ITEM 1. BUSINESS - ------------------
Introduction - ------------
First Liberty Financial Corp. ("First Liberty") is a savings and loan holding company headquartered in Macon, Georgia which owns and operates First Liberty Bank ("Liberty Bank"), and its wholly-owned subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage") and NewSouth Financial Services, Inc. ("NewSouth"). At September 30, 1996, First Liberty had total assets of approximately $1.1 billion, total deposits of approximately $760 million and stockholders' equity of approximately $76 million.
Liberty Bank is a federally chartered stock savings bank headquartered in Macon, Georgia which serves Macon, Savannah and other Georgia cities through its home office and 30 full service branch offices. Liberty Bank operates as a system of community banks under a single charter along with a residential construction loan production office located in Atlanta, Georgia. Based on total assets at September 30, 1996, 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 in all of its market areas and through correspondent relationships in several southeastern states. Liberty Mortgage originates permanent first mortgage loans on residential properties for Liberty Bank's portfolio and for sale in the secondary market. During fiscal 1996, Liberty Mortgage originated approximately $378 million of permanent residential mortgage loans. Liberty Mortgage's loan servicing portfolio was approximately $1.0 billion at September 30, 1996, including approximately $210 million of loans serviced for Liberty Bank. See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Non-Interest Income" - herein.
During 1996, First Liberty organized NewSouth to engage in the consumer finance business in selected Georgia market areas. NewSouth commenced operations in four offices during the first quarter of fiscal 1997.
First Liberty's Vision and Strategy Statements - ----------------------------------------------
First Liberty operates under a three-year strategic plan which is renewed annually. As a part of that plan, First Liberty has adopted a vision and strategy statement to communicate to customers, employees and stockholders its vision and strategic direction. The vision statement reads as follows:
"We will operate an independent, high quality system of community banks and affiliated businesses, with focus on serving consumers and businesses with selected financial services."
The strategy statement includes a strategic direction for customer development, employee development, stockholders and acquisitions. The strategy statement for stockholders reads as follows:
"We will continue to operate in a safe and sound manner. Our financial targets are as follow:"
Measure Target ----------------------------- ------ Return on Equity 16.00% Return on Assets 1.15% Efficiency Ratio 55.00% Criticized Loans to Net Loans 4.00% Classified Loans to Net Loans 1.00% Nonperforming Assets Ratio 1.00%
Management believes these financial targets are attainable within the Company's current three-year strategic plan period. The major components of the strategic plan are as follows:
Safety - First Liberty plans to continue to conduct its ------ operations consistent with safe and prudent banking practices, in compliance with all applicable laws and regulations.
Capital Adequacy - Liberty Bank is classified as a "well- ---------------- capitalized" institution for regulatory purposes. Liberty Bank will seek to maintain capital adequacy primarily through the retention of earnings, supplemented as needed through capital offerings. See "Acquisitions," herein.
Credit Quality - First Liberty currently operates within the -------------- established target levels for credit quality and intends to maintain the level of its nonperforming and other criticized and classified assets inside established targets. First Liberty will continue to commit significant resources to the credit administration and credit review functions to insure 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 in metropolitan Atlanta and through Liberty Bank in middle, south and coastal Georgia market areas. Additionally, Liberty Mortgage will expand its market share for wholesale loan originations in the southeastern United States through correspondent relationships. NewSouth plans to expand in selected market areas in Georgia to include certain market areas of Liberty Bank.
From time to time, the Company may publish forward-looking statements, such as the ones in the preceding paragraphs, relating to such matters as anticipated financial performance, business prospects, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward- looking statements. Some of the risks and uncertainties that may affect the operations, performance, development and results of the Company's business include but are not limited to the following:
a. Deterioration in local economic conditions; b. Deterioration in national or global economic conditions; c. Significant changes in laws and regulations affecting the financial service industry; and d. Significant changes in local competition.
Acquisitions - ------------
On November 15, 1996, the Company acquired by merger Middle Georgia Bank ("MGB"). MGB on the date of acquisition held the following approximate balances: loans of $67 million, cash and investments of $58 million, premises and equipment of $1 million and deposits of $117 million. This business combination has been accounted for utilizing the pooling-of-interests method of accounting. No intangible assets were recorded from the acquisition.
In September 1995, the Company acquired by merger Tifton Banks, Inc. ("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank & Trust Company ("Tifton Bank"). Tifton Bank on the date of acquisition held the following approximate balances: loans of $42 million, cash and investments of $21 million, premises and equipment of $1 million and deposits of $45 million. Intangible assets resulting from the acquisition amounted to approximately $2 million.
In March 1995, the Company acquired three banking offices located in Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets acquired were approximately $3 million and total cash received and deposits assumed were approximately $95 million. Intangible assets resulting from the acquisition were approximately $4 million.
In December 1994, the Company acquired by merger Central Banking Company ("CBC") of Swainsboro, Georgia, and its subsidiary, The
Central Bank ("Central Bank"). Central Bank on the date of acquisition held the following approximate balances: loans of $21 million, cash and investments of $34 million, premises and equipment of $1 million and deposits of $52 million. Intangible assets resulting from the acquisition amounted to approximately $2 million.
In March 1993, Liberty Bank acquired six branch offices, located in supermarkets in Savannah, Georgia, from another institution. Liberty Bank operated four branches in Savannah prior to the acquisition. Total assets acquired by Liberty Bank were approximately $7 million and total deposits assumed were approximately $38 million. Intangible assets resulting from the acquisition amounted to approximately $1 million.
In December 1992, the Company acquired First Federal Savings and Loan Association, Milledgeville, Georgia ("First Federal") in a supervisory merger-conversion for a cash purchase price of $1,000. First Federal, on the date of acquisition, held loans and mortgage- backed securities of approximately $32 million, cash and investments of approximately $6 million, premises and equipment with a value of approximately $1 million, deposits of approximately $38 million, and other borrowings of approximately $3 million. Intangible assets resulting from the acquisition amounted to approximately $449,000.
Issuance and Redemption of Convertible Preferred Stock - ------------------------------------------------------
In December 1994 and September 1995, in connection with the respective acquisitions of Tifton and CBC, the Company issued $7.6 million in Series B 6.00% Cumulative Convertible Preferred ("Series B") stock. The shares have a liquidation preference of $25.00 per share. Dividends on the Series B stock are cumulative at an annual rate of $1.50 per share and are payable quarterly. Each share of the Series B stock is convertible at the option of the holder into 1.79 shares of common stock, at a conversion price of $14.00 per share of common stock, subject to adjustment in certain circumstances. The Company, at its option, may redeem the Series B stock at any time on or after January 1, 1997.
In February 1993, First Liberty issued 460,000 shares of Series A 7.75% Cumulative Convertible Preferred ("Series A") stock which raised approximately $10.5 million in equity. The Series A provided for cumulative cash dividends payable quarterly at the rate of $1.9375 per share per annum. A share of Series A was convertible at the option of the holder into three shares of First Liberty Common Stock. In July 1995 the Company redeemed 2,537 shares of Series A for $66,879, plus accrued and unpaid dividends. The remaining 457,463 shares of the Series A were converted into 1,372,389 shares of the Company's common stock, at a conversion price of $8.33 per share of common stock.
Lending Activities - ------------------
General - -------
Liberty Bank originates loans primarily in Macon, Savannah and the other Georgia cities in which its offices are located, and through
loan production offices specializing in residential real estate construction lending located in metropolitan Atlanta. Even though Liberty Bank is permitted by the Office of Thrift Supervision ("OTS") to originate loans collateralized by real estate located anywhere in the United States, it concentrates its lending activities in the primary market areas in which it operates. Liberty Mortgage originates and operates through correspondent relationships to purchase real estate loans in Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia principally for sale into the secondary market.
Federal laws and regulations prescribe the types and amounts of loans which may be made by federal thrifts and generally permit such institutions to make residential real estate loans, commercial real estate loans, business loans, agricultural loans and consumer loans.
Economic conditions in First Liberty's banking markets are generally consistent with Georgia markets other than metropolitan Atlanta. The following table summarizes economic data relating to the Macon and Savannah markets. Macon MSA Savannah MSA ------------- ------------ Population (1994) 307,420 275,656 % Change (1990-1994) 5.60% 6.90% Households (1990) 106,478 94,940 % Change (1980-1990) 15.30% 18.20% Personal income (1993) % Earnings: Goods producing industries 23.60% 26.20% Service producing industries 49.50% 57.60% Government 28.40% 17.80% Unemployment rate (1993) 5.80% 6.00% Per capita personal income (1993) $17,886 $18,808
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 appraised value of the property. Residential construction loans are made for periods of one year or less, and land acquisition and development loans are made for periods of up to five years, both on an interest-only basis. These periods may be extended subject to negotiation of terms. Typically, interest rates on construction and acquisition and development loans are indexed to the prime rate and are adjustable daily during the term of the loan.
Commercial Real Estate Loans - ----------------------------
Federally chartered thrifts are permitted to invest in non- residential real estate loans so long as such loans do not exceed 400% of capital. Liberty Bank is conservative in making loans of this nature choosing to limit this type of lending to its primary banking markets, to customers with proven track records and strong credit histories, and to projects that are soundly underwritten.
Interim construction and permanent commercial real estate loans are
secured by owner-occupied businesses, commercial and industrial properties, apartment projects, office buildings, shopping centers and other properties located in Liberty Banks's primary banking markets. Construction and permanent commercial real estate loans are underwritten with the primary analysis focusing on the adequacy of net operating income and cash flow being available to provide debt service. These loans are generally made for up to 80% of the appraised value of the property in conformity with the guidelines found in the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
Consumer Loans and Indirect Lending - -----------------------------------
Federally chartered thrifts are authorized to make both secured and unsecured consumer loans for personal or household purposes in amounts up to 30% of the institution's total assets. At September 30, 1996, these types of consumer loans constituted 16% of Liberty Bank's total assets. In addition, these institutions have lending authority above the 30% limit for certain consumer loans, such as home equity loans, property improvement loans, mobile home loans and education loans.
Liberty Bank currently purchases 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, 1996, indirect loans constituted $155 million or 20% of the total loan portfolio, or approximately 65% of Liberty Bank's consumer loan portfolio. This compares to total indirect loans of $124 million or 19% of the total loan portfolio, or 63% of the consumer loan portfolio at September, 30, 1995. Liberty Bank intends to continue prudent expansion of its consumer lending activities, including indirect lending activities, subject to market conditions, as part of its strategy to provide a full range of banking products and services to its customers.
Commercial/Business Loans - -------------------------
Liberty Bank makes various types of commercial loans to creditworthy borrowers within Liberty Bank's primary banking market areas for financing equipment purchases, capital projects, working capital and other legitimate business needs. The terms of these loans range generally from three months to fifteen years, with the longer maturities generally subject to balloon payments. These loans normally carry interest rates indexed to the prime rate.
Liberty Bank is authorized by federal law to make secured and unsecured loans for business or agricultural purposes in amounts aggregating no more than 10% of its total assets. Additionally, some business loans secured by nonresidential real estate are subject to a separate limit, see "Commercial Real Estate" - herein. Commercial business loans subject to the 10% limitation represented 6.4% of total assets.
Loan Originations and Processing - --------------------------------
Liberty Mortgage actively solicits mortgage loan applications from existing customers, local real estate agents, builders, developers and others. Additionally, numerous loan applications are received as a result of media advertising, customer referrals and from walk- in customers at loan production offices.
Liberty Bank has a structured loan approval process in which lending authority for various types and amounts of loans is delegated by the Board of Directors to loan officers on a basis commensurate with seniority and lending experience. Liberty Bank has a Senior Loan Committee which must approve loans in amounts above $500,000 and up to $4 million. Liberty Bank's Board of Directors regularly reviews and ratifies the actions of the Senior Loan Committee and must approve any loan relationship of $4 million or more.
Loan Sales and Purchases - ------------------------
Permanent first mortgage loans on residential properties are originated for sale to the secondary market and for investment. Liberty Mortgage originates and purchases loans on residential properties through correspondent relationships with lenders in Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. These correspondents provide approximately 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 to 1/4 to 1/2 of 1% per annum of the unpaid principal balance of each loan. As of September 30, 1996, Liberty Mortgage serviced loans for Liberty Bank and for others aggregating approximately $1.0 billion. Liberty Bank may also receive commitment fees in connection with certain commitments on multi-family commercial and development loans. Other loan fee income includes fees from late payment charges, prepayment premiums, loan assumption fees, renewal fees, property transfer fees and miscellaneous services related to its loans.
Credit Risk Management and Allowance for Loan Losses - ----------------------------------------------------
Liberty Bank has a multi-faceted program designed to control and continually monitor the credit risks inherent in its loan portfolio. This begins with a structured loan approval process in which authority for various types and amounts of loans is delegated by the Board of Directors to loan officers on a basis commensurate with seniority and lending experience. See "Loan Originations and Processing" - herein.
Liberty Bank uses an asset classification system which is consistent with OTS regulations, which apply to all assets of an insured institution and require each institution to periodically classify its assets. There are four categories of "criticized" assets: Special Mention, Sub-Standard, Doubtful and Loss. Assets classified as substandard, doubtful or loss are considered "classified". The classification of assets is subject to OTS review and re-classification. Institutions must include aggregate totals of criticized assets, and general and specific valuation reserves in quarterly reports to the OTS. Liberty Bank's loan classification system utilizes both the account officer and an independent loan review function to monitor the classification of Liberty Bank's loans. The account officer is charged with the responsibility of monitoring changes in loan quality within his or her loan portfolio and reporting changes directly to loan review and senior management. Additionally, loan review performs an independent review of Liberty Bank's loans to determine that the appropriate risk grade has been assigned to each borrowing relationship.
Liberty Bank's policy requires an annual review of all borrowing relationships exceeding $100,000 in aggregate debt. A report of the results of these reviews on loans of $500,000 and greater are forwarded to the Board of Directors for their review. Delinquencies are monitored on all loans as a basis for potential inclusion in general valuation reserves or, ultimately, for potential charge- off. Loans which are delinquent 90 days (four payments) or longer generally are placed on nonaccrual status unless the collectibility of principal and accrued interest is assured beyond a reasonable doubt. In certain cases, loans less than 90 days (four payments) delinquent are placed on nonaccrual where uncertainty exists as to
their collectibility. Real estate acquired through foreclosure is classified as sub-standard unless there is sufficient evidence to indicate such classification is not warranted. A portfolio of mortgage-backed securities are all guaranteed by either the GNMA, the FNMA, the FHLMC, or investment grade private issuers and are therefore not generally subject to any material risk of collateral loss. Similarly, the portfolio of investment securities is comprised of U.S. Government obligations of the Federal Home Loan Bank ("FHLB") of Atlanta and investment grade corporate debt securities.
Loan loss reserves are determined based on management's internal review of nonperforming loans, delinquency trends, the level of rated assets and charge-off trends. Additionally, management assesses general and specific economic trends both nationally and locally and regulatory information to determine the impact of those external factors on loan loss reserve levels.
Based on the internal and external reviews, Liberty Bank segregates its loan portfolio by type of loans and by loan classification within each loan type. Reserve percentages are applied (based on historical and anticipated loss rates) to each loan group to determine the required amount of allocated general loan loss reserves. Additionally, an amount is provided for unallocated general loan loss reserves, reflecting the potential for estimation errors in allocated reserves.
See Item 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition - Loan Loss Provision and Allowance for Loan Losses and Nonperforming Assets and Credit Risk" - - herein.
Interest Rate Risk - ------------------
Interest rate risk is a measure of exposure to changes in net interest income or the theoretical market value of portfolio equity due to changes in market interest rates. The differential (known as "gap"), is the difference between interest rate sensitive assets and interest rate sensitive 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 rate sensitive assets over rate sensitive liabilities, while a negative gap indicates an excess of rate sensitive liabilities over rate sensitive assets.
Liberty Bank operates under an interest rate risk policy through an Asset Liability Management Committee ("ALCO"). The policy outlines limits on interest rate risk in terms of changes in net interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a cash flow simulation model which projects the impact of changes in interest rates on Liberty Bank's assets and liabilities. Additionally, the committee may set additional 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. For the three years ended September 30, 1996, Liberty Bank did not engage in any transactions under its hedging policy.
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, 1996, $257 million or 26% of First Liberty's earning assets were classified as available-for-sale.
At September 30, 1996, Liberty Bank's investment portfolio, consisted of government agency debt and equity securities of investment grade and Federal Home Loan Bank stock. Additionally, Liberty Bank holds investments in investment grade mortgage-backed
securities. Liberty Bank does not invest in collateralized mortgage obligations considered "high risk" as defined by the Federal Financial Institutions Examination Council guidelines.
See Note 4 of Notes to First Liberty's Consolidated Financial Statements contained in Item 8 - "Financial Statements and Supplementary Data" - herein.
Sources of Funds - ----------------
General - -------
Savings accounts and other types of deposits are the major source of funds for lending and other investment purposes. In addition to deposits, Liberty Bank obtains funds from loan principal repayments, proceeds from sales of loans and loan participations, advances from the FHLB of Atlanta, and repurchase agreements. Loan repayments are a relatively stable source of funds while deposit inflows and outflows and sales of loans and investment securities are significantly influenced by prevailing interest rates and economic conditions. Borrowings may be used to compensate for reductions in normal sources of funds or to support expanded lending activities. Liberty Bank's unused borrowing capacity with the FHLB of Atlanta at September 30, 1996 was approximately $32.4 million in advance and warehouse lines of credit. Additionally, Liberty Bank had approximately $30.0 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. Additionally, Liberty Bank has outstanding approximately $16.6 million principal amount of subordinated debt securities as of September 30, 1996.
