UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number 0-24532
FLAG FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-2094179
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(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 3007
LaGrange, Georgia 30241
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(Address of principal executive (Zip Code)
offices)
(706) 845-5000
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(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Common stock, par value $1 per share: 5,180,932, shares
Outstanding as of October 31, 1998
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Table of Contents
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997.............................................. 1
Consolidated Statements of Earnings for the Nine Months and
Quarter Ended September 30, 1998 and 1997...................... 2
Consolidated Statements of Comprehensive Income for the
Nine Months and Quarter Ended September 30, 1998 and 1997...... 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997.............................. 4
Notes to Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations...................................... 7
PART II Other Information
Item 1. Legal Proceedings................................................. 11
Item 2. Changes in Securities............................................. 11
Item 3. Defaults Upon Senior Securities................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
Item 5. Other Information................................................. 11
Item 6. Exhibits and Reports on Form 8-K.................................. 11
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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September 30, December 31,
1998 1997
-----------------------------
ASSETS (UNAUDITED)
Cash and due from banks.......................... $14,629,422 $13,350,755
Federal funds sold............................... 10,510,000 5,900,000
-----------------------------
Total cash and cash equivalents.............. 25,139,422 19,250,755
-----------------------------
Interest-bearing deposits........................ 13,067,997 3,168,353
Investment securities held-to-maturity........... 1,551,485 2,957,971
Investment securities available-for-sale......... 64,276,913 71,063,805
Other investments................................ 5,748,503 5,358,063
Mortgage loans held for sale..................... 5,118,696 3,481,678
Loans, net....................................... 310,953,360 279,285,679
Premises and equipment, net...................... 12,308,657 11,348,843
Mortgage servicing rights ....................... 1,546,700 1,174,292
Accrued interest receivable...................... 6,180,169 4,713,021
Cash surrender value of life insurance........... 4,033,859 3,864,612
Other assets..................................... 3,721,747 5,618,002
-----------------------------
Total assets...................... $453,647,508 $411,285,074
=============================
LIABILITIES
Non interest-bearing deposits.................... $29,546,528 $32,245,871
Interest-bearing deposits........................ 321,726,342 292,606,172
Federal funds purchased.......................... 260,000 170,000
Other borrowed funds............................. 2,001,334 -
Advances from Federal Home Loan Bank............. 51,875,000 43,637,494
Accrued interest payable......................... 1,759,446 1,312,319
Other liabilities................................ 6,785,467 4,542,310
-----------------------------
Total liabilities................ 413,954,117 374,514,166
-----------------------------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized, none
issued and outstanding) - -
Common stock ($1 par value, 20,000,000 shares
authorized, 5,180,932 and 5,171,432 shares
issued and outstanding...................... 5,180,932 5,171,432
Additional paid-in capital....................... 8,856,865 8,794,541
Retained earnings................................ 24,123,204 22,813,421
Unrealized gain (loss) on investment securities
available-for-sale, net of tax............. 1,532,390 (8,486)
-----------------------------
Total stockholders' equity..... 39,693,391 36,770,908
-----------------------------
Total liabilities and
stockholders' equity......... $453,647,508 $411,285,074
=============================
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------------------------------------------------
Interest Income (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and fees on loans..................... $7,672,819 $6,592,196 $22,710,074 $18,819,936
Interest on securities......................... 1,058,047 1,169,569 3,570,383 3,187,353
Interest on Federal funds sold................. 221,252 64,192 243,990 186,844
Interest on interest-bearing deposits ......... 75,699 25,630 177,217 106,830
------------------------- ------------------------
Total interest income.................... 9,027,817 7,851,587 26,701,664 22,300,963
------------------------- ------------------------
Interest Expense
Interest on deposits........................... 3,712,398 3,410,259 10,909,549 9,697,263
Interest on borrowings......................... 865,465 400,215 2,346,327 878,515
------------------------- ------------------------
Total interest expense................... 4,577,863 3,810,474 13,255,876 10,575,778
------------------------- ------------------------
Net interest income before...............
