<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-14417
--------------------------------------------------------
FIRST LIBERTY FINANCIAL CORP.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Georgia 58-1680650
-------------------------------------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
201 Second Street, Macon, Georgia 31201
-------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(912) 743-0911
-------------------------------------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Exhibit index appears on page 21.
There were 14,287,336 shares of common stock outstanding as of August 10, 1999.
1
<PAGE> 2
FIRST LIBERTY FINANCIAL CORP.
Quarterly Report on Form 10-Q
For The Quarter Ended June 30, 1999
Table of Contents
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item Page
- ---- ----
<S> <C>
1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION
6. (a) Exhibits 21
(b) Reports on Form 8-K 21
Signatures 22
</TABLE>
2
<PAGE> 3
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
----------- -----------
(dollars and shares in
thousands)
<S> <C> <C>
Assets:
Cash and due from banks $ 47,275 $ 41,703
Federal funds sold 12,139 8,073
Securities available-for-sale 457,577 344,134
Loans available-for-sale, net 53,919 70,346
Loans, net 1,027,989 986,301
Accrued interest receivable 11,489 11,717
Premises and equipment, net 31,941 29,826
Real estate, net 1,946 2,239
Intangible assets 10,143 11,131
Mortgage servicing rights 26,375 13,822
Advances to attorneys for loans originated 16,792 41,242
Other assets 10,909 7,573
----------- -----------
Total assets $ 1,708,494 $ 1,568,107
=========== ===========
Liabilities and Stockholders' Equity:
Deposits:
Demand $ 299,718 $ 267,587
Savings 164,484 162,878
Time 762,495 722,376
----------- -----------
Total deposits 1,226,697 1,152,841
Notes payable and other borrowed money 315,333 244,345
Securities sold under agreements to repurchase 23,660 26,791
Checks payable on loans originated 1,868 3,091
Other liabilities 8,637 14,224
----------- -----------
Total liabilities 1,576,195 1,441,292
=========== ===========
Commitments and contingencies -- --
Stockholders' equity:
Common stock ($1.00 par value, 100,000 shares
authorized, 14,287 and 14,227 shares issued,
respectively, and 14,265 and 14,205 shares
outstanding, respectively) 14,287 14,227
Additional paid-in capital 41,288 41,069
Retained earnings 80,876 70,164
Accumulated other comprehensive income (3,883) 1,624
Treasury stock at cost (22 shares) (269) (269)
----------- -----------
Total stockholders' equity 132,299 126,815
----------- -----------
Total liabilities and stockholders' equity $ 1,708,494 $ 1,568,107
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 4
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ------------------------
June 30 June 30
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest Income:
Loans and leases $ 24,606 $ 24,409 $ 72,444 $ 72,742
Securities 6,514 5,418 18,309 15,394
Federal funds sold 242 127 725 549
-------- -------- -------- --------
Total interest income 31,362 29,954 91,478 88,685
-------- -------- -------- --------
Interest Expense:
Deposits 12,292 12,300 37,203 36,829
Short-term borrowings 2,254 3,001 6,218 8,012
Long-term borrowings 1,410 521 4,353 2,043
-------- -------- -------- --------
Total interest expense 15,956 15,822 47,774 46,884
-------- -------- -------- --------
Net interest income 15,406 14,132 43,704 41,801
Provision for estimated losses on loans and leases 1,186 1,288 2,930 4,640
-------- -------- -------- --------
Net interest income after provision for
estimated losses on loans and leases 14,220 12,844 40,774 37,161
-------- -------- -------- --------
Noninterest Income:
Deposit account service charges 2,009 1,853 5,871 5,444
Mortgage banking income 2,827 2,113 8,889 5,008
Gain (loss) on sale of investment securities 8 184 (43) 265
Other income 1,890 1,543 5,280 4,126
-------- -------- -------- --------
Total non-interest income 6,734 5,693 19,997 14,843
-------- -------- -------- --------
20,954 18,537 60,771 52,004
-------- -------- -------- --------
Noninterest Expense:
Compensation, taxes and benefits 7,376 6,801 21,188 18,144
Occupancy and equipment 2,084 1,324 4,921 3,714
Advertising 333 336 976 966
Professional fees 699 977 1,133 1,574
Data processing 722 1,906 2,132 2,845
Federal deposit insurance premiums 181 176 533 511
Amortization of intangible assets 319 320 958 960
Other expenses 2,356 1,823 6,272 5,061
-------- -------- -------- --------
Total non-interest expense 14,070 13,663 38,113 33,775
-------- -------- -------- --------
Income before income tax expense 6,884 4,874 22,658 18,229
Income tax expense 2,340 2,123 8,043 7,060
-------- -------- -------- --------
Net income 4,544 2,751 14,615 11,169
Other comprehensive loss, before tax:
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) on
securities arising during the period (6,407) (348) (8,515) (292)