See Item 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" - herein. Also see Notes 10, 11, and 12, of Notes to First Liberty's Consolidated Financial Statements contained in Item 8 - "Financial Statements and Supplementary Data" - herein.
Competition - -----------
Based on total assets of approximately $1.1 billion at September 30, 1996, Liberty Bank is the largest savings institution headquartered in Georgia, as measured by total assets. Liberty Mortgage, with total permanent mortgage originations of approximately $378 million for the year ended September 30, 1996, ranked as one of the larger mortgage banking companies in terms of dollar volume in Georgia.
Liberty Bank and Liberty Mortgage face substantial competition for deposits and loans throughout their market areas. Liberty Bank considers Macon, Savannah, and the other smaller Georgia cities in which its offices are located to be the primary market areas for attracting deposits, while Liberty Mortgage considers those markets and metropolitan Atlanta its primary market areas for originating mortgage loans. Additionally, Liberty Mortgage offers mortgage loans in Alabama, Florida, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee and Virginia through its wholesale loan origination operation. 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.
The primary factors in competing for loans are interest rates, discount points, loan fees and the quality and range of lending services offered. Competition for origination of mortgage loans comes primarily from mortgage banking firms, mortgage brokers, commercial banks, savings institutions and insurance companies.
Various states in the Southeastern region, including Georgia, have enacted regional interstate banking laws which permit banks and, in some states such as Georgia, savings institutions, to acquire financial institutions in other states within the region. As a result of such laws there have been major interstate acquisitions involving Georgia financial institutions which have offices in Liberty Bank's service area but are headquartered in other Southeastern states. The effect of such acquisitions (and of the possible increase in the size of the financial institutions in Liberty Bank's market area) may be to further increase the competition faced by Liberty Bank. Additionally, pursuant to OTS policy, savings institutions are permitted to branch and merge across state lines.
Employees - ---------
At November 30, 1996, First Liberty had 482 full-time employees and 46 part-time employees. All officers and other personnel serving First Liberty are employed and compensated by Liberty Bank, Liberty Mortgage, or NewSouth. No employees are covered by a collective bargaining agreement, and management considers its relations with its employees to be good.
Supervision and Regulation - --------------------------
General - -------
First Liberty is a savings and loan holding company subject to regulation, examination, supervision and reporting requirements of the OTS. As a federally chartered savings institution, Liberty Bank is subject to extensive regulation by the OTS. The lending activities and other investments of Liberty Bank must comply with various federal regulatory requirements. The OTS periodically examines Liberty Bank and Liberty Bank must file periodic reports with the OTS describing its activities and financial condition. Liberty Bank is also subject to examination by the FDIC and must meet certain reserve requirements promulgated by the Federal Reserve Board ("FRB"). This supervision and examination is intended primarily to determine compliance with various regulatory requirements and for the protection of depositors.
The description of laws and regulations applicable to savings institutions set forth herein does not purport to be a complete description of such laws and regulations and their effects on First Liberty and Liberty Bank.
Legislation previously has been pending in Congress which could result in the conversion of all savings institution charters to bank charters and in the merger of the OTS into the Office of the Comptroller of the Currency, the federal agency which supervises national banks. It is likely that such legislation will again be introduced but it is presently not possible to determine the likelihood of enactment of such legislation or its effects upon Liberty Bank.
Federal Savings and Loan Holding Company Regulation - ---------------------------------------------------
As the owner of all of the stock of Liberty Bank, First Liberty is a savings and loan holding company subject to regulation by the OTS under the Home Owners' Loan Act (the "HOLA"). As a unitary savings and loan holding company owning only one savings institution, First Liberty generally is allowed to engage and invest in a broad range of business activities not permitted to commercial bank holding companies or multiple savings and loans holding companies; provided that Liberty Bank continues to qualify as a "qualified thrift lender." See "- Regulation of Liberty Bank - Qualified Thrift Lender Test" herein. In the event of any acquisition by First Liberty of another savings association subsidiary, except for a supervisory acquisition, First Liberty would become a multiple savings and loan holding company and would be subject to limitations on the types of business activities in which it could engage.
First Liberty is prohibited from directly or indirectly acquiring control of any savings institution or savings and loan holding company without prior approval from the OTS or from acquiring more than 5% of the voting stock of any savings institution or savings and loan holding company which is not a subsidiary. Control of a savings institution or a savings and loan holding company is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the
institution or holding company or controls in any manner the election of a majority of the directors of the insured institution or the holding company. Control is rebuttably presumed to exist if, among other things, a person acquires 10% or more of any class of voting stock (or 25% of any class of stock) and is subject to any of certain specified "control factors."
Recent Legislation - ------------------
On September 30, 1996, the President signed into law the Omnibus Consolidated Appropriations Act which included, among other provisions, the Deposit Insurance Funds Act of 1996 (the "DIFA"). The principal purpose of the DIFA was to recapitalize the Savings Associate Insurance Fund (the "SAIF") so that over time its deposit insurance assessments could be reduced to parity with those of the Bank Insurance Fund (the "BIF"), and to provide for the eventual merger of the SAIF and the BIF. Specifically, the DIFA requires, in pertinent part, (i) a one-time special assessment of SAIF members, calculated at 65.7 basis points, to recapitalize the SAIF; (ii) full prorata sharing by BIF and SAIF member of the debt service obligations of the Financing Corp. ("FICO") beginning no later than January 1, 2000, and non-prorata sharing (with premiums of 6.4 basis points for SAIF members and 1.3 basis points for SAIF members) until that date; and (iii) a merger of the BIF and the SAIF into a new Deposit Insurance Fund (the "DIF") on January 1, 1999, if bank and savings association charters have been combined by that date. The latter requirement cannot be implemented without further legislation requiring the combination of such charter types.
The effects of the DIFA on Liberty Bank are significant. The special assessment, which was paid to the FDIC on November 27, 1996, was $3.6 million, based upon Liberty Bank's SAIF-assessable deposits as of March 31, 1995. Since the FDIC's non-FICO deposit insurance assessments are presently at zero for well-capitalized institutions such as Liberty Bank, it will pay only the FICO premium beginning January 1, 1997. For the three-year period beginning that date, Liberty Bank's deposit insurance expense is expected to decrease by approximately $900,000 per year.
As was the case in the most recent session of Congress, it is expected that legislation will be introduced in Congress which will provide for the elimination of all federal savings association charters as of varying dates. The effect of such legislative proposals would be to require all savings associations to convert to either a national bank or state bank charter by a specified date, with any related holding company required to become a bank holding company, subject to the limitations regarding permitted activities of the Bank Holding Company Act of 1956. In addition, other legislative proposals are pending, the effect of which would reform the Glass-Stegall Act as well as to effect regulatory relief for financial institutions. The likelihood of enactment of any
such proposed legislation is unknown.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act") allows bank holding companies to acquire existing banks across state lines, regardless of state statutes. Further, under the Interstate Banking Act, effective June 1, 1997, a bank holding company may consolidate interstate bank subsidiaries into branches and a bank may merge with an unaffiliated bank across state lines to the extent that the applicable states have not "opted out" of interstate branching prior to such effective date. States may elect to permit interstate mergers prior to June 1, 1997. The Interstate Banking Act also permits de novo branching to the extent that a particular state "opts into" the de novo branching provisions. The Interstate Banking Act generally prohibits an interstate acquisition (other than an initial entry into a state by a bank holding company), which would result in either the control of more than (i) 10% of the total amount of insured deposits in the United States, or (ii) 30% of the total insured deposits in the home state of the target bank unless such 30% limitation is waived by the home state on a basis which does not discriminate against out of state institutions.
Regulation of Liberty Bank - --------------------------
Community Reinvestment Act - --------------------------
The Community Reinvestment Act of 1977 ("CRA") requires the federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low- and moderate-income borrowers in their local communities. CRA regulations provide for certain disclosure obligations. In accordance with the CRA, each institution must prepare and make available a CRA Statement for each of its local communities that includes a delineation of the community served and a list of specified types of credit offered to the community. Additionally, each lending institution must maintain for public inspection, a public comment file that includes written comments from the public on its CRA Statement or its performance in meeting community credit needs.
In May 1995, the federal bank regulatory agencies published final amended regulations promulgated pursuant to the CRA. The final regulations eliminate the 12 assessment factors under the former regulation and replace them with performance tests. Institutions are no longer required to prepare CRA Statements or extensively document director participation, marketing efforts or the ascertainment of community credit needs. Under the final rule, an institution's size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions will be examined using a performance-based lending, investment and service test. Small institutions will be examined using a streamlined approach. Wholesale and limited purpose
institutions will be examined under a community development test. All institutions have the option of being evaluated under a strategic plan formulated with community input and pre-approved by the applicable bank regulatory agency.
Public disclosure of written CRA evaluations of financial institutions made by regulatory agencies is required under the CRA, to promote enforcement of CRA requirements by providing the public with the status of a particular institution's community reinvestment record. Liberty Bank received an "outstanding" rating on the most recent performance evaluation of its CRA efforts by the OTS.
Congress and various federal agencies responsible for implementing fair lending laws have been increasingly concerned with discriminatory lending practices. In 1994, those federal agencies announced a Joint Policy Statement detailing specific discriminatory practices prohibited under the Equal Opportunity Act and the Fair Housing Act. In the Policy Statement, three methods of proving lending discrimination were identified: (i) overt evidence of discrimination, where a lender blatantly discriminates on a prohibited basis; (ii) evidence of disparate treatment, when a lender treats applicants differently based upon a prohibited factor, even where there is no showing that the treatment was motivated by intention to discriminate; and (iii) evidence of disparate impact, when a lender applies a practice uniformly to all applicants, but the practice has a discriminatory effect, even where such practices are neutral in appearance and applied equally. Lenders are particularly uncertain about the application of the "disparate impact" criteria by virtue of the vague nature of the Policy Statement. The Policy Statement notes that "the precise contours of the law on disparate impact as it applies to lending discrimination are under development."
Federal Home Loan Bank System - -----------------------------
General - -------
Liberty Bank is a member of the FHLB System, which consists of 12 regional FHLBs subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs maintain central credit facilities primarily for member institutions.
Liberty Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at least equal to the greater of: (i) 1% of the aggregate outstanding principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations as of the beginning of each year, (ii) 5% of its advances (borrowings) from the FHLB of Atlanta, or (iii) $500. Additionally, during 1996 the FHLB of Atlanta imposed a maximum investment in its capital stock equal to $500,000 over the required minimum. During the
quarter ended September 30, 1996, Liberty Bank increased its advances from the FHLB of Atlanta to avoid a forced redemption of its excess capital stock in the FHLB of Atlanta. Liberty Bank is in compliance with this requirement with an investment of $9.7 million in FHLB of Atlanta stock at September 30, 1996. See Item 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" - herein.
Advances from Federal Home Loan Bank - ------------------------------------
Each FHLB serves as a reserve or central bank for its member institutions within its assigned regions. It is funded primarily from proceeds derived from the sale of obligations of the FHLB System. The FHLB makes advances (i.e., loans) to members in accordance with policies and procedures established by its Board of Directors. Liberty Bank is authorized to borrow funds from the FHLB of Atlanta to meet demands for withdrawals of savings deposits, to meet seasonal requirements and for the expansion of its loan portfolio. Advances may be made on a secured or unsecured basis depending upon a number of factors, including the purpose for which the funds are being borrowed and existing advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the regional FHLB and the purpose of the borrowing.
Liquidity Requirements - ----------------------
Federal regulations require a savings institution to maintain an average daily balance of liquid assets (which includes cash, certain time deposits, certain bankers' acceptances, certain corporate debt securities and highly-rated commercial paper, securities of certain mutual funds, balances maintained in a Federal Reserve Bank and specified United States Government, state or federal agency obligations) equal to a monthly average of not less than a specified percentage, currently 5%, of its net withdrawable accounts plus short-term borrowings. These regulations also require each institution to maintain an average daily balance of short-term liquid assets at a specified minimum percentage, currently 1%, of the total of its net withdrawable accounts and borrowings payable in one year or less. Liberty Bank complied with its requirements at September 30, 1996.
Insurance of Accounts - ---------------------
Deposits at Liberty Bank are insured to a maximum of $100,000 for each insured depositor by the FDIC. As an insurer, the FDIC issues regulations, conducts examinations and generally supervises the operations of its insured institutions (institutions insured by the FDIC hereinafter are referred to as "insured institutions"). Any insured institution which does not operate in accordance with or conform to FDIC regulations, policies and directives may be sanctioned for non-compliance.
The FDIC has the authority to suspend or terminate insurance of deposits upon the finding that the institution has engaged in unsafe or unsound practices, is operating in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. If insurance of accounts is terminated by the FDIC, the deposits in the institution will continue to be insured by the FDIC for a period of two years following the date of termination. The FDIC requires an annual audit by independent accountants and also periodically makes its own examinations of insured institutions.
As an insurer, the FDIC issues regulations, conducts examinations and generally supervises the operations of its insured members. FDICIA directed the FDIC to establish a risk-based premium system under which each premium assessed against Liberty Bank would generally depend upon the amount of Liberty Bank's deposits and the risk that it poses to the SAIF. The FDIC was further directed to set semiannual assessments for insured depository institutions to maintain the reserve ratio of the SAIF at 1.25% of estimated insured deposits. The FDIC may designate a higher reserve ratio if it determines there is a significant risk of substantial future loss to the particular fund. Under the FDIC's risk-related insurance regulations, an institution is classified according to capital and supervisory factors. Institutions are assigned to one of three capital groups: well capitalized, adequately capitalized or under capitalized. Within each capital group, institutions are assigned to one of three supervisory subgroups. There are nine combinations of groups and subgroups (or assessment risk classifications) to which varying assessment rates are applicable. The rate assessed for SAIF insured deposits range from $.23 per $100 of domestic deposits to $.31 per $100 of domestic deposits. Deposits insured by the Bank Insurance Fund such as the deposits of MGB are subject to significantly lower premium assessment. See "Recent Legislation" - herein.
In addition to the payment of deposit insurance premiums to the FDIC, savings institutions also must bear a portion of the administrative costs of the OTS through an assessment based on the level of total assets of each insured institution and which differentiates between troubled and nontroubled savings institutions. In 1996, Liberty Bank paid $188,000 to the OTS for such assessments. Additionally, the OTS assesses fees for the processing of various applications.
Qualified Thrift Lender Test - ----------------------------
Historically, the amount of advances which might be obtained by a member institution from the FHLB has been subject to the institution's compliance with a qualified thrift lender ("QTL") test. The QTL test generally requires that an institution maintain 65% of its total portfolio assets in qualified thrift investments. This level must be maintained on a monthly average basis in nine
out of every twelve months. For purposes of the QTL test, "portfolio assets" equal total assets minus (i) goodwill and other intangible assets, (ii) the value of property used by an institution in the conduct of its business and (iii) assets of the type used to meet liquidity requirements in an amount not exceeding 20% of the savings institution's total assets. Qualified thrift investments include (i) loans made to purchase, refinance, construct, improve or repair domestic residential or manufactured housing, (ii) home equity loans, (iii) securities backed by or representing an interest in mortgages on domestic residential or manufactured housing, (iv) obligations issued by the federal deposit insurance agencies and (v) shares of FHLB stock owned by the savings institution. Subject to a 20%-of-portfolio assets limitation, qualified thrift investments also include 50% of the dollar amount of domestic residential mortgage loans originated and sold within 90 days of origination, consumer loans (up to a maximum of 10% of portfolio assets), investments in certain subsidiaries, loans for the purchase or construction of schools, churches, nursing homes and hospitals, shares of stock issued by the FHLMC or the FNMA and 200% of investments in loans for low-to-moderate income housing and certain other community oriented investments.
A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the restrictions imposed for noncompliance. If the institution converts to a bank charter, it will continue to pay SAIF insurance assessments and any applicable exit and entrance fees before converting to BIF insurance. If the institution does not convert to a bank charter, it must comply with the following additional restrictions on the operations of the institution: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for both a national bank and a savings institution; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution generally will not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. A savings institution that has not converted to a bank charter within three years after failing to qualify as a QTL may not retain any investment or engage in any activity not permitted for both a national bank and a savings institution and must also repay all FHLB System advances. Liberty Bank's qualified thrift investments as of September 30, 1996 were $694 million, or 69% of its portfolio assets at that date. Liberty Bank expects to remain in compliance with the QTL test.
Capital Requirements - --------------------
Since 1989, OTS capital regulations have set capital standards applicable to all savings institutions, including a core capital requirement, a tangible capital requirement and a risk-based capital requirement. The OTS also has established, pursuant to
FDICIA, five classifications for institutions based upon the capital requirements: well capitalized, adequately capitalized, under capitalized, significantly under capitalized and critically under capitalized. At September 30, 1996, Liberty Bank was well capitalized. Failure to maintain that status could result in greater regulatory oversight or restrictions on Liberty Bank's activities.
The OTS requires a savings institution to maintain core capital in an amount not less than 3% of the savings institution's total assets. Core capital includes, generally, common stockholders' equity, noncumulative perpetual preferred stock and related surplus, nonwithdrawable accounts and pledged deposits of mutual savings associations, and minority interests in fully-consolidated subsidiaries, less (i) investments in certain "non-includable" subsidiaries (as determined by regulation) and (ii) certain intangible assets (except for mortgage servicing rights and purchased credit card relationships).
The tangible capital requirement requires a savings institution to maintain tangible capital in a amount not less than 1.5% of its adjusted total assets. Tangible capital means core capital less any intangible assets (except for mortgage servicing rights included in core capital).
Most national banks will be required to maintain a level of core capital of at least 100 to 200 basis points above the 3% minimum level. Because OTS capital standards for savings institutions may not be less stringent than capital standards established for national banks, savings institutions will be required to maintain core capital levels at least as high as national banks.