provision for loan losses............ 4,449,954 4,041,113 13,445,788 11,725,185
Provision for Loan Losses........................... 222,000 184,000 666,000 591,000
------------------------- ------------------------
Net interest income after
provision for loan losses.............. 4,227,954 3,857,113 12,779,788 11,134,185
------------------------- ------------------------
Other Income
Fees and service charges........................ 1,078,051 904,917 2,903,886 2,706,455
Gain on sale of investment securities........... 73,104 64,759 221,146 169,658
Gain on sale of loans........................... 149,138 326,664 1,048,893 743,897
Gain (loss) on sale of real estate, net......... 350 7,314 (24,568) (28,703)
Other income.................................... 232,223 322,868 1,101,347 597,022
------------------------- ------------------------
Total other income........................ 1,532,866 1,626,522 5,250,704 4,188,329
------------------------- ------------------------
Other Expenses
Salaries and employee benefits................. 2,695,712 1,446,668 7,050,429 4,968,019
Occupancy ..................................... 910,144 890,644 2,458,048 2,123,550
Other operating................................ 2,242,548 1,681,572 5,565,427 3,868,548
------------------------- ------------------------
Total other expenses..................... 5,848,404 4,018,884 15,073,904 10,960,117
------------------------- ------------------------
Earnings (loss) before provision for
income taxes.......................... (87,584) 1,464,751 2,956,588 4,362,397
Provision for income taxes..................... (140,915) 444,637 788,077 1,394,501
------------------------- ------------------------
Net earnings ........................... $ 53,331 $1,020,114 $2,168,511 $2,967,896
========================= ========================
Basic earnings per share....................... $0.01 $0.20 $0.42 $0.57
Diluted earnings per share..................... $0.01 $0.20 $0.42 $0.57
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-----------------------------------------------
<S> <C> <C> <C> <C>
Net earnings............................................ $ 53,331 1,020,114 2,168,511 2,967,896
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available-for-sale:
Unrealized gains (losses) arising during
the period, net of tax of $810,818,($10,057),
$944,408, and $62,260, respectively........... 1,322,913 (16,409) 1,540,876 101,582
Less: Reclassification adjustment for gains
included in net earnings, net of tax of
$27,780, $24,608, $84,035, and $64,470
respectively............................ (45,324) (40,151) (137,111) (105,188)
-----------------------------------------------
Other comprehensive income............................. 1,277,589 (56,560) 1,403,765 (3,606)
-----------------------------------------------
Comprehensive income................................... $1,330,920 963,554 3,572,276 2,964,290
===============================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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<TABLE>
<CAPTION>
September 30,
1998 1997
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings ............................................... $ 2,168,511 $ 2,967,896
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion............ 1,584,088 1,190,273
Provision for loan losses .......................... 666,000 591,000
Gain on sale of investment securities
available-for-sale ............................. (221,146) (169,658)
Gain on sales of loans ............................ (1,048,893) (743,897)
Loss on other real estate, net ................... 24,568 28,703
Change in:
Mortgage loans held for sale ................ (588,125) (1,735,077)
Other ...................................... 3,635,008 2,623,985
------------------------------
Net cash provided by operating activities 6,220,011 4,753,225
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits ................... (9,899,644) (4,544,749)
Proceeds from sales and maturities of investment securities
available-for-sale ..................................... 47,582,932 53,345,716
Proceeds from maturities of investment securities
held-to-maturity ...................................... 1,370,966 680,214
Proceeds from sale of other investments..................... 338,260 643,100
Purchases of other investments ............................. (711,200) (992,395)
Purchases of investment securities available-for-sale ..... (38,239,489) (57,565,138)
Net change in loans ........................................ (32,333,681) (28,718,283)
Net increases of premises and equipment .................... (2,231,670) (2,901,316)
Purchases of cash surrender value life insurance ........... (169,247) (185,816)
--------------------------------
