverse in the foreseeable future. Future reversal of
the Base-Year Reserve would occur if Liberty Bank ceases to be in the banking
business. At September 30, 1998, First Liberty's Base-Year Reserve for which no
deferred tax liability is recognized was approximately $12 million.
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain temporary
differences will be realized. A valuation allowance is recorded for those
deferred tax items for which it is more likely than not that realization will
not occur.
ITEM 2. PROPERTIES
First Liberty neither owns nor leases any real property, and uses the
premises, equipment and furniture of Liberty Bank without payment of any rental
fees to Liberty Bank. First Liberty's headquarters is located at 201 Second
Street, Macon, Georgia, where it occupies space owned by Liberty Bank.
At November 30, 1998 Liberty Bank operated 37 banking offices. All
facilities are owned by Liberty Bank, with the exception of five supermarket
branches in Savannah and three permanent branches in Milledgeville, Sylvania and
Vidalia. The total net book value at September 30, 1998 of the offices owned by
Liberty Bank on that date, including improvements, furniture, fixtures and
equipment, was approximately $29 million. NewSouth leases their facilities
consisting of eleven operating offices and one administrative office. OFC
Capital leases their facilities. All significant data processing services for
deposits, loan servicing, accounting and other operations of Liberty Bank
currently are provided by an in-house data processing center. The investment in
in-house data processing equipment has been included as equipment above. See
Note 7 of the Notes to First Liberty's Financial Statements as contained in Item
8 -- "Financial Statements and Supplementary Data" -- herein.
Liberty Bank currently is unaware of any potential environmental liability
that may be incurred by Liberty Bank in connection with any properties owned by
Liberty Bank.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which First Liberty is
party or to which any of their property is subject. From time to time First
Liberty is a party to legal proceedings which arise in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matter was submitted by First Liberty to a vote of its stockholders
during the fourth quarter of the fiscal year ended September 30, 1998.
ITEM 4.(A) EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) of Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, is certain information as of
September 30, 1998, regarding the executive officers of First Liberty and other
individuals having key policy making roles with respect to First Liberty.
DIRECTORS
F. DON BRADFORD, 71, is the retired former owner of Macon Janitor service
in Macon, Georgia. He has served as a director of First Liberty since 1984.
RICHARD W. CARPENTER, 61, is President of Realmark Holding Corp. in
Atlanta, Georgia. He has served as a director of First Liberty since 1984.
C. LEE ELLIS, 47, is Executive Vice President, Investments, of Alfa Mutual
Insurance Company in Montgomery, Alabama. Mr. Ellis has served as a director of
First Liberty since 1986.
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ROBERT F. HATCHER, 57, joined Liberty Bank in 1988 as a director and as
President of its Middle Georgia Region. He was elected President of Liberty Bank
in 1989 and was elected Chief Executive Officer of Liberty Bank and President
and Chief Executive Officer of First Liberty in 1990. He was previously Senior
Vice President of Trust Company Bank of Middle Georgia in Macon, Georgia, where
he had served for 27 years.
MELVIN I. KRUGER, 69, is President of L. E. Schwartz & Son, Inc., a
commercial roofing contractor in Macon, Georgia. He has served as a director of
First Liberty since 1993.
KEN B. LANIER, 60, is the retired chief executive officer of Southland Bank
Corporation of Georgia and Coffee County Bank in Douglas, Georgia. He has served
as a director of First Liberty since June 1998.
THOMAS H. McCOOK, 59, is Vice President of Cherokee Culvert Company, Inc.
in Macon, Georgia. Mr. McCook has served as a director of First Liberty since
1984, and as Chairman of the Board of Directors since 1990.
HAROLD W. PEAVY, JR., 62, is the retired founder and former president of
Middle Georgia Bank in Byron, Georgia. Mr. Peavy has served as a director of
First Liberty since November 1996.
HERBERT M. PONDER, JR., 63, was the president of Bank South, Macon, in
Macon, Georgia where he had served from 1985 until his retirement in 1993. Mr.
Ponder has served as a director of First Liberty since March 1996.
JO SLADE WILBANKS, 51, is Manager of the Central Region of Georgia Power
Company. She has served as a director of First Liberty since 1994.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
ROBERT W. AIKEN, 35, joined First Liberty in 1996, and serves as President
and Chief Executive Officer of NewSouth Financial Services, Inc. He previously
was employed by Fleet Finance, Inc. for ten years.
CHARLES G. DAVIS, 51, joined Liberty Bank in 1976, and serves as Executive
Vice President in charge of operations.
LARRY D. FLOWERS, 48, joined Liberty Bank in 1993. He is Executive Vice
President in charge of marketing and retail banking. He previously was employed
by Citibank in various capacities.
DAVID L. HALL, 39, joined First Liberty and Liberty Bank in 1985. He is
Executive Vice President and Chief Financial Officer of both entities.
RICHARD A. HILLS, JR., 58, joined First Liberty in 1987, and serves as
Executive Vice President and General Counsel of First Liberty, and as Senior
Vice President and General Counsel of Liberty Bank and Liberty Mortgage. He also
serves as Secretary of First Liberty and all of its subsidiaries.
ROBERT E. LEAS, 48, joined First Liberty in August 1998, and serves as
President and Chief Executive Officer of OFC Capital Corporation, the position
which he has held since 1986, prior to First Liberty's acquisition of that
subsidiary.
MARIAN M. MACKLE, 43, joined Liberty Bank in 1995 and serves as Senior Vice
President in charge of risk management. She previously was Executive Vice
President of Nova Financial Corporation.
GEORGE A. MOLLOY, 50, joined Liberty Mortgage in 1995 and serves as its
President and Chief Executive Officer. He previously was President of SB&T
Mortgage in Atlanta.
LEE B. MURPHEY 54, joined Liberty Bank in 1991 and serves as Executive Vice
President and Chief Credit Officer.
J. LARRY WALLACE, 47, joined Liberty Bank in 1983, and serves as Executive
Vice President in charge of residential construction lending and the disposition
of foreclosed properties.
18
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed and traded on The Nasdaq Stock Market under the
symbol "FLFC." The following table sets forth the high and low last sale prices
per share of the Common Stock as reported on The Nasdaq Stock Market, and the
dividends declared per share of Common Stock for the periods indicated.
<TABLE>
<CAPTION>
LAST SALE PRICES
PER SHARE
----------------- DIVIDENDS
FISCAL YEAR ENDED SEPTEMBER 30, HIGH LOW PER SHARE(1)
- ------------------------------- ------- ------- ------------
<S> <C> <C> <C>
1998
First Quarter............................................... $22.50 $15.25 $.073
Second Quarter.............................................. 22.92 19.95 .073
Third Quarter............................................... 25.38 22.00 .075
Fourth Quarter.............................................. 25.50 18.50 .075
1997
First Quarter............................................... $14.33 $11.00 $.067
Second Quarter.............................................. 15.00 12.17 .067
Third Quarter............................................... 15.00 14.00 .067
Fourth Quarter.............................................. 16.67 14.50 .067
</TABLE>
- ---------------
(1) Not restated for dividends paid by SBC during 1998 and 1997. Dividends per
share has been restated in the accompanying Consolidated Financial
Information.
On December 15, 1998, the last sale price of the Common Stock, as reported
on The Nasdaq Stock Market was $20.88. On December 15, 1998, there were
13,556,629 shares of Common Stock outstanding and approximately 1,064 record
holders of the Common Stock.
For discussion on dividend restrictions see Item 7 -- "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources" -- herein.
19
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for First Liberty for each year of the five-year
period ended September 30, 1998 are set forth below (in thousands, except per
share data).
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Interest income...................... $ 113,936 $ 108,067 $ 94,647 $ 80,296 $ 63,483
Interest expense..................... 60,303 57,603 50,159 41,745 31,923
---------- ---------- ---------- ---------- ----------
Net interest income.................. 53,633 50,464 44,488 38,551 31,560
Provision for loan losses............ 5,671 7,764 3,432 2,457 2,295
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................... 47,962 42,700 41,056 36,094 29,265
Noninterest income, excluding gains
and losses on asset sales.......... 12,930 11,807 10,016 8,531 9,181
Gain (loss) on sale of loans and
securities......................... 5,153 2,260 1,759 (225) 314
Gain on sale of servicing rights..... 797 1,397 790 2,353 3,367
Noninterest expense.................. 42,713 39,320 37,788 31,562 29,966
---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary items................ 24,129 18,844 15,833 15,191 12,161
Income taxes......................... 8,672 5,746 5,095 4,181 3,600
---------- ---------- ---------- ---------- ----------
Income before extraordinary items.... 15,457 13,098 10,738 11,010 8,561
Extraordinary item(3)................ -- 2,811 -- -- --
---------- ---------- ---------- ---------- ----------
Net income........................... 15,457 10,287 10,738 11,010 8,561
Dividends on preferred stock......... -- 113 454 864 891
---------- ---------- ---------- ---------- ----------
Net income applicable to common
stockholders....................... $ 15,457 $ 10,174 $ 10,284 $ 10,146 $ 7,670
========== ========== ========== ========== ==========
PER COMMON SHARE DATA:
Income before extraordinary
item(4)............................ $ 1.14 $ .96 $ .82 $ .87 $ .73
Extraordinary item(4)................ -- .21 -- -- --
---------- ---------- ---------- ---------- ----------
Net income(4)........................ $ 1.14 $ .75 $ .82 $ .87 $ .73
========== ========== ========== ========== ==========
Book value........................... $ 9.02 $ 8.20 $ 8.14 $ 7.65 $ 7.69
Tangible book value.................. 8.20 7.32 7.19 6.62 6.37
Dividends paid....................... .286 .250 .188 .171 .139
Dividend payout ratio(4)............. 25.09% 33.33% 22.93% 19.66% 20.14%
Average number of shares
outstanding(4)..................... 13,585 13,592 13,080 12,680 11,732
CORE INCOME DATA:(5)
Income before extraordinary item..... $ 15,457 $ 13,098 $ 10,738 $ 11,010 $ 8,561
Merger related expenses.............. 1,868 312 -- -- --
Discontinued business lines.......... -- 1,708 -- -- --
SAIF assessment...................... -- -- 2,341 -- --
---------- ---------- ---------- ---------- ----------
Core income.......................... $ 17,325 $ 15,118 $ 13,079 $ 11,010 $ 8,561
========== ========== ========== ========== ==========
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CORE EARNINGS PER SHARE:(4)(5)
Income before extraordinary item..... $ 1.14 $ .96 $ .82 $ .87 $ .73
Merger related expenses.............. .13 .02 -- -- --
Discontinued business lines.......... -- .13 -- -- --
SAIF assessment...................... -- -- .18 -- --
---------- ---------- ---------- ---------- ----------
Core income.......................... $ 1.27 $ 1.11 $ 1.00 $ .87 $ .73
========== ========== ========== ========== ==========
Intangible amortization per share.... .08 .08 .08 .06 .03
Core return on average:
Assets............................. 1.18% 1.09% 1.09% 1.07% .94%
Equity............................. 14.95 13.95 13.05 12.90 11.46
BALANCE SHEET DATA:
Total assets......................... $1,503,268 $1,418,095 $1,307,907 $1,154,737 $ 909,885
Earning assets....................... 1,348,567 1,303,130 1,193,804 1,055,265 829,657
Loans(6)............................. 941,653 960,028 868,093 763,130 614,018
Nonperforming assets (excluding
troubled debt restructurings)...... 11,651 10,360 10,779 11,273 18,443
Loans and securities
available-for-sale(7).............. 406,914 343,102 326,456 320,670 235,932
Deposits............................. 1,093,423 1,068,487 966,374 925,377 754,910
Long-term borrowings................. 112,315 104,461 35,144 24,410 31,117
Stockholders' equity................. 122,204 109,514 102,158 94,417 78,536
PERFORMANCE RATIOS:
Return on average assets............. 1.05% .74% .89% 1.07% .94%
Return on average equity............. 13.34 9.49 10.72 12.90 11.46
Net interest margin(8)............... 4.04 4.02 4.11 4.13 3.87
Efficiency(9)........................ 55.61 58.49 65.33 62.74 64.99
Ratio of earnings to fixed
charges(10):
Excluding interest on deposits..... 2.76x 2.31% 2.54x 1.33x 1.33x
Including interest on deposits..... 1.40x 1.32x 1.30x 1.16x 1.18x
ASSET QUALITY RATIOS:
Allowance for loan losses to
loans(6,11)........................ 1.71% 1.48% 1.32% 1.40% 1.34%
Allowance for loan losses to
nonperforming loans................ 187.55 231.63 176.67 174.10 114.46
Nonperforming assets to loans and
repossessed assets(6,11)........... 1.21 1.06 1.22 1.46 2.93
Nonperforming assets to total
assets............................. .78 .73 .82 .98 2.04
Net charge-offs to average loans..... .43 .53 .31 .13 .38
CAPITAL AND LIQUIDITY:
Tangible capital ratio(12)........... 7.41% 7.24% 6.08% 5.98% 6.46%
Core capital ratio(12)............... 7.47 7.34 6.21 6.17 6.73
Core capital to risk-based
assets(12)......................... 10.31 10.08 8.65 8.70 9.49
Risk-based capital ratio(12)......... 11.56 11.21 11.35 11.80 12.99
Average equity to average assets..... 7.90 7.91 8.35 8.33 8.22
Loans to deposits(6)................. 86.12 89.85 89.83 82.47 81.34
</TABLE>
- ---------------
(1) During 1998 the Company acquired by merger SBC. This business combination
was accounted for utilizing the pooling-of-interests method of accounting,
and accordingly, all financial information prior to the merger has been
retroactively restated. During 1995, the Company completed an acquisition
of a financial institution with assets of approximately $107 million. See
"Management's Discussion and
21
<PAGE> 24
Analysis of Results of Operations and Financial Condition" -- herein. Also
see Note 3 of Notes to First Liberty's Consolidated Financial statements
contained in Item 8 -- "Financial Statements and Supplementary
Data" -- herein.
(2) Not used.
(3) Loss on extinguishment of debt, net of income tax benefits of $1.5 million.
(4) Diluted.
(5) Core income represents income exclusive of after tax expenses related to
poolings and charges associated with discontinued business lines recorded
in 1997 and a one time SAIF assessment recorded in 1996.
(6) Excludes loans available-for-sale.
(7) Includes loans and securities available-for-sale, fed funds sold and
repurchase agreements.
(8) Net interest income divided by average interest-earning assets.
(9) Computed by dividing noninterest expense excluding provisions for real
estate losses and nonrecurring items by the sum of net interest income
before provisions for loan losses and noninterest income excluding
nonrecurring items. Excludes the SBC pooling expenses in 1998 and the MGB
pooling expenses and discontinued business lines charges in 1997 and the
one time SAIF assessment recorded in 1996.
(10) The ratio of earnings to fixed charges has been determined by dividing a)
income before taxes and fixed charges by (b) total fixed charges. Fixed
charges consist of interest expense (both excluding and including interest
on deposits) and amortization of debt expense. No portion of rental expense
could be demonstrated to be representative of the interest factor, and
therefore none is included in fixed charges.
(11) Loans before allowance for losses.
(12) Includes only capital held by Liberty Bank and has not been retroactively
restated for the SBC merger.
22
<PAGE> 25
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 1998. 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 September 1995 and December 1994, in connection with the respective
acquisitions of Tifton Banks, Inc. ("Tifton") and Central Banking Company
("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
805,830 shares of the Company's common stock at a conversion price of $9.33 per
share, or 2.69 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 $7.26 per share.
In October 1996, First Liberty commenced operations at NewSouth Financial
Services, Inc. ("NewSouth"), a consumer finance subsidiary. NewSouth provides
consumer finance services in select communities throughout Georgia.
In November 1996, the Company acquired by merger Middle Georgia Bank
("MGB"). MGB on the date of acquisition held the following approximate balances:
loans of $67 million, cash and investments of $58 million, premises and
equipment of $1 million and deposits of $117 million. This business combination
was accounted for utilizing the pooling-of-interests method of accounting.