The OTS capital regulations require savings institutions to maintain a ratio of total capital to total risk-weighted assets of 8%. Total capital, for purposes of the risk-based capital requirement, equals the sum of core capital plus supplementary capital, which includes cumulative preferred stock, mandatory convertible securities, subordinated debt, and the allowance for loan and lease losses of up to 1.25% of total risk-weighted assets. In determining total risk-weighted assets for purposes of the risk- based capital requirements, (i) each off-balance sheet item must be converted to an on-balance sheet credit equivalent amount by multiplying the face amount of each such item by a credit conversion factor ranging from 0% to 100% (depending upon the nature of the item); (ii) the credit equivalent amount of each off- balance sheet item and each on-balance sheet asset must be multiplied by a risk factor ranging from 0% to 100% (again depending on the nature of the item); and (iii) the resulting amounts are added together and constitute total risk-weighted assets.
In addition, the OTS requires institutions with an above-normal
degree of interest rate risk to maintain an additional amount of capital. The test of above-normal is determined by postulating a 200 basis point shift (increase or decrease) in interest rates and determining the effect on the market values of an institution's portfolio equity. If the decline is less than 2%, no addition to risk-based capital is required (i.e., an institution has only a normal degree of interest rate risk). If the decline is greater than 2%, the institution must add additional capital equal to one- half the difference between its measured interest rate risk and 2% multiplied by the market value of its assets. Management believes that Liberty Bank's interest rate risk is within the normal range.
The following table reflects Liberty Bank's compliance with its regulatory capital requirements at September 30, 1996 (dollars in thousands): Actual Required Excess ------------- ------------ ------------ Amount % Amount % Amount % ------- ---- ------- ---- ------- ---- Core capital $62,673 5.89 $31,915 3.00 $30,758 2.89 Tangible capital 61,003 5.74 15,933 1.50 45,070 4.24 Risk-based capital 82,676 10.75 61,520 8.00 21,156 2.75
Capital Distributions - ---------------------
Capital distributions also are regulated by the OTS. Capital distributions are defined to include, in part, dividends, stock repurchases and cash-out mergers. An association is categorized as either a Tier 1, Tier 2, or Tier 3 association. A Tier 1 association is defined as an association that has, on a pro forma basis after the proposed distribution, capital equal to or greater than the OTS fully phased-in capital requirements. A Tier 2 association is an association that has, on a pro forma basis after the proposed distribution, capital equal to or in excess of its minimum capital requirement but does not meet the fully phased-in capital requirement. A Tier 3 association is defined as an association that has current capital less than its minimum capital requirement.
Liberty Bank currently is in compliance with the regulatory capital requirements and therefore is a Tier 1 association. A Tier 1 association is permitted to make capital distributions during a calendar year up to the higher of (i) 100% of its net income to date plus the amount that would reduce by one-half its surplus capital ratio at the beginning of the calendar year, or (ii) 75% of its net income over the most recent four-quarter period. Any distribution in excess of that amount requires prior OTS notice, with the opportunity for the OTS to object to the distribution. In addition, a savings association must provide the OTS with a 30-day advance written notice of all proposed capital distributions, whether or not advance approval is required by OTS regulations. Currently, Liberty Bank periodically notifies the OTS of the gross amount of dividends it intends to pay First Liberty as the sole stockholder of Liberty Bank. Liberty Bank's ability to pay
dividends to First Liberty is subject to the financial performance of Liberty Bank which is dependent upon, among other things, the local economy, the success of Liberty Bank's lending activities, compliance by Liberty Bank with applicable regulations, investment performance and the ability to generate fee income.
Federal Reserve System Requirements - -----------------------------------
The FRB requires depository institutions to maintain noninterest- bearing reserves against their deposit transaction accounts, non- personal time deposits (transferrable or held by a person other than a natural person) with an original maturity of less than one and one-half years and certain money market deposit accounts. Federal Reserve regulations currently require financial institutions to maintain average daily reserves equal to 3% on all amounts from $4.3 million to $52.0 million of net transactions, plus 10% on the remainder. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. Members of the FHLB System also are authorized to borrow from the FRB "discount window" subject to restrictions imposed by FRB regulations. However, Federal Reserve policy generally requires that a savings institution exhaust its FHLB resources before borrowing from the Federal Reserve.
Transactions with Affiliates - ----------------------------
Liberty Bank is also subject to certain transactions with affiliates rules applicable to banks and savings institutions which are set forth in Sections 23A, 23B and 22(h) of the Federal Reserve Act as well as additional limitations imposed by OTS regulations. Such regulations generally impose quantitative and qualitative limitations on loans and other transactions between an institution and its affiliates, including loans to insiders.
Consumer Protection and Other Laws and Regulations - --------------------------------------------------
Liberty Bank, Liberty Mortgage and NewSouth are also subject to various laws and regulations dealing generally with consumer protection matters including without limitation the Equal Credit Opportunity Act and Regulation B, the Electronic Funds Transfer Act and Regulation E, the Truth in Lending Act and Regulation Z, the Truth in Savings Act and Regulation DD, the Expedited Funds Availability Act and Regulation CC, the Bank Secrecy Act and fair housing laws. Liberty Bank, Liberty Mortgage and NewSouth may be subject to potential liability under these laws and regulations for material violations.
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 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.
Thrift institutions that meet certain definitional tests and other conditions prescribed by the Internal Revenue Code of 1986 ("the Code") are allowed to establish a bad debt reserve and to make annual additions to the reserve that may be taken as a deduction in computing taxable income for federal income tax purposes. One of the tests is prescribed in Code Section 7701(a)(19) and requires that at least 60 percent of a thrift institution's assets be "qualifying" assets, as defined in that Section. Failure to meet this test would result in recapture into taxable income the thrift's tax bad debt reserve. Due to the significance of this test, First Liberty monitors this test periodically to ensure that its assets meet the 60 percent test. At September 30, 1996 Liberty Bank's qualified assets were $696 million or 64.3% of includable assets.
The amount of the bad debt reserve deduction is based upon either (i) actual loss experience, or (ii) a percentage of taxable income before such deduction. Under the taxable income method, thrift institutions are permitted to deduct 8% of taxable income if used for annual additions to their bad debt reserves established for federal income tax purposes. For the tax years ended September 30, 1995 and 1994, Liberty Bank determined its bad debt reserve
deduction based on the actual loss experience method. For the tax year ended September 30, 1996, Liberty Bank determined its bad debt reserve deduction based on the percentage of taxable income method.
The bad debt reserve deduction is available only to the extent that total amounts accumulated in the bad debt reserve for qualifying real property loans do not exceed 6% of such loans at year-end. In addition, the deduction is further limited to the amount by which 12% of savings accounts exceeds the sum of retained earnings and reserves at the beginning of the year. The bad debt reserve deductions have not been limited by these restrictions during the three fiscal years ended September 30, 1996, 1995 and 1994.
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. First Liberty has a taxable temporary difference relating to its bad debt reserves for which Liberty Bank has not provided a deferred tax liability. The temporary difference is the amount of the base year tax bad debt reserve (i.e., tax bad debt reserves that arose in tax years beginning before December 31, 1987). At September 30, 1996, the cumulative amount of this temporary difference for which First Liberty is not required to recognize a deferred tax liability is approximately $12.0 million. The amount of the unrecognized deferred tax liability related to this temporary difference is $4.2 million.
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. Pre-1988 bad debt reserves will generally not be recaptured while post-1987 reserves would be recaptured ratably over a six-year period beginning with the tax year ended September 30, 1997, unless Liberty Bank meets a special residential loan requirement which will suspend the start of the recapture for two years. Substantially all of Liberty Bank's reserves are pre-1988 reserves. As a result of this repeal, Liberty Bank will be required to use the specific charge-off method of accounting for bad debts for tax years ending after September 30, 1996. In addition, for years ending after September 1996, Liberty Bank will no longer be subject to the 60% asset test described in Code Section 7701(a)(19).
First Liberty's income tax returns are periodically examined by various taxing authorities. During the fiscal year ended September 30, 1996, First Liberty and the Internal Revenue Service ("IRS") reached a settlement in connection with the IRS's examination of First Liberty's federal income tax returns for the tax years ended September 30, 1986 through 1989. This settlement is reflected in the financial statements for the year ending September 30, 1996 and
did not have a material impact on the consolidated financial statements.
State Taxation - --------------
First Liberty's federal taxable income with certain adjustments is subject to the Georgia corporate income tax at a rate of 6%. 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.
Accounting for Income Taxes - ---------------------------
First Liberty adopted Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes" effective October 1, 1991. SFAS No. 109 allows First Liberty to record an income tax benefit related to its book reserve, but recognize no deferred tax liability with respect to its base year tax bad debt reserve, unless it becomes apparent that this temporary difference will reverse in the foreseeable future. Future reversal of the base year tax bad debt reserve would occur if Liberty Bank ceases to be in the banking business. The cumulative amount of this temporary difference for which First Liberty is not required to recognize a deferred tax liability is approximately $12.0 million. See "Federal Taxation" - herein.
ITEM 2.
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, 1996 Liberty Bank operated 31 banking offices. All facilities are owned by Liberty Bank, with the exception of five supermarket branches in Savannah and three permanent branches in Milledgeville, Sylvania and Vidalia. The total net book value at September 30, 1996 of the offices owned by Liberty Bank on that date, including improvements, furniture, fixtures and equipment, was approximately $22 million. All significant data processing services for deposits, loan servicing, accounting and other operations of Liberty Bank currently are provided by an in-house data processing center. The investment in in-house data processing equipment has been included as equipment above. See Note 8 of the Notes to First Liberty's Financial Statements as contained in Item 8 - "Financial Statements and Supplementary Data" - herein.
Liberty Bank currently is unaware of any potential environmental liability that may be incurred by Liberty Bank in connection with any properties owned by Liberty Bank.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ---------------------------
There are no material pending legal proceedings to which First Liberty is a party or to which any of their property is subject. From time to time First Liberty is a party to legal proceedings which arise in the ordinary course of business.
ITEM 4.
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, 1996.
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, 1996, regarding the executive officers of First Liberty and other individuals having key policy making roles with respect to First Liberty.
Directors - ---------
F. DON BRADFORD, 69, is the retired former owner of Macon Janitor Service in Macon, Georgia. He has served as a director of First Liberty since 1984 and as a director of Liberty Bank since 1966.
RICHARD W. CARPENTER, 59, is President of Realmark Holding Corp. in Atlanta, Georgia. He has served as a director of First Liberty and as a director of Liberty Bank since 1984.
C. LEE ELLIS, 45, is Executive Vice President, Investments, of Alfa Mutual Insurance Company in Montgomery, Alabama. Mr. Ellis has served as a director of First Liberty and Liberty Bank since 1986.
ROBERT F. HATCHER, 54, 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, 67, is President of L. E. Schwartz & Son, Inc., a commercial roofing contractor in Macon, Georgia. He has served as a director of First Liberty since 1993 and as a director of Liberty Bank since July 1995.
THOMAS H. McCOOK, 57, is Vice President of Cherokee Culvert Company, Inc. in Macon, Georgia. Mr. McCook has served as a director of First Liberty since 1984, as a director of Liberty Bank since 1978 and as Chairman of the Boards of Directors of both
entities since 1990.
HERBERT M. PONDER, JR., 60, was the president of Bank South, Macon, in Macon, Georgia where he had served from 1985 until his retirement in 1993.
JO SLADE WILBANKS, 49, is Manager of the Central Region of Georgia Power Company. She has served as a director of First Liberty since 1994 and as a director of Liberty Bank since July 1995.
Executive Officers Who Are Not Directors - ----------------------------------------
ROBERT W. AIKEN, 33, joined First Liberty in August 1996, and serves as President and Chief Executive Officer of NewSouth Financial Services, Inc. He previously was employed by Fleet Finance, Inc. for ten years.
CHARLES G. DAVIS, 49, joined Liberty Bank in 1976, and serves as Executive Vice President in charge of operations. Before joining Liberty Bank, he was employed by American Broadcasting Company.
LARRY D. FLOWERS, 46, 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, 37, joined First Liberty and Liberty Bank in 1985. He is Executive Vice President and Chief Financial Officer of both entities, having previously served as Senior Vice President and Controller. Before joining First Liberty, he was employed by Coopers & Lybrand, Certified Public Accountants, Atlanta, Georgia.
RICHARD A. HILLS, JR., 56, serves as Executive Vice President and General Counsel of First Liberty, and as Senior Vice President and General Counsel of Liberty Bank and Liberty Mortgage. He also serves as Secretary of First Liberty, Liberty Bank and Liberty Mortgage. Prior to joining First Liberty in 1987, he was a partner in the law firm of Aiken & Ward, Atlanta, Georgia.
GEORGE A. MOLLOY, 48, joined Liberty Mortgage in 1995 and serves as its President and Chief Executive Officer. He previously was President of S B & T Mortgage in Atlanta.
LEE B. MURPHEY 52, joined Liberty Bank in June 1991 as Executive Vice President and Chief Credit Officer. He previously was Senior Vice President of Trust Company Bank of Middle Georgia in Macon, Georgia, where he had served for 21 years.
J. LARRY WALLACE, 45, joined Liberty Bank in 1983. He is Executive Vice President in charge of residential construction lending and the disposition of foreclosed properties. Before joining Liberty Bank he was employed by Cameron Brown Company.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED - ---------------------------------------------------------- STOCKHOLDER MATTERS - -------------------
The Common Stock is listed and traded on The Nasdaq Stock Market under the symbol "FLFC." The following table sets forth the high and low last sale prices per share of the Common Stock as reported on The Nasdaq Stock Market, and the dividends paid per share of Common Stock for the periods indicated. On August 28, 1996, the Board of Directors of First Liberty declared a three-for-two stock split payable on October 1, 1996 in the form of a 50% stock dividend. The financial data presented below has been restated to give retroactive effect to that stock split.
Fiscal Year Ended Last Sale Prices Dividends September 30, Per Share Paid Per Share - ----------------- ------------------ ---------------- High Low ------- -------
First Quarter $15.00 $13.17 $ .08 Second Quarter 15.00 14.00 .08 Third Quarter 15.17 13.50 .09 Fourth Quarter 17.17 13.67 .09
First Quarter $ 9.50 $ 8.50 $ .07 Second Quarter 9.17 8.67 .07 Third Quarter 12.33 8.67 .07 Fourth Quarter 13.67 10.67 .07
On December 3, 1996, the last sale price of the Common Stock, as reported on The Nasdaq Stock Market was $20.25. On December 3, 1996, there were 7,110,106 shares of Common Stock outstanding and approximately 660 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ---------------------------------
Selected financial data for First Liberty for each year of the five-year period ended September 30, 1996 are set forth below (in thousands, except per share data).
