POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET, N.E.
SIXTEENTH FLOOR
ATLANTA, GEORGIA 30303
(404 572-6600)
October 15, 1998
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: FLAG Financial Corporation - Registration Statement on Form S-4
Ladies and Gentlemen:
As counsel to FLAG Financial Corporation, a Georgia corporation (the
"Company"), we enclose for filing with the Commission under the Securities Act
of 1933, as amended, the Company's Registration Statement on Form S-4
registering 262,500 shares of its common stock for issuance in connection with
the proposed merger of The Brown Bank with and into Citizens Bank, a
wholly-owned subsidiary of the Company.
No distribution of the Registration Statement or the related Proxy
Statement/Prospectus will be made prior to effectiveness of the Registration
Statement, except that, as noted below, copies will be furnished to certain bank
regulatory agencies pursuant to their filing requirements.
The transactions described in the Registration Statement are also
subject to certain filings with and approvals by the Federal Deposit Insurance
Corporation and the Georgia Department of Banking and Finance. We will advise
you promptly if a favorable approval is not obtained from any of these entities,
although no difficulty is expected in obtaining such approvals.
If you have any questions or comments concerning the Registration
Statement, please call me at 404/572-4514 or Kathryn L. Knudson at 404/572-6952.
Our fax number is 404/572-5954 or 404/572-6999.
Sincerely,
/s/ Lynn M. Sumlin
------------------
For POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
Enclosures
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1998
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------
FLAG FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Georgia 6060 58-2094179
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
101 NORTH GREENWOOD STREET
LAGRANGE, GEORGIA 30240
(706) 845-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
J. Daniel Speight, Jr.
President and Chief Executive Officer
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service) with copies to:
Walter G. Moeling, IV T. Daniel Brannan, Esq.
Powell, Goldstein, Frazer & Murphy LLP Morris Manning & Martin L.L.P.
Suite 1600 1600 Atlantic Financial Center
191 Peachtree Street, N.E. 3343 Peachtree Road, N.E.
Atlanta, Georgia 30303 Atlanta, Georgia 30326
(404) 572-6600 (404) 233-7000
--------------------
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| _____________________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ________________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------- --------------- --------------------- -------------------- ----------------
Title of Each Class Proposed Maximum Proposed Maximum
of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered (1) Per Unit Offering Price (2) Registration
Fee
- ----------------------------------------- --------------- --------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 262,500 N/A 1,673,000 $494.00
=====================================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares of the
common stock of the Registrant which is expected to be issued in connection with
the merger.
(2) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis
of the aggregate book value of the common stock of The Brown Bank to be
exchanged in the merger. The registrant hereby amends this registration
statement on such date or dates as may be necessary to dela its effective date
until the registrant shall file a further amendment which specifically states
that this registration statement shall thereafter become effective in accordance
with section 8(a) of the securities act of 1933 or until the registration
statement shall become effective on such date as the commission, acting pursuant
to said section 8(a), may determine.
<PAGE>
THE BROWN BANK
Railroad Street
Cobbtown, Georgia 30420
To the Shareholders of October __, 1998
The Brown Bank
I am pleased to invite you to attend a Special Meeting of the
shareholders of The Brown Bank to be held at the main office of The Brown Bank,
located at Railroad Street, Cobbtown, Georgia, on _________, ______________,
1998, at _____ p.m., local time.
At the Special Meeting, you will be asked to approve the merger
agreement among The Brown Bank, FLAG Financial Corporation and Citizens Bank.
The merger agreement provides that The Brown Bank will merge into Citizens Bank,
which is a wholly-owned subsidiary of FLAG Financial Corporation. As a result of
the merger, each outstanding share of common stock of The Brown Bank (except for
shares held by The Brown Bank, FLAG Financial Corporation, or their
subsidiaries, and shares held by shareholders of The Brown Bank who exercise
their dissenters' rights) will be exchanged for 1.5 shares of FLAG Financial
Corporation common stock. FLAG Financial Corporation will pay shareholders of
The Brown Bank cash instead of issuing fractional shares.
Your Board believes that the merger will have many benefits. We believe
that the combined company will have greater financial strength and greater
opportunity and flexibility to expand and diversify. Your Board of Directors
unanimously approved the merger agreement and recommends that you approve the
merger agreement. Consummation of the merger is subject to certain conditions,
including approval of the merger agreement by the affirmative vote by holders of
two-thirds of the outstanding voting stock of The Brown Bank and approval of the
merger by various regulatory agencies.
This Proxy Statement/Prospectus provides detailed information about the
proposed merger. You should read this entire document carefully. You can also
get information about FLAG Financial Corporation from the Securities and
Exchange Commission.
Whether or not you plan to attend the Special Meeting, you are urged to
complete, sign, and promptly return the enclosed proxy card. If you attend the
Special Meeting, you may vote in person if you wish, even if you previously have
returned your proxy card. The proposed merger with FLAG Financial Corporation is
a significant step for The Brown Bank and your vote on this matter is of great
importance.
On behalf of the board of directors, I strongly urge you to vote FOR
approval of the merger agreement and the transactions contemplated therein by
marking the enclosed proxy card "FOR" item one.
We look forward to seeing you at the Special Meeting.
Sincerely,
Dennis D. Allen
President and Chief Executive Officer
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission or any state securities
commission has approved of the securities to be issued under this Proxy
Statement/Prospectus or determined if this Proxy Statement/Prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
The securities offered hereby are not savings accounts or deposit accounts or
other obligations of any bank or savings association and they are not insured by
the Federal Deposit Insurance Corporation, the Bank Insurance Fund or any other
government agency.
- --------------------------------------------------------------------------------
This Proxy Statement/Prospectus is dated October __, 1998 and was first mailed
to shareholders on October __, 1998.
<PAGE>
We have not authorized anyone to give any information or make any
representation about the merger or our companies that differs from, or adds to,
the information in the Proxy Statement/Prospectus or in documents that are
publicly filed with the Securities and Exchange Commission. Therefore, if anyone
does give you different or additional information, you should not rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange
or sell, or to ask for offers to exchange or buy, the securities offered by this
Proxy Statement/Prospectus or to ask for proxies, or if you are a person to whom
it is unlawful to direct such activities, then the offer presented by this Proxy
Statement/Prospectus does not extend to you.
The information contained in this Proxy Statement/Prospectus speaks
only as of its date unless the information specifically indicates that another
date applies.
Information in this Proxy Statement/Prospectus about FLAG Financial
Corporation has been supplied by FLAG Financial Corporation, and information
about The Brown Bank has been supplied by The Brown Bank.
A Warning About Forward-Looking Statements
Each company makes forward-looking statements that are subject to risks
and uncertainties in this document. FLAG Financial Corporation's public
documents also contain forward-looking statements. These forward-looking
statements include information about possible or assumed future results of
operations or the performance of FLAG Financial Corporation after the merger of
The Brown Bank and Citizens Bank. When we use words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions, we are
making forward-looking statements. Many possible events or factors could affect
the financial results and performance of each of our companies. This could cause
results or performances to differ materially from those expressed in our
forward-looking statements.
You should consider these risks when you vote on the merger. These
possible events or factors include the following:
(1) our cost savings from the merger are less than we expect, or
we are unable to obtain those cost savings as soon as we
expect;
(2) we lose more deposits, customers, or business than we expect;
(3) competition in the banking industry increases significantly;
(4) our restructuring costs are higher than we expect or our
operating costs after the merger are greater than we expect;
(5) technological changes and systems integration are harder to
make or more expensive than we expect;
(6) changes in the interest rate environment reduce our margins;
(7) general economic or business conditions are worse than we
expect;
(8) legislative or regulatory changes occur which adversely affect
our business;
(9) changes occur in business conditions and inflation;
(10) changes occur in the securities markets; and
(11) we have more trouble obtaining regulatory approvals for the
merger than we expect.
<PAGE>
PROPOSED MERGER OF THE BROWN BANK WITH CITIZENS BANK
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _________________, 1998
The Brown Bank ("Brown") will hold a Special Meeting of shareholders at
the main office of Brown, located at Railroad Street, Cobbtown, Georgia, on
__________, ___________, 1998, at _____ p.m., local time, to vote on:
1. Agreement and Plan of Merger, dated as of July 24, 1998 (the "Merger
Agreement"), among Brown, FLAG Financial Corporation, and Citizens Bank, a
wholly-owned subsidiary of FLAG Financial Corporation. The Merger Agreement
provides that Brown will merge with Citizens Bank. Each outstanding share of
Brown common stock at the effective time of the merger will be exchanged for 1.5
shares of FLAG Financial Corporation common stock, as more fully described in
the accompanying Proxy Statement/Prospectus. A copy of the Merger Agreement is
attached to the accompanying Proxy Statement/Prospectus as Appendix A.
2. Any other business as may come properly before the Special Meeting,
or any adjournments or postponements.
Only shareholders who hold their stock at the close of business on
____________, 1998, will be entitled to notice of and to vote at the Special
Meeting or any adjournment or postponement thereof. Approval of the Merger
Agreement and the transactions contemplated therein requires the affirmative
vote of a majority of the issued and outstanding shares of Brown common stock.
The Board of Directors of Brown recommends that shareholders vote FOR
approval of the Merger Agreement.
BY ORDER OF THE BOARD OF DIRECTORS
Dennis D. Allen
President and Chief Executive Officer
Cobbtown, Georgia
October __, 1998
Whether or not you plan to attend the Special Meeting, please complete,
date, and sign the enclosed form of proxy and promptly return it in the enclosed
postage paid return envelope in order to ensure that your shares will be
represented at the Special Meeting.
--------------------
Each shareholder has the right to dissent from the Merger Agreement and
demand payment of the fair value of his shares in cash if the merger is
consummated. The right of any shareholder to receive such payment is contingent
upon strict compliance with the requirements of Part 552 of the Regulations of
the Office of Thrift Supervision, 12 C.F.R. Section 552.14. The full text of 12
C.F.R. Section 552.14, that describes the right to dissent is included as
Appendix B to the accompanying Proxy Statement/Prospectus. See "DESCRIPTION OF
MERGER--Dissenters' Rights" in the accompanying Proxy Statement/Prospectus, page
22.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY........................................................................1
THE COMPANIES...............................................................1
THE MERGER..................................................................1
OUR REASONS FOR THE MERGER..................................................1
RECOMMENDATION TO BROWN SHAREHOLDERS........................................2
THE BROWN BANK SPECIAL SHAREHOLDER MEETING..................................2
RECORD DATE FOR SPECIAL SHAREHOLDER MEETING.................................2
VOTE REQUIRED...............................................................2
WHAT BROWN SHAREHOLDERS WILL RECEIVE........................................3
REGULATORY APPROVALS........................................................3
CONDITIONS TO THE MERGER....................................................3
TERMINATION OF THE MERGER AGREEMENT.........................................3
DISSENTERS' RIGHTS..........................................................4
OTHER INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER THAT ARE
DIFFERENT FROM YOURS........................................................4
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.....................4
ACCOUNTING TREATMENT OF THE MERGER..........................................5
CERTAIN DIFFERENCES IN SHAREHOLDERS' RIGHTS.................................5
COMPARATIVE MARKET PRICES OF COMMON STOCK...................................5
DIVIDENDS AFTER THE MERGER..................................................5
LISTING OF FLAG COMMON STOCK................................................5
RISK FACTORS................................................................6
COMPARATIVE PER SHARE DATA..................................................6
SELECTED FINANCIAL DATA.....................................................8
SELECTED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA....................9
RECENT DEVELOPMENTS IN FLAG'S BUSINESS.....................................11
RISK FACTORS..................................................................12
THERE IS LIMITED MARKET FOR SHARES OF FLAG COMMON STOCK....................12
THERE ARE RESTRICTIONS ON FLAG'S ABILITY TO PAY DIVIDENDS..................12
THERE MAY BE POSSIBLE COSTS ASSOCIATED WITH THE
INTEGRATION OF FLAG'S PENDING ACQUISITIONS...............................12
FLAG IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION.......................12
THE FINANCIAL INSTITUTION INDUSTRY IS VERY COMPETITIVE.....................12
MANAGEMENT OF FLAG HOLDS A LARGE PORTION OF FLAG COMMON STOCK..............13
FLAG'S ARTICLES OF INCORPORATION AND BYLAWS MAY PREVENT
TAKEOVER BY ANOTHER COMPANY..............................................13
YEAR 2000 ISSUES...........................................................13
MEETING OF BROWN SHAREHOLDERS.................................................13
DATE, PLACE, TIME, AND PURPOSE.............................................13
RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES.....14
DESCRIPTION OF MERGER.........................................................15
GENERAL....................................................................15
BACKGROUND OF AND REASONS FOR THE MERGER...................................16
EFFECTIVE DATE OF THE MERGER...............................................18
DISTRIBUTION OF FLAG CERTIFICATES..........................................18
i
<PAGE>
CONDITIONS TO CONSUMMATION OF THE MERGER...................................20
REGULATORY APPROVALS.......................................................21
WAIVER, AMENDMENT, AND TERMINATION.........................................22
DISSENTERS' RIGHTS.........................................................22
CONDUCT OF BUSINESS PENDING THE MERGER.....................................24
MANAGEMENT AND OPERATIONS AFTER THE MERGER; INTERESTS OF
CERTAIN PERSONS IN THE MERGER............................................26
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................28
ACCOUNTING TREATMENT.......................................................29
EXPENSES AND FEES..........................................................30
RESALES OF FLAG COMMON STOCK...............................................30
DESCRIPTION OF FLAG COMMON STOCK..............................................31
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS................................32
AUTHORIZED CAPITAL STOCK...................................................32
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS..........................33
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING.............34
REMOVAL OF DIRECTORS.......................................................35
INDEMNIFICATION............................................................35
SPECIAL MEETINGS OF SHAREHOLDERS...........................................36
ACTIONS BY SHAREHOLDERS WITHOUT A MEETING..................................36
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS...............................36
SHAREHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS..........................37
DIVIDENDS..................................................................38
COMPARATIVE MARKET PRICES AND DIVIDENDS.......................................38
BUSINESS OF BROWN.............................................................40
GENERAL....................................................................40
MANAGEMENT STOCK OWNERSHIP.................................................40
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF BROWN......................41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................42
CERTAIN TRANSACTIONS AND BUSINESS RELATIONSHIPS............................58
YEAR 2000 ISSUES...........................................................58
BUSINESS OF FLAG..............................................................59
GENERAL....................................................................59
DIRECTORS AND EXECUTIVE OFFICERS...........................................59
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION..................................65
SHAREHOLDER PROPOSALS.........................................................72
EXPERTS.......................................................................72
LEGAL MATTERS.................................................................73
OTHER MATTERS.................................................................73
WHERE YOU CAN FIND MORE INFORMATION ABOUT FLAG................................73
ii
<PAGE>
INDEX TO BROWN FINANCIAL DATA................................................F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER BY AND AMONG
FLAG FINANCIAL CORPORATION, CITIZENS BANK AND THE BROWN BANK..A-1
APPENDIX B -- DISSENTERS' RIGHTS.............................................B-1
iii
<PAGE>
SUMMARY
This summary highlights selected information from this Proxy
Statement/Prospectus. Because this is a summary, it does not contain all of the
information that may be important to you. You should read the entire Proxy
Statement/Prospectus and its appendices carefully before you decide to vote.
The Companies (Page 40 for Brown, Page 59 for FLAG)
The Brown Bank
Railroad Street
Cobbtown, Georgia 30420
912-684-2130
Brown is a federal savings bank headquartered in Cobbtown, Georgia.