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.
In March 1998, First Liberty announced a three-for-two stock split. The
split was effective April 27, 1998 and paid in the form of a stock dividend.
In June 1998, the Company acquired by merger Southland Bank Corporation of
Georgia ("SBC"). SBC on the date of acquisition held the following approximate
balances: loans of $94 million, cash and investments of $44 million, premises
and equipment of $3 million and deposits of $123 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 SBC acquisition.
In August 1998, First Liberty acquired OFC Capital Corporation ("OFC
Capital"), a commercial leasing company. This acquisition did not have a
significant impact on the Company's results of operations or its financial
condition. Management anticipates a growing contribution by OFC Capital towards
the results of operations of the Company.
CORE INCOME
First Liberty's 1998 core income was $17.3 million compared to $15.1
million a year earlier. Core income per diluted share increased 14% to $1.27 for
fiscal 1998 from $1.11 per share for fiscal 1997. During 1998 and 1997, several
events occurred which resulted in non-recurring charges which have been excluded
from core operating results. During 1998, the Company incurred non-recurring
merger related expenses of approximately
23
<PAGE> 26
$1.9 million (or $.13 per diluted share) after-tax incurred in the third fiscal
quarter associated with the SBC merger.
During 1997, the following non-recurring charges were excluded from core
operating earnings:
-- merger related expenses of approximately $312,000 (or $.02 per diluted
share) after-tax incurred in the first fiscal quarter associated with
the MGB merger;
-- an extraordinary charge of $2.8 million (or $.21 per 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 $.13 per 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 for 1996 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.
For the year ended September 30, 1998, Liberty Bank (excluding
contributions of its subsidiaries) contributed $23.1 million of core income
before taxes, compared to $21.0 million in 1997 and $16.9 million in 1996. These
amounts represent 87%, 95% and 87% of First Liberty's core income before income
taxes for 1998, 1997 and 1996, respectively. These trends are indicative of (i)
improved margins, which resulted in increased net interest income, (ii) improved
internal operating efficiency, (iii) internal growth, and (iv) the contributions
of acquisitions.
NET INCOME
First Liberty's net income for the year ended September 30, 1998 was $15.5
million compared to $10.3 million for the year ended September 30, 1997 and
$10.7 million for the year ended September 30, 1996. First Liberty's income
before income taxes and extraordinary item was $24.1 million for the year ended
September 30, 1998 compared to $18.8 million in 1997 and $15.8 million in 1996.
For the year ended September 30, 1998, Liberty Mortgage contributed $3.1
million of income before income taxes, compared to $1.4 million in 1997 and $2.5
million in 1996. These amounts represent 13%, 7% and 16% of First Liberty's
income before income taxes for 1998, 1997 and 1996, respectively.
Included in Liberty Mortgage's income before income taxes are net gains on
sale of loans, securities and loan servicing rights of approximately $5.3
million, $3.2 million and $2.6 million for the fiscal years ended September 30,
1998, 1997, and 1996, respectively. Income before income taxes for 1998 also
included a provision of $1.2 million for the estimated impairment in the fair
value of mortgage servicing rights resulting from an anticipated acceleration in
future prepayments on mortgage loans as well as a decrease in demand for
mortgage servicing rights by acquirors. These prepayments are expected to result
from loans refinancings as borrowers take advantage of the historically low
mortgage loan interest rates experienced during 1998. Further accelerated
prepayments or reduced demand for mortgage servicing rights could result in
future impairments of the mortgage servicing rights and further provisions
against future earnings.
For the year ended September 30, 1998, NewSouth contributed $1.1 million or
5% of income before income taxes. NewSouth commenced operations in 1997 and did
not significantly affect earnings for that year.
During 1998, OFC Capital did not significantly affect 1998 operating
results.
NET INTEREST INCOME
Net interest income increased by $3.2 million or 6% during fiscal 1998 as
compared to 1997 due primarily to average interest-earning assets growth and an
increase in the net interest margin principally a result of the
24
<PAGE> 27
higher spreads from NewSouth. Net interest income increased by $6.0 million or
13% during fiscal 1997 as compared to 1996 due to growth in earning assets
partially offset by margin compression at Liberty Bank.
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>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
AVERAGE RATE/ AVERAGE RATE/ AVERAGE RATE/
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1).......................... $1,004,303 $ 93,364 9.30% $ 943,983 $ 88,142 9.34% $ 832,686 $77,000 9.25%
Mortgage-backed securities........ 248,090 15,559 6.27 202,453 13,290 6.56 155,499 11,273 7.25
Investments....................... 75,145 5,013 6.67 108,465 6,635 6.12 93,719 6,374 6.80
---------- -------- ---------- -------- ---------- -------
Total interest-earning assets..... 1,327,538 $113,936 8.58 1,254,901 $108,067 8.61 1,081,904 $94,647 8.75
======== ======== =======
Other assets...................... 139,466 116,344 118,706
---------- ---------- ----------
Total assets.............. $1,467,004 $1,371,245 $1,200,610
========== ========== ==========
Savings deposits.................. $ 54,800 $ 1,332 2.43 $ 58,450 $ 1,494 2.56 $ 64,088 $ 1,807 2.82
Time deposits..................... 670,468 38,638 5.76 617,320 35,010 5.67 550,075 31,900 5.80
Other deposits.................... 350,228 6,619 1.89 337,909 7,025 2.08 326,172 7,270 2.23
Short-term borrowings............. 212,038 11,203 5.28 121,787 7,100 5.83 106,605 6,359 5.97
Long-term borrowings(2)........... 47,358 2,511 5.30 110,304 6,974 6.32 30,450 2,823 9.27
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
liabilities............. 1,334,892 $ 60,303 4.52 1,245,770 $ 57,603 4.62 1,077,390 $50,159 4.66
======== ======== =======
Other liabilities................. 16,246 17,073 23,021
Equity............................ 115,866 108,402 100,199
---------- ---------- ----------
Total liabilities and Equity...... $1,467,004 $1,371,245 $1,200,610
========== ========== ==========
Interest rate spread.............. 4.06 3.99 4.09
---- ---- ----
Net interest margin............... 4.04 4.02 4.11
==== ==== ====
</TABLE>
- ---------------
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
25
<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,
-----------------------------------------------------------------------------
1998 VS 1997 1997 VS 1996
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)............................... $ (378) $5,624 $ (24) $ 5,222 $ 749 $10,293 $ 100 $11,142
Mortgage-backed securities............. (587) 2,988 (132) 2,269 (1,073) 3,414 (324) 2,017
Investments............................ 597 (2,036) (183) (1,622) (637) 998 (100) 261
------- ------- ------- ------- ------- ------- ------- -------
Total interest income.............. (368) 6,576 (339) 5,869 (961) 14,705 (324) 13,420
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Savings deposits....................... (76) (91) 5 (162) (168) (160) 15 (313)
Time deposits.......................... 556 3,025 48 3,629 (715) 3,911 (87) 3,109
Other deposits......................... (639) 256 (23) (406) (489) 262 (18) (245)
Short-term borrowings.................. (670) 5,650 (496) 4,484 (149) 755 (22) 584
Long-term borrowings(2)................ (1,125) (4,362) 642 (4,845) (898) 7,563 (2,356) 4,309
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense............. (1,954) 4,478 176 2,700 (2,419) 12,331 (2,468) 7,444
------- ------- ------- ------- ------- ------- ------- -------
Net interest income................ $ 1,586 $2,098 $ (515) $ 3,169 $ 1,458 $2,374 $2,144 $ 5,976
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes nonperforming loans.
(2) Includes subordinated debt.
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.
26
<PAGE> 29
Management considers assets and liabilities which mature or reprice within one
year to be interest rate sensitive. As of September 30, 1998, $752 million or
55% of interest-earning assets were interest sensitive and $894 million or 73%
of interest-bearing liabilities were interest sensitive.
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 1998, interest rates
generally declined from 1997 levels. Despite First Liberty's historical asset
sensitivity (which indicates a bias toward rising rates), the interest rate
spread remained relatively stable reflecting a relatively neutral interest rate
risk position.
Loan demand (including loans held-for-sale) remained robust during 1998
requiring additional acquisitions 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, 1998.
Management measures the risk of net interest income volatility by the
percentage exposure of forecasted net interest income under stable rates to
various other rate scenarios. During 1997, management completed a plan begun two
years earlier to reduce the level of bias toward rising interest rates. As of
September 30, 1998, management estimates that First Liberty's relative level of
risk was essentially neutral.
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, 1998.
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>
1 MONTH 2 MONTHS 3 MONTHS 6 MONTHS 1 YEAR
LESS THAN TO TO TO TO TO OVER
1 MONTH 2 MONTHS 3 MONTHS 6 MONTHS 1 YEAR 2 YEARS 2 YEARS TOTAL
--------- -------- -------- -------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)(2)...................... $397,865 $ 20,771 $ 20,580 $ 60,633 $ 98,975 $ 109,556 $320,003 $1,028,383
Securities....................... 46,516 9,718 8,748 29,427 56,324 75,054 108,710 334,497
Fed funds sold and repurchase
agreements..................... 2,071 -- -- -- -- -- -- 2,071
-------- -------- -------- -------- --------- --------- -------- ----------
Total financial assets..... $446,452 $ 30,489 $ 29,328 $ 90,060 $ 155,299 $ 184,610 $428,713 $1,364,951
======== ======== ======== ======== ========= ========= ======== ==========
Interest-bearing liabilities:
Deposits:
Savings(3)..................... $ 4,339 $ 4,346 $ 4,346 $ 9,897 $ 7,512 $ 1,187 $ 22,471 $ 54,098
Money market................... 99,710 -- -- -- -- -- -- 99,710
Interest-bearing deposits(3)... 1,742 1,740 1,739 4,967 9,219 14,489 73,970 107,866
Time........................... 88,809 62,416 40,221 149,154 220,172 93,971 31,810 686,553
-------- -------- -------- -------- --------- --------- -------- ----------
Total interest-bearing
deposits................. 194,600 68,502 46,306 164,018 236,903 109,647 128,251 948,227
Other borrowings................... 224,431 8,929 8,932 -- 1,530 -- 27,314 271,136
Interest rate agreements........... (60,000) -- -- -- -- 60,000 -- --
-------- -------- -------- -------- --------- --------- -------- ----------
Total financial
liabilities.............. $359,031 $ 77,431 $ 55,238 $164,018 $ 238,433 $ 169,647 $155,565 $1,219,363
======== ======== ======== ======== ========= ========= ======== ==========
Current period gap................. $ 87,421 $(46,942) $(25,910) $(73,958) $ (83,134) $ 14,963 $273,148 $ 145,588
Cumulative gap..................... $ 87,421 $ 40,479 $ 14,569 $(59,389) $(142,523) $(127,560) $145,588
Cumulative gap as a % of Total
asset............................ 5.8% 2.7% 1.0% -3.9% -9.5% -8.5% 9.7%
</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. Loans exclude allowance for estimated
losses.
(2) The repricing of loans does include amounts attributable to the amortization
and estimated repayment of principal.
27
<PAGE> 30
(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 1998, the provision for estimated losses on loans was $5.7
million compared to $7.8 million during 1997 and $3.4 million during 1996.
During 1998, total loans held-for-investment decreased by 2% after increasing by
11% during 1997. Nonperforming loans increased by 40% during 1998 after
remaining relatively stable during 1997. During 1998, the level of consumer
bankruptcies and consumer charge-offs remained consistent with the 1997 level
which had increased more than 200% over the prior year. During fiscal 1998, net
charge-offs were $4.3 million or .43% of average loans compared to $5.0 million
or .53% of average loans in fiscal 1997. Substantially all of the decrease in
net charge-offs related to commercial business loans. Net charge-offs on
consumer bankruptcies were $0.7 million or 16% of net charge-offs for 1998. Net
charge-offs on indirect auto loans were $1.8 million in 1998 or 42% of net
charge-offs. Excluding consumer loans in bankruptcy and indirect auto loans, the
net charge-offs would have been $1.8 million or .18% of average loans for 1998.
This trend experienced by First Liberty is believed to be indicative of trends
in most financial institutions.
Considering the reduction in loans and the overall trends in the level of
credit risk, the provision for estimated losses on loans for 1998 was comparable
to the amount provided in 1997 (disregarding $2.0 million in non-core charges
included in the 1997 amount) which was an increase of $2.2 million or 65% over
the 1996 provision. As the concentration of indirect auto loans decreases, the
level of consumer bankruptcies and consumer loans charge-offs is expected to
decline. However, management estimates the core provision in 1998 and 1997 to be
reflective of recurring portfolio risk and would anticipate that the level of
future loan loss provisions would continue to follow with the level of loan
growth and net charge-off experience.
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,
----------------------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
------------- ------------- ------------- ------------- ------------
AMT % AMT % AMT % AMT % AMT %
------- --- ------- --- ------- --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage:
Residential............................ $ 291 12 $ 764 17 $ 1,155 21 $ 1,227 26 $ 998 27
Commercial(2).......................... 358 6 1,121 10 1,106 12 1,328 14 1,934 20
Residential construction............... 799 11 389 10 311 11 409 10 217 10
Commercial business.................... 4,511 38 3,572 30 2,837 26 2,200 22 1,723 14
Consumer(3)............................ 6,486 33 6,308 33 4,336 30 3,372 28 2,038 29
Unallocated............................ 3,939 -- 2,235 -- 1,860 -- 2,255 -- 1,410 --
------- --- ------- --- ------- --- ------- --- ------ ---
Total............................ $16,384 100% $14,389 100% $11,605 100% $10,791 100% $8,320 100%
======= === ======= === ======= === ======= === ====== ===
</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).
28
<PAGE> 31
Changes in the allowance for estimated losses on loans for the five years
ended September 30, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year.......... $14,389 $11,605 $10,791 $ 8,320 $ 8,472
Provision for estimated losses.... 5,671 7,764 3,432 2,457 2,295
Acquisitions(1)................... 666 -- -- 879 --
Adjustment for MGB pooling........ -- -- (43) -- --
Recoveries........................ 1,640 1,393 2,592 2,523 2,429
Charge-offs....................... (5,982) (6,373) (5,167) (3,388) (4,876)
------- ------- ------- ------- -------
Balance, end of year................ $16,384 $14,389 $11,605 $10,791 $ 8,320
======= ======= ======= ======= =======
Allowance for loan losses to
nonperforming loans............... 187.55% 231.63% 176.67% 174.10% 114.46%
Allowance for loan losses to total
loans held-for-investment......... 1.71% 1.48% 1.32% 1.40% 1.34%
</TABLE>
- ---------------
(1) Allowances for loans and leases acquired from First Credit Service
Corporation and OFC Capital.
The following table summarizes charge-offs and recoveries by loan type
(dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Charge-offs:
Residential real estate................ $ 257 $ 287 $ 79 $ 234 $ 243
Commercial real estate................. 195 22 20 493 205
Commercial business.................... 925 1,494 2,069 855 997
Consumer............................... 4,605 4,570 2,999 1,806 3,431
------ ------ ------ ------ ------
5,982 6,373 5,167 3,388 4,876
------ ------ ------ ------ ------
Recoveries:
Residential real estate................ 96 44 31 68 198
Commercial real estate................. 103 21 28 3 --
Commercial business.................... 376 221 1,073 835 304
Consumer............................... 1,065 1,107 1,460 1,617 1,927
------ ------ ------ ------ ------
1,640 1,393 2,592 2,523 2,429
------ ------ ------ ------ ------
Net charge-offs.......................... $4,342 $4,980 $2,575 $ 865 $2,447
====== ====== ====== ====== ======
Percentage of average loans.............. .43% .53% .31% .13% .38%
====== ====== ====== ====== ======
</TABLE>
29
<PAGE> 32
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, 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,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................ $ 8,736 $ 6,196 $ 6,126 $ 5,197 $ 6,575
Loans past due 90 days or more and still
accruing.................................. -- 16 442 1,001 694
------- ------- ------- ------- -------
Total nonperforming loans................... 8,736 6,212 6,568 6,198 7,269
Real estate acquired through foreclosure.... 2,239 3,547 3,616 4,863 11,096
Other repossessed assets.................... 676 601 595 220 196
------- ------- ------- ------- -------
Total nonperforming assets.................. $11,651 $10,360 $10,779 $11,281 $18,561
======= ======= ======= ======= =======
Total nonperforming assets to total
assets.................................... .78% .73% .82% .98% 2.06%
======= ======= ======= ======= =======
Troubled debt restructurings................ $ 1,866 $ -- $ 5,252 $10,817 $12,199
======= ======= ======= ======= =======
</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.
