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 June 30, 1997 Commission File Number 0-24532
FLAG Financial Corporation
(Exact name of registrant as specified in its charter)
Georgia 58-2094179
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(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 August 14, 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 June 30, 1997
(Unaudited) and December 31, 1996...................................1
Consolidated Statements of Income (Unaudited) for the
quarter and six months ended June 30, 1997 and June 30, 1996........2
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 1997 and June 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 six months
ended June 30, 1997. ...............................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........11
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Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ...............12
Item 6. Exhibits and Reports on Form 8-K .................................12
Signatures ........................................................13
Index to Exhibits .................................................14
<PAGE>
ITEM I. FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
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June 30, December 31,
1997 1996
---- ----
Assets
Cash............................................. $5,014,756 $2,527,785
Interest-bearing deposits........................ 3,362,908 3,557,138
Federal funds sold............................... 1,580,000 0
Proceeds receivable from secondary market........ 554,241 1,162,121
Investment securities............................ 7,086,662 7,057,494
Mortgage-backed securities....................... 36,953,396 37,458,698
Loans receivable - net........................... 150,705,040 152,644,436
Loans held for sale.............................. 0 343,677
Mortgage servicing rights........................ 1,002,069 1,703,710
Accrued interest and
dividends receivable......................... 1,792,518 1,763,345
Real estate acquired through foreclosure......... 495,184 524,703
Federal Home Loan Bank stock..................... 1,478,200 1,895,900
Fixed assets..................................... 5,860,054 5,417,962
Deferred and refundable income taxes............. 1,737,422 2,012,987
Other assets..................................... 4,303,077 4,748,910
------------ ------------
Total assets................................. $221,925,527 $222,818,866
============ ============
Liabilities
Savings accounts................................ $180,391,014 $177,999,415
Federal funds purchased......................... 0 2,210,000
Advances from Federal Home Loan Bank............ 16,879,164 17,370,833
Advances from borrowers
for taxes and insurance..................... 1,041,546 709,672
Advances payable to secondary market............ 509,399 1,982,676
Accrued interest on deposits.................... 311,811 323,783
Dividends payable on common stock............... 173,144 173,144
Other liabilities............................... 1,352,789 1,531,051
------------ ------------
Total liabilities............................. 200,658,867 202,300,574
------------ ------------
Stockholders' Equity
Common stock.................................... 2,036,990 2,036,990
Additional paid-in capital...................... 8,037,630 8,044,728
Retained earnings............................... 11,514,884 10,732,992
Unrealized loss - marketable securities
available-for-sale.......................... (322,844) (296,418)
------------ -------------
Total stockholders' equity.................... 21,266,660 20,518,292
------------ -------------
Total liabilities and
stockholders' equity........................ $221,925,527 $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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Interest Income
Interest and fees on loans.. $3,342,717 $3,478,191 $6,643,043 $6,714,683
Interest and dividends
on securities............. 139,972 274,446 305,140 517,829
Interest on mortgage-backed
securities................ 567,062 545,129 1,138,526 1,165,975
Interest on time deposits... 41,016 27,715 87,176 83,815
--------- --------- --------- ---------
Total interest income..... 4,090,767 4,325,481 8,173,885 8,482,302
--------- --------- --------- ---------
Interest Expense
Interest on savings......... 2,021,759 1,928,871 3,991,668 3,951,986
Interest on borrowings...... 218,092 326,122 452,739 650,185
--------- --------- --------- ---------
Total interest expense.... 2,239,851 2,254,993 4,444,407 4,602,171
--------- --------- --------- ---------
Net interest income
before provision
for loan losses......... 1,850,916 2,070,488 3,729,478 3,880,132
Provision for Loan Losses..... 124,000 634,529 274,000 784,529
--------- --------- --------- ---------
Net interest income
after provision