Net cash used in investing activities ... (34,292,773) (40,238,667)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits ..................................... 26,420,827 18,513,804
Increase (decrease) in federal funds purchased ............. 90,000 (50,000)
Proceeds from FHLB advances ............................... 52,100,000 75,013,881
Payments of FHLB advances ................................. (43,862,494) (60,526,384)
Proceeds from exercise of stock options..................... 72,938 -
Cash paid for fractional shares of acquired entity.......... (1,114) -
Cash dividends paid ....................................... (858,728) (497,231)
--------------------------------
Net cash provided by financing activities.. 33,961,429 32,454,070
--------------------------------
Net change in cash and cash equivalents ... 5,888,667 (3,031,372)
Cash and cash equivalents at beginning of period ........... 19,250,755 14,107,593
--------------------------------
Cash and cash equivalents at end of period .................. $ 25,139,422 $ 11,076,221
================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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The accompanying consolidated financial statements have not been audited. The
results of operations are not necessarily indicative of the results of
operations for the full year or any other interim periods. The accounting
principles followed by FLAG Financial Corporation ("FLAG") and its bank
subsidiaries and the methods of applying these principles conform with generally
accepted accounting principles and general practices within the banking
industry. Certain principles, which significantly affect the determination of
financial position, results of operations, and cash flows are summarized below
and in FLAG's annual report on Form 10-K/A for the year ended December 31, 1997.
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of FLAG and its
wholly-owned subsidiaries: First Federal Savings Bank of LaGrange ("LaGrange"),
Citizens Bank ("Vienna"), and Bank of Milan ("Milan"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain items in prior period's financial statements have been reclassified to
conform to the current financial statement presentation.
The consolidated financial information furnished herein represents all
adjustments that are, in the opinion of management, necessary to present a fair
statement of the results of operations, and financial position for the periods
covered herein and are normal and recurring in nature. For further information,
refer to the consolidated financial statements and footnotes included in FLAG's
annual report on Form 10-K/A for the year ended December 31, 1997.
Note 2. Business Combinations
On March 30, 1998, FLAG completed its merger with Middle Georgia Bankshares,
Inc., the parent company of Vienna. Effective May 8, 1998, FLAG completed its
merger with Three Rivers Bancshares, Inc., parent company of Milan. The
acquisitions have been accounted for as poolings of interests, and all prior
period financial statements of FLAG have been restated to reflect the mergers as
if they had occurred at the beginning of the earliest period presented.
On May 14, 1998, FLAG announced the execution of a Letter of Intent with The
Brown Bank in Metter, Georgia. The operations will be combined by means of a
tax-free merger. The Brown Bank operates three full service banking offices in
Metter, Cobbtown, and Reidsville, Georgia. The Letter of Intent provides, among
other things, for the merger of The Brown Bank with and into FLAG and the
exchange of each share of The Brown Bank's common stock for 1.5 shares of FLAG
common stock.
On May 28, 1998, FLAG announced the execution of a Letter of Intent with Heart
of Georgia Bancshares, Inc. ("Heart of Georgia") to combine their two operations
by means of a tax-free merger. The Letter of Intent provides, among other
things, for the merger of Heart of Georgia with and into FLAG and the exchange
of each share of Heart of Georgia common stock for 2.025
5
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
shares of FLAG common stock. On November 4, 1998, FLAG announced that
negotiations with Heart of Georgia had ceased and that the companies would not
merge.
On June 1, 1998, FLAG announced the execution of a Letter of Intent with Empire
Banking Corp., Inc. ("Empire") in Homerville, Georgia. The operations will be
combined by means of a tax free merger. The Letter of Intent provides, among
other things, for the merger of Empire with and into FLAG and the exchange of
each share of Empire common stock for 42.5 shares of FLAG common stock.
These two pending acquisitions are expected to be accounted for as poolings of
interests and are projected to be consummated during the fourth quarter of 1998,
pending execution of definitive agreements, final due diligence, regulatory
approval, and shareholder approval.