At September 30, 1998 foreclosed properties included six commercial
properties with aggregate investments (net of reserves) of approximately $1.2
million. The remaining balance of foreclosed properties consisted of residential
properties.
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 following loans were considered impaired as of September 30,
1998 and 1997 (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, 1998 BALANCE RESERVE VALUE
- ------------------ ------- ------- --------
<S> <C> <C> <C>
Residential first mortgage.................................. $ 1,665 $ 767 $ 898
Commercial first mortgage................................... 933 93 840
Commercial business......................................... 423 66 357
Consumer(1)................................................. 7,380 2,740 4,640
------- ------ ------
$10,401 $3,666 $6,735
======= ====== ======
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
CARRYING
SEPTEMBER 30, 1997 BALANCE RESERVE VALUE
- ------------------ ------- ------- --------
<S> <C> <C> <C>
Residential first mortgage.................................. $1,125 $ 112 $1,013
Commercial first mortgage................................... 1,017 138 879
Commercial business......................................... 965 484 481
Consumer(1)................................................. 3,864 1,619 2,245
------ ------ ------
$6,971 $2,353 $4,618
====== ====== ======
</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.
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,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Loan activity:
Loans originated.................................. $771,420 $305,461 $377,994
Loan servicing rights sold........................ 101,210 181,833 104,761
-------- -------- --------
Loan servicing contributed to portfolio........... $670,210 $123,628 $273,233
======== ======== ========
Percentage sold................................... 13% 60% 28%
======== ======== ========
Operating results:
Gain on sale of loans and securities.............. $ 4,552 $ 1,815 $ 1,770
Gain on sale of loan servicing rights............. 797 1,397 790
-------- -------- --------
Net gain on sale of loans and securities and loan
servicing rights............................... $ 5,349 $ 3,212 $ 2,560
======== ======== ========
Net gain as a percentage of loans originated...... .69% 1.05% .68%
======== ======== ========
</TABLE>
During 1998, historically low interest rates and stable business conditions
resulted in loan originations more than doubling as compared to 1997.
Additionally, the accounting change of 1996 which allows for recognition of the
value of mortgage servicing rights continued in 1998 to allow for a reduction in
the percentage of servicing rights sold and an increase in investments in
mortgage servicing rights. As such, the loan servicing portfolio increased by
$274 million during 1998.
Gains on sales of loans and securities increased by $2.9 million or 128%
during 1998 resulting from increased loan originations and sales at Liberty
Mortgage. As of September 30, 1998 and 1997, Liberty Bank's investments and
mortgage-backed securities available-for-sale totalled $334 million and $287
million, respectively, and represented 100% of total investments and
mortgage-backed securities.
Deposit account service charges increased by $381,000 during 1998 as
compared to 1997, and $1.2 million during 1997 as compared to 1996 principally
due to average transaction accounts increasing 3% and 20% for the same periods
resulting principally from acquisition activity and internal growth.
Other income in fiscal 1998 was $4.0 million compared to $2.5 million
during fiscal 1997 and $1.8 million in 1996. There were several sources of
increased income, none of which were individually significant.
31
<PAGE> 34
NONINTEREST EXPENSE
Total noninterest expense increased by $3.4 million or 9% during fiscal
1998 compared to fiscal 1997 and increased $1.5 million or 4% during fiscal 1997
compared to fiscal 1996. The principal factors contributing to increased
noninterest expense were merger related expenses, increased data processing
expenses related to implementation of a wide area network linking all offices of
First Liberty, implementation of new branch automation equipment to improve
customer service and Year 2000 related costs (see "Year 2000" -- herein). Fiscal
1998 included merger related expenses of $2.4 million plus the incremental costs
of acquired operations. Fiscal 1997 included merger related expenses of $423,000
plus incremental costs of acquired operations. Fiscal 1996 included a one-time
SAIF assessment of $3.6 million.
During 1998 Liberty Bank recorded $175,000 for possible losses on sales of
foreclosed real estate as compared to $411,000 and $510,000 in 1997 and 1996,
respectively. The ending allowance for losses on foreclosed real estate for
1998, 1997 and 1996 was $657,000, $708,000 and $543,000, 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,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Postage and freight......................................... $1,357 $1,201 $1,059
Telephone................................................... 1,400 1,054 778
Stationery and supplies..................................... 978 934 788
Losses...................................................... 705 890 440
Other....................................................... 1,829 2,744 2,201
------ ------ ------
$6,269 $6,823 $5,266
====== ====== ======
</TABLE>
INCOME TAXES
Income tax expense for the year ended September 30, 1998 reflects a
variation from the statutory federal income tax rate of 35% primarily due to
state income taxes. Income tax expense for the year ended September 30, 1997,
reflects a variation from the statutory federal income tax rate of 35% primarily
due to the resolution of certain tax contingencies. First Liberty's effective
tax rate after such items for the years ended September 30, 1998, 1997 and 1996
was 35.9%, 29.1% and 32.2%, respectively.
At September 30, 1998 First Liberty had gross deferred tax assets of
approximately $6.4 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, 1998 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.
32
<PAGE> 35
LOANS
The following table states the composition of First Liberty's loan
portfolio at the indicated dates (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential permanent first mortgages:
Held-for-investment:
Fixed rate.......................... $ 29,951 3 $ 66,668 7 $ 70,663 8 $ 66,205 8 $ 69,266 11
Adjustable rate..................... 84,029 8 99,830 10 114,837 12 134,206 17 96,814 16
---------- --- ---------- --- -------- --- -------- --- -------- ---
113,980 11 166,498 17 185,500 20 200,411 25 166,080 27
---------- --- ---------- --- -------- --- -------- --- -------- ---
Available-for-sale:
Fixed rate.......................... 69,863 7 26,198 3 25,637 3 21,307 3 8,005 1
Adjustable rate..................... 483 -- 3,362 -- 1,269 -- 975 -- 1,978 --
---------- --- ---------- --- -------- --- -------- --- -------- ---
70,346 7 29,560 3 26,906 3 22,282 3 9,983 1
---------- --- ---------- --- -------- --- -------- --- -------- ---
Residential construction................ 108,056 11 102,018 10 97,907 11 76,570 10 60,697 10
Commercial construction................. 35,355 3 31,432 3 26,221 3 19,083 2 19,648 3
Commercial permanent(1)................. 20,519 2 62,677 6 82,204 9 91,860 12 108,014 17
---------- --- ---------- --- -------- --- -------- --- -------- ---
163,930 16 196,127 19 206,332 23 187,513 24 188,359 30
---------- --- ---------- --- -------- --- -------- --- -------- ---
Consumer(2)............................. 318,623 31 322,731 33 261,776 29 218,614 27 178,070 28
Commercial.............................. 361,504 35 289,061 28 233,128 25 167,383 21 89,829 14
---------- --- ---------- --- -------- --- -------- --- -------- ---
680,127 66 611,792 61 494,904 54 385,997 48 267,899 42
---------- --- ---------- --- -------- --- -------- --- -------- ---
1,028,383 100% 1,003,977 100% 913,642 100% 796,203 100% 632,321 100%
=== === === === ===
Allowance for estimated losses.......... (16,384) (14,389) (11,605) (10,791) (8,320)
---------- ---------- -------- -------- --------
Total........................... $1,011,999 $ 989,588 $902,037 $785,412 $624,001
========== ========== ======== ======== ========
</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).
During 1998, the commercial loan portfolio increased by $72 million or 25%
after increasing by $56 million or 24% in 1997. The 1998 level resulted from
Liberty Bank's strategic plan to emphasize commercial customers as a targeted
line of business. Management anticipates a continued expansion of commercial
loans in 1999.
The following table sets forth the scheduled contractual repayments of
Liberty Bank's construction and commercial business loans at September 30, 1998.
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).......................................... $120,987 $123,728
After 1 year through 5 years.............................. 22,013 180,942
After 5 years............................................. 411 56,834
-------- --------
$143,411 $361,504
======== ========
</TABLE>
- ---------------
(1) Includes demand loans, loans having no stated schedule of repayment and no
stated maturity.
33
<PAGE> 36
The following table summarizes the total amount of construction and
commercial loans at September 30, 1998 due after one year by fixed and
adjustable rates (dollars in thousands).
<TABLE>
<CAPTION>
FIXED ADJUSTABLE
RATE RATE
-------- ----------
<S> <C> <C>
Construction................................................ $ 7,389 $15,035
Commercial.................................................. 163,810 73,966
-------- -------
$171,199 $89,001
======== =======
</TABLE>
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The following table summarizes securities available-for-sale (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
TYPES OF INVESTMENTS 1998 1997 1996
-------------------- -------- -------- --------
<S> <C> <C> <C>
Investment securities:
U.S. government agencies............................. $ 35,136 $ 63,234 $ 37,908
Investment grade corporate debt and equity
securities........................................ 98 353 7,734
FHLB of Atlanta stock................................ 12,342 10,492 10,167
State, county and municipal.......................... -- 6,898 6,501
Certificates of deposit.............................. -- 891 5,795
Other................................................ 836 1,230 166
Mortgage-backed securities:
FNMA, FHLMC and GNMA securities...................... 225,595 186,646 174,050
Nonagency issuer securities.......................... 60,490 17,611 14,725
-------- -------- --------
Total securities available-for-sale.......... $334,497 $287,355 $257,046
======== ======== ========
</TABLE>
The stated contractual maturities and weighted average yield of securities
available-for-sale at September 30, 1998 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:
FHLB of Atlanta stock................ $12,342 $ -- $ -- $ -- $ 12,342
Investment grade corporate equity
securities........................ 98 -- -- -- 98
U.S. government agencies............. 12,040 22,196 900 -- 35,136
Other................................ 836 -- -- -- 836
------- ------- ------- -------- --------
25,316 22,196 900 -- 48,412
------- ------- ------- -------- --------
Weighted average yield................. 6.74% 6.23% 6.11% -- 6.43%
------- ------- ------- -------- --------
Mortgage-backed securities:
FNMA, FHLMC and GNMA securities...... 2,201 30,603 29,402 162,417 224,623
Nonagency issuer securities.......... -- 1,691 -- 59,771 61,462
------- ------- ------- -------- --------
2,201 32,294 29,402 222,188 286,085
------- ------- ------- -------- --------
Weighted average yield................. 7.60% 6.48% 6.50% 6.65% 6.37%
------- ------- ------- -------- --------
Total securities
available-for-sale......... $27,517 $54,490 $30,302 $222,188 $334,497
======= ======= ======= ======== ========
Weighted average yield................. 6.83% 6.36% 6.49% 6.65% 6.38%
======= ======= ======= ======== ========
</TABLE>
34
<PAGE> 37
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,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -----------------
% OF % OF % OF
TYPE OF ACCOUNT AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------------- ---------- ----- ---------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Savings:
Regular(1)................... $ 54,098 5% $ 55,150 5% $ 62,231 7%
Money market(2).............. 99,710 9 92,236 9 108,205 11
---------- --- ---------- --- -------- ---
Total savings........ 153,808 14 147,386 14 170,436 18
---------- --- ---------- --- -------- ---
Demand deposits:
Consumer
interest-earning(3)....... 107,866 10 102,143 10 106,601 11
Consumer
non-interest-earning...... 31,888 2 46,895 4 50,877 5
Commercial................... 94,644 9 74,640 7 68,589 7
Custodial accounts........... 18,664 2 13,369 1 13,759 1
---------- --- ---------- --- -------- ---
Total demand
deposits........... 253,062 23 237,047 22 239,826 24
---------- --- ---------- --- -------- ---
Time deposits:
1.00%-3.00%.................. 200 -- 234 -- 241 --
3.01%-5.00%.................. 15,132 1 15,732 1 38,119 4
5.01%-7.00%.................. 657,717 61 652,087 62 502,342 52
7.01%-9.00%.................. 12,093 1 14,483 1 19,936 2
9.01%-11.00%................. 1,411 -- 1,518 -- 1,457 --
---------- --- ---------- --- -------- ---
Total time
deposits........... 686,553 63 684,054 64 562,095 58
---------- --- ---------- --- -------- ---
Total deposits....... $1,093,423 100% $1,068,487 100% $972,357 100%
========== === ========== === ======== ===
Weighted average rate at year
end.......................... 4.39% 4.68% 4.53%
========== ========== ========
Contractual maturities of time
deposits:
Within 1 year................ $ 557,329 $ 481,982 $411,832
1 to 5 years................. 129,201 202,066 150,263
Over 5 years................. 23 6 --
---------- ---------- --------
$ 686,553 $ 684,054 $562,095
========== ========== ========
</TABLE>
- ---------------
(1) The range of nominal interest rates were 2.00% to 2.95% at September 30,
1998 and 2.00% to 3.25% at both September 30, 1997 and 1996.
(2) The range of nominal interest rates were 2.45% to 4.72% at September 30,
1998, 2.45% to 4.90% at September 30, 1997, and 2.45% to 4.90% at September
30, 1996.
(3) The range of nominal interest rates were 1.25% to 3.00% at September 30,
1998, 1.75% to 3.15% at September 30, 1997 and 1.75% to 3.25% at September
30, 1996.
As of September 30, 1998 the amount and remaining term to maturity for time
deposits in the amount of $100,000 or greater is as follows; approximately $46.8
million in three months or less, approximately $43.4 million in over three
months through six months, approximately $55.8 million in over six months
through twelve months, and approximately $3.7 million in over twelve months.
Included in total deposits are accounts having balances in excess of
$100,000 totaling approximately $215 million, $189 million and $176 million at
September 30, 1998, 1997 and 1996, respectively.
Certain deposits are collateralized by mortgage-backed and investment
securities aggregating approximately $43.1 million and $42.7 million at
September 30, 1998 and 1997, respectively.
35
<PAGE> 38
In the second quarter of fiscal 1996, First Liberty began a wholesale
certificate of deposit program as part of their overall funding strategy. Since
1995 brokered deposits have grown to $34 million and other wholesale deposits
have grown to $104 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 certain information and terms of FHLB
advances and other borrowings and the associated weighted average interest rates
at the dates indicated (dollars in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Outstanding balance, end of period......................... $244,345 $197,399 $187,520
Maximum month end balance.................................. 244,345 224,016 186,766
Average balance............................................ 210,393 191,094 106,413
Weighted average interest rate, end of year.............. 5.45% 5.98% 5.45%
Weighted average interest rate, during the year.......... 5.91% 5.58% 5.71%
</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 $272 million, $192 million and $197 million
at September 30, 1998, 1997 and 1996, respectively. At September 30, 1998,
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.
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. Federal
regulations currently require institutions to maintain a liquidity ratio of at
least 4%. Liberty Bank met its liquidity requirement at September 30, 1998.
The Office of Thrift Supervision ("OTS") capital regulations include a core
capital requirement of 3.0%, a tangible capital requirement of 1.5% and a
risk-based capital requirement of 8.0%. 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.
At September 30, 1998, Liberty Bank had core capital, tangible capital and
risk-based capital of 7.47%, 7.41% and 11.56%, respectively.
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
36
<PAGE> 39
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). During fiscal 1998,
1997, and 1996, Liberty Bank paid dividends to First Liberty of $10.0 million,
$1.0 million, and $4.5 million, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("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 owners 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 the fiscal year beginning October
1, 1998.
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 effective for financial statements for the fiscal year beginning
October 1, 1998.
In February 1998, the 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 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 the fiscal year
beginning October 1, 1998.