September 30, -------------------------------------------- 1996 1995(1) 1994 1993(1) 1992 -------- -------- -------- -------- -------- Statements of income data: - -------------------------- Interest income $ 75,082 $ 61,490 $ 48,562 $ 51,241 $ 57,933 Interest expense 40,812 32,733 25,117 29,012 37,919 -------- -------- -------- -------- -------- Net interest income 34,270 28,757 23,445 22,229 20,014 Provision for loan losses 1,788 1,440 1,500 1,979 3,950 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 32,482 27,317 21,945 20,250 16,064 Noninterest income, excluding gains and losses on asset sales 7,536 6,605 6,437 5,081 4,322 Gain (loss) on sale of loans and securities 1,781 (173) 461 1,190 (1,319) Gain on sale of servicing rights 790 2,353 3,367 3,321 5,424 Noninterest expense 30,917 24,824 23,411 22,490 22,158 -------- -------- -------- -------- -------- Income before income taxes, accounting change and extraordinary item 11,672 11,278 8,799 7,352 2,333 Income taxes 3,902 3,207 2,750 2,619 719 -------- -------- -------- -------- -------- Income before accounting change and extraordinary item 7,770 8,071 6,049 4,733 1,614 Accounting change (2) - - - - 1,217 Extraordinary item (3) - - - (521) - -------- -------- -------- -------- -------- Net income 7,770 8,071 6,049 4,212 2,831 Dividends on preferred stock 454 864 891 557 - -------- -------- -------- -------- -------- Net income applicable to common stockholders $ 7,316 $ 7,207 $ 5,158 $ 3,655 $ 2,831 ======== ======== ======== ======== ========
Per common share data: (4) - -------------------------- Income before accounting changes and extra- ordinary items (5) $ 1.17 $ 1.29 $ 1.00 $ .86 $ .36 Accounting changes (5) - - - - .27 Extraordinary items (5) - - - (.09) - -------- -------- -------- -------- -------- Net income (5) $ 1.17 $ 1.29 $ 1.00 $ .77 $ .63 ======== ======== ======== ======== ========
Book value $ 11.35 $ 10.62 $ 9.95 $ 9.39 $ 8.61 Tangible book value 9.67 8.72 9.17 8.53 7.89 Dividends paid .34 .28 .21 - - Dividend payout ratio (5) 29.06% 21.71% 21.00% - - Average number of shares outstanding (5) 6,673 6,307 6,074 5,531 4,559
September 30, ------------------------------------------------ 1996 1995(1) 1994 1993(1) 1992 -------- -------- -------- -------- -------- (Dollars in thousands, except per share, ratio and percentage data)
Core income data: (4) (6) - ------------------------- Net income $ 7,770 $ 8,071 $ 6,049 $ 4,212 $ 2,831 SAIF assessment, net of tax 2,341 - - - - --------- -------- -------- -------- -------- Core income $ 10,111 $ 8,071 $ 6,049 $ 4,212 $ 2,831 ========= ======== ======== ======== ========
Net income per share (5) $ 1.17 $ 1.29 $ 1.00 $ .77 $ .63 SAIF assessment, net of tax per share (5) .35 - - - - --------- -------- -------- -------- -------- Core income per share (5) $ 1.52 $ 1.29 $ 1.00 $ .77 $ .63 ========= ======== ======== ======== ========
Core return on average asset 1.05% 1.01% .86% .60% .40% Core return on average equity 13.42% 12.93% 10.98% 8.96% 7.60%
Balance sheet data: - ------------------- Total assets $1,071,191 $919,274 $693,205 $728,248 $679,376 Earning assets 976,808 838,188 632,427 647,681 604,516 Loans (7) 720,178 625,641 487,315 465,491 469,207 Nonperforming assets (excluding troubled debt restructurings) 6,591 6,793 14,951 20,460 22,647 Loans and securities available-for- sale (8) 294,555 237,157 161,405 195,668 125,147 Deposits 760,494 719,226 561,616 546,379 494,734 Long-term borrowings 32,366 20,501 29,319 49,560 78,996 Stockholders' equity 76,450 70,669 56,391 53,884 38,453
Performance ratios: - ------------------- Return on average assets .81% 1.01% .86% .60% .40% Return on average equity 10.32 12.93 10.98 8.96 7.60 Interest rate spread 3.91 3.92 3.70 3.58 3.21 Net interest margin (9) 3.93 3.95 3.76 3.57 3.15 Efficiency (10) 61.11 65.58 66.98 68.81 73.41 Ratio of earnings to fixed charges (11): Excluding interest on deposits 2.31x 2.72x 2.65x 1.99x 1.23x Including interest on deposits 1.29x 1.34x 1.35x 1.25x 1.06x
Asset quality ratios: - --------------------- Allowance for loan losses to period end loans (7)(12) 1.18% 1.23% 1.15% 1.30% 1.19% Allowance for loan losses to period end non- performing loans 241.61 323.64 124.51 97.55 158.06 Nonperforming assets to period end loans and foreclosed properties (7)(12) .90 1.07 2.97 4.21 4.58 Nonperforming assets to period end total assets .62 .74 2.16 2.81 3.33 Net charge-offs to average loans .14 .03 .39 .60 .57
September 30, ------------------------------------------------ 1996 1995(1) 1994 1993(1) 1992 -------- -------- -------- -------- -------- (Dollars in thousands, except per share, ratio and percentage data)
Capital and liquidity: - ---------------------- Tangible capital to total adjusted assets (13) 5.74% 5.69% 6.26% 5.34% 5.07% Core capital to total adjusted assets (13) 5.89 5.89 6.57 5.59 5.36 Core capital to risk-based assets (13) 8.15 8.18 9.14 7.66 6.95 Risk-based capital to risk- based assets (13) 10.75 11.07 12.61 10.92 10.32 Average equity to average assets 7.83 7.88 7.82 6.70 5.26 Loans to deposits (7) 94.70 86.99 86.77 85.20 94.84
(1) During 1995 and 1993, the Company completed acquisitions of financial institutions with assets of approximately $107 million and $48 million, respectively. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" - herein. Also see Note 3 of Notes to First Liberty's Consolidated Financial statements contained in Item 8 - "Financial Statements and Supplementary Data" - herein. (2) Adoption of SFAS No. 109, "Accounting for Income Taxes". (3) Loss on extinguishment of debt, net of income tax benefit of $269,000. (4) All information has been restated to give retroactive effect to the three-for two stock split effective October 1, 1996 in the form of a dividend. (5) Fully diluted. (6) Core income represents income exclusive of the one time SAIF assessment in the amount of $2.3 million after tax recorded as of September 30, 1996. (7) Excludes loans available-for-sale. (8) Includes loans and securities available-for-sale, fed funds sold, repurchase agreements and cash and cash equivalents. (9) Net interest income divided by average earning assets. (10) Computed by dividing non-interest expense excluding provisions for real estate losses and nonrecurring items by the sum of net interest income before provisions for loan losses and non- interest income excluding nonrecurring items. Excludes the one time SAIF assessment recorded September 30, 1996. (11) 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. (12) Loans before allowance for losses. (13) Includes only capital held by Liberty Bank.
ITEM 7.
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 1996. The positive trends reflect the results of an ongoing plan which focuses on (1) maintaining a low level of interest rate risk, (2) improving operating efficiency, (3) reductions in the levels of nonperforming and classified assets, (4) maintaining a strong regulatory capital position and (5) continued growth.
In February 1993, First Liberty issued 460,000 shares of Series A 7.75% Cumulative Convertible Preferred ("Series A") stock. These shares had a liquidation preference of $25 per share. Dividends on the Series A stock were cumulative at an annual rate of $1.9375 per share and were payable quarterly. In July 1995 the Company redeemed 2,537 shares of Series A for $66,879, plus accrued and unpaid dividends. The remaining 457,463 shares of the Series A were converted into 1,372,389 shares of the Company's common stock, at a conversion price of $8.33 per share of common stock.
In December 1994, the Company acquired by merger Central Banking Company ("CBC") of Swainsboro, Georgia and its subsidiary, The Central Bank ("Central Bank"). Central Bank on the date of acquisition, held the following approximate balances: loans of $21 million, cash and investments of $34 million, premises and equipment of $1 million and deposits of $52 million. Intangible assets resulting from the acquisition amounted to approximately $2 million.
In March 1995, the Company acquired three banking offices located in Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets acquired were approximately $3 million and total cash received and deposits assumed were approximately $95 million. Intangible assets resulting from the acquisition were approximately $4 million.
In September 1995, the Company acquired by merger Tifton Banks, Inc. ("Tifton") of Tifton, Georgia and its subsidiary, Tifton Bank & Trust Company ("Tifton Bank"). Tifton Bank on the date of acquisition, held the following approximate balances: loans of $42 million, cash and investments of $21 million, premises and equipment of $1 million and deposits of $59 million. Intangible assets resulting from the acquisition amounted to approximately $2 million.
On November 15, 1996, the Company acquired by merger Middle Georgia Bank ("MGB"). MGB on the date of acquisition held the following approximate balances: loans of $67 million, cash and investments of $58 million, premises and equipment of $1 million and deposits of $117 million. This business combination has been accounted for utilizing the pooling-of-interests method of accounting.
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 have a liquidation preference of $25.00 per share. Dividends on the Series B are cumulative at an annual rate of $1.50 per share and are payable quarterly.
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 payable to holders on the redemption date of October 7, 1996. The remaining holders elected to convert into common stock at the conversion price of $10.89 per share.
In October 1996, First Liberty commenced operations at NewSouth Financial Services, Inc. ("NewSouth"), a consumer finance subsidiary. NewSouth will provide consumer finance services in select communities throughout Georgia.
Net Income - ----------
First Liberty's core income was $10.1 million compared to $8.1 million a year earlier. Core income per fully diluted share increased 18% to $1.52 for fiscal 1996 from $1.29 per share for fiscal 1995. Core earnings represent earnings exclusive of a one- time Federal Deposit Insurance Corporation ("FDIC") assessment of $3.6 million ($2.3 million net of tax) to recapitalize the Savings Association Insurance Fund ("SAIF"), recorded September 30, 1996 pursuant to a law enacted on that date.
First Liberty's net income for the year ended September 30, 1996 was $7.8 million compared to $8.1 million for the year ended September 30, 1995 and $6.0 million for the year ended September 30, 1994. First Liberty's income before income taxes was $11.7 million for the year ended September 30, 1996 compared to $11.3 million in 1995 and $8.8 million in 1994.
For the year ended September 30, 1996, First Liberty Bank ("Liberty Bank") (excluding contributions of Liberty Mortgage Corporation) contributed $12.6 million of core income before taxes, compared to core income of $9.1 million in 1995 and core income of $4.7 million in 1994. These amounts represent 83%, 81% and 54% of First Liberty's income before income taxes for 1996, 1995 and 1994, respectively. These trends are indicative of (i) improved margins, which resulted in increased net interest income, and reductions in nonperforming assets, (ii) improved internal operating efficiency and (iii) the contributions of acquisitions.
For the year ended September 30, 1996, Liberty Mortgage Corporation ("Liberty Mortgage") contributed $2.5 million of income before income taxes, compared to $2.0 million in 1995 and $3.9 million in 1994. These amounts represent 17%, 18% and 44% of First Liberty's core income before income taxes for 1996, 1995 and 1994, respectively.
Included in Liberty Mortgage's income before income taxes are net gains on sale of loans, securities and loan servicing rights of approximately $2.6 million, $2.0 million and $3.8 million for the fiscal years ended September 30, 1996, 1995, and 1994, respectively. The decrease in these net gains from 1994 thru 1995 was largely attributable to a lower volume of loan originations, which resulted primarily from a rising interest rate environment which generally had a negative impact on the mortgage banking industry as a whole.
Net Interest Income - -------------------
Net interest income increased by $5.5 million or 19% during fiscal 1996 as compared to 1995 due to growth in earning assets. Net interest income increased by $5.3 million or 23% during fiscal 1995 as compared to 1994 due to a $8.2 million reduction in nonperforming assets, growth in earning assets and an expansion of the net interest margin to 3.95% in 1995 from 3.76% in 1994. See "Nonperforming Assets and Credit Risk" - herein.
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 liablilites. Average balances for 1995 and 1994 have been restated to reflect the conversion from month-end to daily balances in computing averages (dollars in thousands).
----------------------------------- Average Rate/ Balance Interest Yield -----------------------------------
Loans (1) $ 687,673 $ 62,021 9.02% Mortgage-backed securities 144,583 10,543 7.29% Investments 36,551 2,391 6.54% ----------- ----------- Total interest-earning assets 868,807 $ 74,955 8.62% =========== Other assets 93,059 ----------- Total assets $ 961,866 ===========
Savings deposits $ 48,183 $ 1,211 2.51% Time deposits 444,897 25,670 5.77% Other deposits 239,279 5,000 2.09% Short-term borrowings 106,239 6,108 5.75% Long-term borrowings (2) 27,345 2,823 10.32% ----------- ----------- Total interest-bearing liabilities 865,943 $ 40,812 4.71% =========== Other liabilities 20,600 Equity 75,323 ----------- Total liabilities and equity $ 961,866 ===========
Interest rate spread 3.91% ===========
Net interest margin 3.93% ===========
(1) Includes nonperforming loans. (2) Includes subordinated debt.
---------------------------------- Average Rate/ Balance Interest Yield ----------------------------------
Loans (1) $ 556,971 $ 49,990 8.98% Mortgage-backed securities 134,500 9,103 6.77% Investments 34,872 2,320 6.65% ----------- ----------- Total interest-earning assets 726,343 $ 61,413 8.46% =========== Other assets 72,048 ----------- Total assets $ 798,391 ===========
Savings deposits $ 45,695 $ 1,226 2.68% Time deposits 395,705 20,792 5.25% Other deposits 196,328 4,149 2.11% Short-term borrowings 58,746 3,785 4.10% Long-term borrowings (2) 25,206 2,781 11.03% ----------- ----------- Total interest-bearing liabilities 721,680 $ 32,733 4.54% =========== Other liabilities 13,796 Equity 62,915 ----------- Total liabilities and equity $ 798,391 ===========
Interest rate spread 3.92% ===========
Net interest margin 3.95% ===========
(1) Includes nonperforming loans. (2) Includes subordinated debt.
----------------------------------- Average Rate/ Balance Interest Yield -----------------------------------
Loans (1) $ 500,023 $ 41,827 8.37% Mortgage-backed securities 99,704 5,629 5.65% Investments 23,360 1,106 4.73% ----------- ----------- Total interest-earning assets 623,087 $ 48,562 7.79% =========== Other assets 81,761 ----------- Total assets $ 704,848 ===========
Savings deposits $ 42,688 $ 1,090 2.55% Time deposits 347,203 15,558 4.48% Other deposits 166,412 3,148 1.89% Short-term borrowings 32,620 1,470 4.51% Long-term borrowings (2) 41,283 3,851 9.33% ----------- ----------- Total interest-bearing liabilities 630,206 $ 25,117 3.98% =========== Other liabilities 19,000 Equity 55,642 ----------- Total liabilities and equity $ 704,848 ===========
Interest rate spread 3.81% ===========
Net interest margin 3.76% ===========
(1) Includes nonperforming loans. (2) Includes subordinated debt.
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 changes in volume) (dollars in thousands).
(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 principal amortization, estimated prepayments, 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. As such, the cash flow simulation will generally provide a better indication of interest rate risk.
During the first quarter of fiscal 1996, short term interest rates generally decreased and fluctuated through the remainder of the year. First Liberty's asset sensitivity contributed to a slight compression to interest rate spreads during the first half of fiscal 1996. Throughout fiscal 1996, management has continued a plan to reduce the level of asset sensitivity to hedge against declining rate environments. As of September 30, 1996, in management's opinion, First Liberty's interest rate risk position was basically neutral.
During 1996 the interest rate sensitivity of First Liberty's balance sheet increased. Management considers interest-earning assets and interest-bearing liabilities which reprice or mature within one year to be interest sensitive. At September 30, 1996 interest-sensitive assets were $543 million or 51% of total assets compared to interest-sensitive liabilities of $631 million or 59% of total assets. A year ago interest-sensitive assets were $501 million or 54% of total assets compared to interest-sensitive liabilities of $440 million or 48% of total assets.
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, 1996. 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).
(1) The portfolio of loans available-for-sale are included in the less than three months repricing periods as all these assets are assigned to optional or mandatory commitments to sell.
(2) The repricing of loans does not include amounts attributable to the amortization and estimated repayment of principal.
(3) The estimated repricing of savings and interest-bearing checking accounts was based on the Office of Thrift Supervision decay rates.
Interest Rate Sensitivity Long Term Analysis - --------------------------------------------
The following table summarizes the repricing of First Liberty's interest- earning assets and interest-bearing liabilities at September 30, 1996. 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).
(1) The portfolio of loans available-for-sale are included in the less than three months repricing period as all these assets are assigned to optional or mandatory commitments to sell.
(2) The repricing of loans does not include amounts attributable to the amortization and estimated repayment of principal.
(3) The estimated repricing of savings and interest-bearing checking accounts was based on the Office of Thrift Supervision decay rates.
Loan Loss Provision and Allowance for Loan Losses - -------------------------------------------------
During fiscal 1996, the provision for estimated losses on loans was $1.8 million compared to $1.4 million during 1995 and $1.5 million during 1994. During 1996, total loans held-for-investment increased by 15% while nonperforming loans increased somewhat. Additionally, net charge-offs have increased due to a decrease in the level of recoveries. Accordingly, the provision for estimated losses on loans increased by 24% during 1996. During 1995, total loans held-for-investment (net of acquisitions) increased by 16%, while nonperforming loans and net charge-offs declined significantly. The provision for estimated losses on loans during 1995 dropped by 4% from 1994.
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 provision for loan losses during 1992 was elevated as economic conditions were relatively weak. The allocation of the allowance for estimated losses for the years indicated was as follows (dollars in thousands):
September 30, -------------------------------------------------------------- 1996 (1) 1995 (1) 1994 (1) 1993 (1) 1992 (1) ----------- ----------- ----------- ----------- ----------- Amt % Amt % Amt % Amt % Amt % ------ --- ------ --- ------ --- ------ --- ------ ---
First mortgage: Residential $ 244 20 $ 313 25 $ 240 26 $ 379 25 $ 350 34 Commercial (2) 525 9 775 12 1,434 19 1,139 22 1,470 23 Residential construction 305 12 402 11 209 11 157 9 161 8 Commercial business 2,145 26 1,507 21 1,130 12 1,494 11 1,513 10 Consumer (3) 3,625 33 2,654 31 1,357 32 1,366 33 1,232 25 Unallocated 1,767 - 2,165 - 1,310 - 1,606 - 915 - ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Total $8,611 100% $7,816 100% $5,680 100% $6,141 100% $5,641 100% ====== ==== ====== ==== ====== ==== ====== ==== ====== ====
(1) Loan categories as a percentage of total loans held-for-investment. (2) Includes commercial construction first mortgage loans. (3) Includes consumer mortgage loans (such as second mortgage loans and home equity lines of credit).