Less: reclassification adjustment for
(gains) losses included in net income (8) (184) 43 (265)
-------- -------- -------- --------
Other comprehensive loss, before tax (6,415) (532) (8,472) (557)
Income tax benefit related to items of other
comprehensive loss 2,245 186 2,965 195
-------- -------- -------- --------
Other comprehensive loss, net of tax (4,170) (346) (5,507) (362)
-------- -------- -------- --------
Comprehensive income $ 374 $ 2,405 $ 9,108 $ 10,807
======== ======== ======== ========
</TABLE>
4
<PAGE> 5
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- ------------------------
June 30 June 30
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings Per Common Share:
Basic $ .32 $ .20 $ 1.02 $ .80
Diluted $ .31 $ .19 $ 1.00 $ .78
Dividends Per Common Share: $ .095 $ .071 $ .277 $ .201
Average Number of Shares Outstanding:
Basic 14,265 14,018 14,242 14,007
Diluted 14,682 14,323 14,572 14,309
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
First Liberty Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended June 30, 1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Operating Activities:
Cash flows from operating activities:
Net income $ 14,615 $ 11,169
Adjustments to reconcile net income to cash provided by (used in) operating
activities:
Depreciation 2,657 1,827
Amortization of loan fees, net 306 341
Provision for estimated losses on loans, real estate and mortgage servicing rights 2,427 4,698
Amortization of intangibles 959 960
Gain on sale of loans and securities (8,214) (3,376)
Loans available-for-sale:
Disbursements (719,379) (100,760)
Purchases (26,144) (407,374)
Sales 771,776 474,238
Repayments 1,975 532
Decrease in accrued interest receivable 188 1,204
Increase in accrued interest payable 193 359
Increase in other assets (3,988) (106)
Other, net (7,658) (7,972)
----------- -----------
Total adjustments 15,098 (35,429)
----------- -----------
Net cash provided by (used in) operating activities 29,713 (24,260)
----------- -----------
Investing Activities:
Cash flows from investing activities:
Net (increase) decrease in federal funds sold and repos (3,266) 22,113
Securities available-for-sale:
Purchases (296,567) (192,645)
Sales 26,568 11,622
Maturities and principal payments 146,972 165,943
Net increase in loans (43,127) 23,688
Acquisition of mortgage servicing rights (14,123)
Purchases of premises and equipment (5,063) (1,254)
Proceeds from sales of real estate 546 2,177
Net (increase) decrease in advances to attorneys for loans originated 24,450 (29,679)
Other, net (3,398) 11
----------- -----------
Net cash provided by (used in) investing activities (167,008) 1,976
----------- -----------
Financing Activities:
Cash flows from financing activities:
Net increase in deposits 74,449 27,956
Proceeds from notes payable and other borrowed money 450,500 188,344
Repayments of notes payable and other borrowed money (379,512) (199,127)
Net increase in securities sold under agreements to repurchase (3,131) 36,059
Net increase in checks payable on loans originated (1,223) 1,642
Issuance of common stock 279 410
Dividends paid on stock (3,375) (2,724)
Other, net 4,880 (21)
----------- -----------
Net cash provided by financing activities 142,867 52,539
----------- -----------
Net increase in cash and due from banks 5,572 30,255
Cash and due from banks, beginning of period 41,703 41,620
----------- -----------
Cash and due from banks, end of period $ 47,275 $ 71,875
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Noncash investing and financing activities:
Real estate foreclosed $ 912 $ 3,128
Financing of sales of foreclosed real estate 672 1,645
Dividends declared but not paid on common stock 2,648 872
Mortgage loans securitized into mortgage-backed securities -- 13,427
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accounting and reporting policies of First Liberty Financial Corp. and
Subsidiaries ("First Liberty" or "the Company") conform to generally accepted
accounting principles and to general practices within the savings and loan
industry. The interim consolidated financial statements included herein are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial position,
results of operations and cash flows for the interim periods presented. All
adjustments reflected in the interim financial statements are of a normal
recurring nature. Such financial statements should be read in conjunction with
the financial statements and notes thereto and the report of independent
accountants included in the Company's Form 10-K Annual Report for the fiscal
year ended September 30, 1998. The year end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results of operations for the
three and nine months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
All financial information has been retroactively restated to reflect the
Vidalia Bankshares Inc. merger that closed on April 1, 1999 and was accounted
for utilizing the pooling-of-interests method of accounting.