Note 4. Earnings per share
Net earnings per common share is based on the weighted average number of common
shares outstanding during each period. The calculation of basic and diluted
earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Net earnings........................ 53,331 1,020,114 2,168,511 2,967,896
Weighted average common shares
outstanding..................... 5,176,626 5,171,511 5,173,765 5,171,511
Per share amount.................... 0.01 0.20 0.42 0.57
Diluted earnings per share:
Net earnings........................ 53,331 1,020,114 2,168,511 2,967,896
Effect of dilutive securities -
Stock options.................... 41,265 21,684 41,265 21,684
Diluted earnings per share.......... 0.01 0.20 0.42 0.57
</TABLE>
Note 5. Stock Split
On May 18, 1998, FLAG announced the declaration of a 3-for-2 stock split. The
split was payable on June 3, 1998 to shareholders of record on May 22, 1998. All
per share amounts have been restated to reflect this stock split as if it had
occurred at the beginning of the earliest period presented.
6
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
For the nine months ended September 30, 1998 and 1997
Overview
Net earnings for the nine months ended September 30, 1998, decreased $799,000
compared to the first nine months of 1997. Net earnings for the nine months
ended September 30, 1998 included one-time charges totaling approximately
$894,000, net of tax. Net earnings per common share, both basic and fully
diluted, decreased $0.15 per share for the first nine months of 1998. Net
interest income increased 15 percent for the nine months ended September 30,
1998, over the same period of 1997 to approximately $13 million. Non-interest
income and expense increased 25 percent and 38 percent, respectively, for the
nine months ended September 30, 1998 compared to the same period in 1997.
Net Interest Income
Net interest income for the nine months ended September 30, 1998 increased
$1,721,000 compared to the same period in 1997. This increase resulted from a
$4,401,000, or 20 percent increase in interest income and a $2,680,000 or 25
percent increase in interest expense. The increase in interest income resulted
from an increase in average earning assets of $66 million. The increase in
interest expense was due to a $37 million increase in average interest-bearing
liabilities.
Non-Interest Income and Expense
Non-interest income for the first nine months of 1998 increased $1,062,000 or 25
percent compared to the same period in 1997. Other income includes a loan fee of
approximately $530,000 that FLAG received for its assistance in originating,
finding participants and selling an R&D loan in the first quarter of 1998.
Another contributing factor to the increase in 1998 non-interest income was
gains related to sales of currently originated residential mortgage loans. These
gains increased $305,000 in 1998 due to an increased number of residential loan
refinancings.
Non-interest expense increased $4,114,000 or 38 percent in the first nine months
of 1998 compared to the same period in 1997. Salaries and employee benefits
increased $2,082,000, a 42 percent increase over the first nine months of 1997.
The increase was primarily due to additional staffing requirements. Many of the
additional positions were sales related, that management believes in the
long-term will increase revenues. Management also believes consolidation
efficiencies will be realized from its recent completed and pending mergers that
will reduce the need for some personnel. Other operating expenses increased
$1,697,000 or 44 percent during 1998 compared to the first nine months in 1997.
Approximately $637,000 of this increase is due to additional legal and
professional fees related to FLAG's recent mergers. FLAG also incurred one-time
expenses relating to its data processing and communications conversion of
approximately $640,000. These one-time expenses total $1,277,000 or $894,000,
net of tax.
7
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Income Taxes
Income tax expense for the first nine months of 1998 was $788,000 in 1998
compared to $1,395,000 in 1997. The effective tax rates for the first nine
months ended September 30, 1998 and 1997 were 27 percent and 32 percent,
respectively. FLAG's effective tax rate is lower than the statutory Federal tax
rate of 34 percent primarily due to interest income on tax-exempt securities.
Provision and Allowance for Possible Loan Losses
The adequacy of the allowance for loan and losses is determined through
management's informed judgment concerning the amount of risk inherent in FLAG's
loan portfolios. This judgment is based on such factors as the change in levels
of non-performing and past due loans, historical loan loss experience,
borrowers' financial condition, concentration of loans to specific borrowers and
industries, estimated values of underlying collateral, and current and
prospective economic conditions. The allowance for loan losses at September 30,
1998, was $3.9 million compared to $3.8 million at December 31, 1997. The
allowance for loan losses at September 30, 1998, was 1.25 percent of outstanding
loans compared to 1.35 percent at December 31, 1997. It is management's belief
that the allowance for loan losses is adequate to absorb possible loss in the
loan portfolio.