for loan losses......... 1,726,916 1,435,959 3,455,478 3,095,603
--------- --------- --------- ---------
Other Income
Fees and service charges.... 644,307 652,758 1,272,610 1,191,617
Gain on sale of investment
securities................ 20,722 42,590 82,059 166,373
Gain on sale of loans....... 181,488 153,713 406,320 367,613
Gain/(loss) on sale of
mortgage-backed securities. 0 1,024 (3,909) 7,614
Gain (loss) on sale of real
estate - net ............. (27,733) (23,051) (37,219) (35,027)
Sundry income............... 52,2955 92,302 127,829 120,266
--------- --------- --------- ---------
Total other income...... 871,079 919,336 1,847,690 1,818,456
--------- --------- --------- ---------
Operating Expenses
Compensation and benefits... 768,207 669,377 1,586,078 1,346,061
Office occupancy expense.... 89,425 65,945 162,773 128,284
Furniture, fixtures and
equipment expenses........ 70,128 55,200 148,005 103,658
Federal deposit insurance
premium................... 45,282 118,842 69,096 237,821
Legal and professional
fees...................... 83,271 67,012 151,691 141,740
Data processing expense..... 121,657 128,390 243,665 257,463
Advertising................. 51,548 51,262 97,538 91,108
General and payroll tax
expense.................. 92,236 89,638 147,140 170,950
Printing and postage........ 79,935 59,061 162,926 145,545
Depreciation................ 145,500 129,999 291,000 259,998
Other expenses........... 298,600 238,280 556,436 466,198
--------- --------- ---------- ----------
Total operating
expenses............. 1,845,789 1,673,006 3,616,348 3,348,827
--------- --------- ---------- ----------
Net income prior to taxes..... 752,206 682,290 1,686,820 1,565,232
Less provision for taxes.... 243,092 254,156 558,640 551,757
------- ------- ------- -------
Net Income.................... $509,114 $428,133 $1,128,180 $1,013,474
========= ========= ========== ==========
Basic earnings per share...... $0.25 $0.21 $0.55 $0.51
Book value per share.......... $10.44 $10.72 $10.44 $10.72
Equity to total assets........ 9.58% 9.55% 9.58% 9.55%
See Accompanying Notes to Consolidated Financial Statements
2
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FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
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Six Months Ended
06-30-97 06-30-96
-------- --------
Cash Flows from Operating Activities (UNAUDITED)
Net Income................................... $1,128,180 $1,013,474
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for loan losses.................. 274,000 784,529
Provision for depreciation................. 291,000 259,998
Amortization of premiums/discounts
on securities............................. 102,194 109,546
(Gain)/loss on sale of investment
sedurities................................ (12,338) (23,505)
(Gain)/loss on sale of loans and
mortgage-backed securities................ (402,412) (375,227)
(Gain)/loss on sale of real estate
acquired through foreclosure.............. 37,219 35,027
(Gain) on sale of stock .................... (67,833) (135,252)
Change in accrued interest and
dividends receivable...................... (29,173) (285,684)
Change in deferred taxes.................... 291,762 35,741
Change in accrued interest on savings....... (11,972) (65,274)
Change in dividends payable on common stock. 0 29,435
Change in other - net....................... 969,205 (75,162)
---------- ----------
Total adjustments....................... 1,441,652 294,172
---------- ----------
Net cash provided by operating
activities............................ 2,659,832 1,307,646
---------- ----------
Cash Flows from Investing Activities
Change in interest-bearing deposits......... 194,230 (1,296,152)
Change in investment securities............. 1,000,000 4,250,382
Proceeds from sale of investment
securities................................ 1,384,886 4,380,796
Proceeds from sale of loans and
mortgage-backed securities................ 7,443,608 11,726,761
Proceeds from sale of FHLB stock............ 417,700 0
Loans originated net of principal
collected................................. (1,365,386) (10,961,284)
Proceeds from sale of stock................. 2,633,846 2,721,836
Change in real estate acquired through
foreclosure................................ (7,700) 247,105
Purchase of investment securities........... (3,090,596) (3,518,047)
Purchase of loans and mortgage-backed
securities................................ (2,894,018) (3,215,378)
Deferred net origination fees/costs......... 183,704 (25,665)
Purchase of FHLB stock...................... 0 0
Purchase of other stock..................... (1,865,193) (1,847,181)
Purchase of fixed assets.................... (733,092) (192,388)
Change in federal funds sold................ (1,580,000) 1,590,000
---------- -----------
Net cash provided by investing
activities.............................. 1,721,995 3,860,786
---------- -----------