Changes in the allowance for estimated losses on loans for the five years ended September 30, 1996 are as follows (dollars in thousands): September 30, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Balance, beginning of year $ 7,816 $ 5,680 $ 6,141 $ 5,641 $ 4,864 Provision for estimated losses 1,788 1,440 1,500 1,979 3,950 Acquisitions - 879 - 1,675 - Recoveries 1,467 2,415 2,318 1,544 1,440 Charge-offs (2,460) (2,598) (4,279) (4,698) (4,613) ------- ------- ------- ------- ------- Balance, end of year $ 8,611 $ 7,816 $ 5,680 $ 6,141 $ 5,641 ======= ======= ======= ======= =======
Allowance for loan losses to non- performing loans 241.6% 323.6% 124.5% 97.6% 158.1% Allowance for loan losses to total loans held-for-investment 1.2% 1.2% 1.2% 1.3% 1.2%
The following table summarizes charge-offs and recoveries by loan type (dollars in thousands):
September 30, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Charge-Offs: Residential real estate $ 76 $ 193 $ 116 $ 381 $ 876 Commercial real estate - 426 205 559 846 Commercial business 161 587 715 1,651 1,213 Consumer 2,223 1,392 3,243 2,107 1,678 ------- ------- ------- ------- ------- 2,460 2,598 4,279 4,698 4,613 ------- ------- ------- ------- ------- Recoveries: Residential real estate 22 31 185 216 207 Commercial real estate - 3 - 141 278 Commercial business 115 810 271 217 397 Consumer 1,330 1,571 1,862 970 558 ------- ------- ------- ------- ------- 1,467 2,415 2,318 1,544 1,440 ------- ------- ------- ------- ------- Net charge-offs $ 993 $ 183 $ 1,961 $ 3,154 $ 3,173 ======= ======= ======= ======= ======= Percentage of average loans .14% .03% 0.39% 0.60% .57% ======= ======= ======= ======= =======
Nonperforming Assets and Credit Risk - ------------------------------------
The table below summarizes nonperforming assets and troubled debt restructurings at the dates indicated. Nonperforming assets consist of nonaccrual loans, foreclosed properties and insubstance foreclosures, as well as loans past due 90 days or more as to interest or principal and still accruing. Material potential problem loans, (i.e., those with respect to which management has serious doubts regarding the ability of the borrowers to comply with present loan repayment terms) have been classified as
nonaccrual loans regardless of payment status, and therefore are included in Liberty Bank's nonperforming assets (dollars in thousands). September 30, --------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Nonaccrual loans $ 3,564 $ 2,415 $ 4,362 $ 6,295 $ 3,569 Loans past due 90 days or more and still accruing - - 200 - - ------- ------- ------- ------- ------- Total nonperforming loans 3,564 2,415 4,562 6,295 3,569 Real estate acquired through foreclosure 2,751 4,185 10,189 9,342 10,849 Insubstance foreclosures - - 32 4,665 8,117 Other repossessed assets 276 193 168 158 112 ------- ------- ------- ------- ------- Total nonperforming assets $ 6,591 $ 6,793 $14,951 $20,460 $22,647 ======= ======= ======= ======= ======= Total nonperforming assets as a percentage of total assets .62% .74% 2.16% 2.81% 3.33% ======= ======= ======= ======= =======
Troubled debt restructurings $ 5,252 $10,817 $12,199 $12,554 $13,723 ======= ======= ======= ======= =======
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, 1996 foreclosed properties included three commercial properties with aggregate investments (net of reserves) of approximately $1.3 million. The remaining balance of foreclosed properties consisted of residential properties.
During fiscal 1995, management elected to writedown six commercial properties in the amount of $3.0 million, which were reserved for in prior years, as discussed below, due to the permanent impairment of such assets. During fiscal 1996 and 1995, five of the six properties were sold.
During the fourth quarter of fiscal 1994, all remaining commercial properties were reevaluated in light of current economic conditions. In several cases, management elected to reduce the net carrying value of certain properties (by increasing reserves) to facilitate near term liquidation. As a result of the reductions, Liberty Bank recorded a provision of approximately $852,000.
On October 1, 1995 the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, an Amendment of SFAS No. 114". As a result, the following loans were considered impaired as of September 30, 1996. See Notes 1 and 6 to First Liberty's Consolidated Financial Statements contained in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
Page ----
Report of Independent Accountants.......................... 59
Consolidated Statements of Financial Condition as of September 30, 1996 and 1995.............................. 60
Consolidated Statements of Income for each of the three years in the period ended September 30, 1996............. 61
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended September 30, 1996... 63
Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1996............. 64
Notes to Consolidated Financial Statements................. 67
Coopers & Lybrand L.L.P. 1100 Campanile Building 1155 Peachtree Street Atlanta, GA 30309-3630
Report of Independent Accountants ---------------------------------
The Board of Directors First Liberty Financial Corp.
We have audited the accompanying consolidated statements of financial condition of First Liberty Financial Corp. and Subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Liberty Financial Corp. and Subsidiaries as of September 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company changed its method of accounting for impaired loans and mortgage servicing rights in 1996.
Coopers & Lybrand L.L.P.
Atlanta, Georgia November 5, 1996, except as to the information presented in the first paragraph of Note 3, for which the date is November 15, 1996.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Financial Condition - ----------------------------------------------
September 30, -------------------------------- 1996 1995 - ----------------------------------------------------------------------------- (Dollars in Thousands) Assets: - ------- Cash and due from banks $ 37,925 $ 24,610 Federal funds sold and repurchase agreements 29,707 22,652 Securities available-for-sale, at market value 200,017 167,613 Loans available-for-sale, net, at market value 26,906 22,282 Loans, net 720,178 625,641 Accrued interest receivable 7,312 6,406 Premises and equipment, net 22,151 22,194 Real estate, net 2,512 4,053 Intangible assets 10,211 11,315 Mortgage servicing rights 6,132 2,076 Advances to attorneys for loans originated 1,729 3,220 Deferred federal income taxes 450 - Other assets 5,961 7,212 ---------- -------- Total assets $1,071,191 $919,274 ========== ========
Liabilities and Stockholders' Equity: - ------------------------------------- Deposits: Noninterest-bearing demand $ 81,139 $ 63,323 Interest-bearing demand 99,916 94,689 Savings 116,677 120,012 Time 462,762 441,202 ---------- -------- Total deposits 760,494 719,226 Notes payable and other borrowed money 184,660 88,500 Subordinated debentures 12,155 12,501 Securities sold under agreements to repurchase 16,644 4,315 Checks payable on loans originated 4,450 7,119 Deferred federal income taxes - 1,264 Other liabilities 16,338 15,680 ---------- -------- Total liabilities 994,741 848,605 ---------- --------
Commitments and contingencies - -
Stockholders' equity: Series B, 6.00% Cumulative Convertible Preferred stock ($25.00 stated value, 302,580 shares authorized, issued and outstanding) 7,564 7,564 Common stock ($1.00 par value, 37,500,000 shares authorized, 6,103,452 and 5,973,924 shares issued, respectively, and 6,069,942 and 5,940,414 shares outstanding, respectively) 6,104 5,974 Additional paid-in capital 26,132 25,376 Retained earnings 36,804 31,593 Net unrealized gain on securities available- for-sale, net of taxes 115 431 Treasury stock at cost (33,510 shares) (269) (269) ---------- -------- Total stockholders' equity 76,450 70,669 ---------- -------- Total liabilities and stockholders' equity $1,071,191 $919,274 ========== ========
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Income - ---------------------------------
Years Ended September 30, ------------------------------------------ 1996 1995 1994 - --------------------------------------------------------------------------- (Dollars in Thousands) Interest Income: - ---------------- Loans $62,021 $49,990 $41,827 Securities 12,263 10,957 6,481 Federal funds sold and repurchase agreements 671 466 254 Other interest income 127 77 - ------- ------- ------- Total interest income 75,082 61,490 48,562 ------- ------- -------
Interest Expense: - ----------------- Deposits 31,881 26,167 19,796 Short-term borrowings 6,108 3,785 1,470 Long-term borrowings 2,823 2,781 3,851 ------- ------- ------- Total interest expense 40,812 32,733 25,117 ------- ------- ------- Net interest income 34,270 28,757 23,445 Provision for estimated losses on loans 1,788 1,440 1,500 ------- ------- ------- Net interest income after provision for estimated losses on loans 32,482 27,317 21,945 ------- ------- -------
Noninterest Income: - ------------------- Loan servicing fees 2,354 2,398 2,870 Gain on sale of investment securities 11 34 - Gain (loss) on sale of loans and mortgage-backed securities 1,770 (207) 461 Gain on sale of servicing 790 2,353 3,367 Deposit account service charges 4,509 3,491 2,859 Other income 673 716 708 ------- ------- ------- Total noninterest income 10,107 8,785 10,265 ------- ------- ------- 42,589 36,102 32,210 ------- ------- ------- Noninterest Expense: - -------------------- Compensation, taxes and benefits 14,449 12,442 11,960 Occupancy and equipment 3,499 2,965 2,765 Advertising 904 856 854 Professional fees 820 765 815 Data processing 772 718 655 Federal deposit insurance premiums 5,019 1,740 1,551 Amortization of intangible assets 1,113 729 375 Net cost of operation of other real estate 229 370 1,080 Other expenses 4,112 4,239 3,356 ------- ------- ------- Total noninterest expense 30,917 24,824 23,411 ------- ------- -------
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Income, continued - --------------------------------------------
Years Ended September 30, ---------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------- (Dollars in thousands, except per share data)
Income before income tax expense 11,672 11,278 8,799 -------- -------- --------
Income Tax Expense(Benefit): - ---------------------------- Current 5,858 3,394 2,557 Deferred (1,956) (187) 193 -------- -------- -------- 3,902 3,207 2,750 -------- -------- -------- Net income 7,770 8,071 6,049 Dividends on preferred stock 454 864 891 -------- -------- -------- Net income applicable to common stockholders $ 7,316 $ 7,207 $ 5,158 ======== ======== ========
Earnings Per Common Share: - -------------------------- Primary $ 1.21 $ 1.48 $ 1.11 Fully diluted $ 1.17 $ 1.29 $ 1.00
Dividends Per Common Share: $ .34 $ .28 $ .21 - ---------------------------
Average Number of Shares - ------------------------ Outstanding: ------------ Primary 6,056,372 4,843,047 4,633,242 Fully diluted 6,672,680 6,307,338 6,074,234
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Stockholders' Equity - ----------------------------------------------- (Dollars in Thousands)
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Cash Flows - -------------------------------------
Years Ended September 30, --------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------- Operating Activities: (Dollars in Thousands) - --------------------- Cash flows from operating activities: Net income $ 7,770 $ 8,071 $ 6,049 Adjustments to reconcile net income to cash provided by(used in) operations: Depreciation 1,936 1,727 1,618 Deferred income tax expense (benefit) (1,956) (187) 193 Amortization of loan fees (costs), net 113 (623) (776) Provision for estimated losses on loans and real estate 2,201 1,947 2,597 Amortization of intangibles 1,113 729 375 Dividends received on stock (272) (254) (416) Loss(gain) on sales of loans, mortgage-backed and investment securities (1,781) 173 (461) Loans available-for-sale: Disbursements (140,618) (57,020) (160,060) Purchases (228,087) (69,590) (190,758) Sales 365,341 113,053 402,506 Repayments 600 791 8,079 Increase in accrued interest receivable (906) (1,475) (431) Increase(decrease) in accrued interest payable 33 170 (26) Other, net (2,750) 9,328 (1,399) ---------- ---------- ---------- Total adjustments (5,033) (1,231) 61,041 ---------- ---------- ---------- Net cash provided by operating activities 2,737 6,840 67,090 ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Cash Flows, continued - ------------------------------------------------
Years Ended September 30, --------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------- Investing Activities: (Dollars in Thousands) - --------------------- Cash flows from investing activities: Net increase in federal funds sold and repurchase agreements (7,055) (15,917) (3,309) Investment securities available- for-sale: Purchases (10) (11,211) (5,176) Sales 819 30,960 74 Maturities 4,000 3,000 2,843 Mortgage-backed securities available-for-sale: Purchases (77,187) (64,450) (59,864) Sales 2,763 19,478 6,205 Principal repayments 36,959 23,041 33,891 Net increase in loans (97,754) (76,552) (19,800) Purchases of premises and equipment (1,899) (1,447) (1,743) Proceeds from sales of real estate 3,714 1,612 1,821 Net decrease(increase) in advances to attorneys for loans originated 1,491 (1,956) 17,448 Cash received in acquisitions,net - 86,220 - --------- --------- --------- Net cash used in investing activities (134,159) (7,222) (27,610) --------- --------- ---------
Financing Activities: - --------------------- Cash flows from financing activities: Net increase(decrease) in deposits 41,122 (33,300) 15,656 Notes payable and other borrowed money: Proceeds 605,762 380,000 176,000 Repayments (509,602) (342,415) (197,008) Net increase(decrease) in securities sold under agreements to repurchase 12,329 2,655 (6,814) Net increase(decrease) in checks payable on loans originated (2,669) 3,295 (22,422)
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Consolidated Statements of Cash Flows, continued - ------------------------------------------------
Years Ended September 30, ---------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------- (Dollars in Thousands)
Redemption of preferred stock - (66) - Issuance of common stock 270 230 - Dividends paid on stock (2,475) (1,700) (2,077) --------- --------- ---------
Net cash provided by(used in) financing activities 144,737 8,699 (36,665) --------- --------- ---------
Net increase in cash and due from banks 13,315 8,317 2,815 Cash and due from banks beginning of period 24,610 16,293 13,478 --------- --------- ---------
Cash and due from banks end of period $ 37,925 $ 24,610 $ 16,293 ======== ======== ========
Supplemental Disclosures of - --------------------------- Cash Flow Information: ---------------------- Cash paid during the year for: Interest $ 40,780 $ 32,564 $ 25,144 Income taxes 5,687 2,665 3,688
Noncash Investing and Financing Activities: Real estate foreclosed $ 2,028 $ 1,462 $ 1,492 Financing of sales of foreclosed real estate 350 3,678 3,339 Conversion of mortgage loans into mortgage-backed securities - - 596 Dividends declared but not paid on preferred stock 114 66 - Dividends declared but not paid on common stock 524 515 -
Acquisitions: Fair value of assets acquired - $(113,176) - Fair value of liabilities assumed - 199,396 - --------- Net cash received - $ 86,220 - =========
The accompanying notes are an integral part of the consolidated financial statements.
First Liberty Financial Corp. and Subsidiaries - ---------------------------------------------- Notes to Consolidated Financial Statements - ------------------------------------------
1. Summary of Significant Accounting Policies - ----------------------------------------------
Description of Business - -----------------------
First Liberty Financial Corp. ("First Liberty") is a savings and loan holding company which owns and operates First Liberty Bank ("Liberty Bank") and its wholly-owned subsidiaries, Liberty Mortgage Corporation ("Liberty Mortgage") and NewSouth Financial Services, Inc. ("NewSouth"). Liberty Bank operates as a system of community banks throughout Georgia. Liberty Mortgage originates first mortgage loans throughout Georgia and the southeastern states.
Principles of Consolidation - ---------------------------
The consolidated financial statements include the accounts of First Liberty and its wholly-owned subsidiaries, Liberty Bank and Liberty Mortgage (collectively known as "the Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - -------------------------
For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the statement of financial condition caption "Cash and Due From Banks."
Debt and Equity Securities - --------------------------
Held-to-maturity securities are debt and equity securities that the Company has the positive intent and ability to hold to maturity. Held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities that are not classified as either held-to-maturity securities or trading securities are classified as available-for-sale and represent those securities intended to be held for an indefinite period of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to interest rates, change in prepayment risk, the need to increase regulatory capital or other similar factors. Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity until realized. This amount is reported net of income taxes. As of September 30, 1996 and 1995, the Company's entire portfolio of debt and equity securities was classified as
available-for-sale.
Gains or losses on sales of securities are determined based upon the specific identification method.
Loans Available-for-Sale - ------------------------
Loans available for sale are stated at the lower of cost or market and gains and losses on sales of first mortgage loans are recognized at the time of sale. Gains and losses are determined as the difference between the net sales proceeds (including fees paid to the Company to release servicing rights) and the book value of the loans or securities sold, as adjusted by the estimated present value associated with excess or deficient servicing fees. The present value of excess and deficient servicing fees is amortized on the level-yield method over the estimated lives of the related loans.
Loans - -----
Loans are generally recorded at the contractual amounts owed by borrowers, less unearned discounts, deferred origination fees, the undisbursed portion of any loans in process, and the allowance for loan losses. Interest on loans is credited to income as earned to the extent it is deemed collectible. Discounts on loans purchased are accreted into interest income using the level-yield method over the contractual lives of the loans, adjusted for actual prepayments.
Loans which are delinquent 90 days (four payments) or over generally are placed on non-accrual status unless the collectibility of principal and accrued interest is assured beyond a reasonable doubt. In some cases, loans less than 90 days (four payments) delinquent are placed on non-accrual where material uncertainty exists as to their collectibility. When loans are placed on non-accrual, all previously accrued interest is charged against interest income and further accruals are discontinued, unless a part of the previously accrued interest is considered collectible beyond a reasonable doubt. In such cases, the amount of accrued interest considered collectible is not charged off.
Allowance for Estimated Loan Losses - -----------------------------------
On October 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an Amendment of SFAS No. 114". Under these new standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.
The Company uses several factors in determining if a loan is impaired under SFAS No. 114. Quarterly asset classification procedures generally include a review of significant loans and lending data, including loan payment status and borrowers' financial data and operation factors, such as cash flows and
operating income or loss. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate of the loan, except that collateral dependent loans are measured for impairment at the fair value of the collateral. The adoption of SFAS No. 114 resulted in no additional provision for loan losses at October 1, 1995.
The allowance for estimated loan losses is established and maintained through a periodic review and evaluation of various factors which affect the loans' collectibility and results in provisions for loan losses which are charged to expense. Numerous factors are considered in the evaluation including: (1) a review of certain borrowers' current financial status, credit standing, and available collateral; (2) historical loan loss experience in relation to outstanding loans; (3) the diversification and size of the loan portfolio; (4) the results of the most recent regulatory examinations available to the Company; (5) the overall loan portfolio quality; (6) management's judgement regarding prevailing and anticipated economic conditions; and (7) other relevant factors.
Mortgage Servicing Rights - -------------------------
The Company adopted SFAS No. 122 "Accounting for Mortgage Servicing Rights", effective October 1, 1995. SFAS No. 122 requires that the right to service mortgage loans for others be recognized as an asset, whether that servicing right is acquired or originated. The total cost of mortgage loans sold or securitized is allocated to the loans and to the mortgage servicing rights based upon their relative fair values. Mortgage servicing rights are amortized using a method approximating the level-yield method over management's best estimate of the remaining loan lives.
When loans sold have an average contractual interest rate, adjusted for normal servicing fees, that differs from the agreed yield to the purchaser, gains or losses are recognized equal to the present value of such differential over the estimated remaining life of such loans. The resulting "excess (deficient) servicing fees receivable (payable)" is amortized over the estimated life using a method approximating the level-yield method over management's best estimate of the remaining loan lives.
