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(FLAG Logo)
FLAG FINANCIAL CORPORATION
1996 ANNUAL REPORT
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(CBA Logo)
1996 Georgia Community Bank of the Year
First Federal Savings Bank of LaGrange
Georgia Community Bank of the Year.
First Federal Savings Bank of LaGrange
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(Picture of CBA award)
"Winning the award is more than just an honor - it supports our diligent
commitment to continually improve our customer service."
- -John S. Holle,
Chairman of the Board
Occasionally an honor is bestowed that humbles and astounds you. In 1996 it
happened to First Federal Savings Bank. The Bank was selected by the Community
Bankers Association (CBA) of Georgia as the Georgia Community Bank of the Year.
This prestigious award is given to a community bank that delivers outstanding
customer service and consistently helps customers on a personal, one-to-one
basis. We are honored with this achievement.
The 1996 Quality Service Award and Georgia's Community Bank of the Year is
selected by a panel of judges who review applications from qualified bank
applicants. The finalists receive on-site examinations and are exposed to a
series of "mystery shoppers". The winning bank is then selected on the basis of
clear quality standards that are built into the bank's operations and which are
then exemplified through the bank staff and conveyed to the customer. The CBA
founded the Quality Service Award in 1992 to emphasize the commitment of
community banks in Georgia to excellence through superior quality service. The
Bank has the distinction of also receiving an Honorable Mention in both 1993 and
1994.
"We're proud to receive this award, but also humbled. After 70 years of striving
to provide exceptional customer service, we know that it takes constant
vigilance and dedication to the customer's best interest... it's hard work and
you don't always get it right. But, when you do, it's worth the effort. We know
that we must continue to improve on the things we do well and bolster and
improve other areas of opportunity... this commitment to continued excellence is
exemplified by our 1996 restructuring of various operating divisions which will
further enhance customer services and quality. We look forward to providing
outstanding and thoughtful customer service in the coming years and expect the
new century to find First Federal Savings Bank well-positioned for continued
growth and profitability."
- -John S. Holle, Chairman of the Board
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(FLAG Logo)
Commitment to Excellence Quality Statement
It is our commitment to provide excellence in service that is driven by customer
satisfaction through . . .
Leadership
by creating a clear and visible quality culture in an environment of total
personnel involvement
Improvement
by achieving the highest levels of quality through problem prevention at design
stage and creating fault-tolerant processes and products
Responsiveness
by making response time a key indicator to meet customers' needs, market changes
and product innovation
Planning
by evaluating the planning process for the short and long term overall operation
Comparison
by understanding our own process and the process of competition to better
service the customer and improve corporate performance
Relationships
by focusing on customer requirements and expectations, and strengthening all
alliances to enhance effective management for our continuous commitment of
customer satisfaction
<PAGE>
Corporate Profile
FLAG Financial Corporation is a unitary thrift holding company that owns
100 percent of the Common Stock of First Federal Savings Bank of LaGrange. FLAG
was formed in February of 1993 for the purpose of providing a broader range of
operating flexibility and financial products and services.
Because FLAG's primary activity during 1996 was the operation of First Federal,
its financial operating results are essentially determined by the financial
operating results of the Bank. Income is derived from interest earned on lending
and investment activities as well as from fees assessed on lending and retail
services. Primary expenses are interest paid on savings deposits, cost of
borrowings and operating expenses. Excess funds are invested in securities,
primarily U.S. Government obligations, federal agency securities and
mortgage-backed securities. Retail and commercial deposit products are used to
fund the lending and investment operations.
First Federal Savings Bank of LaGrange was founded in 1927 by a group of local
businessmen for the purpose of providing home loans from membership dues. On
January 10, 1927, the Bank was granted its charter from the State of Georgia as
the Home Building and Loan Association. The Bank received its Federal Charter on
April 7, 1955 and changed its name to First Federal Savings and Loan Association
of LaGrange. The Association converted to a public company on December 18, 1986.
It was renamed First Federal Savings Bank of LaGrange in 1989 to better reflect
the expansion and direction of its retail banking services.
Today, First Federal is a full-service community savings bank engaged primarily
in retail and commercial banking, small business lending, residential and
commercial real estate lending and mortgage banking. First Federal Savings Bank
of LaGrange manages seven locations, including four full-service banking
facilities and one drive-up banking facility that serve the West Georgia and
East Alabama markets and two loan production offices under the name Piedmont
Mortgage Service that serve the Columbus, GA, and Auburn, AL, market areas.
Operating as the tenth largest of 38 thrift institutions headquartered in
Georgia, First Federal reported assets of $221,733,163 as of December 31, 1996.
Piedmont Mortgage Service, Inc., which is a wholly-owned subsidiary of the Bank,
conducts an investment service business under the name Piedmont Investment
Service. The investment service, now in its second year of operation, is a
growing provider of a wide range of brokerage services, including stock
transactions, retirement planning, asset allocation, risk assessment, mutual
funds and municipal bonds.
Piedmont Mortgage Service, Inc. also does business in the LaGrange area as
Piedmont Appraisal Service, providing appraisals for First Federal and also for
mortgage companies in West Georgia and East Alabama.
FLAG Financial Corporation's Common Stock is traded on the Nasdaq National
Market under the symbol "FLAG".
Table of Contents
Financial Highlights ...................................................... 3
To Our Shareholders ....................................................... 4
Toward the Millennium ..................................................... 6
A Future Pledge, Person to Person ......................................... 11
Management's Discussion and Analysis ...................................... 12
Table of Contents to Consolidated Financial Statements .................... 20
Independent Auditors' Report .............................................. 20
Board of Directors ........................................................ 47
Officers, Locations and Corporate Information ............................. 48
2
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FINANCIAL HIGHLIGHTS
(Dollars in thousands except per share data)
Year Ended December 31,
-----------------------
FINANCIAL CONDITION
& OTHER DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total assets $221,958 $232,105 $231,700 $206,660 $188,173
Loans receivable - net 152,988 147,433 141,153 137,233 137,368
Investment &
mortgage-backed securities 46,412 60,556 71,950 49,389 31,938
Deposit accounts 177,999 177,848 165,721 162,816 153,129
FHLB advances 17,371 29,504 43,281 20,500 14,000
Stockholder's equity 20,518 20,698 19,011 19,874 18,151
Number of:
Loans outstanding 4,567 4,498 4,609 4,596 4,709
Loans serviced for others 3,993 4,006 4,266 3,045 2,265
Deposit accounts 31,291 30,231 27,804 26,017 24,672
Offices open - full service 4 4 3 3 3
Year Ended December 31,
-----------------------
OPERATING RESULTS 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Interest income 17,363 17,168 15,058 14,203 14,992
Interest expense 9,191 9,886 8,222 7,796 8,714
Other income 2,607 2,250 1,908 1,534 1,122
Total operating expenses 8,170 6,041 5,528 4,686 4,351
Gain (loss) on sale of loans
and investment securities 466 177 21 514 214
Provision for loan losses 3,485 630 440 620 595
REO losses (gains) and provisions 79 (33) 49 75 96
Income before income taxes (489) 3,071 2,748 3,074 2,572
Provision for income taxes (311) 1,045 980 1,098 947
Change in accounting principles 258 -
Net income (178) 2,026 1,768 2,234 1,625
Year Ended December 31,
-----------------------
PER SHARE DATA 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net income per share $(0.09) $0.97 $0.85 $1.07 $0.78
Dividends per share $0.31 $0.30 $0.30 $0.28 $0.24
Dividends/Income per share -344.44% 30.83% 35.33% 26.09% 30.75%
Book value per share(1) 10.07 10.80 9.45 9.88 9.02
Year Ended December 31,
-----------------------
KEY RATIOS 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Return on average assets -0.08% 0.87% 0.79% 1.10% 0.89%
Return on average equity -0.88% 9.78% 9.00% 11.78% 9.28%
Average equity to average
assets 8.96% 8.94% 8.76% 9.37% 9.57%
Net interest margin 3.98% 3.39% 3.25% 3.37% 3.63%
Year-end interest earning
assets to interest-bearing
liabilities 106.00% 107.00% 112.00% 111.00% 109.00%
Operating expenses to
average assets 3.63% 2.61% 2.47% 2.29% 2.38%
(1) Book value per share is calculated using shares outstanding as of year-end.
For the years 93 and 92, the shares outstanding have been adjusted for stock
dividends and stock splits. Shares outstanding for the years 91-94 were
2,012,500, 1,916,000 for 1995, and 2,036,990 for 1996.
Operating Income Net Interest Income
($ in thousands) ($ in thousands)
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96 $2,607 96 $8,172
95 $2,250 95 $7,283
94 $1,908 94 $6,837
93 $1,534 93 $6,407
92 $1,122 92 $6,278
3
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(Picture of John S. Holle)
To Our Shareholders
Nineteen ninety-six will be remembered as a very successful year for your
Company, particularly in light of certain challenges with which we were
confronted during the year. It will also be remembered as a year in which we
strengthened our management capabilities by restructuring certain operating
divisions and hiring key personnel, thereby positioning the Bank for success as
it approaches the coming year. Finally it was a year when the Bank was
increasingly recognized as an outstanding service provider within the
communities we serve, as evidenced by First Federal Savings Bank of LaGrange's
selection as the Georgia Community Bank of the Year by the Community Bankers
Association of Georgia.
Financial Results Reflected Solid Growth
Core earnings reflected solid growth in 1996. Excluding nonrecurring charges,
net income for the year was $2,453,000, or $1.18 per share, versus $2,026,000,
or $0.97 per share, in 1995. Results for 1996 after nonrecurring charges, which
are discussed below, were a net loss of $178,000, or $0.09 per share, in 1996
versus net income of $2,026,000, or $0.97 per share, in 1995. The increase in
core earnings was largely a function of the Bank's strong growth in net interest
income, which increased 8% and benefited from higher net interest margins.
Additionally, earnings benefited from particularly strong growth in noninterest
income, which increased 20% in 1996, or 14% excluding gains and losses on
securities, loans and real estate sold. The Bank also maintained a strong
capital level. Stockholders' equity was $20.5 million, or $9.86 per share, as of
December 31, 1996. This level of equity represents a capital ratio of 9.2%, an
increase from the 8.9% ratio as of December 31, 1995.
SAIF Assessment - The Playing Field Has Been Leveled for Banks and Thrifts
It has been said that out of adversity comes opportunity. We believe the same
can be said of two challenges we faced during 1996. The first relates to an
assessment that affected all savings institutions whose deposits were insured by
the Savings Association Insurance Fund ("SAIF"). On September 30, 1996,
President Clinton signed legislation designed to recapitalize the SAIF and
create better parity between banks (whose deposits are insured by the Bank
Insurance Fund, or "BIF") and thrifts in terms of the cost of deposit insurance.
While the assessment resulted in a pretax charge to earnings of $1,156,000, it
will ultimately level the playing field for banks and thrifts by eliminating
differences in deposit insurance premiums and will result in estimated annual
cost savings of approximately $300,000.
Bennett Funding Matters Addressed
The second challenge we faced in 1996 related to a $4.5 million portfolio of
equipment leases sold to the Bank by Bennett Funding Group, Inc. As is discussed
in more detail in the Management's Discussion and Analysis section of this
report, Bennett Funding Group filed for Chapter 11 bankruptcy protection during
1996, and based on its problems, the collection of cash flows and the values
associated with the leases became less certain. To reflect this possible loss in
value, the Bank recognized special provisions totaling $2,978,000 during the
year. The resulting reserve position conservatively positions the Bank against
any further write-downs, and we will continue to work diligently toward
recovering the full amounts invested.
4
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Resolution of Nonrecurring Items Enhances Our long-term Outlook
Importantly, while these two events negatively affected net income in 1996, they
should enhance our ability to reflect solid earnings growth in 1997. Not only
will 1997's results benefit from lower insurance premiums, but the provision for
losses in 1997 will likely be significantly lower and any proceeds collected on
the lease portfolio will be employed into income producing assets such as loans
or investments.
"Community Bank of the Year" Award Reflects That Service is a Key Strength
Nineteen ninety-six was also highlighted by several important achievements. One
of our proudest achievements for the year was First Federal Savings Bank of
LaGrange's selection as Georgia's Community Bank of the Year and the receipt of
the 1996 Quality Service Award that was presented by the Community Bankers
Association of Georgia ("CBA"). The award was partly based on the exceptional
level of service that is provided by our staff, all of whom are constantly
reminded of the key role that service plays in our continued success.
People Remain Our Most Important Asset
Recognizing that people are our most valuable resource, we significantly
strengthened our management team in 1996 through several key personnel
additions. As is discussed in detail later in this report, we hired experienced
bank executives in human resources, branch operations and retail banking, all of
whom will contribute to our ability to offer superior service, achieve greater
efficiency and better utilize our facilities.
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Stockholders' Equity
($ in thousands)
96 $20,518
95 $20,698
94 $19,011
93 $19,874
92 $18,151
Outlook
We enter 1997 with a tremendous amount of excitement and planned activity. We
will be opening a new operations center during the first quarter of 1997 that
will enable the Bank to better process customer transactions at peak times,
thereby enhancing customer service. We are conducting a comprehensive evaluation
of all deposit products and services offered by the Bank and intend to make
appropriate enhancements based on customer feedback. Furthermore, we will be
installing a database marketing central information file to better match our
customers' needs with these products and services, as well as to facilitate
cross-selling opportunities. All of these efforts will be instrumental in
maintaining our leadership position in the market. Additionally, business
expansion through acquisition or combination of similar business entities will
be more favorably considered should an opportunity arise.
Our renewed focus on the customer, combined with greater management and
technological resources, uniquely positions us for growth as we enter the new
year. Obviously, none of this would have been possible without the dedicated
staff and Board of Directors that remain committed to the Company and its
success. We look forward to serving you in the future and appreciate your
continued support. Sincerely,
/s/ John S. Holle
John S. Holle
Chairman of the Board,
President and Chief Executive Officer
5
<PAGE>
Toward the Millennium.
First Federal Savings Bank
Setting the Stage for Providing Even Better Service and Products.
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(Picture of Ellison Rudd)
". . . our goal is to see and measure tangible improvement in both product
growth and customer service by the end of 1997 and be poised to enter the new
century leading the marketplace and setting precedents as we go."
- -Ellison C. Rudd,
Executive Vice President,
Chief Financial Officer
First Federal Savings Bank has a proud heritage of delivering
exceptional customer service while providing outstanding financial services to
customers throughout the Troup County area. This respected institution has
consistently endeavored to meet the specific financial needs of a wide variety
of customers and has built a leading market position in both home mortgage
lending and deposit based products. This commitment to sound banking practices
and to delivery of high quality products and customer service has resulted in
core business that is well-positioned to take advantage of business and banking
opportunities in the new millenium.
Dynamic Reorganization Drives Commitment to Better Service, Innovative Products.
Nineteen ninety-six was a year of change. Recognizing the need to provide even
better service and to deliver innovative financial products to customers, First
Federal Savings Bank set in motion a strategic plan designed to usher the Bank
into the new millennium as an independent, profitable and efficiently managed
financial institution. In 1996 the Bank restructured various operating divisions
and built a unique, talented management team that would complement its strategic
objectives.
Key management and executive positions were created to focus on specific areas
of the Bank's operations. A Retail Banking Manager with extensive experience was
hired to oversee, market and develop Bank branches. This expertise will allow
First Federal Savings Bank to develop better products uniquely suited to its
customers, deliver even better customer service and centralize marketing and
support for retail branches.
To attract and retain customers, the Bank recognizes the need to provide
services and products that reflect the market and changing customer needs.
Therefore, plans for enhancement of deposit products and services include a 1997
first quarter evaluation of all current products and services. This evaluation
will include direct customer surveys and focus groups which will be used to
determine the features and products best suited to the Bank's marketplace.
