SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Ammendment No.1
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-24532
FLAG FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Georgia 58-2094179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Greenwood Street, LaGrange, Georgia 30240
(Address of principal executive offices)
(706) 845-5000
(Registrant's telephone number)
_______________________________
Securities registered pursuant to Section 12(b) of the Act: None
________________________________
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 15, 1997 was $20,310,939. There were
2,036,990 shares of Common Stock outstanding as of March 15, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1996 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be held on April 16, 1997 are incorporated by
reference in Part III hereof.
<PAGE>
FLAG FINANCIAL CORPORATION
Annual Report on Form 10-K/A
For the Fiscal Year Ended December 31, 1996
Table of Contents
-----------------
Item Page
Number Number
- ------ ------
Part I
1. Business ......................................................... 3
Part II
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 41
8. Financial Statements and Supplementary Data ...................... 41
Part III
None
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................... 43
Signatures............................... 47
Index of Exhibits ....................... 49
2
<PAGE>
PART I
ITEM 1. BUSINESS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and
similar expressions are intended to identify such forward-looking statements.
The Company's actual results may differ materially from the results anticipated
in these forward-looking statements due to a variety of factors, including,
without limitation: the effects of future economic conditions; governmental
monetary and fiscal policies, as well as legislative and regulatory changes; the
risks of changes in interest rates on the level and composition of deposits,
loan demand, and the values of loan collateral, securities and interest rate
protection agreements, as well as interest rate risks; the effects of
competition from other commercial banks, thrifts, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market and other mutual funds and other financial institutions
operating in the Company's market area and elsewhere, including institutions
operating locally, regionally, nationally and internationally, together with
such competitors offering banking products and services by mail, telephone, and
computer and the Internet; and the failure of assumptions underlying the
establishment of reserves for possible loan losses and estimations of values of
collateral and various financial assets and liabilities. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these cautionary statements.
The Company
FLAG Financial Corporation (the "Company") is the holding company for First
Federal Savings Bank of LaGrange (the "Bank"). The Company was incorporated
under the laws of the State of Georgia on February 9, 1993 at the direction of
the Bank for the purpose of becoming the holding company for the Bank. On March
1, 1994, FLAG Interim Corporation, a wholly-owned subsidiary of the Company
organized for the purpose of effecting the Reorganization, was merged with and
into the Bank, and the Company issued shares of its Common Stock to shareholders
of the Bank in exchange for all of the outstanding Common Stock of the Bank (the
"Reorganization"). As a result, shareholders of the Bank became shareholders of
the Company, with the same proportional interests in the Company as they
previously held in the Bank (excluding the nominal effect on their ownership
interest of the exercise of dissenters' rights by certain shareholders of the
Bank).
Following the Reorganization, the Bank continued its business operations as
a federally-chartered stock savings bank under the same name, charter and
bylaws. The directors, officers and employees of the Bank were unchanged
following the Reorganization. The directors of the Bank also serve as the
directors of the Company, and the Chairman of the Board, President and Chief
Executive Officer of the Bank serves as the Chairman of the Board, President and
Chief Executive Officer of the Company.
As a bank holding company, the Company is intended to facilitate the Bank's
ability to serve its customers' requirements for financial services. The holding
company structure permits diversification by the Company into a broader range of
financial services and other business activities than currently are permitted to
the Bank under applicable law. The holding company structure also provides
greater financial and operating flexibility than is permitted to the Bank.
Additionally, the Articles of Incorporation and Bylaws of the Company contain
terms that provide a degree of anti-takeover protection to the Company that is
currently unavailable to the Bank and its shareholders under regulations of the
Office of Thrift Supervision (the "OTS") but is permissible for the Company
under Georgia law. See "Supervision and Regulation" below.
3
<PAGE>
The Bank
The Bank is a federally chartered stock savings bank headquartered in
LaGrange, Troup County, Georgia. The Bank was originally chartered by the State
of Georgia in January 1927 under the name "Home Building and Loan Association."
The Bank received its federal charter and changed its name to First Federal
Savings and Loan Association of LaGrange in 1955, and at that time its deposits
became insured by the Federal Savings and Loan Insurance Corporation (the
"FSLIC"). In December 1986, the Bank converted from a federal mutual savings and
loan association to a federal stock savings and loan association by selling
805,000 shares of Common Stock to the public pursuant to a plan of conversion
approved by the members of the institution. In June 1989, the Bank converted
from a federal stock savings and loan association to a federal stock savings
bank and changed its name to "First Federal Savings Bank of LaGrange." Based on
total assets of approximately $222 million at December 31, 1996, the Bank is the
10th largest of 38 thrift institutions headquartered in Georgia and the largest
financial institution headquartered in Troup County.
The Bank's deposits are now insured by the Federal Deposit Insurance
Corporation (the "FDIC"), as the successor to the FSLIC. Primarily for the
protection of depositors, the Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC.
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, making residential mortgage
loans and, to a lesser extent, consumer loans, commercial loans, commercial real
estate loans, residential construction loans and securities investments. In
addition to deposits, sources of funds for the Bank's loans and other
investments include amortization and prepayment of loans, loan origination and
commitment fees, sales of loans or participations in loans, fees received for
servicing loans sold to others and advances from the Federal Home Loan Bank of
Atlanta (the "FHLB of Atlanta"). The principal sources of income for the Bank
are interest and fees collected on loans, including fees received for
originating and selling loans and for servicing loans sold to others, and, to a
lesser extent, interest and dividends collected on other investments and service
charges on deposit accounts. In addition, the Bank's wholly owned service
corporation subsidiary, Piedmont Mortgage Service, Inc., operates a full-service
appraisal office under the name of Piedmont Appraisal Service and offers certain
securities brokerage services under the name of Piedmont Investment Service. The
principal expenses of the Bank are interest paid on deposits, interest paid on
FHLB of Atlanta advances, employee compensation, federal deposit insurance
premiums, office expenses and other overhead expenses.
The Company's financial performance has been determined primarily by the
results of operations of the Bank because the Company's only significant asset
is the Common Stock of the Bank. For information regarding the consolidated
financial condition and results of operations of the Company, the Bank and the
Bank's wholly owned subsidiary, Piedmont Mortgage Service, Inc., as of December
31, 1995 and 1996 and for the three years in the period ended December 31, 1996,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
related notes thereto which are contained in the Company's 1996 Annual Report
(the "1996 Annual Report"). The 1996 Annual Report is filed as Exhibit 13 to
this report. All average balances presented in this report were derived based on
monthly averages.
As used herein, the term "Company" includes FLAG Financial Corporation, the
Bank and Piedmont Mortgage Service, Inc. unless the context indicates otherwise.
References to, or information with respect to, the "Company" or the "Bank" for
periods ended prior to the Reorganization (March 1, 1994) refer to First Federal
Savings Bank of LaGrange and Piedmont Mortgage Service, Inc. unless the context
indicates otherwise.
4
<PAGE>
The table below sets forth certain measures of the Company's performance for
the periods indicated.
Years Ended December 31,
1996 1995 1994
---- ---- ----
Net Interest Margin (net interest
income divided by average
interest-earning assets) ................ 3.98% 3.39% 3.25%
Return on Average Assets
(Net income divided by average
total assets) ........................... -0.08% 0.87% .79%
Return on Average Equity
(Net income divided by
average equity) ......................... -0.88% 9.78% 9.00%
Equity-to-Assets (Average equity
divided by average total assets) ........ 8.96% 8.94% 8.76%
Dividend Payout Ratio (Dividends
declared divided by net income) ......... -377.18% 29.56% 34.15%
5
<PAGE>
Net Interest Income
The Bank's (and, therefore, the Company's) earnings depend primarily on its
"net interest income," which is the difference between the interest income it
receives from its assets (primarily its loans and other investments) and the
interest expense (or "cost of funds") which it pays on its liabilities
(primarily its deposits and borrowings). The Bank's net interest income before
provision for loan losses has increased in each of the last three fiscal years.
Such net interest income was $8,172,716 for 1996, an increase of 12.22% over the
1995 amount of $7,282,756, and the 1995 amount represented an increase of 6.52%
over the 1994 amount of $6,836,718.
Net interest income is a function of (i) the difference between rates of
interest earned on the Bank's interest-earning assets and rates of interest paid
on its interest-bearing liabilities (the "interest rate spread" or "net interest
spread") and (ii) the relative amounts of its interest-earning assets and
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The Bank adheres to an asset and liability management
strategy which is intended to control the impact of interest rate fluctuations
upon the Bank's earnings and to make the yields on its loan portfolio and other
investments more responsive to its cost of funds, in part by more closely
matching the maturities and repricing of its interest-earning assets and its
interest-bearing liabilities, while still maximizing net interest income.
Nevertheless, the Bank is and will continue to be affected by changes in the
levels of interest rates and other factors beyond its control. See "Asset and
Liability Management" below.
The following table sets forth average balances of various categories of
interest-earning assets and interest-bearing liabilities, interest income on
interest-earning assets and related average yields, interest expense on
interest-bearing liabilities and related average rates paid, the interest rate
spread (the difference between interest rates earned and interest rates paid),
the net interest margin (net interest income divided by average interest-earning
assets) and the ratio of interest-earning assets to interest-bearing liabilities
for the periods indicated.
6
<PAGE>
Years Ended December 31,
1996
---------------------------------
Interest Weighted
Average Income/ Average
Balance Expense Rate
------- ------- --------
ASSETS
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%
Other assets ................... 19,978,721
Total assets ................... $ 225,353,315
LIABILITIES AND SHAREHOLDERS' EQUITY
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%
Other liabilities .................. 13,553,489
Shareholders' equity ............... 20,182,887
Total liabilities and
shareholders' equity ......... $ 225,353,315
Interest rate spread................ 3.65%
Net interest margin................. 3.98%
Interest-earning assets/
interest-bearing liabilities ...... 107%
Years Ended December 31,
1995
----------------------------------
Interest Weighted
Average Income/ Average
Balance Expense Rate
------- ------- ----
ASSETS
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%
Other assets ................... 17,012,997
Total assets ................... $ 231,695,150
LIABILITIES AND SHAREHOLDERS' EQUITY
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%
Other liabilities .................. 14,445,623
Shareholders' equity ............... 20,717,348
Total liabilities and
shareholders' equity ......... $ 231,695,150
Interest rate spread................ 2.97%
Net interest margin................. 3.39%
Interest-earning assets/
interest-bearing liabilities ...... 109%
Years Ended December 31,
1994
-----------------------------------
Interest Weighted
Average Income/ Average
Balance Expense Rate
------- ------- ----
ASSETS
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%
Other assets ................... 13,454,295
Total assets ................... $ 224,030,012
LIABILITIES AND SHAREHOLDERS' EQUITY
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%
Other liabilities .................. 13,720,050
Shareholders' equity ............... 19,640,445
Total liabilities and
shareholders' equity ......... $ 224,030,012
Interest rate spread................ 2.84%
Net interest margin................. 3.25%
Interest-earning assets/
interest-bearing liabilities ...... 110%
At December 31,
1996
----------------------
Weighted
Actual Average
ASSETS Balance Rate
------- ----
Interest-earning assets:
Loans ............................ $ 150,394,436 9.34%
Mortgage-backed securities ....... 37,458,698 6.56
Investment securities ............ 8,953,394 7.80
Interest-bearing deposits
in other Banks ................. 3,557,138 2.55
Federal funds sold ............... -- --
Repurchase Agreements ............ -- --
Other short-term investments ..... -- --
------------- -----
Total interest-
earning assets ................ $ 200,363,666 8.67%
Other assets ................... 21,594,215
Total assets ................... $ 221,957,881
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits ................. $ 53,500,777 2.78%
Other time deposits .............. 116,128,638 5.62
Federal Funds Purchased .......... 2,210,000 0.53
FHLB advances .................... 17,370,833 6.72
------------- -----
Total interest-
bearing liabilities .......... $ 189,210,248 4.86%
Other liabilities .................. 12,229,341
Shareholders' equity ............... 20,518,292
Total liabilities and
shareholders' equity ......... $ 221,957,881
Interest rate spread................ 3.81%
Net interest margin................. 4.08%
Interest-earning assets/
interest-bearing liabilities ...... 106%
7
<PAGE>
Changes in interest income and interest expense are attributable to three
factors: (i) a change in volume or amount of an asset or liability; (ii) a
change in interest rates; or (iii) a change caused by the combination of changes
in volume and interest rates. The following table describes the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
expense during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided as to changes
attributable to change in volume (change in volume multiplied by old rate),
change in rates (change in rate multiplied by old volume), and changes
attributable to changes in both rate and volume. The net change attributable to
changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 Compared to 1995 1995 Compared to 1994
---------------------------------- --------------------------------
Rate/ Net Rate/ Net
Volume Rate Volume Change Volume Rate Volume Change
------ ---- ------ ------ ------ ---- ------ ------
(dollars in thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1) ................... $ 432 $ 834 $ 28 $ 1,294 $ 445 $ 986 $ 41 $1,472
Mortgage-backed securities . (406) (179) 25 (560) (77) 562 (18) 467
Investment securities(2) ... (509) (70) 29 (550) (3) 127 (1) 123
Interest-bearing deposits in
other banks .............. (59) 20 (9) (48) (9) 43 (4) 30
Federal funds sold ......... 55 1 3 59 - - 18 18
----- ----- ---- ------- ----- ------ ---- ------
Total interest income ... $(487) $ 606 $ 76 $ 195 $ 356 $1,718 $ 36 $2,110
----- ----- ---- ------- ----- ------ ---- ------
Interest expense:
Savings deposits ........... $ 168 $(140) $(17) $ 11 $ (24) $ 29 $ (1) $ 4
Other time deposits ........ (24) - - (24) 520 882 89 1,491
Federal funds purchased .... - - 12 - - - - -
FHLB advances ................ (607) (128) 41 (694) (189) 403 (45) 169
----- ----- ---- ------- ----- ------ ---- ------
Total interest expense .. $(463) $(268) $ 36 $ (695) $ 307 $1,314 $ 43 $1,664
----- ----- ---- ------- ----- ------ ---- ------
Net interest income .......... $ (24) $ 874 $ 40 $ 890 $ 49 $ 404 $ (7) $ 446
===== ===== ==== ======= ===== ====== ==== ======
</TABLE>
(1) Interest income generally is not accrued on loans delinquent 90 days
or more. These figures do not include interest accrued but not paid on
certain loans which were delinquent 90 days or more at December 31,
1996, 1995 and 1994. Interest accrued on loans delinquent 90 days or
more has shown no significant variances from 1994 through 1996. Loan
commitment and origination 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. The amortization of these fees into
income was not material in the years ended December 31, 1996, 1995 and
1994.