On October 1, 1998, the Company adopted 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,
in the second year of application, 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 been reviewing First
Liberty's information systems to ensure adequate data is available to provide
these required disclosures in the financial statements for the fiscal year
ending September 30, 1999.
On January 1, 1999, the Company adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," which 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. The adoption of SFAS No. 134 did not have a material impact
on the Company's results of operations or its financial condition.
7
<PAGE> 8
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year consolidated financial
statements' presentation.
2. Comprehensive Income
On October 1, 1998, the Company adopted 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. For the Company, the only
difference between net income and comprehensive income is the change in
unrealized gains and losses on securities available-for-sale. The Company has
displayed the components of comprehensive income in the accompanying
consolidated statements of income and comprehensive income. Comprehensive
income for the quarter and nine months ended June 30, 1998 has been presented
to provide comparable information to the three and nine months ended June 30,
1999, as required.
8
<PAGE> 9
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Earnings Per Share
The following tables provide a reconciliation of the numerators and
denominators used in calculating basic and diluted earnings per share ("EPS")
for the three and nine months ended June 30, 1999 and 1998 (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
For the Three Months Ended
June
30, June 30,
1999 1998
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------- ----------------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income applicable to common stockholders $4,544 14,265 $0.32 $2,751 14,018 $0.20
====== ===== ====== =====
Effect of Dilutive Securities:
Options 417 305
------ ------
Diluted:
Net income applicable to common
Stockholders plus assumed conversions $4,544 14,682 $0.31 $2,751 14,323 $0.19
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
June 30, June 30,
1999 1998
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------- --------- -------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income applicable to common stockholders $14,615 14,242 $1.02 $11,169 14,007 $0.80
======= ====== ===== ======= ====== =====
Effect of Dilutive Securities:
Options 330 302
------ ------
Diluted:
Net income applicable to common
Stockholders plus assumed conversions $14,615 14,572 $1.00 $11,169 14,309 $0.78
======= ====== ===== ======= ====== =====
</TABLE>
Options to purchase 21,500 shares of common stock at an average price of $23.65
per share were outstanding during the nine months ended June 30, 1999,
respectively, but were not included in the computation of diluted EPS because
the options' exercise prices were greater than the average market price of the
common shares. The options, which expire at various dates in 2008 and 2009,
were still outstanding at June 30, 1999.
9
<PAGE> 10
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Mortgage Servicing Rights
Liberty Mortgage, the Company's mortgage banking subsidiary, recognizes
mortgage servicing rights (MSRs) as assets when loans (either originated or
purchased through correspondent relationships) are sold. The value of the MSRs
is determined by allocating total costs incurred between the loan and servicing
rights retained based on their relative fair values. Thus, the MSRs reduce the
basis in the loans originated or purchased and increase the gain (or reduce the
loss) on the sales of loans. The following table outlines the activity in MSRs
for the three and nine month periods ended June 30 (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- -------------------------
June 30 June 30
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance beginning of period $ 22,722 $ 8,327 $ 13,822 $ 6,571
Capitalized 3,925 3,704 14,123 7,170
Sold -- -- -- (1,118)
Amortized (815) (380) (2,247) (972)
Recovery of reserve 543 -- 677 --
-------- -------- -------- --------
Balance end of period $ 26,375 $ 11,651 $ 26,375 $ 11,651
======== ======== ======== ========
</TABLE>
The estimated combined fair value of these assets exceeded the book value at
June 30, 1998. However a reserve of $0.2 million was required at June 30, 1999.