Subsequent adjustment and addition of products and services will be made to the
Bank's product mix as a result of this effort.
6
<PAGE>
Target Marketing.
Knowing the customers' financial needs and delivering the appropriate product
information to the right customer at the right time is critical to providing
customers with the best possible service. First Federal Savings Bank's
restructuring brings a new ability to offer more products to specific customers
and therefore more financial opportunities. Plans for 1997 include installation
of a database marketing central information file to track, target and offer
specific groups of customers the products that they are more likely to utilize.
The new system is intended to result in an expanded customer base and increased
deposit, investment and mortgage lending volume. Sales initiatives and officer
calling programs also should benefit from improved information and focused sales
efforts.
Management restructuring should also have a significant impact on First Federal
Savings Bank's deposit and transaction business in 1997 and is expected to
expand employee product and service knowledge and streamline lobby operations.
The restructuring will directly affect tellers, personal bankers, loan personnel
and other employees who will attend focused training sessions in order to
provide customers with better and more knowledgeable product information. This
commitment to training includes a substantial investment by the Bank in a
full-time professional training officer for continuous employee and management
training. The Bank also plans to further develop middle management by providing
professional bank training at some of the country's finest bank schools.
The Bank also strengthened the management team by hiring a professional Human
Resource Manager who will offer continuous support to Bank employees in the
areas of training and employee benefits.
In addition, a new position of Vice President, Bank Operations was established
to oversee and improve operations of both product delivery systems and branch
systems support. The new Bank Operations position will oversee the Bank's new
2,500 square foot operations center scheduled to open in early 1997. Located
just one block from the main office facility, the new center will allow the Bank
to consolidate operational support, services and communication.
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(Picture of Mary E. Winks)
"We'll strive to equip our staff with the tools necessary to better serve our
customers, while developing sales opportunities. This means that First Federal
Savings Bank will remain on target with its strategic objective to improve
customer service and that customers will find their visit to the Bank quick,
easy and efficient."
- -Mary E. Winks,
Senior Vice President,
Retail Banking
7
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(Picture of Raymond C. Smith)
". . . exceptional training is really about empowering your employees to feel as
though they can make decisions, on-the-spot, that will help their customers
receive the best possible products and service. I'm pleased with management's
strong commitment to ongoing in-house and external bank school training for both
employees and management."
- -Raymond C. Smith, Jr.,
Senior Vice President, Human Resources
This restructuring sets the stage for building an even stronger foundation in
1997. Ultimately the customer will feel the impact of the 1996 restructuring
through better products and unparalleled customer service.
Deposit Services.
Setting the Pace for Exciting New Services.
Checking and Convenience Banking.
First Federal Savings Bank's focus on customers is reflected in a solid core
deposit base. First among that base is Totally Free Checking which was
introduced in 1989. The success of Totally Free Checking is reflected in the
number of customers who are introduced to and take advantage of other products
and services of the Bank.
Investment Services.
Meeting Customer Demands for Innovative Investment Vehicles.
Piedmont Investment Service, a subsidiary of First Federal Savings Bank, offers
customers full-service independent brokerage services and non-traditional
investment vehicles from stocks and bonds to government securities, mutual
funds, retirement planning and other services that go beyond traditional banking
services. Introduced in 1995, Piedmont Investment Service has offered First
Federal Savings Bank the dual benefit of generating fee income for the Bank and
providing alternative investment products for customers, such as mutual funds.
During 1996, Piedmont Investment Service doubled its customer base. Expectations
for the coming year include a substantial increase in customers as the Bank's
strategic marketing plan enters its first phase.
Alternative investment products such as those offered through Piedmont
Investment Service create additional incentives for customers to establish and
maintain a long-term banking relationship with First Federal Savings Bank. The
1996 restructuring will aid Piedmont Investment Service by improving operational
procedures and therefore enabling it to offer quicker, more efficient service to
customers. The coming year will see a new staff employee added to assist the
investment division to further explore new product offerings and investment
opportunities for customers.
8
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Lending.
Strong Housing Market Drives Record Lending Volume.
Mortgage Lending
First Federal Savings Bank's home mortgage lending operation is distinguished by
an emphasis on single family residential lending. As the leading home mortgage
lender in Troup County, controlling over 60% of the available home loan market,
the Bank can trace much of its success to a 70-year lending philosophy. That
philosophy combines a commitment to offering high quality, well-designed lending
products, such as fixed rate home loans and affordable FHA/VA loans, with
knowledgeable mortgage origination officers trained to help families attain home
ownership.
Exceptional customer service and outstanding lending products along with a
strong housing market resulted in record lending volumes for 1996. First Federal
Savings Bank originated over $78.9 million in home mortgage loans in 1996
compared to a 1995 volume of $61.6 million, a 28% increase. The resulting
increase in mortgage loan volume allowed the Bank to generate substantial fee
income by selling these loans in the secondary market for a premium.
The strong housing market was also reflected in construction lending. Closed
construction loan balances increased from $4.6 million at year-end 1995 to $9.1
million at year-end 1996, a 109% increase. Plans to further accommodate and
service the building community during 1997 are in place and include greater
personal service and one-on-one product customization.
First Federal Savings Bank is optimistic about 1997. Economic indicators in the
Bank's marketplace suggest that the current strong housing market will continue
and that the demand for home loans will remain firm. First Federal Savings Bank
is committed to continue developing innovative loan products designed
specifically to help families purchase their own homes.
Commercial Lending
The Bank's fastest growing lending area is commercial lending. In 1996, First
Federal Savings Bank's commercial loan portfolio increased by $10 million, a 30%
increase over the 1995 year-end amount. This increase can be credited to a more
aggressive marketing strategy by the Bank and to its desire to pursue the highly
profitable commercial loan sector. Commercial loans are generally shorter term,
adjustable rate loans with higher interest rates than conventional mortgage
loans. A larger percentage of commercial loans in the loan portfolio will offer
the Bank greater flexibility and reduce interest rate sensitivity.
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(Picture of Lee W. Washam)
"It's important to note the value of a growing commercial loan portfolio in
terms of flexibility and profitability to the Bank. The commercial deposit
relationships open the door to many new cross-selling opportunities and a new
reservoir of potential customers."
- -Lee W. Washam,
Senior Vice President,
Lending
9
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(Picture of John S. Holle)
"We want our operations to be at a level where significant growth by the Bank is
not noticed by our customers. . . this restructuring will allow us to be where
we want to be at the end of 1997 - set for growth, with a strong foundation
supported by operations that are seamless to the customer."
- -John S. Holle,
Chairman of the Board,
President and CEO
For 1997, the Bank's primary goal will be to explore the feasibility of adding
new loan programs to the product mix and to make more types of loans available
to the Bank's expanding marketplace. For example, loans that carry government
guarantees, such as Small Business Administration (SBA) loans, tend to offer
greater profitability to the Bank while granting new opportunities to customers.
Plans also include restructuring to include a Credit Administration Manager
whose primary responsibility will be to help manage and maintain First Federal
Savings Bank's commercial loan portfolio.
Commercial Deposits
Hand-in-hand with commercial lending is the growth of First Federal Savings
Bank's commercial deposit base. In 1996, the Bank realized a 15% increase in
commercial deposits, up by $1.5 million. This growth can be attributed to the
increase in commercial business generated through commercial lending and the
ensuing visibility of First Federal Savings Bank's additional product offerings.
Leasing
Equipment Leasing Offers Small Businesses New Opportunity.
During 1996, First Federal Saving Bank focused on providing equipment leasing
services. Specializing in smaller leasing equipment requirements, total leasing
volume for 1996 was $1.9 million. Leases generally support a higher yield than
traditional commercial loans and therefore are both profitable and successful
for the Bank.
Leasing offers customers a choice of financing methods and distinct advantages
such as capital conservation, cash flow control and convenience. To the Bank,
leasing meets a strategic objective by offering customers a wider selection of
products, options and personalized financial solutions.
Leasing plans for 1997 include pooling leases and repackaging them for sale in
the secondary market. In addition, enhanced operations, technological support
and ongoing employee training will merge to form a solid foundation for future
leasing opportunities
10
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.A Future Pledge,
Person to Person
As the only locally-owned community bank headquartered in LaGrange, we believe
that First Federal Savings Bank of LaGrange holds a unique position in the
community - one of significant consequence. That consequence is reflected in our
belief that a strong community bank can offer three advantages: solid
shareholder value, innovative products and services and a positive contribution
to the community in which we live and work.
Owned by FLAG Financial Corporation - a unitary thrift holding company that owns
100 percent of First Federal Savings Bank of LaGrange Common Stock and whose
primary activity is the operation of First Federal Savings Bank of LaGrange -
the Bank's performance directly affects the operating results of FLAG Financial
Corporation and its shareholder value.
We pledge to strengthen shareholder value by maintaining the Bank's position as
a leader in the banking community by remaining on the cutting edge and providing
exceptional financial products and superior customer service. Through
alternative delivery systems we will offer unequaled convenience in banking,
each based on the needs of our customers. We pledge to set the stage for growth
as an independent, profitable and efficiently managed institution - one that
fortifies shareholder value, everyday.
Our strategy and pledge also includes helping to build and maintain strong
communities through wise investments of our resources. In 1996 the Bank was
actively involved in numerous charity and civic organizations, participated with
area schools in job fairs and other promotions and sponsored a Community
Homebuyer Seminar for area citizens with low to moderate income. First Federal
Savings Bank's acknowledged commitment to our communities extends to our
officers and employees, who live, work and invest personal volunteer hours
within their community to make a positive difference.
We pledge to continue our person-to-person, individual approach to the community
and to our customers. It's something we do well and something that we believe is
the most important investment we'll make.
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(Picture of Annette F. Woodyard)
"For 39 years I've had the opportunity to work for an organization that
encourages personal growth as well as community involvement. Every day was a
challenge and a rewarding experience. I would encourage each employee to believe
in themselves, work hard and participate in the unique opportunities that First
Federal Savings Bank brings to them as a professional, community participant and
neighbor. My thanks to everyone."
- -Annette F. Woodyard,
Senior Vice President,
Branch Administration and Personnel
11
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Management's Discussion and Analysis of Financial Condition and Results of
Operation
General
FLAG Financial Corporation ("FLAG") is a unitary thrift holding company that
owns 100 percent of the common stock of First Federal Savings Bank of LaGrange
(the "Bank"). The Bank is a federally chartered stock savings bank doing
business in west central Georgia. The Bank is a full-service, retail oriented
community bank primarily engaged in retail banking, small business, residential
and commercial real estate lending and mortgage banking.
In 1993, the shareholders of the Bank approved the organization of FLAG as a
holding company for the Bank (the "Reorganization"). The Reorganization was
effective on March 1, 1994, when each share of the outstanding common stock of
the Bank automatically was converted into one share of the common stock of FLAG,
and the Bank became a wholly-owned subsidiary of FLAG.
Because the primary activity of FLAG is the ownership and operation of the Bank,
FLAG's financial performance is determined primarily by the operation of the
Bank. Accordingly, the discussion below relates principally to the operation of
the Bank. As used herein, the term "FLAG" includes FLAG and, where appropriate,
the Bank. The following discussion presents financial information regarding FLAG
for periods ending after the Reorganization and for the Bank for periods ending
prior to the Reorganization. This discussion and the financial information
contained herein are presented to assist the reader in understanding and
evaluating the financial condition, results of operations and future prospects
of FLAG and should be read as a supplement to and in conjunction with the
Consolidated Financial Statements and related notes.
Forward-Looking Statements
In the following pages, the management of FLAG presents an analysis of FLAG's
financial condition as of December 31, 1996, as well as comparisons to prior
years. In addition to this historical information, the following discussion
contains forward-looking statements that involve risks, estimates, expectations
and other uncertainties. Economic circumstances beyond the control of FLAG as
well as FLAG's operations and actual financial results could
TABLE 1
December 31,
---------------------------------
1996 1995 1994
---- ---- ----
Net Interest Income ............ $ 8,172,716 $ 7,282,756 $ 6,836,718
Provision for Loan Losses ...... (3,484,529) (630,000) (440,000)
Other Income ................... 2,992,798 2,459,034 1,879,726
Operating Expenses ............. (8,169,833) (6,040,872) (5,527,953)
----------- ----------- -----------
Pretax Income .................. (488,848) 3,070,918 2,748,491
Provision for Income Taxes ..... 311,222 (1,044,911) (980,639)
----------- ----------- -----------
Net Income / (Loss) ............ ($ 177,626) $ 2,026,007 $ 1,767,852
=========== =========== ===========
differ significantly from the assumptions and figures discussed in the
forward-looking statements. Some of the factors that could cause or contribute
to such differences are discussed herein but also include changes in the
economy, changes in the interest rates in the nation and changes in the interest
rates in FLAG's general market area.
Operating Results
FLAG reported a consolidated net loss for the year ended December 31, 1996 of
$177,626, or $0.09 per share, a decrease of $2,203,633 from consolidated net
income of $2,026,007, or $0.97 per share, for 1995. FLAG's consolidated net
income for the year ended December 31, 1994 was $1,767,852, or $0.85 per share.
The two largest factors in the decrease in 1996's earnings when compared to 1995
were charges related to Bennett Funding Group, Inc. ("Bennett Funding") and an
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"), both
of which are discussed in further detail below. Excluding non-recurring charges,
net income for the year ended December 31, 1996 was $2,453,000, or $1.18 per
share, versus $2,026,000, or $0.97 per share, for the year ended December 31,
1995.
Bennett Funding Group, Inc.
Bennett Funding is an equipment leasing and finance company based in Syracuse,
New York. For several years, FLAG, along with many other financial institutions
and individuals throughout the United States, invested in office equipment
leases sold through Bennett Funding. During 1996, Bennett Funding filed for
Chapter 11 bankruptcy protection, and certain officers of Bennett Funding are
being investigated for possible wrongdoing, including but not limited to
criminal securities fraud. As a result of the Chapter 11 bankruptcy filing, the
collection of cash flows and the values associated with these leases became less
certain, and to reflect this possible loss in value, the Bank established a
specific reserve for possible Bennett Funding losses of $678,000 in the second
quarter of 1996.
After further review and consultation with regulatory authorities and advisors
to the Bank, it was determined that an additional special provision of $2.3
million should be added to the reserves of $678,000. Reflecting the additional
provision of $2.3 million, approximately $3.0 million in reserves was
established in connection with the portfolio. As part of this review, it was
also determined that the $4.5 million in equipment leases should be classified
as "Doubtful," a classification which generally requires reserves equal to 50
percent of the carrying value of the asset.
12
<PAGE>
Although the establishment of this level of reserves reflects the risk that
significantly less than book value will be realized from these leases, it in no
way limits the amount of recovery sought by the Bank. Although there is no way
to anticipate the timing or ultimate resolution of the Bennett Funding matter,
the Company continues to seek full recovery of the amounts invested and is
aggressively pursuing legal and other actions to seek such recovery.
SAIF Assessment
On September 30, 1996, President Clinton signed legislation providing for a
special assessment on financial institutions whose deposits are insured by SAIF
of the Federal Deposit Insurance Corporation ("FDIC"). Pursuant to the new law,
a one-time fee was paid by all SAIF-insured institutions at the rate of 65.7
cents per $100 of deposits held by such institutions at March 31, 1995. The
money collected will recapitalize the SAIF reserve to the level required by law.
In September 1996 the Company recorded an expense of $1,156,000 for this
assessment.