(2) Stock dividends on Federal Home Loan Bank stock are exempt from
federal and state income taxes. A certain percentage of cash
dividends received on stock owned by the Bank qualified for the
dividends received deduction for state and federal tax purposes.
These figures are not calculated on a tax equivalent basis.
8
<PAGE>
Asset and Liability Management
As noted above, the Bank's earnings are largely dependent upon the
difference between the interest it receives from its loans and other
interest-earning assets and the interest it pays on its deposits and other
interest-bearing liabilities. Like the deposit base of many other thrift
institutions, a significant portion of the Bank's deposit base historically has
consisted of relatively short-term deposits which bear interest at rates
determined by current market conditions. By contrast, a significant portion of
the Bank's loan portfolio historically has consisted of longer-term loans and,
to a lesser extent, fixed rate loans having yields which do not vary as rapidly
or to the same extent as the Bank's cost of funds. The Bank's deposit base
therefore historically has been more sensitive than its loan portfolio to
changes in interest rates so that when interest rates rose, the Bank's cost of
funds increased more rapidly than the yield on its loan portfolio.
A primary long-term financial objective of the Bank has been to reduce the
sensitivity of its earnings to interest rate fluctuations while maximizing net
interest income. To counter interest rate volatility and the historical mismatch
between its relatively short-term rate sensitive liabilities and its relatively
long-term rate insensitive assets, the Bank, through its Asset and Liability
Management Committee, has implemented certain asset and liability management
strategies designed to reduce its exposure to changes in interest rates by more
closely matching the maturities and pricing characteristics of its liabilities
with those of its assets. These strategies include (i) acquiring or originating
more residential mortgage loans with adjustable interest rates, (ii) increasing
lending activities involving the origination of commercial, consumer and other
installment loans, which typically bear higher interest rates than residential
mortgage loans and offer greater interest rate sensitivity through shorter
maturities, (iii) selling long-term fixed rate mortgage loans in the secondary
market and participating in the "Swap" program of the Federal Home Loan Mortgage
Corporation ("FHLMC") and the mortgage-backed securities or "MBS" program of the
Federal National Mortgage Association ("FNMA") to convert these whole loans to
more liquid mortgage-backed securities, (iv) maintaining a significant
percentage of short-term liquid assets, such as interest-bearing deposits,
investment securities maturing within one year and cash, (v) significant
investments in adjustable rate mortgage-backed securities and collateralized
mortgage obligations, (vi) developing marketing policies designed to give
priority to longer-term and non-interest sensitive deposits, and (vii) using
computer software to facilitate the implementation of the asset and liability
management program to monitor the Bank's repricing opportunities. At December
31, 1996, the Bank's adjustable rate mortgage loans, adjustable rate
mortgage-backed securities ("MBSs") and collateralized mortgage obligations
("CMOs") which mature or interest rate adjust in one year or less totaled
approximately $81 million or 51% of gross loans receivable. Commercial and
consumer loans which mature or interest rate adjust in one year or less totalled
approximately $20 million or 12.6% of gross loans receivable. The combination of
these adjustable rate and short-term loans and adjustable rate MBSs and CMOs
help insulate the Bank to the effect of adverse long-term interest rate
fluctuations.
The difference between the amounts of interest rate sensitive assets and
interest rate sensitive liabilities to be repriced during a specific time period
is referred to as the "interest rate sensitivity gap." A positive interest rate
sensitivity gap indicates an excess of rate sensitive assets over rate sensitive
liabilities, while a negative gap indicates an excess of rate sensitive
liabilities over rate sensitive assets. While management of the interest rate
sensitivity gap is affected by many factors not within the control of the Bank,
including federal regulatory policies and depositor and customer reaction to
changes in deposit and loan interest rates, it generally is the case that in
periods of rising interest rates, the gap will move toward a negative position
and that in periods of falling interest rates, the gap will tend to be
increasingly positive. Historically, the Bank, like most other thrift
institutions, typically had an excess of interest-sensitive liabilities which
mature or reprice within one year over interest-sensitive assets which mature or
reprice within one year (a negative "one-year gap"). A financial institution
with a negative one year gap ordinarily will experience an adverse impact on net
interest income during a period of rising interest rates, while an institution
with a positive one year gap will tend to experience an increase in such income.
The Bank's asset liability strategies have limited the Bank's interest rate
sensitivity and exposure to interest rate risk. At December 31, 1996, the Bank
had a positive one-year interest rate sensitivity gap of approximately $4
million or 1.84% of total assets. The Bank's ratio of total interest-earning
assets compared to interest-bearing liabilities was 106% at December 31, 1996.
The Bank's liabilities, due to their generally longer term to maturity or
repricing, are now less sensitive than the Bank's assets to interest rate
9
<PAGE>
changes. Management believes that the Bank's net interest income will increase
during a period of rising interest rates and will decrease during a period of
falling interest rates.
The following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1996 which are
expected to mature, prepay or reprice in each of the future time periods shown
(i.e., the interest rate sensitivity). Except as stated below, the amounts of
assets or liabilities shown which mature or reprice during a particular period
were determined in accordance with the contractual terms of the asset or
liability. Adjustable rate loans and securities are primarily included in the
period in which interest rates are next scheduled to adjust rather than in the
period in which they are due, and fixed rate loans and mortgage-backed
securities are included in the periods in which they are anticipated to be
repaid based on scheduled maturities and estimated projected repayments of loans
and mortgage-backed securities with specified characteristics. The Bank's
passbook accounts, interest-bearing checking accounts and money market deposit
accounts, which generally are subject to immediate withdrawal, are included in
the various categories based upon decay rate assumptions.
<TABLE>
<CAPTION>
Maturing or Repricing in
Over 1 Year Over 3 Years
One Year Through Through Over
or Less 3 Years 5 Years 5 Years Total
---------- --------- ---------- ------- -----
(dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Adjustable rate mortgages and
mortgage-backed securities ........... $ 80,852 $ 8,160 $ - $ - $ 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 - 2,113 8,953
Interest-bearing deposits
in other banks ...................... 3,557 - - - 3,557
-------- -------- -------- -------- --------
Total interest-earning 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 - - - 2,210
FHLB advances ......................... 15,950 400 - 1,021 17,371
-------- -------- -------- -------- --------
Total interest-bearing
liabilities.............. $133,373 $ 24,405 $ 14,417 $ 17,015 $189,210
-------- -------- -------- -------- --------
Interest rate 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% --
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
10
<PAGE>
interest rates while interest rates on other types may lag behind changes in
market rates. Further, certain assets, such as adjustable rate mortgages
("ARMs"), MBSs and collateralized mortgage obligations have features which
restrict changes in interest rates both on a short-term basis and over the life
of the asset. Moreover, prepayment rates, early withdrawal levels and the
ability of borrowers to service their debt, among other factors, may change
significantly from the assumptions used in the table in the event of a change in
interest rates.
Lending Activities
Federal laws and regulations prescribe the types and amounts of loans which
may be made by federal savings institutions such as the Bank and generally
permit such institutions to make residential real estate loans, commercial real
estate loans, consumer loans, commercial loans and agricultural loans.
The Bank's principal lending activity has been the origination of permanent
residential mortgage loans. The Bank also makes consumer loans, commercial loans
and leases, commercial real estate loans and residential construction loans. At
December 31, 1996, the Bank's loan portfolio (including loans held for sale)
constituted approximately 68.92% of the Bank's total assets. The following table
sets forth the composition of the Bank's loan portfolio at the indicated dates.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
---------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial/financial/agricultural....... $10,209 $10,262 $5,707 $2,497 $9,713
Real estate construction................ 11,812 9,665 9,032 5,140 3,996
Real estate mortgage.................... 112,107 112,694 116,362 114,871 114,269
Installment loans to individuals........ 18,166 14,732 8,066 7,914 8,153
Lease financings........................ 7,571 6,654 8,354 6,553 4,002
------ ------ ------- ------- -------
Total.............................. 159,865 154,007 147,521 136,975 140,133
------ ------ ------- ------- -------
Less:
Undisbursed proceeds on
loans in process................... 2,663 4,978 4,869 1,254 1,681
Deferrred loan fees and discounts....... 219 287 309 330 401
Allowance for loan losses............... 4,339 1,339 1,244 882 683
-------- ------ ------- ------- ------
Total net loans......................... $152,644 147,403 141,099 134,509 137,368
======== ====== ======= ======= =======
</TABLE>
Prior to 1984, the Bank's lending activities, like those of other thrift
institutions, consisted primarily of the origination of long-term, fixed-rate
permanent residential mortgage loans for its own portfolio. Since then, the Bank
has expanded its consumer, business and other short-term lending. Although the
Bank continues originating long-term residential mortgage loans, generally these
loans are either sold directly in the secondary mortgage market or pooled into
MBSs for sale in the secondary market. See "Origination, Purchase and Sale of
Loans" below. In addition, the Bank has purchased ARMs and MBSs for its
portfolio. These policies, together with certain other asset and liability
management strategies, have been implemented to make the Bank's assets more
sensitive to changes in interest rates, thereby better matching the Bank's
interest-sensitive short-term liabilities and reducing the Bank's interest rate
risk. See "Asset and Liability Management" above and "Permanent Residential
Mortgage Loans" below. The following table sets forth certain information as of
December 31, 1996 regarding loans in the Bank's loan portfolio which are due
after one year and which have fixed interest rates or floating or adjustable
interest rates. All loans with floating or adjustable interest rates reprice
either at stated intervals or upon changes in a "prime" interest rate or other
specified index.
11
<PAGE>
December 31,
Fixed Rate Adjustable Rate
---------- ---------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
(dollars in thousands)
Residential mortgage................... $29,739 25.41% $41,067 35.09%
Commercial real estate................. 14,247 12.17 9,901 8.46
Consumer .............................. 8,565 7.32 - -
Commercial loans/leases ............... 6,589 5.63 6,568 5.61
Residential construction............... - - 347 0.30
------- ----- ------- ------
Total............................... $59,140 50.54% $57,883 49.46%
======= ===== ======= =====
The following table sets forth the scheduled maturities of the loans in the
Bank's loan portfolio as of December 31, 1996 based on their contractual terms
of maturity. Demand loans, loans having no stated repayment schedule and no
stated maturity, and overdrafts are reported as due in less than one year. Loans
unpaid at maturity are renegotiated based on current market rates and terms.
<TABLE>
<CAPTION>
Maturing in
----------------------------------------------------------------------
Less Than 1-2 2-3 3-5 5-10 10-15 After
1 Year Years Years Years Years Years 15 Years Total
------- ----- ----- ----- ----- ----- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage... $ 7,457 $1,936 $ 2,825 $ 7,437 $12,435 $ 7,581 $38,592 $ 78,263
Commercial real estate. 9,696 3,828 2,359 6,024 4,212 5,099 2,626 33,844
Consumer .............. 9,601 2,658 2,641 3,253 2 9 2 18,166
Commercial loans/leases 4,624 1,167 1,839 3,680 2,101 513 3,856 17,780
Residential construction 11,465 347 - - - - - 11,812
------ ------ ------ ------- ------- ------- ------- --------
Total............... $42,843 $9,936 $9,664 $20,394 $18,750 $13,202 $45,076 $159,865
======= ====== ====== ======= ======= ======= ======= ========
</TABLE>
Types of Loans
Permanent Residential Mortgage Loans
The origination of one-to-four family permanent residential mortgage loans
traditionally has been, and continues to be, the Bank's principal lending
operation, with such loans totaling approximately $77.2 million or 50.55% of the
net outstanding loan portfolio at December 31, 1996. The Bank offers both ARMs
and fixed rate mortgage loans. The interest rates on the Bank's currently
available ARMs are subject to adjustment, primarily at one year intervals, in
accordance with a rate yielding a predetermined margin over the "weekly average
yield of U.S. Treasury Securities adjusted to a constant maturity of one year"
(the "One-year Treasury Security Index"), a statistic published by the Board of
Governors of the Federal Reserve System and verifiable by the borrower. Interest
rates on ARMs have limitations on upward adjustments equal generally to 2% per
year and 6% over the life of the loan.