Non-Performing Assets and Past Due Loans
Non-performing assets, comprised of real estate owned, non-accrual loans and
loans for which payments are more than 90 days past due, totaled $7.3 million at
September 30, 1998, compared to $5.6 million at December 31, 1997.
Non-performing assets as a percentage of total loans and real estate owned at
September 30, 1998, and December 31, 1997, were 2.35 percent and 1.97 percent,
respectively.
FLAG has a loan review function that continually monitors selected accruing
loans for which general economic conditions or changes within a particular
industry could cause the borrowers financial difficulties. The loan review
function also identifies loans with high degrees of credit or other risks. The
focus of loan review as well as FLAG management is to maintain a low level of
non-performing assets and return current non-performing assets to earning
status.
Management is unaware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on FLAG's
liquidity, capital resources or operations.
8
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Financial Condition
Overview
Total assets were $453.6 million at September 30, 1998, an increase of $42.4
million or 10.3 percent from December 31, 1997.
Assets and Funding
At September 30, 1998, earning assets totaled $411.2 million, an increase of
more than $40.0 million from December 31, 1997. The mix of interest earning
assets remained relatively the same in the first nine months of 1998. Loans
increased from 75 percent of earning assets at December 31, 1997, to 76 percent
of earning assets at September 30, 1998. Investment securities decreased to 17
percent of earning assets at September 30, 1998 from 21 percent at December 31,
1997.
At September 30, 1998, interest-bearing deposits increased $29.1 million
compared to December 31, 1997. Noninterest-bearing deposits decreased $2.7
million in the first nine months of 1998 and totaled $29.5 million at September
30, 1998. Federal Home Loan Bank advances increased $8.2 million in the first
nine months of 1998 and totaled $51.9 million at September 30, 1998. At
September 30, 1998, deposits represented 86 percent of FLAG's interest-bearing
liabilities and Federal Home Bank advances represented 14 percent.
Liquidity and Capital Resources
Net cash provided by operating activities totaled $6,220,000 for the nine months
ended September 30, 1998. Net cash used in investing activities totaling
$34,293,000 consisted of $49,292,000 of proceeds from sale and maturities of
investment securities, offset by cash flows of $38,239,000 in investment
securities purchases, a $9,900,000 increase in interest-bearing deposits, a
$32,334,000 net increase in loans outstanding, additions to bank premises and
equipment of $2,232,000, and a net $169,000 increase in cash surrender value of
life insurance. Net cash provided by financing activities consisted largely of
$26,421,000 increases in deposits and a net increase in Federal Home Loan Bank
advances of $8,238,000.
Total stockholders' equity at September 30, 1998, was 8.75 percent of total
assets compared to 8.94 percent at December 31, 1997. The slight decrease is
attributed to a $42.4 million increase in total assets since December 31, 1997.
9
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
At September 30, 1998, FLAG and its banks were in compliance with various
regulatory capital requirements administered by Federal and state banking
agencies. The following is a table representing FLAG's consolidated Tier-1,
tangible capital, and risk-based capital.
September 30, 1998
- --------------------------------------------------------------------------------
Actual Required Excess
Amount % Amount % Amount %
- --------------------------------------------------------------------------------
Tier 1 capital $36,013 11.07% $13,012 4.00% $23,001 7.07%
Tier 2 capital 40,079 12.32% 4,880 1.50% $35,200 10.82%
Leverage ratio 36,013 8.28% 34,780 8.00% $ 1,223 0.28%
Year 2000
FLAG Financial Corporation and each subsidiary have appointed a Year 2000
committee comprised of outside directors and key senior executives. The
committees meet on a regular basis to provide direction and monitor the progress
relating to each subsidiary's year 2000 efforts.