The new law provides for the merger, subject to certain conditions, of the SAIF
into the Bank Insurance Fund ("BIF") by 1999 and also requires BIF-insured
institutions to share in the payment of interest on the bonds previously issued
by a specially created government entity, the Financing Corporation ("FICO"),
the proceeds of which were applied toward resolution of the thrift industry
crisis in the 1980s. Beginning on January 1, 1997, SAIF-insured institutions
began paying deposit insurance premiums at an annual rate of approximately 6.4
basis points of their insured deposits, and BIF-insured institutions began
paying deposit insurance premiums at an annual rate of approximately 1.3 basis
points of their insured deposits towards the payment of interest on the FICO
bonds. These FICO interest premiums are in addition to the insurance premiums
paid by SAIF-insured institutions to maintain the SAIF reserve at its required
level (which ranges from zero basis points to 27 basis points pursuant to the
current risk classification system).
Based on the Company's insured deposits at December 31, 1996, the expected new
deposit insurance premium level, inclusive of the payment of interest on the
FICO bonds, would result in an estimated 1997 pre-tax savings of approximately
$300,000 beginning in the March 1997 quarter.
Table 1 provides a summary and the following discussion provides a more detailed
explanation of operating results for the three year period ending December 31,
1996.
Net Interest Income
Net interest income (interest income less interest expense) increased from
$6,836,718 in 1994 to $7,282,756 in 1995 and to $8,172,716 in 1996. Net interest
income is determined by the amount of interest-earning assets compared to
interest-bearing liabilities and their related yields and costs. The difference
between the weighted average interest rates earned on interest-earning assets
TABLE 2
YEAR ENDED DECEMBER 31,
1996
---------------------------------------------
INCOME WEIGHTED
AVERAGE OR AVERAGE
BALANCE EXPENSE RATE
---------------------------------------------
Interest-earning assets:
Loans ............................ $151,084,092 $14,039,683 9.29%
Mortgage-backed securities ....... 40,000,629 2,458,011 6.14%
Investment securities ............ 11,254,754 698,079 6.20%
Interest -bearing deposits
in other banks................... 1,692,240 90,599 5.35%
Federal funds sold ............... 1,342,879 76,988 5.73%
Repurchase agreements ............ -- -- --
Other short-term investments ..... -- -- --
----------- ----------- -----
Total interest-
earning assets .................. $205,374,594 $17,363,360 8.45%
============ =========== ====
Interest-bearing liabilities:
Savings deposits ................. $55,508,307 $1,485,966 2.68%
Other time deposits .............. 114,371,184 6,525,050 5.71%
Federal funds purchased .......... 206,710 11,665 5.64%
FHLB advances .................... 21,530,738 1,167,963 5.42%
---------- --------- ----
Total interest-bearing
liabilities ..................... $191,616,939 $9,190,644 4.80%
============ ========== ====
Interest rate spread ............. 3.65%
Net interest margin .............. 3.98%
Interest-earning assets/
interest -bearing liabilities .... 107%
YEAR ENDED DECEMBER 31,
1995
---------------------------------------
INCOME WEIGHTED
AVERAGE OR AVERAGE
BALANCE EXPENSE RATE
---------------------------------------
Interest-earning assets:
Loans ............................ $146,143,602 $12,745,773 8.72%
Mortgage-backed securities ....... 46,239,347 3,018,244 6.53%
Investment securities ............ 19,006,528 1,247,822 6.57%
Interest -bearing deposits
in other banks ................... 2,959,588 138,372 4.68%
Federal funds sold ............... 333,088 18,238 5.48%
Repurchase agreements ............ -- -- --
Other short-term investments ..... -- -- --
----------- ---------- --------
Total interest-
earning assets ................. $214,682,153 $17,168,449 8.00%
============ =========== ====
Interest-bearing liabilities:
Savings deposits ................. $49,777,172 $1,473,125 2.96%
Other time deposits .............. 114,793,340 6,551,062 5.71%
Federal funds purchased .......... -- -- --
FHLB advances .................... 31,961,667 1,861,506 5.82%
----------- ---------- --------
Total interest-bearing
liabilities .................... 196,532,179 9,885,693 5.03%
=========== ========= ====
Interest rate spread ............. 2.97%
Net interest margin .............. 3.39%
.............
Interest-earning assets/
interest -bearing liabilities .... 109%
YEAR ENDED DECEMBER 31,
1994
--------------------------------------
INCOME WEIGHTED
AVERAGE OR AVERAGE
BALANCE EXPENSE RATE
--------------------------------------
Interest-earning assets:
Loans ............................ $140,610,236 $11,273,849 8.02%
Mortgage-backed securities ....... 47,673,253 2,550,982 5.35%
Investment securities ............ 19,065,624 1,125,221 5.90%
Interest -bearing deposits
in other banks ................... 3,226,604 108,438 3.36%
Federal funds sold ............... -- -- --
Repurchase agreements ............ -- -- --
Other short-term investments ..... -- -- --
----------- ---------- --------
Total interest-
earning assets ................. $210,575,717 $15,058,490 7.15%
=========== ========== ========
Interest-bearing liabilities:
Savings deposits ................. $50,608,968 $1,469,691 2.90%
Other time deposits .............. 104,059,715 5,059,436 4.86%
Federal funds purchased .......... -- -- --
FHLB advances .................... 36,000,834 1,692,645 4.70%
----------- --------- --------
Total interest-bearing
liabilities .................... 190,669,517 8,221,772 4.31%
=========== ========== ========
Interest rate spread ............. 2.84%
Net interest margin .............. 3.25%
Interest-earning assets/
interest -bearing liabilities .... 110%
13
<PAGE>
TABLE 3
Year Ended December 31,
1996 1995 1994
-------------------------------------
Average net loans ......................... $151,084 $146,144 $141,640
Allowance for loan losses,
beginning of period ..................... 1,339 1,244 882
Charge-offs for the period
Consumer loans ........................ 87 118 88
Commercial loans ...................... 0 364 2
Permanent mortgage loans .............. 410 60 35
Residential construction loans ........ 22 23 0
-------- -------- --------
Total charge-offs ................. 519 565 125
-------- -------- --------
Recoveries for the period
Consumer loans ........................ 35 30 46
Commercial loans ...................... 0 0 0
Permanent mortgage loans .............. 0 0 1
Residential construction loans ........ 0 0 0
-------- -------- --------
Total recoveries .................. 35 30 47
-------- -------- --------
Net charge-offs for the period ............ 484 535 78
Provision for loan losses ................. 3,484 630 440
Allowance for loan losses, end of period... $ 4,339 $ 1,339 $ 1,244
Ratio of allowance for loan losses to
total net loans outstanding .......... 2.84% 0.91% 0.88%
Ratio of net charge-offs to average
net loans for the period ............. 0.32% 0.37% 0.06%
(i.e., loans and investment securities) and the weighted average interest rates
paid on interest-bearing liabilities is called the net interest spread. Another
measure of the difference in interest income earned versus interest expense paid
is net interest margin. Net interest margin is calculated by dividing net
interest income by average earning assets. Table 2 presents, for the three years
ended December 31, 1996, the Bank's average balances of interest-earning assets
and interest-bearing liabilities and the weighted average interest rates earned
and paid on those balances. In addition, interest rate spreads, net interest
margins and the ratio of interest-earning assets versus interest-bearing
liabilities for those years are presented.
TABLE 4
Year Ended December 31,
1996 1995 1994
------------------------------------------
Checking accounts
Number of accounts ................ 14,628 13,689 12,541
Balance ........................... $45,356,770 $45,515,784 $41,077,917
Average balance per account ....... $ 3,101 $ 3,325 $ 3,275
Deposit related fees .............. $ 1,621,516 $ 1,435,076 $ 1,284,169
TABLE 5
Annual Mortgage Loan Production
1996 1995 1994
----------------------------------------------------------
No. Amount No. Amount No. Amount
----------------------------------------------------------
Mortgage types originated
Conforming ....... 552 $45,879,255 392 $32,468,141 491 $37,964,116
VA/FHA ........... 255 17,788,369 229 15,859,414 263 18,724,503
--- ---------- --- ---------- --- ----------
Total activity 807 $63,667,624 621 $48,327,555 754 $56,688,619
=== =========== === =========== === ===========
As shown in Table 2, the Bank's average interest-earning assets increased from
$210,575,717 in 1994 to $214,682,153 in 1995 but decreased to $205,374,594 in
1996, while average interest-bearing liabilities increased from $190,669,517 in
1994 to $196,532,179 in 1995 but decreased to $191,616,939 in 1996. The Bank's
net interest margin was 3.25% in 1994, 3.39% in 1995 and 3.98% in 1996.
Throughout 1994 interest rates increased dramatically, causing the Bank's net
interest spread and margin to decline. The reason for this is that when interest
rates increase, deposit rates respond more quickly than interest rates on loans
and most securities, which typically have longer terms. In 1995 interest rates
reached the peak of this interest rate cycle early in the year and then started
declining. When interest rates decline, as they did throughout most of 1995,
interest rate spreads and net interest margins typically widen again, because
interest rates paid on deposits normally adjust more quickly than interest rates
earned on loans and most securities. In 1996, interest rates remained fairly
stable, although long-term interest rates generally rose more than short-term
rates. As a result, the Bank's net interest spread and margin increased due
primarily to a higher rate earned on loans and a slight moderation in the rates
paid on deposit accounts.
Provision For Possible Loan Loss
Table 3 presents an analysis of the provision for possible loan loss and
activities in the allowance for possible loan losses account for the past three
years. An allowance for possible losses is provided through charges to the
Bank's expenses in the form of a provision for possible loan loss. The provision
for possible loan losses was $440,000 in 1994, $630,000 in 1995 and $3,484,000
in 1996. The large increase in the provision for loan losses from 1995 to 1996
is directly attributable to the Bennett Funding matter, as previously discussed.
Excluding the provision associated with Bennett Funding, the provision for loan
losses would have been $506,000. The Bank determines the level of the provision
for possible loan losses based on outstanding loan and lease balances and the
levels of nonperforming assets and assets classified as substandard, doubtful or
loss, together with an analysis of historical loss experience, economic
conditions and specific problem and potential problem loans and leases in the
Bank's portfolio.
Historically, the Bank's loan portfolio has consisted primarily of loans secured
by one-to-four family residential properties, and actual losses have not been
14
<PAGE>
significant. The Bank also provides other services and loan products to meet the
growing financial needs of the Bank's communities, including consumer loans,
commercial loans and commercial real estate loans. Because these loans present a
somewhat higher credit risk than loans secured by residential properties,
management has significantly increased the allowance for loan losses compared to
historic levels to reflect the increased potential for future losses. Excluding
the portion of the provision that was attributable to Bennett Funding, the
provision for loan losses in 1996 would have been $124,000 less than the
provision in 1995.
As shown in Table 3, the year-end allowance for possible loan losses increased
from $1,244,000 at December 31, 1994 to $1,339,000 at December 31, 1995 and to
$4,339,000 at December 31, 1996. The allowance for possible losses has increased
from 0.88% of net outstanding loans at December 31, 1994 to 0.91% of net
outstanding loans at December 31, 1995 and to 2.84% at December 31, 1996.
Management believes that the allowance for possible loan losses for each of the
past three fiscal years is both adequate and appropriate. However, the future
level of the allowance for loan losses is highly dependent upon future
developments surrounding the Bennett Funding matter and cannot be anticipated
with a high degree of certainty.
Other Income
As shown in Table 1, other income increased from $1,879,726 in 1994 to
$2,459,034 in 1995 and to $2,992,798 in 1996. The increase in other income in
1996 was due to a combination of higher fee and service charge income as well as
to an increase in gains from the sale of investment securities and loans. The
increase in other income in 1995 compared to 1994 was due to an increase in
deposit related fees (see Table 4).
Table 5 reflects the Bank's mortgage banking activity for each of the three
years in the period ended December 31, 1996. This table shows that mortgages
originated for sale in the secondary mortgage market were $56,688,619 in 1994
but were only $48,327,555 in 1995 and increased to $63,667,624 in 1996. Gains on
sales of mortgage loans decreased from $707 in 1994 to a loss of $42,497 in 1995
and increased to $246,800 in 1996. Mortgage rates increased dramatically
throughout 1994, which significantly reduced mortgage loan origination volumes
and opportunities to sell mortgages at gains. Although mortgage interest rates
significantly declined in the latter half of 1995, they did not reach low enough
levels to produce significant mortgage refinancing activity, and the Bank's
overall volume in 1995 was even lower than 1994. In 1996, loan originations
accelerated in part due to continued strong economic conditions and generally
stable interest rates.
Table 4 presents the results of the Bank's checking account acquisition program.
As seen in this table, checking accounts increased from 12,541 accounts with
balances totaling $41,077,917 at December 31, 1994 to 13,689 accounts with
balances of $45,515,784 at December 31, 1995 and to 14,628 accounts with
balances totaling $45,356,770 at December 31, 1996. Fee income related to these
accounts has increased from $1,284,169 in 1994 to $1,435,076 in 1995 and to
$1,621,516 in 1996.
As this table shows, the Bank remains successful in the acquisition of personal
and commercial checking accounts. These checking accounts provide the Bank with
additional fee income and noninterest-bearing funds. Management believes that
its continued focus on mortgage banking activities and the acquisition of
checking accounts is necessary to increase noninterest income.
Operating Expenses
Operating expenses increased from $5,527,953 in 1994 to $6,040,872 in 1995 and
to $8,169,833 in 1996. Employee compensation and benefits increased from
$2,149,214 in 1994 to $2,337,143 in 1995 and to $2,581,523 in 1996. In 1994, a
loan production office was opened in Auburn, Alabama, an appraisal services
office was opened and in the fourth quarter of the year a large drive-up
facility was opened in LaGrange across from the main office to relieve
congestion at the main office. The increase in employee compensation and
benefits in 1995 reflects a full year's operation of the drive-up facility
mentioned above and the opening of a full-service branch on the east sector of
LaGrange, near Interstate 85 south and West Georgia Commons Mall. The increase
in employee compensation and benefits in 1996 was primarily due to normal
increases in compensation levels as well as to the hiring of several key
individuals during the year.
FDIC deposit insurance premiums were $436,665 in 1994, $459,581 in 1995 and
$1,666,101 in 1996. The large increase in 1996 was due to the one-time SAIF
assessment of $1,156,000, as was previously discussed.
Advertising expense was $264,020 in 1994, $178,394 in 1995 and $210,190 in 1996.
The decrease in 1995 reflects the conclusion of certain promotional campaigns
which were implemented during 1994. The increase in 1996 was due to increased
promotional efforts surrounding the previously mentioned full-service branch on
the east sector of LaGrange as well as increases associated with the Bank's
checking account acquisition program.
General and payroll tax expense was $292,428 in 1994, $270,451 in 1995 and
$343,875 in 1996. The decrease in 1995 and the increase in 1996 were partly due
to changes in the overall level of compensation as well as to timing differences
on the recognition of such expenses.
The growth in the number of loan and deposit accounts, significant increases in
the number of transactions, new costs associated with check imaging and the
increase in the number of automatic teller machines added in 1994 and 1995
15
<PAGE>
TABLE 6 December 31,
-------------------------------------
1996 1995
---- ----
Total assets ..................... $221,957,881 $232,105,364
Loans- net........................ 152,644,436 147,402,036
Securities ....................... 46,412,092 60,556,400
Deposits ......................... 177,999,415 177,848,121
FHLB advances .................... $ 17,370,833 $ 29,504,167
TABLE 7 December 31,
---------------------------------------------
1996 1995
---- ----
Amount Percent Amount Percent
Residential mortgages ........ $ 78,263 48.96% $ 88,719 57.61%
Commercial real estate loans . 33,844 21.17% 23,976 15.57%
Consumer loans ............... 18,166 11.36% 14,732 9.57%
Commercial loans/leases....... 17,780 11.12% 16,916 10.98%
Residential construction loans 11,812 7.39% 9,664 6.28%
-------- ------ -------- ------
Gross loans receivable ..... $159,865 100.00% $154,007 100.00%
continued to drive up data processing expenses. They increased from $414,045 in
1994 to $480,209 in 1995 and to $520,762 in 1996.