In June 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 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 the derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Due to the present limited use of
derivative instruments, Management anticipates the adoption of SFAS No. 133 will
not have a significant impact on the Company's results of operations or its
financial position.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 is effective for
the first fiscal quarter beginning after December 15, 1998 (January 1, 1999 for
the Company). SFAS No. 134 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities", to require that after the securitization of mortgage loans
held-for-sale, an entity that engages in mortgage banking activities classify
the resulting mortgage-backed securities or other retained interests based on
its ability and intent to sell or hold those investments. Management has not yet
determined the impact of SFAS No. 134 on the Company's results of operations or
its financial condition.
37
<PAGE> 40
YEAR 2000
First Liberty has initiated a company-wide program to identify and address
issues associated with the ability of its date-sensitive information, computer,
telephony, business systems and certain equipment to properly recognize the Year
2000 as a result of the century change on January 1, 2000. The program is also
designed to assess the readiness of other entities with which First Liberty does
business.
Inability to reach substantial Year 2000 compliance in First Liberty's
systems and integral third party systems could result in interruption of
telecommunications services, interruption or failure of First Liberty's ability
to service customers, failure of operating and other information systems and
failure of certain date-sensitive equipment. Such failures could result in
substantial claims by customers as well as loss of revenue due to service
interruption, delays in First Liberty's ability to service its customers
accurately and timely, and increased expenses associated with litigation,
stabilization of operations following such failures or execution of contingency
plans.
The Year 2000 program is being conducted by a management team that is
coordinating efforts of internal resources as well as third party providers and
vendors in identifying and making necessary changes to First Liberty's systems
hardware, software and date-sensitive equipment. The program includes all
affiliates of First Liberty. Some of the changes that are necessary in First
Liberty's operations are being made as a part of ongoing systems upgrades.
First Liberty's Year 2000 program has been divided into five phases:
Awareness; Assessment; Renovation; Validation; and Implementation. First Liberty
monitors its progress within these five phases based on the number of
inventoried items that have been addressed. Management's target date for
completion of all phases for its mission critical applications is June 30, 1999.
Mission critical applications include those that (1) directly affect delivery of
primary services to First Liberty's customers; (2) directly affect First Liberty
revenue recognition and collection; (3) would create noncompliance with any
statutes or laws; and (4) would require significant costs to address in the
event of noncompliance.
First Liberty has identified four main areas of focus for its Year 2000
program. Each focus area includes the hardware, software, embedded chips, third
party vendors and suppliers as well as third party networks that are associated
with the identified systems.
The first focus area, Mission Critical Applications and Systems, consists
of software and hardware that comprise the core of First Liberty's financial and
customer servicing systems. Outside suppliers provide all hardware and most
software that comprise First Liberty's networks and core systems. These
components are being remediated by third party suppliers, contract staff and
internal staff. Testing of these components for Year 2000 compliance is being
performed by the vendors and First Liberty. As of November 30, 1998, the
awareness, assessment, renovation and validation phases for First Liberty's
mission critical applications were each approximately 75% to 100% complete, and
the remaining phase, Implementation, is approximately 15% to 20% complete.
The second focus area, Business Partners, Suppliers and Vendors, includes
notification and determination of Year 2000 status for each. These entities are
being asked to respond to a survey designed to evaluate each with regard to Year
2000 risk to First Liberty. As of November 30, 1998, the awareness, assessment,
renovation and validation phases were each approximately 80% to 100% complete.
The remaining phase, Implementation, is approximately 70% to 100% complete.
The third focus area, Risk Management, includes reviewing Corporate
Borrowers (Fund Takers), Funds Providers and Capital Market/Asset Management
counterparts for Year 2000 readiness. These entities are also being asked to
respond to a survey designed to evaluate each with regard to Year 2000 risk to
First Liberty. As of November 30, 1998, the awareness, assessment, renovation
and validation phases were each approximately 95% to 100% complete. The
remaining phase, Implementation, is approximately 75% to 100% complete.
Building and environmental systems, the fourth focus area, includes various
products and systems that are not used in support of network or customer support
functions. Building and environmental systems are
38
<PAGE> 41
primarily provided by third parties and include building operations, copy
machines, security systems, voice telephone systems, printed forms, etc. As of
November 30, 1998, the awareness, assessment, renovation and validation phases
were each approximately 95% to 100% complete. The remaining phase,
Implementation, is approximately 2% to 5% complete.
As of November 30, 1998, for First Liberty's overall Year 2000 Project
Plan, the Awareness phase was approximately 95% to 100% complete, the Assessment
phase was approximately 95% to 100% complete, the Renovation phase was
approximately 95% to 100% complete, the Validation phase was approximately 70%
to 80% complete and the Implementation phase was approximately 0% to 25%
complete.
Over the years, First Liberty has developed numerous contingency plans for
conducting its business operations in the event of crises including system
outages and natural disasters. As a part of its Year 2000 compliance efforts,
First Liberty is modifying its Corporate Contingency Plan to ensure that tested
contingency plans are in place for each of its critical applications in the
event that planned Year 2000 compliance testing activities for its mission
critical applications are not successful and in the event that a mission
critical application should fail as a result of the date roll-over to January 1,
2000. This effort is not limited to the risks posed by the potential Year 2000
failures of internal information systems and infrastructures, but also includes
the potential secondary impact on First Liberty of Year 2000 failures, including
potential systems failures of business partners and infrastructure service
providers. Major milestones for the contingency plan include completion of
individual plans by the end of 1998, assessments by the end of first quarter
1999, and the completion of testing by June 30, 1999.
Expenses associated with First Liberty Financial Corp's Year 2000
compliance for fiscal year 1998 were between $300,000 - $400,000. Expenses
projected for fiscal year 1999 are between $400,000 and $600,000. Additionally,
First Liberty estimates the total cost of its capital investments will be
between $2 million and $3 million over the life of the project. First Liberty
intends to continually reassess the estimated costs and status of Year 2000
remediation efforts.
First Liberty currently anticipates that its mission critical applications
will be Year 2000 compliant by June 30, 1999. However, no assurance can be given
that unforeseen circumstances will not arise during the performance of the
testing and implementation phases that would adversely affect the Year 2000
compliance of First Liberty's systems. Furthermore, the Year 2000 compliance
status of integral third party suppliers and networks, which could adversely
impact First Liberty's mission critical applications, cannot be fully known. As
a result, First Liberty is unable to determine the impact that any system
interruption would have on its results of operations, financial position and
cash flows. However, such impact could be material.
39
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 41
Consolidated Statements of Financial Condition as of
September 30, 1998 and 1997............................... 42
Consolidated Statements of Income for each of the three
years in the period ended September 30, 1998.............. 43
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1998.... 45
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1998.............. 46
Notes to Consolidated Financial Statements.................. 47
</TABLE>
40
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
First Liberty Financial Corp.
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
First Liberty Financial Corp. and its subsidiaries at September 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Atlanta, Georgia
October 30, 1998
41
<PAGE> 44
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
(DOLLARS AND SHARES
IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 39,253 $ 39,323
Federal funds sold and repurchase agreements................ 2,071 26,187
Securities available-for-sale............................... 334,497 287,355
Loans available-for-sale, net............................... 70,346 29,560
Loans, net.................................................. 941,653 960,028
Accrued interest receivable................................. 10,751 10,173
Premises and equipment, net................................. 29,110 27,922
Real estate, net............................................ 2,239 2,854
Intangible assets........................................... 10,947 10,794
Mortgage servicing rights................................... 13,822 6,571
Advances to attorneys for loans originated.................. 41,242 8,106
Other assets................................................ 7,337 9,222
---------- ----------
Total assets...................................... $1,503,268 $1,418,095
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................................ $ 145,196 $ 117,310
Interest-bearing demand................................... 107,866 119,737
Savings................................................... 153,808 147,386
Time...................................................... 686,553 684,054
---------- ----------
Total deposits.................................... 1,093,423 1,068,487
Notes payable and other borrowed money...................... 244,345 197,399
Securities sold under agreements to repurchase.............. 26,791 26,099
Checks payable on loans originated.......................... 3,091 1,709
Other liabilities........................................... 13,414 14,887
---------- ----------
Total liabilities................................. 1,381,064 1,308,581
---------- ----------
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock ($1.00 par value, 25,000 shares authorized,
13,574 and 13,492 shares issued, respectively, and
13,552 and 13,355 shares outstanding, respectively).... 13,574 13,492
Additional paid-in capital................................ 38,797 38,425
Retained earnings......................................... 68,482 57,828
Net unrealized gain on securities available-for-sale, net
of taxes............................................... 1,620 1,246
Unearned compensation -- restricted stock................. -- (47)
Treasury stock at cost (22 and 137 shares,
respectively).......................................... (269) (1,430)
---------- ----------
Total stockholders' equity........................ 122,204 109,514
---------- ----------
Total liabilities and stockholders' equity........ $1,503,268 $1,418,095
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE> 45
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Loans..................................................... $ 93,364 $ 88,142 $77,000
Securities................................................ 20,043 18,630 16,662
Federal funds sold and repurchase agreements.............. 529 1,295 985
-------- -------- -------
Total interest income............................. 113,936 108,067 94,647
-------- -------- -------
Interest Expense:
Deposits.................................................. 46,589 43,529 40,977
Short-term borrowings..................................... 11,203 7,100 6,359
Long-term borrowings...................................... 2,511 6,974 2,823
-------- -------- -------
Total interest expense............................ 60,303 57,603 50,159
-------- -------- -------
Net interest income......................................... 53,633 50,464 44,488
Provision for estimated losses on loans................... 5,671 7,764 3,432
-------- -------- -------
Net interest income after provision for estimated losses on
loans..................................................... 47,962 42,700 41,056
-------- -------- -------
Noninterest Income:
Loan servicing fees....................................... 1,621 2,310 2,445
Gain (loss) on sale of investment securities.............. 261 128 (11)
Gain on sale of loans and mortgage-backed securities...... 4,892 2,132 1,770
Gain on sale of servicing................................. 797 1,397 790
Deposit account service charges........................... 7,333 6,952 5,740
Other income.............................................. 3,976 2,545 1,831
-------- -------- -------
Total noninterest income.......................... 18,880 15,464 12,565
-------- -------- -------
66,842 58,164 53,621
-------- -------- -------
Noninterest Expense:
Compensation, taxes and benefits.......................... 23,290 21,086 18,165
Occupancy and equipment................................... 4,948 4,298 4,409
Advertising............................................... 1,203 1,493 987
Professional fees......................................... 1,723 1,572 1,189
Data processing........................................... 3,334 1,579 1,187
Federal deposit insurance premiums........................ 668 769 5,024
Amortization of intangible assets......................... 1,234 1,233 1,234
Net cost of operation of other real estate................ 44 467 327
Other expenses............................................ 6,269 6,823 5,266
-------- -------- -------
Total noninterest expense......................... 42,713 39,320 37,788
-------- -------- -------
</TABLE>
43
<PAGE> 46
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Income before income tax expense........................ $ 24,129 $ 18,844 $ 15,833
----------- ----------- -----------
Income Tax Expense (Benefit):
Current............................................... 9,395 7,003 7,113
Deferred.............................................. (723) (1,257) (2,018)
----------- ----------- -----------
8,672 5,746 5,095
----------- ----------- -----------
Income before extraordinary loss........................ 15,457 13,098 10,738
Extraordinary loss on extinguishment of debt (net of
related income tax benefit of $1,514)................. -- 2,811 --
----------- ----------- -----------
Net income.............................................. 15,457 10,287 10,738
Dividends on preferred stock............................ -- 113 454
----------- ----------- -----------
Net income applicable to common stockholders.......... $ 15,457 $ 10,174 $ 10,284
=========== =========== ===========
Earnings Per Common Share:
Income before extraordinary loss:
Basic.............................................. $ 1.16 $ 1.00 $ 0.83
Diluted............................................ $ 1.14 $ 0.96 $ 0.82
Extraordinary loss on extinguishment of debt, net of
related income tax:
Basic.............................................. $ -- 0.22 --
Diluted............................................ $ -- 0.21 --
Net income:
Basic.............................................. $ 1.16 $ 0.78 $ 0.83
Diluted............................................ $ 1.14 $ 0.75 $ 0.82
Dividends Per Common Share:............................. $ .286 $ .250 $ .188
Average Number of Shares Outstanding:
Basic.............................................. 13,373,000 13,045,037 12,387,290
Diluted............................................ 13,584,994 13,592,447 13,079,723
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE> 47
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL GAIN (LOSS) TOTAL
PREFERRED COMMON PAID-IN RETAINED UNEARNED ON TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS COMPENSATION SECURITIES STOCK EQUITY
--------- ------- ---------- -------- ------------ ----------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30,
1995..................... $ 7,564 $12,346 $30,526 $43,774 $ (37) $ 601 $ (357) $ 94,417
Series B, 6.00% Cumulative
Convertible Preferred
stock dividends declared,
$1.50 per share.......... -- -- -- (454) -- -- -- (454)
Common stock dividends
declared, $0.188 per
share.................... -- -- -- (2,452) -- -- -- (2,452)
Conversion of $602,000 in
8.25% Convertible
Debentures into 82,891
shares of Common stock... -- 83 508 (2) -- -- -- 589
Common stock issued for
exercise of stock
options -- 111,600
shares................... -- 112 183 (25) -- -- -- 270
Common stock issued as
unearned compensation.... -- 3 22 -- (25) -- -- --
Amortization of unearned
compensation............. -- -- -- -- 18 -- -- 18
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................. -- -- -- -- -- (731) -- (731)
Adjustment for difference
in year ends relating to
Middle Georgia Bank
pooling.................. -- -- -- (235) -- -- -- (235)
Net income................. -- -- -- 10,738 -- -- -- 10,738
------- ------- ------- ------- ----- ------ ------- --------
Balances at September 30,
1996..................... 7,564 12,544 31,239 51,342 $ (44) (130) (357) 102,158
Series B, 6.00% Cumulative
Convertible Preferred
stock dividends declared,
$0.75 per share.......... -- -- -- (113) -- -- -- (113)
Common stock dividends
declared, $0.250 per
share.................... -- -- -- (3,363) -- -- -- (3,363)
Conversion of 301,171
shares of Series B, 6.00%
Cumulative Convertible
Preferred stock into
805,830 shares of Common
stock, and 1,409 shares
redeemed for $27.00 per
share.................... (7,564) 806 6,719 -- -- -- -- (39)
Conversion of $30,000 in
8.25% Convertible
Debentures into 4,131
shares of Common stock... -- 4 26 -- -- -- -- 30
Common stock issued for
exercise of stock
options -- 138,400
shares................... -- 138 364 -- -- -- -- 502
Common stock issued as
unearned compensation.... -- 3 22 -- (25) -- -- --
Amortization of unearned
compensation............. -- -- -- -- 22 -- -- 22
Shares cancelled........... -- (3) (5) -- -- -- -- (8)
Nonqualified stock options
exercised................ -- -- 60 -- -- -- -- 60
Net unrealized gain on
securities
available-for-sale, net
of taxes................. -- -- -- -- -- 1,376 -- 1,376
Acquisition of treasury
stock.................... -- -- -- -- -- -- (1,073) (1,073)
Adjustment for difference
in year ends relating to
Southland Bank
Corporation pooling...... -- -- -- (325) -- -- -- (325)
Net income................. -- -- -- 10,287 -- -- -- 10,287
------- ------- ------- ------- ----- ------ ------- --------
Balances at September 30,
1997..................... -- 13,492 38,425 57,828 $ (47) 1,246 (1,430) 109,514
Common stock dividends
declared, $0.286
per share................ -- -- -- (3,758) -- -- -- (3,758)
Common stock issued for
exercise of stock
options -- 104,575
shares................... -- 105 449 -- -- -- -- 554
Common stock issued........ -- 115 (66) -- -- -- -- 49
Shares cancelled........... -- (23) (11) 11 -- -- -- (23)
Dividends paid for
fractional shares in
three-for-two stock split
effected April 1998...... -- -- -- (10) -- -- -- (10)
Cancellation of treasury
stock resulting from SBC
pooling.................. -- (115) -- (1,046) -- -- 1,161 --
Amortization of unearned
compensation............. -- -- -- -- 47 -- -- 47
Net unrealized gain on
securities
available-for-sale, net
of taxes................. -- -- -- -- -- 374 -- 374
Net income................. -- -- -- 15,457 -- -- -- 15,457
------- ------- ------- ------- ----- ------ ------- --------
Balances at September 30,
1998..................... $ -- $13,574 $38,797 $68,482 $ -- $1,620 $ (269) $122,204
======= ======= ======= ======= ===== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
45
<PAGE> 48
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Cash flows from operating activities:
Net income.............................................. $ 15,457 $ 10,287 $ 10,738
--------- --------- ---------
Loss on extinguishment of debt.......................... -- 4,324 --
--------- --------- ---------
Adjustments to reconcile net income to cash used in
operations:
Depreciation.......................................... 2,414 2,179 2,320
Deferred income tax benefit........................... (723) (1,257) (2,018)