Brown has three banking offices located in Cobbtown, Reidsville and Metter,
Georgia. Brown offers a broad range of banking and banking-related services. The
Brown Bank Service Corporation is a Georgia corporation and a wholly-owned
subsidiary of Brown. The Brown Bank Service Corporation provides various
insurance products. As of June 30, 1998, Brown's total assets were about $28.7
million, deposits were about $25.9 million and shareholder's equity was about
$1.7 million.
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
706-845-5000
FLAG is a bank holding company headquartered in LaGrange, Georgia. FLAG
is the sole shareholder of the following depository institutions: Citizens Bank,
Bank of Milan and First Federal Savings Bank of LaGrange. Through its
subsidiaries, FLAG offers a full array of deposit accounts and retail and
commercial banking services, engages in small business lending, residential and
commercial real estate lending, mortgage banking services, brokerage services
and performs real estate appraisal services. As of June 30, 1998, FLAG's total
assets were about $442.9 million, deposits were about $339.2 million and
shareholders' equity was about $38.6 million.
The Merger (Page 15)
The Merger Agreement provides for the merger of Brown and Citizens
Bank. After the merger, the combined company will be called "Citizens Bank."
Citizens Bank is a subsidiary of FLAG and will remain a subsidiary of FLAG after
the merger.
A copy of the Merger Agreement is included as Appendix A to this Proxy
Statement/Prospectus. We encourage you to read the Merger Agreement since it is
the legal document that governs the merger.
Our Reasons for the Merger (Page 16)
The Brown Board of Directors unanimously approved the Merger Agreement.
In deciding to approve the Merger Agreement, the Brown Board of Directors
considered a number of factors, including:
1. the ability to diversify lending risks,
2. the liquidity of FLAG common stock,
3. the characteristics of the markets in which FLAG currently operates,
and
1
<PAGE>
4. FLAG and Brown's shared vision for future expansion.
The FLAG Board of Directors believes that the merger is in the best
interests of FLAG and its shareholders. The FLAG Board of Directors unanimously
approved the Merger Agreement. In deciding to approve the Merger Agreement and
the issuance of shares of FLAG common stock to Brown shareholders in the merger,
the FLAG Board of Directors considered a number of factors, including:
1. the financial condition of Brown,
2. the likelihood of regulators approving the merger without undue
conditions or delay,
3. the financial and nonfinancial terms of the merger, and
4. the compatibility and the community bank orientation of FLAG
and Brown.
The Boards of Directors of Brown and FLAG believe that the merger will
result in a company with expanded opportunities for profitable growth and that
the combined resources and capital of Brown and FLAG will provide greater
ability to compete in the changing and competitive financial services industry.
Recommendation to Brown Shareholders (Page 17)
The Brown Board believes that the merger of Brown and Citizens Bank is
in the best interests of Brown and Brown's shareholders. The Brown Board
unanimously recommends that you vote FOR the merger.
The Brown Bank Special Shareholder Meeting (Page 13)
The Special Meeting will be held at the main office of Brown, located
at Railroad Street, Cobbtown, Georgia, on __________, _________, 1998, at ____
p.m., local time. The Brown Board of Directors is soliciting proxies for use at
the Special Meeting of Brown shareholders. At the Special Meeting the Brown
Board of Directors will ask the Brown shareholders to vote on a proposal to
approve the merger of Brown and Citizens Bank.
Record Date for Special Shareholder Meeting (Page 14)
You may vote at the Special Meeting if you owned Brown common stock as
of the close of business on ____________, 1998. You will have one vote for each
share of Brown common stock you owned on ____________, 1998. You can revoke your
proxy at any time prior to the vote at the Special Meeting.
Vote Required (Page 14)
In order to approve the merger, shareholders holding two-thirds of the
outstanding shares of Brown common stock must approve the Merger Agreement. As
of the Brown Record Date, all directors and executive officers of Brown as a
group (11 persons) could vote approximately 82,059 shares of Brown common stock,
constituting approximately 47% of the total number of shares of Brown common
stock outstanding at that date. The Brown directors and executive officers have
committed to vote their shares of Brown common stock in favor of the merger. As
of the Brown Record Date, FLAG held 5,000 shares of Brown common stock. FLAG
will vote its shares of Brown Common Stock in favor of the merger.
2
<PAGE>
What Brown Shareholders will Receive (Page 15)
As a result of the merger, FLAG will pay Brown shareholders 1.5 shares
of FLAG common stock for each share of Brown common stock that they own. Brown
shareholders will not receive fractional shares. Instead, they will receive a
check in payment for any financial shares based on the market value of FLAG
common stock. The market value is determined by the last sale price of FLAG
common stock on the Nasdaq National Market (as reported by The Wall Street
Journal) on the last trading day before the merger becomes effective.
Once the merger is complete, FLAG's transfer agent will mail to you
materials and instructions for use to exchange your Brown stock certificates for
FLAG stock certificates.
Brown shareholders should not send in their stock certificates until
they are instructed to do so after the merger.
Regulatory Approvals (Page 21)
We cannot complete the merger until we receive approval of the Federal
Deposit Insurance Corporation (the "FDIC") and the Georgia Department of Banking
and Finance (the "GDBF"). FLAG and Brown filed applications with the FDIC and
GDBF seeking approval of the merger. FLAG and Brown also filed a notice
describing the merger with the Office of Thrift Supervision (the "OTS"). The OTS
is the primary regulator of Brown. It is possible that the FDIC or GDBF
approvals will impose conditions or restrictions that FLAG or Brown believe to
materially adversely affect the economic or business benefits of the merger.
Conditions to the Merger (Page 20)
The completion of the merger depends upon FLAG and Brown satisfying a
number of conditions, including:
1. Brown shareholders must approve the Merger Agreement;
2. FLAG and Brown must receive a legal opinion confirming the tax-free
nature of the merger;
3. FLAG and Brown must receive a letter from FLAG's independent
accountants stating that the merger will qualify for
pooling-of-interests accounting treatment, and
4. FLAG and Brown must receive all required regulatory approvals and
any waiting periods required by law must have passed.
Termination of the Merger Agreement (Page 21)
Either FLAG or Brown can terminate the Merger Agreement without
completing the merger if, among other things any of the following occurs:
1. the merger is not completed by December 31, 1998;
2. the holders of two-thirds of Brown common stock do not approve the
merger or;
3. the other party breaches or materially fails to comply with any
of its representations or warranties or obligations under the Merger
Agreement.
In certain instances, including a breach of a representation, warranty,
covenant or agreement or failure of the Brown shareholders to approve the Merger
Agreement, either FLAG or Brown will be required to pay the other party the
lesser of $100,000 or actual costs of the other party incurred in connection
3
<PAGE>
with the merger. If the merger is not consummated, FLAG will continue to operate
as a bank holding company under its present management and Brown will continue
to operate as a federal savings bank under its present management.
Dissenters' Rights (Page 22 and Appendix B)
The regulations of the OTS provide that a Brown shareholder may receive
cash for the "fair value" of his or her shares if the Brown shareholder does not
vote in favor of the merger and complies with certain notice requirements and
other procedures. If you wish to dissent, you must precisely follow specific
procedures to exercise the right to dissent or the right to dissent may be lost.
The procedures to exercise dissenters' rights are described in this Proxy
Statement/Prospectus and the regulations of the OTS that describe the procedures
are attached as Appendix B.
Interests of Officers and Directors in the Merger That Are Different From Yours
(Page 26)
Certain members of Brown's management and Board of Directors have
interests in the merger that are different from your interests. The Merger
Agreement states that, as a condition to completing the merger, FLAG will
provide Dennis D. Allen, President and Chief Executive Officer of Brown, with a
Separation Agreement. The Separation Agreement provides that if Mr. Allen is
involuntarily terminated, he will receive severance payments equal to his annual
base salary and bonus paid over the previous three fiscal years. In addition,
the Separation Agreement provides that Mr. Allen will agree not to compete with
FLAG during the term of the Separation Agreement and for one year after the
termination of the Separation Agreement or the termination of Mr. Allen's status
as an employee of FLAG. The Merger Agreement provides that Mr. Allen will be
appointed to the Board of Directors of FLAG when the merger is complete.
The Merger Agreement also states that FLAG will indemnify the Brown
directors and officers. FLAG has also agreed to provide the officers and
employees of Brown with certain employee benefits that FLAG already provides to
its officers and employees. The FLAG and Brown Boards of Directors were aware of
these interests and took them into account in approving the Merger Agreement.
Important Federal Income Tax Consequences of the Merger (Page 27)
We expect that FLAG, Brown and their shareholders will not recognize
any gain or loss for U.S. federal income tax purposes in the merger, except in
connection with any cash that Brown shareholders receive instead of fractional
shares. Both companies have received a legal opinion that this will be the case.
This legal opinion is filed as an exhibit to the Registration Statement of which
this Proxy Statement/Prospectus is a part. The opinion will not bind the
Internal Revenue Service, which could take a different view. This tax treatment
will not apply to any Brown shareholder who exercises dissenters' rights.
Determining the actual tax consequences of the merger to you as an individual
taxpayer can be complicated. The tax treatment will depend on your specific
situation and many variables not within our control. You should consult your own
tax advisor for a full understanding of the merger tax consequences.
4
<PAGE>
Accounting Treatment of the Merger (Page 29)
FLAG and Brown intend for the merger to be accounted for as a
"pooling-of-interests", which means that, for accounting and financial reporting
purposes, we will treat Brown and FLAG as if they had always been one company.
Both FLAG and Brown have the right not to complete the merger if it does not
receive a letter from FLAG's independent public accountants that the merger will
qualify as a "pooling-of-interests."
Certain Differences in Shareholders' Rights (Page 32)
The rights of FLAG shareholders differ from the rights of Brown
shareholders in certain important respects, some of which constitute additional
anti-takeover provisions provided for in FLAG's governing documents.
Comparative Market Prices of Common Stock (Page 38)
FLAG common stock is traded in the over-the-counter market and quoted
on the Nasdaq National Market under the symbol "FLAG." Brown common stock is not
traded in any established market. On May 13, 1998, the last day prior to public
announcement of the merger between Citizens and Brown, the last reported sale
price per share of FLAG common stock on the Nasdaq National Market was $13.33.
The resulting equivalent pro forma price per share of Brown common stock (based
on the 1.5 Exchange Ratio) was $19.995.
On _________, 1998, the latest practicable date prior to the mailing of
this Proxy Statement/Prospectus, the last reported sale price per share of FLAG
common stock on the Nasdaq National Market was $________. The resulting
equivalent pro forma price per share of Brown common stock was $______. The
equivalent per share price of a share of Brown common stock at each specified
date represents the closing sale price of a share of FLAG common stock on that
date multiplied by the Exchange Ratio of 1.5.
To the knowledge of Brown, the most recent trade of Brown common stock
prior to May 13, 1998, the last day prior to public announcement of the merger
between Citizens and Brown, was on May 4, 1998 of 400 shares for a purchase
price of $10.00 per share. To the knowledge of Brown, there have been no trades
since the announcement of the merger. There can be no assurance as to what the
market price of the FLAG common stock will be if and when the merger is
consummated.
Dividends After the Merger (Page 39)
Brown has not paid dividends to its shareholders since 1994. FLAG has
paid regular cash dividends every quarter since 1987. Although FLAG currently
plans to continue to pay quarterly cash dividends, FLAG cannot assure that it
will always pay dividends.
Listing of FLAG Common Stock (Page 20)
FLAG will list the shares of FLAG common stock to be issued in
connection with the merger on the Nasdaq National Market.
5
<PAGE>
Risk Factors (Page 12)
In determining whether to approve the Merger Agreement, you should
consider the various risks associated with an investment in FLAG common stock.
Such as:
1. there is a limited market for shares of FLAG common stock;
2. FLAG's only sources of income are dividends and other payments from
its subsidiaries;
3. FLAG's ability to integrate new banks into FLAG;
4. FLAG and its subsidiaries must comply with extensive governmental
regulations;
5. the financial industry is very competitive;
6. before the merger, FLAG's management controls about 24% of FLAG
common stock;
7. FLAG's Articles of Incorporation and Bylaws contain provision that
will make it difficult for another company to obtain control of
FLAG, and
8. FLAG may experience some problems and losses as a result of Year
2000.
Comparative Per Share Data
The following table shows certain data relating to income, cash
dividends, and book value on (1) an historical basis for FLAG and Brown; (2) a
pro forma combined basis per share of FLAG common stock, giving effect to the
merger; and (3) an equivalent pro forma basis per share of Brown common stock,
giving effect to the merger. The Brown and FLAG pro forma combined information
and the Brown pro forma equivalent information give effect to the merger on a
pooling-of-interests accounting basis and reflects the exchange ratio of 1.5
shares of FLAG common stock for each share of Brown common stock. You should not
rely on the pro forma information as being indicative of the historical results
that we would have achieved or the future results we will achieve after the
merger.
6
<PAGE>
Comparative Per Share Data
<TABLE>
<CAPTION>
As of and for the
-----------------
Six Months Ended
June 30, Year Ended December 31,
-------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (Loss) Per Common Share
FLAG Historical .41 .38 .73 .25 .68
Brown historical .83 .77 (.75) .98 (.12)
FLAG and Brown pro forma combined (1) .42 .38 .67 .27 .66
Brown pro forma equivalent (2) .63 .57 1.01 .41 .99
Dividends Declared Per Common Share
FLAG historical .08 .11 .15 .14 .13
Brown historical - - - - -
FLAG and Brown pro forma combined (1) (4) .08 .11 .15 .14 .13
Brown pro forma equivalent (3) .12 .17 .23 .21 .20
Book Value Per Common Share (period end)
FLAG historical 7.46 6.77 7.11 6.47 6.48
Brown historical 9.56 10.14 8.71 9.37 8.18
FLAG and Brown pro forma combined (1) 7.40 6.77 7.05 6.46 6.43
Brown pro forma equivalent (2) 11.10 10.16 10.58 9.69 9.65
</TABLE>
(1) Represents the pro forma combined information of FLAG and Brown as if the
merger was consummated at the beginning of the period, and were accounted
for as a pooling-of-interests.
(2) Represents the pro forma combined per common share amounts multiplied by
the Exchange Ratio of 1.5 shares of FLAG common stock for each share of
Brown common stock.
(3) Represents historical dividends declared per share by FLAG multiplied by
the Exchange Ratio of 1.5 shares of FLAG common stock for each share of
Brown common stock.
(4) Represents historical dividends paid by FLAG, as it is assumed that FLAG
will not change its dividend policy as a result of the merger.
7
<PAGE>
Selected Financial Data
The following tables present certain selected historical financial
information for FLAG and Brown and are derived from the consolidated financial
statements (and related notes) of FLAG and Brown, contained in or incorporated
by reference to this Proxy Statement/Prospectus. This information is only a
summary and should be read in conjunction with each companies' historical
financial statements (and related notes), and other financial information
concerning FLAG and Brown contained in or incorporated by reference to this
Proxy Statement/Prospectus.
Interim unaudited data for the six month periods ended June 30, 1998
and 1997 of FLAG and Brown reflect, in the opinion of the managements of FLAG
and Brown, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information. Results for the six month
periods ended June 30, 1998 and 1997 are not necessarily indicative of results
which may be expected for any other interim period or for the year as a whole.