Cash Flows from Financing Activities
Net change in deposit accounts............. 2,391,599 (1,647,070)
Change in federal funds purchased.......... (2,210,000) 0
Proceeds from FHLB advances................ 7,500,000 9,500,000
Repayment of FHLB advances................. (7,991,665) (13,591,666)
Change in advances to secondary
market................................... (1,473,277) 42,027
Change in advances for borrower
taxes & insurance........................ 331,874 1,043,450
Refund of overpayment on exercise of
stock options............................ (7,098) 0
Exercise of stock options.................. 0 640,967
Cash options............................... (346,288) (325,481)
---------- -----------
Net cash provided/(used) by
financing activities................... (1,804,855) (4,337,773)
---------- ----------
Net change in cash and cash equivalents........ 2,486,971 830,659
Cash and cash equivalents at beginning of year. 2,527,785 4,301,653
========== ==========
Cash and cash equivalents at June 30,.......... $5,014,756 $5,132,312
========== ==========
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 six months ended June 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 June 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)............ 7,104,417 (17,755) (11,010)
Trading securities....... 0 0 0
------------ ------------ ------------
Total investment
securities........... 7,104,417 (17,755) (11,010)
------------ ------------ ------------
Mortgage-Backed Securities
Held to maturity (at
amortized cost)........ 2,846,149 0 0
Available-for-sale (at
fair value)............ 34,610,205 (502,958) (311,834)
Trading securities....... 0 0 0
------------ ------------ ------------
Total mortgage-backed
securities.......... 37,456,354 (502,958) (311,834)
------------ ------------ ------------
FHLB Stock
(available-for-sale)........ 1,478,200 0 0
------------ ------------ ------------
Total $46,038,971 ($520,713) ($322,844)
============ ============ ============
4
<PAGE>
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:
June 30, December 31,
1997 1996
---- ----
Residential Mortgage Loans
Residential 1-4 family..................... $74,783,040 $ 77,162,436
Multi-family............................... 945,000 1,101,000
------------ ------------
Total residential mortgages.... ........... 75,728,040 78,263,436
Commercial real estate loans................... 35,136,000 33,844,000
Consumer loans................................. 15,662,000 18,166,000
Commercial loans and leases.................... 20,917,000 17,780,000
Residential construction loans................. 8,241,000 11,812,000
------------ ------------
Gross loans receivable......................... 155,684,040 159,865,436
------------ ------------
Less:
Undisbursed proceeds on loans in
process.................................. 431,000 2,663,000
Deferred loan fees and discounts........... 35,000 219,000
Allowance for loan losses.................. 4,513,000 4,339,000
------------ ------------
Total net loans................................ $150,705,040 $152,644,436
============ ============
NOTE 4: Loans Held for Sale
The Bank had $0 and $343,677 of mortgage loans held for sale in the secondary
market at June 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 six months ended:
June 30,
1997 1996
---- ----
Interest................................. $4,011,961 $3,727,231
Income taxes............................. $305,385 $692,291
NOTE 6: Stockholders' Equity
The following table sets forth changes in stockholders' equity for the six
months ended June 30, 1997:
Balance at December 31, 1996........ $20,518,292
Net income (loss)................... 1,128,180
Dividends declared.................. (346,288)
Increase in unrealized losses on
marketable securities........... (26,426)
Refund of overpayment on exercise
of stock options................ (7,098)
------------
Balance at June 30, 1997............ $21,266,660
============
5
<PAGE>
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(UNAUDITED)
On May 15, 1997 the Board of Directors declared a $0.085 per share cash dividend
payable July 1, 1997 to shareholders of record June 20, 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, 28,000 options were granted with an average price of $11.37 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 June 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
six months ended June 30, 1997 were computed based on the following:
Six Months
June 30,
1997 1996
---- ----
Net income ....................................... $1,128,180 $1,013,474
Weighted average number of shares outstanding .... 2,036,990 1,984,847
Basic earnings per share.......................... $ 0.55 $ 0.51
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 second quarter of 1996 as previously reported was
$0.20. Earnings per share for the first six months of 1996 as previously
reported was $0.48.