Depending on market conditions, the Bank offers various types of ARMs to
meet customer demand and its investment needs. The volume and types of ARMs
originated by the Bank are affected by such market factors as interest rates on
various types of loans, competition, consumer preferences and the availability
of funds. In periods of relatively low interest rates, the Bank's customers have
12
<PAGE>
a preference for fixed-rate loans for single family residences. In periods of
higher rates, customers have a preference for ARMs. When qualifying a borrower
with a loan to value ratio greater than 70% for an ARM, the Bank adheres to FNMA
requirements that the interest rate used to calculate the borrower's
debt-to-income ratio is the maximum rate that could be in effect after the first
year.
The interest rate, maturity, loan-to-value ratio and other provisions of the
Bank's residential mortgage loans generally reflect the policy of making the
maximum loan permissible consistent with applicable regulations, market
conditions and the Bank's lending practices and underwriting standards. Interest
rates and points charged on residential mortgage loans originated by the Bank
are competitive with those of other financial institutions in the general market
area. Such interest rates are affected principally by the demand for such loans
and the supply of money available for lending purposes.
Permanent residential mortgage loans made by the Bank are generally
long-term loans, amortized on a monthly basis, with principal and interest due
each month. The initial contractual loan payment period for fixed rate
residential mortgage loans typically ranges from 15 to 30 years, while the
Bank's ARMs generally have terms of 20 to 30 years. The Bank's experience
indicates that permanent residential mortgage loans normally remain outstanding
for much shorter periods (seven years on average) than their stated maturity
because the borrowers repay the loans in full upon the sale of the security
property or upon refinancing the original loan.
Since December 1988, the Bank has offered a biweekly mortgage product. The
Bank's biweekly mortgage loans provide for payments and loan amortization on a
biweekly (i.e., every 14 days) basis, which results in an increased number of
collections annually and, accordingly, a shorter term of maturity and a faster
equity build-up than monthly mortgage loans. The Bank had approximately $4.3
million in biweekly mortgage loans outstanding as of December 31, 1996.
In the case of owner-occupied single family residences, permanent
residential mortgage loans are made for up to 95% of the appraised value of the
property securing the loan. When the loan is secured by real estate containing a
non-owner occupied dwelling of not more than four family units, loans generally
are made at up to 80% of the appraised value. All conventional loans with a
loan-to-value ratio in excess of 80% must have private mortgage insurance
covering that portion of the loan in excess of 75% of the appraised value. The
cost of this insurance is included in the borrower's monthly payments. The Bank
also requires title insurance to insure the priority of the property lien on
most of its mortgage loans and requires fire and casualty insurance on all of
its loans. The borrower also must pay monthly into an escrow account an amount
equal to 1/12 of the annual hazard insurance premium and property taxes on the
security property.
The permanent residential mortgage loans originated by the Bank contain a
"due-on-sale" clause which provides that the unpaid balance of the loan may be
declared immediately due and payable upon the sale of the mortgaged property.
Such clauses are an important means of reducing the average loan life and
increasing the yield on existing fixed-rate mortgage loans, and it is the Bank's
policy to enforce due-on-sale clauses with respect to fixed-rate loans. ARMs are
assumable, subject to payment of an assumption fee, to the extent of the
creditworthiness of the purchaser, but due-on-sale clauses on ARMs are enforced
if the Bank is not satisfied with such credit.
There are, in connection with ARMs, certain risks resulting from increased
costs to the borrower as a result of periodic repricing. Despite the benefits of
ARMs to the Bank's asset and liability management program, they do pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, thereby increasing the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates.
Commercial Real Estate Loans
Current regulations permit federal thrifts such as the Bank to invest up to
400% of their capital in commercial real estate loans. The Bank's permanent
commercial real estate loans, including loans secured by multi-family apartment
projects with more than four units, amounted to approximately $34 million or
22.17% of the Bank's loan portfolio at December 31, 1996. The Bank's permanent
commercial real estate loans are typically secured by improved commercial real
estate located in the Bank's primary lending areas, including small office
13
<PAGE>
buildings, apartments, warehouses and shopping centers. Permanent commercial
real estate loans are generally made in amounts up to 75% of the appraised value
of the property and generally have an initial contractual loan payment period of
from 10 to 20 years. Many of these loans have interest rates that adjust either
daily based on The Wall Street Journal prime rate or annually based on the
One-year Treasury Security Index. Some of the Bank's commercial real estate
loans have fixed interest rates with contractual payment periods of from three
to five years. Monthly payments of these loans are computed based on an assumed
amortization period of 10 to 15 years, with balloon payments becoming due at the
end of the contractual loan term for the remaining outstanding principal
balance.
Permanent commercial real estate loans usually have higher interest rates
than residential mortgage loans, in part because real estate lending on income
producing property entails certain significant risks. Commercial real estate
loans typically involve relatively large loan balances to single borrowers or
groups of related borrowers. The payment experience on such loans is typically
dependent on the successful operation of the real estate project. These risks
can be significantly impacted by supply and demand conditions in the market for
commercial space and, as such, may be subject to a greater extent to adverse
conditions in the economy generally. In dealing with these risk factors, the
Bank generally limits itself to the real estate market in the Bank's Troup
County market area and/or to borrowers with which it has substantial knowledge
and experience. In setting interest rates and origination fees on new loans and
loan extensions, management analyzes the risk associated with the particular
project to ensure that a project's cash flow will be sufficient to cover
operating expenses and debt service payments.
Consumer Loans
The Bank is authorized to make both secured and unsecured consumer loans for
any personal or household purposes in amounts up to 35% of its total assets. In
addition, federal thrifts such as the Bank have lending authority above the 30%
limit for certain consumer loans, such as home equity loans (loans secured by
the equity in the borrower's residence but not necessarily for the purpose of
home improvement), property improvement loans, mobile home loans, deposit
account secured loans and education loans. The Bank also is authorized to make
secured and unsecured loans for business purposes in amounts up to 10% of its
total assets. At December 31, 1996, consumer loans totaled approximately $18.2
million or 11.90% of the total loan portfolio.
Most of the Bank's consumer loans are automobile loans and leases, boat
loans, home equity loans, property improvement loans, student loans and loans to
depositors on the security of their savings accounts. These loans are made at
fixed interest rates for terms of up to 10 years. The Bank considers consumer
loans to involve a relatively high credit risk compared to permanent residential
mortgage loans. Consumer loans therefore generally yield a relatively high
return to the Bank and provide a relatively short maturity. The Bank believes
that the generally higher yields and the shorter terms available on various
types of consumer loans contribute to a positive spread between the Bank's
average yield on earning assets and the Bank's cost of funds.
Consumer loans, particularly automobile loans and secured savings loans,
have constituted an increasing area of emphasis in the Bank's lending
activities. The Bank intends to continue to expand its consumer lending
activities, subject to market conditions, as part of its plan to provide a wide
range of personal financial services to its customers.
14
<PAGE>
Commercial Loans/Leases
The Bank is authorized to make secured and unsecured loans to commercial
businesses up to a limit of 20% of total assets. The Bank makes various types of
commercial loans and leases to creditworthy borrowers for the purpose of
financing equipment, capital projects, working capital and other legitimate
business needs requiring financing. The terms of these loans range from three to
five years, with the longer maturities sometimes being subject to balloon
payments. Commercial loans normally carry interest rates indexed to The Wall
Street Journal prime rate. Interest rates on leases are in the 10% to 14% range.
At December 31, 1996, commercial loans and leases outstanding totaled $17.8
million.
At December 31, 1996, the Bank had a lease portfolio with an outstanding
balance of approximately $4.5 million that was purchased from Bennett Funding
Group, Inc. (Bennett funding). Bennett Funding is an equipment leasing and
finance company based in Syracuse, New York. For several years, the Bank, 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 criminal securities fraud. At December 31, 1996, the Bank had a $3
million specific loan loss reserve for Bennett Funding and related companies.
The $4.5 million lease portfolio is classified as "Doubtful," a classification
that generally requires reserves equal to 50 percent of the carrying value of
the asset (See "Bennett Funding Group, Inc." In the "Management Discussion and
Analysis of Financial Condition and Results of Operation," "Allowance for Loan
Losses" and "Non-Performing Assets," of the Company's 1996 Annual Report.)
Residential Construction Loans
Approximately $11.8 million or 7.74% of the loans held by the Bank at
December 31, 1996 were residential construction loans, consisting primarily of
residential construction mortgage loans to owner-occupants and, to a lesser
extent, to persons building residential properties for resale. These loans are
made for an initial term of up to six months, have fixed rates of interest, are
generally limited to 75% of the appraised value of the lot and the completed
value of the proposed structure, but construction loans of up to 90% can be
issued with private mortgage insurance coverage for owner occupants. These loans
also provide for disbursement of loan funds based on receipts submitted by the
builder during construction and periodic site inspections. The loans are then
completed, extended or sold. Extensions for additional fees are permitted if
construction has continued satisfactorily and if the loan is current and other
circumstances warrant the extension. In response to competitive conditions, the
Bank permits a portion of its single-family residential construction loan
portfolio to consist of loans made without commitments for "take-out" or
permanent financing from third parties.
Residential construction financing, like commercial real estate lending, is
generally considered to involve a higher degree of credit risk than permanent
mortgage financing of residential properties, and this additional risk usually
is reflected in higher interest rates. The higher risk of loss on construction
loans is attributable in large part to the fact that loan funds are estimated
and advanced upon the security of the project under construction, which is of
uncertain value prior to the completion of construction. Moreover, because of
the uncertainties inherent in estimating construction costs, delays arising from
labor problems, material shortages and other unpredictable contingencies, it is
relatively difficult to accurately evaluate the total loan funds required to
complete a project and to accurately evaluate the related loan-to-value ratios.
If the estimates of construction costs and the salability of the property upon
completion of the project prove to be inaccurate, the Bank may be required to
advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project with a value
which is insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate and minimize the
risk of each residential construction loan. Among other things, the Bank
considers evidence of the availability of permanent financing or a take-out
commitment to the borrower, the financial strength and reputation of the
borrower, an independent appraisal and review of cost estimates, and, if
applicable, the amount of the borrower's equity in the project, pre-construction
sale or leasing information and cash flow projections of the borrower.
Origination, Purchase and Sale of Loans
15
<PAGE>
Origination, Purchase and Sale of Loans
The Bank is permitted by applicable regulations to originate or purchase
loans secured by real estate located in any part of the United States. The Bank
originates loans in Troup County, Georgia through its main office, its Lee's
Crossing office and its LaFayette Parkway office, all located in LaGrange,
Georgia. The Bank also originates loans in Muscogee County and Harris County,
Georgia and Russell County, Alabama through a loan production office located in
Columbus, Muscogee County, which the Bank operates under the name Piedmont
Mortgage Service. The Bank also operates a second loan production office under
the name of Piedmont Mortgage Service in Auburn, Lee County, Alabama which
originates loans in Lee County. As of December 31, 1996, Troup County had a
population of approximately 59,000, Muscogee County had a population of
approximately 187,000, Harris County had a population of approximately 20,000,
Russell County had a population of approximately 52,000 and Lee County had a
population of approximately 94,000, based on Troup County, Muscogee County,
Harris County, Russell County and Lee County Chambers of Commerce estimates.
Loans are originated by seven loan officers in the Bank's main office and
one loan officer in each of the Lee's Crossing and LaFayette Parkway offices in
LaGrange, Georgia. In addition, two loan officers operate from the Piedmont
Mortgage Service office in Columbus, Georgia, and one loan officer operates from
the Piedmont Mortgage Service office in Auburn, Alabama. These loan officers
solicit loan applications from existing customers, real estate agents, builders,
real estate developers and others. The Bank also receives loan applications as a
result of customer referrals and walk-ins to its offices.
Upon receipt of a loan application and all required supporting information
from a prospective borrower, a credit report is obtained and verification is
made of specific information relating to the loan applicant's employment, income
and credit standing. An appraisal of any real estate intended to secure the
proposed loan is undertaken by an independent appraiser approved by the Bank.
The Bank's loan officers and underwriters then analyze the loan applications and
any collateral involved. All real estate loans, regardless of amount, and all
consumer and commercial loans in excess of the loan officer's lending limit, as
set by the Board of Directors, are approved by a loan committee comprised of
executive officers and one outside director.