Summary Consolidated Financial Information
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended June 30, As of and For the Year Ended December 31,
-------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
FLAG
Balance Sheet Data
Total assets $ 442,879 $370,141 $411,285 $350,519 $337,857 $326,229 $293,935
Loans, net 306,527 254,849 279,286 239,652 216,204 207,715 191,029
Stockholders' equity 38,889 34,936 36,771 33,415 32,254 28,741 28,785
Deposits 339,245 312,461 324,852 294,420 270,853 251,828 242,062
Statement of Earnings Data
Net interest income $ 8,996 $ 7,684 $ 15,997 $ 14,757 $ 13,933 $ 11,824 $ 10,253
Provision for loan losses 444 407 765 3,744 775 490 955
Noninterest income 3,718 2,562 5,332 4,637 3,706 2,915 2,938
Noninterest expense 9,226 6,941 15,020 14,018 11,687 9,578 8,400
Net earnings 2,115 1,948 3,749 1,286 3,472 3,117 3,175
Per Share Data
Book value (period end) $ 7.52$ 6.77 $ 7.11 $ 6.47 $ 6.48$ 5.61$ 5.60
Net earnings .41 .38 .73 .25 .68 .61 .62
Dividends .08 .11 .15 .14 .13 .13 .11
Total shares outstanding 5,175 5,162 5,172 5,164 4,979 5,120 5,143
Weighted average shares outstanding 5,172 5,164 5,167 5,121 5,088 5,110 5,143
Ratios
Return on average assets .99% 1.08% 1.01% .39% 1.05% 1.00% 1.12%
Return on average stockholders' equity 11.23 11.40 10.68 3.97 11.07 10.76 11.42
Average equity to average assets 8.82 9.48 9.49 9.72 9.53 9.28 9.79
Average loans to average deposits 88.21 81.48 83.81 81.92 82.62 83.47 85.00
</TABLE>
8
<PAGE>
Summary Consolidated Financial Information
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended June 30, As of and For the Year Ended December 31,
-------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Brown
Balance Sheet Data
Total assets $ 28,659 $ 28,143 $ 30,850 $ 24,868 $ 18,025 $ 7,438 $ 6,267
Loans, net 22,213 21,250 24,026 18,686 12,732 4,730 4,229
Deposits 25,926 25,786 28,307 21,995 16,423 6,589 5,373
Stockholders' equity 1,674 1,775 1,524 1,640 1,272 732 741
Statement of Earnings Data
Net interest income $ 793 $ 722 $ 1,494 $ 1,209 $ 625 $ 481 $ 425
Provision for loan losses 30 75 580 100 72 13 37
Noninterest income 146 124 271 145 90 62 60
Noninterest expense 700 568 1,384 1,004 671 433 410
Net earnings (loss) 145 135 (131) 167 (13) 75 42
Per Share Data
Book value (period end) 9.56 10.14 $ 8.71 $ 9.37 $ 8.18 $ 7.32 $ 7.41
Net earnings (loss) .83 .77 (.75) .98 (.12) .75 .42
Dividends - - - - - .08 .04
Total shares outstanding 175 175 175 175 156 100 100
Weighted average shares outstanding 175 175 175 171 109 100 100
Ratios
Return on average assets 1.96% 2.04% (.46)% .78% (.11)% 1.10% 1.35%
Return on average stockholders' equity 36.40 31.71 (8.01) 11.18 (1.62) 10.22 11.16
Average equity to average assets 5.84 6.31 5.68 7.00 6.49 10.20 10.62
Average loans to average deposits 85.68 82.41 84.97 81.12 76.35 74.18 73.65
</TABLE>
Selected Condensed Consolidated Pro Forma Financial Data
The following selected unaudited pro forma financial data give effect
to the merger as of the dates and for the periods indicated, assuming the merger
is accounted for as a pooling-of-interests. You should not rely on the pro forma
information as being indicative of the historical results that we would have
achieved or the future results we will achieve after the merger. The information
should be read in conjunction with the unaudited pro forma financial information
appearing elsewhere in this Proxy Statement/Prospectus.
9
<PAGE>
Selected Pro Forma Financial Data
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the
Six Months Ended For the Year Ended
June 30, December 31,
-------- ------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings Data
Interest income 19,146 15,754 33,471 30,121 28,477
Interest expense 9,357 7,347 15,980 14,156 13,919
Net interest income 9,789 8,406 17,491 15,965 14,558
Provision for loan losses 474 482 1,345 3,844 847
Noninterest income 3,864 2,686 5,603 4,782 3,795
Noninterest expense 9,926 7,509 16,405 15,022 12,356
Income taxes 993 1,018 1,727 429 1,692
Net earnings 2,260 2,083 3,617 1,452 3,458
Earnings per common share .42 .38 .67 .27 .66
</TABLE>
As of
June 30, 1998
-------------
Balance Sheet Data
Total assets 471,537
Federal funds sold 10,180
Investment securities 76,943
Loans, net 328,740
Deposits 365,171
Other borrowings 56,330
Stockholders' equity 40,255
10
<PAGE>
Recent Developments in FLAG's Business
FLAG and Empire Bank Corp. ("Empire") entered into an Agreement and
Plan of Merger (the "Empire Agreement"), dated as of July 30, 1998, which
provides that Empire will merge with FLAG. The Empire Agreement provides that
FLAG will exchange 42.5 shares of FLAG common stock for each share of Empire
common stock outstanding. FLAG expects to issue approximately 1,124,125 shares
of FLAG common stock to Empire shareholders. The parties expect the merger to be
accounted for as a pooling-of-interests and expect to consummate the transaction
in the fourth quarter of 1998. The merger of Empire with FLAG is subject to
approval of Empire shareholders, approval of various regulatory authorities and
other customary conditions of closing.
Empire is a bank holding company located in Homerville, Georgia and is
the sole shareholder of Empire Banking Co. Empire Banking Co. has two bank
offices located in Homerville and Waycross, Georgia.
FLAG and Heart of Georgia Bancshares, Inc. ("Heart") entered into an
Agreement and Plan of Merger (the "Heart Agreement"), dated as of August 19,
1998, which provides that Heart will merge with FLAG. The Heart Agreement
provides that FLAG will exchange 2.025 shares of FLAG common stock for each
share of Heart common stock outstanding. FLAG expects to issue approximately
445,500 shares of FLAG common stock to Heart shareholders. The parties expect
the merger to be accounted for as a pooling-of-interests and expect to
consummate the transaction during the fourth quarter of 1998. The merger of
Heart with FLAG is subject to approval of Heart shareholders, approval of
various regulatory authorities and other customary conditions of closing.
Heart is a bank holding company located in Mount Vernon, Georgia and is
the sole shareholder of Mount Vernon Bank. Mount Vernon Bank has one office
located in Mount Vernon, Georgia.
You can find additional information about the Empire and Heart
transactions in FLAG's Current Reports on Form 8-K dated May 28, 1998, June 1,
1998, August 10, 1998 and August 11, 1998 (the "FLAG 8-Ks"). The FLAG 8-Ks
include or incorporate by reference certain forward-looking statements,
estimates, and projections concerning the transactions with Empire and Heart.
The parties made certain assumptions in making estimates and projections
concerning the future financial performance of FLAG following the transactions
with Empire and Heart. You should consider the estimates and projections only as
estimates and understand that they are uncertain and may be inaccurate. Future
events may cause FLAG's actual experience to differ materially from such
estimates and projections.
11
<PAGE>
RISK FACTORS
In deciding whether to approve the Merger Agreement, you should
consider the various risks associated with an investment in FLAG common stock,
including, but not limited to the following:
There is limited market for shares of FLAG common stock
While FLAG common stock is listed and traded on the Nasdaq National
Market, there has only been limited trading activity of FLAG common stock. The
average daily trading volume of FLAG common stock over the six-month period
ending June 30, 1998 was approximately 4,600 shares, and on some days the
trading volume for shares of FLAG common stock was zero. FLAG does not
anticipate that FLAG's acquisition of Brown will cause any significant change in
the trading of FLAG common stock.
There are restrictions on FLAG's ability to pay dividends
FLAG must comply with Georgia corporate law and rules and regulations
of bank regulators before it can pay any dividends. The Board of Directors of
FLAG must authorize FLAG to pay any dividends and FLAG must have sufficient
funds to pay dividends. FLAG's only sources of income are dividends and other
payments that First Federal Savings Bank of LaGrange, Citizens Bank, Bank of
Milan, Brown, and the other subsidiaries of FLAG make to FLAG. Certain statutes
and regulations restrict the ability of FLAG's subsidiaries to pay dividends to
FLAG.
There may be possible costs associated with the integration of FLAG's pending
acquisitions
The ability of FLAG, as the corporation surviving the merger, to
perform with financial success is dependent upon the integration of Brown,
Empire, Heart and their subsidiaries into FLAG. There may be significant,
unanticipated costs associated with the integration of these companies with
FLAG. See "SUMMARY Recent Developments in FLAG's Business."
FLAG is subject to extensive governmental regulation
FLAG, Brown, and their respective subsidiaries are currently subject to
extensive governmental regulation. FLAG, as a bank holding company, is primarily
regulated by the Federal Reserve. Citizens Bank and Bank of Milan are primarily
regulated by the FDIC and the GDBF. First Federal Savings Bank of LaGrange and
Brown, as federal savings banks, are primarily regulated by the OTS. The federal
and state bank regulators of these entities have the ability, should the
situation require, to place significant regulatory and operational restrictions
upon FLAG and its subsidiaries. Any restrictions that the federal and state bank
regulators impose could affect the profitability of FLAG and its subsidiaries.
The financial institution industry is very competitive
FLAG and its subsidiaries compete directly with financial institutions
that are well established. Many of FLAG's competitors have significantly greater
resources and lending limits than FLAG and its subsidiaries. As a result of
those greater resources, the large financial institutions that FLAG competes
with may be able to provide a broader range of services to their customers than
FLAG and may be able to afford newer and more sophisticated technology than
FLAG. The long-term success of FLAG will be dependent on the ability of FLAG's
subsidiaries to compete successfully with other financial institutions in their
service areas.
12
<PAGE>
Management of FLAG holds a large portion of FLAG common stock
The directors and executive officers of FLAG beneficially own about
1,336,463 shares of FLAG common stock, or 24.6%, of the total outstanding shares
of FLAG. As a result, FLAG's management has significant control of FLAG.
FLAG's Articles Of Incorporation and Bylaws may prevent takeover by another
company
FLAG's Articles of Incorporation permit the Board of Directors of FLAG
to issue preferred stock without shareholder action. The ability to issue
preferred stock could discourage a company from attempting to obtain control of
FLAG by means of a tender offer, merger, proxy contest or otherwise.
Additionally, FLAG's Articles of Incorporation and Bylaws divide the Board of
Directors of FLAG into three classes, as nearly equal in size as possible, with
staggered three-year terms. One class is elected each year. The classification
of the Board of Directors could have the effect of making it more difficult for
a company to acquire control of FLAG. FLAG is also subject to certain provisions
of the GBCC and the FLAG Articles of Incorporation which relate to business
combinations with interested shareholders.
Year 2000 issues
It is possible that FLAG's and Brown's current computer systems,
software products or other business systems, or those of FLAG's or Brown's
suppliers or customers, will not always accept input of, store, manipulate and
output dates in the years 1999, 2000 or thereafter without error or
interruption. FLAG and Brown have conducted reviews of their business systems,
including their computer systems, to attempt to identify ways in which problems
in correctly processing date information could affect their systems. In
addition, FLAG and Brown are requesting assurances from all software vendors
that they have purchased or from which they may purchase software that the
software sold to FLAG and Brown will correctly process all date information at
all times. FLAG and Brown are querying their customers and suppliers as to their
progress in identifying and addressing problems that their computer systems will
face in correctly processing date information as the year 2000 approaches and is
reached. However, FLAG and Brown cannot assure that FLAG and Brown will identify
all date-handling problems in their business systems before any problems occur,
or that FLAG and Brown will be able to successfully remedy problems that are
discovered. The expenses of FLAG's and Brown's efforts to identify and address
such problems, or the expenses or liabilities to which FLAG and Brown may
experience as a result of Year 2000 problems, could have a material adverse
effect on FLAG's results of operations and financial condition.
MEETING OF BROWN SHAREHOLDERS
Date, Place, Time, And Purpose
The Brown Board of Directors is sending you this Proxy
Statement/Prospectus in connection with the solicitation by the Brown Board of
Directors of proxies for use at the Special Meeting. At the Special Meeting, the
Brown Board of Directors will ask you to vote on a proposal to approve the
Merger Agreement. Brown will pay the costs associated with the solicitation of
proxies for the Special Meeting. The Special Meeting will be held at the main
office of Brown, located at Railroad Street, Cobbtown, Georgia, on _________,
________________, 1998, at ______ p.m., local time.
13
<PAGE>
Record Date, Voting Rights, Required Vote, And Revocability Of Proxies
Brown has set the close of business on _____________, 1998, as the
Brown Record Date for determining holders of outstanding shares of Brown common
stock entitled to notice of and to vote at the Special Meeting. Only holders of
Brown common stock of record on the books of Brown at the close of business on
the Brown Record Date are entitled to notice of and to vote at the Special
Meeting. As of the Brown Record Date, there were 175,000 shares of Brown common
stock issued and outstanding and entitled to vote at the Special Meeting, which
shares were held by 140 holders of record. FLAG holds 5,000 shares of Brown
common stock.
Brown shareholders are entitled to one vote for each share of Brown
common stock owned on the Brown Record Date. The vote required for the approval
of the Merger Agreement is two-thirds of the issued and outstanding shares of
Brown common stock entitled to vote at the Special Meeting. Consequently, with
respect to the proposal to approve the Merger Agreement, abstentions and broker
non-votes will be counted as part of the base number of votes to be used in
determining if the proposal has received the requisite number of base votes for
approval. Thus, an abstention or a broker non-vote will have the same effect as
a vote "against" such proposal.
The designated proxy holder will vote shares of Brown common stock, if
such proxies are properly executed, received in time and not revoked, in
accordance with the instructions on the proxies. If the proxy does not contain
instructions of how to vote, the proxy holders will vote for approval of the
Merger Agreement. Additionally, if you do not include instructions with your
proxy, the proxy holder will use his or her discretion to vote on any other
matter which may properly come before the Special Meeting. Further, if you do
not include instructions with your proxy as to how to vote at the Special
Meeting, you will not be entitled to assert dissenters' rights. See "Description
of Merger -- Dissenters' Rights." If necessary, the proxy holder may vote in
favor of a proposal to adjourn the Special Meeting in order to permit further
solicitation of proxies in the event there are not sufficient votes to approve
the proposal at the time of the Special Meeting. No proxy that is voted against
the approval of the Merger Agreement will be voted in favor of an adjournment of
the Special Meeting in order to permit further solicitation of proxies.
- --------------------------------------------------------------------------------
Failure either to vote by proxy or in person at the Special Meeting
will have the effect of a vote cast against approval of the Merger Agreement.
- --------------------------------------------------------------------------------
A Brown shareholder who has given a proxy may revoke it at any time
prior to its exercise at the Special Meeting by (1) giving written notice of
revocation to the Secretary of Brown, (2) properly submitting to Brown a duly
executed proxy bearing a later date, or (3) attending the Special Meeting and
voting in person. All written notices of revocation and other communications
with respect to revocation of proxies should be addressed as follows: The Brown
Bank, Railroad Street, Cobbtown, Georgia 30420; Attention: Dennis D. Allen.
As of the Brown Record Date, all directors and executive officers of
Brown as a group (11 persons) were entitled to vote approximately 82,059 shares
of Brown common stock, constituting approximately 47% of the total number of
shares of Brown common stock outstanding at that date, and have committed to
vote their shares of Brown common stock in favor of the Merger Agreement. As of
the Brown Record Date, FLAG held 5,000 shares of Brown common stock. FLAG will
vote its shares of Brown common stock in favor of the merger. See "BUSINESS OF
BROWN -- Management."
14
<PAGE>
DESCRIPTION OF THE MERGER
The following information describes certain aspects of the merger. This
description is not complete and is qualified in its entirety by reference to the
Appendices hereto, including the Merger Agreement, which is attached as Appendix
A to this Proxy Statement/Prospectus and incorporated herein by reference. All
shareholders are urged to read the Appendices in their entirety.