6
<PAGE>
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 9.92% as of June 30, 1997, as compared to 7.75% at
December 31, 1996, and 8.93% as of June 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, the purchase of mortgage-backed and investment securities,
and for repayment of borrowings and advances. During the six months ended June
30, 1997, funds were primarily used to fund newly originated loans and to pay
off FHLBA advances.
The Consolidated Statements of Cash Flow for the six months ended June 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 June 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
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Required Actual Excess
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
Tangible Capital $3,330 $20,147 $16,817
1.50% 9.07% 7.57%
Core Capital $6,661 $20,147 $13,486
3.00% 9.07% 6.07%
Risk-based Capital $12,352 $22,077 $9,725
8.00% 14.30% 6.30%
Changes in Financial Condition
December 31, 1996 and June 30, 1997
Total assets decreased approximately $0.8 million from $222,818,866 at December
31, 1996, to $221,925,527 at June 30, 1997. Total liabilities decreased
approximately $1.64 million, from $202,300,574 at December 31, 1996, to
$200,658,867 at June 30, 1997. The changes resulted primarily from increases in
deposits and repayment of FHLBA advances and federal funds purchased.
Stockholders' Equity increased $748,368 from December 31, 1996 to June 30, 1997
as follows:
Balance at December 31, 1996.......... $20,518,292
Net income............................ 1,128,180
Dividends declared.................... (346,288)
Increase in unrealized losses on
marketable securities............ (26,426)
Refund of overpayment on exercise
of stock options................. (7,098)
------------
Balance at June 30, 1997.............. $21,266,660
============
Results of Operations
Quarter ended June 30, 1997 and 1996
FLAG Financial reported net income in the second quarter of 1997 of $509,114, or
$0.25 per share, versus $428,133, or $0.21 per share, in the second quarter of
1996. Annualized return on average assets was 0.92% in the second quarter of
1997 versus 0.75 % in the comparable period in 1996, while the respective
figures for annualized return on average equity were 9.95% and 8.15%. The
improvement in earnings was primarily due to a significantly lower provision for
loan losses of $124,000 in the second quarter of 1997, versus $634,529 in the
second quarter of 1996. The reduction in the loan loss provision was
attributable to the fact that the year-ago period included a special provision
associated with Bennett Funding. The Bank is in the process of finalizing
negotiations of a settlement with the bankruptcy trustee for Bennett Funding.
The settlement is contingent upon a satisfactory settlement agreement as well as
bankruptcy court approval.
Total interest income decreased 5.4% to $4,090,767 in the second quarter of 1997
from $4,325,481 in the comparable period in 1996, while total interest expense
declined 0.7% to $2,239,851, versus $2,254,993 in the comparable period in 1996.
Net interest income decreased approximately 10.6% to $1,850,916 in the second
quarter of 1997. The decrease in interest income is the result of a decrease in
earning assets, primarily Bennett Funding. Bennett Funding was included in
earning assets for the first six months of last year, and had it still been
performing this year, there would be virtually no change in total interest
income or net interest income. Net interest income after provision for loan
losses was $1,726,916, an increase of 20.3% from the $1,435,959 in the second
quarter of 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Other income was virtually unchanged for the second quarter of 1997 versus the
second quarter of 1996. Gains on sale of loans increased 18.1% in the second
quarter of 1997 to $181,488 from $153,713 in the second quarter of 1996. Fees
and service charges declined 1.3% to $644,307 in the second quarter of 1997 from
$652,758 in the second quarter of 1996.
Total operating expenses increased 10.3% to $1,846,789 in the second quarter of
1997 from $1,673,006 in the second quarter of 1996. 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. The
most significant increase in operating expenses was an increase in compensation
and benefits of 14.76% which resulted from the hiring of key employees in the
third and fourth quarters of 1996 and first and second quarters of 1997.