FLAG and the subsidiaries' managers and supervisors have identified: (i)
hardware and software used in their areas of responsibility impacted by the Year
2000 issue; and (ii) vendors upon whom FLAG and its subsidiaries rely to provide
financial information or services which may be impacted by the Year 2000 issue.
FLAG and its subsidiaries have conducted a risk assessment for each product, and
have categorized the risks associated with each product as "catastrophic,"
"serious," or "minimal." FLAG and its subsidiaries' overall risk is considered
to be serious to minimal. A separate plan and action date has been established
for hardware/software considered to be critical to FLAG and its subsidiaries'
ongoing operations. FLAG and its subsidiaries have developed a testing plan for
the hardware/software and electronic components affected by the year 2000. The
next steps in the process will be to test the hardware/software as it becomes
Year 2000 compliant and to document these tests accordingly.
FLAG's two largest subsidiaries converted their core applications to the Phoenix
International, Ltd., Inc. ("Phoenix") application system in August 1998. The
core applications include the general ledger, loans, deposits and
receivables/payables. Phoenix has represented that their application system is
Year 2000 compliant. FLAG has developed a testing plan for the Phoenix system
and will conduct appropriate testing in November 1998. The other subsidiaries
are scheduled to convert to the Phoenix system in January 1999.
Payroll processing for FLAG and its subsidiaries is performed by an outside
vendor who has represented to FLAG that it is Year 2000 compliant.
10
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
FLAG has incurred approximately $976,000 in converting to the Phoenix system at
FLAG and its two largest subsidiaries. FLAG expects to spend an additional
$130,000 in converting its other subsidiaries. FLAG would have upgraded its core
application systems if the Year 2000 had not been an issue. FLAG has also spent
an additional $807,000 in upgrading most of the personal computers at FLAG and
its two largest subsidiaries. FLAG expects to spend an additional $50,000 in
upgrading the personal computers at its other subsidiaries. It was necessary to
upgrade the personal computers so that they would be compatible with the Phoenix
system. To date, FLAG has spent $27,000 of an estimated $235,000 to address Year
2000 concerns.
Each subsidiary is monitoring its larger loan customer compliance issues in
becoming Year 2000 compliant. For those customers unable and/or unwilling to
become Year 2000 compliant, FLAG Credit Administration will evaluate options to
minimize FLAG's risks associated with continuing to do business with these
customers on a case by case basis.
As is the case with most financial institutions, FLAG is highly automated and
many of its systems are date sensitive.
For each mission critical process, available options have been identified with
the most reasonable contingency strategy being chosen. A "drop dead" date has
been established for each mission critical process and is monitored for
potential implementation of the contingency plan. The Year 2000 Committee is
responsible for the implementation of the contingency plan. Appropriate staff
and resources will be available during key dates within this project, such as
December 30, 1999 through January 3, 2000.
PART II.
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K
11
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
On September 30, 1998, FLAG filed a Form 8-K announcing the signing of a Letter
of Intent to acquire the Blackshear branch office from First Georgia Bank of
Brunswick, Georgia.
On August 19, 1998, FLAG filed a Form 8-K announcing the execution of an
Agreement and Plan of Merger with Heart of Georgia Bancshares, Inc., pursuant to
which Heart of Georgia Bancshares, Inc. agreed to merge with and into the
Registrant.
On July 24, 1998, FLAG filed a Form 8-K announcing the execution of an Agreement
and Plan of Merger with The Brown Bank, pursuant to which The Brown Bank agreed
to merge with and into Citizens Bank, a wholly-owned subsidiary of the
Registrant.
On July 30, 1998, FLAG filed a Form 8-K announcing the execution of an Agreement
and Plan of Merger with Empire Bank Corp., pursuant to which Empire Bank Corp.
agreed to merge with and into the Registrant.
Exhibit 27 - Financial Data Schedule (for SEC use only)
12
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAG Financial Corporation
By: /s/Patti S. Davis
Patti S. Davis
(Chief Financial Officer)
Date: November 13, 1998
13
<PAGE>
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
0
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