General
Upon consummation of the merger, Brown will merge with and into
Citizens Bank, a wholly-owned banking subsidiary of FLAG. Citizens Bank will
survive the merger and the separate existence of Brown will cease. On the
effective date of the merger, each share of Brown common stock then issued and
outstanding (excluding shares held by Brown, FLAG, or their respective
subsidiaries, in each case other than shares held in a fiduciary capacity or in
satisfaction of debts previously contracted, and excluding shares held by Brown
shareholders who perfect their dissenters' rights) will be converted into and
exchanged for the right to receive 1.5 shares of FLAG common stock (the
"Exchange Ratio").
FLAG will not adjust the Exchange Ratio based on changes in the market
value of FLAG common stock before the effective date of the merger. The market
value of the FLAG common stock to be received by shareholders of Brown who do
not properly perfect their dissenters' rights may vary significantly between the
date of this Proxy Statement/Prospectus and the effective date of the merger.
Because consummation of the merger is subject to satisfaction of various
conditions, including receipt of necessary regulatory approvals, the merger may
not be consummated until a substantial period of time following the Special
Meeting. During the time between the date of the Special Meeting and the
effective date of the merger, shareholders of Brown who do not properly perfect
their dissenters' rights or sell their shares of Brown common stock before the
effective date of the merger will be subject to the risk of a decline in the
market value of FLAG common stock.
FLAG will not issue fractional shares. Instead, FLAG will pay cash
(without interest) in lieu of any fractional share to which any Brown
shareholder would otherwise be entitled upon consummation of the merger. FLAG
will calculate the cash value of any fractional shares as the amount equal to
the fractional part of a share of FLAG common stock multiplied by the last sale
price of FLAG common stock on the Nasdaq National Market (as reported by The
Wall Street Journal or, if not reported thereby, any other authoritative source
selected by FLAG) on the last trading day preceding the effective date of the
merger.
As of the Brown Record Date, Brown had 175,000 shares of Brown common
stock issued and outstanding. Based on the number of shares of Brown common
stock outstanding on the Brown Record Date and the Exchange Ratio of 1.5, it is
anticipated that upon consummation of the merger, FLAG would issue approximately
255,000 shares of FLAG common stock to holders of Brown common stock. FLAG will
not issue shares of its common stock in exchange for the 5,000 shares of Brown
common stock that FLAG holds. Accordingly, FLAG would then have issued and
outstanding approximately 6,999,438 shares of FLAG common stock based on the
number of shares of FLAG common stock issued and outstanding on the Brown Record
Date (and assuming the completion of the mergers with Empire and Heart).
Following the merger, and assuming no exercise of dissenters' rights and
assuming the completion of the mergers of Empire and Heart with FLAG, the
current shareholders of Brown will beneficially own approximately 3.7% of the
FLAG common stock.
15
<PAGE>
The Merger Agreement permits FLAG to pursue and consummate other
mergers, acquisitions or securities distributions. If FLAG issues or agrees to
issue additional shares of FLAG common stock between the date of this Proxy
Statement/Prospectus and the effective date of the merger in connection with a
business acquisition or other securities distribution, the aggregate percentage
of FLAG common stock that the Brown shareholders will receive in the merger will
be decreased. Additionally, if FLAG pursues and consummates other mergers,
acquisitions or securities distributions, the value of the FLAG common stock
that the Brown shareholders receive in the merger may be reduced (depending on
the terms of the other transaction) and the consummation of the merger may be
delayed substantially. As of the date of this Proxy Statement/Prospectus, FLAG
had entered into two other merger agreements whereby FLAG will issue shares of
FLAG common stock if these mergers are consummated. See "SUMMARY -- Recent
Developments in FLAG's Business."
Background Of And Reasons For The Merger
Background of the Merger. Representatives from FLAG met with the Board
of Directors of Brown on May 9, 1998 to discuss a combination of Brown and FLAG.
In negotiating the final Exchange Ratio, Brown and FLAG considered the
relative book value and earnings of each entity, as well as certain special
factors relating to historical performance, market growth potential, ancillary
businesses and future growth plans. Brown and FLAG did not follow a precise
formula in the negotiation of the final Exchange Ratio, which was based on a
determination by management of each institution that the Exchange Ratio fairly
represented equivalent value for the shareholders of each institution
participating in the merger.
The Board of Directors of Brown met on May 31, 1998 and July 24, 1998,
to discuss the Merger Agreement and related agreements. On July 24, 1998, after
review of the matters considered by the Board of Directors and Executive
Committee of Brown, the Board of Directors of Brown unanimously approved the
Merger Agreement and authorized the President and Chief Executive Officer of
Brown to take the appropriate actions necessary to execute the Merger Agreement.
The Board of Directors of FLAG met on July 20, 1998, to discuss the
Merger Agreement and related agreements. After review of the matters considered
by the Board of Directors and Executive Committee of FLAG, the Board of
Directors of FLAG unanimously approved the Merger Agreement and authorized the
President and Chief Executive Officer of FLAG to take the appropriate actions
necessary to execute the Merger Agreement in substantially the form approved by
the Board.
The Merger Agreement was executed as of July 24, 1998. FLAG and Brown
each conducted a due diligence review of the material financial, operating and
legal information relating to the other party.
Brown's Reasons for the Merger and Recommendation of Directors. The
Brown Board of Directors, with the assistance of outside legal advisors,
evaluated the financial, legal and market considerations bearing on the decision
to recommend the merger to the shareholders of Brown. In reaching its conclusion
that the Merger Agreement is in the best interests of Brown and its
shareholders, the Brown Board of Directors carefully considered the following
material factors:
(1) the business, operations, earnings and financial
condition, including the capital levels and asset quality, of FLAG on
an historical, prospective, and pro forma basis and in comparison to
other financial institutions in the area;
(2) the demographic, economic and financial characteristics of
the markets in which FLAG operates, including the similarity to the
markets in which Brown operates, existing competition, history of the
16
<PAGE>
market areas with respect to financial institutions, and average demand
for credit, on an historical and prospective basis;
(3) the local autonomy that FLAG provides its subsidiary
banking operations;
(4) the results of Brown's due diligence review of FLAG and a
variety of factors affecting and relating to the overall strategic focus
of Brown, including Brown's desire to expand into markets outside the
general vicinity of its core markets;
(5) the potential increases in access to the public capital
markets and stock liquidity;
(6) the vision shared by Brown and FLAG relating to future
expansion; and
(7) the likelihood of the merger being approved by applicable
regulatory authorities without undue conditions or delay.
While each member of the Brown Board of Directors individually
considered the foregoing and other factors, the Brown Board of Directors did not
collectively assign any specific or relative weights to the factors considered
and did not make any determination with respect to any individual factor. The
Brown Board of Directors collectively made its determination with respect to the
merger based on the unanimous conclusion reached by its members, in light of the
factors that each of them consider as appropriate, that the merger is in the
best interests of the Brown shareholders.
The terms of the merger, including the Exchange Ratio, were the result
of arm's-length negotiations between representatives of Brown and
representatives of FLAG. Based upon its consideration of the foregoing factors,
the Board of Directors of Brown approved the Merger Agreement and the merger as
being in the best interests of Brown and its shareholders.
The Brown Board of Directors unanimously recommends that Brown
shareholders vote "FOR" approval of the Merger Agreement.
FLAG's Reasons for the Merger. Since the completion of the merger of
Middle Georgia Bankshares, Inc. with FLAG in March 1998, FLAG has explored
opportunities that would further FLAG's goal of building a strong presence in
Georgia through a partnership of community banks. The FLAG Board of Directors
evaluated the financial, legal and market considerations relating to the merger.
In reaching its conclusion that the Merger Agreement is in the best interests of
FLAG and its shareholders, the FLAG Board of Directors carefully considered the
following material factors:
(1) the information presented to the directors by the
management of FLAG concerning the business, operations, earnings, asset
quality, and financial condition of Brown, including the composition of
the earning assets portfolio of Brown;
(2) the financial terms of the merger, including the
relationship of the value of the consideration issuable in the merger
to the market value, tangible book value, and earnings per share of
Brown common stock;
(3) the nonfinancial terms of the merger, including the
treatment of the merger as a tax-free exchange of Brown common stock
for FLAG common stock for federal income tax purposes;
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(4) the likelihood of the merger being approved by applicable
regulatory authorities without undue conditions or delay;
(5) the opportunity for reducing the noninterest expense of
the operations of Brown and the ability of the operations of Brown
after the effective date of the merger to contribute to the earnings of
FLAG;
(6) the attractiveness of the Brown franchise, the market
position of Brown in Cobbtown, Reidsville and Metter, the compatibility
of the franchise of Brown with the operations of FLAG and the ability
of Brown to contribute to the business strategy of FLAG;
(7) the compatibility of the community bank orientation of the
operations of Brown to that of FLAG; and
(8) the opportunity to leverage the infrastructure of FLAG.
While each member of the FLAG Board of Directors individually
considered the foregoing and other factors, the Board of Directors did not
collectively assign any specific or relative weights to the factors considered
and did not make any determination with respect to any individual factor. The
FLAG Board of Directors collectively made its determination with respect to the
merger based on the unanimous conclusion reached by its members, in light of the
factors that each of them consider as appropriate, that the merger is in the
best interests of the FLAG shareholders.
The terms of the merger, including the Exchange Ratio, were the result
of arm's-length negotiations between representatives of FLAG and representatives
of Brown. Based upon its consideration of the foregoing factors, the Board of
Directors of FLAG approved the Merger Agreement and the merger as being in the
best interests of FLAG and its shareholders.
Effective Date Of The Merger
Subject to the conditions to the obligations of the parties to effect
the merger, the effective date of the merger will occur on the date and at the
time that the Secretary of State of the State of Georgia declares the
Certificate of Merger effective. Unless Brown and FLAG otherwise agree in
writing, and subject to the conditions to the obligations of FLAG and Brown to
effect the merger, the parties will use their reasonable efforts to cause the
effective date of the merger to occur on the fifth business day following the
last to occur of (1) the effective date (including expiration of any applicable
waiting period) of the last required consent of any regulatory authority having
authority over and approving or exempting the merger, and (2) the date on which
the shareholders of Brown approve the Merger Agreement.
FLAG and Brown cannot assure that they can obtain the necessary
shareholder and regulatory approvals or that they can or will satisfy other
conditions precedent to the merger. Brown and FLAG anticipate that they will
satisfy all conditions to consummation of the merger so that the merger can be
completed during the fourth quarter of 1998. However, delays in the consummation
of the merger could occur.
The Board of Directors of either Brown or FLAG generally may terminate
the Merger Agreement if the merger is not consummated by December 31, 1998,
unless the failure to consummate by that date is the result of a breach of the
Merger Agreement by the party seeking termination. See "-- Conditions to
Consummation of the Merger" and "-- Waiver, Amendment, and Termination."
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Distribution of FLAG Certificates
Promptly after the effective date of the merger, FLAG will mail
appropriate transmittal materials and instructions for use in exchanging Brown
Certificates for FLAG Certificates representing shares of FLAG common stock to
each holder of record of a Brown Certificate or Certificates which, immediately
prior to the effective date of the merger, represented outstanding shares of
Brown common stock.
Holders of Brown Common Stock should NOT send in their Brown
Certificates until they receive the appropriate transmittal materials and
instructions.
FLAG's Exchange Agent will issue and mail to each holder of Brown
common stock (other than shares as to which holders have perfected dissenters'
rights) a FLAG Certificate or Certificates representing the number of shares of
FLAG common stock to which such holder is entitled after the Exchange Agent
receives the Brown Certificates and properly completed transmittal materials.
The Exchange Agent will also send Brown shareholders a check for the amount to
be paid in lieu of any fractional shares (without interest), and all undelivered
dividends or distributions in respect of such shares (without interest thereon).
After the effective date of the merger, to the extent permitted by law,
holders of Brown common stock of record as of the effective date of the merger
will be entitled to vote at any meeting of FLAG shareholders the number of whole
shares of FLAG common stock into which their shares of Brown common stock have
been converted, regardless of whether such shareholders have surrendered their
Brown Certificates. Whenever FLAG declares a dividend or other distribution on
FLAG common stock, the record date for which is at or after the effective date
of the merger, the declaration will include dividends or other distributions on
all shares issuable pursuant to the Merger Agreement. FLAG will not pay any
dividend or other distribution payable after the effective date of the merger
with respect to FLAG common stock to the holder of any unsurrendered Brown
Certificate until the holder duly surrenders such Brown Certificate. Upon
surrender of such Brown Certificate, however, both the FLAG Certificate,
together with all undelivered dividends or other distributions (without
interest) and any undelivered cash payments to be paid in lieu of fractional
shares (without interest), will be delivered and paid with respect to each share
represented by such Brown Certificate. In no event will the holder of any
surrendered Brown Certificate(s) be entitled to receive interest on any cash to
be issued to such holder. In no event will FLAG or the Exchange Agent be liable
to any holder of Brown common stock for any amounts paid or property delivered
in good faith to a public official pursuant to any applicable abandoned
property, escheat, or similar law.
After the effective date of the merger, no transfers of shares of Brown
common stock on Brown's stock transfer books will be recognized. If Brown
Certificates are presented for transfer after the effective date of the merger,
they will be canceled and exchanged for the shares of FLAG common stock and a
check for the amount due in lieu of fractional shares, if any.
After the effective date of the merger, holders of Brown Certificates
will have no rights with respect to the shares of Brown common stock other than
the right to surrender such Brown Certificates and receive in exchange the
shares of FLAG common stock, if any, to which such holders are entitled. After
the effective date of the merger, holders of Brown Certificates who have
complied with the rules and regulations of the OTS relating to dissenters'
rights still have the right to perfect their dissenters' rights.
If a Brown shareholder wishes to have a FLAG Certificate issued in a
name other than that in which the Brown Certificate surrendered for exchange is
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issued, the surrendered Brown Certificate shall be properly endorsed and
otherwise in proper form for transfer. The person requesting such exchange must
affix any requisite stock transfer tax stamps to the Brown Certificates
surrendered, provide funds for the purchase of any stock transfer tax stamps, or
establish to the exchange agent's satisfaction that such taxes are not payable.
Conditions To Consummation of The Merger
Consummation of the merger is subject to various conditions, including:
(1) approval of the Merger Agreement by the shareholders of Brown as
required by any law or by the provisions of any governing
instruments of Brown;
(2) receipt of certain regulatory approvals required for consummation
of the merger (see "-- Regulatory Approvals");
(3) receipt of all consents required for consummation of the merger
or for the preventing of any default under any contract or permit
which, if not obtained or made, is reasonably likely to have,
individually or in the aggregate, a material adverse effect;
(4) the absence of any law or order or any action taken by any court,
governmental, or regulatory authority prohibiting, restricting,
or making illegal the consummation of the transactions
contemplated by the Merger Agreement;
(5) the Registration Statement being declared effective and the
receipt of all necessary SEC and state approvals relating to the
issuance or trading of the shares of FLAG common stock issuable
pursuant to the Merger Agreement;
(6) approval of the shares of FLAG common stock issuable pursuant to
the Merger Agreement for listing on the Nasdaq National Market;
(7) receipt of an opinion of Powell, Goldstein, Frazer & Murphy LLP
as to the qualification of the merger as a tax-free
reorganization (see "-- Certain Federal Income Tax
Consequences");
(8) the accuracy, as of the date of the Merger Agreement and as of
the effective date of the merger, of the representations and
warranties of Brown and FLAG as set forth in the Merger
Agreement;
(9) the performance of all agreements and the compliance with all
covenants of Brown and FLAG as set forth in the Merger Agreement;
(10) receipt by FLAG of a letter from Porter Keadle Moore, LLP to the
effect the merger will qualify for pooling-of-interests
accounting treatment; and
(11) satisfaction of certain other conditions, including the receipt
of certain agreements of the affiliates of Brown, the execution
of certain claims letters by the directors and officers of Brown,
the receipt of certain opinion letters from counsel for FLAG and
counsel for Brown, and receipt of various certificates from the
officers of Brown and FLAG.