Results of Operations
Six months ended June 30, 1997 and 1996
FLAG Financial reported net income in the first six months of 1997 of $1,128,180
or $0.55 per share, versus $1,013,474, or $0.51 per share, for the comparable
period in 1996. Annualized return on average assets was 1.01% in the first six
months of 1997 versus 0.89 % in the first half of 1996. Annualized return on
average equity was 11.11% in the first six months of 1997 versus 9.68% in the
first half of 1996. As was the case with the second quarter, much of the
improvement in earnings was due to a lower provision for loan losses, although
earnings also benefited from growth in other income.
Other income increased 18.3% to $1,847,690 in the first six months of 1997 from
$1,574,858 in the first six months of 1996, with the increase attributable to
gains on the sale of loans, higher fees and service charges and higher
miscellaneous income. Gains on sale of loans increased 10.5% in the first six
months of 1997 to $406,320 from $367,613 in the first six months of 1996. Fees
and service charges increased 6.8% to $1,272,610 in the first six months of 1997
from $1,191,617 in the first six months of 1996.
Total operating expenses increased 8.0% to $3,616,348 in the first six months of
1997 from $3,348,827 in the first six months of 1996. As was the case with the
second quarter, expense reductions occurred in federal deposit insurance
premiums and data processing expense, while most other expenses increased. The
most significant increase in operating expense for the six months was also
compensation and benefits, for the same reasons mentioned in the discussion of
results of operations for the second quarter of 1997.
9
<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 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 the following loan portfolios:
consumer, commercial loans and leases, and commercial real estate. Actual losses
in the form of loans charged-off during the six months ended June 30, 1997, and
the year ended December 31, 1996, are presented as follows:
June 30, December 31,
1997 1996
---- ----
Average net loans............................... $150,538,062 $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................................. 40,000 87,000
Commercial loans and leases.................... 1,000 -
Residential construction loans................. - 22,000
Residential mortgage loans..................... 83,000 410,000
Commercial real estate loans................... - -
------------ ------------
Total charge-offs.......................... 124,000 519,000
------------ ------------
Recoveries for the period:
Consumer loans................................. 19,000 35,000
Commercial loans and leases.................... - -
Residential construction loans................. - -
Residential mortgage loans..................... 5,000 -
Commercial real estate loans................... - -
------------ ------------
Total recoveries............................ 24,000 35,000
------------ ------------
Net charge-offs for the period................... 100,000 484,000
Provision for loan and lease losses.............. 274,000 3,484,000
Allowance for possible loan and lease losses,
end of period.................................. $4,513,000 $4,339 000
============ ============
Ratio of allowance for loan and lease losses
to average net loans outstanding............... 3.00% 2.84%
Ratio of net charge-offs during the period to
average net loans and leases outstanding,
during the period.............................. 0.07% 0.32%
10
<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:
June 30, December 31,
1997 1996
---- ----
Percent of Percent of
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Residential mortgage loans....... $ - -% $ - -%
Commercial real estate loans..... 145,000 0.10% 261,000 0.17%
Consumer loans................... 5,000 0.01% 7,000 0.01%
Commercial loans and leases...... 2,308,000 1.53% 2,978,000 1.93%
Residential construction loans... - -% - -%
---------- ----- --------- -----
Total loans allocated.......... 2,458,000 1.64% 3,246,000 2.11%
Unallocated allowance............ 2,055,000 1.36% 1,093,000 0.71%
---------- ----- --------- -----
Total allowance for possible
loan and lease losses...... $4,513,000 2.99% $4,339,000 2.82%
========== ===== ========== =====
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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.