The carrying value of mortgage servicing rights, and the excess (deficient) servicing fees receivable (payable) are evaluated for impairment based on their fair value. Fair values of servicing rights are determined by estimating the present value of future net servicing income considering the average interest rate and the average remaining lives of the related loans being serviced. The Company evaluates the carrying value of its excess (deficient) servicing fee receivable (payable) by determining the present value of the amount by which the actual monthly servicing fees collected exceed "normal" servicing fees. Periodically, the Company uses an independent party to evaluate the present value of its portfolio of mortgage servicing. Both evaluations are 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.
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 10 to 25 years on the straight-line basis. The recoverability of the intangible assets are reviewed periodically to determine if adjustments to carrying value or amortization periods are necessary. Accumulated amortization as of September 30, 1996 and 1995 was $4.6 million and $3.5 million, respectively.
Fair Value of Financial Instruments - -----------------------------------
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. These fair values are provided for disclosure purposes only, and do not impact carrying values of financial statement amounts.
Cash, Due From Banks and Federal Funds Sold and Repurchase Agreements. ---------------------------------------------------------------------- The carrying amount reported in the balance sheet for cash, due from banks and federal funds sold approximates those assets' fair values.
Investment Securities (Including Mortgage-backed Securities). Fair ------------------------------------------------------------- values for investment securities are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
Loans Receivable. For variable-rate loans held-for-investment, fair ----------------- values are based on carrying values. The fair values for loans available-for-sale are based on quoted market prices of similar loans sold including the value of servicing rights. The fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Mortgage Servicing Rights and Excess Servicing Fees. The fair value is ---------------------------------------------------- estimated by discounting future cash flows from servicing fees using discount rates that approximate current market rates.
Deposit Liabilities. The fair values disclosed for deposits (i.e., -------------------- interest and non-interest checking), regular savings, and money market accounts are equal to the amount payable on demand at the reporting date. Fair values for fixed-rate certificates are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated monthly maturities on time deposits.
Short-term Borrowings. The carrying amounts of federal funds purchased, ---------------------- borrowings under repurchase agreements, and other short-term borrowings approximate their fair values.
Long-term Borrowings. The fair values of the Company's long-term --------------------- borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing agreements.
Subordinated Debt. The fair values of Liberty Bank's subordinated debt ------------------ is based on the optional redemption price of 102.0% at September 30, 1996 and 103.0% at September 30, 1995.
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.
Advertising - -----------
Advertising costs are expensed as incurred.
Income Taxes - ------------
The Company follows the liability method of accounting for income taxes. Deferred tax balances are regularly adjusted through the consolidated statements of income to reflect current estimates of future taxes payable or refundable. First Liberty files a consolidated income tax return; however, income taxes are computed by each subsidiary on a separate basis, and taxes currently payable are remitted to First Liberty.
Earnings Per Common Share - -------------------------
Earnings per share are computed on the weighted average number of shares outstanding including common stock equivalents, if dilutive. For computing primary earnings per share, stock options exercisable at a price less than average market price during the period are considered common stock equivalents. Fully diluted earnings per share assumes: (i) the conversion, if dilutive, of all convertible debt as of the beginning of the year (or date of issue), with the elimination of the related interest expense net of applicable income taxes, (ii) the exercise of all stock options below the market price at September 30 or the average market price for the year, and (iii) the conversion, if dilutive, of all convertible preferred stock as of the beginning of the year (or date of issue), with the elimination of dividends declared.
Reclassifications and Restatements - ----------------------------------
Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation.
All references to number of shares, per share amounts, stock option data and market prices have been restated to give retroactive effect to the three-for- two stock split in the form of a stock dividend effective on October 1, 1996.
Estimates - ---------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. Recently Issued Accounting Standards - ----------------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under this approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Management is currently reviewing the provisions of SFAS No. 125 and does not believe that the Company's financial statements will be materially negatively impacted by the adoption.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used at the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. This statement also requires that long-lived assets and certain intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, except for assets that are covered by Accounting Principles Board ("APB") Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Assets that are covered by Opinion No. 30 will continue to be reported at the lower of carrying amount or net realizable value. SFAS No. 121 is effective for the Company beginning October 1, 1996. Management believes that the adoption of SFAS No. 121 will not have a material impact on the Company's financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 establishes accounting and reporting standards for stock-based employee compensation plans including stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123 defines a fair value based method of accounting for an employee stock option
or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued To Employees". Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. SFAS No. 123 is effective for the Company for the year ending September 30, 1997. As such, SFAS No. 123 was adopted effective October 1, 1996 for disclosure purposes only and did not impact the Company's financial position or results of operations.
3. Acquisitions - ----------------
On November 15, 1996, the Company acquired by merger Middle Georgia Bank ("MGB"). On the merger date MGB had total assets of approximately $129 million, total liabilities of $119 million and total stockholders' equity of $10.1 million. This business combination has been accounted for utilizing the pooling-of-interests method of accounting. The following table shows the pro forma effect of the above transaction on results of operations for the periods prior to the combination. The results listed are not necessarily indicative of future operations and they exclude the pro forma effects of prior year acquisitions accounted for under the purchase method (dollars in thousands). (Unaudited) September 30, -------------------------------------- 1996 1995 1994 -------- -------- -------- Total Revenue: -------------- First Liberty $85,189 $70,275 $58,827 MGB 10,664 10,081 8,184 Combined $95,853 $80,356 $67,011 Net Income: ----------- First Liberty $ 7,770 $ 8,071 $ 6,049 MGB 1,167 1,274 1,151 Combined $ 8,937 $ 9,345 $ 7,200 Earnings Per Common Share: -------------------------- First Liberty Primary $ 1.21 $ 1.48 $ 1.11 Fully diluted 1.17 1.29 1.00 MGB Primary 5.84 6.37 5.75 Fully diluted 5.84 6.37 5.75 Combined Primary 1.20 1.42 1.09 Fully diluted 1.16 1.26 1.01
In September 1995, the Company acquired by merger Tifton Banks, Inc. ("Tifton") of Tifton, Georgia, and its subsidiary, Tifton Bank & Trust Company ("Tifton Bank"). Tifton Bank, on the date of acquisition, held the following approximate balances: loans of $42 million, cash and investments of $21 million, premises and equipment of $1 million and deposits of $45 million. Intangible assets resulting from the acquisition amounted to approximately $2 million.
In March 1995, the Company acquired three banking offices located in Sylvania, Vidalia and Waycross, Georgia from a commercial bank. Total assets acquired were approximately $3 million and total cash received and deposits assumed were approximately $95 million. Intangible assets resulting from the acquisition were approximately $4 million.
In December 1994, the Company acquired by merger Central Banking Company ("CBC") of Swainsboro, Georgia, and its subsidiary, The Central Bank ("The Central Bank"). Central Bank on the date of acquisition, held the following approximate balances: loans of $21 million, cash and investments of $34 million, premises and equipment of $1 million and deposits of $52 million. Intangible assets resulting from the acquisition amounted to approximately $2 million.
The financial institutions acquired prior to 1996 were accounted for as purchases and accordingly, income and expenses of such institutions are included in the consolidated statements of the Company from the date of acquisition.
The following table presents unaudited proforma results of operations for the year ended September 30, 1995, after giving effect to the amortization of intangibles and other proforma adjustments, as if the purchase acquisitions previously discussed had occurred at the beginning of the 1995 period. The proforma adjustments do not include any operating efficiencies which have been realized in the combined operations. Accordingly, the proforma summary information does not necessarily reflect the results of operations as they actually would have been, if the acquisitions had occurred at the beginning of the year presented (dollars and shares outstanding in thousands).
(Unaudited) September 30, --------------- ------ Net interest income before provision for estimated losses on loans $31,674 Net income 8,309
Earnings Per Common Share: -------------------------- Primary $ 1.45 Fully diluted 1.26 Average Shares Outstanding: --------------------------- Primary 4,844 Fully diluted 6,617
4. Securities Available-for-Sale - ---------------------------------
Investment and mortgage-backed securities available-for-sale are summarized as follows (dollars in thousands):
September 30, --------------------------- 1996 1995 ------------- ------------ Investment Securities: - ---------------------- U.S. government agencies $ 9,792 $ 14,591 Investment grade corporate equity securities 4,666 4,394 Federal Home Loan Bank of Atlanta stock 9,733 9,733 Other 90 80
Mortgage-backed Securities: - --------------------------- Federal National Mortgage Association 76,628 40,738 Federal Home Loan Mortgage Corporation 82,985 78,721 Government National Mortgage Corporation 2,376 2,835 Other 13,747 16,521 -------- -------- $200,017 $167,613 ======== ========
Mortgage-backed securities at September 30, 1996 and 199$124 million and $85.3 million, respectively, of investments collateralized by mortgage obligations and mortgage pass-through securities. Liberty Bank does not invest in collateralized mortgage obligations which are considered "high risk" as defined by the Federal Financial Institutions Examination Council guidelines.
At September 30, 1996 and 1995, all mortgage-backed securities were available-for-sale. Adjustable rate pass-through securities are subject to interest rate adjustments indexed to the one year or three year constant maturity treasury, the one to six month London Inter-Bank Offered Rate, or the 11th District Cost of Funds Index.
At September 30, 1996, 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): Gross Gross Estimated Amortized Unrealized Unrealized Market At September 30,1996: Cost Gains Losses Value - --------------------- ----------- ------------ ------------ ------------ U.S. government agencies $ 9,824 $ 24 $ 56 $ 9,792 Investment grade corporate equity securities 4,688 - 22 4,666 Federal Home Loan Bank of Atlanta stock 9,733 - - 9,733 Other 90 - - 90 Mortgage-backed securities 175,508 1,073 845 175,736 -------- -------- -------- -------- $199,843 $ 1,097 $ 923 $200,017 ======== ======== ======== ========
Gross Gross Estimated Amortized Unrealized Unrealized Market At September 30,1995: Cost Gains Losses Value - --------------------- ------------ ------------ ----------- ------------ U.S. government agencies $ 14,526 $ 94 $ 29 $ 14,591 Investment grade corporate equity securities 4,416 - 22 4,394 Federal Home Loan Bank of Atlanta stock 9,733 - - 9,733 Other 80 - - 80 Mortgage-backed securities 138,205 1,288 678 138,815 -------- -------- -------- -------- $166,960 $ 1,382 $ 729 $167,613 ======== ======== ======== ========
The change to stockholders' equity for the net unrealized gain or loss on debt and equity securities during fiscal 1996 was a net loss of $316,000 (net of related tax benefit of $163,000) and a net gain of $1.3 million (net of related taxes of $672,000) during fiscal 1995.
The amortized cost and estimated market value of debt and equity securities at September 30, 1996, 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): Estimated Amortized Market Cost Value ---------- ---------- Due in one year or less $ 8,887 $ 8,857 Due after one year through five years 5,715 5,691 -------- -------- 14,602 14,548 Federal Home Loan Bank of Atlanta stock 9,733 9,733 Mortgage-backed securities 175,508 175,736 -------- -------- $199,843 $200,017 ======== ========
Proceeds, gross realized gains and losses on the sale of debt and equity securities for the three years ended September 30, 1996 are as follows (dollars in thousands):
September 30, ------------------------------- 1996 1995 1994 -------- ------- ------- Proceeds $ 3,581 $50,438 $ 6,279 Gross realized gains 13 255 13 Gross realized losses 2 74 20
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. The Company had commitments to originate or purchase residential mortgage loans of approximately $76 million, including $1.6 million to be held in Liberty Bank's portfolio and $43 million on which the interest rate had not been locked-in at September 30, 1996. Commitments to buy and sell, respectively, residential mortgage loans and mortgage-backed securities for mandatory delivery were approximately $500,000 and $43 million at September 30, 1996. Also, at September 30, 1996, the Company bought $2.0 million of optional commitments to sell residential mortgage loans. The Company had no open futures contracts as interest rate hedges related to loans available-for-sale or commitments to originate residential mortgage loans at September 30, 1996.
The following summarizes the principal balance of whole loans and participations which the Company was servicing for its portfolio and investors (dollars in thousands):
September 30, ---------------------------------------- 1996 1995 1994 ------------ ------------- ------------- Loans serviced for investors $ 788,624 $ 617,549 $ 837,926 Loans sub-serviced for others 2,324 2,744 57,857 Loans serviced for Liberty Bank's portfolio 210,003 233,436 208,172 ---------- ---------- ---------- Total loans serviced $1,000,951 $ 853,729 $1,103,955 ========== ========== ========== Number of loans serviced 13,873 12,326 15,142 ========== ========== ==========
In connection with loans serviced, there were no off-balance sheet escrow accounts.
Changes in the amounts capitalized in connection with mortgage servicing rights are as follows (dollars in thousands):
September 30, ---------------------------------- 1996 1995 1994 ----------- ---------- ----------- Balance, beginning of year $ 2,076 $ 2,915 $ 1,491 Capitalized 4,812 337 2,138 Sold (46) (692) (156) Amortization (710) (484) (558) ------- ------- ------- Balance, end of year $ 6,132 $ 2,076 $ 2,915 ======= ======= =======
The Company capitalized $1.8 million and amortized $151,000 in originated mortgage servicing rights during fiscal 1996.
The following table summarizes the Company's financial data with respect to its mortgage banking operations (dollars in thousands):
September 30, -------------------------------- 1996 1995 1994 --------- --------- ---------- Total revenues $ 7,743 $ 6,602 $ 9,222 Total expenses 5,212 4,575 5,354 ------- ------- ------- Income before income taxes $ 2,531 $ 2,027 $ 3,868 ======= ======= ======= Total assets $19,410 $19,884 $18,191 ======= ======= ======= Depreciation expense $ 215 $ 193 $ 120 ======= ======= ======= Capital expenditures for office premises and equipment $ 146 $ 112 $ 356 ======= ======= =======
6. Loans - --------
Loans are summarized as follows (dollars in thousands):
September 30, --------------------------- 1996 1995 ----------- ----------- Loans collateralized by real estate: Residential first mortgage $ 143,005 $ 157,531 Commercial first mortgage 44,797 60,730 Consumer mortgage (1) 61,400 51,786 Construction loans: Residential real estate 88,416 69,579 Commercial real estate 24,185 18,301 Commercial business 190,988 131,963 Consumer-indirect auto loans 154,869 123,750 Consumer-other loans 21,129 19,817 --------- --------- 728,789 633,457 Allowance for estimated losses (8,611) (7,816) --------- --------- $ 720,178 $ 625,641 ========= =========
(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 $104 million and $80.1 million at September 30,
1996 and 1995, 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, 1996 was approximately $12.4 million based on the 15% limitation and $20.7 million based on the 25% limitation. At September 30, 1996, Liberty Bank had no relationships in excess of the LTOB limitation.
Liberty Bank's aggregate investment in loans collateralized by non- residential real estate may not exceed 400% of its risk-based capital. Liberty Bank had excess capacity to originate loans collateralized by non-residential real estate of approximately $167 million at September 30, 1996.
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, 1996, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $4.7 million, with a corresponding valuation allowance of $1.9 million. For the period ended September 30, 1996, the average recorded investment in impaired loans was approximately $3.9 million. 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.
All restructured loans were performing at September 30, 1996. The average yield on restructured loans was 8.37% at that date and was not materially below the market rate of interest for such loans.
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 and for troubled debts restructured for the year ended September 30, 1996 (dollars in thousands).
Troubled Nonaccrual Debts Loans Restructured ---------- ------------ Interest income that would have been recorded under the original terms $ 334 $ 499 ====== ====== Interest income recorded $ 165 $ 440 ====== ======
7. Allowance for Estimated Loan Losses - ---------------------------------------
Changes in the allowance for estimated loan losses for the three years ended September 30, 1996 are as follows (dollars in thousands): September 30, ------------------------------ 1996 1995 1994 -------- -------- -------- Balance at beginning of year $7,816 $5,680 $6,141 Provision for estimated losses 1,788 1,440 1,500 Acquisitions - 879 - Charge-offs (2,460) (2,598) (4,279) Recoveries 1,467 2,415 2,318 ------ ------ ------ Balance end of year $8,611 $7,816 $5,680 ====== ====== ======
8. Premises and Equipment - --------------------------
Premises and equipment are summarized as follows (dollars in thousands): September 30, --------------------- 1996 1995 -------- --------
Land $ 3,602 $ 3,596 Office buildings 22,984 22,528 Furniture, fixtures and equipment 13,240 11,885 -------- -------- 39,826 38,009 Less accumulated depreciation 17,675 15,815 -------- -------- $ 22,151 $ 22,194 ======== ========
Certain office facilities are occupied under operating lease arrangements with future annual rentals as follows (dollars in thousands):
Year ended September 30,: 1997 $ 279 1998 281 1999 283 2000 281 2001 228 Thereafter 722 -------- $ 2,074 ========
Total rent expense was approximately $452,000, $360,000, and $256,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
9. Real Estate - ----------------
Investments in real estate are summarized as follows (dollars in thousands): September 30, ------------------------ 1996 1995 ---------- ---------- Acquired through foreclosure $ 2,751 $ 4,185 Allowance for estimated losses (382) (302) -------- -------- 2,369 3,883 -------- -------- Acquired for development 268 312 Allowance for estimated losses (125) (142) -------- -------- 143 170 -------- -------- $ 2,512 $ 4,053 ======== ========
Sales of real estate owned (gross of gains and losses) during fiscal 1996 and 1995 were $4.2 million and $5.1 million, respectively, of which, Liberty Bank provided financing for $350,000 and $3.7 million during the same periods.