Amortization of loan fees, net........................ 572 152 113
Provision for estimated losses on loans, real estate
and mortgage servicing rights........................ 7,047 8,175 3,942
Amortization of intangibles........................... 1,234 1,233 1,234
Dividends received on stock........................... -- (241) (272)
Gain on sales of loans and securities................. (5,153) (2,260) (1,759)
Loans available-for-sale:
Disbursements....................................... (744,086) (100,988) (140,618)
Purchases........................................... (4,206) (172,097) (228,087)
Sales............................................... 724,916 271,954 365,341
Repayments.......................................... 974 372 600
(Increase) decrease in accrued interest receivable.... (578) 151 (1,086)
Increase(decrease) in accrued interest payable........ 607 5 (48)
Other, net............................................ (12,594) (8,978) (4,673)
--------- --------- ---------
Total adjustments................................... (29,576) (1,600) (5,011)
--------- --------- ---------
Net cash (used in) provided by operating activities..... (14,119) 13,011 5,727
--------- --------- ---------
Investing Activities:
Cash flows from investing activities:
Net decrease (increase) in fed funds sold and repurchase
agreements............................................. 24,116 12,900 (7,975)
Investment securities available-for-sale:
Purchases............................................. (188,947) (136,971) (109,961)
Sales................................................. 8,773 20,021 29,826
Maturities............................................ 23,806 39,686 17,291
Principal repayments.................................. 123,884 56,494 37,652
Net increase in loans................................... (4,322) (92,305) (116,127)
Cash paid to acquire certain assets, including
intangible assets...................................... (9,395) -- --
Purchases of premises and equipment..................... (3,652) (4,529) (2,328)
Proceeds from sales of real estate...................... 2,535 1,146 4,023
Net (increase) decrease in advances to attorneys for
loans originated....................................... (33,136) (6,377) 1,491
Other net............................................... (1,444) 3,747 (30)
--------- --------- ---------
Net cash used in investing activities................... (57,782) (106,188) (146,138)
--------- --------- ---------
Financing Activities:
Cash flows from financing activities:
Net increase (decrease) in deposits..................... 24,936 96,813 46,071
Notes payable & other borrowed money:
Proceeds.............................................. 496,711 373,946 608,358
Repayments............................................ (449,707) (357,783) (513,321)
Net increase in securities sold under agreements to
repurchase............................................. 692 3,171 12,329
Net increase (decrease) in checks payable on loans
originated............................................. 1,382 (2,741) (2,669)
Acquisition of treasury stock........................... -- (1,073) --
Redemption of subordinated debentures................... -- (16,707) --
Redemption of preferred stock........................... -- (38) --
Issuance of common stock................................ 568 494 270
Dividends paid on stock................................. (2,751) (3,342) (2,851)
--------- --------- ---------
Net cash provided by financing activities................. 71,831 92,740 148,187
--------- --------- ---------
Net (decrease) increase in cash and due from banks.......... (70) (437) 7,776
Cash and due from banks beginning of period............. 39,323 39,760 31,984
--------- --------- ---------
Cash and due from banks end of period................... $ 39,253 $ 39,323 $ 39,760
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest................................................ $ 59,696 $ 57,596 $ 49,555
Income taxes............................................ 5,218 6,812 6,635
Noncash Investing and Financing Activities:
Mortgage Loans Securitized into mortgage-backed
securities............................................. $ 13,427 $ -- $ --
Real estate foreclosed.................................. 3,766 1,989 2,681
Financing of sales of foreclosed real estate............ 2,067 733 350
Dividends declared but not paid on preferred stock...... -- -- 114
Dividends declared but not paid on common stock......... 1,025 772 524
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 49
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"), NewSouth Financial Services, Inc. ("NewSouth") and OFC Capital
Corporation ("OFC Capital"). Liberty Bank operates as a system of community
banks throughout Georgia. Liberty Mortgage originates first mortgage loans
throughout Georgia and the southeastern states. NewSouth originates consumer
finance products in offices throughout Georgia. OFC Capital originates
commercial leases on a nationwide basis.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Liberty
and its wholly-owned subsidiaries, Liberty Bank, Liberty Mortgage, NewSouth and
OFC Capital (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. Federal Home Loan Bank of Atlanta stock is carried
at cost. As of September 30, 1998 and 1997, 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 estimated
aggregate market value 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.
47
<PAGE> 50
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
The Company considers a loan to be 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.
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 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
The Company recognizes 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. 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.
The Company evaluates all MSRs 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
48
<PAGE> 51
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 5 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, 1998 and 1997 was $7.5
million and $6.3 million, respectively.
49
<PAGE> 52
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 estimated 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.
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; 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 Statement of Financial
Accounting Standard ("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
50
<PAGE> 53
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
In December 1997, the Company adopted 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 (i) the exercise of all stock
options below the market price at period end 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 1997 and 1996 have been
restated to reflect the adoption of SFAS No. 128.
SWAP AGREEMENT
The Company utilizes a swap agreement for interest rate risk management
purposes. Net interest income (expense) resulting from the differential between
exchanging fixed and floating-rate interest payments is recorded on a current
basis. If the swaps were to be terminated or sold, the gain or loss would be
deferred and amortized into interest income or expense over the remaining
maturity period of the borrowings that are being hedged. (See Note 17 for
additional information.)
RECLASSIFICATIONS AND RESTATEMENTS
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
All financial information has been retroactively restated to reflect the
Southland Bank Corporation ("SBC") merger which closed in June 1998 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 April 27,
1998.
USE OF 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 consolidated
financial statements
51
<PAGE> 54
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("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 owners 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 the fiscal year beginning October
1, 1998.
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 effective for financial statements for the fiscal year beginning
October 1, 1998.
In February 1998, the 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 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 the fiscal year
beginning October 1, 1998.
In June 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 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 the derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Due to the present limited use of
derivative instruments, Management anticipates the adoption of SFAS No. 133 will
not have a significant impact on the Company's results of operations or its
financial position.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 is effective for
the first fiscal quarter beginning after December 15, 1998 (January 1, 1999 for
the Company). SFAS No. 134 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities", to require that after the securitization of mortgage loans
held-for-sale, an entity that engages in mortgage banking activities classify
the resulting mortgage-backed securities or other retained interests based on
its
52
<PAGE> 55
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ability and intent to sell or hold those investments. Management has not yet
determined the impact of SFAS No. 134 on the Company's results of operations or
its financial condition.
2. EARNINGS PER SHARE
The following tables provide a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share for the
years ended September 30, 1998, 1997 and 1996 (dollars and shares in thousands).
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
1998 EARNINGS PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT
----------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Basic:
Net income applicable to common stockholders............. $15,457 13,373 $1.16
=====
Effect of Dilutive Securities:
Options............................................... 212
------- ------
Diluted:
Net income applicable to common stockholders plus assumed
conversions........................................... $15,457 13,585 $1.14
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
1997 EARNINGS PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT
----------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Income before extraordinary item........................... $13,098
Less preferred stock dividend.............................. 113
-------
Basic:
Income applicable to common stockholders before
extraordinary item.................................... 12,985 13,045 $1.00
=====
Effect of Dilutive Securities:
Convertible preferred stock.............................. 113 351
Options.................................................. 196
------- ------
Diluted:
Income applicable to common stockholders before
extraordinary item plus assumed conversions........... $13,098 13,592 $ .96
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
1996 EARNINGS PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT
----------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Net income applicable to common shareholders............... $10,738
Less preferred stock dividend.............................. 454
-------
Basic:
Net income applicable to common stockholders............. 10,284 12,387 $.83
====
Effect of Dilutive Securities:
Convertible preferred stock.............................. 454 541
Convertible debentures................................... 30 59
Options.................................................. 93
------- ------
Diluted:
Net income applicable to common stockholders plus assumed
conversions........................................... $10,768 13,080 $.82
======= ====== ====
</TABLE>
53
<PAGE> 56
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
In August 1998, First Liberty acquired OFC Capital Corporation ("OFC
Capital"), a commercial leasing company. This acquisition did not have a
significant impact on the Company's results of operations or its financial
condition. Management anticipates a growing contribution by OFC Capital towards
the results of operations of the Company.
In June 1998, the Company acquired by merger Southland Bank Corporation
("SBC"). On the date of acquisition, SBC held the following approximate
balances: loans of $94 million, cash and investments of $44 million, premises
and equipment of $3 million and deposits of $123 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.
<TABLE>
<CAPTION>
SEPTEMBER 30,
NINE MONTHS ENDED -------------------
JUNE 30, 1998 1997 1996
----------------- -------- --------
<S> <C> <C> <C>
Total Revenue:
First Liberty.......................................... $89,965 $110,378 $ 95,643
SBC.................................................... 9,708 13,153 11,569
------- -------- --------
Combined............................................ $99,673 $123,531 $107,212
======= ======== ========
Net Income:
First Liberty.......................................... $10,773 $ 8,899 $ 8,920
SBC.................................................... 14 1,388 1,818
------- -------- --------
Combined............................................ $10,787 $ 10,287 $ 10,738
======= ======== ========
</TABLE>
In November 1996, the Company acquired by merger Middle Georgia Bank
("MGB"). This business combination, which increased the assets of the Company by
approximately $126 million, was accounted for utilizing the pooling-of-interests
method of accounting.
4. SECURITIES AVAILABLE-FOR-SALE
Investment and mortgage-backed securities available-for-sale are summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
INVESTMENT SECURITIES:
U.S. government agencies.................................. $ 35,136 $ 63,234
Investment grade corporate equity securities.............. 98 353
FHLB of Atlanta stock..................................... 12,342 10,492
State, county and municipal............................... -- 6,898
Certificates of deposit................................... -- 891
Other..................................................... 836 1,230
MORTGAGE-BACKED SECURITIES:
FNMA, FHLMC, and GNMA securities.......................... 225,595 186,646
Nonagency issuer securities............................... 60,490 17,611
-------- --------
$334,497 $287,355
======== ========
</TABLE>
Mortgage-backed securities at September 30, 1998 and 1997 included $185
million and $132 million, respectively, of investments in collateralized
mortgage obligations.
54
<PAGE> 57
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1998 and 1997, 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
("LIBOR"), or the FHLB 11th District Cost of Funds Index.
At September 30, 1998, 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, 1998 COST GAINS LOSSES VALUE
--------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. government agencies...................... $ 34,893 $ 255 $ 12 $ 35,136
Investment grade corporate equity
securities.................................. 98 -- -- 98
FHLB of Atlanta stock......................... 12,342 -- -- 12,342
Other......................................... 887 -- 51 836
Mortgage-backed securities.................... 283,785 2,436 136 286,085
-------- ------ ---- --------
$332,005 $2,691 $199 $334,497
======== ====== ==== ========
</TABLE>
<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...................... $ 63,026 $ 250 $ 42 $ 63,234
Investment grade corporate equity
securities.................................. 383 -- 30 353
FHLB of Atlanta stock......................... 10,492 -- -- 10,492
Certificates of deposit....................... 891 -- -- 891
State county and municipal.................... 6,874 24 -- 6,898
Other......................................... 1,223 8 1 1,230
Mortgage-backed securities.................... 202,548 1,921 212 204,257
-------- ------ ---- --------
$285,437 $2,203 $285 $287,355
======== ====== ==== ========
</TABLE>
The change to stockholders' equity for the net unrealized gain or loss on
debt and equity securities during fiscal 1998 was a net gain of $1.6 million
(net of related taxes of $872,000) and a net gain of $1.2 million (net of
related tax benefit of $672,000) during fiscal 1997.
55
<PAGE> 58
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, 1998, 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..................................... $ 10,854 $ 6,871
Due after one year through five years....................... 24,015 28,201
Due after five years through ten years...................... 911 900
Due after ten years......................................... -- --
-------- --------
35,780 35,972
FHLB of Atlanta stock....................................... 12,342 12,342
Mortgage-backed securities.................................. 283,785 286,085
Other and equity securities................................. 98 98
-------- --------
$332,005 $334,497
======== ========
</TABLE>
Proceeds, gross realized gains and losses on the sale of debt and equity
securities for the three years ended September 30, 1998 are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Proceeds.................................................. $ 8,773 $20,021 $29,826
Gross realized gains...................................... 267 161 159
Gross realized losses..................................... 6 33 170
</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 $328 million, including $14 million to be held
in Liberty Bank's portfolio and $93 million on which the interest rate had not
been locked-in at September 30, 1998. Commitments to sell residential mortgage
loans and mortgage-backed securities for mandatory delivery were approximately
$190 million at September 30, 1998. Also, at September 30, 1998, the Company
bought $8 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, 1998.
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,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Loans serviced for investors....................... $1,159,701 $ 726,054 $ 788,624
Loans sub-serviced for others...................... -- 132,348 2,324
Loans serviced for Liberty Bank's portfolio........ 164,359 191,876 210,003
---------- ---------- ----------
Total loans serviced............................... $1,324,060 $1,050,278 $1,000,951
========== ========== ==========
Number of loans serviced........................... 14,832 13,958 13,873
========== ========== ==========
</TABLE>
In connection with loans serviced, there were no off-balance sheet escrow
accounts.
56
<PAGE> 59
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,
--------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Balance, beginning of year................................. $ 6,571 $ 6,132 $2,076
Capitalized.............................................. 11,015 3,480 4,812
Sold..................................................... (1,118) (1,671) (46)
Amortization............................................. (1,445) (1,370) (710)
Impairment............................................... (1,201) -- --
------- ------- ------
Balance, end of year....................................... $13,822 $ 6,571 $6,132
======= ======= ======
</TABLE>
The following table summarizes the Company's financial data with respect to
its mortgage banking operations (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Total revenues............................................ $10,776 $ 7,071 $ 7,743
Total expenses............................................ 7,716 5,685 5,212
------- ------- -------
Income before income taxes................................ $ 3,060 $ 1,386 $ 2,531
======= ======= =======
Total assets.............................................. $45,577 $17,268 $19,410
======= ======= =======
Depreciation expense...................................... $ 102 $ 188 $ 215
======= ======= =======
Capital expenditures for office premises and equipment.... $ 196 $ 175 $ 146
======= ======= =======
</TABLE>
57
<PAGE> 60
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS
Loans are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Loans collateralized by real estate:
Residential first mortgage................................ $113,980 $166,498
Commercial first mortgage................................. 20,519 62,677
Consumer mortgage(1)...................................... 150,889 102,120
Construction loans:
Residential real estate................................... 108,056 102,018
Commercial real estate.................................... 35,355 31,432
Commercial business......................................... 361,504 289,061
Consumer -- indirect auto loans............................. 99,036 171,990
Consumer -- other loans..................................... 68,698 48,621
-------- --------
958,037 974,417
Allowance for estimated losses.............................. (16,384) (14,389)
-------- --------
$941,653 $960,028
======== ========
</TABLE>
- ---------------
(1) Loans collateralized by the equity in the borrower's residence.
The above balances exclude undisbursed loan commitments representing loans
in process and unused lines of credit amounting to approximately $177 million
and $132 million at September 30, 1998 and 1997, 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, 1998 was
approximately $18.9 million based on the 15% limitation and $31.5 million based
on the 25% limitation. At September 30, 1998, Liberty Bank had no relationships
in excess of the LTOB limitation.