Other operating expenses were $644,328 in 1994, $775,874 in 1995 and $1,018,751
in 1996. The increase in 1995 is attributable to local and wide area networks
and new image statement processing that were introduced in 1995 . With this new
imaged statement process, customers receive images of their checks, up to 24 to
a page, in an easier to read format. Storage is much easier for the customer
with this new system. Future savings to the Bank should be obtained through
reduced postage costs and research time. The increase in 1996 was largely due to
investments in the Bank's new leasing program and research-related expenses
associated with the Bennett Funding matter.
Provision For Income Taxes
The provision for income taxes increased from $980,639 in 1994 to $1,044,911 in
1995 and decreased to $(311,222) in 1996. The effective actual tax rate for each
of those years (tax provision as a percentage of income before taxes) was 35.7%,
34.0% and (63.7)%, respectively.
Financial Condition
As presented in Table 6, total assets decreased approximately $10,147,000 from
$232,105,364 at December 31, 1995 to $221,957,881 at December 31, 1996. Total
liabilities decreased $9,967,559, from $211,407,148 at December 31, 1995 to
$201,439,589 at December 31, 1996. The decrease in liabilities primarily
resulted from a decrease in Federal Home Loan Bank advances of $12,133,334.
Stockholders' equity declined $179,924 from $20,698,216 at December 31, 1995 to
$20,518,292 at December 31, 1996.
Investment and Mortgage-Backed Securities
Investment securities and mortgage-backed securities decreased $14,144,308 from
December 31, 1995 to December 31, 1996. This decrease resulted from sales,
normal paydowns and prepayments of securities. In 1995, various held-to-maturity
mortgage-backed securities were transferred to the available-for-sale category
as allowed by Financial Accounting Standards Board Special Report, "A Guide to
Implementation of Statement 115."
Loans
Gross loans receivable increased by approximately $5,858,000 in 1996, from
approximately $154,007,000 at December 31, 1995 to approximately $159,865,000 at
December 31, 1996. This increase was the result of growth in consumer loans and
commercial loans and mortgages. As shown in Table 7, commercial mortgages
increased by approximately $9,868,000, consumer loans increased by approximately
$3,434,000 and commercial loans and leases increased by approximately $864,000.
The decrease in residential mortgages resulted from the Bank's policy of selling
originated long-term fixed rate mortgages and the normal paydown and prepayment
of portfolio mortgages.
Deposits
Total deposits increased $151,294 during 1996, from $177,848,121 at December 31,
1995 to $177,999,415 at December 31, 1996. As shown in Table 8, commercial
checking was the largest component of the increase, with an increase of
approximately $1,904,000. There was also an increase of approximately $310,000
in passbook and other savings and certificates of deposit.
FHLB Advances
As shown in Table 6, Federal Home Loan Bank advances decreased by approximately
$12,133,000 in 1996. Even though loan demand was strong in 1996, stable deposits
and reductions in investment and mortgage-backed securities allowed management
to reduce advances from the Federal Home Loan Bank.
TABLE 8 December 31,
-------------------------------
1996 1995
---- ----
Commercial checking ...................... $ 11,352,839 $ 9,448,925
Retail checking and NOW accounts ......... 19,294,867 20,628,369
MMDA's ................................... 14,709,064 15,438,490
Passbook and other savings ............... 16,514,007 16,401,140
Certificates of deposit .................. 116,128,638 115,931,197
------------ ------------
Total Deposits ........................... $177,999,415 $177,848,121
============ ============
16
<PAGE>
TABLE 9
Maturing or Repricing in
Over
(Dollars in Thousands) 1 Year 1-3 Years 3-5 Years 5 Years Total
--------------------------------------------
Interest-earning assets:
Adjustable rate mortgages and
mortgage-backed securities .. $80,852 $8,160 $0 $0 $89,012
Fixed rate mortgages and
mortgage-backed securities .. 28,114 8,325 6,411 25,235 68,085
Other loans ................... 20,082 4,105 2,370 4,200 30,757
Investment securities ......... 4,858 1,982 0 2,113 8,953
Interest-bearing deposits
in other banks .............. 3,557 0 0 0 3,557
-------- ------- ------ ------- --------
Total interest rate
sensitive assets ......... $137,463 $22,572 $8,781 $31,548 $200,364
======== ======= ====== ======= ========
Interest-bearing liabilities:
Fixed maturity deposits ....... $84,679 $18,059 $10,496 $2,895 $116,129
NOW and money market demand
accounts .................... 20,949 5,256 3,384 7,397 36,986
Passbook accounts ............. 9,585 690 537 5,702 16,514
Federal funds purchased ...... 2,210 0 0 0 2,210
FHLB advances ................. 15,950 400 0 1,021 17,371
------ --- - ----- ------
Total interest rate
sensitive liabilities $133,373 $24,405 $14,417 $17,015 $189,210
======== ======= ======= ======= ========
Interest sensitivity gap ........ $4,090 ($1,833) ($5,636) $14,533 $11,154
Cumulative interest rate
sensitivity gap ... ....... $4,090 $2,257 ($3,379) $11,154 -------
Cumulative interest rate
sensitivity gap
to total assets ........... 1.84% 1.02% -1.52% 5.03% -------
Asset-Liability Management
A primary objective of FLAG's asset and liability management program is to
control exposure to interest rate risk (the exposure to changes in net interest
income due to changes in market interest rates) so as to enhance its earnings
and protect its net worth against potential loss resulting from interest rate
fluctuations.
Historically, the average term to maturity or repricing (rate changes) of the
assets of the Bank (primarily loans and investment securities) has exceeded the
average repricing period of the Bank's liabilities (primarily deposits and
borrowings). Table 9 provides information about the amounts of interest-earning
assets and interest-bearing liabilities outstanding for the year ended December
31, 1996 that are expected to mature, prepay or reprice in each of the future
time periods shown (i.e., the interest rate sensitivity). As presented in this
table, at December 31, 1996, the Bank's assets subject to rate changes within
one year exceeded its liabilities subject to rate changes within one year. This
mismatched condition subjects the Bank to interest rate risk within the one year
period because the assets, due to their generally shorter term to maturity or
repricing, are more sensitive to short-term interest rate changes than the
liabilities. It is management's belief that the result of this position would be
an increase in net interest income if market interest rates rise and a decrease
in net interest income if market interest rates decline.
Management carefully measures and monitors the Bank's interest rate sensitivity
and believes that its operating strategies offer protection against interest
rate risk. As required by regulations of the Office of Thrift Supervision
("OTS"), the Board of Directors of the Bank has established an interest rate
risk policy which sets specific limits on interest rate risk exposure. Adherence
to this policy is reviewed quarterly by the Board of Directors' Asset Liability
Committee.
To help manage interest rate risk, mortgage-backed securities (MBSs),
collateralized mortgage obligations (CMOs) and callable agency securities with
step-up features (Agency Step-ups) have been acquired for the Bank's investment
portfolio. Some of these securities (CMOs and Agency Step-ups) are considered
derivative investments. Derivatives within the portfolio are primarily U.S.
Agency debt securities with adjustable and step-up coupons. Many of the CMOs
coupons adjust monthly. Most of the others adjust semi-annually or annually.
Although most of these derivatives have adjustable coupons, if market interest
rates increase more rapidly than maximum incremental interest rate resets of the
security, the market value of the security will be less than its book value.
However, the same is generally true for all adjustable rate securities. Notes 3
and 4 to the Consolidated Financial Statements disclose the unrealized gains and
losses in the Bank's investment portfolio.
Management has maintained positive ratios of average interest-earning assets to
average interest-bearing liabilities. As represented in Table 2 this ratio,
based on average balances for the respective years, was 110% in 1994, 109% in
1995 and 107% in 1996.
Liquidity
The Bank is required under federal regulations to maintain in cash and eligible
short-term investment securities a monthly average of 5% of net withdrawable
deposits and borrowings payable in one year or less. The Bank's average
liquidity in December 1996 was 7.36% of the aggregate of the prior month's daily
average deposits and short-term borrowings. The Bank's liquidity was 7.75% at
December 31, 1996 and 9.60% at December 31, 1995.
17
<PAGE>
The Bank's primary sources of liquidity (funds) are deposit inflows, loan
repayments, proceeds from sales of loans and securities, advances from the
Federal Home Loan Bank of Atlanta (the "FHLBA") and earnings from investments.
Short-term deposits, particularly noninterest-bearing checking accounts, are
becoming a more significant source of liquidity than they have been historically
to the Bank. Advances from the FHLBA were $29,504,167 and $17,370,833,
respectively, at December 31, 1995 and 1996.
Subject to certain limitations, the Bank may borrow funds from the FHLBA in the
form of advances. Credit availability from the FHLBA to the Bank is based on the
Bank's financial and operating condition. Credit availability from the FHLBA to
the Bank was approximately $58 million at December 31, 1996. In addition to
creditworthiness, the Bank must own a minimum amount of FHLBA capital stock.
This minimum is 5.00% of outstanding FHLBA advances. Unused borrowing capacity
at December 31, 1996 was $40.6 million. The Bank uses FHLBA advances for both
long-term and short-term liquidity needs. Other than normal banking operations,
the Bank has no long-term liquidity needs. The Bank has never been involved with
highly leveraged transactions that may cause unusual potential long-term
liquidity needs.
The Consolidated Statements of Cash Flows for the years ended December 31, 1995
and 1996 detail the Bank's sources and uses of funds for those periods.
TABLE 10
Required Actual Excess
Capital Capital Capital
------- ------- -------
(Dollars in Thousands)
Tangible capital ............. $3,340 $19,694 $16,354
1.50% 8.84% 7.34%
Core capital ................. $6,681 $19,694 $13,013
3.00% 8.84% 5.84%
Risk-based capital ........... $12,000 $21,568 $9,568
8.00% 14.38% 6.38%
TABLE 11
Total Risk- Tier 1 Risk- Tier 1
Based Ratio Based Ratio Leverage Ratio*
------------ ------------ ---------------
Well capitalized .................. 10% or above 6% or above 5% or above
Adequately capitalized ............ 8% or above 4% or above 4% or above
Under capitalized ................. Under 8% Under 4% Under 4%
Significantly under capitalized ... Under 6% Under 3% Under 3%
- ----------
*Note: A "Critically under capitalized" category exists for institutions whose
Tier 1 Leverage Ratio is less than 2%.
Capital Adequacy
Adequate capital provides the foundation for balance sheet expansion and
protection against unforeseen losses. The OTS requires the Bank to maintain
certain minimum capital levels. As can be seen from examining Table 10, the
Bank's capital levels at December 31, 1996 significantly exceeded the regulatory
capital requirements. The Federal Deposit Insurance Corporation Improvement Act
("FDICIA") required federal banking agencies to take "prompt corrective action"
with regard to institutions that do not meet minimum capital requirements. As a
result of FDICIA, the federal banking agencies introduced an additional capital
measure called the "Tier 1 risk-based capital ratio." The Tier 1 ratio is the
ratio of core capital to risk adjusted total assets. Table 11 presents a summary
of FDICIA's capital tiers. The Bank met all requirements of the
"well-capitalized" institution at December 31, 1996.
In October 1995, FLAG purchased 128,100 shares of its common stock in the open
market for $12.75 per share. At December 31, 1995, these shares were classified
as issued but not outstanding. Since it is not the intent of management to
reissue these shares, these shares were reclassified as authorized but unissued
in the first quarter of 1996. No shares were repurchased in 1996.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation. The liquidity and maturity
structures of FLAG's assets and liabilities are critical to the maintenance of
acceptable performance levels.
Statement of Management's Responsibility
Management of FLAG is responsible for the preparation and integrity of the
consolidated financial statements and other information presented in this Annual
Report. The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis, and
necessarily include amounts that are based on best estimates and judgments with
appropriate consideration to materiality.
18
<PAGE>
Management also is responsible for maintaining a system of internal accounting
controls. The purpose of the system is to provide reasonable assurance that
assets are safeguarded and that the books reflect only authorized transactions
of FLAG. The system includes proper segregation of duties, the establishment of
appropriate policies and procedures, and careful selection, training and
supervision of qualified personnel. In addition, both the independent certified
public accountants and the internal auditor periodically review the system of
internal accounting controls and report their findings to the Audit Committee of
the Board of Directors.
The Board of Directors pursues its responsibility for reported financial
information through its Audit Committee. The Audit Committee meets with
management, the internal auditor and independent certified public accountants to
assure that they are carrying out their responsibilities and to discuss
auditing, internal control and financial reporting matters. Both the internal
auditor and the independent certified public accountants have free and separate
access to the Audit Committee. The minutes of all Audit Committee meetings are
presented to the Board of Directors for their review and approval.
Accounting Rule Changes
In 1994, the Bank adopted Financial Accounting Standards Board Statement No. 115
("FASB 115"), "Accounting for Certain Investments in Debt and Equity
Securities." Prior to implementing FASB 115, investment and mortgage-backed
securities were stated at cost, adjusted for amortization of premiums and
accretion of discounts. These securities were carried at cost because the Bank
had the ability and intent to hold the securities to maturity. Certain debt
securities and marketable equity securities were carried at the lower of cost or
market. Accounting changes related to adopting FASB 115 require that securities
held for short-term resale are classified as trading securities and carried at
fair value. Debt securities that management has the ability and intent to hold
to maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Realized and unrealized gains
and losses on trading securities are included in income. Unrealized gains and
losses on securities classified as available-for-sale are recognized as a direct
increase or decrease in stockholders' equity. However, the OTS and other
financial institution regulators do not require financial institutions to report
unrealized gains and losses in their securities available-for-sale portfolio as
a separate component of shareholders' equity. In fact, unrealized gains and
losses related to securities available-for-sale have no regulatory capital
effect.
As mentioned previously in "Investment and Mortgage-Backed Securities" and in
Note 4 to the Consolidated Financial Statements, various held-to-maturity
mortgage-backed securities were transferred in 1995 to the available-for-sale
classification as permitted by Financial Accounting Standards Board Special
Report, "A Guide to Implementation of Statement 115."
In March 1995, the Financial Accounting Standards Board ("FASB") issued its
Statement of Financial Accounting Standards No. 121 ("FASB 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." FASB 121 requires that long-lived assets and certain intangibles to be held
and used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, FASB 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. FASB 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the Company's financial statements.
In May 1995, FASB issued its Statement of Financial Accounting Standards No. 122
("FASB 122"), "Accounting for Mortgage Servicing Rights." FASB 122 requires
entities to allocate the cost of acquiring or originating mortgage loans between
the mortgage servicing rights and the loans, based on their relative fair
values, if the bank sells or securitizes the loans and retains the mortgage
servicing rights. In addition, FASB 122 requires entities to assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. FASB 122 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the Company's financial statements.
In June 1996, FASB issued its Statement of Financial Accounting Standards No.
125 ("FASB 125"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." FASB 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. 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. In addition, a transfer of financial
assets in which the transferor surrenders control over those assets is accounted
for as a sale to the extent that consideration other than beneficial interests
in the transferred assets is received in exchange. FASB 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 does not expect the application of this pronouncement to have a
material effect on the financial statements of the Company.
