FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended September 30, 1997 Commission File Number 0-24532
FLAG Financial Corporation
(Exact name of registrant as specified in its charter)
Georgia 58-2094179
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 North Greenwood St., P.O. Box 3007
LaGrange, Georgia 30240
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (706) 845-5000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was
required to file such report), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No___
Shares outstanding as of November 13, 1997: 2,036,990 shares of Common Stock,
$1.00 par value.
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FLAG FINANCIAL CORPORATION
INDEX
Part I. Financial Information Page
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Item I. Financial Statements
Consolidated Statements of Condition as of September 30, 1997
(Unaudited) and December 31, 1996................................ 1
Consolidated Statements of Income (Unaudited) for the quarter
and nine months ended September 30, 1997 and September 30, 1996.. 2
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 1997 and September 30, 1996 ..... 3
Notes to Consolidated Financial Statements....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the quarter and nine months ended
September 30, 1997............................................... 7
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ............................... 13
Signatures ...................................................... 14
Index to Exhibits ............................................... 15
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
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September 30, December 31,
1997 1996
---- ----
Assets
Cash ..................................... $ 3,806,065 $ 2,527,785
Interest-bearing deposits ................ 5,871,857 3,557,138
Federal funds sold ....................... 0 0
Proceeds receivable from secondary market 2,645,704 1,162,121
Investment securities .................... 10,252,071 7,057,494
Federal Home Loan Bank stock ............. 1,693,000 1,895,900
Mortgage-backed securities ............... 38,757,364 37,458,698
Loans receivable - net ................... 158,792,265 152,644,436
Loans held for sale ...................... 1,339,068 343,677
Mortgage servicing rights ................ 1,077,092 1,703,710
Accrued interest and dividends receivable. 1,973,826 1,763,345
Real estate acquired through foreclosure . 342,018 524,703
Fixed assets ............................. 5,961,346 5,417,962
Deferred and refundable income taxes ..... 1,648,472 2,012,987
Other assets ............................. 4,302,814 4,748,910
------------- -------------
Total assets ............................. $ 238,462,962 $ 222,818,866
============= =============
Liabilities
Savings accounts ......................... $ 177,639,273 $ 177,999,415
Federal funds purchased .................. 2,160,000 2,210,000
Advances from Federal Home Loan Bank ..... 31,858,330 17,370,833
Advances from borrowers for
taxes and insurance .................. 1,631,995 709,672
Advances payable to secondary market ..... 662,669 1,982,676
Accrued interest on deposits ............. 258,775 323,783
Dividends payable on common
stock .................................... 173,144 173,144
Other liabilities ........................ 2,361,106 1,531,051
--------- ---------
Total liabilities ...................... 216,745,292 202,300,574
----------- -----------
Stockholders' Equity
Common stock ............................. 2,036,990 2,036,990
Additional paid-in capital ............... 8,037,630 8,044,728
Retained earnings ........................ 11,844,005 10,732,992
Unrealized loss - marketable securities
available-for-sale .................... (200,955) (296,418)
-------- --------
Total stockholders' equity ............. 21,717,670 20,518,292
---------- ----------
Total liabilities and
stockholders' equity ................. $ 238,462,962 $ 222,818,866
============= =============
See Accompanying Notes to Consolidated Financial Statements
1
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FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
1997 1996 1997 1996
---- ---- ---- ----
Interest Income
Interest and fees on
loans.............. $3,496,027 $3,625,015 $10,418,461 $10,583,296
Interest and dividends
on securities...... 181,855 250,483 486,995 768,312