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, 1998 and 1997, the recorded investment in loans for which
impairment had been recognized in accordance with SFAS No. 114 totaled $10.4
million and $7.0 million, respectively, with a corresponding valuation allowance
of $3.7 million and $2.4 million, respectively. For the periods ended September
30, 1998 and 1997, the average recorded investment in impaired loans was
approximately $8.6 million and $7.2 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.
58
<PAGE> 61
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 (dollars in thousands).
<TABLE>
<S> <C>
Interest income that would have been recorded under the
original terms............................................ $ 1,122
========
Interest income recorded.................................... $ 632
========
</TABLE>
Changes in the allowance for estimated loan losses for the three years
ended September 30 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year.............................. $14,389 $11,605 $10,791
Provision for estimated losses............................ 5,671 7,764 3,432
Adjustment for MGB pooling................................ -- -- (43)
Acquisitions(1)........................................... 666 -- --
Charge-offs............................................... (5,982) (6,373) (5,167)
Recoveries................................................ 1,640 1,393 2,592
------- ------- -------
Balance end of year....................................... $16,384 $14,389 $11,605
======= ======= =======
</TABLE>
- ---------------
(1) relates to certain assets acquired during 1998.
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1998 1997
------- -------
<S> <C> <C>
Land........................................................ $ 4,988 $ 4,687
Office buildings............................................ 28,271 27,517
Furniture, fixtures and equipment........................... 21,436 18,696
------- -------
54,695 50,900
Less accumulated depreciation............................... 25,585 22,978
------- -------
$29,110 $27,922
======= =======
</TABLE>
Certain office facilities are occupied under operating lease arrangements
with future annual rentals as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,:
- -------------------------
<S> <C>
1999...................................................... $ 557
2000...................................................... 551
2001...................................................... 476
2002...................................................... 305
2003...................................................... 206
Thereafter................................................ 525
------
$2,620
======
</TABLE>
Total rent expense was approximately $656,000, $542,000, and $459,000 for
the years ended September 30, 1998, 1997 and 1996, respectively.
59
<PAGE> 62
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. REAL ESTATE
Investments in real estate are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1998 1997
------ ------
<S> <C> <C>
Acquired through foreclosure................................ $2,896 $3,562
Allowance for estimated losses.............................. (657) (708)
------ ------
$2,239 2,854
====== ======
</TABLE>
Sales of real estate owned (gross of gains and losses) during fiscal 1998
and 1997 were $4.6 million and $1.9 million, respectively, of which, Liberty
Bank provided financing for $2.1 million and $733,000 during the same periods.
Changes in the allowance for estimated losses on real estate for the years
ended September 30 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Acquired through foreclosure:
Balance, beginning of year................................ $ 708 $ 543 $ 481
Provision for estimated losses............................ 175 411 510
Charge-offs, net.......................................... (226) (246) (448)
----- ----- -----
Balance, end of year...................................... $ 657 $ 708 $ 543
===== ===== =====
Acquired for development:
Balance, beginning of year................................ $ -- $ 125 $ 142
Charge-offs, net.......................................... -- (125) (17)
----- ----- -----
Balance, end of year...................................... $ -- $ -- $ 125
===== ===== =====
</TABLE>
9. DEPOSITS
The Company had brokered deposits totalling $34 million and $17 million at
September 30, 1998 and 1997, respectively. Banking regulations have established
guidelines in order for financial institutions to accept brokered deposits.
Without obtaining a waiver, only well capitalized financial institutions, as
defined, are allowed to accept brokered deposits.
At September 30, 1998 and 1997, the Company had $215 million and $189
million of time deposits of $100,000 or more.
The maturities of the Company's time deposits are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $557,329
2000........................................................ 97,039
2001........................................................ 17,412
2002........................................................ 14,773
2003........................................................ --
Thereafter.................................................. --
--------
$686,553
========
</TABLE>
60
<PAGE> 63
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. NOTES PAYABLE AND OTHER BORROWED MONEY
Notes payable and other borrowed money are summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Line of Credit (interest rate of 6.625% and 6.66% at
September 30, 1998 and 1997, respectively)................ $ 500 $ 10,000
Advances from the FHLB of Atlanta:
Short term (interest rates ranging from 5.57% to 7.42% and
5.05% to 6.55% at September 30, 1998 and 1997,
respectively).......................................... 131,530 82,449
Long term (interest rates ranging from 4.99% to 7.65% and
5.51% to 8.66% at September 30, 1998 and 1997,
respectively).......................................... 112,315 104,461
Other....................................................... -- 489
-------- --------
$244,345 $197,399
======== ========
</TABLE>
Liberty Bank's unused borrowing capacity with the FHLB of Atlanta at
September 30, 1998 was approximately $52 million in advances and warehouse lines
of credit. Additionally, Liberty Bank has approximately $55 million in fed fund
lines with correspondent banks.
At September 30, 1998, contractual principal maturities of long-term notes
payable and other borrowed money are as follows (dollars in thousands):
<TABLE>
<S> <C>
1999........................................................ $ --
2000........................................................ 60,000
2001........................................................ 50,000
2002........................................................ --
2003........................................................ --
2004 and thereafter......................................... 2,315
--------
$112,315
========
</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,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Outstanding balance, end of period.......................... $132,030 $ 92,449 $164,449
Maximum month end balance................................... 215,230 164,449 164,449
Average balance outstanding during the year................. 168,609 96,183 91,298
Weighted average interest rate, end of period............... 5.63% 6.40% 5.50%
Weighted average interest rate, during the period........... 5.71 5.62 5.81
</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 $272 million and $197 million at
September 30, 1998 and 1997, respectively. At September 30, 1998, 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.
61
<PAGE> 64
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Mortgage-backed securities sold under agreements
To repurchase at year end:
Book value.............................................. $42,899 $22,103 $23,158
Market value............................................ $43,739 $22,301 $23,080
Maximum borrowings under repurchase agreements
For the year:
Identical securities................................. $26,988 $33,987 $32,507
Average borrowings under repurchase agreements
For the year:
Identical securities................................. $23,087 $28,296 $18,406
Weighted average interest rate at year end................ 5.24% 5.56% 4.89%
</TABLE>
12. 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 year ended September 30, 1996, Liberty Bank
determined its bad debt reserve deduction based on the percentage of taxable
income method. For the years ended September 30, 1998 and 1997, Liberty Bank
determined its tax bad debt deduction based on the specific charge-off method of
accounting.
The provision for federal income taxes consists of the following (dollars
in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Current.................................................... $9,395 $ 7,003 $ 7,113
Deferred................................................... (723) (1,257) (2,018)
------ ------- -------
Total............................................ $8,672 $ 5,746 $ 5,095
====== ======= =======
</TABLE>
62
<PAGE> 65
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income taxes (including income tax (benefit) on extraordinary items)
differ from income taxes computed at the federal corporate statutory rate of 35%
as shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
Benefit of graduated tax brackets........................... -- (.8) (.5)
State taxes, net of federal benefit......................... 1.4 -- --
Amortization of intangible assets........................... .9 1.9 1.5
Tax exempt interest......................................... (.5) (2.1) (2.1)
Resolution of tax contingencies............................. -- (6.7) --
Other, net.................................................. (.9) 1.8 (1.7)
---- ---- ----
Effective federal income tax rate........................... 35.9% 29.1% 32.2%
==== ==== ====
</TABLE>
The net deferred tax asset is included in other assets in 1998 and 1997 in
the consolidated statements of financial condition. Gross deferred tax assets
and deferred tax liabilities as of September 30 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred Tax Assets:
Allowance for estimated loan losses....................... $4,650 $3,655
Deferred loan fees........................................ 15 --
Real estate owned loss allowance.......................... -- 5
Reserve for uncollected late fees......................... 167 118
Purchase accounting adjustments, net...................... 104 137
Other reserves............................................ 255 212
Unrealized loss on securities available-for-sale.......... -- 11
Core deposits............................................. 242 160
Benefits.................................................. 438 254
Other..................................................... 486 204
------ ------
Total deferred tax assets......................... $6,357 $4,756
------ ------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred Tax Liabilities:
Section 481 mark-to-market adjustment..................... $ -- $ 158
Depreciation.............................................. 331 326
Loan swap................................................. -- 87
Loan discounts............................................ 415 390
FHLB stock................................................ 1,459 1,313
Loan origination fees..................................... 436 381
Purchase accounting adjustments, net...................... 57 119
Unrealized gain on securities available-for-sale.......... 434 679
Deferred loan fees........................................ 315 57
Benefits.................................................. 161 119
Other, net................................................ 205 284
------ ------
Total deferred tax liabilities.................... 3,813 3,913
------ ------
Total net deferred tax asset...................... $2,544 $ 843
====== ======
</TABLE>
63
<PAGE> 66
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
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
("Base-Year Reserve"), unless it becomes apparent that this temporary difference
will reverse in the foreseeable future. Future reversal of the Base-Year Reserve
would occur if the Company ceases to be in the banking business. At September
30, 1998, 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.
13. PREFERRED STOCK
In March 1997, the Company redeemed 1,409 shares of its Series B 6.00%
Cumulative Convertible Preferred ("Series B") stock for $38,043 plus accrued and
unpaid dividends. The remaining 301,171 shares of the Series B were converted
into 805,830 shares of the Company's common stock, at a conversion price of
$9.33 per share, or 2.69 shares of common stock.
The 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 2.69 shares of common stock, at a
conversion price of $9.33.
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.
14. REGULATORY RESTRICTIONS
Liberty Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. 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. The regulations require Liberty Bank to meet
specific capital 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 judgments by the regulators
about components, risk weightings and other factors.
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
64
<PAGE> 67
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the regulations) to risk weighted assets (as defined), and of tangible capital
(as defined) to assets (as defined). As of September 30, 1998 Liberty Bank met
all capital adequacy requirements to which it is subject.
As of July 1, 1998, the date of the most recent notification from the
Federal Deposit Insurance Corporation ("FDIC"), Liberty Bank was categorized as
well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed Liberty Bank's category.
The following table reflects Liberty Bank's compliance with its regulatory
capital requirements as of the dates indicated (dollars in thousands)(restated
to reflect transactions accounted for as pooling-of-interests.):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ------------------ -----------------
SEPTEMBER 30, 1998 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------ -------- ----- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk weighted
Assets)............................ $125,185 11.56% $86,655 >=8.00% $108,319 >=10.00%
Core Capital (to Adjusted Tangible
Assets)............................ 111,660 7.47 59,787 >=4.00 74,734 >=5.00
Tangible Capital (to Tangible
Assets)............................ 110,640 7.41 22,405 >=1.50 N/A
Tier 1 Capital (to Risk weighted
Assets)............................ 111,660 10.31 N/A 64,991 >=6.00
SEPTEMBER 30, 1997
- ------------------
Total Capital (to Risk weighted
Assets)............................ $119,522 11.77% $81,210 >=8.00% $101,512 >=10.00%
Core Capital (to Adjusted Tangible
Assets)............................ 107,873 7.94 40,742 >=3.00 67,903 >=5.00
Tangible Capital (to Tangible
Assets)............................ 104,832 7.74 20,325 >=1.50 N/A
Tier 1 Capital (to Risk weighted
Assets)............................ 107,873 10.63 N/A 60,907 >=6.00
</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 Office of Thrift Supervision ("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). During
fiscal 1998 and 1997 Liberty bank paid dividends to First Liberty in the amounts
of $10.0 million and $1.0 million, respectively.
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 $4.7 million to $47.8 million of net transactions, plus 10% on
the
65
<PAGE> 68
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remainder. Liberty Bank held no additional reserves at September 30, 1998 due to
an adequate amount of qualifying assets.
15. 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 makes matching
contributions of the Company common stock in amounts determined annually by its
Board of Directors. Dividends earned on the Company common stock are retained in
the ESSOP.
Prior to January 1, 1998, the Company also maintained 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 provided for additional cash
compensation for OPSP participants if core earnings for the fiscal year equaled
or exceed a predetermined minimum. The OPSP was terminated at the end of the
first quarter of fiscal 1998. On January 1, 1998, the Company's officers and
employees began participating in a new Performance Excellence Plan ("PEP") under
which all participants are 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, the OPSP and the PEP included in the
accompanying financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1998 1997 1996
------ ---- ----
<S> <C> <C> <C>
ESSOP....................................................... $ 440 $377 $339
OPSP/PEP.................................................... $1,217 $571 $867
</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.
16. 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 1992 and approved
by the stockholders in 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 1,354,500
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, 1998, there were 598,375
shares available for grant. The 1992 Plan is administered by the Compensation
and Benefits Committee of the Company's Board of Directors ("the Committee").
66
<PAGE> 69
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 and under the 1992
Plan during each of the three fiscal years in the period ended September 30,
1998 follows:
<TABLE>
<CAPTION>
ISOP 1992 PLAN
------------------- ------------------
OPTION AVERAGE OPTION AVERAGE
SHARES PRICE SHARES PRICE
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Options outstanding at September 30, 1995........ 189,000 $2.93 236,250 $ 5.94
Issued......................................... -- -- 228,375 9.73
Exercised...................................... (111,600) 2.41 -- --
--------- ----- -------- ------
Options outstanding at September 30, 1996........ 77,400 3.67 464,625 7.80
Issued......................................... -- -- 143,250 12.19
Exercised...................................... (77,400) 3.67 (45,000) 4.00
--------- ----- -------- ------
Options outstanding at September 30, 1997........ -- -- 562,875 9.22
Issued......................................... -- -- 121,250 24.76
Exercised...................................... -- -- (104,575) 5.87
--------- ----- -------- ------
Options outstanding at September 30, 1998........ -- $ -- 579,550 $11.99
========= ===== ======== ======
</TABLE>
Under the 1992 Plan, the number of shares exercisable at September 30, 1998
and 1997 was 371,144 and 330,000, respectively. All options under the ISOP were
exercisable during 1997 and 1996.
In October 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").
In November 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 180,000 shares of common stock, in the aggregate, may
be granted to non-employee directors under the DSOP.
67
<PAGE> 70
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information with regard to options issued under the DSOP during each of the
three fiscal years that the plan has been in effect in the period ended
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
DSOP
-----------------
OPTION AVERAGE
SHARES PRICE
------- -------
<S> <C> <C>
Options outstanding at September 30, 1995................... -- --
Issued.................................................... 69,750 $ 9.77
------ ------
Options outstanding at September 30, 1996................... 69,750 9.77
Issued.................................................... 18,000 13.52
------ ------
Options outstanding at September 30, 1997................... 87,750 10.55
Issued.................................................... 2,250 23.63
------ ------
Options outstanding at September 30, 1998................... 90,000 $10.86
====== ======
</TABLE>
The Company has elected the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost as
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 1998, 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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income -- as reported................................... $15,457 $10,287 $10,738
Net income -- pro forma..................................... 14,623 9,620 10,004
Earnings per share -- as reported........................... 1.14 0.75 0.82
Earning per share -- pro forma.............................. 1.11 0.71 0.74
</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>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield..................................... 1.4% 1.4% 2.4%
Expected stock price volatility............................. 35.2 35.4 36.5
Risk-free interest rate..................................... 6.0 6.1 5.9
Expected life of options.................................... 8.7 years 8.5 years 7.4 years
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $8.63, $4.91 and $3.31 per share, respectively.
17. 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
68
<PAGE> 71
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Georgia, its primary
market area. The contract or notional amounts of financial instruments with
off-balance sheet risk at September 30 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commitments to originate loans:
Fixed rate................................................ $332,206 $131,736
Adjustable rate........................................... 58,691 56,371
Standby letters of credit................................... 683 1,764
Commitments to sell loans:
Mandatory................................................. 190,118 59,888
Optional.................................................. 8,000 4,000
</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, 1998 and 1997 of $235.1 million, and $40.7
million, 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.