Almost all loans in the Bank's portfolio were originated by the Bank. The
Bank generally does not purchase loans; however, in order to improve the Bank's
interest rate sensitivity, the Bank has purchased a small number of adjustable
rate loans for its portfolio. The Bank originates adjustable rate loans
primarily for its portfolio and generally originates permanent fixed-rate
residential mortgage loans for sale in the secondary market or for pooling into
MBSs for sale in the secondary market. All fixed rate conforming residential
mortgage loans originated by the Bank in 1996 either were sold in the secondary
market or are carried on the balance sheet (at the lower of cost or market) as
"loans held for sale."
The sale of fixed-rate loans in the secondary mortgage market not only
reduces the Bank's risk of an unfavorable interest rate spread over the cost of
funds but also allows the Bank to continue to make loans during periods when
savings flows decline or funds are not otherwise available for lending purposes.
The Bank generally retains the servicing (i.e., collection of principal and
interest payments) of the loans sold in the secondary market, for which it
generally receives a fee of 1/4% to 1/2% per annum of the unpaid balance of each
loan. Secondary market sales are made primarily to mortgage companies,
commercial banks, other thrift institutions and governmental and
quasi-governmental agencies such as the FHLMC, the FNMA and the Government
National Mortgage Association ("GNMA") which purchase residential mortgage loans
from financial institutions. As market conditions dictate, the Bank may elect to
hold permanent mortgage loans in its portfolio where favorable spreads over the
cost of funds make these investments advantageous. All secondary market sales
are made without recourse to the Bank.
16
<PAGE>
The table below shows the Bank's loan origination, purchase (including MBSs)
and sale activity during the periods indicated.
Years Ended December 31,
1996 1995
-----------------
(dollars in thousands)
Loans originated:
Residential mortgage ......................... $ 79,597 $ 66,812
Commercial real estate ....................... 23,481 15,610
Consumer ..................................... 10,399 22,377
Commercial loans/leases ...................... 25,116 8,228
Residential construction ..................... 11,296 7,286
Loans refinanced ............................. 19,212 20,260
-------- --------
Total loans originated .................... $169,101 $140,573
Loans purchased ................................ 449 2,987
-------- --------
Total loans originated and purchased ...... $169,550 $143,560
Loans sold:
Residential mortgage ......................... $ 63,042 $ 47,962
Commercial real estate ....................... -- --
Consumer ..................................... -- --
Commercial loans/leases ...................... -- --
Residential construction ..................... -- --
-------- --------
Total loans sold ............................... $ 63,042 $ 47,962
-------- --------
Net loan activity ......................... $106,508 $ 95,598
======== ========
Loan Fee Income
In addition to interest earned on loans, the Bank receives fees for
originating loans, fees for commitments to make certain loans, fees for
continuing to service loans (i.e., collecting principal and interest payments)
after selling such loans in the secondary market, purchased servicing fees and
other fees for miscellaneous loan-related services. Such fee income varies with
the volume of loans made, prepaid or sold, and the rates of fees vary from time
to time depending on the supply of funds and competitive conditions in the
mortgage markets.
Origination fees are a percentage of the principal amount of the loan which
are charged to the borrower for the granting of the loan. Origination fees
normally are deducted from the proceeds of the loan and generally range from 1%
to 2% of the principal amount, depending on the type and volume of loans made
and market conditions such as the demand for loans, the availability of money
and general economic conditions.
It is the policy of the Bank to make loan commitments for a term not to
exceed 30 days without charging a commitment fee. From time to time, however,
the Bank receives commitment fees for certain longer term forward commitments on
permanent fixed-rate residential mortgage loans, generally not in excess of 1%
of the requested loan amount. The Bank has not experienced a significant number
of loan applications/commitments that were not funded within the commitment
period. The Bank did not receive any commitment fees during the year ended
December 31, 1996.
17
<PAGE>
Servicing fees are payable monthly in an amount equal to 1/4% to 1/2% per
annum of the unpaid principal balance of each loan serviced. As of December 31,
1996, 1995 and 1994, the Bank was servicing loans for others with principal
balances aggregating approximately $247.9 million, $249.3 million and $273.1
million, respectively. Loan servicing income expressed as a percentage of net
interest income for the years ended December 31, 1996, 1995 and 1994 was 3.90%,
5.91%, and 5.36%, respectively.
The Bank also receives fee income from late payment charges, prepayment
premiums, loan assumption fees, property inspection fees, property transfer fees
and miscellaneous services related to its existing loans. These fees and charges
have not constituted a material source of income for the Bank.
In accordance with the Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," the Bank records income from loan origination
and commitment fees, net of certain direct loan origination costs (such as
advertising, administrative, occupancy and equipment costs and a portion of
employee compensation and benefit amounts), for each loan as an adjustment of
yield over the contractual life of the loan rather than recognizing such income
in full at the time of origination. The Bank had net deferred origination fees
totaling $218,314 at December 31, 1996 that will be recognized in future
periods. See Note 2 of Notes to Consolidated Financial Statements contained in
the Company's 1996 Annual Report, which information is incorporated by reference
in Item 8 hereof.
Credit Risk Management
Classification and Collection of Problem Loans
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the guarantee of the security for
the loan. The loan portfolio is continually reviewed by the Bank's management to
identify deficiencies and to take corrective actions as necessary. As discussed
below, each of the Bank's loans is assigned a rating in accordance with the
Bank's internal loan rating system and is reviewed regularly to update its
rating in accordance with the performance of the loan. All past due loans are
reviewed weekly by the Bank's collection manager and monthly by the Loan Review
Committee of the Bank and by the Board of Directors, and all loans classified as
"substandard" or "doubtful" are reviewed at least quarterly by the Asset Review
Committee of the Board of Directors. In addition, all loans to a particular
borrower, regardless of classification, are reviewed by the originating loan
officer and the collection manager each time such borrower requests a renewal or
extension of any loan or requests an additional loan. All lines of credit are
reviewed annually prior to renewal. Such reviews include, but are not limited
to, the ability of the borrower to repay the loan, the loan to value ratio, the
value of any collateral and the estimated loss to the Bank, if any.
The Bank's internal loan rating system establishes three classifications
for problem assets: substandard, doubtful and loss. Additionally, in connection
with regulatory examinations of the Bank, federal examiners have authority to
identify problem assets and, if appropriate, to require the Bank to classify
them. Assets that have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected are classified as "substandard. Assets that have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable and improbable are
classifed as "doubtful." An asset classified as "loss" is considered
uncollectible and of such little value that continuance as an asset of the Bank
is not warranted.
Assets classified as substandard or doubtful require the Bank to establish
general allowances for loan losses. If an asset or portion thereof is classified
as loss, the Bank must either establish a specific allowance for loan loss in
the amount of 100% of the portion of the asset classified as loss or charge off
such amount. General loss allowances established to cover possible losses
related to assets classified as substandard or doubtful may be included, up to
certain limits, in determining the Bank's regulatory capital, while specific
valuation allowances for loan losses do not qualify as regulatory capital.
18
<PAGE>
The Bank's collection procedures provide that when a loan becomes ten days
delinquent, the borrower is contacted by mail and payment is requested. If the
delinquency continues, subsequent efforts are made to contact and request
payment from the delinquent borrower. Most loan delinquencies are cured within
30 days and no legal action is required. In certain circumstances, the Bank may
modify the loan, grant a limited moratorium on loan payments or revise the
payment schedule to enable the borrower to restructure his or her financial
affairs. Generally, the Bank stops accruing interest on delinquent loans when
payment is in arrears for 90 days or when collection otherwise becomes doubtful.
If the delinquency exceeds 120 days and is not cured through the Bank's normal
collection procedures or through a restructuring, the Bank will institute
measures to enforce its remedies resulting from the default, including
commencing a foreclosure, repossession or collection action. In certain cases,
the Bank will consider accepting a voluntary conveyance of collateral in lieu of
foreclosure or repossession. Real property acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as "real estate
owned" until it is sold and is carried at the lower of (i) fair value minus
estimated costs to sell or (ii) the adjusted cost basis.
Allowance for Loan Losses
The allowance or reserve for possible loan losses is a means of absorbing
future losses which could be incurred from the current loan portfolio.
Management utilizes a systematic methodology each month to independently
evaluate the adequacy of the allowance for loan losses. The Bank's Asset Review
Committee meets monthly. During this meeting, presentations are made, reports
are reviewed and discussions arise regarding the Bank's loan portfolio, loan
delinquencies, non-performing and classified loans, and loan payment activity.
During the course of this meeting, management considers the risk inherent in the
Bank's loan portfolio and determines the adequacy of the reserve for loan losses
This determination is based on such factors as the levels of non-performing and
substandard loans, portfolio mix, borrowers' financial condition, estimated
underlying collateral values, current and prospective local economic conditions,
and historical loss experience. The Bank establishes specific allowances for
assets or portions thereof classified as a loss in an amount equal to 100% of
the loan or a portion thereof. As explained in "Commercial Loans/Leases," the
Allowance for Loan Losses includes a specific reserve of approximately $3
million for a lease portfolio with a remaining balance of $4.5 million purchased
from Bennett Funding. The following table presents this specific reserve on the
line identified as " "Commercial loans/leases."
The following table summarizes the Bank's allocation of the allowance for
loan losses for each of the following types of loans at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995 1994
------------------- -------------------- -------------------
Percent of Percent of Percent of
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Permanent mortgage loans.. .......... $ -- -- $ 16 0.01% $ -- --
Commercial real estate loans ........ 261 0.17% 257 0.17% 53 0.04%
Consumer loans ...................... 7 0.01% 19 0.01% 35 0.02%
Commercial loans & leases ........... 2,978 1.93% -- -- -- --
Residential construction loans ...... -- -- -- -- -- --
------ ---- ------ ---- ----- -----
Total loans ....................... $3,246 2.11% $ 292 0.19% 88 0.06%
Unallocated allowance ............... 1,093 0.71 1,047 0.70 1,156 0.78%
------ ---- ------ ---- ----- -----
Total allowance for possible
loan losses ..................... $4,339 2.82% $1,339 0.89% 1,244 0.84%
====== ==== ====== ==== ===== =====
</TABLE>
19
<PAGE>
General and specific valuation allowances will be maintained at the levels
as determined above by periodic charges against income. A loan or portion
thereof is charged off against the allowance when management has determined that
losses on such loans are probable. Recoveries on any loans charged off in prior
fiscal periods are credited to the allowance. It is the opinion of the Bank's
management that the balance in the allowance for loan losses as of December 31,
1996 is adequate to absorb possible losses from loans currently in the
portfolio.
The following table sets forth information regarding changes in the
allowance for loan losses for the periods indicated.
Years Ended December 31,
------------------------
1996 1995 1994
-------- ------- -------
(dollars in thousands)
Average net loans ........................... $151,084 $146,144 $141,640
Allowance for possible loan losses,
beginning of the period .................... 1,339 1,244 882
Charge-offs for the period:
Consumer loans ............................ 87 118 88
Commercial loans/leases ................... -- -- --
Residential construction loans ............ 22 23 2
Residential mortgage loans ................ 410 60 35
Commercial real estate loans .............. -- 364 --
-------- -------- --------
Total charge-offs....................... $ 519 $ 565 $ 125
-------- -------- --------
Recoveries for the period:
Consumer loans............................. $ 35 $ 30 46
Commercial loans/leases ................... -- -- --
Residential construction loans ............ -- -- 1
Residential mortgage loans ................ -- -- --
Commercial real estate loans .............. -- -- --
-------- -------- --------
Total recoveries........................ $ 35 $ 30 47
-------- -------- --------
Net charge-offs for the period ....... 484 535 78
Provision for loan losses ................... 3,484 630 440
-------- -------- --------
Allowance for possible 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 during the
period to average net loans outstanding
during the period .......................... 0.32% 0.37% 0.06%
20
<PAGE>
Risk Elements
The following table sets forth information regarding the Bank's
non-performing assets and troubled debt restructurings as of the dates
indicated. Non-performing assets consist of nonaccruing loans and foreclosed
properties. The Bank has no loans 90 days or more past due as to which interest
is still accruing and has no loans categorized as in-substance foreclosures.
Material potential problem loans (i.e., those with respect to which management
has serious doubts regarding the ability of the borrowers to comply with present
loan repayment terms) have been classified as nonaccrual loans, regardless of
payment status. Included in non-performing/nonaccruing loans is the lease
portfolio with a remaining balance of approximately $4.5 million purchased from
Bennett Funding (see "Bennett Funding Group, Inc." In Management's Discussion
and Analysis of Financial Condition and Results of Operation in the Company's
1996 Annual Report).
December 31,
------------
1996 1995 1994 1993 1992
-------- -------- ------- ------ ------
(dollars in thousands)
Nonaccruing loans $6,688 $1,394 $2,751 $3,280 $3,505
Loans past due 90 days
and still accruing.......... -- -- -- -- --
Troubled debt restructuring ..... -- -- -- -- --
For the year ended December 31, 1996, the Bank recorded no interest income
on the non-performing assets listed above subsequent to their classification as
non-performing assets. The gross interest income that would have been recorded
during the year ended December 31, 1996 if the assets listed above had been
current in accordance with their original terms would have been approximately
$470,000. The amount of interest income on those assets that was actually
recorded during the year ended December 31, 1996 prior to their classification
as non-performing assets was approximately $148,000.