Changes in the allowance for estimated losses on real estate for the years ended September 30, 1996, 1995, and 1994 are as follows (dollars in thousands): September 30, -------------------------------- 1996 1995 1994 ----------- ---------- --------- Acquired through foreclosure: - ----------------------------- Balance, beginning of year $ 302 $ 2,908 $ 2,277 Provision for estimated losses 413 507 1,097 Charge-offs, net (333) (3,113) (466) ------- ------- ------- Balance, end of year $ 382 $ 302 $ 2,908 ======= ======= ======= Acquired for development: - ------------------------- Balance, beginning of year $ 142 $ 158 $ 177 Charge-offs, net (17) (16) (19) ------- ------- ------- Balance, end of year $ 125 $ 142 $ 158 ======= ======= =======
10. Notes Payable and Other Borrowed Money - -------------------------------------------
Notes payable and other borrowed money are summarized as follows (dollars in thousands): September 30, ------------------- 1996 1995 -------- ------- Advances from the Federal Home - ------------------------------ Loan Bank of Atlanta: --------------------- Short term (interest rates ranging from 5.42% to 6.05% and 5.91% to to 8.95% at September 30, 1996 and 1995, respectively) $164,449 $80,500 Long term (interest rates ranging from 4.64% to 7.14% and 5.05% to 5.09% at September 30, 1996 and 1995, respectively) 20,211 8,000 -------- ------- $184,660 $88,500 ======== =======
Liberty Bank's unused borrowing capacity with the Federal Home Loan Bank ("FHLB") of Atlanta at September 30, 1996 was approximately $32.4 million in advance and warehouse lines of credit. Additionally, Liberty Bank has approximately $30.0 million in fed fund lines with correspondent banks.
At September 30, 1996, contractual principal maturities of long- term notes payable and other borrowed money are as follows (dollars in thousands):
1997 $ - 1998 8,000 1999 10,000 2000 - 2001 - 2002 and thereafter 2,211 ------- $20,211 =======
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).
September 30, ------------------------------- 1996 1995 1994 ---------- --------- ---------- Outstanding balance, end of period $164,449 $ 80,500 $ 33,250 Maximum month end balance 164,449 92,500 47,250 Average balance outstanding during the year 91,298 49,279 28,668 Weighted average interest rate, end of period 5.50% 6.25% 5.91% Weighted average interest rate, during the period 5.81% 6.11% 4.48%
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 $195 million and $140 million at September 30, 1996 and 1995, respectively. At September 30, 1996, Liberty Bank was required to collateralize its advances with acceptable collateral with a lendable collateral value equal to 100% of advances outstanding. The lendable collateral value of the residential first mortgage loans and mortgage-backed securities pledged to the advances was 85% and 90% of their fair market value, respectively.
11. Subordinated Debentures - ----------------------------
Subordinated debentures are summarized as follows (dollars in thousands): September 30, ------------------------------- 1996 1995 ------------- ------------- 8 1/4% Convertible subordinated debentures due August 1, 2005 $ 62 $ 664 11% Subordinated debentures due August 1, 2004 16,116 16,116 8 1/4% Subordinated debentures due August 1, 2004 379 379 ---------- ---------- 16,557 17,159 Discounts and capitalized issuance costs (4,402) (4,658) ---------- ---------- $ 12,155 $ 12,501 ========== ========== Accretion of discounts and amortization of issuance costs $ 244 $ 206 ========== ==========
On September 5, 1996 the Company issued a redemption notice for the Company's 8 1/4% convertible debentures due August 1, 2005. As of September 30, 1996, $62,000 plus accrued interest was payable to holders on the redemption date of October 7, 1996. The remaining holders elected to convert into common stock at the conversion price of $10.89 per share.
In 1991, the Company issued $16.2 million and $379,000 principal amount of 11.00% and 8 1/4% subordinated debentures due August 1, 2004, respectively. Both of these issues are not convertible and may be redeemed at the option of the Company, in whole or in part, after August 1, 1993 at the principal amount plus accrued interest and at a premium if redeemed before August 1, 1998. Periodic interest and principal payments on the debentures are made directly by Liberty Bank. The initial premium was 5.00% and declines annually each August 1 beginning in 1994. The premium at September 30, 1996 was 2.00%. There is no mandatory redemption of these debentures prior to maturity.
The following provisions apply to all subordinated debentures. The indentures provide, among other things, that the Company will not dispose of the capital stock of Liberty Bank nor will it permit Liberty Bank to issue securities that are convertible into the capital stock of Liberty Bank if the Company would own less than 80% of the outstanding shares of any voting class of stock. The liability of the Company on the indebtedness is subordinated to all senior indebtedness as defined in the indentures. At September 30, 1996, the Company had approximately $962 million of outstanding indebtedness (including approximately $760 million in deposits) that would constitute senior indebtedness under the indentures.
12. Securities Sold Under Agreements to Repurchase - ---------------------------------------------------
Liberty Bank enters into financing arrangements with approved brokers, dealers and individuals whereby securities are sold under agreements to repurchase identical or substantially identical
securities at a future date ("repurchase agreements"). These arrangements are reflected as financing transactions in that the securities sold are reported as assets in the accompanying financial statements with the proceeds of sale reflected as borrowings. These financing arrangements generally have maturities ranging from 30 to 180 days. Generally, securities sold under agreements to repurchase are under the control of the counterparty during the term of the agreement. Selected data concerning repurchase agreements is presented below (dollars in thousands).
September 30, -------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Mortgage-backed securities sold under agreements to repurchase at year end: Book value $23,088 $ 4,287 $ 1,773 Market value $23,010 $ 4,344 $ 1,781 Obligations under repurchase agreements at year end: Identical securities $16,644 $ 4,315 $ 1,660 Maximum borrowings under repurchase agreements for the year: Identical securities $29,402 $24,839 $ 9,493 Average borrowings under repurchase agreements for the year: Identical securities $14,941 $ 9,463 $ 3,898 Weighted average interest rate on repurchase agreements at year end: 4.89% 6.07% 4.47%
13. Income Taxes - -----------------
The Company files a consolidated federal income tax return. The Company is allowed to determine its bad debt deductions for tax purposes under either the percentage of taxable income method (limited to 8% of taxable income before such deduction), or the experience method. Generally, the experience method is based on actual loss experience. For the tax years ended September 30, 1995 and 1994, Liberty Bank determined its bad debt reserve deduction based on the actual loss experience method. For the tax year ended September 30, 1996, Liberty Bank determined its bad debt reserve deduction based on the percentage of taxable income method.
The provision for federal income taxes consists of the following (dollars in thousands): September 30, ---------------------------- 1996 1995 1994 --------- --------- --------
Current $ 5,858 $ 3,394 $ 2,557 Deferred (1,956) (187) 193 ------- ------- ------- Total $ 3,902 $ 3,207 $ 2,750 ======= ======= =======
Actual income taxes (including income tax (benefit) on extraordinary items) differ from income taxes computed at the federal corporate statutory rate of 34% as shown below:
September 30, ------------------------------- 1996 1995 1994 ----------- --------- --------- Statutory federal income tax rate 34.7% 34.0% 34.0% Bad debt deduction - (8.9) 2.2 Amortization of intangible assets 1.8 1.3 1.0 Tax exempt interest (.8) (.9) (1.6) Other, net (2.3) 2.9 (4.3) ------ ------ ------ Effective federal income tax rate 33.4% 28.4% 31.3% ====== ====== ======
Deferred income taxes included in the consolidated statements of financial condition is presented net. Gross deferred tax assets and deferred tax liabilities as of September 30, 1996 and 1995 are as follows (dollars in thousands):
September 30, -------------------- 1996 1995 --------- -------- Deferred Tax Assets: - -------------------- Allowance for estimated loan losses $ 1,970 $ 1,652 Deferred loan fees 51 136 Real estate owned loss allowance 44 346 Reserve for uncollected late fees 89 102 Purchase accounting adjustments, net 155 211 Other reserves 236 249 Unrealized loss on securities available- for-sale 91 248 SAIF recapitalization assessment 1,261 - Other 359 283 ------- ------- Total deferred tax assets 4,256 3,227 ------- -------
Deferred Tax Liabilities: - ------------------------- Section 481 mark-to-market adjustment 264 384 Depreciation 280 497 Cancellation of indebtedness 346 353 Loan swap 116 140 Loan discounts 437 466 FHLB stock 1,313 1,275 Loan origination fees 370 358 Purchase accounting adjustments, net 172 251 Unrealized gain on securities available- for-sale 152 470 Other, net 356 297 ------- ------- Total deferred tax liabilities 3,806 4,491 ------- -------
Total net deferred tax asset(liability) $ 450 $(1,264) ======= =======
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, 1996 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. The Company has a taxable temporary difference relating to its bad debt reserves for which Liberty Bank has not provided a deferred tax liability. The temporary difference is the amount of the base year tax bad debt reserve (i.e., tax bad debt reserves that arose in tax years beginning before December 31, 1987). As of the year ended September 30, 1996, the cumulative amount of this temporary difference for which the Company is not required to recognize a deferred tax liability is approximately $12.0 million. The amount of the unrecognized deferred tax liability related to this temporary difference is $4.2 million.
The Company's income tax returns are periodically examined by various taxing authorities. During the fiscal year ended September 30, 1996, First Liberty and the Internal Revenue Service ("IRS") reached a settlement in connection with the IRS's examination of the Company's federal income tax returns for the tax years ended September 30, 1986 through 1989. This settlement is reflected in the financial statements for the year ending September 30, 1996 and did not have a material impact on the consolidated financial statements.
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% and is based on federal taxable income, with certain adjustments. The primary difference between taxable income for state and federal income tax purposes is interest income on United States Government obligations, which is not taxable for state income tax purposes.
14. Preferred Stock - --------------------
In September 1995 and December 1994, 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 have a liquidation preference of $25.00 per share. Dividends on the Series B stock are cumulative at an annual rate of $1.50 per share and are payable quarterly. Each share of the Series B stock is convertible at the option of the holder into 1.79 shares of common stock, at a conversion price of $14.00 per share of common stock, subject to adjustment in certain circumstances. The Company, at its option, may redeem the Series
B stock at any time on or after January 1, 1997.
In July 1995 the Company redeemed 2,537 shares of its Series A 7.75% Cumulative Convertible Preferred (Series "A") stock for $66,879, plus accrued and unpaid dividends. Each share of the Series A was convertible into three shares of the Company's common stock. The remaining 457,463 shares of the Series A stock were converted into 1,372,389 shares of the Company's common stock on that date.
Prior to July 1995, the Series A stock had a liquidation preference of $25 per share. Dividends on the stock were cumulative at an annual rate of $1.9375 per share and were payable quarterly. Each share of Series A stock was convertible at the option of the holder into three shares of common stock, at a conversion price of $8.33.
Dividends declared during 1996 and 1995 were $454,000 and $864,000, respectively. Dividends paid during 1996 and 1995 were $406,000 and $798,000, respectively.
As required by APB Opinion No. 15, supplementary primary earnings per share data is presented for each of the years effected in the three-year period ended September 30, 1996. For the computation of supplementary primary earnings per share, shares issued in July 1995 for the conversion of preferred stock originally issued in February 1993, are included in the weighted average shares outstanding from the beginning of each period and, accordingly, net income has not been reduced by preferred dividends.
Supplementary primary earnings per share is as follows:
Years ended September 30, ---------------------------- 1995 1994 ------------ ------------ Net income per share of common stock $ 1.31 $ 1.01 Average number of shares outstanding 5,982,318 6,005,631
15. Regulatory Restrictions - ----------------------------
Liberty Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The regulations require Liberty Bank to meet specific capital adequacy guidelines that involve quantitative measures of Liberty Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Liberty Bank's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that could have a direct material effect on the Company's financial statements.
Quantitative measures established by regulation to ensure capital adequacy require Liberty Bank to maintain minimum amounts and ratios (set forth in the table below) of total and core capital (as defined in the regulations) to risk-weighted assets (as defined),
and of tangible capital (as defined) to assets (as defined). As of September 30, 1996 Liberty Bank met all capital adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the Office of Thrift Supervision ("OTS"), Liberty Bank was categorized as well capitalized under the regulatory framework for prompt corrective action.
The following table reflects Liberty Bank's compliance with its regulatory capital requirements at September 30, 1996 (dollars in thousands):
Actual Required Excess -------------- ------------- ------------- Amount % Amount % Amount % ------- ---- ------- ---- ------- ---- Core capital $62,673 5.89 $31,915 3.00 $30,758 2.89 Tangible capital 61,003 5.74 15,933 1.50 45,070 4.24 Risk-based capital 82,676 10.75 61,520 8.00 21,156 2.75
As required by regulations, Liberty Bank, at the time of its conversion to a stock institution, established a liquidation account and maintains the account for the benefit of its depositors at that time who continue to have funds on deposit. The initial balance of this liquidation account was equal to the institution's net worth prior to conversion of $15,722,000. In the event of a complete liquidation of the institution (and only in such event), each such depositor who continues to be a depositor at the time of such liquidation shall be entitled to receive a liquidation distribution from this account in the amount of the then current adjusted balance for deposits held, before any liquidation distribution may be made to shareholders. This account is reduced annually in proportion to the reduction of eligible savings account balances measured on each fiscal year end.
Liberty Bank is prohibited from declaring or paying cash dividends on its common stock if the payment thereof would cause a reduction in its regulatory capital below either the liquidation account or the capital requirements set by the OTS or, without the prior approval of the OTS, if the amount of dividends to be paid in any year would exceed 50% of its net income for the fiscal year in which the dividend is declared (except that permitted dividends may be deferred and paid in a subsequent year). No dividends were declared during fiscal 1994 and 1996. During fiscal 1995 Liberty bank declared and paid dividends to First Liberty in the amounts of $6.3 million and $3.2 million, respectively. Liberty Bank paid dividends to the Company during fiscal 1996 in the amount of $3.6 million.
The Federal Reserve Board requires depository institutions to maintain noninterest-bearing reserves against their deposit transaction accounts, non-personal time deposits (transferrable or held by a person other than a natural person) with an original maturity of less than one and one-half years and certain money market deposit accounts. Federal Reserve regulations currently require financial institutions to maintain average daily reserves
equal to 3% on all amounts from $4.3 million to $52.0 million of net transactions, plus 10% on the remainder. Liberty Bank maintained $4.7 million in reserves at September 30, 1996.
16. Employee Benefit Plans - ---------------------------
The First Liberty Financial Corp. Employee Savings and Stock Ownership Plan (the "ESSOP") is both a qualified retirement plan and an employee stock ownership plan. The Company may make discretionary contributions of the Company common stock to the employee stock ownership plan portion of the ESSOP in an amount not more than 10% of the total compensation of participants for the plan year. Under the 401(k) portion of the ESSOP, the Company will make matching contributions of the Company common stock in amounts determined annually by its Board of Directors. Dividends earned on the Company common stock are retained in the ESSOP.
The Company also has an Officer Profit Sharing Plan (the "OPSP"), which was designed to reward the Company's officers for their collective effort in maximizing the Company's "core earnings," (as defined in the OPSP agreement). The OPSP provides that if core earnings for the fiscal year equal or exceed a predetermined minimum core earnings, the OPSP participants will receive additional cash compensation based upon a percentage of annual salary, with the percentage increasing as the amount of core earnings increases.
The contributions to the ESSOP and the OPSP included in the accompanying financial statements are as follows (dollars in thousands): September 30, ------------------------------------------- 1996 1995 1994 ------------ ------------ ----------- ESSOP $ 211 $ 201 $ 302 OPSP $ 710 $ 501 $ 450
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 ten percent of total annual compensation.
17. Stock Options - ------------------
The Company granted options to purchase its common stock to certain officers and key employees under an Incentive Stock Option Plan ("ISOP") which was approved by the Company's stockholders in 1984. The options are exercisable for a period of up to five years from the date of issuance under the Plan. The ISOP expired in 1993.
The First Liberty Financial Corp. 1992 Stock Incentive Plan (the
"1992 Plan") was adopted by the Board of Directors of the Company in November 1992 and approved by the stockholders in March 1993. The stock granted under the 1992 Plan is the $1.00 par value common stock. The Company has been authorized to issue up to 573,000 shares of common stock, in the aggregate, under the 1992 Plan, and unexercised option shares of common stock allocable to expired or terminated options may again be granted under that plan. As of September 30, 1996, there were 245,250 shares available for grant. The 1992 Plan is administered by the Compensation and Benefits Committee of the Company's Board of Directors ("the Committee").
Incentive stock options and other stock options granted under the 1992 Plan must be at a price not less than the fair market value of the shares at the date of grant. Options granted under the plan must be exercised within the earlier of: (i) three months after the optionee ceases to be employed by the Company for any reason other than death or disability; (ii) the expiration date as determined by the Committee, listed in the option agreement; (iii) immediately upon termination of employment for cause; (iv) one year after termination of employment because of disability unless the optionee dies within this one year period; or (v) one year after the death of an optionee who dies (a) while employed by the Company, (b) within three months after termination of employment, or (c) within one year after employment terminated due to disability. The Committee may extend the above expiration dates for any non-incentive stock options it grants.
The 1992 Plan will terminate on the later of (i) the complete exercise or lapse of the last outstanding option, or (ii) on the last date upon which options may be granted under the plan (which may not be later than ten years after the date on which the plan is adopted), subject to its earlier termination by the Board of Directors at any time.
Information with regard to options issued under the ISOP during each of the three fiscal years in the period ended September 30, 1996 and under the 1992 plan during the years then ended is as follows: ISOP 1992 Plan ------------------- -------------------- Option Average Option Average Shares Price Shares Price --------- -------- ---------- -------- Options outstanding at September 30, 1993 171,000 $ 4.23 105,000 $ 7.39 Issued - - 85,500 10.15 ------- -------- Options outstanding at September 30, 1994 171,000 4.23 190,500 8.63 Issued - - 22,500 10.67 Exercised (45,000) 3.76 (10,500) 5.83 Canceled - - (45,000) 9.33 ------- ------- Options outstanding at September 30, 1995 126,000 4.39 157,500 8.91 Issued - - 152,250 14.59 Exercised (74,400) 3.62 - - ------- ------- Options outstanding at September 30, 1996 51,600 5.50 309,750 11.70 ======= =======
Under the 1992 Plan, the number of shares exercisable at September 30, 1996 and 1995 was 152,000 and 78,000, respectively. All options under the ISOP were exercisable during the above periods.