No assurance can be provided as to when or if all of the conditions
precedent to the merger can or will be satisfied or waived by the party
permitted to do so. In the event the merger is not effected on or before
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December 31, 1998, the Merger Agreement may be terminated and the merger
abandoned by either Brown or FLAG, unless the failure to consummate the merger
by that date is the result of a breach of the Merger Agreement by the party
seeking termination. See "-- Waiver, Amendment, and Termination."
Regulatory Approvals
The merger may not be consummated in the absence of the receipt of the
requisite regulatory approvals. FLAG and Brown cannot assure whether or when
they will receive such regulatory approvals. Additionally, FLAG and Brown cannot
assure that any such approvals will not impose conditions or be restricted in a
manner (including requirements relating to the raising of additional capital or
the disposition of assets) which in the reasonable judgment of the Board of
Directors of FLAG or Brown would so materially adversely impact the economic or
business benefits of the transactions contemplated by the Merger Agreement that,
had such condition or requirement been known, either of FLAG or Brown would not,
in its reasonable judgment, have entered into the Merger Agreement.
Brown and FLAG are not aware of any material governmental approvals or
actions that are required for consummation of the merger, except as described
below. Should any other approval or action be required, it presently is
contemplated that such approval or action would be sought.
The Merger will require the prior approval of the FDIC, pursuant to
Section 18(c) of the Federal Deposit Insurance Act. FLAG has filed all required
applications with the FDIC. In evaluating the merger, the FDIC must consider,
among other factors, the financial and managerial resources and future prospects
of the institutions and the convenience and needs of the communities to be
served. The relevant statutes prohibit the FDIC from approving the merger if (1)
it would result in a monopoly or be in furtherance of any combination or
conspiracy to monopolize or attempt to monopolize the business of banking in any
part of the United States or (2) its effect in any section of the country may be
to substantially lessen competition or to tend to create a monopoly, or if it
would be a restraint of trade in any other manner, unless the FDIC finds that
any anticompetitive effects are outweighed clearly by the public interest and
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served. The merger may not be consummated until the 30th
day (which may be reduced to 15 days) following the date of the FDIC approval,
during which time the United States Department of Justice may challenge the
transaction on antitrust grounds. The commencement of any antitrust action would
stay the effectiveness of the approval of the agencies, unless a court of
competent jurisdiction specifically orders otherwise. FLAG and Brown cannot
assure when or whether the FDIC will approve the merger.
The merger will also require the prior approval of the GDBF pursuant to
the Financial Institutions Code of Georgia. FLAG has filed all applications
required to be filed with the GDBF in connection with the merger.
FLAG and Brown cannot assure when or whether the GDBF will approve the merger.
FLAG and Brown also filed a notice with the OTS describing the Merger.
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Waiver, Amendment, and Termination
To the extent permitted by applicable law, Brown and FLAG may amend the
Merger Agreement by written agreement at any time before approval of the Merger
Agreement by the Brown shareholders. After the Brown shareholders approve the
Merger Agreement no amendment shall be made to the Merger Agreement that,
pursuant to 12 C.F.R. Section 552.13(h) of the OTS Regulations, requires further
shareholder approval without receiving such shareholder approval. In addition,
prior to or at the effective date of the merger, either Brown or FLAG, or both,
acting through their respective Boards of Directors, chief executive officers or
other authorized officers may waive any default in the performance of any term
of the Merger Agreement by the other party, may waive or extend the time for the
compliance or fulfillment by the other party of any and all of its obligations
under the Merger Agreement, and may waive any of the conditions precedent to the
obligations of such party under the Merger Agreement, except any condition that,
if not satisfied, would result in the violation of any applicable law or
governmental regulation. No such waiver will be effective unless written and
unless signed by a duly authorized officer of Brown or FLAG, as the case may be.
The Merger Agreement may be terminated and the merger abandoned at any
time prior to the effective date of the merger (1) by the mutual consent of
Brown and FLAG or (2) by Brown or FLAG (a) in the event of any material breach
of any representation or warranty of the other party contained in the Merger
Agreement which cannot be or has not been cured within 30 days after giving
written notice to the breaching party of such inaccuracy and which breach is
reasonably likely, in the opinion of the non-breaching party, to have,
individually or in the aggregate, a Brown or FLAG Material Adverse Effect (as
defined in the Merger Agreement), as applicable, on the breaching party
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant, or other agreement contained in the Merger
Agreement), (b) in the event of a material breach by the other party of any
covenant or agreement contained in the Merger Agreement which cannot be or has
not been cured within 30 days after the giving of written notice to the
breaching party of such breach (provided that the terminating party is not then
in material breach of any representation, warranty, covenant, or other agreement
contained in the Merger Agreement), (c) if the merger is not consummated by
December 31, 1998, provided that the failure to consummate is not due to a
breach by the party electing to terminate, or (d) provided that the terminating
party is not then in material breach of any representation, warranty, covenant,
or other agreement contained in the Merger Agreement, if (i) any approval of any
regulatory authority required for consummation of the merger and the other
transactions contemplated by the Merger Agreement has been denied by final
nonappealable action, or if any action taken by such authority is not appealed
within the time limit for appeal or (ii) the shareholders of Brown fail to vote
their approval of the matters submitted for the approval by such shareholders at
the Special Meeting.
If the merger is terminated as described in this section, the Merger
Agreement will become void and have no effect, except that certain provisions of
the Merger Agreement, including those relating to the obligations to maintain
the confidentiality of certain information obtained, will survive. In addition,
termination of the Merger Agreement will not relieve any breaching party from
liability for any uncured willful breach of a representation, warranty,
covenant, or agreement giving rise to such termination.
Dissenters' Rights
If the Merger Agreement and the transactions contemplated thereby are
consummated, any shareholder of Brown who properly dissents from the merger in
connection with the Special Meeting may be entitled to receive in cash the fair
value of such shareholder's shares of Brown common stock determined immediately
prior to the merger, excluding any appreciation or depreciation in anticipation
of the merger.
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- --------------------------------------------------------------------------------
FAILURE TO COMPLY WITH THE PROCEDURES PRESCRIBED BY APPLICABLE LAW WILL
RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
- --------------------------------------------------------------------------------
Any shareholder of Brown entitled to vote on the Merger Agreement has
the right to receive payment of the fair value of his or her shares of Brown
common stock upon compliance with the applicable provisions of 12 C.F.R. Section
552.14. Any Brown shareholder intending to enforce the right to dissent (1) may
not vote in favor of the Merger Agreement, and (2) must file a written notice of
demand for payment for his or her shares (the "Demand Notice") with The Brown
Bank, Railroad Street, Cobbtown, Georgia 30420 (telephone: (912) 684-2130,
Attention: Dennis D. Allen), before the vote on the proposal to approve the
Merger Agreement is taken at the meeting. The Demand Notice must state that the
shareholder demands payment for his or her shares of Brown common stock if the
merger is effected. A vote against approval of the Merger Agreement, in and of
itself, will not constitute a Demand Notice satisfying the requirements of
Section 552.14.
If the Merger Agreement is approved by Brown's shareholders at the
Special Meeting, each shareholder who has properly filed a Demand Notice and who
has not voted in favor of the Merger Agreement will be notified by FLAG of such
approval within ten days of the effective date of the merger. Such notice must
(1) state the effective date of the merger, (2) make a written offer to each
shareholder to pay for dissenting shares at a specified price deemed by FLAG to
be the fair value for the shares, and (iii) inform the shareholder that, within
sixty days of such date, the respective requirements of paragraphs (c)(5) and
(c)(6) of section 552.14 (set out in the notice) must be satisfied. Such notice
must also be accompanied by (1) Brown's balance sheet and statement of income
for a fiscal year ending not more than sixteen months before the date of the
notice, and (2) the latest available interim financial statements.
Any shareholder who has made a Demand Notice shall thereafter neither
be entitled to vote such stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to, or a vote to be taken by shareholders of record at a
date which is on or prior to, the effective date of the merger); however, if any
shareholder becomes unentitled to appraisal and payment of appraised value with
respect to such stock and accepts or is deemed to have accepted the terms
offered upon the merger, such shareholder shall thereupon be entitled to vote
and receive the distributions described above.
If within sixty days of the effective date of the merger the fair value
is agreed upon between FLAG and any shareholder who has complied with the
provisions of Section 552.14, payment for the shares shall be made within ninety
days of the effective date of the merger. If a fair value cannot be agreed upon
between FLAG and any shareholder who has complied with the provisions of Section
552.14 within sixty days of the effective date of the merger, any such
shareholder may file a petition with the OTS, with a copy by registered or
certified mail to FLAG, demanding a determination of the fair market value of
the stock of all such shareholders. A shareholder entitled to file a petition
who fails to file such petition within sixty days of the effective date of the
merger shall be deemed to have accepted the terms offered under the merger.
Within sixty days of the effective date of the merger, each shareholder
demanding appraisal and payment under Section 552.14 shall submit to the
transfer agent his stock certificates for notation on the stock certificates
that an appraisal and payment have been demanded with respect to such stock and
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that appraisal proceedings are pending. Any shareholder who fails to submit his
or her stock certificates for such notation shall no longer be entitled to
appraisal rights under Section 552.14 and shall be deemed to have accepted the
terms offered under the merger.
Notwithstanding the foregoing, at any time within sixty days after the
effective date of the merger, any shareholder shall have the right to withdraw
his or her demand for appraisal and to accept the terms offered upon the merger.
After demand for appraisal and payment has been made to the OTS, the
Director of the OTS shall either appoint one or more independent persons or
direct appropriate staff of the OTS to appraise the shares to determine their
fair market value, as of the effective date of the merger, exclusive of any
element of value arising from the accomplishment or expectation of the merger.
The Director, after consideration of the appraisal report and the advice of the
appropriate staff, shall, if he or she concurs in the valuation of the shares,
direct payment by FLAG of the appraised fair market value of the shares, upon
surrender of the certificates representing such stock. Payment shall be made,
together with interest from the effective date of the merger at a rate deemed
equitable by the Director. The costs and expenses of any proceeding under
Section 552.14 may be apportioned and assessed by the Director as he or she may
deem equitable against all or some of the parties. In making this determination
the Director shall consider whether any party has acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by Section
552.14.
The foregoing summary of the applicable provisions of 12 C.F.R. Section
552.14 is not intended to be a complete statement of such provisions, and is
qualified in its entirety by reference to such sections, which are included as
Appendix B to this Proxy Statement/Prospectus. The provisions of the statutes
are technical in nature and complex. It is suggested that any shareholder who
desires to exercise the right to object to the Merger Agreement consult counsel.
Failure to comply with the provisions of the statute may defeat a shareholder's
right to dissent. No further notice of the events giving rise to dissenters'
rights or any steps associated therewith will be furnished to Brown
shareholders, except as indicated above or otherwise required by law.
Any dissenting Brown shareholder who perfects such holder's right to be
paid the value of such holder's shares will recognize taxable gain or loss upon
receipt of cash for such shares for federal income tax purposes.
See "-- Certain Federal Income Tax Consequences."
Conduct Of Business Pending The Merger
Pursuant to the Merger Agreement, Brown and FLAG have agreed that
unless the prior written consent of the other party has been obtained, and
except as otherwise expressly contemplated in the Merger Agreement, each of
Brown and FLAG will, and will cause its respective subsidiaries to (1) operate
its business only in the usual, regular, and ordinary course, (2) preserve
intact its business organization and assets and maintain its rights and
franchises, and (3) take no action which would (a) materially adversely affect
the ability of any party to obtain any consents required for the transactions
contemplated by the Merger Agreement without the imposition of a condition or
restriction of the type referred to in the last sentences of Section 9.1(b) or
9.1(c) of the Merger Agreement, or (b) materially adversely affect the ability
of any party to perform its covenants and agreements under the Merger Agreement.
In addition, Brown has agreed that, from the date of the Merger
Agreement until the earlier of the effective date of the merger or the
termination of the Merger Agreement, unless FLAG has given prior written
consent, and except as otherwise expressly contemplated by the Merger Agreement,
Brown will not do or agree or commit to do, or permit any of its subsidiaries to
do or agree or commit to do, any of the following:
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(1) amend the Articles of Incorporation, Bylaws or other governing
instruments of any Brown entity;
(2) incur any additional debt obligation or other obligation for
borrowed money (other than indebtedness of an Brown entity to
another Brown entity) in excess of an aggregate of $100,000 (for
the Brown entities on a consolidated basis) except in the
ordinary course of the business of the Brown subsidiaries
consistent with past practices (which shall include, for Brown
subsidiaries that are depository institutions, creation of
deposit liabilities, purchases of federal funds, advances from
the Federal Reserve Bank or Federal Home Loan Bank, and entry
into repurchase agreements fully secured by U.S. government or
agency securities), or impose, or suffer the imposition, on any
asset of any Brown entity of any lien or permit any such lien to
exist (other than in connection with deposits, repurchase
agreements, bankers acceptances, "treasury tax and loan" accounts
established in the ordinary course of business, the satisfaction
of legal requirements in the exercise of trust powers, and liens
in effect as of the date of the Merger Agreement that were
previously disclosed to FLAG by Brown);
(3) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans),
directly or indirectly, any shares, or any securities convertible
into any shares, of the capital stock of any Brown entity, or
declare or pay any dividend or make any other distribution in
respect of Brown's capital stock;
(4) except for the Merger Agreement, or pursuant to the exercise of
stock options outstanding as of the date thereof and pursuant to
the terms thereof in existence on the date thereof, or as
previously disclosed to FLAG by Brown, issue, sell, pledge,
encumber, authorize the issuance of, enter into any contract to
issue, sell, pledge, encumber, or authorize the issuance of, or
otherwise permit to become outstanding, any additional shares of
Brown common stock or any other capital stock of any Brown
entity, or any stock appreciation rights, or any option, warrant,
or other equity right;
(5) adjust, split, combine or reclassify any capital stock of any
Brown entity or issue or authorize the issuance of any other
securities in respect of or in substitution for shares of Brown
common stock, or sell, lease, mortgage or otherwise dispose of or
otherwise encumber any asset having a book value in excess of
$100,000 other than in the ordinary course of business for
reasonable and adequate consideration or any shares of capital
stock of any Brown subsidiary (unless any such shares of stock
are sold or otherwise transferred to another Brown entity);
(6) enter into or amend any employment contract between any Brown
entity and any person having a salary thereunder in excess of
$50,000 per year (unless such amendment is required by law) that
the Brown entity does not have the unconditional right to
terminate without liability (other than liability for services
already rendered), at any time on or after the effective date of
the merger;
(7) except for loans made in the ordinary course of its business,
make any material investment, either by purchase of stock or
securities, contributions to capital, asset transfers, or
purchase of any assets, in any entity other than a wholly-owned
Brown subsidiary, or otherwise acquire direct or indirect control
over any entity, other than in connection with (a) foreclosures
in the ordinary course of business, (b) acquisitions of control
by a depository institution subsidiary in its fiduciary capacity,
or (c) the creation of new wholly-owned subsidiaries organized to
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conduct or continue activities otherwise permitted by the Merger
Agreement;
(8) grant any increase in compensation or benefits to the employees
or officers of any Brown entity, except in accordance with past
practice previously disclosed to FLAG by Brown or as required by
law; pay any severance or termination pay or any bonus other than
pursuant to written policies or written contracts in effect on
the date of the Merger Agreement and previously disclosed to FLAG
by Brown; enter into or amend any severance agreements with
officers of any Brown entity; grant any material increase in fees
or other increases in compensation or other benefits to directors
of any Brown entity except in accordance with past practice
previously disclosed to FLAG by Brown; or voluntarily accelerate
the vesting of any stock options or other stock-based
compensation or employee benefits or other equity rights;
(9) adopt any new employee benefit plan of any Brown entity or
terminate or withdraw from, or make any material change in or to,
any existing employee benefit plans of any Brown entity other
than any such change that is required by law or that, in the
opinion of counsel, is necessary or advisable to maintain the tax
qualified status of any such plan, or make any distributions from
such employee benefit plans, except as required by law, the terms
of such plans or consistent with past practice;
(10) make any significant change in any tax or accounting methods or
systems of internal accounting controls, except as may be
appropriate to conform to changes in tax laws or regulatory
accounting requirements or GAAP;
(11) commence any litigation other than in accordance with past
practice or except as previously disclosed to FLAG by Brown,
settle any litigation involving any liability of any Brown entity
for material money damages or restrictions upon the operations of
any Brown entity; or
(12) except in the ordinary course of business, enter into, modify,
amend or terminate any material contract (including any loan
contract with an unpaid balance exceeding $50,000) or waive,
release, compromise or assign any material rights or claims.