19
<PAGE>
Table of Contents to Consolidated Financial Statements
Pages
Independent Auditors' Report....................................... 20
Consolidated Statements of Condition at December 31, 1996 and 1995 21
Consolidated Statements of Income for Each of the Three Years in the
Period Ended December 31, 1996................................ 22-23
Consolidated Statements of Stockholders' Equity for Each of the Three
Years in the Period Ended December 31, 1996.................. 23
Consolidated Statements of Cash Flows for Each of the Three Years in
the Period Ended December 31, 1996............................. 24-25
Notes to Consolidated Financial Statements........................ 26-46
Independent Auditors' Report
Board of Directors
FLAG Financial Corporation
LaGrange, Georgia
We have audited the accompanying consolidated statements of condition of FLAG
Financial Corporation and its subsidiaries as of December 31, 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 December 31, 1996. These
consolidated financial statements are the responsibility of the management of
FLAG Financial Corporation and its subsidiaries. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FLAG Financial
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and cash flows for each of the three years in the
period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Robinson, Grimes & Company, P.C.
Certified Public Accountants
Columbus, Georgia
January 31, 1997
20
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31,
1996 1995
---- ----
ASSETS
Cash and due from banks ......................... $ 2,527,785 $ 4,301,653
Interest bearing deposits ....................... 3,557,138 1,538,601
Federal funds sold .............................. 0 2,010,000
Proceeds receivable from secondary market ....... 1,162,121 2,482,757
Investment securities available-for-sale
at fair value ................................ 7,057,494 14,555,238
Mortgage-backed securities held-to-maturity
(fair value of$3,108,722 in 1996 and
$3,772,337 in 1995) ......................... 3,209,696 3,897,180
Mortgage-backed securities available-for-sale
at fair value ................................... 34,249,002 40,208,082
Investment in limited partnership ............... 1,475,000 1,000,000
Investment required by law - FHLB stock - at cost 1,895,900 1,895,900
Loans receivable - net .......................... 152,644,436 147,402,036
Loans held for sale ............................. 343,677 30,750
Mortgage servicing rights ....................... 1,703,710 1,455,983
Accrued interest and dividends receivable ....... 1,763,345 1,750,434
Real estate acquired through foreclosure ........ 524,703 800,714
Fixed assets - net .............................. 5,417,962 5,572,290
Deferred income taxes ........................... 1,711,438 690,891
Refundable income taxes ......................... 301,549 88,164
Cash surrender value of life insurance .......... 1,910,657 1,832,000
Other assets .................................... 502,268 592,691
------------ ------------
Total assets ............................ $221,957,881 $232,105,364
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Savings accounts ................................. $177,999,415 $177,848,121
Federal funds purchased .......................... 2,210,000 0
Advances from Federal Home Loan Bank ............. 17,370,833 29,504,167
Advances from borrowers for taxes and insurance .. 709,672 971,777
Advances payable to secondary market ............. 1,982,676 1,788,205
Accrued interest on savings and borrowings ....... 323,783 399,390
Dividends payable on common stock ................ 173,144 143,603
Other liabilities ................................ 670,066 751,885
------------ ------------
Total liabilities ............................ 201,439,589 211,407,148
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized;
none issued and outstanding) ............... 0 0
Common stock,($1 par value, 20,000,000 shares
authorized, 2,036,990 shares issued and
outstanding in 1996, and 2,044,100 shares
issued and 1,916,000 shares outstanding
in 1995) ................................... 2,036,990 1,916,000
Additional paid-in capital ................... 8,044,728 7,519,001
Retained earnings - substantially restricted . 10,732,992 11,580,579
Net unrealized loss on securities
available-for-sale ......................... (296,418) (317,364)
Total stockholders' equity ................ 20,518,292 20,698,216
---------- ----------
Total liabilities and stockholders' equity $ 221,957,881 $ 232,105,364
============= =============
See Notes to Consolidated Financial Statements
21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
INTEREST INCOME
Interest and fees on loans ......... $14,039,683 $12,745,773 $11,273,849
Interest and dividends on
investments ...................... 698,079 1,247,822 1,125,221
Interest on mortgage-backed
securities ....................... 2,458,011 3,018,244 2,550,982
Interest on time deposits ......... 167,587 156,610 108,438
------------ ------------ ------------
Total interest income ......... 17,363,360 17,168,449 15,058,490
------------ ------------ ------------
INTEREST EXPENSE
Interest on savings ................ 8,011,016 8,024,187 6,529,127
Interest on borrowings ............. 1,179,628 1,861,506 1,692,645
------------ ------------ ------------
Total interest expense ........ 9,190,644 9,885,693 8,221,772
------------ ------------ ------------
Net interest income before
provision for loan losses ....... 8,172,716 7,282,756 6,836,718
PROVISION FOR LOAN LOSSES ........... 3,484,529 630,000 440,000
------------ ------------ ------------
Net interest income after
provision for loan losses ....... 4,688,187 6,652,756 6,396,718
------------ ------------ ------------
OTHER INCOME
Gain on sales of investment
securities ....................... 206,873 133,627 23,038
Gain (loss) on sales of loans ...... 246,800 (42,497) 707
Gain (loss) on sales of
mortgage-backed securities ....... 12,506 85,440 (2,354)
Fees and service charges ........... 2,395,829 2,140,872 1,717,407
Sundry ............................. 210,433 109,074 189,767
Gain (loss) on real estate - net ... (79,643) 32,518 (48,839)
------------ ------------ ------------
Total other income ............... 2,992,798 2,459,034 1,879,726
------------ ------------ ------------
Income before operating
expenses and income taxes ....... 7,680,985 9,111,790 8,276,444
------------ ------------ ------------
OPERATING EXPENSES
Compensation
Directors and executive committee 83,100 86,000 78,150
Officers and employees .......... 1,996,150 1,857,636 1,702,964
Pension and other employee benefits . 585,373 479,507 446,250
Office occupancy expense ............ 261,507 246,133 216,442
Federal insurance premiums ......... 1,666,101 459,581 436,655
Furniture, fixtures and equipment
expenses ......................... 213,637 151,250 132,893
Advertising ........................ 210,190 178,394 264,020
General and payroll tax expense .... 343,875 270,451 292,428
Legal, professional and supervisory
exams ............................ 419,476 249,694 211,564
Printing and postage ............... 296,915 299,865 264,214
Data processing .................... 520,762 480,209 414,045
Depreciation ....................... 553,996 506,278 424,000
Other expenses ..................... 1,018,751 775,874 644,328
------------ ------------ ------------
Total operating expenses ......... 8,169,833 6,040,872 5,527,953
------------ ------------ ------------
Income (loss) before provision
(benefit)for income taxes ....... (488,848) 3,070,918 2,748,491
See Notes to Consolidated Financial Statements
22
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Continued)
PROVISION (BENEFIT) FOR INCOME TAXES ... (311,222) 1,044,911 980,639
---------- ---------- ----------
Net income (loss) .................. $ (177,626) $2,026,007 $1,767,852
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) ................... $ (.09) $ .97 $ .85
==== ==== ====
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL NET TOTAL
COMMON STOCK PAID-IN RETAINED UNREALIZED STOCKHOLDERS'
STOCK DISTRIBUTABLE CAPITAL EARNINGS LOSS ON AFS EQUITY
----- ------------- ------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ........ $ 1,006,250 $1,006,250 $ 7,867,500 $ 9,993,733 $ 0 $ 19,873,733
Initial adoption of SFAS No. 115 -- -- -- -- 213,552 213,552
Common stock distribution ...... 1,006,250 (1,006,250) 0 0 0 0
Increase in unrealized loss on
marketable equity securities . 0 0 0 0 (2,239,961) (2,239,961)
Net income ..................... 0 0 0 1,767,852 0 1,767,852
Dividends declared ............. 0 0 0 (603,750) 0 (603,750)
--------------------------------------------------------------------------------
Balance, December 31, 1994 ...... 2,012,500 0 7,867,500 11,157,835 (2,026,409) 19,011,426
Common stock options exercised . 26,793 0 97,605 0 0 124,398
Issuance of common stock ....... 4,807 0 54,679 0 0 59,486
Repurchase of common stock ..... (128,100) 0 (500,783) (1,004,389) 0 (1,633,272)
Decrease in unrealized loss on
securities available-for-sale 0 0 0 0 1,709,045 1,709,045
Net income ..................... 0 0 0 2,026,007 0 2,026,007
Dividends declared ............. 0 0 0 (598,874) 0 (598,874)
--------------------------------------------------------------------------------
Balance, December 31, 1995 ...... 1,916,000 0 7,519,001 11,580,579 (317,364) 20,698,216
Common stock options exercised .. 120,207 0 517,520 0 0 637,727
Issuance of common stock ........ 783 0 8,207 0 0 8,990
Decrease in unrealized loss on
securities available-for-sale . 0 0 0 0 20,946 20,946
Net loss ........................ 0 0 0 (177,626) 0 (177,626)
Dividends declared .............. 0 0 0 (669,961) 0 (669,961)
-----------------------------------------------------------------------------------
Balance, December 31, 1996 ..... $ 2,036,990 $ 0 $ 8,044,728 $10,732,992 $ (296,418) $ 20,518,292
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................... $ (177,626) $ 2,026,007 $ 1,767,852
---------- ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ......... 3,484,529 630,000 440,000
Provision for depreciation ........ 553,996 506,278 424,000
Amortization of premiums/
discounts on securities ......... 236,685 148,757 238,474
Amortization of mortgage
servicing rights ................ 203,666 203,665 69,535
Gain on sales of investment
securities available-for-sale ... (206,873) (133,627) (23,038)
(Gain) loss on sales of loans ..... (246,800) 42,497 (707)
(Gain) loss on sales of
mortgage-backed securities
available-for-sale ............... (12,506) (85,440) 2,354
(Gain) loss on sales of real
estate acquired through
foreclosure before provision
for losses ...................... 79,643 (32,518) 48,839
(Gain) loss on sales of fixed
assets .......................... 400 (9,148) (10,813)
Proceeds from sales of loans ...... 48,897,367 48,048,035 53,563,540
Cash value of life insurance ...... (54,655) (50,000) 0
(Increase) decrease in proceeds
receivable ...................... 1,320,636 (1,359,294) 557,432
(Increase) decrease in accrued
interest and dividends
receivable ...................... (12,911) 97,975 (424,998)
Increase in deferred income taxes . (1,033,206) (78,049) (39,525)
(Increase) decrease in estimated
refundable income taxes ......... (213,385) (74,024) 130,646
Decrease in deferred origination
fees/costs ...................... (69,082) (21,543) (21,265)
Increase (decrease) in accrued
interest on savings and
borrowings ...................... (75,607) 57,166 148,214
Other - net ....................... (72,852) 357,221 (453,328)
------- ------- --------
Total adjustments ............. 52,779,045 48,247,951 54,649,360
---------- ---------- ----------
Net cash provided by
operating activities ......... 52,601,419 50,273,958 56,417,212
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities
of investment securities
available-for-sale .............. 16,609,727 18,601,248 7,134,746
Proceeds from sales and
maturities of mortgage-backed
securities available-for-sale ... 6,099,005 10,047,401 3,586,660
Maturities of mortgage-backed
securities held-to-maturity ..... 0 0 660,281
Proceeds from sales of
fixed assets .................... 389 14,000 22,376
Proceeds from sales of
FHLB stock ...................... 0 318,500 370,600
Investment in foreclosed real
estate .......................... (238,138) (1,525,138) (457,372)
Proceeds from sales of
foreclosed real estate .......... 516,326 989,228 577,849
Loans originated net of
principal collected ............. (52,162,523) (50,339,643) (32,490,782)
Purchase of investment securities
available-for-sale .............. (8,909,864) (10,024,257) (23,338,491)
24
<PAGE>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES: (Continued)
Purchase of mortgage-backed
securities available-
for-sale ........................ (4,647,760) (9,176,680) (18,846,976)
Purchase of mortgage-backed
securities held-to-maturity ..... 0 0 (9,149,250)
Purchase of loans ................. (449,683) (275,601) (9,890,358)
Investment in limited partnership . (475,000) (250,000) (150,000)
Purchase of FHLB stock ............ 0 0 (712,600)
Purchase of fixed assets .......... (400,457) (1,065,156) (841,587)
Investment in mortgage servicing
rights .......................... (451,393) (34,141) (1,508,846)
Acquisition of cash value of
life insurance .................. (24,002) (1,782,000) 0
------- ---------- -
Net cash used in investing
activities ................... (44,533,373) (44,502,239) (85,033,750)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings
accounts .................. 151,294 12,127,395 2,904,727
Net increase in federal
funds purchased ........... 2,210,000 0 0
Proceeds from FHLB advances . 16,000,000 67,800,000 123,500,000
Repayment of FHLB advances .. (28,133,334) (81,576,389) (100,719,444)
Increase (decrease) in
advances payable to
secondary market .......... 194,471 294,131 (465,473)
Increase (decrease)
in advances from
borrowers for taxes
and insurance ............. (262,105) (214,534) 738,656
Issuance of common stock .... 646,717 183,884 0
Repurchase of common stock .. 0 (1,633,272) 0
Cash dividends paid ......... (640,420) (606,209) (603,750)
-------- -------- --------
Net cash provided by
(used in)financing
activities .............. (9,833,377) (3,624,994) 25,354,716
---------- ---------- ----------
Net increase (decrease)
in cash and cash
equivalents ............. (1,765,331) 2,146,725 (3,261,822)
Cash and cash equivalents,
January 1 .............. 7,850,254 5,703,529 8,965,351
--------- --------- ---------
Cash and cash equivalents,
December 31 ............. $ 6,084,923 $ 7,850,254 $ 5,703,529
=============== ============= =============
CASH AND CASH EQUIVALENTS:
Cash and due from banks .... $ 2,527,785 $ 4,301,653 $ 4,265,250
Interest bearing deposits .. 3,557,138 1,538,601 1,438,279
Federal funds sold ......... 0 2,010,000 0
- --------- -
Total cash and cash
equivalents ............ $ 6,084,923 $ 7,850,254 $ 5,703,529
=============== ============= =============
See Notes to Consolidated Financial Statements.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
1. Nature of Operations
FLAG Financial Corporation's primary operations are carried out through
First Federal Savings Bank of LaGrange. The Savings Bank provides financial
services to individuals and corporate customers. The Savings Bank is
subject to the regulations of certain Federal agencies and undergoes
periodic examinations by those regulatory authorities. The Savings Bank is
located in LaGrange, Georgia and has loan origination offices in Columbus,
Georgia and Auburn, Alabama. The Savings Bank's subsidiary, Piedmont
Mortgage Service, Inc. provides appraisal services to the Savings Bank and
other financial institutions and brokerage services to individuals.
Piedmont is also located in LaGrange, Georgia.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
the accounts of FLAG Financial Corporation ("FLAG") FLAG's wholly-owned
subsidiary, First Federal Savings Bank of LaGrange ("the Savings Bank"),
and the Savings Bank's wholly-owned subsidiary, Piedmont Mortgage Service,
Inc. (Piedmont). All significant intercompany accounts and transactions
have been eliminated.
Investment and Mortgage-Backed Securities - Securities that are held for
short-term resale are classified as trading securities and carried at fair
value. Debt securities that management has the ability and intent to hold
to maturity are classified as held-to-maturity and carried at cost,
adjusted for amortization of premium and accretion of discounts using
methods approximating the interest method. Other marketable securities are
classified as available-for-sale and are carried at fair value. Realized
and unrealized gains and losses on trading securities are included in net
income. Unrealized gains and losses on securities available-for-sale are
recognized as direct increases or decreases in stockholders' equity net of
applicable income taxes. Cost of securities sold is recognized using the
specific identification method.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal
balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Mortgage-backed
securities also includes collateralized mortgage obligations for which
certain factors such as prepayments and interest rates may affect the yield
or recoverability.
Investment in Limited Partnership - The Savings Bank owns a 39.6% interest
in a limited partnership, Guilford Georgia Affordable Housing Fund V, L.P.
The partnership invests in multi-family real estate and passes low income
housing credits to the investors. The Savings Bank recognizes these tax
credits in the year received and accounts for the investment on the cost
basis which approximates the value on the equity method.