When determining fair value the Company considers the date of origination, the
average note rate, average remaining term and estimated prepayment speed. The
fair value is calculated by estimating the present value of future net
servicing income.
5. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and then in
July 1999 issued SFAS No. 137, which delayed the effective date of SFAS No. 133
for one year. Thus, SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (October 1, 2000 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.
10
<PAGE> 11
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Changes in Stockholders' Equity
The following table summarizes the changes in the components of stockholders'
equity for the period shown (in thousands).
<TABLE>
<CAPTION>
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income Stock Equity
------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $14,227 $41,069 $70,164 $ 1,624 $(269) $126,815
Common stock dividends declared, $0.277
per share (3,903) (3,903)
Common stock issued for exercise of stock
options- 71,925 shares 72 431 503
Shares cancelled (12) (212) (224)
Net change in other comprehensive income (5,507) (5,507)
Net income 14,615 14,615
------- ------- ------- ------- ----- --------
Balance at June 30, 1999 $14,287 $41,288 $80,876 $(3,883) $(269) $132,299
======= ======= ======= ======= ===== ========
</TABLE>
11
<PAGE> 12
FIRST LIBERTY FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Overview
First Liberty Financial Corp., headquartered in Macon, Georgia, is a savings
and loan holding company for First Liberty Bank ("Liberty Bank") which operates
37 banking offices in Middle, Coastal and South Georgia, and First Community
Bank of Vidalia in Vidalia, Georgia. Liberty Bank also owns and operates its
wholly-owned subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage"),
NewSouth Financial Services, Inc. ("NewSouth") and OFC Capital Corporation
("OFC Capital"), collectively known as "the Company".
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements, such as
the ones in the following 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 markets;
d. Significant changes in laws and regulations affecting the financial
services industry; and
e. Significant changes in local competition.
Results of Operations
The Company's consolidated net income for the quarter ended June 30, 1999 was
$4.5 million compared to $2.8 million for the quarter ended June 30, 1998. The
increase of $1.7 million was primarily attributable to an increase of $1.3
million in net interest income, a decrease of $102,000 in the provision for
estimated losses on loans and leases and an increase of $714,000 in mortgage
banking income. These factors were offset by an increase of $407,000 in
noninterest expenses.
The Company's net income for the nine months ended June 30, 1999 was $14.6
million compared to $11.2 million for the same period in 1998. The increase of
$3.4 million was primarily attributable to a decrease of 37% in the provision
for estimated losses on loans and
12
<PAGE> 13
leases, an increase of 77% in mortgage banking income offset by an increase of
13% in noninterest expenses.
Included in the Company's net income for the three and nine months ended June
30, 1999 were nonrecurring expenses related to the Vidalia Bankshares, Inc.
("VBI") merger which closed on April 1, 1999 totaling approximately $1.0
million, net of taxes. Included in the Company's net income for the nine months
ended June 30, 1998 were nonrecurring expenses related to the Southland Bank
Corporation ("SBC") merger which closed on June 19, 1998 totaling approximately
$1.8 million, net of taxes.
The Company's net income is most significantly affected by the difference
between interest income on its loan and investment portfolios and the interest
expense of its deposits and borrowings ("net interest income"). Net interest
income is affected by several factors, but is most affected by the volume of
and interest rates on interest-earning assets and interest-bearing liabilities.