The Bank attempts to sell real estate owned promptly after foreclosure.
During 1996, seven commercial and residential properties were foreclosed with
aggregate investments, net of reserves, of $769,398. The aggregate charge-off to
the loan loss reserve for these properties was $227,822. During 1996, 14
residential properties were sold with carrying values of $570,007. At December
31, 1996, foreclosed properties consisted of three residential properties with
an aggregate investment, net of reserves, of approximately $525,000. All of
these properties are in the Bank's west central Georgia or east central Alabama
market areas.
There may be additional loans within the Bank's portfolio that may become
classified as conditions dictate; however, management was not aware of any such
loans that are material in amount at December 31, 1996. At December 31, 1996,
management was unaware of any known trends, events or uncertainties that will
have, or that are reasonably likely to have a material effect on the Bank's
liquidity, capital resources or operations.
21
<PAGE>
Investment Activities
Federally chartered savings institutions such as the Bank have authority to
invest in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposits at federally insured banks and savings and loan
associations, certain bankers' acceptances and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. Federally chartered
savings institutions are required to classify their securities in one of three
categories: securities purchased or held for investment, for sale, or for
trading. Such investments must be carefully managed for quality, maintenance of
current market yields and matching of rate sensitivity. Investment decisions are
made within formal policy guidelines established by the Board of Directors.
Income from investments in securities provides the second largest source of
revenues for the Company after interest on loans, constituting approximately
$3.2 million or 15.50% of total interest and other income for the year ended
December 31, 1996. The Bank's investment portfolio totaled approximately $50
million as of December 31, 1996 or 22.73% of total assets and consisted of FHLB
stock, United States Government and federal government agency obligations and
other investments, as compared to $65 million or 28.03% of total assets at
December 31, 1996. At December 31, 1996, the investment portfolio had a net
unrealized loss of approximately $572,000. See Notes 3 and 4 of Notes to
Consolidated Financial Statements contained in the Company's 1996 Annual Report,
which information is incorporated by reference in Item 8 hereof.
The following table sets forth the book value of the Bank's investments at
the dates indicated.
At December 31,
---------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
Mortgage-backed securities .......... $37,920 $44,608 $49,983
U.S. Government and federal
agency securities .................. 4,018 9,250 17,250
Other debt securities ............... 1,096 - 401
Interest-bearing deposits
and bankers' acceptances ........... 3,557 1,539 3,334
FHLB stock and
other equity investments ........... 3,857 7,210 4,466
Federal funds sold .................. - 2,010 -
------- ------- -------
Total ............................... $50,448 $64,617 $75,434
======= ======= =======
22
<PAGE>
The following table sets forth the book value of the Bank's investments at
December 31, 1996, the weighted average yields on the Bank's investments at
December 31, 1996 and the periods to maturity of the Bank's investments from
December 31, 1996. Yields on tax exempt obligations have not been computed on a
tax equivalent basis.
<TABLE>
<CAPTION>
Periods to Maturity from December 31, 1996
------------------------------------------
After 1 through After 5 through
1 Year or Less 5 Years 10 Years After 10 Years Total
---------------- --------------- --------------- ----------------- ---------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ------- ------ -------- ------ ------- ------ ------- ------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities .......... $ 999 5.63% $4,829 6.08% $2,904 6.22% $29,188 6.39% $37,920 6.32%
U.S. Government
and federal
agency securities ... - - 2,000 5.72 2,018 6.44 - - 4,018 6.08
Other debt
securities .......... - - 981 7.27 115 6.81 - - 1,096 7.22
Interest-bearing
deposits and bankers'
acceptances ......... 3,557 5.35 - - - - - - 3,557 5.35
FHLB stock and
preferred stock ..... 3,857 9.01 - - - - - - 3,857 9.01
Federal funds sold ... - - - - - - - - - -
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Total ................ $8,413 7.06% $7,810 6.14% $5,037 6.32% $29,188 6.39% $50,448 6.46%
====== ==== ====== ==== ====== ==== ======= ==== ======= ====
</TABLE>
As of December 31, 1996, none of the Bank's investment in securities of
other issuers exceeded 10% of the shareholders' equity of the Bank. the Bank.
Sources of Funds
General
Time, money market, savings and demand deposits are the major sources of the
Bank's funds for lending and other investment purposes. In addition, the Bank
obtains funds from loan principal repayments, proceeds from sales of loans, loan
participations and investment securities, and advances from the FHLB of Atlanta.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows and sales of loans, loan participations and investment securities
are significantly influenced by prevailing interest rates, economic conditions
and the Bank's asset and liability management strategies. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of other
sources of funds or on a longer term basis to support expanded lending
activities and for other general business purposes.
Deposits
The Bank offers several types of deposit accounts, with the principal
differences relating to the minimum balance required, the time period the funds
must remain on deposit and the interest rate. Deposits are obtained primarily
from the Bank's Troup County market area. The Bank does not advertise for
deposits outside of this area, and an insignificant amount of the Bank's
deposits are from out-of-state sources. The Bank generally does not solicit
funds from brokers, although the Bank occasionally consults with brokers to
obtain information on competitive market rates offered on jumbo certificates of
deposit ("CDs") which the Bank occasionally offers in minimum denominations of
$100,000.
23
<PAGE>
The Bank does not rely upon any single person or group of related persons for a
material portion of its deposits. The Bank held CDs with minimum denominations
of $100,000 totaling $33.1 million at December 31, 1996.
The following table sets forth the composition of deposits, excluding
accrued interest payable, by type of account and interest rate category at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
------------------------------------------------------
Interest Interest
Type of Account Rate Amount Percent(1) Rate Amount Percent
- --------------- ------ ------ ------- ------ ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regular savings deposits 2.75% $16,514 9.27% 2.75% $ 16,401 9.22%
NOW accounts........... 2.25% 28,820 16.19 2.25% 27,977 15.67
Super NOW accounts..... 2.70% 1,828 1.03 2.70% 2,100 1.24
Money market deposits.. 3.20% 14,709 8.26 3.20% 15,438 8.68
------- ----- -------- ------
Total............... $61,871 34.75% $ 61,916 34.81%
------- ----- -------- -----
Certificates of deposit Below 4% $ 50 0.03% Below 4% $ 89 0.05%
4-6% 84,258 47.34 4-6% 60,608 34.08
6-8% 31,821 17.88 6-8% 54,731 30.77
8-10% - - 8-10% 504 0.29
-------- ------ -------- ------
Total time deposits .. $116,129 65.25% $115,932 65.19%
-------- ----- -------- ------
Total deposits..... $178,000 100.00% $177,848 100.00%
======== ====== ======== ======
December 31,
------------------ Increase (Decrease)
1994 During the
--------------------------- Year Ended
Interest December 31,
Type of Account Rate Amount Percent(1) 1996
- --------------- ------ ------ ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Regular savings deposits 2.75% $15,976 9.64% $ 113
NOW accounts........... 2.25% 22,752 13.73 843
Super NOW accounts..... 2.70% 1,859 1.12 (272)
Money market deposits.. 3.20% 16,466 9.94 (729)
------- ----- ------
Total............... $57,053 34.43% $ (45)
------- ----- ------
Certificates of deposit Below 4% $ 12,383 7.47% $ (39)
4-6% 80,122 48.35 23,650
6-8% 14,603 8.81 (22,910)
8-10% 1,560 0.94 (504)
-------- ------ ------
Total time deposits .. $108,667 65.57% $ 197
-------- ----- ------
Total deposits..... $165,720 100.00% $ 152
======== ====== =======
- ----------------
(1) Represents percentage of deposits in the respective category of deposits to
total deposits.
</TABLE>
24
<PAGE>
The following table sets forth information with respect to interest expense
and average deposit balances for the periods indicated.
Years Ended December 31,
------------------------
1996 1995
------------------------------------------------------
Average Average
Average Interest Rate Average Interest Rate
Balance Expense Paid Balance Expense Paid
(dollars in thousands)
Deposits:
Noninterest- bearing
demand deposits....... $ 8,370 $ - - $ 10,066 $ - -
Interest-bearing
demand deposits....... 23,074 546 2.37 17,581 529 3.01
Money market deposit
accounts.............. 15,497 532 3.43 15,844 540 3.41
Passbook and statement
savings............... 16,937 408 2.41 16,352 404 2.47
Time deposits.......... 114,371 6,525 5.71 114,793 6,551 5.71
-------- ------ ---- -------- ------ ----
Total deposits..... $178,249 $8,011 4.49% $174,636 $8,024 4.58%
======== ====== ==== ======== ====== ====
The following table sets forth the amount of time deposits at December
31, 1996 maturing in the periods indicated.
Amount Maturing
Within Within Within After
Interest Rate 1 Year 2 Years 3 Years 3 Years Total
- ------------- -------- ------- ------- ------- -----
(dollars in thousands)
Below 4%.......... $ 40 $ 10 $ - $ - $ 50
4% - 6%.......... 65,240 10,891 4,525 3,602 84,258
6% - 8%.......... 18,092 8,518 2,411 2,800 31,821
8% - 10%......... - - - - -
------- ------- ------ ------- --------
Total .......... $83,372 $19,419 $6,936 $ 6,402 $116,129
======= ======= ====== ======= ========
25
<PAGE>
The following table sets forth the maturity distribution of time CDs of
$100,000 or more and other time deposits of $100,000 or more at December 31,
1996.
December 31,
------------
Other
Time Time
Time to Maturity CDs Deposits
- ---------------- --- --------
(dollars in thousands)
3 months or less............................. $ 8,791 $-
Over 3 months through 6 months............... 8,715 -
Over 6 months through 12 months.............. 10,878 -
Over 12 months............................... 4,716 -
------- ---
Total outstanding......................... $33,100 $-
In the event of liquidation of the Bank, savings account holders of the
Bank would be entitled to full payment of their savings accounts prior to any
payment to the holders of capital stock of the Bank.
Borrowings
Deposits are the primary source of funds for the Bank's lending and
investment activities and for its general business purposes. However, the Bank
periodically borrows from the FHLB of Atlanta to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta
functions as a central reserve bank providing credit for thrift institutions and
certain other member financial institutions. See "Supervision and Regulation --
Regulation of Federal Savings Associations -- Federal Home Loan Bank System"
below. As a member, the Bank is required to own capital stock in the FHLB of
Atlanta and is authorized to apply for advances on the security of such stock
and certain of the Bank's home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities, and the FHLB of
Atlanta may prescribe the acceptable uses to which the advances pursuant to each
program may be put, as well as limit the size of such advances. Depending on the
program, limitations on the size of advances are based either on a fixed
percentage of the Bank's net worth or on the FHLB of Atlanta's assessment of the
Bank's creditworthiness. The Bank's advances from the FHLB of Atlanta are
typically secured by the Bank's stock in the FHLB of Atlanta and its pledge of
qualified first mortgage loans equal to 165% of the advances outstanding. The
Bank's advances in the short-term credit program are secured by MBSs and
CMOs.
The following table sets forth the borrowing activities of the Bank at the
end of and during the periods indicated.
At and for the Years Ended December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(dollars in thousands)
Balance, end of period ............... $17,371 $29,504 $43,281
Highest month-end balance ............ $25,413 $39,230 $48,222
Weighted average interest rate
at end of period .................... 5.28% 5.47% 5.84%
Average balances for period .......... $21,585 $31,962 $36,567
Weighted average interest rate
during the period ................... 5.32% 5.82% 4.50%
26
<PAGE>
The Bank has not used and does not plan to use subordinated debentures,
CMOs or reverse purchase agreements as borrowing tools in the immediate future.
Retail Services
The Bank provides its customers with a variety of retail banking services.
The Bank has 24-hour automatic teller machines ("ATMs") at five of its offices
in LaGrange as well as at LaGrange College and the West Georgia Medical Center
in LaGrange. The Bank is a member of the Southeast Switch, Inc. system of
automatic tellers, and the PLUS(R) and CIRRUS(R) systems, which provide Bank
customers with access to HONOR(R), PLUS(R) and CIRRUS(R) services at more than 1
million locations throughout the United States and the world. Also, the Bank
offers the First Federal Check Card which gives Bank customers access to VISA(R)
merchants world-wide through point of sale transactions. The Bank provides (in
addition to the lending and deposit services described above), checking
accounts, savings programs, night depository services and safe deposit
facilities. The Bank also provides cash management services for its business
customers. The Bank offers certain securities brokerage services through its
wholly owned service corporation, Piedmont Mortgage Service, Inc., under the
name of Piedmont Investment Service, and, based on an arrangement with the
brokerage firm of Attkisson, Carter & Akers, Inc., a registered broker-dealer
and a member firm of the New York Stock Exchange. This service provides
customers with a variety of investment products and services that are common in
the financial markets of today.