On October 26, 1995, the Board of Directors of First Liberty (the "Board") approved an amendment to the 1992 Plan to provide that options granted on and after that date will be exercisable over a period of ten years from date of grant rather than five years from date of grant and to increase the number of shares available for grant under that plan. This amendment was approved by First Liberty's stockholders at the 1996 Annual Meeting of Stockholders (the "1996 Annual Meeting").
On November 21, 1995, the Board adopted the First Liberty Financial Corp. 1995 Director Stock Option Plan (the "DSOP"), which was approved by First Liberty's stockholders at the 1996 Annual Meeting. The DSOP is intended to further the growth and development of First Liberty by encouraging its directors who are not employees of First Liberty to obtain proprietary interest in First Liberty by acquiring its stock. Up to 75,000 shares of common stock, in the aggregate, may be granted to non-employee directors under the DSOP.
Information with regard to options issued under the DSOP during the fiscal year ended September 30, 1996 is as follows:
DSOP ---------------- Option Average Shares Price ------ -------
Options outstanding at September 30, 1995 - $ - Issued 46,500 14.66 ------ Options outstanding at September 30, 1996 46,500 14.66 ======
18. Financial Instruments With Off Balance Sheet Risk - ------------------------------------------------------
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments and standby letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company has no significant concentrations of credit risk with any individual counterparty to originate loans. The Company's lending is concentrated in Georgia, its primary market area. The contract or notional amounts of financial instruments with off-balance sheet
risk at September 30, 1996 and 1995 are as follows (dollars in thousands): September 30, -------------------------- 1996 1995 ---------- ---------- Commitments to originate loans: Fixed rate $86,163 $ 47,236 Adjustable rate 35,607 19,299 Standby letters of credit 240 945 Delivery forward placement contracts: Mandatory 43,164 35,781 Optional 2,000 4,000
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, 1996 and 1995 of $45,310 and $40,129, 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.
19. Fair Values of Financial Instruments - -----------------------------------------
The estimated fair values of the Company's financial instruments were as follows (dollars in thousands).
September 30, 1996 September 30, 1995 -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ------- ---------- ------- Financial Assets: - ----------------- Cash, due from banks, fed funds sold and repurchase agreements $ 67,632 $ 67,632 $ 47,262 $ 47,262 Securities available- for-sale 200,017 200,017 167,613 167,613 Loans, net 720,178 719,380 625,641 629,306 Loans available-for-sale 26,906 26,906 22,282 22,282 Mortgage servicing rights 6,132 7,959 2,076 3,463
Financial Liabilities: - ---------------------- Deposits $ 760,494 $ 760,136 $719,226 $719,343 Federal Home Loan Bank advances 184,660 184,812 88,500 88,353 Subordinated debentures 12,155 16,887 12,501 17,654 Securities sold under agreements to repurchase 16,644 16,644 4,315 4,315
Off-Balance-Sheet Financial - --------------------------- Instruments: ------------ Standby letters of credit $ 240 $ 240 $ 945 $ 945 Commitments to originate loans 76,452 76,624 66,535 66,611 Mandatory commitments to sell loans 43,164 43,298 35,781 35,708 Optional commitments to sell loans 2,000 2,007(1) 4,000 4,003(1) Loan servicing rights - 5,034 - 6,397
(1) Excludes net unamortized option fees of $17,369 at September 30, 1996, and $23,240 at September 30, 1995.
The fair value disclosures provided exclude certain financial instruments and all nonfinancial instruments from its disclosure requirements. The disclosures also do not include certain intangible assets, such as customer relationships, deposit base intangible and goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
20. Contingencies - ------------------
The Company is from time to time a defendant in legal actions from normal business activities. Management does not anticipate that the ultimate liability arising from litigation outstanding at September 30, 1996, will have a materially adverse effect on the Company's financial position, results of operations or liquidity.
21. Financial Information of First Liberty Financial Corp. (Parent - ------------------------------------------------------------------- Only) - -----
First Liberty's statements of financial condition (parent only) as of September 30, 1996 and 1995 and the related statements of income and cash flows for each of the three years in the period ended September 30, 1996 are as follows:
Statements of Financial Condition ---------------------------------
September 30, -------------------------- 1996 1995 ----------- ----------- (Dollars in Thousands) Assets: - ------- Cash $ 92(1) $ 75(1) Other investments 6,850(1) 8,050(1) Real estate, net 142 170 Dividends receivable from Liberty Bank - 3,555(1) Investment in Liberty Bank 71,341(1) 63,375(1) Other assets 1 65 ------- ------- Total assets $78,426 $75,290 ======= =======
Liabilities and Stockholders' Equity: - ------------------------------------- Dividends payable $ 638 $ 581 Other liabilities 1,338 4,040 ------- ------- Total liabilities 1,976 4,621 ------- -------
Stockholders' equity: Series B Preferred stock 7,564 7,564 Common stock 6,104 5,974 Additional paid-in capital 26,132 25,376 Retained earnings 36,804 31,593 Net unrealized gain on securities available-for-sale, net of taxes 115 431 Treasury stock at cost (269) (269) ------- ------- Total stockholders' equity 76,450 70,669 ------- ------- Total liabilities and stockholders' equity $78,426 $75,290 ======= =======
(1) Eliminates in consolidation.
First Liberty Financial Corp. (Parent Only) - ------------------------------------------- Statements of Income - --------------------
Years Ended September 30, ---------------------------------- 1996 1995 1994 -------- -------- -------- (Dollars in Thousands) Income: - ------- Interest income on other investments $ 233(1) $ 302(1) $ 282(2) Cash dividends from Liberty Bank (2) 3,555 3,198 - Other income 1 1 - ------ ------ ------ Total income 3,789 3,501 282 ------ ------ ------
Expense: - -------- Directors fees - 30 18 Other expense 117 106 79 ------ ------ ------ Total expense 117 136 97 ------ ------ ------
Income before income tax expense and equity in undistributed net income of Liberty Bank 3,672 3,365 185 Income tax expense 40 57 63 ------ ------ ------ Income before equity in undistributed net income of Liberty Bank 3,632 3,308 122 Equity in undistributed net income of Liberty Bank (2) 4,138 4,763 5,927 ------ ------ ------ Net income 7,770 8,071 6,049 Dividends on preferred stock 454 864 891 ------ ------ ------ Net income applicable to common stockholders $7,316 $7,207 $5,158 ====== ====== ======
(1) $231,000 in 1996 and $297,000 in 1995 eliminates in consolidation. (2) Eliminates in consolidation.
First Liberty Financial Corp. (Parent Only) - -------------------------------------------- Statements of Cash Flow - -----------------------
Years Ended September 30, -------------------------------- 1996 1995 1994 ------ ------ ------ (Dollars in Thousands) Operating Activities: - --------------------- Cash flows from operating activities: Net income $ 7,770 $ 8,071 $ 6,049 Equity in undistributed earnings of Liberty Bank (4,138) (4,763) (5,927) Other, net 917 (28) 198 ------- ------- ------- Total adjustments (3,221) (4,791) (5,729) ------- ------- ------- Net cash provided by operating activities 4,549 3,280 320 ------- ------- -------
Investing Activities: - --------------------- Cash flows from investing activities: Net decrease in other investments 1,200 1,490 1,733 Cash paid in acquisitions (3,555) (3,198) - Sale of real estate 28 28 27 ------- ------- ------- Net cash provided by (used in) investing activities (2,327) (1,680) 1,760 ------- ------- -------
Financing Activities: - --------------------- Cash flows from financing activities: Issuance of common stock 270 230 - Redemption of preferred stock - (66) - Dividends paid on stock (2,475) (1,700) (2,077) ------- ------- ------- Net cash used in financing activities (2,205) (1,536) (2,077) ------- ------- ------- Net increase in cash 17 64 3 Cash beginning of period 75 11 8 ------- ------- ------- Cash end of period $ 92 $ 75 $ 11 ======= ======= =======
Supplemental Disclosures of - --------------------------- Cash Flow Information: ---------------------- Cash paid during the year for: Income taxes $ 5,687 $ 2,665 $ 3,688
22. Consolidated Condensed Quarterly Results of Income (Unaudited) - -------------------------------------------------------------------
The following summarizes the consolidated condensed quarterly results of income (unaudited) for the year ended September 30, 1996 (dollars in thousands, except per share data):
Quarters Ended, ------------------------------------------------------ December 31 March 31 June 30 September 30(1) ----------- ----------- ----------- --------------- Total interest income $18,259 $18,159 $18,985 $19,679 Net interest income 8,225 8,196 8,674 9,175 Provision for estimated losses on loans 300 300 300 888 Net income 2,375 2,479 2,585 331 Dividends on preferred stock 113 113 113 115 ------- ------- ------- ------- Net income applicable to common stockholders $ 2,262 $ 2,366 $ 2,472 $ 216 ======= ======= ======= =======
Earnings per common share: Primary $ .37 $ .39 $ .41 $ .04 Fully diluted $ .36 $ .37 $ .39 $ .04 Dividends per common share: $ .08 $ .08 $ .09 $ .09
(1) The fourth quarter included a one-time FDIC assessment to recapitalize the SAIF in the amount of $3.6 million pre tax, equaling $2.3 million and $.35 per fully diluted share after tax.
The following summarizes the consolidated condensed quarterly results of income (unaudited) for the year ended September 30, 1995 (dollars in thousands, except per share data):
Quarters Ended, --------------------------------------------------- December 31 March 31 June 30 September 30 ----------- ----------- ----------- ------------ Total interest income $13,498 $15,159 $16,022 $16,811 Net interest income 6,468 7,044 7,583 7,662 Provision for estimated losses on loans 300 300 300 540 Net income 1,765 2,027 2,086 2,193 Dividends on preferred stock 240 279 278 67 ------- ------- ------- ------- Net income applicable to common stockholders $ 1,525 $ 1,748 $ 1,808 $ 2,126 ======= ======= ======= =======
Earnings per common share: Primary $ .33 $ .37 $ .39 $ .39 Fully diluted $ .29 $ .32 $ .33 $ .35 Dividends per common share: $ .07 $ .07 $ .07 $ .07
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - -------------------------------------------------------------
For the three year period ended September 30, 1996, there has been no disagreement between First Liberty and any accountants on any matter of accounting principles or practices or financial statement disclosure.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
Information relating to the directors of First Liberty is set forth under the caption "Proposal No. 1 - Election of Directors - Nominees" in First Liberty's definitive Proxy Statement for its Annual Meeting of Stockholders to be held on January 29, 1997. 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.
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.
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - ---------------------------------------------------------- MANAGEMENT - ----------
Information regarding ownership of First Liberty's $1.00 par value Common Stock by certain persons is set forth under the captions "Voting - Principal Stockholders" and "Proposal 1 - Election of Directors - Nominees" in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
Information regarding certain transactions between Liberty Bank and affiliates of First Liberty and Liberty Bank is set forth under the caption "Proposal 1 - Election of Directors - Transactions With First Liberty" in the Proxy Statement referred to in Item 10 above. Such information is incorporated herein by reference.
PART IV -------
ITEM 14.
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 59 through 98 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.
Exhibit No. Description
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)
4(a) Form of Registrant's 8-1/4% Convertible Subordinated Debenture Due August 1, 2005 and related Indenture (Exhibit E to Registrant's Registration Statement on Form S-1, No. 2- 98803)
4(b) Forms of Registrant's 8-1/4% Subordinated Debenture Due August 1, 2004 and 11% Subordinated Debenture Due August 1, 2004 and related Indenture (Exhibit T3C to Amendment No. 2 to Form T-3 to Registrant's Application for Qualification of Indentures under the Trust Indenture Act of 1939)
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)
Exhibit No. Description
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) Agreement and Plan of Merger dated as of June 3, 1992, among Liberty Bank, Registrant and First Federal Savings and Loan Association of Milledgeville, as amended
10(l) Purchase and Assumption Agreement dated as of September 30, 1992, between Liberty Bank and Bankers First Savings Bank, FSB, as amended
10(m) First Liberty Financial Corp. 1992 Stock Incentive Plan dated as of November 24, 1992
10(n) Employment Agreement dated June 28, 1995 between Liberty Bank and J. Larry Wallace
10(o) Registrant's Officer Profit Sharing Plan as amended and restated effective October 1, 1993
Exhibit No. Description
10(p) Amended and Restated Agreement and Plan of Merger as of July 15, 1994 among Registrant, Liberty Bank, Central Banking Company and The Central Bank (Appendix A to Registrant's Registration Statement on Form S-4, No. 33- 83108)
10(q) Purchase and Assumption Agreement as of October 4, 1994 between Liberty Bank and First Union National Bank of Georgia, as amended as of October 31, 1994, and November 29, 1994
10(r) Agreement and Plan of Merger as of May 10, 1995 among Registrant, Liberty Bank, Tifton Banks, Inc. and Tifton Bank & Trust Company (Appendix to Registrant's Registration Statement on Form S-4, No. 33-60207)
10(s) Registrant's 1995 Director Stock Option Plan as of November 21, 1995
10(t) 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(u) Employment Agreement dated May 23, 1995 between Liberty Mortgage and George A. Molloy
10(v) Employment Agreement dated August 5, 1996 between NewSouth and Robert W. Aiken
11 Statements of Computation of Earnings Per Share
12 Statements of Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
21 Subsidiaries of Registrant (Exhibit 22 to Registrant's Annual Report on Form 10-K for the year ended September 30, 1990)
23(a) Consent of Independent Certified Public Accountants
23(b) Consent of KPMG Peat Marwick to incorporation by reference of financial statements in First Liberty's Registration Statement No. 33-24733 on Form S-8
27 Financial Data Schedule
(b) Reports on Form 8-K
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST LIBERTY FINANCIAL CORP. (Registrant)
Date: December 17, 1996 By: /s/ Robert F. Hatcher ----------------------- --------------------------- Principal Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Thomas H. McCook Chairman of the Board December 17, 1996 -------------------- -------------------- Thomas H. McCook and Director
/s/ Robert F. Hatcher President December 17, 1996 -------------------- -------------------- Robert F. Hatcher Chief Executive Officer and Director
/s/ F. Don Bradford Director December 17, 1996 -------------------- -------------------- F. Don Bradford
/s/ Richard W. Carpenter Director December 17, 1996 -------------------- -------------------- Richard W. Carpenter
/s/ C. Lee Ellis Director December 17, 1996 -------------------- -------------------- C. Lee Ellis
/s/ Melvin I. Kruger Director December 17, 1996 -------------------- -------------------- Melvin I. Kruger
/s/ Jo Slade Wilbanks Director December 17, 1996 -------------------- -------------------- Jo Slade Wilbanks
/s/ H.M. Ponder, Jr. Director December 17, 1996 -------------------- -------------------- H.M. Ponder, Jr.
/s/ David L. Hall Executive Vice President December 17, 1996 -------------------- -------------------- David L. Hall and Chief Financial Officer (Duly authorized principal financial officer)
/s/ Laura B. Cross Vice President and December 17, 1996 -------------------- -------------------- Laura B. Cross Controller (Duly authorized principal accounting officer)
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.
Exhibit No. Description Page
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)
4(a) Form of Registrant's 8 1/4% Convertible Subordinated Debenture and related Indenture (Exhibit E to Registrant's Registration Statement on Form S-1, No. 2- 98803)
4(b) Forms of Registrant's 8-1/4% Subordinated Debenture Due August 1, 2004 and 11% Subordinated Debenture Due August 1, 2004 and related Indenture (Exhibit T3C to Amendment No. 2 to Form T-3 to Registrant's Application for Qualification of Indentures under the Trust Indenture Act of 1939)
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
Exhibit No. Description Page
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) Agreement and Plan of Merger dated as of June 3, 1992, among Liberty Bank, Registrant and First Federal Savings and Loan Association of Milledgeville, as amended
10(l) Purchase and Assumption Agreement dated as of September 30, 1992, between Liberty Bank and Bankers First Savings Bank, FSB, as amended
10(m) First Liberty Financial Corp. 1992 Stock Incentive Plan dated as of November 24, 1992
10(n) Employment Agreement dated June 28, 1993 between Liberty Bank and J. Larry Wallace
10(o) Registrant's Officer Profit Sharing Plan as amended and restated effective October 1, 1994
10(p) Amended and Restated Agreement and Plan of Merger as of July 15, 1994 among Registrant, Liberty Bank, Central Banking Company and The Central Bank (Appendix A to Registrant's Registration Statement on Form S-4, No. 33- 83108)
10(q) Purchase and Assumption Agreement as of October 4, 1994 between Liberty Bank and First Union National Bank of Georgia, as amended as of October 31, 1994, and November 29, 1994
10(r) Agreement and Plan of Merger as of May 10, 1995 among Registrant, Liberty Bank, Tifton Banks, Inc. and Tifton Bank & Trust Company (Appendix to Registrant's Registration Statement on Form S-4, No. 33-60207)
10(s) Registrant's 1995 Director Stock Option Plan as of November 21, 1995
10(t) 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
Exhibit No. Description Page
10(u) Employment Agreement dated May 23, 1995 between Liberty Mortgage and George A. Molloy 107
10(v) Employment Agreement dated August 5, 1996 between NewSouth and Robert W. Aiken 113
11 Statements of Computation of Earnings Per Share 119
12 Statements of Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 121
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 122
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