The following tables reflect the effective yields and costs of funds for the
nine months ended June 30, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Average Balance Rate/Yield
----------------------------- ------------------
1999 1998 1999 1998
---------- ---------- ----- -----
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans and leases $1,060,676 $1,039,791 9.11% 9.33%
Fed funds sold and repurchase agreements 21,164 8,971 4.57% 8.14%
Investment securities 399,657 326,009 6.11% 6.30%
---------- ---------- ---- ----
All interest-earning assets $1,481,497 $1,374,771 8.23% 8.60%
========== ========== ==== ====
Interest-Bearing Liabilities:
Deposits $1,210,928 $1,119,696 4.11% 4.40%
Short-term borrowings 176,984 205,512 4.70% 5.21%
Long-term borrowings 112,309 46,759 5.18% 5.84%
---------- ---------- ---- ----
All interest-bearing liabilities $1,500,221 $1,371,967 4.26% 4.57%
========== ========== ==== ====
Interest rate spread 3.97% 4.03%
==== ====
Net interest income as a percentage
of average earning assets 3.93% 4.05%
==== ====
</TABLE>
The following table describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected the Company's interest income and expense during the periods
indicated. For each category, information is provided on changes attributable
to (1) changes in volume (changes in volume multiplied by the old rate), (2)
changes in rate (changes in rate multiplied by the old volume, and (3) changes
in rate/volume (changes in rate multiplied by changes in volume) (dollars in
thousands).
13
<PAGE> 14
<TABLE>
<CAPTION>
June 30, 1999 vs June 30, 1998
------------------------------
Increase / (Decrease)
---------------------
Due To
--------------------------------------------------------------
Rate/
Rate Volume Volume Total
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Changes in Interest Income:
Loans and leases $ (1,724) $ 1,461 $ (35) $ (298)
Investments (788) 4,081 (202) 3,091
-------- -------- -------- -------
Total interest income (2,512) 5,542 (237) 2,793
-------- -------- -------- -------
Changes in Interest Expense:
Deposits (2,436) 3,008 (198) 374
Short-term borrowings (794) (1,110) 110 (1,794)
Long-term borrowings (231) 2,865 (324) 2,310
-------- -------- -------- -------
Total interest expense (3,461) 4,763 (412) 890
-------- -------- -------- -------
Net interest income $ 949 $ 779 $ 175 $ 1,903
======== ======== ======== =======
</TABLE>
The Company's provision for estimated losses on loans and leases decreased by
8% and 37% for the three and nine month periods ended June 30, 1999,
respectively, as compared to the same periods from 1998. Changes in the
allowance for estimated losses on loans and leases for the three and nine month
periods ended June 30, 1999 and 1998 are as follows (dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------
June 30, June 30,
-------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Balance beginning of period $ 17,083 $ 16,322 $ 17,075 $ 14,782
Provision for estimated losses 1,186 1,288 2,930 4,640
Charge-offs, net of recoveries (1,744) (1,236) (3,998) (3,048)
Acquired allowances -- -- 518 --
---------- ---------- -------- --------
Balance end of period $ 16,525 $ 16,374 $ 16,525 $ 16,374
========== ========== ======== ========
Allowance for loan losses as a
percentage of:
Non-performing loans -- -- 129.95% 135.38%
Loans held-for-investment -- -- 1.58% 1.63%
</TABLE>
While the provision for estimated losses on loans and leases decreased,
Management believes the resultant allowance level to be adequate based on
internal reviews of nonperforming assets, delinquency trends, rated asset
levels, charge-off trends and the trend of outstanding loans. In 1997 the
Company established an allowance related to indirect automobile loans related
to the discontinuance of these operations. Charge-offs in this allowance
exceeded provisions as this sector of the portfolio declined due to charge-offs
and repayments. Management currently anticipates future provisions for
estimated losses on loans and leases to be consistent with the recent level of
net charge-offs and changes in the outstanding balances, portfolio mix and
asset quality. However this could change if there are significant changes in
any of the other factors noted above.
14
<PAGE> 15
The table below sets forth First Liberty's nonperforming assets at the dates
indicated (dollars in thousands).