Interest on mortgage-
backed securities...... 604,425 502,732 1,742,951 1,668,707
Interest on time
deposits............... 50,526 35,544 137,702 119,359
------ ------ ------- -------
Total interest
income.............. 4,332,833 4,413,774 12,786,109 13,139,674
--------- --------- ---------- ----------
Interest Expense
Interest on savings..... 2,002,030 2,009,266 5,993,698 5,961,252
Interest on borrowings... 365,056 285,656 817,795 935,841
------- ------- ------- -------
Total interest expense.... 2,367,086 2,294,922 6,811,493 6,897,093
---------- ---------- ---------- -----------
Net interest income
before provision for
loan losses.............. 1,965,747 2,118,852 5,974,616 6,242,581
Provision for Loan Losses. 150,000 2,550,000 424,000 3,334,529
---------- ---------- ---------- -----------
Net interest income
after Provision for
loan losses............. 1,815,747 (431,148) 5,550,616 2,908,052
---------- ---------- ---------- -----------
Other Income
Fees and service charges. 688,744 624,366 1,961,354 1,815,983
Gain on sale of
investment securities.. 34,547 35,632 120,515 202,005
Gain on sale of loans.... 86,458 122,435 209,478 246,450
Gain (loss) on sale of
mortgage-backed
securities....... 30,011 0 26,102 7,615
Gain (loss) on sale of
real estate - net...... (8,555) (21,964) (45,774) (56,991)
Sundry income............ 79,615 33,282 207,444 153,548
---------- ---------- ---------- -----------
Total other income......... 910,820 793,751 2,479,119 2,368,610
---------- ---------- ---------- -----------
Operating Expenses
Compensation and
benefits............... 814,820 683,995 2,400,898 2,030,056
Office occupancy expense. 99,773 70,381 262,546 198,665
Furniture, fixtures and
equipment expenses..... 73,188 74,570 221,193 178,228
Federal deposit insurance
premium................ 58,842 1,275,541 127,938 1,513,362
Legal and professional
fees................... 89,590 92,496 241,281 234,236
Data processing expense.. 123,134 129,060 366,799 386,523
Advertising.............. 69,372 62,687 166,910 153,795
General and payroll
tax expense............. 93,168 82,036 240,308 252,986
Printing and postage..... 81,494 74,024 244,420 219,569
Depreciation............. 145,500 129,999 436,500 389,997
Other expenses......... 325,998 304,527 882,434 770,727
---------- ---------- ---------- -----------
Total operating expenses... 1,974,879 2,979,316 5,591,227 6,328,144
---------- ---------- ---------- -----------
Net income prior to taxes... 751,688 (2,616,713) 2,438,508 (1,051,482)
Less provision for taxes.. 249,424 ($1,006,493) 808,064 (454,736)
---------- ------------ ---------- -----------
Net Income.................. $502,264 ($1,610,220) $1,630,444 ($596,746)
========== ============ ========== ===========
Basic earnings per share.... $0.25 ($0.79) $0.80 ($0.30)
Book value per share........ $10.66 $9.89 $10.66 $9.89
Equity to total assets...... 9.11% 8.80% 9.11% 8.80%
See Accompanying Notes to Consolidated Financial Statements
2
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FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
-----------------------------
09-30-97 09-30-96
------------ ------------
Cash Flows from Operating Activities ............ (UNAUDITED)
Net Income .................................... $ 1,630,444 ($596,746)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan losses..................... 424,000 3,334,529
Provision for depreciation ................... 436,500 389,997
Amortization of premiums/discounts
on securities .............................. 162,380 177,393
(Gain)/loss on sale of investment
securities ................ (27,903) (41,047)
(Gain)/loss on sale of loans and
mortgage-backed securities ................. (235,580) 238,836
(Gain)/loss on sale of real estate
acquired through foreclosure ............... 45,774 56,991
(Gain) on sale of stock ...................... (92,612) (160,957)
Change in accrued interest and
dividends receivable ....................... (210,481) (292,215)
Change in deferred taxes ..................... 306,005 (956,506)
Change in accrued interest on savings ........ (65,008) (104,798)
Change in dividends payable on common stock .. 0 29,541
Change in mortgage servicing rights........... 626,618 (173,184)
Change in other - net ........................ 1,276,151 384,938
------------ ------------
Total adjustments ........................... 2,645,844 2,883,518