Competition
Based on total assets of approximately $222 million at December 31, 1996,
the Bank is the 10th largest of 38 thrift institutions headquartered in Georgia
and the largest financial institution headquartered in Troup County.
The Bank's most direct competition, for both deposits and loans, comes from
commercial banks, other thrift institutions and mortgage banking companies.
NationsBank N.A.(South), Commercial Bank & Trust Company and SunTrust Company
Bank of Columbus, N.A. are the Bank's major competitors for deposits. These
institutions along with Charter Federal Savings and Loan Association and various
mortgage bankers are also the Bank's major competitors with regard to mortgages
and consumer lending. Some of these institutions are affiliated with large
regional financial institutions and have substantially greater resources and
lending limits than the Bank. The Bank also faces competition in certain areas
of its business from consumer finance companies, insurance companies, money
market mutual funds and investment banking firms, some of which are not subject
to the same degree of regulation as the Bank.
The Bank competes for deposits principally by offering depositors a variety
of deposit programs with competitive interest rates, quality service and
convenient location and hours. The Bank competes for loan originations by
offering a variety of loan programs, competitive interest rates, discount points
and loan fees, timely processing and quality service.
The competitive pressures among thrift institutions, commercial banks and
other entities have increased significantly in recent years and are expected to
continue to do so. The establishment of money market accounts and the
elimination of rate controls for interest rates paid on deposits in the early
and mid-1980s, for example, have increased the competition for deposits and tend
to increase the Bank's cost of funds, especially during periods of high interest
rates.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that banks and bank holding companies may acquire
banks located in other states, regardless of state law to the contrary, subject
to certain deposit-percentage limitations, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, after
June 1, 1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state has the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether. Georgia has enacted "opt in" legislation that permits
interstate branching in Georgia on a reciprocal basis through June 1, 1997, and
on an unlimited basis thereafter. Competition within Georgia among financial
27
<PAGE>
institutions generally, and among savings institutions in particular, may
increase, due in part to this "opt in" legislation, as well as the increased
number of newly-chartered financial institutions, the increased incidence of
branching by savings institutions headquartered in other parts of the state and
the country, and the acquisition of Georgia-based financial institutions by
out-of-state financial institutions although the extent to which such
competition will increase, or the timing of such increase, cannot be predicted.
Employees
As of December 31, 1996, the Bank had 102 full-time and 17 part-time
employees. The employees are not represented by any collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
Supervision and Regulation
General
As a federal savings bank, the Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary regulator, and the FDIC,
as its deposit insurer. The Bank is a member of the FDIC's Savings Association
Insurance Fund ("SAIF"), and its deposit accounts are insured up to applicable
limits by the FDIC. The deposit premiums paid by the Bank to the FDIC for
deposit insurance are currently paid to the SAIF. The Bank is also a member of
the FHLB of Atlanta. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approvals prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions. The OTS and the FDIC conduct
periodic examinations to assess the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which a savings association can engage and is
intended primarily for the protection of the insurance fund and depositors. The
Company, as a savings and loan holding company, is subject to the regulation,
examination and supervision of the OTS and files certain reports with, and
otherwise complies with, the rules and regulations of the OTS and the Securities
and Exchange Commission under the federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the United States Congress, could have
a material adverse impact on the Company, the Bank, and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies, and generally does not purport to be a comprehensive description of
all such statutes and regulations.
Regulation of Savings and Loan Holding Companies
As a savings and loan holding company, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
association subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings association.
The Home Owners' Loan Act, as amended ("HOLA") prohibits a savings and loan
holding company, directly or indirectly, or through one or more subsidiaries,
from acquiring another savings association or holding company thereof, without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5.0% of a non-subsidiary savings association, a
non-subsidiary holding company or a non-subsidiary company engaged in activities
other than those permitted by HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating an
application by a holding company to acquire a savings association, the OTS must
consider the financial and managerial resources and future prospects of the
28
<PAGE>
company and savings association involved, the effect of the acquisition on the
risk to the FDIC's insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to satisfy the qualified thrift
tender ("QTL") test. See "Regulation of Federal Savings Associations -- QTL
Test" for a discussion of the QTL requirements. Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test, is deemed to be a savings association by the OTS and will be
held as a separate subsidiary, the Company would become a multiple savings and
loan holding company and would be subject to limitations on the types of
business activities in which it could engage. HOLA limits the activities of a
multiple savings and loan holding company and its non-insured association
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings associations in
more than one state, subject to two exceptions: an acquisition of a savings
association in another state (i) in a supervisory transaction, and (ii) pursuant
to authority under the laws of the state of the association to be acquired that
specifically permit such acquisitions. The conditions imposed upon interstate
acquisitions by those states that have enacted authorizing legislation vary.
Some states impose conditions of reciprocity, which have the effect of requiring
that the laws of both the state in which the acquiring holding company is
located (as determined by the location of its subsidiary savings association)
and the state in which the association to be acquired is located, have each
enacted legislation allowing its savings associations to be acquired by
out-of-state holding companies on the condition that the laws of the other state
authorize such transactions on terms no more restrictive than those imposed on
the acquirer by the state of the target association. Some of these states also
impose regional limitations, which restrict such acquisitions to states within a
defined geographic region. Other states allow full nationwide banking without
any condition of reciprocity. Some states do not authorize interstate
acquisitions of savings associations.
Transactions between the Bank and the Company and its other subsidiaries are
also subject to various conditions and limitations. See "Regulation of Federal
Savings Associations -- Transactions with Related Parties." The Bank is required
to give 30-days written notice to the OTS prior to any declaration of the
payment of any dividends or other capital distributions to the Company. See
"Regulation of Federal Savings Associations -- Limitation on Capital
Distributions."
During 1996, Congress entertained various industry restructuring proposals
that would require all federal savings banks to convert to national or state
bank charters and to be subject to regulation as commercial banks. Under such
proposals, all savings and loan holding companies, in turn, would be required to
register as bank holding companies under the BHC Act, and those holding
companies that were not unitary savings and loan holding companies on a
specified date would become subject to the activities restrictions set forth in
the BHC Act as well as the restrictions on affiliations with entities primarily
engaged in securities underwriting contained in the Glass-Steagall Act. While
the outcome of the ongoing efforts to merge the thrift industry into the banking
industry and to reorganize and consolidate the federal regulatory structure are
uncertain at this time, the foregoing proposal, if enacted, would cause the
Company to be regulated as a bank holding company. As such, the Company would be
subject to examination, regulation and periodic reporting under the BHC Act, as
administered by the Board of Governors of the Federal Reserve System (the
"FRB"). The end result of such initiatives, and the resulting impact on the
Company's business and operations, are unclear at this time.
Regulation of Federal Savings Associations
Business Activities
The Bank derives its lending and investment powers from the HOLA, and the
regulations of the OTS thereunder. Under these laws and regulations, the Bank
may invest in mortgage loans secured by residential and commercial real estate,
commercial and consumer loans, certain types of debt securities, and certain
other assets. The Bank may also establish service corporations that may engage
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in activities not otherwise permissible for the Bank, including certain real
estate equity investments and securities and insurance brokerage. These
investment powers are subject to various limitations, including: (i) a
prohibition against the acquisition of any corporate debt security that is not
rated in one of the four highest rating categories; (ii) a limit of 400% of an
association's capital on the aggregate amount of loans secured by nonresidential
real estate property; (iii) a limit of 20% of an association's assets on
commercial loans provided that amounts in excess of 10% of total assets are used
only for small business loans; (iv) a limit of 35% of an association's assets on
the aggregate amount of consumer loans and acquisitions of certain debt
securities; (v) a limit of 5.0% of assets on non-conforming loans (loans in
excess of the specific limitations of HOLA); and (vi) a limit of the greater of
5.0% of assets or an association's capital on certain construction loans made
for the purpose of financing what is or is expected to become residential
property.
Loans to One Borrower
Under HOLA, savings associations are generally subject to the same limits
on loans to one borrower as are imposed on national banks. Generally, under
these limits, a savings association may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if such loan or extension of credit is fully
secured by readily-marketable collateral. Such collateral is defined to include
certain debt and equity securities and bullion, but generally does not include
real estate.
The OTS has indicated that it considers a series of leases and secured
loans made by the Bank to Bennett Funding Group, Inc. and certain of its
affiliates to be transactions with one borrower.[These leases and loans have an
aggregate principal balance of $4.5 million which exceeds the Bank's legal
lending limit of $3.2 million.] To the extent that these transactions are
aggregated, the Bank will be deemed to be in violation of the loans to one
borrower rule under HOLA, as discussed above. The Bank has agreed with the OTS
to develop a plan to remedy the situation, although the details of such plan
have not yet been determined. Bennett Funding Group, Inc. is presently the
subject of bankruptcy proceedings in which the Trustee is contesting the secured
status of the Bank's loans. The Bank is vigorously defending its status as a
fully secured, perfected creditor and has established a reserve of approximately
$3 million to cover potential losses incurred in connection with the
proceedings. See "Litigation." The outcome of such proceedings may affect the
Bank's method of addressing the loans to one borrower violation, and the
outcome, timing, and effect of such proceedings and such violation cannot be
determined at this time.
QTL Test
Under the QTL test, a savings association is required to maintain at least
65% of its "portfolio assets" in certain "qualified thrift investments" in at
least 9 months of the most recent 12-month period. "Portfolio assets" mean, in
general, an association's total assets less the sum of (i) specified liquid
assets up to 20% of total assets, (ii) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (iii) the value of
property used to conduct the association's business. "Qualified thrift
investments" include various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans up to 10% of the
association's portfolio assets. At December 31, 1996, the Bank maintained 74.86%
of its portfolio assets in qualified thrift investments.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (i) engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings association does not requalify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
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any outstanding advances from an FHLB. A savings association that has failed the
QTL test may requalify under the QTL test and be free of such limitations, but
it may do so only once.
Capital Requirements
The OTS regulations require savings associations to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations, a leverage ratio requirement of 3.0% of
core capital to such adjusted total assets, and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt corrective action regulations, which impose a 4.0% core capital
requirement for "adequately capitalized" thrifts and a 5.0% core capital
requirement for "well capitalized" thrifts. See "Prompt Corrective Regulatory
Action." In determining the amount of risk-weighted assets for purposes of the
risk-based capital requirement, a savings association must compute its
risk-based assets by multiplying its assets and certain off-balance sheet items
by risk-weights, which range from 0% for cash and obligations issued by the
United States Government or its agencies to 100% for consumer and commercial
loans, as assigned by the OTS based on the risks the OTS believes are inherent
in the type of asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings)and certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain purchased
credit card relationships. Supplementary capital currently includes cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. The allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of supplementary capital that may be included as total capital
cannot exceed the amount of core capital.
When determining its compliance with the risk-based capital requirement, a
savings association with "above normal" interest rate risk is required to deduct
a portion of such capital from its total capital to account for the "above
normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) resulting from a hypothetical 2.0%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3-month Treasury bond
equivalent yield falls below 4.0%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2.0%. A savings association whose measured interest rate
risk exposure exceeds 2.0% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2.0%, multiplied by
the estimated economic value of the association's assets. That dollar amount is
deducted from an association's total capital in calculating its risk-based
capital. Any required deduction for interest rate risk becomes effective on the
last day of the third quarter following the reporting date of the association's
financial data on which the interest rate risk was computed. The regulations
authorize the Director of the OTS to waive or defer an association's interest
rate risk component on a case-by-case basis. At December 31, 1996, the Bank was
not required to maintain any additional risk-based capital under this rule.
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At December 31, 1996, the Bank met each of the OTS capital requirements, in
each case on a fully phased-in basis. The table below presents the Bank's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 1996:
December 31,
-------------------------------------------------
Actual Required Excess
-------------------------------------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(dollars in thousands)
Core capital........... $19,694 8.84% $ 6,681 3.00% $13,013 5.84%
Tangible capital....... 19,694 8.84 3,340 1.50 16,354 7.34
Risk-based capital..... 21,568 14.38 12,000 8.00 9,568 6.38
The OTS has adopted the Federal Financial Institutions Examination
Council's ("FFIEC") updated statement of policy entitled "Uniform Financial
Institutions Rating System" ("UFIRS") effective January 1, 1997. UFIRS is an
internal rating system used by the federal and state regulators for assessing
the soundness of financial institutions on a uniform basis and for identifying
those institutions requiring special supervisory attention. Under the previous
UFIRS, each financial institution was assigned a confidential composite rating
based on an evaluation and rating of five essential components of an
institution's financial condition and operations including Capital adequacy,
Asset quality, Management, Earnings, and Liquidity (the "CAMEL Rating"). In
updating UFIRS, the FFIEC increased its emphasis on the quality of risk
management practices and added a sixth component for sensitivity to market risk.
For most institutions, the FDIC has indicated that market risk primarily
reflects exposures to changes in interest rates. When regulators evaluate this
component, consideration is expected to be given to: management's ability to
identify, measure, monitor, and control market risk; the institution's size; the
nature and complexity of its activities and its risk profile; and the adequacy
of its capital and earnings in relation to its level of market risk exposure.