69
<PAGE> 72
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows at September 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
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.......... $ 41,324 $ 41,324 $ 65,510 $ 65,510
Securities available-for-sale......... 334,497 334,497 287,355 287,355
Loans, net............................ 941,653 967,198 960,028 967,639
Loans available-for-sale, net......... 70,346 70,346 29,560 29,560
Mortgage servicing rights............. 13,822 14,174 6,571 8,053
Financial Liabilities:
Deposits.............................. $1,093,423 $1,097,518 $1,068,487 $1,069,840
Notes payable and other borrowed
money.............................. 244,345 244,895 197,399 197,431
Securities sold under agreements to
repurchase......................... 26,791 26,791 26,099 26,099
Off-Balance-Sheet Financial Instruments:
Standby letters of credit............. $ 683 $ 683 $ 1,764 $ 1,764
Commitments to originate loans........ 390,897 392,379 133,609 133,828
Mandatory commitments to sell loans... 190,118 189,997 59,888 60,088
Optional commitments to sell loans.... 8,000 8,000 4,000 3,996
Mortgage servicing rights............. -- 1,313 -- 5,661
</TABLE>
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.
19. 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, 1998, will have a
materially adverse effect on the Company's financial position, results of
operations or liquidity.
70
<PAGE> 73
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. FINANCIAL INFORMATION OF FIRST LIBERTY FINANCIAL CORP. (PARENT ONLY)
First Liberty's statements of financial condition (parent only) as of
September 30, 1998 and 1997 and the related statements of income and cash flows
for each of the three years in the period ended September 30, 1998 are as
follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 884 $ 3,882
Other investments........................................... 2 17
Investment in Liberty Bank.................................. 123,333 115,517
Other assets................................................ 210 2,208
-------- --------
Total assets...................................... $124,429 $121,624
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable........................................... $ 1,025 $ 772
Line of credit.............................................. 500 10,000
Other liabilities........................................... 700 1,338
-------- --------
Total liabilities................................. 2,225 12,110
-------- --------
Stockholders' equity:
Common stock.............................................. 13,574 13,492
Additional paid-in capital................................ 38,797 38,425
Retained earnings......................................... 68,482 57,828
Net unrealized gain on securities available-for-sale, net
of taxes............................................... 1,620 1,246
Treasury stock at cost.................................... (269) (1,430)
Unearned compensation..................................... -- (47)
-------- --------
Total stockholders' equity........................ 122,204 109,514
-------- --------
Total liabilities and stockholders' equity........ $124,429 $121,624
======== ========
</TABLE>
- ---------------
71
<PAGE> 74
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Interest income on other investments.................... $ 32 $ 176 $ 243
Cash dividends from Liberty Bank........................ 10,000 1,009 4,458
Gain on sale of securities.............................. -- 90 --
Other income............................................ -- -- 1
------- ------- -------
Total income.................................... 10,032 1,275 4,702
------- ------- -------
Expense:
Interest expense on line of credit...................... 263 5 --
Directors fees.......................................... -- 32 32
Loss on sale of real estate............................. -- 23 --
Other expense........................................... 445 427 382
------- ------- -------
Total expense................................... 708 487 414
------- ------- -------
Income before income tax expense and equity in
undistributed net income of Liberty Bank................ 9,324 788 4,288
Income tax benefit........................................ (259) (53) (49)
------- ------- -------
Income before equity in undistributed net income of
Liberty Bank............................................ 9,583 841 4,337
Equity in undistributed net income of Liberty Bank........ 5,874 9,446 6,401
------- ------- -------
Net income................................................ 15,457 10,287 10,738
Dividends on preferred stock.............................. -- 113 454
------- ------- -------
Net income applicable to common stockholders.............. $15,457 $10,174 $10,284
======= ======= =======
</TABLE>
- ---------------
72
<PAGE> 75
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,
-----------------------------
1998 1997 1996
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Cash flows from operating activities:
Net income......................................... $ 15,457 $ 10,287 $10,738
-------- -------- -------
Equity in undistributed earnings of Liberty Bank... (5,874) (9,446) (6,401)
Other, net......................................... 344 (500) 913
-------- -------- -------
Total adjustments............................. (5,530) (9,946) (5,488)
-------- -------- -------
Net cash provided by (used in) operating activities..... 9,927 341 5,250
-------- -------- -------
Investing Activities:
Cash flows from investing activities:
Net decrease in other investments.................. 15 6,809 1,200
Cash paid in acquisitions.......................... -- -- (3,555)
Sale of real estate................................ -- 119 28
Other, net......................................... 128 475 (303)
-------- -------- -------
Net cash provided by (used in) investing activities..... 143 7,403 (2,630)
-------- -------- -------
Financing Activities:
Cash flows from financing activities:
Proceeds from line of credit....................... 1,500 10,000 --
Repayment of line of credit........................ (11,000) -- --
Capital infusion to Liberty Bank................... (1,696) (10,000) --
Issuance of common stock........................... 568 494 270
Redemption of preferred stock...................... -- (38) --
Dividends paid on stock............................ (2,751) (3,343) (2,851)
Purchase of treasury stock......................... -- (1,073) --
Other, net......................................... 311 (146) --
-------- -------- -------
Net cash used in financing activities................... (13,068) (4,106) (2,581)
-------- -------- -------
Net increase in cash.................................... (2,998) 3,638 39
Cash beginning of period................................ 3,882 244 205
-------- -------- -------
Cash end of period...................................... $ 884 $ 3,882 $ 244
======== ======== =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes.......................................... $ 5,735 $ 6,812 $ 6,635
</TABLE>
73
<PAGE> 76
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. CONSOLIDATED CONDENSED QUARTERLY RESULTS OF INCOME (UNAUDITED)
The following summarizes the consolidated condensed quarterly results of
income (unaudited) for the years ended September 30 (dollars in thousands,
except per share data):
<TABLE>
<CAPTION>
1998 QUARTERS 1ST 2ND 3RD 4TH(1)
- ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income............................. $28,271 $28,139 $28,692 $28,834
Net interest income............................... 13,262 13,233 13,501 13,637
Provision for estimated losses on loans........... 1,714 1,522 1,197 1,238
Net income applicable to common stockholders...... $ 3,947 $ 4,195 $ 2,645 $ 4,670
Earnings per common share:
Net income
Basic........................................ $ .30 $ .31 $ .20 $ .35
Diluted...................................... $ .30 $ .31 $ .19 $ .34
Dividends per common share:..................... $ .068 $ .068 $ .075 $ .075
</TABLE>
- ---------------
(1) The fourth quarter of 1998 includes a provision of $1.2 million related to
an impairment in the value of mortgage servicing rights.
<TABLE>
<CAPTION>
1997 QUARTERS 1ST 2ND 3RD 4TH(1)
- ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income............................. $25,983 $26,471 $27,588 $28,025
Net interest income............................... 12,249 12,607 12,824 12,784
Provision for estimated losses on loans........... 1,096 876 2,370 3,422
Income before extraordinary item.................. 3,289 3,734 3,906 2,169
Extraordinary loss on extinguishment of debt, net
of related taxes................................ -- -- -- 2,811
------- ------- ------- -------
Net income (loss)................................. 3,289 3,734 3,906 (642)
Dividends on preferred stock...................... 113 -- -- --
------- ------- ------- -------
Net income (loss) applicable to common
stockholders.................................... $ 3,176 $ 3,734 $ 3,906 $ (642)
======= ======= ======= =======
Earnings per common share:
Income before extraordinary item
Basic........................................ $ .26 $ .29 $ .29 $ .16
Diluted...................................... $ .24 $ .28 $ .28 $ .16
Extraordinary loss on extinguishment of debt,
net of related taxes
Basic........................................ -- -- -- $ .22
Diluted...................................... -- -- -- $ .21
Net income (loss)
Basic........................................ $ .26 $ .29 $ .29 $ (.06)
Diluted...................................... $ .24 $ .28 $ .28 $ (.05)
Dividends per common share:....................... $ .062 $ .063 $ .063 $ .063
</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 $.13 per 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 $.21 per diluted share) after-tax reflecting the loss on redemption of
$16.5 million principal balance of subordinated debt.
74
<PAGE> 77
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
For the three year period ended September 30, 1998, there has been no
disagreement between First Liberty and any accountants on any matter of
accounting principles or practices or financial statement disclosure.
75
<PAGE> 78
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of First Liberty is set forth under
the caption "Proposal No. 1 -- Election of Directors" in First Liberty's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
January 27, 1999. Such information is incorporated herein by reference. The
definitive Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after First Liberty's fiscal year end. Pursuant to
instruction 3 of Item 401(b) of Regulation S-K and General Instruction G(3) of
Form 10-K, information relating to the executive officers of First Liberty is
set forth at Part I, Item 4(A) of this Report under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
caption "Proposal No. 1 -- Election of Directors -- Executive Compensation" in
the Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference.
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of First Liberty's $1.00 par value Common
Stock by certain persons is set forth under the captions "Voting -- Principal
Stockholders" and "Proposal No. 1 -- Election of Directors -- Stock Ownership"
in the Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain transactions between Liberty Bank and
affiliates of First Liberty and Liberty Bank is set forth under the caption
"Proposal No. 1 -- Election of Directors -- Transactions With First Liberty" in
the Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference.
76
<PAGE> 79
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report:
1. Financial Statement Schedules
The Company's financial statements, the notes thereto and the report of the
independent accountants are set forth on pages 41 through 74 of this Form 10-K.
3. Exhibits
The following exhibits are filed as part of or incorporated by reference in
the Report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
3(a) -- Amended and Restated Articles of Incorporation (Exhibit 3(a)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
3(b) -- By-laws, as amended (Exhibit 3(b) to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1986)
3(b)1 -- By-Laws, as amended (Exhibit 3(b)1 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
3(b)2 -- By-Laws, as amended (Exhibit 3(b)2 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
10(a) -- Plan of Conversion of Liberty Bank (Exhibit 10(a) to
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1986)
10(b) -- Registrant's Employee Savings and Stock Ownership Plan
(Exhibit 4 to Registrant's Registration Statement on Form
S-8, No. 33-24733)
10(c) -- Registrant's Shareholder Rights Plan dated as of August 2,
1989 (Exhibit 4.1 to Registrant's Current Report on Form 8-K
dated August 14, 1989)
10(d) -- Executive Employment Agreement dated as of November 1, 1990,
among Liberty Bank, Registrant and Robert F. Hatcher
10(e) -- First Amendment to Executive Employment Agreement dated as
of November 1, 1991, among Liberty Bank, Registrant and
Robert F. Hatcher
10(f) -- Second Amendment to Executive Employment Agreement dated as
of October 21, 1992, among Liberty Bank, Registrant and
Robert F. Hatcher
10(g) -- Third Amendment to Executive Employment Agreement dated as
of January 26, 1994, among Liberty Bank, Registrant and
Robert F. Hatcher
10(h) -- Employment Agreement dated November 5, 1987 among
Registrant, Liberty Bank and Richard A. Hills, Jr.
10(i) -- Employment Agreement dated August 1, 1990 between Liberty
Bank and Charles G. Davis
10(j) -- Employment Agreement dated June 30, 1992 among Registrant,
Liberty Bank and David L. Hall
10(k) -- First Liberty Financial Corp. 1992 Stock Incentive Plan
dated as of November 24, 1992
10(l) -- Employment Agreement dated June 28, 1995 between Liberty
Bank and J. Larry Wallace
10(m) -- Registrant's Officer Profit Sharing Plan as amended and
restated effective October 1, 1993
</TABLE>
77
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
10(n) -- Agreement and Plan of Merger as of June 11, 1996, among
Registrant, Liberty Bank, and Middle Georgia Bank (Appendix
A to Registrant's Registration Statement on Form S-4, No.
333-10617)
10(o) -- Registrant's 1995 Director Stock Option Plan as of November
21, 1995
10(p) -- Registrant's Annual Report on Form 11-K for the First
Liberty Financial Corp. Employee Savings and Stock Ownership
Plan for the year ended September 30, 1992
10(q) -- Employment Agreement dated May 23, 1995 between Liberty
Mortgage and George A. Molloy
10(r) -- Employment Agreement dated August 5, 1996 between NewSouth
and Robert W. Aiken
10(s) -- Employment Agreement dated August 31,1998 between OFC
Capital and Robert E. Leas
12 -- Statements of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
21 -- Subsidiaries of Registrant (Exhibit 22 to Registrant's
Annual Report on Form 10-K for the year ended September 30,
1990)
23(a) -- Consent of Independent Certified Public Accountants
23(b) -- Consent of KPMG Peat Marwick to incorporation by reference
of financial statements in First Liberty's Registration
Statement No. 33-24733 on Form S-8
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
None
78
<PAGE> 81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST LIBERTY FINANCIAL CORP.
(Registrant)
<TABLE>
<S> <C>
Date: December 22, 1998 By: /s/ ROBERT F. HATCHER
----------------------------------------------
Robert F. Hatcher
Principal Executive Officer
</TABLE>
Pursuant to the requirements of Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS H. MCCOOK Chairman of the Board and December 22, 1998
- ----------------------------------------------------- Director
Thomas H. McCook
/s/ ROBERT F. HATCHER President, Chief Executive December 22, 1998
- ----------------------------------------------------- Officer and Director
Robert F. Hatcher
/s/ F. DON BRADFORD Director December 22, 1998
- -----------------------------------------------------
F. Don Bradford
Director
- -----------------------------------------------------
Richard W. Carpenter
/s/ C. LEE ELLIS Director December 22, 1998
- -----------------------------------------------------
C. Lee Ellis
/s/ MELVIN I. KRUGER Director December 22, 1998
- -----------------------------------------------------
Melvin I. Kruger
Director
- -----------------------------------------------------
Ken B. Lanier
/s/ HAROLD W. PEAVY, JR. Director December 22, 1998
- -----------------------------------------------------
Harold W. Peavy, Jr.
/s/ HERBERT M. PONDER, JR. Director December 22, 1998
- -----------------------------------------------------
Herbert M. Ponder, Jr.
/s/ JO SLADE WILBANKS Director December 22, 1998
- -----------------------------------------------------
Jo Slade Wilbanks
/s/ DAVID L. HALL Executive Vice President and December 22, 1998
- ----------------------------------------------------- Chief Financial Officer
David L. Hall (Duly authorized principal
financial and accounting
officer)
</TABLE>
79
<PAGE> 82
FIRST LIBERTY FINANCIAL CORP.
INDEX OF EXHIBITS
The following exhibits are filed as part of or incorporated by reference in
the Report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C> <C>
3(a) -- Amended and Restated Articles of Incorporation (Exhibit 3(a)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996)
3(b) -- By-laws, as amended (Exhibit 3(b) to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1986)
3(b)1 -- By-Laws, as amended (Exhibit 3(b)1 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
3(b)2 -- By-Laws, as amended (Exhibit 3(b)2 to Registrant's Annual
Report on Form 10-K for the year ended September 30, 1990)
10(a) -- Plan of Conversion of Liberty Bank (Exhibit 10(a) to
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1986)
10(b) -- Registrant's Employee Savings and Stock Ownership Plan
(Exhibit 4 to Registrant's Registration Statement on Form
S-8, No. 33-24733)
10(c) -- Registrant's Shareholder Rights Plan dated as of August 2,
1989 (Exhibit 4.1 to Registrant's Current Report on Form 8-K
dated August 14, 1989)
10(d) -- Executive Employment Agreement dated as of November 1, 1990,
among Liberty Bank, Registrant and Robert F. Hatcher
10(e) -- First Amendment to Executive Employment Agreement dated as
of November 1, 1991, among Liberty Bank, Registrant and
Robert F. Hatcher
10(f) -- Second Amendment to Executive Employment Agreement dated as
of October 21, 1992, among Liberty Bank, Registrant and
Robert F. Hatcher
10(g) -- Third Amendment to Executive Employment Agreement dated as
of January 26, 1994, among Liberty Bank, Registrant and
Robert F. Hatcher
10(h) -- Employment Agreement dated November 5, 1987 among
Registrant, Liberty Bank and Richard A. Hills, Jr.