------------ ------------
Net cash provided by operating activities ... 4,276,288 2,286,772
------------ ------------
Cash Flows from Investing Activities
Change in interest-bearing deposits .......... (2,314,719) (1,007,829)
Calls and maturities of investment
securities ................................. 1,250,000 4,250,382
Proceeds from sale of investment
securities.................................. 1,752,121 6,136,986
Proceeds from sale of loans and
mortgage-backed securities ................. 16,625,294 15,582,455
Proceeds from sale of FHLB stock ............. 417,700 0
Loans originated net of principal
collected................................... (14,442,028) (14,783,308)
Proceeds from sale of stock .................. 3,368,527 3,685,920
Change in real estate acquired
through foreclosure ........................ 136,911 259,740
Purchase of investment securities ............ (6,798,905) (4,871,454)
Purchase of loans and
mortgage-backed securities ................. (12,490,162) (4,099,634)
Deferred net origination fees/costs .......... 63,626 (48,733)
Purchase of FHLB stock ....................... (214,800) 0
Purchase of other stock ...................... (2,524,836) (2,785,560)
Purchase of fixed assets ..................... (979,884) (262,887)
Change in federal funds sold ................. 0 90,000
------------ ------------
Net cash provided by investing activities ... (16,151,155) 2,146,078
------------ ------------
Cash Flows from Financing Activities
Net change in deposit accounts ............... (360,142) 5,889,837
Change in federal funds purchased ............ (50,000) 0
Proceeds from FHLB advances .................. 24,500,000 11,000,000
Repayment of FHLB advances ................... (10,012,497) (21,612,500)
Change in advances to secondary market ....... (1,320,007) 212,838
Change in advances for borrower
taxes & insurance .......................... 922,323 1,021,664
Refund of overpayment on exercise of
stock options .............................. (7,098) 0
Exercise of stock options .................... 0 646,717
Cash dividends ............................... (519,432) (498,624)
------------ ------------
Net cash provided/(used by)financing ....... 13,153,147 (3,340,068)
------------ ------------
Net change in cash and cash equivalents ......... 1,278,280 1,092,782
Cash and cash equivalents at
beginning of year ............................. 2,527,785 4,301,653
------------ ------------
Cash and cash equivalents at
September 30, ................................. $3,806,065 $5,394,435
============ ============
See Accompanying Notes to Consolidated Financial Statements
3
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FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
NOTE 1: Principles of Consolidation
The consolidated financial statements include the operations of FLAG Financial
Corporation ("FLAG" or the "Company") and its wholly-owned subsidiary, First
Federal Savings Bank of LaGrange (the "Bank"). The interim consolidated
financial statements included herein are unaudited but reflect all adjustments
necessary to eliminate all significant intercompany balances and transactions
and such other adjustments and accruals which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial position and the
results of operations for the interim periods presented. All such adjustments
are of a normal recurring nature. Certain prior period amounts have been
reclassified to conform with the current period's presentation. For the purpose
of comparison, information is included for prior periods. Financial information
for those periods, including the financial statements, footnotes and independent
auditors' opinion contained in the Company's 1996 Annual Report, should be read
in conjunction with these financial statements. The results of operations for
the quarter and nine months ended September 30, 1997, are not necessarily
indicative of the results for a full year's operation.
NOTE 2: Investments
Investments are classified in three categories: held-to-maturity securities
(reported at amortized cost), trading securities (reported at fair value), and
available-for-sale securities (reported at fair value). Net unrealized gains or
losses on available-for-sale securities are excluded from income but reported in
a separate component of stockholders' equity. Net unrealized gains or losses on
trading securities are included in current earnings.