The Merger Agreement also provides that from the date of the Merger
Agreement until the earlier of the effective date of the merger or the
termination of the Merger Agreement, unless Brown has given prior written
consent, and except as otherwise expressly contemplated by the Merger Agreement,
FLAG will not amend the Articles of Incorporation or Bylaws of FLAG in any
manner adverse to the holders of Brown common stock or take any action that will
materially adversely impact the ability of the FLAG entities to consummate the
merger.
Management And Operations After The Merger; Interests Of Certain Persons In The
Merger
Citizens Bank will be the surviving corporation resulting from the
merger. Certain members of Brown's management and the Brown Board of Directors
have interests in the merger in addition to their interests as shareholders of
Brown generally. These include, among other things, provisions in the Merger
Agreement relating to indemnification of directors and officers and eligibility
for certain FLAG employee benefits. Promptly after the effective date of the
merger, Dennis D. Allen, President and Chief Executive of Brown, will become a
member of FLAG's Board of Directors. Additionally, the Merger Agreement provides
that Mr. Allen and FLAG will execute a Separation Agreement. As of the Brown
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Record Date, none of the directors and officers of Brown beneficially owned any
shares of FLAG common stock.
Indemnification and Advancement of Expenses. The Merger Agreement
provides that FLAG will indemnify, defend and hold harmless each person entitled
to indemnification from a Brown entity against all liabilities arising out of
actions or omissions occurring at or prior to the effective date of the merger
(including the transactions contemplated by the Merger Agreement) to the fullest
extent permitted under Georgia law and by Brown's Charter and Bylaws as in
effect on the date of the Merger Agreement, including provisions relating to
advances of expenses incurred in the defense of any litigation. Without limiting
the foregoing, in any case in which approval by FLAG is required to effectuate
any indemnification, FLAG will direct, at the election of the indemnified party,
that the determination of any such approval shall be made by independent counsel
mutually agreed upon between FLAG and the indemnified party.
Separation Agreement. The Merger Agreement provides that, as a
condition to consummation of the merger, FLAG will provide Mr. Allen with a
Separation Agreement. Pursuant to the terms of the Separation Agreement, Mr.
Allen will receive severance payments equal to his annual base salary and bonus
paid over the previous three fiscal years in the event Mr. Allen is
involuntarily terminated, as such term is defined in the Separation Agreement.
In addition, pursuant to the terms of the Separation Agreement, Mr. Allen will
make certain covenants not to compete with FLAG during the term of the
Separation Agreement and for a 12-month period following the termination of the
Separation Agreement or the termination of Mr. Allen's status as an employee of
FLAG.
Other Matters Relating to Employee Benefit Plans. The Merger Agreement
also provides that, after the effective date of the merger, FLAG will either (1)
continue to provide to officers and employees of the Brown entities employee
benefits under Brown's existing employee benefit and welfare plans or, (2) if
FLAG determines to provide to officers and employees of the Brown entities
employee benefits under other employee benefit plans and welfare plans, provide
generally to officers and employees of the Brown entities employee benefits
under employee benefit and welfare plans (other than stock option or other plans
involving the potential issuance of FLAG common stock), on terms and conditions
which, when taken as a whole are substantially similar to those currently
provided by the FLAG entities to their similarly situated officers and
employees. For purposes of participation and vesting (but not accrual of
benefits) under FLAG's employee benefit plans, (1) service under any qualified
defined benefit plan of Brown will be treated as service under FLAG's defined
benefit plan, if any, (2) service under any qualified defined contribution plans
of Brown will be treated as service under FLAG's qualified defined contribution
plans, and (3) service under any other employee benefit plans of Brown will be
treated as service under any similar employee benefit plans maintained by FLAG.
With respect to officers and employees of the Brown entities who, at or after
the effective date of the merger, become employees of a FLAG entity and who,
immediately prior to the effective date of the merger, are participants in one
or more employee welfare benefit plans maintained by the Brown entities, FLAG
will cause each comparable employee welfare benefit plan which is substituted
for a Brown welfare benefit plan to waive any evidence of insurability or
similar provision, to provide credit for such participation prior to such
substitution with regard to the application of any pre-existing condition
limitation, and to provide credit towards satisfaction of any deductible or
out-of-pocket provisions for expenses incurred by such participants during the
period prior to such substitution, if any, that overlaps with the then current
plan year for each such substituted employee welfare benefit plan. FLAG also
will cause the surviving corporation and its subsidiaries to honor in accordance
with their terms all employment, severance, consulting and other compensation
contracts previously disclosed to FLAG by Brown between any Brown entity and any
current or former director, officer, or employee thereof, and all provisions for
vested benefits or other vested amounts earned or accrued through the effective
date of the merger under the Brown benefit plans.
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Certain Federal Income Tax Consequences
The following is a summary of the material anticipated federal income
tax consequences of the merger. This summary is based on the federal income tax
laws now in effect and as currently interpreted; it does not take into account
possible changes in such laws or interpretations, including amendments to
applicable statutes or regulations or changes in judicial decisions or
administrative rulings, some of which may have retroactive effect. This summary
does not purport to address all aspects of the possible federal income tax
consequences of the merger and is not intended as tax advice to any person. In
particular, and without limiting the foregoing, this summary does not address
the federal income tax consequences of the merger to shareholders in light of
their particular circumstances or status (for example, as foreign persons,
tax-exempt entities, dealers in securities, and insurance companies, among
others). Nor does this summary address any consequences of the merger under any
state, local, estate, or foreign tax laws. Shareholders, therefore, are urged to
consult their own tax advisors as to the specific tax consequences to them of
the merger, including tax return reporting requirements, the application and
effect of federal, foreign, state, local, and other tax laws, and the
implications of any proposed changes in the tax laws.
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service ("IRS"). Instead, Powell, Goldstein,
Frazer & Murphy LLP, counsel to FLAG, will render an opinion to Brown and FLAG
concerning material federal income tax consequences of the proposed merger under
federal income tax law. It is such firm's opinion that, based upon the
assumption the merger is consummated in accordance with the Merger Agreement and
the representations made by the management of Brown and FLAG, the merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
Assuming the merger does qualify as a reorganization pursuant to
Section 368(a) of the Code, the shareholders of Brown will have the following
federal income tax consequences:
(a) The shareholders of Brown will recognize no gain or loss
upon the exchange of all of their Brown common stock solely for shares
of FLAG common stock.
(b) The aggregate tax basis of the FLAG common stock received
by the Brown shareholders in the merger will, in each instance, be the
same as the aggregate tax basis of the Brown common stock surrendered
in exchange therefor, less the basis of any fractional share of FLAG
common stock settled by cash payment.
(c) The holding period of the FLAG common stock received by
the Brown shareholders will, in each instance, include the period
during which the Brown common stock surrendered in exchange therefor
was held, provided that the Brown common stock was held as a capital
asset on the date of the exchange.
(d) The payment of cash to Brown shareholders in lieu of
fractional share interests of FLAG common stock will be treated for
federal income tax purposes as if the fractional shares were
distributed as part of the exchange and then were redeemed by FLAG.
These cash payments will be treated as having been received as
distributions in full payment in exchange for the stock redeemed.
Generally, any gain or loss recognized upon such exchange will be
capital gain or loss, provided the fractional share would constitute a
capital asset in the hands of the exchanging shareholder.
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(e) Where solely cash is received by a Brown shareholder in
exchange for Brown common stock pursuant to the exercise of dissenters'
rights, the former Brown shareholder will be subject to federal income
tax as a result of such transaction. The cash will be treated as having
been received as a redemption in exchange for such holder's Brown
common stock, subject to the provisions and limitations of Section 302
of the Code.
Upon the subsequent sale or exchange of FLAG common stock, a holder of
such stock generally will recognize capital gain or loss equal to the difference
between the amount of cash and the fair market value of any property received
upon the sale or exchange and such holder's adjusted tax basis in the FLAG
common stock. Under recently enacted legislation, capital gains recognized by
certain non-corporate holders of FLAG common stock generally will be subject to
a maximum federal income tax rate of 20% if the shares sold or exchanged are
held for more than 18 months, and to a maximum federal income tax rate of 28% if
such shares are held for more than one year but are not held for more than 18
months. Tax consequences to dealers in FLAG common stock, non-United States
holders of FLAG common stock or others who have a special tax status (including,
without limitation, financial institutions, insurance companies and tax-exempt
entities) or to persons who received their shares through the exercise of
employee stock options or otherwise as compensation may be different and such
persons should consult their tax advisors as to the tax consequences of a sale
or exchange of FLAG common stock.
Each Brown shareholder who receives FLAG common stock in the merger
will be required to attach a statement to such shareholder's federal income tax
return for the year of the merger which describes the facts of the merger,
including the shareholder's basis in the Brown common stock exchanged, and the
number of shares of FLAG common stock received in exchange for Brown common
stock. Each shareholder should also keep as part of such shareholder's permanent
records information necessary to establish such shareholder's basis in, and
holding period for, the FLAG common stock received in the merger.
If the merger fails to qualify as a tax-free reorganization for any
reason, the principal federal income tax consequences, under currently
applicable law, would be as follows: (1) gain or loss would be recognized to
Brown as a result of the merger; (2) gain or loss would be recognized by the
holders of Brown common stock upon the exchange of such shares in the merger for
shares of FLAG common stock; (3) the tax basis of the FLAG common stock to be
received by the holders of Brown common stock in the merger would be the fair
market value of such shares of FLAG common stock at the effective date of the
merger; and (4) the holding period of such shares of FLAG common stock to be
received by Brown shareholders pursuant to the merger would begin the day after
the effective date of the merger. If the condition of receiving this tax opinion
is waived by Brown, Brown will resolicit its shareholders prior to proceeding
with the merger.
Certain tax consequences of the merger may vary depending upon your
particular circumstances. You are urged to consult your own tax advisors to
determine the particular tax consequences of the merger to you (including the
application and effect of federal, state, local and foreign income and other tax
laws).
Accounting Treatment
FLAG and Brown anticipate that the merger will be accounted for as a
pooling-of-interests. Under the pooling-of-interests method of accounting, the
recorded amounts of the assets and liabilities of Brown will be carried forward
at their previously recorded amounts.
In order for the merger to qualify for pooling-of-interests accounting
treatment, substantially all (90% or more) of the outstanding Brown common stock
must be exchanged for FLAG common stock with substantially similar terms. There
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are certain other criteria that must be satisfied in order for the merger to
qualify as a pooling of interests, some of which criteria cannot be satisfied
until after the effective date of the merger.
For information concerning certain conditions to be imposed on the
exchange of Brown common stock for FLAG common stock in the merger by affiliates
of Brown and certain restrictions to be imposed on the transferability of the
FLAG common stock received by those affiliates in the merger in order, among
other things, to ensure the availability of pooling-of-interests accounting
treatment, see "-- Resales of FLAG common stock."
Expenses And Fees
The Merger Agreement provides that each of the parties will bear and
pay all direct costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated by the Merger Agreement, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel.
In the event the Merger Agreement is terminated by FLAG as a result of
a material breach by Brown of any representation, warranty, covenant or
agreement, which cannot be or has not been cured within 30 days after FLAG has
given Brown written notice of such breach, and the breach of any representation
or warranty, in the opinion of FLAG is reasonably likely to have a material
adverse effect or if the Brown shareholders do not approve the Merger Agreement,
then Brown shall pay to FLAG an amount equal to the lesser of $100,000 or FLAG's
actual out of pocket expenses incurred in connection with the merger
transaction.
In the event that the Merger Agreement is terminated by Brown as a
result of a material breach by FLAG of any representation, warranty, covenant or
agreement, which cannot or has not been cured within 30 days after Brown has
given FLAG written notice of such breach, and the breach of any representation
or warranty, in the opinion of Brown, is reasonably likely to have a material
adverse effect, then FLAG shall pay to Brown an amount equal to the lesser of
$100,000 or Brown's actual out of pocket expenses incurred in connection with
the merger transaction.
Resales Of FLAG Common Stock
The issuance of FLAG common stock to shareholders of Brown in
connection with the merger will be registered under the Securities Act. All
shares of FLAG common stock received by holders of Brown common stock and all
shares of FLAG common stock issued and outstanding immediately prior to the
effective date of the merger, upon consummation of the merger will be freely
transferable by those shareholders of Brown and FLAG not deemed to be
"Affiliates" of Brown or FLAG. "Affiliates" generally are defined as persons or
entities who control, are controlled by, or are under common control with Brown
or FLAG at the time of the Special Meeting (generally, directors, executive
officers and 10% shareholders).
Rules 144 and 145 promulgated under the Securities Act restrict the
sale of FLAG common stock received in the merger by Affiliates and certain of
their family members and related interests. Generally speaking, during the
one-year period following the effective date of the merger, Affiliates of Brown
or FLAG may resell publicly the FLAG common stock received by them in the merger
within certain limitations as to the amount of FLAG common stock sold in any
three-month period and as to the manner of sale. After this one-year period,
Affiliates of Brown who are not Affiliates of FLAG may resell their shares
without restriction. The ability of Affiliates to resell shares of FLAG common
stock received in the merger under Rule 144 or 145 as summarized herein
generally will be subject to FLAG's having satisfied its Exchange Act reporting
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requirements for specified periods prior to the time of sale. Affiliates will
receive additional information regarding the effect of Rules 144 and 145 on
their ability to resell FLAG common stock received in the merger. Affiliates
also would be permitted to resell FLAG common stock received in the merger
pursuant to an effective registration statement under the Securities Act or an
available exemption from the Securities Act registration requirements. This
Proxy Statement/Prospectus does not cover any resales of FLAG common stock
received by persons who may be deemed to be Affiliates of Brown or FLAG.
Brown has agreed to use its reasonable efforts to cause each person who
may be deemed to be an Affiliate of Brown to execute and deliver to FLAG prior
to the effective date of the merger, an agreement (each, a "Brown Affiliate
Agreement") providing that such Affiliate will not sell, pledge, transfer, or
otherwise dispose of any FLAG common stock obtained as a result of the merger
(1) except in compliance with the Securities Act and the rules and regulations
of the SEC thereunder and (2) in any case, until after results covering 30 days
of post-merger operations of FLAG have been published. The receipt of the Brown
Affiliate Agreements by FLAG is also a condition to FLAG's obligations to
consummate the merger. Brown Certificates surrendered for exchange by any person
who is an Affiliate of Brown for purposes of Rule 145(c) under the Securities
Act shall not be exchanged for FLAG Certificates until FLAG has received such a
written agreement from such person. Prior to publication of such results, FLAG
will not transfer on its books any shares of FLAG common stock received by an
Affiliate pursuant to the merger. The stock certificates representing FLAG
common stock issued to Affiliates in the merger may bear a legend summarizing
the foregoing restrictions. See "-- Conditions to Consummation of the Merger."