2. Summary of Significant Accounting Policies (Continued)
Investment Required by Law - The Savings Bank is required as a member of
the FHLB system to maintain a specified level of investment in FHLB stock.
The stock investment is carried at cost because it represents a restricted
investment for which there is no market value.
Loans Held for Sale - Loans held for sale represent mortgage collateralized
loans which the Savings Bank intends to sell to the secondary market. These
loans are carried at the lower of their aggregate cost or market value. A
valuation allowance is established by direct charges to income when the
market value is less than the cost.
26
<PAGE>
Accrued Interest and Dividends Receivable - Interest and dividends due to
the Savings Bank, but not yet received, are calculated through year end and
accrued for reporting purposes based on normal accounting procedures. An
allowance for accrued interest on loans under foreclosure, bankruptcy, and
uncollectible loans reduces accrued interest and dividends receivable for
financial statement reporting.
Loans Receivable - Loans receivable are stated at unpaid principal
balances, less the allowance for loan losses, and net deferred
loan-origination fees and discounts.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Savings Bank's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic
conditions.
For loans originated prior to 1988, amounts for loan origination fees in
excess of origination costs were amortized into income over an estimated
average loan term using a method which approximates the level-yield method.
When these loans were paid off or sold before the expiration of such
period, the remaining deferred fee was credited to income. For loans
originated after 1987, loan origination and commitment fees and certain
direct loan origination costs are deferred and the net amount is amortized
as an adjustment of the related loan's yield in accordance with Financial
Accounting Standards Board Statement No. 91.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the extent
of interest payments received.
Foreclosed Real Estate - Real estate properties acquired through, or in
lieu of foreclosure are initially recorded at fair value less estimated
costs to sell at the date of foreclosure, which becomes the property's new
basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. Costs incurred in
maintaining foreclosed real estate and subsequent write-downs to reflect
declines in the fair value of the property are included in gain (loss) on
real estate - net. Costs incurred to bring the property to a rentable or
salable condition are capitalized.
Fixed Assets and Related Depreciation - Fixed assets are stated at cost and
are depreciated principally on the straight-line method for financial
reporting purposes, at various rates, to extinguish the cost over the
estimated useful lives of the assets as follows:
Buildings and improvements 15 - 40 years
Furniture, fixtures and equipment 3 - 10 years
Mortgage Servicing Rights - Mortgage servicing rights include all purchased
mortgage servicing rights and originated mortgage servicing rights since
January 1, 1995, the date the Savings Bank adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights".
(See Note 7 for further description.) The carrying value of mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing revenues. Management periodically evaluates
mortgage servicing rights and the related amortization in relation to
estimated future net servicing revenues taking into consideration changes
in interest rates, current prepayment rates, and expected future cash
flows. Management evaluates the carrying value of the servicing portfolio
by estimating the future net servicing income of the portfolio based on
estimated remaining loan lives on an undiscounted basis for pools of loans
with similar characteristics, including interest rate, loan term and
origination dates.
27
<PAGE>
Gain or Loss on Sales of Loans - The Savings Bank periodically generates
additional funds for lending by selling whole and participating interests
in residential and commercial real estate loans. Gains or losses on such
sales are recognized at the time of the sale and are determined by the
difference between the net sales proceeds and the unpaid principal balance
of the loans sold, adjusted for any deferred fees or costs, yield
differential, servicing fees and servicing costs applicable to future
years. Net fee income from originating these loans is included as part of
gain or loss on sale of loans along with direct operating expenses when the
loans are sold servicing released, when loans are sold with servicing
retained, a portion of the operating expenses may be allocated to mortgage
servicing rights. In addition, any loans held for sale are carried at lower
of cost or market, as determined on an aggregate basis.
Income Taxes - FLAG files a consolidated income tax return with the Savings
Bank and reports for income taxes on substantially the same basis as for
financial statement purposes except for timing differences related to the
basis of available-for-sale securities, loan origination fees, allowance
for loan losses and alternative methods of depreciation of fixed assets.
Deferred income taxes represent the future tax consequences and are
provided on these timing differences when material.
Earnings Per Share - Earnings per share are calculated by dividing net
income by the weighted average number of common and common equivalent
shares outstanding after consideration of the dilutive effect of stock
options outstanding as of the date of issuance of the financial statements.
Statements of Cash Flows - For purposes of the statements of cash flows,
FLAG considers all cash and due from banks, interest-bearing deposits, and
federal funds sold to be cash equivalents.
Reclassifications - Certain items in the 1995 and 1994 financial statements
have been reclassified in order to be in conformity with the 1996 statement
presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for loan losses and foreclosed real estate, management obtains
independent appraisals for significant properties.
A significant portion of the Savings Bank's loan portfolio consists of
single-family residential loans originated in local markets. Accordingly,
the ultimate collectibility of a substantial portion of the Savings Bank's
loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Savings Bank's allowances on loan losses and
foreclosed real estate. Such agencies may require the Savings Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because of
these factors, it is reasonably possible that the allowances for losses on
loans and foreclosed real estate may change materially in the near term.
28
<PAGE>
3. Investment Securities
Investment securities available-for-sale at December 31, 1996 consist of
the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Equity securities .... $ 1,960,918 $ 5,891 $ (7,583) $ 1,959,226
U.S. Government and
federal agencies .. 4,018,271 2,109 (27,409) 3,992,971
State and local
governments ....... 114,695 712 0 115,407
Corporate debt
securities ........ 980,790 9,100 0 989,890
------- ----- - -------
$ 7,074,674 $ 17,812 $ (34,992) $ 7,057,494
=========== ========= ========== ===========
Investment securities available-for-sale at December 31, 1995 consist of
the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Equity securities . $ 5,314,238 $ 3 $ (2,867) $ 5,311,374
U.S. Government and
federal agencies 9,250,230 37,761 (44,127) 9,243,864
--------- ------ ------- ---------
$ 14,564,468 $ 37,764 $ (46,994) $ 14,555,238
============ ========= ========= ============
The following is a summary of maturities of debt securities
available-for-sale as of December 31, 1996:
SECURITIES
AVAILABLE-FOR-SALE
------------------
Amounts maturing in: AMORTIZED
COST FAIR VALUE
---- ----------
One year or less ........ $ 0 $ 0
After one year through
five years ............. 2,980,685 2,984,788
After five years through
ten years .............. 2,133,071 2,113,480
After ten years ......... 0 0
- -
$5,113,756 $5,098,268
========== ==========
During 1996, the Savings Bank sold securities available-for-sale for total
proceeds of approximately $10,356,000, resulting in gross realized gains of
approximately $231,000 and gross realized losses of approximately $25,000.
During 1995, the Savings Bank sold securities available-for-sale for total
proceeds of approximately $16,487,000, resulting in gross realized gains of
approximately $159,000 and gross realized losses of approximately $26,000.
During 1994, the Savings Bank sold investment securities for total proceeds
of approximately $6,141,000, resulting in gross realized gains of
approximately $73,000 and gross realized losses of approximately $50,000.
29
<PAGE>
4. Mortgage-Backed Securities
Mortgage-backed securities held-to-maturity at December 31, 1996 consist of
the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal National Mortgage
Association certificates . . $ 117,547 $1,396 $ 0 $ 118,943
Collateralized mortgage
obligations ................ 3,092,149 4,099 (106,469) 2,989,779
---------- ----- --------- ----------
Total ................. $3,209,696 $5,495 $(106,469) $3,108,722
========== ====== ========= ==========
Mortgage-backed securities held-to-maturity at December 31, 1995 consist of
the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal National Mortgage
Association certificates ... $ 130,793 $ 2,616 $ 0 $ 133,409
Collateralized mortgage
obligations ................ 3,766,387 8,107 (135,566) 3,638,928
---------- ------- ---------- ----------
Total ................ $3,897,180 $10,723 $(135,566) $3,772,337
========== ======= ========= ==========
Mortgage-backed securities available-for-sale at December 31, 1996 consist
of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal National Mortgage
Association certificates ... $ 3,116,349 $ 17,596 $ (63,087) $ 3,070,858
Government National
Mortgage Association
certificates ............... 4,096,479 31,955 (14,157) 4,114,277
Federal Home Loan Mortgage
Corporation certificates ... 6,330,571 34,826 (69,418) 6,295,979
Small Business
Administration pool
certificates ............... 4,034,000 35,441 (6,181) 4,063,260
Collateralized mortgage
obligations ................ 17,132,514 17,921 (445,807) 16,704,628
---------- -------- ---------- ----------
Total ................. $34,709,913 $137,739 $(598,650) $34,249,002
=========== ======== ========= ===========
30
<PAGE>
Mortgage-backed securities available-for-sale at December 31, 1995 consist
of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
Federal National Mortgage
Association certificates $ 4,898,630 $ 27,502 $ (48,941) $ 4,877,191
Government National
Mortgage Association
certificates ............ 3,251,438 8,647 (9,137) 3,250,948
Federal Home Loan Mortgage
Corporation certificates 7,373,259 33,723 (45,053) 7,361,929
Small Business
Administration Pool
certificates ............ 2,359,744 15,762 (241) 2,375,265
Collateralized mortgage
obligations ............. 22,827,659 25,545 (510,455) 22,342,749
----------- --------- --------- -----------
Total ................. $40,710,730 $ 111,179 $(613,827) $40,208,082
=========== ========= ========= ===========
The amortized cost and fair value of mortgage-backed securities at December
31, 1996 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations without penalties.
AMORTIZED
COST FAIR VALUE
---- ----------
Mortgage-backed securities:
In one year or less ......................... $ 998,818 $ 1,005,271
After one year through five years ........... 4,908,433 4,891,902
After five years through ten years .......... 5,770,006 5,647,238
After ten years ............................. 26,242,352 25,813,313
---------- ----------
$37,919,609 $37,357,724
=========== ===========
During 1996, the Savings Bank sold mortgage-backed securities
available-for-sale for total proceeds of approximately $5,295,000,
resulting in gross realized gains of approximately $19,000 and gross
realized losses of approximately $6,500. During 1995, the Savings Bank sold
mortgage-backed securities available-for-sale for total proceeds of
approximately $9,981,000, resulting in gross realized gains of
approximately $87,000 and gross realized losses of approximately $2,000.
During 1994, the Savings Bank sold mortgage-backed securities
available-for-sale for total proceeds of approximately $606,000, resulting
in gross realized losses of approximately $2,000.
In 1995, various held-to-maturity mortgage-backed securities were
transferred to the available-for-sale category as permitted by Financial
Accounting Standards Board Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities". The securities had an amortized cost of $17,341,580 and net
unrealized losses of $52,625 at the time of transfer. There were no
held-to-maturity mortgage-backed securities transferred to another
classification during 1996.
As of December 31, 1996, approximately $17,920,000 of mortgage-backed
securities were pledged to secure advances from FHLB and deposits of
government agencies as required or permitted by law.
As of December 31, 1996, the Savings Bank had no high-risk collateralized
mortgage obligations.
31
<PAGE>
5. Loans Receivable
Loans receivable are summarized as follows:
DECEMBER 31,
1996 1995
---- ----
Conventional real estate loans:
Residential and commercial ............... $112,107,034 $112,693,968
Construction and land acquisition ........ 11,812,220 9,665,024
---------- ---------
Total ................................. 123,919,254 122,358,992
Loans secured by savings accounts ........ 1,021,688 916,298
Consumer loans ........................... 17,143,823 13,816,222
Commercial loans ......................... 10,209,043 10,261,530
Lease financings ......................... 7,571,427 6,654,470
--------- ---------
Total .................................. 159,865,235 154,007,512
----------- -----------
Less:
Undisbursed portion of loans
in process ............................ 2,663,178 4,978,687
Deferred loan fees - net ................. 218,314 287,396
Allowance for loan losses ................ 4,339,307 1,339,393
--------- ---------
Total .................................. 7,220,799 6,605,476
--------- ---------
Loans receivable - net ................. $152,644,436 $147,402,036
============ ============
The adequacy of the provision for loan losses is continually evaluated by
management and adjusted as deemed necessary. The Savings Bank's allowance
for loan losses is summarized as follows:
DECEMBER 31,
1996 1995 1994
---- ---- ----
Beginning balance, allowance for
loan losses ..................... $ 1,339,393 $ 1,243,623 $ 881,989
Current year's provision for loan
losses ......................... 3,484,529 630,000 440,000
Recoveries ........................ 36,830 38,613 46,402
Uncollectible loans charged
against the allowance .......... (521,445) (572,843) (124,768)
-------- -------- --------
Ending balance, allowance for
loan losses .................... $ 4,339,307 $ 1,339,393 $ 1,243,623
=========== =========== ===========
As of December 31, 1996, 1995, and 1994, the principal balance of loans
sold with recourse amounted to $3,404,360, $4,281,966 and $6,421,588,
respectively. Proceeds receivable reflects loans sold in December, 1996 and
1995 to the secondary market and collected in January, 1997 and 1996,
respectively.
As of December 31, 1996, 1995 and 1994, the Savings Bank had loans
amounting to approximately $13,095,000, $4,121,000 and $2,593,000,
respectively, that were specifically classified as impaired. The average
balance of these loans amounted to approximately $215,000, $52,000 and
$35,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The allowance for loan losses related to impaired loans amounted to
approximately $3,775,000, $1,114,000 and $463,000 at December 31, 1996,
1995 and 1994, respectively.
Nonaccrual and renegotiated loans for which interest has been reduced
totaled approximately $8,536,000, $3,520,000 and $4,599,000 as of December
31, 1996, 1995, and 1994, respectively. Interest income that would have
been recorded under the original terms of such loans and the interest
income actually recognized are summarized as follows:
32
<PAGE>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Interest income that would
have been recorded ............. $ 470,250 $ 209,922 $ 261,658
Interest income recognized ........ (148,442) (140,829) (120,745)
--------- --------- ---------
Interest income foregone .......... $ 321,808 $ 69,093 $ 140,913
========= ========= =========
6. Loans Held for Sale
The Savings Bank had $343,677 and $30,750 of mortgage loans held for sale
in the secondary market at December 31, 1996 and 1995, respectively, stated
at the lower of cost or market value.
7. Mortgage Servicing Rights
Mortgage servicing rights include the rights to service mortgage loans
purchased by the Savings Bank. Mortgage servicing rights also include
rights to service loans originated by the Savings Bank sold with servicing
rights retained since January 1, 1995, the date Statement of Financial
Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights" was
adopted. When originated mortgage loans are sold and the servicing rights
are retained, the total cost is allocated between the mortgage loans and
the servicing rights based on their relative fair values.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of condition. The unpaid principal balances of
these loans were approximately $247,963,000 and $249,309,000 as of December
31, 1996 and 1995, respectively.
Custodial escrow balances maintained in connection with mortgage loan
servicing were approximately $695,000 and $618,000 as of December 31, 1996
and 1995, respectively.