The following summarizes FLAG's investments as of September 30, 1997:
Net After-Tax
Unrealized Unrealized
Balance Gain/(Loss) Gain/(Loss)
------- ----------- -----------
Investment Securities
Held to maturity
(at amortized cost) ........... $ 0 $ 0 $ 0
Available-for-sale
(at fair value) ............... 10,163,123 88,948 55,148
Trading securities ............. 0 0 0
---------- ---------- ----------
Total investment securities 10,163,123 88,948 55,148
---------- ---------- ----------
Mortgage-Backed Securities
Held to maturity
(at amortized cost) ........... 2,684,844 0 0
Available-for-sale
(at fair value) ............... 36,485,589 (413,069) (256,103)
Trading securities ............. 0 0 0
---------- ---------- ----------
Total mortgage-backed
securities ................ 39,170,433 (413,069) (256,103)
---------- ---------- ----------
FHLB Stock (available-for-sale) .... 1,693,000 0 0
---------- ---------- ----------
Total ...................... $51,026,556 ($324,121) ($200,955)
=========== =========== ==========
4
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FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
NOTE 3: Net Loans Receivable (Excluding Loans Held for Sale)
Loans receivable are summarized as follows:
September 30, December 31,
1997 1996
---- ----
Residential Mortgage Loans
Residential 1-4 family ................... $ 93,949,265 $ 84,728,436
Multi-family ............................. 643,000 606,000
------------- -------------
Total residential mortgages .............. 94,592,265 85,334,436
Commercial real estate loans ................. 41,307,000 33,844,000
Consumer loans ............................... 8,306,000 11,095,000
Commercial loans and leases .................. 18,486,000 17,780,000
Residential construction loans ............... 5,928,000 11,812,000
------------- -------------
Gross loans receivable ................... 168,619,265 159,865,436
------------- -------------
Less:
Undisbursed proceeds on loans
in process ............................. 5,027,000 2,663,000
Deferred loan fees and discounts ......... 155,000 219,000
Allowance for loan losses ................ 4,645,000 4,339,000
------------ ------------
Total net loans .............................. $158,792,265 $152,644,436
============ ============
NOTE 4: Loans Held for Sale
The Bank had $1,339,068 and $343,677 of mortgage loans held for sale in the
secondary market at September 30, 1997, and December 31, 1996, respectively,
stated at the lower of cost or market.
NOTE 5: Supplemental Disclosure of Cash Flow Information
Cash paid during the nine months ended:
September 30,
-------------
1997 1996
---- ----
Interest...........................$ 6,033,700 $ 5,092,384
Income taxes.......................$ 498,997 $ 1,016,855
NOTE 6: Stockholders' Equity
The following table sets forth changes in stockholders' equity for the nine
months ended September 30, 1997:
Balance at December 31, 1996 ..................... $ 20,518,292
Net income/(loss) ................................ 1,630,444
Dividends declared ............................... (519,431)
(Increase)/decrease in unrealized losses on
marketable securities .......................... 95,463
Refund of overpayment on exercise of
stock options .................................. (7,098)
------
Balance at September 30, 1997 .................... $ 21,717,670
============
5
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FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(UNAUDITED)
On September 15, 1997, the Board of Directors declared a $0.085 per share cash
dividend payable October 1, 1997, to shareholders of record September 24, 1997.
FLAG has 2,036,990 shares of common stock outstanding. FLAG has an Employee
Stock Incentive Plan which provides up to 201,250 shares of common stock which
may be issued upon the exercise of options granted under the plan and also
provides for the granting of stock appreciation rights. Pursuant to the option
agreements, all options granted are subject to a four year, 25% per year vesting
schedule. The maximum option term is ten years. As of December 31, 1996, options
for 120,207 shares had been exercised at an average price of $5.38. In the first
quarter of 1997, 26,750 options were granted with an average price of $11.38 and
expire in the year 2007, none of which have been exercised in 1997.
FLAG also has a Directors Stock Incentive Plan. Under this Plan, up to 100,625
shares may be issued. The options granted vest on the date of grant, and the
maximum term is ten years. There were 46,000 director stock options outstanding
as of September 30, 1997. Of these options, 40,000 can be exercised at a price
of $9.50 and expire in 2004, and 6,000 can be exercised at a price of $13.50 and
expire in 2006.
NOTE 7: Earnings Per Share
Net earnings per share is based on the weighted average number of shares
outstanding during each period. Stock options granted to key management
personnel are considered to be common stock equivalents. However, these
equivalents are not included in the calculation of net earnings per common share
as the effect of such is considered to be immaterial. Earnings per share for the
nine months ended September 30, 1997, were computed based on the following:
Nine Months Ended
-----------
September 30,
1997 1996
---- ----
Net income .......................... $ 1,630,444 ($ 596,746)
Weighted average number of
shares outstanding................. 2,036,990 2,002,004
Basic earnings per share ............ $ 0.80 $ (0.30)
Per share data presented above for 1996 has been restated to reflect a change in
the method of computing weighted average shares outstanding, as explained above.