DESCRIPTION OF FLAG COMMON STOCK
FLAG's authorized capital stock consists of 20,000,000 shares of $1.00
par value common stock, and 10,000,000 shares of preferred stock. The holders of
the FLAG common stock have unlimited voting rights and are entitled to one vote
per share for all purposes. Subject to such preferential rights as may be
determined by the Board of Directors of FLAG in connection with the future
issuance of shares of FLAG preferred stock, holders of FLAG common stock are
entitled to such dividends, if any, as may be declared by the Board of Directors
of FLAG in compliance with the provisions of the GBCC and the regulations of the
appropriate regulatory authorities, and to receive the net assets of the
corporation upon dissolution. The FLAG common stock does not have any preemptive
rights with respect to acquiring additional shares of FLAG common stock, and the
shares are not subject to any conversion, redemption or sinking fund provisions.
The outstanding shares of FLAG common stock are, and the shares to be issued by
FLAG in connection with the Merger Agreement will be, when issued, fully-paid
and nonassessable. The FLAG Board of Directors is divided into three classes, as
nearly equal in number as possible. FLAG common stock does not have cumulative
voting rights in the election of FLAG directors.
The Board of Directors is authorized to determine the series,
preferences, limitations, and relative rights, including par value, of any
authorized but unissued shares of FLAG preferred stock. No shares of FLAG
preferred stock are presently outstanding. Although such shares may be issued in
the future, FLAG has no present plans to issue any preferred stock. The FLAG
preferred stock was authorized for future flexibility, and could be issued in a
manner that could have an anti-takeover effect by discouraging a third party
from seeking to acquire FLAG. FLAG knows of no present attempts to acquire FLAG.
In order to approve certain "business combinations" with certain
"interested shareholders" (10% or more shareholders), or to amend the provisions
in the FLAG Articles of Incorporation relating to such business combinations,
the affirmative vote of two-thirds of the issued and outstanding shares of FLAG
common stock entitled to vote thereon is required, unless (1) at least
two-thirds of the directors of FLAG approve a memorandum of understanding with
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the interested shareholder regarding the business combination prior to the date
on which such shareholder became an interested shareholder, or (2) the business
combination is unanimously approved by certain "continuing directors" of FLAG.
In addition, in order to amend certain provisions of FLAG's Articles of
Incorporation and Bylaws relating to the number, election, term and removal of
FLAG Directors, a two-thirds vote of the issued and outstanding shares of FLAG
is required, unless two-thirds of the directors then serving approve the
amendment.
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
As a result of the merger, holders of Brown common stock will be
exchanging their shares of a federal savings bank which are governed by the Home
Owners' Loan Act, as amended (the "HOLA"), regulations issued by the OTS
pursuant to HOLA, Brown's Charter (the "Brown Charter"), and Bylaws, for shares
of common stock of FLAG, a Georgia corporation, which are governed by the GBCC,
FLAG's Articles of Incorporation (the "FLAG Articles"), and Bylaws. Certain
significant differences exist between the rights of Brown shareholders and those
of FLAG shareholders. The differences that Brown and FLAG deem material are
summarized below. The following discussion is necessarily general. It is not
intended to be a complete statement of all the differences affecting the rights
of shareholders, and their respective entities, and it is qualified in its
entirety by reference to the GBCC, and the HOLA, as well as to FLAG's Articles
and Bylaws and Brown's Charter and Bylaws.
Authorized Capital Stock
FLAG. The FLAG Articles authorize the issuance of an aggregate of
20,000,000 shares of common stock, $1.00 par value, of which 5,174,807 shares
were issued and outstanding as of the June 30, 1998. The FLAG Articles also
authorize the issuance, in one or more series, of not more than 10,000,000
shares of preferred stock ("FLAG Preferred Stock") with preferences, limitations
and relative rights, including par value, as the FLAG Board of Directors from
time to time may determine and set forth in an amendment to the FLAG Articles.
Shares of FLAG common stock have unlimited voting rights and are
entitled to receive the net assets of FLAG upon the dissolution of the
corporation. The FLAG Bylaws provide that each share of FLAG common stock is
entitled to one vote per share for all purposes.
FLAG's Board of Directors may authorize the issuance of authorized but
unissued shares of FLAG common stock without further action by FLAG's
shareholders, unless such action is required in a particular case by applicable
laws or regulations or by any stock exchange upon which FLAG's capital stock may
be listed. FLAG's shareholders do not have the preemptive right to purchase or
subscribe to any unissued authorized shares of FLAG common stock or FLAG
Preferred Stock or any option or warrant for the purchase thereof.
The authority to issue additional shares of FLAG common stock provides
FLAG with the flexibility necessary to meet its future needs without the delay
resulting from seeking shareholder approval. The authorized but unissued shares
of FLAG common stock will be issuable from time to time for any corporate
purpose, including, without limitation, stock splits, stock dividends, employee
benefit and compensation plans, acquisitions, and public or private sales for
cash as a means of raising capital. Such shares could be used to dilute the
stock ownership of persons seeking to obtain control of FLAG. In addition, the
sale of a substantial number of shares of FLAG common stock to persons who have
an understanding with FLAG concerning the voting of such shares, or the
distribution or declaration of a dividend of shares of FLAG common stock (or the
right to receive FLAG common stock) to FLAG shareholders, may have the effect of
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discouraging or increasing the cost of unsolicited attempts to acquire control
of FLAG.
Brown. Brown's authorized capital stock consists of 25,000,000 shares
of Brown common stock, $1.00 par value, of which 175,000 shares were issued and
outstanding as of the Brown Record Date. Each share of Brown common stock is
entitled to one vote per share for all purposes. Brown's shareholders do not
have the preemptive right to purchase or subscribe to any unissued authorized
shares of Brown common stock or any option or warrant for the purchase thereof.
In addition, the Board of Directors of Brown has the ability to increase the
number of issued and outstanding shares of Brown common stock without the
approval of the shareholders, within the maximum number of shares authorized by
Brown's Charter.
Amendment Of Articles Of Incorporation And Bylaws
FLAG. The FLAG Articles and Bylaws are generally silent with respect to
the issue of amending the FLAG Articles, and thus, the GBCC dictates the
requirements for making such an amendment. The GBCC generally provides that
other than in the case of certain routine amendments which may be made by a
corporation's board of directors without shareholder action (such as changing
the corporate name), and other amendments which the GBCC specifically allows
without shareholder action, the corporation's board of directors must recommend
any amendment of the FLAG Articles to the shareholders (unless the board elects
to make no such recommendation because of a conflict of interest or other
special circumstances, and the board communicates the reasons for its election
to the shareholders) and the affirmative vote of a majority of the votes
entitled to be cast on the amendment by each voting group entitled to vote on
the amendment (unless the GBCC, the articles of incorporation, or the board
require a greater vote or a vote by voting groups) is required to amend a
corporation's articles of incorporation. The FLAG Articles provide that the
provisions regarding the approval required for certain business combinations may
only be changed by the affirmative vote of at least two-thirds of the issued and
outstanding shares of the corporation entitled to vote thereon at any regular or
special meeting of the shareholders, and notice of the proposed change must be
contained in the notice of the meeting, unless two-thirds of certain "continuing
directors" approve the proposed amendment. The FLAG Articles also provide that
the provisions regarding the election, term and removal of FLAG Directors may
only be amended or rescinded by the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of FLAG entitled to vote in an
election of directors or at any regular or special meeting of the shareholders,
and notice of any proposed change must be contained in the notice of the
meeting, unless two-thirds of the directors then serving approve the proposed
amendment.
The FLAG Bylaws generally provide that the Bylaws may be made, amended
or repealed by the FLAG Board of Directors unless the FLAG Articles or the GBCC
reserve the power to amend or repeal the Bylaws exclusively to the shareholders
in whole or in part, or the shareholders, in amending or repealing a particular
Bylaw, provide expressly that the FLAG Board of Directors may not amend or
repeal that Bylaw. Neither the FLAG Articles nor Bylaws expressly permit the
FLAG shareholders to make, alter or rescind any Bylaws. Any amendment of the
provisions in the FLAG Bylaws relating to the number of directors of FLAG
requires the affirmative vote of two-thirds of all directors then in office or
the affirmative vote of the holders of two-thirds of the issued and outstanding
shares of FLAG entitled to vote at any regular or special meeting of the
shareholders called for that purpose. Unless two-thirds of the directors then
serving approve, the provisions in the FLAG Bylaws relating to the removal of
FLAG directors by the FLAG shareholders may only be amended or rescinded by the
affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of FLAG entitled to vote in an election of directors or at
any regular or special meeting of the shareholders, and notice of any proposed
change must be contained in the notice of the meeting.
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Brown. The Brown Charter generally provides that no amendment,
addition, alteration, change or repeal of the Charter can be made unless the
change is proposed by the Brown Board of Directors, preliminarily approved by
the OTS, and thereafter approved by the shareholders by a majority of the total
votes eligible to be cast at a legal meeting. Section 552.4 of the OTS
Regulations provides that the board of directors of a savings bank must adopt a
resolution proposing the charter amendment that states the text of the
amendment. Section 552.4 further provides that a savings bank must file an
application with the OTS and obtain its prior approval if the proposed charter
amendment would render more difficult or discourage a merger, tender offer, or
proxy contest, the assumption of control by a holder of a block of the federal
saving bank's stock, the removal of incumbent management, or involve a
significant issue of law or policy. Otherwise, Section 552.4 generally only
requires the federal savings bank to notify the OTS of the proposed amendments
by submitting the proposed amendments to the OTS.
The Brown Bylaws provide that the Bylaws may be amended in a manner
consistent with regulations by the OTS at any time by a majority of the full
Board of Directors or by a majority of the votes cast by the Brown shareholders
at any legal meeting. Section 552.5 of the OTS Regulations reiterates that
bylaws of a federal savings bank may be adopted, amended or repealed by either a
majority of the board of directors or a majority of the votes cast by the
shareholders at a legal meeting. The regulation further provides that OTS
approval is required for any bylaw amendment which would render more difficult
or discourage a merger, tender offer, or proxy contest, the assumption of
control by a holder of a large block of the saving bank's stock, or the removal
of incumbent management, or if the amendment is inconsistent with OTS
regulations, applicable laws, rules, regulations or the savings bank's charter
or involve a significant issue of law or policy, including indemnification,
conflicts of interest, and limitations on director liability.
Classified Board Of Directors And Absence Of Cumulative Voting
FLAG. FLAG's Bylaws generally provide that the number of directors
constituting the FLAG Board of Directors shall be twelve. The FLAG Board of
Directors is classified. The FLAG Articles and Bylaws provide that FLAG's Board
of Directors is divided into three classes, with each class to be as nearly
equal in number as possible. The directors in each class serve three-year terms
of office. The effect of FLAG having a classified Board of Directors is that
only approximately one-third of the members of the Board of Directors are
elected each year, which effectively requires two annual meetings for FLAG's
shareholders to change a majority of the members of the Board of Directors. The
FLAG Bylaws provide that in the event of a vacancy on the FLAG Board of
Directors, including any vacancy created by reason of an increase in the number
of directors, such vacancy may be filled by the shareholders of FLAG, the FLAG
Board of Directors, or, if the directors remaining in office constitute fewer
than a quorum of the Board of Directors, by affirmative vote of a majority of
the remaining directors. FLAG shareholders do not have cumulative voting rights
with respect to the election of directors. All elections for directors are
decided by a plurality of the votes cast by the shares entitled to vote in the
election at a meeting at which a quorum is present.
Brown. The Brown Bylaws provide that the Board of Directors shall
consist of seven members and shall be divided into three classes as nearly equal
in number as possible. The members of each class shall be elected for the term
of three years and until their successor are elected and qualified with one
class elected annually. The Brown Charter provides that each holder of shares of
Brown common stock shall be entitled to one vote for each share held by such
holder, including votes for the election of directors, for which holders shall
not be entitled to cumulate votes.
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Removal Of Directors
FLAG. Under the FLAG Articles and Bylaws, any one or more directors of
FLAG may be removed from office, but only for cause (defined as final conviction
of a felony, request or demand for removal by any bank regulatory authority
having jurisdiction over FLAG, or breach of fiduciary duty involving personal
profit). Such removal must be effected by the affirmative vote of the holders of
a majority of the outstanding shares of FLAG.
Brown. The Brown Bylaws provide that any director may be removed for
cause by a vote of the holders of a majority of the shares then entitled to vote
at an election of directors at a meeting of shareholders called expressly for
that purpose. If less than the entire board is to be removed, no one director
may be removed if the votes cast against the removal would be sufficient to
elect a director if then cumulatively voted at an election of the class of
directors of which such director is a part. Whenever the holders of the shares
of any class are entitled to elect one or more directors by the provisions of
the Brown Charter or supplemental sections thereto, the removal provisions
apply, in respect to the removal of a director or directors so elected, to the
vote of the holders of the outstanding shares of that class and not to the vote
of the outstanding shares as a whole.
Indemnification
FLAG. The FLAG Articles and Bylaws generally provide that any director
who is deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding which is initiated against such person by reason of his
serving as a director, to the fullest extent authorized by the GBCC; provided,
however, that FLAG will not indemnify any director for any liability or expenses
incurred by such director (1) for any appropriation, in violation of his duties,
of any business opportunity of FLAG; (2) for any acts or omissions which involve
intentional misconduct or a knowing violation of law; (3) for the types of
liability set forth in Section 14-2-832 of the GBCC or successor provisions; or
(4) for any transaction from which the director derives an improper personal
benefit. FLAG's Articles and Bylaws provide for the advancement of expenses to
its directors at the outset of a proceeding, upon the receipt from such director
of the written affirmation and repayment promise required by Section 14-2-856 of
the GBCC, the purchase of insurance by FLAG against any liability of the
director arising from his duties and actions as a director, the survival of such
indemnification to the director's heirs, executors and administrators, and the
limitation of a director's liability to the corporation itself. The
indemnification provisions state that they are non-exclusive, and shall not
impair any other rights to which those seeking indemnification or advancement of
expenses may be entitled. The FLAG Bylaws also provide for similar
indemnification of the officers of FLAG. The FLAG Bylaws provide that,
shareholders are entitled to notification of any indemnification granted to the
directors.
Brown. The Brown Bylaws provide that Brown shall indemnify its
directors, officers and employees in accordance with the requirements of 12
C.F.R. Section 545.121. Section 545.121 provides that a federal savings bank
shall indemnify any person against whom an action is brought or threatened
because that person is or was a director, officer or employee of the bank for
(1) any amount for which that person becomes liable under a judgment, and (2)
reasonable costs and expenses, including reasonable attorney's fees, actually
paid or incurred by that person in defending or settling such action, or in
enforcing his or her rights under the regulation if he or she attains a
favorable judgment in such enforcement action. Furthermore, Section 545.121
states that indemnification shall be made for such person only if (1) final
judgment on the merits is in his or her favor, or (2) in case of settlement,
final judgment against him or her, or final judgment in her or her favor other
than on the merits if a majority of the disinterested directors of the federal
savings bank determine that he or she was acting in good faith within the scope
of his or her employment or authority as he or she could reasonably have
perceived it under the circumstances and for a purpose he or she could
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reasonably have believed under the circumstances was in the best interests of
the federal savings bank or its members. The indemnification provision requires
the federal savings bank to give the OTS 60 days' notice of its intention to
make such indemnification. No such indemnification shall be made if the OTS
advises the federal savings bank in writing, within the notice period, of its
objection. Section 545.121 permits a federal savings bank to obtain insurance to
protect it and its directors, officers, and employees from potential losses
arising from claims against any of them for alleged wrongful acts, or wrongful
acts, committed in their capacity as directors, officers or employees. However,
no insurance may be obtained which provides for payment of losses of any person
incurred as a result of his or her willful or criminal misconduct. Finally,
Section 545.121 authorizes the payment of reasonable costs and expenses,
including reasonable attorneys' fees, arising from the defense or settlement of
an action if a majority of the directors concludes that any person ultimately
may become entitled to indemnification. Prior to the advancement of such
expenses, Section 545.121 requires the federal savings bank to obtain an
agreement providing for repayment if the person on whose behalf payment is made
is later determined not to be entitled to such indemnification.