June 30, December 31,
1997 1996
---- ----
Non-accruing loans:
Residential mortgage loans:
Residential 1-4 family..................... $1,049,000 $1,327,000
Multi-family............................... - -
Commercial real estate loans............... 805,000 662,000
Consumer loans............................. 63,000 83,000
Commercial loans and leases................ 4,616,000 4,616,000
---------- ----------
Total non-accruing loans and leases...... 6,533,000 6,688,000
Real estate acquired through foreclosure
and other repossessed collateral........... 495,000 525,000
---------- ----------
Total nonperforming assets............... $7,028,000 $7,213,000
========== ==========
Ratio of total nonperforming assets to:
Total loans and real estate acquired
through foreclosure......................... 4.65% 4.70%
Total assets.................................. 3.17% 3.25%
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET DISCLOSURES ABOUT MARKET RISK
The Company is not required to respond to this Item 3 because it is a "small
business issuer" as defined in the rules and regulations of the Securities and
Exchange commission.
11
<PAGE>
FLAG FINANCIAL CORPORATION
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The 1997 Annual Meeting of Shareholders was held on April 16, 1997.
(b) Election of directors The shareholders voted 1,541,292.569 shares in the
affirmative, and 3066.186 shares in the negative, with 0 shares abstaining,
for the re-election of Mr. H. Speer Burdette, III to a three year term as a
director of the Company.
The shareholders voted 1,541,292.569 shares in the affirmative, and
3066.186 shares in the negative, with 0 shares abstaining for the
re-election of John S. Holle to a three year term as a director of the
Company.
The shareholders voted 1,541,292.569 shares in the affirmative, and
3066.186 shares in the negative, with 0 shares abstaining for the
re-election of John W. Stewart, Jr. to a three year term as a director of
the Company.
The shareholders voted 1,539,792.569 shares in the affirmative, and
3066.186 shares in the negative, with 1,500 shares abstaining for the
re-election of Robert W. Walters to a three year term as a director of the
Company.
(c) The shareholders voted 1,533,865.476 sharees in the affirmative and 5070
shares in the negative with 5423.279 shares abstaining, for the appointment
of Porter Keadle Moore LLP as independent accountants of the Company for
the fiscal year ending December 31, 1997.
ITEM 6.
(a) The following exhibit is filed herewith:
Exhibit No. Description
27 Financial date schedule (For SEC use only)
(b) Current Reports on Form 8-K. No current reports on Form 8-K were filed in
the second quarter.
12
<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: August 14, 1997 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) 15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<PERIOD-END> JUN-30-1997
<FISCAL-YEAR-END> DEC-31-1997
<CASH> 5,014,756
<INT-BEARING-DEPOSITS> 3,362,908
<FED-FUNDS-SOLD> 1,580,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,193,909
<INVESTMENTS-CARRYING> 2,846,149
<INVESTMENTS-MARKET> 2,785,971
<LOANS> 150,705,040
<ALLOWANCE> 4,513,000
<TOTAL-ASSETS> 221,925,527
<DEPOSITS> 180,391,014
<SHORT-TERM> 16,879,164
<LIABILITIES-OTHER> 3,388,689
<LONG-TERM> 0
0
0
<COMMON> 2,036,990
<OTHER-SE> 19,229,670
<TOTAL-LIABILITIES-AND-EQUITY> 221,925,527
<INTEREST-LOAN> 6,643,043
<INTEREST-INVEST> 1,443,666
<INTEREST-OTHER> 87,176
<INTEREST-TOTAL> 8,173,885
<INTEREST-DEPOSIT> 3,991,668
<INTEREST-EXPENSE> 452,739
<INTEREST-INCOME-NET> 3,729,478
<LOAN-LOSSES> 274,000
<SECURITIES-GAINS> 78,150
<EXPENSE-OTHER> 3,616,348
<INCOME-PRETAX> 1,686,820
<INCOME-PRE-EXTRAORDINARY> 1,128,180
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,128,180
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
<YIELD-ACTUAL> 1.80
<LOANS-NON> 6,533,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,449,000
<LOANS-PROBLEM> 5,658,941
<ALLOWANCE-OPEN> 4,339,000
<CHARGE-OFFS> 124,000
<RECOVERIES> 24,000
<ALLOWANCE-CLOSE> 4,513,000
<ALLOWANCE-DOMESTIC> 274,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,055,000
</TABLE>