Earnings per share for the third quarter of 1996 as previously reported was
($0.77). Earnings per share for the first nine months of 1996 as previously
reported was $(0.29).
Note 8: Business Combination
Effective October 28, 1997, the Company signed a Definitive Agreement to combine
operations with Middle Georgia Bankshares, Inc., a Vienna, Georgia based bank
holding company doing business primarily through its banking subsidiary,
Citizens Bank. Pursuant to the terms of the Agreement, all Middle Georgia
shareholders will receive 15.75 shares of FLAG stock, such that an additional
1,012,284 shares will be issued. Total consolidated assets of Middle Georgia at
September 30, 1997 were $119,948,000, with total stockholders' equity of
$11,000,000.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking Statements
Certain of the matters discussed in this document may constitute forward-looking
statements for purposes of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. The words "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate," and similar expressions are intended to identify
such forward-looking statements. The Company's actual results may differ
materially from the results anticipated in these forward-looking statements due
to a variety of factors, including, without limitation, the effects of future
economic conditions; governmental monetary and fiscal policies, as well as
legislative and regulatory changes; the risks of changes in interest on the
level and composition of deposits, loan demand, and the values of loan
collateral, securities and interest rate protection agreements, as well as
interest rate risks; the effects of competition from other commercial banks,
thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other mutual
funds and other financial institutions operating in the Company's market area
and elsewhere, including institutions operating locally, regionally, nationally,
and internationally, together with such competitors offering banking products
and services by mail, telephone, computer, and the Internet; and the failure of
assumptions underlying the establishment of reserves for possible loan losses
and estimations of values of collateral and various financial assets and
liabilities. All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
Liquidity and Capital Resources
Applicable federal regulations require the Bank to maintain cash and eligible
short-term investment securities in an amount greater than or equal to 5% of net
withdrawable deposits and borrowings payable in one year or less. This
requirement is to help assure that funding is adequate to meet deposit
withdrawals, loan fundings and other short-term liquidity needs. The Bank's
liquidity position was 8.02% as of September 30, 1997, as compared to 7.75% at
December 31, 1996, and 8.60% as of September 30, 1996.
The Bank's primary source of liquidity (funds) are deposits, loan repayments,
proceeds from the sale of loans and securities, Federal Home Loan Bank of
Atlanta ("FHLBA") advances, federal funds purchased, and earnings from
interest-bearing assets. Non-interest checking accounts continue to be a growing
source of funds for the Bank. The Bank's principal uses of funds are the
origination of loans and leases, the purchase of mortgage-backed and investment
securities, and for the repayment of borrowings and advances. During the nine
months ended September 30, 1997, funds were primarily used to fund newly
originated loans and investment securities.
The Consolidated Statements of Cash Flows for the nine months ended September
30, 1997 and 1996, provide additional information about the sources and uses of
funds for those two periods.
An adequate level of capital is not only a regulated requirement but is
necessary to provide the foundation for balance sheet expansion and protection
from future losses. The chart below reflects the Bank's capital as of September
30, 1997. As indicated in the following chart, FLAG and the Bank are
significantly above all capital levels which are considered necessary under
current industry standards and are required by regulatory agencies.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
On October 28, 1997, the Company announced the signing of an agreement to
acquire Middle Georgia Bankshares, Inc. ("MGB"), a $119,948,000 asset bank
holding company based in Vienna, Georgia. The merger agreement provides, among
other things, for the merger of MGB with and into the Company and the exchange
of each share of MGB common stock for 15.75 shares of Company common stock.
Total outstanding shares of the Company will increase from approximately
2,037,000 to approximately 3,049,000 at closing.
Following consummation of the merger, the current President and Chief Executive
Officer of MGB, Dan Speight, will become President and Chief Executive Officer
of the Company. John S. Holle will continue to serve as chairman of the Company.
Additionally, the Board of Directors of the Company will be restructured to
include five members of the existing Board of Directors of the Company and two
members of the existing Board of Directors of MGB.