The activity related to mortgage servicing rights is summarized as follows:
YEAR ENDED
DECEMBER 31,
1996 1995
---- ----
Beginning balance ........................ $ 1,455,983 $ 1,625,507
Purchased servicing rights ............... 33,245 18,263
Originated servicing rights .............. 418,148 15,878
Amortization ............................. (203,666) (203,665)
-------- --------
Ending balance ........................ $ 1,703,710 $ 1,455,983
=========== ===========
8. Accrued Interest and Dividends Receivable
Accrued interest and dividends receivable is summarized as follows:
DECEMBER 31,
1996 1995
---- ----
Loans ........................................ $ 1,482,869 $ 1,289,015
Mortgage-backed securities ................... 256,154 331,752
Investments and others ....................... 99,727 198,760
------ -------
1,838,750 1,819,527
Allowance for uncollectible interest ......... (75,405) (69,093)
------- -------
Total accrued interest and dividends
receivable .............................. $ 1,763,345 $ 1,750,434
=========== ===========
33
<PAGE>
9. Fixed Assets and Related Depreciation
Major classes of fixed assets and accumulated depreciation are summarized
as follows:
DECEMBER 31,
1996 1995
---- ----
Land and improvements ...................... $ 1,091,577 $ 1,084,947
Buildings and improvements ................. 4,097,162 4,087,605
Furniture, fixtures and equipment .......... 3,870,297 3,498,972
--------- ---------
Subtotal .............................. 9,059,036 8,671,524
Accumulated depreciation ................... (3,641,074) (3,099,234)
---------- ----------
Fixed assets - net .................... $ 5,417,962 $ 5,572,290
=========== ===========
10. Savings Accounts
Savings accounts are summarized as follows:
DECEMBER 31,
1996 1995
---- ----
NOW accounts and MMDA accounts ........... $ 45,356,770 $ 45,515,784
Passbook accounts ........................ 16,514,007 16,401,140
Time deposits ............................ 116,128,638 115,931,197
------------ ------------
Total ................................ $177,999,415 $177,848,121
============ ============
The aggregate amount of deposits with a minimum denomination over $100,000
was approximately $37,497,000 and $31,553,000 at December 31, 1996 and
1995, respectively. Interest expense on deposits exceeding $100,000 was
approximately $820,000, $774,000 and $505,000 in 1996, 1995 and 1994,
respectively.
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
1997 .................. $ 84,679,214
1998 .................. 18,058,866
1999 .................. 6,277,560
2000 .................. 4,218,127
2001 and thereafter ... 2,894,871
---------
$116,128,638
============
Interest expense on savings accounts is summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
NOW accounts and MMDA accounts ....... $1,078,079 $1,069,096 $1,053,787
Passbook accounts .................... 407,887 404,029 415,904
Time deposits ........................ 6,561,637 6,602,060 5,087,884
--------- --------- ---------
Subtotal ........................... 8,047,603 8,075,185 6,557,575
Less penalties on early withdrawals
of certificates of deposit ........... 36,587 50,998 28,448
--------- ----------- -----------
Total .............................. $8,011,016 $8,024,187 $6,529,127
========== ========== ==========
34
<PAGE>
11. Advances from Federal Home Loan Bank
Advances from the FHLB are secured by FHLB stock and certain securities
held by the Savings Bank and pledged qualified first mortgage loans equal
to, when discounted at 75% of the unpaid principal balances, 100% of the
advances outstanding. Advances as of December 31, 1996 and 1995 are
summarized as follows:
DECEMBER 31,
INTEREST RATE 1996 1995
------------- ---- ----
Due in 1996, fixed and variable
rates ........................... 4.93% - 5.97% $ 0 $17,050,000
Due in 1997, fixed and variable
rates ........................... 5.34% - 5.54% 5,450,000 450,000
Due in 1998, fixed rate only ..... 5.75% 400,000 400,000
Due in 2000, fixed rate only,
callable ........................ 5.00% 10,500,000 10,500,000
Due in 2009, fixed rate only ..... 6.75% 1,020,833 1,104,167
----------- -----------
Total advances ......... $17,370,833 $29,504,167
=========== ===========
Interest expense on advances from Federal Home Loan Bank borrowings is
summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Short-term borrowings .......... $ 597,162 $1,695,356 $1,468,066
Long-term borrowings ........... 582,466 166,150 224,579
------- ------- -------
Total ................ $1,179,628 $1,861,506 $1,692,645
========== ========== ==========
12. Stockholders' Equity
The Savings Bank is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a
direct material effect on the Bank and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Savings Bank must
meet specific capital guidelines involving quantitative measures of the
Savings Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Savings Bank's
capital amounts and classifications under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier 1 capital to risk-weighted assets (as defined
in the regulation), Tier 1 capital to adjusted total assets (as defined),
and tangible capital to adjusted total assets (as defined).
As of December 31, 1996, the most recent notification from the OTS
categorized the Savings Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum ratios as set forth in the
table below. There are no conditions or events since that notification that
management believes have changed the institution's category.
35
<PAGE>
The Savings Bank's actual capital amounts and ratios are also presented
below.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of December 31, 1996:
Total risk-based capital
<S> <C> <C> <C> <C> <C> <C>
(to risk-weighted assets) $21,568,000 14.4% $11,999,760 >/= 8.0% $14,999,700 >/= 10.0%
Tier 1 capital
(to risk-weighted assets) 19,694,000 13.1% 5,999,880 >/= 4.0% 8,999,820 >/= 6.0%
Tier 1 capital
(to adjusted total assets) 19,694,000 8.8% 8,907,440 >/= 4.0% 11,134,300 >/= 5.0%
Tangible capital
(to adjusted total assets) 19,694,000 8.8% 3,340,290 >/= 1.5% 3,340,290 >/= 1.5%
As of December 31, 1995:
Total risk-based capital
(to risk-weighted assets) 21,348,000 14.1% 12,033,120 >/= 8.0% 15,041,400 >/= 10.0%
Tier 1 capital
(to risk-weighted assets) 20,301,000 13.5% 6,016,560 >/= 4.0% 9,024,840 >/= 6.0%
Tier 1 capital
(to adjusted total assets) 20,301,000 8.7% 9,307,240 >/= 4.0% 11,634,050 >/= 5.0%
Tangible capital
(to adjusted total assets) 20,301,000 8.7% 3,490,215 >/= 1.5% 3,340,290 >/= 1.5%
</TABLE>
FLAG declared dividends of $.33 per share on common stock during 1996.
During 1995, FLAG repurchased 128,100 shares of common stock for
$1,633,272. The excess of the cost of shares acquired over the par value
resulted in a reduction of additional paid-in capital based on the per
share amounts of additional paid-in capital for all shares, with the
difference charged to retained earnings.
In December, 1993, the Board of Directors of the Savings Bank authorized a
2 for 1 stock split of the Savings Bank's common stock, distributable
January, 1994. As a result of the split, 1,006,250 shares were issued with
no change in the $1 par value.
36
<PAGE>
13. Income Taxes
FLAG and its subsidiaries file consolidated income tax returns on a
calendar-year basis. Income tax expense or benefit is allocated among the
affiliates based on a separate return basis. Prior to 1996, if certain
conditions were met as specified by the Internal Revenue Service, the
Savings Bank was allowed a special bad-debt deduction based on a percentage
of taxable income or specified experience formulas. The Savings Bank based
its bad debt deduction on the experience method in 1995 and used a
percentage of taxable income in 1994. For 1996 and future years, bad debt
deductions are based on actual losses. If the Savings Bank fails to qualify
as a Bank in future years, pre-1988 bad debt reserves amounting to
approximately $2,036,000 would be restored to taxable income ratably over a
six-year period.
Components of the consolidated provision (benefit) for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Federal
Current ...................... $ 620,845 $ 1,024,824 $ 905,658
Deferred ..................... (841,930) (101,270) (33,614)
-------- -------- -------
Total federal
provision (benefit) ....... (221,085) 923,554 872,044
-------- ------- -------
State
Current ...................... 54,171 139,228 114,527
Deferred ..................... (144,308) (17,871) (5,932)
-------- ------- ------
Total state
provision (benefit) ..... (90,137) 121,357 108,595
------- ------- -------
Total ..................... $ (311,222) $ 1,044,911 $ 980,639
=========== =========== ===========
The differences between FLAG's consolidated provision (benefit) for income
taxes and the amount computed by applying statutory federal income tax
rates to income before provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Provision (benefit) for
income taxes at
statutory rates .................. $ (166,208) $ 1,044,112 $ 934,487
Increase (decrease)
resulting from:
Nontaxable FHLB dividends ....... (46,734) (54,596) (38,137)
Effect of state taxes ........... (64,549) 80,096 69,468
Cash surrender value of
life insurance increase ........ (16,304) (17,000) 0
Other permanent differences ..... (17,427) (7,701) 14,821
------- ------ ------
Provision for income
tax expense (benefit) ....... $ (311,222) $ 1,044,911 $ 980,639
=========== =========== ===========
37
<PAGE>
The expected future tax consequences of temporary differences between the
financial statement carrying amounts and tax basis of assets and
liabilities which comprise the net deferred tax asset are summarized as
follows:
DECEMBER 31,
1996 1995
---- ----
Difference between financial statement and
tax basis of available-for-sale securities ... $ 181,675 $ 194,514
Net loan fees deferred for financial reporting
purposes ......................................... 82,959 109,210
Difference between financial statement and
tax basis depreciation and amortization .......... (180,036) (160,143)
Provision for loan losses not currently
recognized for tax purposes ...................... 1,690,755 593,228
Other, net ....................................... (63,915) (45,918)
----------- -----------
$ 1,711,438 $ 690,891
=========== ===========
Estimated income taxes refundable are summarized as follows:
DECEMBER 31,
1996 1995
Federal .............................................. $254,299 $ 69,227
State ................................................ 47,250 18,937
------ ------
Total........................................... $301,549 $ 88,164
======== ========
14. Commitments and Contingencies
At December 31, 1996, the Savings Bank had outstanding commitments to
originate loans, principally fixed rate, totaling approximately $9,932,000.
Terms of the loans range from 5 to 30 years and rates range from 6.00% to
10.75%. The Savings Bank also had issued approximately $7,146,000 of unused
lines of credit and letters of credit to customers and approximately
$945,000 of standby letters of credit.
The Savings Bank established a partially self-insured health care
plan, effective July 1, 1993, for the benefit of eligible employees
and their eligible dependents. Piedmont Associates, a division of
Group Resources, Inc. in Atlanta, is the third party administrator.
Claims in excess of $15,000 per person annually, but less than
$1,000,000, are covered by an insurance policy with Guarantee Mutual
Life Company. The Savings Bank is responsible for any claims less
than $15,000 per person annually.
15. Profit Sharing Plan
The Savings Bank has a profit sharing plan for which substantially all
employees are eligible. Contributions to the plan are made at the
discretion of the Board of Directors in an amount not to exceed 15% of
eligible compensation. The plan allows participants to direct up to 75% of
account balance and/or contributions to the plan be invested in stock of
the Savings Bank. The trustee of the plan is required to purchase the
Savings Bank's stock at fair value on the open market and the plan may not
acquire more than 25% of the issued and outstanding shares. Contributions
of $186,000, $182,000 and $150,000 were recorded for 1996, 1995 and 1994,
respectively.
38
<PAGE>
16. Pension Plan
The Savings Bank has a trusteed defined benefit pension plan which covers
substantially all employees. The Savings Bank's policy is to fund pension
cost as actuarially determined on an annual basis. Assets of the plan are
invested primarily in a common trust fund.
The following is a reconciliation of the funded status of the plan using
the latest actuarial information applicable for each plan year:
1996 1995 1994
---- ---- ----
Accumulated benefit obligation .... $ 872,174 $ 843,440 $ 614,293
=========== =========== ===========
Projected benefit obligation ...... $ 1,342,926 $ 1,394,731 $ 1,011,163
=========== =========== ===========
Plan assets at fair value ......... $ 1,192,941 $ 923,680 $ 825,830
=========== =========== ===========
Funded status ..................... $ (149,985) $ (471,051) $ (185,333)
Unrecognized net transaction
amount .......................... 17,888 20,021 22,154
Unrecognized prior service cost ... 151,530 161,588 (8,215)
Unrecognized net gain (loss) ...... (107,685) 202,427 147,795
----------- ----------- -----------
Accrued pension liability ...... $ (88,252) $ (87,015) $ (23,599)
=========== =========== ===========
The assumed rate of return on assets used was 8% for 1996, 1995, and 1994
and the assumed rate of compensation increase was approximately 5.5% for
1996, 1995, and 1994. Prior service costs are generally amortized over a
period of 30 years.
Net pension expense is summarized as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Service cost component ............ $ 71,238 $ 84,835 $ 70,674
Interest cost component ........... 95,648 98,476 70,719
Actual return on assets ........... (85,327) (68,476) (62,180)
Other funded amounts/credits ...... 28,493 21,401 14,359
------ ------ ------
Subtotal ....................... 110,052 136,236 93,572
Administrative expenses ........... 52,948 39,664 13,028
------ ------ ------
Net pension expense ............ $ 163,000 $ 175,900 $ 106,600
========= ========= =========
17. Employee Savings Thrift Plan and Trust
Effective January 1, 1987, the Savings Bank adopted a 401K plan for all
employees who meet the eligibility requirements. The plan provides a
matching contribution in direct relation to the voluntary salary reduction
elected by each participating employee. Employer contributions amounted to
approximately $47,600, $49,200 and $40,000, for 1996, 1995 and 1994,
respectively.
39
<PAGE>
18. Stock Options
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" has certain reporting and disclosure requirements
regarding stock options issued in fiscal years beginning after December 15,
1994. FLAG has no material stock options issued after that date that would
require disclosure.
The Company has an Employee Stock Incentive Plan under which the Committee
of the Board of Directors has the authority to grant stock options to
employees of the Company. The options granted shall be immediately vested
as of the grant date and the maximum term is ten years. No more than
201,250 shares may be issued under this Plan.
There were 120,207 employee stock options, issued prior to December 15,
1994, outstanding at January 1, 1996 with a weighted average exercise price
of $5.38. All 120,207 options were exercised during the year.
The Company also has a Directors Stock Incentive Plan. Under this Plan, no
more than 100,625 shares may be issued. The options granted shall be
immediately vested as of the date of grant and the maximum term is ten
years.
There were 40,000 Director stock options outstanding at January 1, 1996.
Each option can be exercised at a price of $9.50 and these options expire
in the year 2004. An additional 6,000 shares were granted during 1996. Each
option can be exercised at a price of $13.50 and these options expire in
the year 2006. No Director Stock Options were exercised during the year.
19. Flexible Compensation Plan
The Savings Bank established a flexible compensation plan, effective
February 1, 1993, to offer eligible employees a choice between cash and
certain non-taxable statutory fringe benefits. The plan is a
non-discriminatory "Cafeteria Plan" as defined by Internal Revenue Code
Section 125. As a part of the flexible compensation plan the Savings Bank
established a medical reimbursement plan, as defined by Internal Revenue
Code Section 105(h), for the benefit of eligible employees. With the
implementation of these plans, employees' payments for health care are on a
pre-tax basis.
20. Indexed Retirement Plan
The Savings Bank established an indexed retirement plan, effective February
3, 1995, to provide retirement benefits to Directors. The Savings Bank also
established a similar plan for the benefit of certain executive officers.
The index used by the plans is the earnings on life insurance policies
purchased on the Directors' and Officers' lives. The Savings Bank retains
the tax-free build-up of cash surrender value in the policies up to the
after tax opportunity costs for premiums paid on the policies. Any
remaining earnings from the policies are accrued to deferred compensation
liability accounts for the Director or Officer to be paid in ten annual
installments commencing thirty days following retirement.
40
<PAGE>
21. Loans to Related Parties
The Savings Bank makes loans to its directors, executive officers and their
associates on substantially the same terms as to others. Set forth below is
an analysis of loans to directors, executive officers and their associates
during the following periods:
Balance, December 31, 1994 ............................. $ 940,198
Additions .............................................. 128,105
Repayments ............................................. (148,495)
-----------
Balance, December 31, 1995 ............................. 919,808
Additions .............................................. 972,108
Repayments ............................................. (216,016)
-----------
Balance, December 31, 1996 ............................. $ 1,675,900
===========
22. Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Interest ................. $9,266,251 $9,828,527 $8,073,558
Income taxes ............. 1,016,855 1,204,398 887,417
Supplemental schedules of noncash investing and financing activities:
Unrealized losses on securities available-for-sale for the years ended
December 31, 1996, 1995 and 1994 are as follows:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Initial adoption of
SFAS No. 115 .............. $ 0 $ 0 $ (213,552)
Unrealized loss ............. 317,364 2,026,409 0
Increase (decrease) in
unrealized loss ........... (11,647) (899,488) 2,239,961
Decrease in unrealized
loss due to sales,
calls, and maturities ..... (9,299) (809,557) 0
----------- ----------- -----------
Total .................... $ 296,418 $ 317,364 $ 2,026,409
=========== =========== ===========
Non-cash transactions - During 1996, the Savings Bank's deferred income tax
asset increased $1,020,547 and decreased $1,047,478 during 1995.