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Market risk is rated based upon, but not limited to: an assessment of the
sensitivity of the financial institution's earnings or the economic value of its
capital to adverse changes in interest rates, foreign exchanges rates, commodity
prices, or equity prices; management's ability to identify, measure, monitor,
and control exposure to market risk; and the nature and complexity of interest
rate risk exposure arising from nontrading positions.
Limitation on Capital Distributions
OTS regulations currently impose limitations upon capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. At least
30-days written notice must be given to the OTS of a proposed capital
distribution by a savings association, and capital distributions in excess of
specified earnings or by certain institutions are subject to approval by the
OTS. An association that has capital in excess of all fully phased-in regulatory
capital requirements before and after a proposed capital distribution and that
is not otherwise restricted in making capital distributions, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements, as described above. See "Prompt Corrective Regulatory Action."
The OTS has proposed regulations that would simplify the existing procedures
governing capital distributions by savings associations. Under the proposed
regulations, the approval of the OTS would be required only for an association
that is deemed to be in troubled condition or that is undercapitalized or would
be undercapitalized after the capital distribution. A savings association would
be able to make a capital distribution without notice to or approval of the OTS
if it is not held by a savings and loan holding company, is not deemed to be in
troubled condition, has received either of the two highest composite supervisory
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ratings and would continue to be adequately capitalized after such distribution.
Notice would have to be given to the OTS by any association that is held by a
savings and loan holding company or that had received a composite supervisory
rating below the highest two composite supervisory ratings. An association's
capital rating would be determined under the prompt corrective action
regulations. See "Prompt Corrective Regulatory Action."
Liquidity
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5.0%. OTS regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable deposit
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's liquidity
ratio at December 31, 1996 was 7.75%, and its short-term liquidity ratio was
3.83%, which exceeded the applicable requirements.
Assessments
Savings associations are required by OTS regulation to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, paid on a
semi-annual basis, is computed upon the savings association's total assets,
including consolidated subsidiaries, as reported in the association's latest
quarterly Thrift Financial Report.
Branching
Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such a branch is available (i) in
states that expressly authorize branches of savings associations located in
another state and (ii) to an association that qualifies as a "domestic building
and loan association" under the Code of Federal Regulations, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "QTL Test." The authority for a federal savings association to
establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions,nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings association, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
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housing and programs benefiting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.
The joint agency CRA regulations provide that an institution evaluated
under a given test receive one of five ratings for that test: outstanding; high
satisfactory; low satisfactory; needs to improve; or substantial non-compliance.
The ratings for each test are then combined to produce an overall composite
rating of either outstanding, satisfactory (including both high and low
satisfactory,) needs to improve, or substantial non-compliance. In the case of a
retail-oriented institution, its lending test rating forms the basis for its
composite rating. That rating is then increased by up to two levels in the case
of outstanding or high satisfactory investment performance, increased by one
level in the case of outstanding service, and decreased by one level in the case
of substantial non-compliance in service. An institution found to have engaged
in illegal lending discrimination is rebuttably presumed to have a
less-than-satisfactory composite CRA rating. The Bank received an "outstanding"
CRA rating in its most recent examination.
Small savings associations are to be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The term "small savings association" is defined as including associations with
less than $250 million in assets or an affiliate of a holding company with
banking and thrift assets of less than $1.0 billion, which would include the
Bank. An institution's CRA performance record is considered in certain
regulatory applications and may be used as a basis for denying an application.
Transactions with Related Parties
The Bank's authority to engage in transactions with its "affiliates" is
limited by the OTS regulations and by Sections 23A and 23B of the Federal
Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that
controls the Bank or any other company that is controlled by a company that
controls the Bank, excluding the Bank's subsidiaries other than those that are
insured depository institutions. The OTS regulations prohibit a savings
association (i) from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of transactions
with any individual affiliate to 10% of the capital and surplus of the savings
association and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings association's capital and surplus. Extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In the absence of comparable transactions, such transactions may only occur
under terms and circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the FRB thereunder. Among other things, these provisions
require that extensions of credit to insiders (i) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features with the exceptions of (1) the
benefit compensation must be widely available to employees of the bank and (2)
the benefit or compensation does not give preference to any insider over other
employees of the Bank and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the association's capital. In addition,
extensions of credit in excess of certain limits must be approved by the
association's board of directors.
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Enforcement
Under the Federal Deposit Insurance Act, as amended (the "FDI Act"), the OTS
has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders and
certain written agreements and conditions continue, up to $1,000,000 per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $10 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness
The FDI Act, as amended by the Federal Deposit Insurance Corporation
Improvement Act of 1991, as amended ("FDICIA") and the Riegle Community
Development and Regulatory Improvement Act of 1994 ("Community Development
Act"), requires the OTS, together with the other federal bank regulatory
agencies, to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits and
such other operational and managerial standards as the agencies deem
appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. The OTS and the other agencies determined that stock valuation
standards were not appropriate. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. See "Prompt
Corrective Regulatory Action." If an institution fails to comply with such an
order, the OTS may seek to enforce such order in judicial proceedings and to
impose civil money penalties.
Real Estate Lending Standards
The OTS and the other federal banking agencies adopted regulations to
prescribe standards for extensions of credit that (i) are secured by real estate
or (ii) are made for the purpose of financing the construction of improvements
on real estate. The OTS regulations require each savings association to
establish and maintain written internal real estate lending standards that are
consistent with safe and sound banking practices and appropriate to the size of
the association and the nature and scope of its real estate lending activities.
The standards also must be consistent with accompanying OTS guidelines, which
include loan-to-value ratios for the different types of real estate loans.
Associations are also permitted to make a limited amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed and justified appropriately. The guidelines also list a number of
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lending situations in which exceptions to the loan-to-value standards are
justified.
Prompt Corrective Regulatory Action
Under the OTS prompt corrective action regulations, the OTS is required to
take certain, and is authorized to take other, supervisory actions against
undercapitalized savings associations. For this purpose, a savings association
would be placed in one of five categories based on the association's capital.
Generally, a savings association is treated as "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10.0%, its ratio of Tier 1
(core) capital to risk-weighted assets is at least 6.0%, its ratio of Tier 1
(core) capital to total assets is at least 5.0%, and it is not subject to any
order or directive by the OTS to meet a specific capital level. A savings
association will be treated as "adequately capitalized" if its ratio of total
capital to risk-weighted assets is at least 8.0%, its ratio of Tier 1 (core)
capital to risk-weighted assets is at least 4.0%, and its ratio of Tier 1 (core)
capital to total assets is at least 4.0% (3.0% if the association receives the
highest rating on the CAMEL financial institutions rating system).
A savings association that has a total risk-based capital of less than 8.0%
or a leverage ratio or a Tier 1 (core) capital ratio that is less than 4.0%
(3.0% leverage ratio if the association receives the highest rating on the CAMEL
financial institutions rating system) is considered to be "undercapitalized." A
savings association that has a total risk-based capital of less than 6.0% or a
Tier 1 (core) risk-based capital ratio or a leverage ratio of less than 3.0% is
considered to be "significantly undercapitalized." A savings association that
has a tangible capital to assets ratio equal to or less than 2.0% is deemed to
be "critically undercapitalized." The elements of an association's capital for
purposes of the prompt corrective action regulations are defined generally as
they are under the regulations for minimum capital requirements. See "Capital
Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for an
association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depository association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
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FDIC from, among other things, entering into certain material transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
Where appropriate, the OTS can impose corrective action by a savings and
loan holding company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts
Pursuant to FDICIA, the FDIC established a new risk-based assessment system
for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (i)
well capitalized, (ii) adequately capitalized or (iii) undercapitalized. The
FDIC also assigns an institution to one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Asessment rates originally ranged from 0.04% (for the Bank
Insurance Fund (the "BIF"), which primarily insures commercial banks) or 0.23%
(for the SAIF) of deposits for an institution in the highest category (i.e.,
well-capitalized and financially sound, with no more than a few minor
weaknesses) to 0.31% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern).These rates were
established for both funds to achieve a designated ratio of reserves to insured
deposits (i.e., 1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so that,
beginning in 1996, the deposit insurance premiums for 92% of all BIF members in
the highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the assessment rate range
of 23 to 31 basis points for SAIF members given the undercapitalized nature of
that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates have
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits, in July 1995, the FDIC, the
Treasury Department, and the OTS released statements outlining a proposed plan
to recapitalize the SAIF, the principal feature of which was a special one-time
assessment on depository institutions holding SAIF-insured deposits, which was
intended to recapitalize the SAIF at a reserve ratio of 1.25%. This proposal
contemplated elimination of the disparity between the assessment rates on BIF
and SAIF deposits following recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act of
1996 (the "Funds Act") was enacted by Congress as part of omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC has implemented a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's SAIF-insured deposits
held as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Bank recorded charges
against earnings for the special assessment in the quarter ended September 30,
1996 in the amount of approximately $1,156,000 pre-tax.
In addition, on December 24, 1996, in order to avoid collecting more than
needed to maintain the SAIF's capitalization rate at 1.25 percent of aggregate
insured deposits, the FDIC adopted in final a revision in the SAIF assessment
rate schedule which retroactively effected, as of December 11, 1996, (i) a
widening in the assessment rate spread among institutions in the different
capital and risk assessment categories, (ii) an overall reduction of the
assessment rate range assessable on SAIF deposits of from 0 to 27 basis points,
and (iii) a special interim assessment rate range for the last quarter of 1996
of from 18 to 27 basis points on institutions subject to assessments with
37
<PAGE>
respect to certain bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the now-defunct FSLIC. Effective January 1, 1997, FICO
assessments are imposed on both BIF- and SAIF-insured deposits in annual amounts
presently estimated at 1.29 basis points and 6.44 basis points, respectively.
[The Bank anticipates that the net effect of the decrease in the premium
assessment rate on SAIF deposits will result in a reduction in their total
deposit insurance premium assessments for the years 1997 through 1999, assuming
no further changes in announced premium assessment rates.]
Accounting for Bad Debt Reserves
The Small Business Job Protection Act of 1996 repealed the reserve method
of accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. As a result, large thrift institutions with more than $500
million in assets are no longer able to deduct additions to a reserve for bad
debts but are permitted to deduct bad debts only as they occur. In addition, a
large thrift institution generally is required to recapture (i.e., take into
income) its post-1987 additions to its bad debt reserve, that is, the amount by
which its bad debt reserve exceeds the balance of such reserve as of the end of
its last taxable year ending before 1988.
Small thrift institutions with not more than $500 million in assets, such
as the Bank, are no longer permitted to make additions to their bad debt
reserves based upon a percentage of the Bank's taxable income (the "PTI Method")
but may make additions to their bad debt reserves based upon the Bank's actual
loss experience (the "Experience Method") in lieu of deducting bad debts only as
they occur. In the case of a small thrift institution, the recapture of
post-1987 additions to its bad debt reserve is limited to the amount of
recapture that reduces the reserve to the balance it would have had if the
institution had always computed its additions to reserves under the Experience
Method.
The excess reserves are recaptured into income over a period of six years,
which may be extended to seven or eight years if the thrift meets a residential
loan requirement. The Bank had no excess reserves. Thus, it was not subject to
any recapture.
The remainder of the Bank's pre-1988 bad debt reserves is subject to
recapture if the Bank ceases to qualify as a bank for federal income tax
purposes, or if the Bank makes certain distributions to the Company in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, or distributions in partial or complete liquidation. In the
event of a distribution considered to be made from its bad debt reserves, the
amount restored to income would be the amount which, when reduced by the amount
of tax on such income, is equal to the amount of the distribution. The Bank does
not intend to make any distribution that would result in recapture of any
portion of its pre-1988 bad debt reserves.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Atlanta, which is one of the regional
FHLBs composing the FHLB System. Each FHLB provides a central credit facility
primarily for its member institutions. The Bank, as a member of the FHLB of
Atlanta, is required to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to the greater of 1.0% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or 1/20 of its advances (borrowings)
from the FHLB of Atlanta. The Bank was in compliance with this requirement at
December 31, 1996 with an investment in FHLB of Atlanta stock , of $1,895,900.
Any advances from a FHLB must be secured by specified types of collateral, and
all long-term advances may be obtained only for the purpose of providing funds
for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.
38
<PAGE>
Federal Reserve System
The Bank is subject to provisions of the FRA and the FRB's regulations
pursuant to which depository institutions may be required to maintain
non-interest-earning reserves against their deposit accounts and certain other
liabilities. Currently, reserves must be maintained against transaction accounts
(primarily NOW and regular checking accounts). The FRB regulations generally
require that reserves be maintained in the amount of 3.0% of the aggregate of
transaction accounts up to $52.0 million. The amount of aggregate transaction
accounts in excess of $52.0 million are currently subject to a reserve ratio of
10.0%, which ratio the FRB may adjust between 8.0% and 12%. The FRB regulations
currently exempt $4.3 million of otherwise reservable balances from the reserve
requirements, which exemption is adjusted by the FRB at the end of each year.