Required Actual Excess
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
Tangible Capital $ 3,567 $ 20,576 $17,009
1.50% 8.65% 7.15%
Core Capital $ 7,134 $ 20,576 $13,442
3.00% 8.65% 5.65%
Risk-based Capital $ 12,382 $ 22,511 $10,129
8.00% 14.54% 6.54%
Changes in Financial Condition
December 31, 1996 and September 30, 1997
Total assets increased 7.02% or approximately $15.6 million from $222,818,866 at
December 31, 1996, to $238,462,962 at September 30, 1997. Total liabilities
increased 7.14% or approximately $14.4 million, from $202,300,574 at December
31, 1996, to $216,745,292 at September 30, 1997. The changes resulted primarily
from increases in net loans receivable and investment securities, with a related
increase of FHLBA advances.
Stockholders' Equity increased $1,199,378 from December 31, 1996, to September
30, 1997, as follows:
Balance at December 31, 1996 ................... $ 20,518,292
Net income ..................................... 1,630,444
Dividends declared ............................. (519,431)
(Increase)/decrease in unrealized losses
on marketable securities ..................... 95,463
Refund of overpayment on
exercise of stock options .................... (7,098)
------
Balance at September 30, 1997 .................. $ 21,717,670
============
Results of Operations
Quarters ended September 30, 1997 and 1996
FLAG Financial reported net income in the third quarter of 1997 of $502,264, or
$0.25 per share, up from a net loss of $1,610,220, or $0.79 per share, in the
third quarter of 1996. Annualized return on average assets was 0.85 % in the
third quarter of 1997, while annualized return on average equity was 9.48 %. The
improvement in profitability was primarily due to the fact that the year-ago
period included a $2.3 million charge related to a portfolio of equipment leases
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
sold to the Bank through Bennett Funding Group, Inc. As has been previously
reported, the Bank is in the process of finalizing negotiations of a settlement
with the bankruptcy trustee in the Bennett Funding case. The settlement is
contingent upon a satisfactory settlement agreement as well as bankruptcy court
approval. The year-ago figure also reflected a special assessment totaling
$1,150,000 to fund the Savings Association Insurance Fund ("SAIF").
Total interest income decreased 1.8% to $4,332,833 in the third quarter of 1997
from $4,413,774 in the comparable period in 1996, while total interest expense
increased 3.1% to $2,367,086, versus $2,294,922 in the comparable period in
1996. Net interest income decreased approximately 7.2% to $1,965,747 in the
third quarter of 1997 from $2,118,852 in the third of 1996. The decrease in net
interest income is the result of a decrease in late fees on mortgage loans, a
decrease in interest income from loans held for sale, lower income from deferred
fees, and a higher balance of FHLBA advances. Late fees on mortgage loans
decreased approximately $33,000 from the comparable period in 1996. Interest
income from loans held for sale decrease approximately $30,000, and deferred
fees decreased approximately $9,000 from the comparable 1996 period. FHLBA
advance expense increased approximately $79,000 as compared to the third quarter
of 1996. This was the result of an increase in FHLBA advances of approximately
$6.1 million. The advances were used to support a higher average cash balance
and for the purchase of loans and investment securities.
After a loan loss provision of $150,000 in the third quarter of 1997, versus a
provision for loan losses of $2,550,000 (including the Bennett Funding charge)
in the third quarter of 1996, net interest income after provision for loan
losses was $1,815,747, up from a net interest loss after provision for loan
losses of $431,148 in the third quarter of 1996.
Other income increased 14.7% to $910,820 in the third quarter of 1997 from
$793,751 in the third quarter of 1996, with a large portion of that increase
attributable to higher fee income and service charges. Fees and service charges
increased 10.3% to $688,744 in the third quarter of 1997 from $624,366 in the
third quarter of 1996. Gains on sale of loans, investments, mortgage-backed
securities and real estate (net) increased 4.7% to $142,461 from $136,103 in the
third quarter of 1996.
Total operating expenses decreased 33.7% to $1,974,879 in the third quarter of
1997 from $2,979,316 in the third quarter of 1996. Excluding the $1,150,000 SAIF
assessment that was included in operating expenses in the third quarter of 1996,
operating expense growth would have been 8.0%. This growth in expenses was due
to normal increases in operating expenses, although cost reductions did occur in
federal deposit insurance premiums and data processing expense.