<TABLE>
<CAPTION>
June 30 March 31 September 30 June 30
1999 1998 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-accrual loans $ 10,390 $ 11,648 $ 8,838 $ 8,734
Foreclosed real estate 2,001 1,901 2,239 2,904
Other repossessed assets 325 414 678 457
---------- ---------- -------- --------
Total non-performing assets $ 12,716 $ 13,963 $ 11,755 $ 12,095
========== ========== ======== ========
Total non-performing assets as
a percentage of total assets .74% .84% .75% .77%
</TABLE>
Noninterest income increased by $1.0 million or 18% during the three months
ended June 30, 1999 as compared to the same quarter a year earlier. The
significant contributors to noninterest income are mortgage banking operations,
deposit account service charges and other noninterest income. Mortgage banking
income, consisting primarily of mortgage servicing fees and gain on sales of
loans, reduced by any impairment in and amortization of mortgage servicing
rights, increased by $714,000 primarily due to a recovery of $543,000 in the
impairment reserve for mortgage servicing rights ("MSR"). This recovery
resulted from an increase in mortgage interest rates. The impairment reserve
for MSRs fluctuates with the changes in mortgage interest rates and the size
and composition of the servicing portfolio. Therefore, the value of this asset
can be volatile during periods of rapidly changing rates. Other noninterest
income increased by $347,000 primarily due to gains on sales of leases of
$290,000 by OFC Capital.
Noninterest income increased by $5.2 million or 35% during the nine months
ended June 30, 1999 as compared to the same period one year earlier. This
increase resulted primarily from an increase of 78% in mortgage banking income
and a 28% increase in other noninterest income. The increase in mortgage
banking income resulted from a recovery of $1.0 million in the impairment
reserve for MSR's and increased gains on sales of mortgage loans of $3.8
million. The 1998 mortgage banking income includes a gain of $706,000 on sale
of loan servicing which was not repeated in 1999. Other noninterest income
increased by $1.2 million primarily due to gains on sales of leases of $500,000
resulting from the addition of OFC Capital (which the Company acquired in
August 1998) and due to an increase of $319,000 in commissions on sales of
mutual funds and other nontraditional products.
Noninterest expense increased by $407,000 or 3% for the quarter ended June 30,
1999 as compared to the quarter ended June 30, 1998. These quarters include
nonrecurring merger related expenses of $1.4 million and $2.4 million,
respectively. Without these merger related expenses, noninterest expenses
increased by $1.4 million or 12%. Compensation and benefits (excluding merger
related expenses) increased by 10% due primarily to: an increase in the number
of NewSouth offices, OFC Capital compensation (which wasn't acquired until
August 1998), an increase in expenses related to the Company's performance
based compensation plan. Data processing expenses (excluding merger related
expenses)
15
<PAGE> 16
increased by 152% reflecting continued costs to upgrade systems to software and
hardware which is compliant with Year 2000 requirements. However, the June 1999
quarterly amount decreased by 47% from the amount expensed in the quarter ended
March 31, 1999, as Year 2000 expenses began to decline. Occupancy and equipment
expenses (excluding merger related expenses increased by 25% reflecting
increased costs associated with the new offices of NewSouth, the acquisition of
OFC Capital and additional depreciation expense on new equipment acquired
during 1999 related to technology upgrades and Year 2000 compliance. Other
noninterest expenses (excluding merger related expenses) increased by 30% due
primarily to additional NewSouth offices and the addition of OFC Capital.
For the nine months ended June 30, 1999, noninterest expenses increased by $4.3
million or 13%. Without the merger related expenses, the increase was $5.3
million or 17% and resulted primarily from increases of 18%, 21% and 29% in
compensation and benefits, occupancy and equipment and other expenses,
respectively. The factors leading to these increases parallel those factors
described above for the quarterly increases.
Mortgage Banking Activities
Liberty Mortgage, the Company's mortgage banking subsidiary, recognizes
mortgage servicing rights (MSRs) as assets when loans (either originated or
purchased through correspondent relationships) are sold. The value of the MSRs
is determined by allocating total costs incurred between the loan and servicing
rights retained based on their relative fair values. Thus, the MSRs reduce the
basis in the loans originated or purchased and increase the gain (or reduce the
loss) on the sales of loans. During the quarters ended June 30, 1999 and 1998,
Liberty Mortgage recorded new MSRs of $3.9 million and $3.7 million,
respectively.