10(i) -- Employment Agreement dated August 1, 1990 between Liberty
Bank and Charles G. Davis
10(j) -- Employment Agreement dated June 30, 1992 among Registrant,
Liberty Bank and David L. Hall
10(k) -- First Liberty Financial Corp. 1992 Stock Incentive Plan
dated as of November 24, 1992
10(l) -- Employment Agreement dated June 28, 1993 between Liberty
Bank and J. Larry Wallace
10(m) -- Registrant's Officer Profit Sharing Plan as amended and
restated effective October 1, 1994
10(n) -- Agreement and Plan of Merger as of June 11, 1996, among
Registrant, Liberty Bank, and Middle Georgia Bank (Appendix
A to Registrant's Registration Statement on Form S-4, No.
333-10617)
10(o) -- Registrant's 1995 Director Stock Option Plan as of November
21, 1995
10(p) -- Registrant's Annual Report on Form 11-K for the First
Liberty Financial Corp. Employee Savings and Stock Ownership
Plan for the Year ended September 30, 1992
</TABLE>
80
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C> <C>
10(q) -- Employment Agreement dated May 23, 1995 between Liberty
Mortgage and George A. Molloy
10(r) -- Employment Agreement dated August 5, 1996 between NewSouth
and Robert W. Aiken
10(s) -- Employment Agreement dated August 31, 1998 between OFC
Capital and Robert E. Leas
12 -- Statements of Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
21 -- Subsidiaries of Registrant (Exhibit 22 to Registrant's
Annual Report on Form 10-K for the year ended September 30,
1990)
23(a) -- Consent of Independent Certified Public Accountants
23(b) -- Consent of KPMG Peat Marwick to incorporation by reference
of financial statements in First Liberty's Registration
Statement No. 33-24733 on Form S-8
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
81
<PAGE> 1
EXHIBIT 10(s)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into on August
31, 1998, by and between ROBERT E. LEAS (the "Employee") and OFC CAPITAL
CORPORATION, a Georgia corporation (the "Company"), pursuant to the Agreement,
Plan of Reorganization and Plan of Merger dated August 31, 1998, by and among
First Liberty Financial Corp., ("FLFC"), FLFC Subsidiary, Inc. ("FLFCS"), the
Company and the Employee (the "Merger Agreement").
W I T N E S S E T H:
WHEREAS, the Company is and, for a number of years, has been engaged in the
equipment leasing business (the "Business");
WHEREAS, pursuant to the terms of the Merger Agreement, the Company initially
will become a wholly-owned subsidiary of FLFC and then will become a subsidiary
of FLFC's subsidiary, First Liberty Bank ("FLB");
WHEREAS, the Employee, immediately prior to the consummation of the transactions
contemplated by the Merger Agreement, served as the President of the Company and
was its sole stockholder; and
WHEREAS, the Company desires to retain the Employee as the President and Chief
Executive Officer of the Company and the Employee wishes to be employed in that
capacity on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, for and in consideration of the compensation and other benefits
to be paid to the Employee as set forth in this Agreement, the consideration
paid to the Employee as the "Stockholder" under the Merger Agreement, the mutual
covenants and agreements herein contained, and other valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. EMPLOYMENT AND POSITION. The Company hereby employs the Employee as its
President and Chief Executive Officer, to serve in the Company's current office
location or any future office location in the metropolitan Atlanta, Georgia
area. As such, the Employee shall be responsible for the management of the
Company, subject to the direction of its Board of Directors.
2. TERM. The employment term is three (3) years, beginning on the date of
this Agreement and ending on August 31, 2001, unless extended by the parties.
3. COMPENSATION. Within five (5) days after the date of this Agreement, the
Company shall pay to the Employee a one-time signing bonus in the amount of
$10,000.00, which will be paid subject to withholding and other applicable
taxes. As compensation for the services to be rendered hereunder, the Employee
shall receive an annual salary of $125,000.00, payable in periodic installments
in accordance with the Company's normal payroll practices. The Employee will
receive annual performance reviews and possible salary increases, the first such
performance review occurring on or about the first anniversary date of this
Agreement.
4. STOCK OPTIONS. Within five (5) days after the date of this Agreement, the
Company shall cause to be delivered to the Employee an Incentive Stock Option
Agreement pursuant to FLFC's 1992 Stock Incentive Plan in the form attached
hereto as Exhibit A. As an executive officer of FLFC, the Employee shall be
eligible to receive additional stock option grants from time to time on the same
basis as such options are granted to other executive officers
<PAGE> 2
generally.
5. BENEFITS. The Employee shall be eligible to participate in FLFC's Performance
Excellence Plan, the terms of which have previously been provided to the
Employee and which provides the opportunity for a participating employee to
receive a percentage of annual salary in the form of incentive compensation for
the accomplishment of certain goals described in such plan. In addition, the
Employee shall be entitled to participate in any employee benefit plans
(including, but not limited to, any life insurance, disability, medical, dental,
hospitalization, savings, retirement and other benefit plans of FLFC) then in
effect for executive officers of FLFC and receive any other fringe benefits that
FLFC then provides to its executive officers. In addition to the above, the
Company shall pay the dues for the Employee's country club membership and the
cost of an annual physical examination for the Employee on the same basis then
in effect for executive officers of FLFC. Further, the Employee shall receive an
automobile allowance of $350 per month during the Initial Term and will be
reimbursed at a rate of $0.15 per mile when conducting business on behalf of the
Company.
6. BUSINESS EXPENSES. The Employee may incur reasonable expenses in
connection with his duties hereunder, including expenses for business travel,
meals, lodging and similar items. The Company will reimburse the Employee for
all such reasonable and necessary expenses upon the Employee's periodic
presentation of an itemized and documented account of such expenditures and in
accordance with the Company's expenses reimbursement policies which are in
effect at the time the expense is incurred.
7. TERMINATION. The Company may terminate the Employee's employment under
this Agreement at any time. If such termination is for cause, the Employee shall
not be entitled to receive any further compensation from the Company. If such
termination is without cause, the Employee shall be entitled to receive
compensation at his then current salary for a period of six (6) months from the
date of such termination, and the restrictions on competition and solicitation
contained in Section 9 of this Agreement shall terminate as of that date.
Termination for cause shall include termination due to the Employee's personal
dishonesty, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provision of this
Agreement.
8. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Employee acknowledges that he
has had access to and intimate knowledge of (i) confidential information
relative to the Company, including but not limited to information about the
business practices and customers of the Company, type and volume of the
Company's business, the Company's customers, and all information contained in
the books and records of the Company. The Employee further acknowledges and
agrees that because of his employment pursuant to this Agreement, he will
continue to have access to confidential or proprietary information of the
Company concerning or relative to the Business of the Company which includes,
without limitation, technical material of the Company, sales and marketing
information, customer account records, billing information, training and
operations information, materials and memoranda, personnel records, pricing and
financial information relating to the business, accounts, customers, prospective
customers, employees and affairs of the Company, (all such information is
collectively referred to herein as the "Confidential Company Information"). The
Employee acknowledges and agrees that the Confidential Company Information is
and shall be the property of the Company. The Employee agrees that during the
term of his employment and for a period of three (3) years thereafter, the
Employee shall keep confidential all Confidential Company Information and shall
not use or disclose the Confidential Company Information for any reason other
than on behalf of the Company.
9. COVENANT NOT TO SOLICIT OR COMPETE. The Employee acknowledges and agrees that
because of his position as the President of the Company he has (i) intimate
knowledge of the Company's Business including, but not limited to, knowledge of
the Confidential Company Information, and (ii) knowledge of and relationships
with the equipment vendors, banks and other financing sources, lease brokers,
customers, and various other parties with which the Company has conducted
Business (collectively, the " Company Business Contacts") The Employee agrees
and acknowledges that such knowledge, access, and relationships are such that if
the Employee were to compete with the Company by terminating his employment
prior to the expiration of the term hereof and thereafter soliciting Company
Business Contacts or employees, the benefits that FLFC and FLFCS bargained for
under the
<PAGE> 3
Merger Agreement would be severely and irreparably damaged. Further, the
Employee acknowledges and agrees that this Agreement and the term hereof, and
the covenants not to solicit or compete contained herein, were a fundamental
element of the transactions contemplated by the Merger Agreement and that the
transactions contemplated therein would not have been consummated in the absence
of this Agreement. Accordingly, the Employee agrees that during the term of his
employment by the Company and for a period of three (3) years after (x) the
termination of this Agreement by the Employee prior to the expiration of its
term, or (y) the termination of the Employee's employment by the Company for
cause, the Employee shall not, directly or indirectly, either individually, in
partnership, jointly, or in conjunction with, or on behalf of, any person, firm,
partnership, corporation, or unincorporated association or entity of any kind
(except on behalf of or with the express authorization of FLFC or the Company,
do any of the following things:
(a) Solicit or contact any Company Business Contact (without regard to
location) for the purpose of providing services or doing business that is the
same as, or substantially similar to, those provided by the Company in
connection with the Business.
(b) Solicit, induce or encourage any Company Business Contact (without
regard to location) to terminate or modify any business relationship with the
Company.
(c) Persuade or attempt to persuade any person who is employed by the
Company at the time of such contact to terminate or modify his or her employment
relationship with the Company, whether or not such relationship is pursuant to a
written agreement.
(d) Employ any person who was employed by the Company within one year prior
thereto to engage in the Business.
The restrictions set forth in this Section 9 shall terminate if (i) there
shall occur a change in control of FLFC, FLB or the Company during the term of
this Agreement, i.e., the acquisition of more than 24.9% ownership by a party,
unless the acquiring party offers the Employee continued employment in the same
or a comparable position as that provided for in this Agreement; or (ii) the
Employee's employment is terminated without cause.
10. REMEDY FOR BREACH. The Employee acknowledges and agrees that his breach of
any of the covenants contained in Sections 8 and 9 of this Agreement would cause
irreparable injury to the Company and that remedies at law of the Company for
any actual or threatened breach by the Employee of such covenants would be
inadequate and that the Company shall be entitled to specific performance of the
covenants in such sections or injunctive relief against activities in violation
of such sections, or both, by temporary or permanent injunction or other
appropriate judicial remedy, writ or order, without the necessity of proving
actual damages. This provision with respect to injunctive relief shall not
diminish the right of the Company to claim and recover damages against the
Employee for any breach of this Agreement in addition to injunctive relief. The
Employee acknowledges and agrees that he will be responsible for all legal
expenses, including attorneys' fees, which the Company incurs in pursuing
remedies, whether legal or equitable, for any breach of the covenants contained
in Sections 8 and 9 of this Agreement by the Employee. The Employee acknowledges
and agrees that the covenants contained in Sections 8 and 9 of this Agreement
shall be construed as agreements independent of any other provision of this or
any other contract or agreement between the parties hereto, and that the
existence of any claim or cause of action by the Employee against the Company,
whether predicated upon this or any other contract or agreement, shall not
constitute a defense to the enforcement by the Company of said covenants.
11. REASONABLENESS. The Employee has carefully considered the nature and extent
of the restrictions upon him and the rights and remedies conferred on the
Company under this Agreement, and the Employee hereby acknowledges and agrees
that:
(a) the restrictions and covenants contained herein, and the rights and
remedies conferred upon the Company, are necessary to protect the goodwill and
other value of the Business of the Company, and the benefits bargained for by
FLFC and FLFCS under the Merger Agreement;
(b) the restrictions placed upon the Employee hereunder are narrowly drawn,
are fair and reasonable
<PAGE> 4
in time and territory, will not prevent him from earning a livelihood, and place
no greater restraint upon the Employee than is reasonably necessary to secure
the goodwill and other value of the Business of the Company, and the benefits
bargained for by FLFC and FLFCS under the Merger Agreement.
12. INVALIDITY OF ANY PROVISION. It is the intention of the parties hereto that
the provisions of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of each state and jurisdiction in
which such enforcement may be sought, but that the unenforceability (or the
modification to conform with such laws or public policies) of any provision
hereof shall not render unenforceable or impair the remainder of this Agreement
which shall be deemed amended to delete or modify, as necessary, the invalid or
unenforceable provisions. The parties further agree to alter the balance of this
Agreement in order to render the same valid and enforceable.
13. APPLICABLE LAW. This Agreement shall be construed and enforced in accordance
with the laws of the State of Georgia.
14. WAIVER OF BREACH. The waiver by the Company of a breach of any provision of
this Agreement by the Employee shall not operate or be construed as a waiver by
the Company of any subsequent breach by the Employee.
15. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the
Company, FLFC, and FLB, and their respective successors and assigns. This
Agreement is not assignable by the Employee but is assignable by the Company.
16. NOTICES. All notices, demands and other communications hereunder shall be in
writing and shall be delivered in person or deposited in the United States mail,
certified or registered, with return receipt requested, as follows:
<PAGE> 5
If to the Employee, to:
Mr. Robert E. Leas
2055 Shallowford Park
Roswell, Georgia 30076
If to the Company, to:
OFC Capital Corporation
c/o First Liberty Bank
201 Second Street
Macon, Georgia 31297
Attention: Mr. Robert F. Hatcher
17. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties with respect to the matters contained herein. It may not be changed
orally but only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension, or discharge is
sought.
18. APPLICABLE LAW. This Agreement shall be construed according to the laws
of the State of Georgia.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the
date first mentioned above.
OFC CAPITAL CORPORATION
By: /s/ Robert F. Hatcher
---------------------
Robert F. Hatcher
Sole Director
/s/ Robert E. Leas (SEAL)
- -------------------------
ROBERT E. LEAS
<PAGE> 1
EXHIBIT 12
STATEMENTS OF COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computation of Earnings:
Income before income taxes and extraordinary item......... $24,129 $18,844 $15,833
Add:
Interest expense.......................................... 60,303 57,603 50,159
------- ------- -------
Earnings as adjusted........................................ $84,432 $76,447 $65,992
======= ======= =======
Computation of Fixed Charges:(a)
Interest expense (including amortization of debt
expense)............................................... $60,303 $57,603 $50,159
Preferred stock dividends(b).............................. -- 163 669
------- ------- -------
$60,303 $57,766 $50,828
======= ======= =======
Ratio of earnings to combined fixed charges and preferred
stock dividends........................................... 1.40x 1.32x 1.30x
======= ======= =======
</TABLE>
- ---------------
(a) No portion of rental expense could be demonstrated to be representative of
the interest factor, and therefore none is included in fixed charges.
(b) Preferred stock dividends have been increased to an amount representing the
pre-tax earnings which would be required to cover such dividend
requirements.
<PAGE> 1
EXHIBIT 23.A
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
First Liberty Financial Corp. and Subsidiaries on Form S-8 (File No. 33-24733)
of our report, dated October 30, 1998, on our audits of the consolidated
financial statements of First Liberty Financial Corp. and Subsidiaries as of
September 30, 1998 and 1997 and for the years ended September 30, 1998, 1997 and
1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Atlanta, Georgia
December 29, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1998, FORM 10-K AND THRIFT FINANCIAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 39,253
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,071
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 334,497
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,028,383
<ALLOWANCE> 16,384
<TOTAL-ASSETS> 1,503,268
<DEPOSITS> 1,093,423
<SHORT-TERM> 158,821
<LIABILITIES-OTHER> 16,505
<LONG-TERM> 112,315
0
0
<COMMON> 13,574
<OTHER-SE> 108,630
<TOTAL-LIABILITIES-AND-EQUITY> 1,503,268
<INTEREST-LOAN> 93,364
<INTEREST-INVEST> 20,572
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 113,936
<INTEREST-DEPOSIT> 46,589
<INTEREST-EXPENSE> 60,303
<INTEREST-INCOME-NET> 53,633
<LOAN-LOSSES> 5,671
<SECURITIES-GAINS> 261
<EXPENSE-OTHER> 42,713
<INCOME-PRETAX> 24,129
<INCOME-PRE-EXTRAORDINARY> 15,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,457
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 8.58
<LOANS-NON> 8,736
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,389
<CHARGE-OFFS> 5,982
<RECOVERIES> 2,316
<ALLOWANCE-CLOSE> 16,384
<ALLOWANCE-DOMESTIC> 12,445
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,939
</TABLE>