Results of Operations
Nine months ended September 30, 1997 and 1996
FLAG Financial reported net income in the first nine months of 1997 of
$1,630,444, or $0.80 per share, up from a net loss of $596,746, or $0.30 per
share, for the comparable period in 1996. Annualized return on average assets
was 0.95 % in the first nine months of 1997, while annualized return on average
equity was 10.56 % in the first nine months of 1997. As was the case with the
third quarter, much of the improvement in earnings was due to the absence in
1997 of the Bennett Funding charges and the SAIF assessment, although earnings
also benefited from growth in other income.
Total interest income decreased 2.7% to $12,786,109 in the first nine months of
1997 from $13,139,674 in the comparable period in 1996, while total interest
expense declined 1.2% to $6,811,493 from $6,897,093 in the comparable period in
1996. Net interest income decreased 4.3% to $5,974,616 from $6,242,581. The
decrease in net interest income was the result of higher earning assets in the
first nine months of 1996 versus earning assets in 1997. After a loan loss
provision of $424,000 in the first nine months of 1997, versus $3,334,529 in the
comparable period of 1996, net interest income after provision for loan losses
was $5,550,616, versus $2,908,052 in the comparable period of 1996.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Other income increased 4.7% to $2,479,119 in the first nine months of 1997 from
$2,368,610 in the first nine months of 1996, with the increase primarily
attributable to higher fee income and service charges. Fees and service charges
increased 8.0% to $1,961,354 in the first nine months of 1997 from $1,815,983 in
the first nine months of 1996. Gains on sale of loans, investments,
mortgage-backed securities and real estate (net) decreased 22.2% to $310,321
from $399,079 in the first nine months of 1996. This decrease was the result of
a $116,000 gain on sale of FNMA stock in the first quarter of 1996.
Total operating expenses decreased 11.6% to $5,591,227 in the first nine months
of 1997 from $6,328,144 in the first nine months of 1996. Excluding the
$1,150,000 SAIF assessment, operating expense growth would have been 8.0%. This
increase is the result of higher compensation and benefits from the Bank's
investment in key people to help manage the growth of the Bank's assets.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Provision for Loan and Lease Losses
Management utilizes a systematic methodology to independently evaluate the
adequacy of the allowance for loan and lease losses. The adequacy of the
allowance for loan and lease losses is determined through management's informed
judgment concerning the amount of risk inherent in the Bank's loan and lease
portfolios. This judgment is based on such factors as the levels of
nonperforming and substandard loans and leases, portfolio mix, borrowers'
financial condition, estimated underlying collateral values, current and
prospective local economic conditions, and historical loss experience.
Management expects the allowance to increase as the Bank continues to expand its
following loan portfolios: consumer, commercial loans and leases, and commercial
real estate. Actual losses in the form of loans charged-off during the nine
months ended September 30, 1997, and the year ended December 31, 1996, are
presented as follows:
September 30, December 31,
1997 1996
---- ----
Average net loans .............................. $152,897,498 $151,084,000
Allowance for possible loan and lease losses,
Beginning of period .......................... 4,339,000 1,339,000
Charge-offs for the period:
Consumer loans ............................... 57,000 87,000
Commercial loans and leases .................. 1,000 -
Residential construction loans ............... - 22,000
Residential mortgage loans ................... 106,000 410,000
Commercial real estate loans ................. - -
-------- --------
Total charge-offs ........................ 164,000 519,000
-------- --------
Recoveries for the period:
Consumer loans ............................... 40,000 35,000
Commercial loans and leases .................. 1,000 -
Residential construction loans ............... - -
Residential mortgage loans ................... 5,000 -
Commercial real estate loans ................. - -
-------- --------
Total recoveries ......................... 46,000 35,000
-------- --------
Net charge-offs for the period ................. 118,000 484,000
Provision for loan and lease losses ............ 424,000 3,484,000
Allowance for possible loan and lease losses,
End of period ................................ $ 4,645,000 $4,339,000
============ ==========
Ratio of allowance for loan and lease losses to
average net loans outstanding ................ 3.04% 2.84%
Ratio of net charge-offs during the period to
average net loans and leases outstanding
during the period ............................ 0.08% 0.32%
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table represents the allocation of the allowance as of the dates
indicated:
September 30, December 31,
1997 1996
---- ----
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Residential mortgage loans ........ $ - -% $ -%
Commercial real estate loans ...... 190,000 0.12% 261,000 0.17%
Consumer loans .................... 2,000 0.01% 7,000 0.01%
Commercial loans and leases ....... 2,580,000 1.61% 2,978,000 1.93%
Residential construction loans .... - -% - %
--------- ----- --------- -----
Total loans allocated.......... 2,772,000 1.74% 3,246,000 2.11%
Unallocated allowance ............. 1,873,000 1.17% 1,093,000 0.71%
--------- ----- --------- -----
Total allowance for possible
loan and lease losses ....... $4,645,000 2.91% $4,339,000 2.82%
========== ===== ========== =====
The Bank continues to monitor the credit quality of its loan and lease
portfolio. The following table represents the non-accrual loans and other
nonperforming assets as of the dates indicated. Interest income is recognized on
a cash basis for these loans.