At June 30, 1999, an impairment reserve of $0.2 million was required based on a
valuation of the MSRs. This amount has declined from the March 31, 1999 and
September 30, 1998 requirements of approximately $0.75 million and $1.2
million, respectively. The estimated aggregate fair value of these assets
exceeded the book value at June 30, 1998. When determining fair value the
Company considers the date of origination, the average note rate and the
average remaining term and estimated prepayment speeds. The fair value is
calculated by estimating the present value of future net servicing income. To
the extent the actual or estimates of prepayments increase, a decline in fair
value may require an increase in the impairment reserve.
Acquisitions
On April 1, 1999, the Company closed it merger with Vidalia Bankshares, Inc.
("VBI"), the parent company of First Community Bank of Vidalia. First Community
operates two banking offices, both in Vidalia, Georgia, under the name of First
Community Bank. First Community has assets of approximately $63 million and
deposits of approximately $57 million.
16
<PAGE> 17
Liquidity
The Company's primary sources of funds are deposits, loan repayments, sales and
maturities of securities, loan sales, repurchase agreements, advances from the
Federal Home Loan Bank of Atlanta and various other borrowings. Deposits
provide a source of funds that are highly dependent on market and other
conditions, while loan repayments are a relatively stable source of funds. The
liquidity of Liberty Bank's operation is measured by the ratio of cash and
short-term investments (as defined by federal regulations) to the sum of
withdrawable deposits and borrowings maturing within one year. Federal
regulations currently require institutions to maintain a liquidity ratio of at
least 4%. Liberty Bank complied with a liquidity ratio of 4.05% at June 30,
1999.
Capital Resources
Under current Office of Thrift Supervision ("OTS") guidelines, savings
institutions must satisfy three minimum capital requirements: core, tangible
and risk-based. At June 30, 1999, Liberty Bank's regulatory capital was 7.1%
for both core capital and tangible capital and 11.4% for risk-based capital. At
June 30, 1999, First Community's regulatory capital was 7.9% for both core
capital and tangible capital and 12.6% for risk-based capital. These regulatory
capital levels exceeded both the regulatory minimum levels and the
well-capitalized standards under the Prompt Corrective Action regulations
adopted by the FDIC. Failure to maintain well-capitalized status could result
in greater regulatory oversight or restrictions on Liberty Bank's and First
Community's activities.
Commitments
Commitments to originate or purchase loans are generally made at the market
rate prevailing at the time of issuance. The Company had open commitments to
originate or purchase residential mortgage loans of approximately $267 million
at June 30, 1999. Commitments to sell residential mortgage loans and
mortgage-backed securities were approximately $101 million at June 30, 1999.
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 June 30, 1999. Loans in process (which represent undisbursed loan
commitments related to construction loans) and unused lines of credit amounted
to $199 million at June 30, 1999.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and then in
July 1999 issued SFAS No. 137, which delayed the effective date of SFAS No. 133
for one year. Thus, SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (October 1, 2000 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,
17
<PAGE> 18
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.
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 was 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,
18
<PAGE> 19
contract staff and internal staff. Testing of these components for Year 2000
compliance is being performed by the vendors and First Liberty. As of June 30,
1999, the awareness, assessment, renovation and validation phases for First
Liberty's mission critical applications were each 100% complete.
The second focus area, Business Partners, Suppliers and Vendors, includes
notification and determination of Year 2000 status for each. These entities
have been asked to respond to a survey designed to evaluate each with regard to
Year 2000 risk to First Liberty. As of June 30, 1999, the awareness,
assessment, renovation and validation phases were each 100% complete.
The third focus area, Risk Management, includes reviewing Corporate Borrowers
(Fund Takers), Funds Providers and Capital Market/Asset Management
counterparties for Year 2000 readiness. These entities have also been asked to
respond to a survey designed to evaluate each with regard to Year 2000 risk to
First Liberty. As of June 30, 1999, the awareness, assessment, renovation and
validation phases were each 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 primarily provided by
third parties and include building operations, copy machines, security systems,
voice telephone systems, printed forms, etc. As of June 30, 1999, the
awareness, assessment, renovation and validation phases were each 100%
complete.
As of June 30, 1999, for First Liberty's overall Year 2000 Project Plan, the
Awareness phase was 100% complete, the Assessment phase was 100% complete, the
Renovation phase was 100% complete, the Validation phase was 100% complete and
the Implementation phase 100% 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 has modified 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 the
completion of testing by September 30, 1999.