41
<PAGE>
23. Operating Leases
The Savings Bank was a party to five operating leases for office space and
equipment during 1996. One lease has a 10 year renewal option, and another
lease has an annual renewal option for $1,500 after the initial lease
period expires.
The total rent expense for all operating leases amounted to $61,495,
$59,880 and $64,430 during 1996, 1995, and 1994, respectively.
24. Financial Instruments with Off-Balance-Sheet Risk
The Savings Bank 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. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the statements of financial condition.
The Savings Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments (see Note 14). The Savings Bank uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn up on, the total commitment amounts
do not necessarily represent future cash requirements. The bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount and
type of collateral obtained, if deemed necessary by the Savings Bank upon
extension of credit, varies and is based on management's credit evaluation
of the counterparty.
Standby letters of credit are conditional commitments issued by the Savings
Bank to guarantee the performance of a customer to a third party. Standby
letters of credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Savings Bank's
policy for obtaining collateral, and the nature of such collateral, is
essentially the same as that involved in making commitments to extend
credit.
42
<PAGE>
25. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is
practicable to estimate that value. The assumptions used in the estimation
of the fair value of the Savings Bank's financial instruments are detailed
below. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. The
use of discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. The following disclosures should not be considered a surrogate of
the liquidation value of the Savings Bank or its subsidiaries, but rather a
good-faith estimate of the increase or decrease in value of financial
instruments held by the Savings Bank since purchase, origination, or
issuance.
Cash and Cash Equivalents - For cash and due from banks, interest bearing
deposits and federal funds sold, the carrying amount is a reasonable
estimate of fair value.
Investment Securities and Mortgage-Backed Securities - Fair values for
investment securities and mortgage-backed securities are based on quoted
market prices.
Investment in FHLB Stock - The carrying value of FHLB stock approximates
fair value.
Loans Receivable - The fair value of fixed rate loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings. For variable
rate loans, the carrying amount is a reasonable estimate of fair value.
Mortgage Servicing Rights - Fair value of mortgage servicing rights is
determined by estimating the present value of the future net servicing
income, on a disaggregated basis, using anticipated prepayment assumptions.
Deposits, Advances from Borrowers and Advances Payable to Secondary Market
- The fair value of demand deposits, savings accounts, NOW accounts,
certain money market deposits, advances from borrowers and advances payable
to secondary market is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
Federal Funds Purchased - For federal funds purchased, the carrying amount
is a reasonable estimate of fair value.
Advances from FHLB - The fair value of the FHLB fixed rate borrowings are
estimated using discounted cash flows, based on the current incremental
borrowing rates for similar types of borrowing arrangements. For variable
rate borrowings, the carrying amount is a reasonable estimate of fair
value.
Commitments to Extend Credit and Standby Letters of Credit - Because
commitments to extend credit and standby letters of credit are made using
variable rates or for short terms, the contract value is a reasonable
estimate of fair value.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Savings Bank's entire
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Savings Bank's financial instruments, fair
value estimates are based on many judgments. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates and it is reasonably possible that
these estimates may change materially in the near term.
43
<PAGE>
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include deferred
income taxes and fixed assets. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
the estimates.
The carrying amount and estimated fair values of the Savings Bank's
financial instruments at December 31, 1996 are as follows:
1996
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Assets:
Cash and cash equivalents ................. $ 6,084,923 $ 6,084,923
Investment securities ..................... 7,057,494 7,057,494
Mortgage-backed securities ................ 37,458,698 37,357,724
Investment in FHLB stock .................. 1,895,900 1,895,900
Loans receivable - net .................... 152,644,436 154,718,806
Mortgage servicing rights ................. 1,703,710 1,703,710
Liabilities:
Deposits .................................. 177,999,415 178,521,623
Federal funds purchased ................... 2,210,000 2,210,000
Advances from Federal Home Loan Bank ...... 17,370,833 17,370,833
Advances from borrowers and advances
payable to secondary market ............. 2,692,348 2,692,348
Unrecognized financial instruments:
Commitments to extend credit .............. 17,078,000 17,078,000
Standby letters of credit ................. 945,000 945,000
44
<PAGE>
The carrying amount and estimated fair values of the Savings Bank's
financial instruments at December 31, 1995 are as follows:
1995
CARRYING ESTIMATED
AMOUNT FAIR VALUE
Assets:
Cash and cash equivalents ................. $ 7,850,254 $ 7,850,254
Investment securities ..................... 15,555,238 15,555,238
Mortgage-backed securities ................ 44,105,262 43,980,419
Investment in FHLB stock .................. 1,185,900 1,895,900
Loans receivable - net .................... 147,402,036 150,533,181
Mortgage servicing rights ................. 1,455,983 1,455,983
Liabilities:
Deposits .................................. 177,848,121 178,820,220
Advances from Federal Home Loan Bank ...... 29,504,167 29,557,382
Advances from borrowers and advances
payable to secondary market ............. 2,759,982 2,759,982
Unrecognized financial instruments:
Commitments to extend credit .............. 19,239,000 19,239,000
Standby letters of credit ................. 795,000 795,000
26. Investment in Subsidiary
The Savings Bank's wholly-owned subsidiary, Piedmont Mortgage Service, Inc.
is engaged in appraisal services as Piedmont Appraisal Company. During
1995, the subsidiary also began offering brokerage services to individuals
as Piedmont Investment Services. The financial statements for Piedmont
Mortgage Service, Inc. are presented below:
CONDENSED STATEMENTS OF CONDITION
DECEMBER 31,
1996 1995
---- ----
ASSETS
Cash on deposit with parent ..................... $ 218,199 $ 198,760
Accounts receivable ............................. 51,009 19,528
Deferred income taxes ........................... 0 16,607
Other assets .................................... 0 1,592
--------- ---------
Total assets ................................. $ 269,208 $ 236,487
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES ..................................... $ 82,759 $ 100,735
--------- ---------
STOCKHOLDER'S EQUITY
Capital stock ................................. 175,000 175,000
Retained earnings (accumulated deficit) ....... 11,449 (39,248)
--------- ---------
Total stockholder's equity ................. 186,449 135,752
--------- ---------
Total liabilities and stockholder's
equity .............................. $ 269,208 $ 236,487
========= =========
45
<PAGE>
CONDENSED STATEMENTS OF INCOME
YEAR ENDED
DECEMBER 31,
1996 1995 1994
---- ---- ----
Interest income ...................... $ 1,971 $ 1,806 $ 1,591
Brokerage commissions ................ 78,536 52,216 0
Appraisal fee income ................. 221,775 181,403 163,400
Operating expenses ................... (220,512) (204,528) (135,129)
--------- --------- ---------
Net income before income tax
expense .......................... 81,770 30,897 29,862
Income tax expense
(31,073) (11,741) (11,348)
--------- --------- ---------
Net income ......................... $ 50,697 $ 19,156 $ 18,514
========= ========= =========
27. Holding Company
The Savings Bank became a wholly owned subsidiary of FLAG effective March
1, 1994. Each share of the Savings Bank's common stock outstanding was
converted into one share of FLAG's common stock.
The financial statements of all prior years have been restated for the
effect of the formation of the holding company. Condensed financial
statements of the subsidiary, the Savings Bank, are presented below:
CONDENSED STATEMENTS OF CONDITION
DECEMBER 31,
1996 1995
---- ----
Total assets ............................. $221,733,163 $231,944,987
============ ============
Total liabilities ........................ $201,822,167 $211,450,315
Total stockholders' equity ............... 19,910,996 20,494,672
------------ ------------
Total liabilities and stock-
holders' equity ........................ $221,733,163 $231,944,987
============ ============
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Net interest income before provision
for loan losses .................. $ 8,172,082 $ 7,282,756 $ 6,836,718
Provision for loan losses .......... (3,484,529) (630,000) (440,000)
Other income ....................... 2,992,798 2,459,034 1,879,726
Operating expenses ................. (8,024,388) (5,908,048) (5,511,383)
Benefit (provision) for income taxes 260,319 (1,063,411) (980,639)
----------- ----------- -----------
Net income (loss) ......... $ (83,718) $ 2,140,331 $ 1,784,422
=========== =========== ===========
46
<PAGE>
FLAG Financial Corporation & First Federal
Savings Bank of LaGrange, Board of Directors
[GRAPHIC OMITTED]
(Picture of Board of Directors)
Left to Right: Dr. A. Glenn Bailey, Dr. Steven P. Teaver, Jacob B. Jarrell,
III, Robert W. Walters, John S. Holle, William F. Holle, Jr., H. Speer
Burdette, III, Gordon M. Smith, Ellison C. Rudd, John W. Stewart, Jr., Fred
A. Durand, III and Kelly R. Linch.
Dr. A. Glenn Bailey
Physician
Clark-Holder Clinic
H. Speer Burdette, III
Vice President, Treasurer
and Managing Officer
J.K. Boatwright & Company, P.C.
Accounting Firm
Fred A. Durand, III
President and
Chief Executive Officer
Durand-Wayland, Inc.
Manufacturer of Produce
Sorting and Spray Equipment
John S. Holle
Chairman of the board,
President and
Chief Executive Officer
FLAG Financial Corporation
First Federal Savings Bank
of LaGrange
William F. Holle, Jr.
Advisory Director and
Retired President
First Federal Savings Bank
of LaGrange
Jacob B. Jarrell, III
Advisory Director and
Retired Vice President
FLAG Financial Corporation
First Federal Savings Bank
of LaGrange
Kelly R. Linch
Owner
Linch's, Inc.
Retail Appliances and
Electronics
Ellison C. Rudd
Executive Vice President, Treasurer and Chief Financial Officer
FLAG Financial Corporation
First Federal Savings Bank of LaGrange
Gordon M. Smith
Pharmacist
Eckerd Drugs
John W. Stewart, Jr.
President
Stewart Wholesale
Hardware Company
Dr. Steven P. Teaver
Dentist
Robert W. Walters
Retired Vice President
The Mill Store, Inc.
Retail and Contract Floor
Coverings
47
<PAGE>
Corporate Information
FLAGFinancial CorporationFirst Federal Savings Bank
of LaGrange
President
John S. Holle
Executive Vice President
Ellison C. Rudd
Senior Vice Presidents
Raymond C. Smith, Jr.
Lee W. Washam
Mary E.Winks
Annette F. Woodyard
First Federal Savings Bank of LaGrange
Vice Presidents
Debbie S. Anderson
Gail A. Costley
C. Kevan Kutter
Michael S. Moyer
Keith M. Parmer
Charles E. Sweat
Michael T Trimeloni
Ronald M. Warner
Assistant Vice Presidents
Everlene W. Clay
Gregory K. Davis
R. Craig DeLoach
Linda A. Evans
Lynn L. Pauley
Yvette K. Pritchett
Cathryne J. Slaughter
Susan B. Whatley
Banking Officers
Melissa M. Bridwell
Ricki J. Matthews
Bonnie M. Weaver
Piedmont Mortgage Service, Inc.
R. Chuck Freeman
Vice President
Piedmont Appraisal Service
Glenn H. Ware
Vice President
Piedmont Investment Service
First Federal Savings Bank of LaGrange
Main Office
101 North Greenwood Street
LaGrange, Georgia 30240
Marketplace Office
908 Hogansville Road
LaGrange, Georgia 30240
Lee's Crossing Office
1795 West Point Road
LaGrange, Georgia 30240
Vernon Street Drive-Up Office
306 Vernon Street
LaGrange, Georgia 30240
LaFayette Parkway Office
1417 LaFayette Parkway
LaGrange, Georgia 30240
Piedmont Mortgage Service
5820 Veterans Parkway
Suite 104
Columbus, Georgia 31904
Executive Office Suites V
1710 Catherine Court
Suite F
Auburn, Alabama 36830
Piedmont Appraisal Service
300 Broome Street
LaGrange, Georgia 30240
Piedmont Investment Service
101 North Greenwood Street
LaGrange, Georgia 30240
48
<PAGE>
Market Makers
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Newport Tower
Jersey City, New Jersey 07310
Interstate/Johnson Lane Corporation
121 West Trade Street
Interstate Tower-12th Floor
Charlotte, North Carolina 28789
Morgan, Keegan & Company, Inc.
Morgan Keegan Tower
Fifth Front Street, 17th Floor
Memphis, Tennessee 38103
The Robinson Humphrey Company, Inc.
3333 Peachtree Road, N.E.
11th Floor
Atlanta, Georgia 30326
Sterne, Agee & Leach, Inc.
950 East Paces Ferry Road
Suite 1580
Atlanta, Georgia 30326
Trident Securities, Inc.
1275 Peachtree Street, N.E.
Suite 460
Atlanta, Georgia 30309
General Counsel
John W. Wyatt
16 North LaFayette Square
LaGrange, Georgia 30240
Special Counsel
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
Independent Auditors
Robinson, Grimes & Company, P.C.
5637 Whitesville Road
Columbus, GA 31906
Transfer Agent
Reliance Trust Company
950 East Paces Ferry Road
Suite 2840
Atlanta, GA 30326-1142
Annual Meeting
The Annual Meeting of Shareholder of FLAG Financial Corporation will be held on
Wednesday, April 16, 1997 at 2:00 p.m. at the Main Office of the Bank, 101 North
Greenwood Street, LaGrange, Georgia 30240
Investor Relations
Shareholders, analysts, investors, the news media, and others desiring a copy of
the Company's 1996 Annual Report or 1996 Annual Report on Form 10-K of FLAG
Financial Corporation as filed with the Securities and Exchange Commission or
general information about FLAG Financial Corporation may obtain such information
with charge by contacting:
FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5000
Dividend Reinvestment Plan
FLAG Financial Corporation offers a Dividend Reinvestment Plan for automatic
reinvestment of dividends in the Common Stock of the Company. For more
information concerning this convenient and economical way to purchase additional
Common Stock and to receive an authorization form, contact:
FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5000
Stock Prices and Dividends
The Company's Common Stock is traded and listed on the Nasdaq National Market
under the symbol "FLAG". Trading information regarding the Common Stock appears
in THE WALL STREET JOURNAL under the abbreviation "FLAG Fnl" and THE ATLANTA
JOURNAL and CONSTITUTION under the abbreviation :FLAG Fincl". As of February 28,
1997, FLAG Financial Corporation had 2,036,990 shares of Common Stock
outstanding. There were approximately 562 holders of record of the Company's
Common Stock as of February 28, 1997.
The following table sets forth the high and low closing sales prices of the
Company's Common Stock, as reported by Nasdaq, for each quarter for the past two
fiscal years and the cash dividends per share of Common Stock paid by the
Company during such fiscal quarters.
Cash
Dividends
Quarter Ended High Low Per Share
- ------------- ---- --- ---------
March 31, 1995 $ 10.25 $ 8.25 $ .075
June 30, 1995 $ 11.75 $ 10.00 $ .075
September 30, 1995 $ 13.50 $ 11.75 $ .075
December 31, 1995 $ 15.25 $ 12.50 $ .075
March 31, 1996 $ 14.50 $ 12.83 $ .075
June 30, 1996 $ 13.50 $ 12.00 $ .085
September 30, 1996 $ 12.75 $ 9.50 $ .085
December 31, 1996 $ 11.75 $ 10.75 $ .085