September 30, December 31,
1997 1996
---- ----
Non-accruing loans:
Residential mortgage loans:
Residential 1-4 family ..................... $1,129,000 $1,327,000
Multi-family ............................... -- --
Commercial real estate loans ............... 902,000 662,000
Consumer loans ............................. 70,000 83,000
Commercial loans and leases ................ 4,616,000 4,616,000
---------- ----------
Total non-accruing loans and leases ...... 6,717,000 6,688,000
Real estate acquired through foreclosure
and other repossessed collateral ........... 348,000 525,000
---------- ----------
Total nonperforming assets ............... $7,065,000 $7,213,000
========== ==========
Ratio of total nonperforming assets to:
Total loans and real estate acquired
through foreclosure ........................ 4.40% 4.70%
Total assets ................................. 2.96% 3.25%
12
<PAGE>
FLAG FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 6.
(a) EXHIBITS.
The following exhibit is filed herewith:
Exhibit No. Description
----------- -----------
27 Financial data schedule (For SEC use only)
(b) Current Reports on Form 8-K. No Current Reports on Form 8-K were filed in
the quarter ended September 30, 1997.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: November 14, 1997 /s/ Ellison C. Rudd
----------------------------
Ellison C. Rudd
Chief Financial Officer
(Duly authorized officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page Number
- -------------- ----------- -----------
27 Financial Data Schedule (for SEC use only) 16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<PERIOD-END> SEP-30-1997
<FISCAL-YEAR-END> DEC-31-1997
<CASH> 3,806,065
<INT-BEARING-DEPOSITS> 5,871,857
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,702,435
<INVESTMENTS-CARRYING> 2,684,844
<INVESTMENTS-MARKET> 2,634,925
<LOANS> 160,131,333
<ALLOWANCE> 4,645,000
<TOTAL-ASSETS> 238,462,962
<DEPOSITS> 177,639,273
<SHORT-TERM> 34,018,330
<LIABILITIES-OTHER> 5,087,689
<LONG-TERM> 0
0
0
<COMMON> 2,036,990
<OTHER-SE> 19,680,680
<TOTAL-LIABILITIES-AND-EQUITY> 238,462,962
<INTEREST-LOAN> 10,418,461
<INTEREST-INVEST> 2,229,946
<INTEREST-OTHER> 137,702
<INTEREST-TOTAL> 12,786,109
<INTEREST-DEPOSIT> 5,993,698
<INTEREST-EXPENSE> 817,795
<INTEREST-INCOME-NET> 5,974,616
<LOAN-LOSSES> 424,000
<SECURITIES-GAINS> 146,617
<EXPENSE-OTHER> 5,591,227
<INCOME-PRETAX> 2,438,508
<INCOME-PRE-EXTRAORDINARY> 1,630,444
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,630,444
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 2.72
<LOANS-NON> 6,717,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,289,000
<LOANS-PROBLEM> 5,684,945
<ALLOWANCE-OPEN> 4,339,000
<CHARGE-OFFS> 164,000
<RECOVERIES> 46,000
<ALLOWANCE-CLOSE> 4,645,000
<ALLOWANCE-DOMESTIC> 4,645,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,873,000
</TABLE>