Expenses associated with First Liberty Financial Corp.'s Year 2000 compliance
for fiscal year 1999 are estimated to be between $500,000 and $700,000.
Additionally, the total cost of related capital investments will be between $2
million and $3 million over the life of the
19
<PAGE> 20
project. First Liberty intends to continually reassess the estimated costs and
status of Year 2000 remediation efforts.
First Liberty currently believes that its mission critical applications are
Year 2000 compliant as of June 30, 1999. However, no assurance can be given that
unforeseen circumstances will not arise 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.
20
<PAGE> 21
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K
During the three months ended June 30, 1999, the Company filed one
Report on Form 8-K, dated April 1, 1999.
On April 1, 1999, First Liberty Financial Corp. ("FLFC") completed the
acquisition by merger of Vidalia Bankshares, Inc. ("VBI") in Vidalia,
Georgia, pursuant to the Agreement and Plan of Merger dated as of
October 30, 1998, as amended. Each VBI stockholder received 3.919
shares of FLFC common stock in exchange for each share of VBI common
stock, resulting in the issuance of 653,070 shares of FLFC common
stock. The transaction was accounted for as a pooling-of-interests.
Accordingly, the accompanying supplemental consolidated financial
statements of FLFC as of September 30, 1998 and 1997 and for each of
the three years in the period ended September 30, 1998 included in
this Current Report on Form 8-K have been prepared as though the
merger with VBI had been completed on or before March 31, 1999. These
supplemental financial statements should be read in conjunction with
the historical financial statements of FLFC for such periods contained
in Form 10-K for the year ended September 30, 1998.
Additionally, the supplemental consolidated financial statements of
FLFC as of March 31, 1999 and 1998 and for the three and six month
periods then ended included in this Current Report on Form 8-K have
been prepared as though the merger with VBI had been completed on or
before March 31, 1999.
On April 28, 1999, the Company announced that it had agreed to be
acquired by BB&T Corporation of Winston-Salem, North Carolina. The
transaction has been approved by the directors of both companies.
Based on BB&T's closing price of $39 on April 26, 1999, First Liberty
shareholders will receive .8525 BB&T shares for each First Liberty
share, worth $33.25. However, the final exchange ratio will be
determined based on the actual closing price during a specified period
prior to closing. The merger, which is subject to the approval of the
First Liberty shareholders and banking regulators, is expected to be
completed in the fourth quarter of calendar 1999.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST LIBERTY FINANCIAL CORP.
(Registrant)
DATE: August 13, 1999 /s/ David L. Hall
-----------------------
David L. Hall
Executive Vice President and
Chief Financial Officer
DATE: August 13, 1999 /s/ Michael B. Smith
------------------------
First Vice President and
Controller
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL POSITION FOR FIRST LIBERTY FINANCIAL CORP.
AND SUBSIDIARIES AS OF JUNE 30, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 47,275
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,139
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 457,577
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,081,908
<ALLOWANCE> 16,525
<TOTAL-ASSETS> 1,708,494
<DEPOSITS> 1,226,697
<SHORT-TERM> 226,693
<LIABILITIES-OTHER> 10,505
<LONG-TERM> 112,300
0
0
<COMMON> 132,299
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,708,494
<INTEREST-LOAN> 72,444
<INTEREST-INVEST> 18,309
<INTEREST-OTHER> 725
<INTEREST-TOTAL> 91,478
<INTEREST-DEPOSIT> 37,203
<INTEREST-EXPENSE> 47,774
<INTEREST-INCOME-NET> 43,704
<LOAN-LOSSES> 2,930
<SECURITIES-GAINS> (43)
<EXPENSE-OTHER> 38,223
<INCOME-PRETAX> 22,658
<INCOME-PRE-EXTRAORDINARY> 14,615
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,615
<EPS-BASIC> 1.02
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 4.05
<LOANS-NON> 10,390
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,075
<CHARGE-OFFS> 5,590
<RECOVERIES> 2,110
<ALLOWANCE-CLOSE> 16,525
<ALLOWANCE-DOMESTIC> 16,525
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,001
</TABLE>