The Bank is in compliance with the foregoing reserve requirements. Because
required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the FRB, the effect of this reserve requirement is to
reduce the Bank's interest-earning assets. The balances maintained to meet the
reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. FHLB System members are also authorized to
borrow from the Federal Reserve discount window, but FRB regulations require
such institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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
39
<PAGE>
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.
40
<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%
41
<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
42
<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
43
<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. The income tax benefit recorded in 1996
resulted from the net loss before income taxes during that year. Management
deemed the items creating the 1996 loss to be temporary in nature, therefore
resulting in the recording of a deferred tax asset representing the tax effect
of future taxable benefits which could be recognized.
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
============ ============
44
<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.
45
<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. Since it is not the intent of management to reissue
these shares, these shares were classified as authorized but unissued at
December 31, 1995. 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.
46
<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.
47
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
48
<PAGE>
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
49
<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
--------- ---------
Cash and cash equivalents .................... 6,084,923 7,850,254
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
50
<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
Miscellaneous....................... 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
51
<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) $ 1.02 $ .88
==== ==== ====
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.
52
<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)
(Increase) decrease in loans
held-for-sale ................... (312,927) 22,050 2,671,753
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 ............. 3,568,751 221,966 3,757,573
---------- -------- ----------
Net cash provided by
operating activities ......... 3,391,125 2,247,973 5,525,425
---------- ---------- ----------
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
Net change in loans ............... (2,952,229) (2,313,658) 18,401,005
Purchase of investment securities
available-for-sale .............. (8,909,864) (10,024,257) (23,338,491)
53
<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 ................... 4,676,921 3,523,746 (34,141,963)
----------- ----------- -----------
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
=============== ============= =============
Supplemental Disclosure of Noncash Financing Activities -
Increase (decrease) in
dividends payable ...... 29,541 (7,335) -
See Notes to Consolidated Financial Statements.
54
<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.
55
<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.
56
<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.
57
<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.
58
<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
=========== ======== ========= ===========
59
<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.
60
<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:
61
<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
=========== ===========
62
<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
========== ========== ==========
63
<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.
64
<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 and retired 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.
65
<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
=========== =========== ===========
66
<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.
67
<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. The assumed weighted average discount rate was 8% 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.
68
<PAGE>
18. Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," became effective January 1, 1996. This statement encourages, but
does not require, entities to compute the fair value of options at the date of
grant and to recognize such costs as compensation expense immediately if there
is no vesting period or ratably over the vesting period of the options. FLAG has
chosen not to adopt the cost recognition principles of this statement. No
compensation expense has been recognized in 1996 or 1995 relating to the stock
option plans. Had compensation cost been determined based upon the fair value of
the options at the grant dates consistent with the method of the new statement,
FLAG's net earnings and net earnings per share would have been reduced to the
pro forma amounts indicated below.
1996 1995
---- ----
Net earnings (loss) As reported (177,626) 2,026,007
Pro forma (184,064) 2,026,007
Earnings (loss) As reported (.09) 1.02
per share Pro forma (.09) 1.02
The fair value of each option is estimated on the date of grant using the
minimum value options pricing model with the following weighted average
assumptions used for grants in 1996: dividend yield of 3%; risk-free interest
rate of 6% and an expected life of 5 years. The weighted average grant-date fair
value of options granted in 1996 was $1.73.
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.
69
<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.
70
<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.
71
<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.
72
<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
73
<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
========= =========
74
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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:
BALANCE SHEETS
DECEMBER 31,
1996 1995
---- ----
ASSETS
Cash .............................. $ 489,869 281,782
Investment securities ............. 188,125 -
Investment in subsidiary .......... 19,910,996 20,494,673
Other assets ...................... 36,593 46,864
------ ------
Total assets $ 20,625,583 20,823,319
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities - accounts payable and
accrued expenses............. 114,389 125,103
Total stockholders' equity ........ 20,511,194 20,698,216
------------ ------------
Total liabilities and stock-
holders' equity ........................ $ 20,625,583 $ 20,823,319
============ ============
STATEMENT OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Income:
Dividend income from the Bank .... $ 525,008 $ 2,282,699 -
Interest income .................. - - -
Other ............................ 633 - -
------- --------- -------
Total income .................. 525,641 2,282,699 -
------- --------- -------
Operating expenses:
Interest expense ................. - - -
Other ............................ 145,445 132,824 16,570
------- ------- ------
Total operating expenses ...... 145,445 132,824 16,570
------- ------- ------
Earnings (loss) before income
tax benefit and equity in
undistributed earnings of
subsidiaries ................ 380,196 2,149,875 (16,570)
Income tax benefit ................. 50,903 18,500 6,297
------ ------ -----
Earnings (loss) before equity
in undistributed earnings of
subsidiaries or dividends
received in excess of earnings
of subsidiaries ............. 431,099 2,l68,375 (10,273)
Dividends received in excess of
earnings (loss) of subsidiaries .. (608,726) (142,368) -
Equity in undistributed earnings
(loss) of subsidiaries............ - - 1,778,125
--------- --------- ---------
Net earnings (loss)............ $ (177,627) 2,026,007 1,767,852
========== ========= =========
75
<PAGE>
Statements of Cash Flows
For the Years Ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) .............. $ (177,627) $2,026,007 $1,767,852
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Amortization 14,419 14,419 -
Dividends received in excess of
earnings (loss) subsidiaries .. 608,726 142,368 -
Equity in undistributed earnings
of subsidiaries ............... - - (1,778,125)
Change in other assets and
liabilities ................... (41,888) 154,585 54,585
------- ------- ------
Net cash provided by
operating activities ..... 403,630 2,337,379 603,750
------- --------- -------
Cash flows from investing activities:
Purchase of securities
available-for-sale............... (194,742) - -
Cash flows from financing activities:
Repurchase of common stock ......... - (1,633,272) -
Exercise of stock options .......... 630,629 124,398 -
Issuance of common stock ........... 8,990 59,486 -
Dividends paid...................... (640,420) (606,209) (603,750)
-------- -------- --------
Net cash used by financing
activities ............... (801) (2,055,597) (603,750)
--------- ---------- --------
Net change in cash ................... 208,087 281,782 -
Cash at the beginning of the year .... 281,782 - -
------- ---------- --------
Cash at the end of the year .......... $489,869 $ 281,782 $ -
======= ========== ========
Supplemental disclosure of noncash
financing activities - Increase
(decrease) in dividends payable .... $ 29,541 $ (7,335) $ -
======= ========== ========
The Company is not required to furnish the supplementary financial
information specified by Item 302 of Regulation S-K.
76
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of This Report:
1. Financial Statements
The consolidated financial statements and the independent
auditors' report thereon which are required to be filed as part
of this report are included in the Company's 1996 Annual Report
and are included in Item 8 hereof. These financial
statements are as follows:
Consolidated Statements of Condition at December 31, 1996 and
1995
Consolidated Statements of Income for each of the three years in
the period ended December 31, 1996
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission have been omitted because such schedules are
not required under the related instructions or are inapplicable
or because the information required is included in the financial
statements or notes thereto incorporated by reference herein.
3. Exhibits
The following exhibits are filed as part of or incorporated by
reference in this report. Where such filing is made by
incorporation by reference to a previously filed registration
statement or report, such registration statement or report is
identified in parentheses. The Company will furnish any exhibit
upon request to Susan R. Huckabee, Investor Relations Department,
FLAG Financial Corporation, 101 North Greenwood Street, LaGrange,
Georgia 30240. There is a charge of $.50 per page to cover
expenses of copying and mailing.
77
<PAGE>
Exhibit No. Description
3.1 (i) Articles of Incorporation of the Company, as amended through
October 15, 1993 (Exhibit 3.1(i) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
(ii) Bylaws of the Company, as amended through September 16, 1993
(Exhibit 3.1(ii) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.1 Agreement and Plan of Merger and Reorganization dated February 28,
1994 among the Bank, the Company and FLAG Interim Savings Bank
(Exhibit 2.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10.2 Tax Sharing Agreement dated March 1, 1994, among the Company, the Bank
and Piedmont Mortgage Service, Inc. (Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993)
10.3 Management Contracts and Compensatory Plans:
a. Employment Agreement between John S. Holle and the Bank dated as
of January 1, 1993 (Exhibit 10.4 to the Company's Registration
Statement on Form S-4, Registration No. 33-58392)
b. Employment Agreement between Ellison C. Rudd and the Bank dated
as of January 1, 1995 - (Exhibit 10.3b to the Company's 10-K for
the fiscal year ended December 31, 1995)
c. 1986 Stock Option and Incentive Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration No.
33-58392)
d. FLAG Financial Corporation 1994 Employees Stock Incentive Plan
(Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
e. FLAG Financial Corporation 1994 Directors Stock Incentive Plan
(Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
f. Profit Sharing Thrift Plan, as amended through November 1, 1992
(Exhibit 10.2 to the Company's Registration Statement on Form
S-4, Registration No. 33-58392)
g. Pension Retirement Plan (Exhibit 10.3 to the Company's
Registration Statement on Form S-4, Registration No. 33-58392)
11 Statement regarding computation of per share earnings
16 Letter regarding change in certifying accountant (Exhibit 16 to the
Company's Form 8-K/A filed March 12, 1997)
21 Subsidiaries (Exhibit 21 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994)
23 Consent of Robinson, Grimes & Company, P.C.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company with the
Securities and Exchange Commission during the quarter ended December
31, 1996.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: February 17, 1998 By: /S/ John S. Holle
------------------------
John S. Holle
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on February 17, 1998.
Signature Title
Chairman of the Board, President and Chief Executive Officer
John S. Holle
/s/Ellison C. Rudd
- -------------------- Executive Vice President, Chief Financial Officer,
Ellison C. Rudd Treasurer and Director (Principal Financial and
Accounting Officer)
/s/ Dr. Albert Glenn Bailey
- --------------------------- Director
Dr. Albert Glenn Bailey
/s/ H. Speer Burdette III
- ------------------------ Director
H. Speer Burdette, III
/s/ Fred A. Durand, III
- ------------------------ Director
Fred A. Durand, III
/s/ Kelly R. Linch
- ------------------------ Director
Kelly R. Linch
/s/ Gordon M. Smith
- ------------------------ Director
Gordon M. Smith
79
<PAGE>
/s/ John S. Stewart, Jr.
- ------------------------ Director
John W. Stewart, Jr.
/s/ Dr. Steven P. Teaver
- ------------------------ Director
Dr. Steven P. Teaver
/s/ Robert W. Walters
- ------------------------ Director
Robert W. Walters
*By: _____________________________
John S. Holle
As Attorney-in-Fact
80
<PAGE>
FLAG FINANCIAL CORPORATION
Index of Exhibits
The following exhibits are filed as part of or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
Exhibit No. Description
3.1 (i) Articles of Incorporation of the Company, as amended
through October 15, 1993 (Exhibit 3.1(i) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
(ii) Bylaws of the Company, as amended through September 16,
1993 (Exhibit 3.1(ii) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
10.1
Agreement and Plan of Merger and Reorganization dated
February 28, 1994 among the Bank, the Company and FLAG
Interim Savings Bank (Exhibit 2.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
10.2 Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Exhibit 10.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993)
10.3 Management Contracts and Compensatory Plans:
a. Employment Agreement between John S. Holle and the Bank
dated as of January 1, 1993 (Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
b. Employment Agreement between Ellison C. Rudd and the Bank
dated as of January 1, 1995 - (Exhibit 10.3 b to the
Company's 10-K for the fiscal year ended December 31, 1995)
c. 1986 Stock Option and Incentive Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration
No. 33-58392)
d. FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Exhibit 10.6 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
81
<PAGE>
e. FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
f. Profit Sharing Thrift Plan, as amended through November 1,
1992 (Exhibit 10.2 to the Company's Registration Statement
on Form S-4, Registration No. 33-58392)
g. Pension Retirement Plan (Exhibit 10.3 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
11 Statement regarding computation of per share earnings
16 Letter regarding change in certifying accountant (Exhibit 16 to
the Company's Form 8-K/A filed March 12, 1997)
21 Subsidiaries (Exhibit 21 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994)
23 Consent of Robinson, Grimes & Company, P.C.
82
<PAGE>
COMPUTATION OF PER SHARE EARNINGS
Primary: 1996 1995 1994
Average Shares
Outstanding ......... 2,010,798 1,990,724 2,012,500
Net income ............ ($177,627) $2,026,007 $1,767,852
Net income per share .. ($0.09) $1.02 $0.88
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of FLAG Financial Corporation of our Independent Auditors'
Report dated January 31, 1997, which appears in the 1996 Annual Report to
Stockholders of FLAG Financial Corporation incorporated by reference in the
Annual Report on Form 10-K/A of FLAG Financial Corporation for the year ended
December 31, 1996.
/s/ Robinson, Grimes & Company, P.C.
Certified Public Accountants
Columbus, Georgia
February 17, 1998