Special Meetings Of Shareholders
FLAG. FLAG's Bylaws provide that special meetings of the shareholders
may be called at any time by a majority of the entire Board of Directors of
FLAG, the Chairman of the Board, the President, or, upon delivery to FLAG's
Secretary of a signed and dated written request setting out the purpose or
purposes for the meeting, the holders of a majority of the votes entitled to be
cast on any issue proposed to be considered at the proposed special meeting.
Brown. The Brown Bylaws provide that special meetings of the
shareholders may be called for any purpose, unless otherwise prescribed by OTS
regulations, by the President, Chairman of the Board of Directors, or a majority
of the Board of Directors. Brown is required to call a special meeting when
requested in writing of not less than 10% of all shares of Brown entitled to
vote at the meeting.
Actions by Shareholders Without a Meeting
FLAG. In accordance with Section 14-2-704 of the GBCC, action required
or permitted by the GBCC to be taken at an annual or special meeting may be
taken without a meeting if the action is taken by all the shareholders entitled
to vote on the action.
The provisions of the GBCC do not affect the special voting
requirements contained in the FLAG Articles of Incorporation or Bylaws for the
approval of a business combination or the amendment of such provision. The
approval of a business combination or of an amendment to the provision which
sets forth the voting requirements of such combinations requires the affirmative
vote of the holders of two-thirds of all shares of FLAG common stock outstanding
and entitled to vote, unless (1) two-thirds of the directors of FLAG approve a
memorandum of understanding with the interested shareholder prior to the date
when such interested shareholder first became an interested shareholder, or (2)
the business combination is unanimously approved by the continuing directors of
FLAG.
Brown. The Brown Bylaws provide that any action required to be taken at
a meeting of the shareholders or any other action which may be taken at a
meeting of shareholders, may be taken without a meeting if consent in writing,
setting forth the action so taken, is given by all of the shareholders entitled
to vote with respect to the subject matter.
Mergers, Consolidations, And Sales Of Assets
FLAG. The FLAG Articles generally require the affirmative vote of the
holders of at least two-thirds of all the issued and outstanding shares (other
than shares held by an "interested shareholder") of FLAG common stock entitled
36
<PAGE>
to vote to approve a "business combination" with an interested shareholder
(basically, a 10% or more shareholder of FLAG), unless (1) two-thirds of the
directors of FLAG approve a memorandum of understanding with the interested
shareholder regarding the business combination prior to the date such
shareholder became an interested shareholder, or (2) the business combination is
unanimously approved by certain "continuing directors" of FLAG. In addition,
FLAG's Bylaws expressly provide that the terms and requirements of Sections
14-2-1110 through 14-2-1113 of the GBCC will be applicable to FLAG and to any
business combination approved or recommended by the Board of Directors of FLAG.
As a result, Section 14-2-1111 requires that the business combination be (1)
unanimously approved by the continuing directors, provided that the continuing
directors constitute at least three members of the board of directors at the
time of such approval, or (2) recommended by at least two-thirds of the
continuing directors and approved by a majority of the votes entitled to be cast
by the holders voting shares of the corporation (other than the voting shares
beneficially owned by the interested shareholder who is a party to the business
combination). These voting requirements are required in addition to any vote
otherwise required by law or the Articles of Incorporation of FLAG. Further,
Section 14-2-1112 states that the voting requirements in Section 14-2-1111 do
not apply as long as all of the shareholders of FLAG receive a fair price in
return for their stock as a result of the business combination. However, the
voting requirements contained within the FLAG Articles of Incorporation would
continue to apply to any such business combinations.
The provisions of the FLAG Articles of Incorporation and Bylaws
relating to business combinations and Sections 14-2-1110 through 14-2-1113 of
the GBCC are designed as anti-takeover measures, and for the protection of the
minority shareholders of FLAG against some of the inequities which arise in
certain hostile takeover attempts.
Brown. The Brown Charter and Bylaws are silent with respect to mergers,
consolidations, and sales of assets. The OTS generally requires, pursuant to 12
C.F.R. Section 552.13, an affirmative vote of two-thirds of the outstanding
voting stock of any constituent federal savings bank for approval of a
combination agreement. Section 552.13 defines a constituent institution as a
resulting, disappearing, acquiring or transferring depository institution in a
combination. Combination is defined by Section 552.13 as a merger or
consolidation with another depository institution, or an acquisition of all or
substantially all of the assets or assumption of all or substantially all of the
liabilities of a depository institution by another depository institution.
Shareholders' Rights To Examine Books And Records
FLAG. The FLAG Bylaws state that the Board of Directors of FLAG has the
power to determine which accounts and books of FLAG, if any, will be open to the
inspection of shareholders, except such books and records which are required by
law to be held open for inspection. The GBCC provides that a shareholder is
entitled to inspect and copy certain books and records (such as the
corporation's articles of incorporation or bylaws) upon written demand at least
five days before the date on which he wishes to inspect such records. A
shareholder is entitled to inspect certain other documents (such as minutes of
the meetings of the board of directors, accounting records and the record of
shareholders of the corporation) provided that such inspection must occur during
regular business hours at a reasonable location determined by FLAG, and any such
demand for inspection will only be permitted if the following conditions are
met: (1) the demand for inspection is made in good faith, or made for a proper
purpose (a purpose reasonably relevant to such person's legitimate interest as a
shareholder); (2) the shareholder describes with particularity his or her
purpose for the inspection and the documents which he wishes to inspect; (3) the
records requested for inspection by the shareholder are directly connected with
his or her stated purpose; and, (4) the records are to be used solely for the
shareholder's stated purpose. The FLAG Bylaws also state that the Board has the
power to prescribe reasonable rules and regulations not in conflict with
applicable law for the inspection of corporate books or accounts.
37
<PAGE>
Brown. Neither the Charter and Bylaws of Brown nor the OTS Regulations
authorize the inspection of the accounts and books of Brown by the shareholders
of Brown.
Dividends
FLAG. The FLAG Bylaws provide that dividends upon the capital stock of
FLAG may be declared by the FLAG Board of Directors, as long as the Board of
Directors complies with the requirements of the GBCC and the applicable rules
and regulations of any relevant regulatory authorities. Such dividends may be
paid in cash, property, or shares of FLAG's capital stock. Section 14-2-640 of
the GBCC provides, generally, that no distribution, including dividends, may be
made by a corporation if, after giving the distribution effect: (1) the
corporation would not be able to pay its debts as they become due in the usual
course of business; or (2) the corporation's total assets would be less than the
sum of its total liabilities plus any amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
Brown. As a federal savings bank, Brown is subject to OTS regulations
which restrict its ability to make capital distributions such as dividends.
Under these regulations, a savings bank that meets its fully phased-in capital
requirements is permitted, with the approval of its Board of Directors, to make
capital distributions without OTS approval during any calendar year up to 100%
of its net income to date during that year plus an amount that would reduce its
surplus capital ratio (as measured at the beginning of the calendar year) by
one-half. Any proposed capital distributions in excess of this amount are
subject to objection by the OTS. Savings banks that have capital immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution that is equal to or in excess of their minimum capital requirement,
but less than their fully phased-in capital requirement, may make capital
distributions from 25% to 75% of net income during the most recent four quarters
(minus distributions previously made over that period), depending upon how close
they are to meeting their fully phased-in capital requirement. Savings banks
that fail to meet their minimum capital requirements are not authorized to make
any capital distributions without prior written approval from the OTS. All
savings banks must provide notice to the OTS prior to making any capital
distribution.
COMPARATIVE MARKET PRICES AND DIVIDENDS
FLAG common stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol "FLAG." The following
table sets forth the high and low sale prices per share of FLAG common stock on
the Nasdaq National Market and the dividends paid per share of FLAG common stock
for the indicated periods. Effective June 3, 1998, FLAG declared a 3-for-2 stock
split. The amounts below have been adjusted to reflect the stock split.
<TABLE>
<CAPTION>
Sale Price Per
Share of FLAG
Common Stock Dividends Declared
-------------------------- Per Share of FLAG
High Low Common Stock
----------- ----------- --------------------
1996
<S> <C> <C> <C>
First Quarter............................. $ 9.67 $ 8.33 $0.042
Second Quarter............................ 9.00 8.00 0.034
Third Quarter............................. 8.50 6.33 0.034
Fourth Quarter............................ 7.83 7.17 0.034
38
<PAGE>
1997
First Quarter............................. $ 8.67 $ 6.83 $0.046
Second Quarter............................ 9.75 7.50 0.034
Third Quarter............................. 11.00 9.33 0.034
Fourth Quarter............................ 14.33 11.00 0.034
1998
First Quarter............................. $ 14.33 $ 11.92 $0.046
Second Quarter............................ 19.38 12.67 0.060
Third Quarter 19.38 12.50 0.060
Fourth Quarter (through _______, 1998)
</TABLE>
On May 13, 1998, the last day prior to the public announcement of the
proposed merger between Citizens and Brown, the last reported sale price per
share of FLAG common stock on the Nasdaq National Market was $13.33, as adjusted
for 3-for-2 stock split effective June 3, 1998, and the resulting equivalent pro
forma price per share of Brown common stock (based on the 1.5 Exchange Ratio)
was $19.995. On _____________, 1998, the latest practicable date prior to the
mailing of this Proxy Statement/Prospectus, the last reported sale price per
share of FLAG common stock on the Nasdaq National Market was $______, and the
resulting equivalent pro forma price per share of Brown common stock was $_____.
The equivalent per share price of a share of Brown common stock at each
specified date represents the last reported sale price of a share of FLAG common
stock on such date multiplied by the Exchange Ratio.
The market price of FLAG common stock on the effective date of the
merger may be higher or lower than the market price at the time the Merger
Proposal was announced, at the time the Merger Agreement was executed, at the
time of mailing of this Proxy Statement/Prospectus, or at the time of the
Special Meeting. Holders of Brown common stock are not assured of receiving any
specific market value of FLAG common stock on the effective date of the merger,
and such value may be substantially more or less than the current value of FLAG
common stock.
There is no established public trading market for the Brown common
stock, and no reliable information is available as to trades of such shares or
the prices at which such shares have traded. Brown pays dividends quarterly.
Brown has not paid dividends since 1994.
To the knowledge of Brown, the most recent trade of Brown common stock
prior to May 13, 1998, the last day prior to the public announcement of the
proposed merger between FLAG and Brown, was the sale of 400 shares on May 4,
1998 at $10.00 per share. To the knowledge of Brown, there have been no trades
of Brown common stock since the announcement of the merger.
The foregoing information regarding Brown common stock is provided for
informational purposes only and, due to the absence of an active market for
Brown's shares, should not be viewed as indicative of the actual or market value
of Brown common stock.
The holders of FLAG common stock are entitled to receive dividends when
and if declared by the Board of Directors out of funds legally available
therefor. FLAG has paid regular quarterly cash dividends on its common stock
since 1987. Although FLAG currently intends to continue to pay quarterly cash
dividends on FLAG common stock, FLAG cannot assure that its dividend policy will
not change after consummation of the merger. The declaration and payment of
dividends thereafter will depend upon business conditions, operating results,
capital and reserve requirements, and the Board of Directors' consideration of
39
<PAGE>
other relevant factors. For information with respect to the provisions of the
Merger Agreement relating to FLAG's and Brown's abilities to pay dividends on
their respective common stock during the pendency of the merger, see
"DESCRIPTION OF MERGER -- Conduct of the Business Pending the merger."
FLAG is a legal entity separate and distinct from its subsidiaries and
its revenues depend in significant part on the payment of dividends from its
subsidiary depository institutions. FLAG's bank subsidiaries and subsidiary
thrift institution are subject to certain legal restrictions on the amount of
dividends they are permitted to pay.
BUSINESS OF BROWN
General
Brown is a federal savings bank headquartered in Cobbtown, Georgia.
Brown operates three banking offices located in Cobbtown, Reidsville and Metter,
Georgia. As of June 30, 1998, Brown had total consolidated assets of
approximately $28.7 million, total consolidated deposits of approximately $25.9
million, and total consolidated shareholders' equity of approximately $1.7
million. Brown offers a broad range of banking and banking-related services. The
Brown Bank Service Corporation, a Georgia corporation and a wholly-owned
subsidiary of Brown, provides various insurance products.
Management Stock Ownership
The following table presents information about each of the directors
and executive officers of Brown and all executive officers and directors as a
group. Unless otherwise indicated, each person has sole voting and investment
powers over the indicated shares. Information relating to beneficial ownership
of the Brown common stock is based upon "beneficial ownership" concepts set
forth in rules promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Under such rules, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which includes
the power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose or to direct the disposition of such
security. Under the rules, more than one person may be deemed to be a beneficial
owner of the same securities.
Number of Shares Percent
Beneficially Owned at Of
Name the Brown Record Date Class (%)
---- --------------------- ---------
(a) Directors
Dennis D. Allen 15,007.17 8.58%
John Robert Bowen 400 0.23%
I.A. Brannen, Jr. 13,933.25 7.96%
Yevonne Brown 24,733.25 14.13%
Lamar Durden 11,666.75 (1) 6.67%
J. Dale Fordham 5,453 3.12%
Don Kennedy 5,550 3.14%
(b) Executive Officers
40
<PAGE>
Malcolm C. Coleman 3,857.75 2.20%
Rhonda Hendrix 200 (2) 0.11%
Judy Johnston 100 (3) 0.06%
Barbara L. Rich 1,208.25 0.69%
(c) Executive Officers and Directors 82,059.42 46.89%
As a Group (11 persons)
- --------------------
(1) Consists of (i) 1,666.75 shares held by Mr. Durden and (ii) 10,000
shares held jointly by Mr. Durden and his spouse.
(2) Held jointly by Ms. Hendrix and her spouse.
(3) Held jointly by Ms. Johnston and her spouse.
Voting Securities And Principal Shareholders of Brown
The following lists each shareholder of record that directly or
indirectly owned, controlled, or held with power to vote 5% or more of the
175,000 outstanding shares of Brown common stock as of the Brown Record Date.
Unless otherwise indicated, each person has sole voting and investment powers
over the indicated shares. Information relating to beneficial ownership of the
Brown common stock is based upon "beneficial ownership" concepts set forth in
rules promulgated under the Exchange Act. Under such rules, a person is deemed
to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities.
Number of Shares Percent
Beneficially Owned At Of
Name and Address the Brown Record Date Class (%)
- ---------------- --------------------- ---------
Dennis D. Allen 15,007.17 8.58%
Route 2, Box 161
Cobbtown, Georgia 30420
I. A. Brannen, Jr. 13,933.25 7.96%
Route 3, Box 236
Metter, Georgia 30437
Yevonne Brown 24,733.25 14.13%
Route 1, Box 4
Cobbtown, Georgia 30420
41
<PAGE>
Geneva Denmark 10,566.75 6.04%
P.O. Box 193
Cobbtown, Georgia 30420
Lamar Durden 11,666.75 (1) 6.67%
P.O. Box 51
Cobbtown, Georgia 30420
Tera Perkins 9,816.75 (2) 5.61%
209 S. Caswell Street
Glennville, Georgia 30427
- --------------------
(1) Consists of (i) 1,666.75 shares held by Mr. Durden and (ii) 10,000
shares held jointly by Mr. Durden and his spouse.
(2) Held jointly by Ms. Perkins and her children.
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
Corporate Profile
- -----------------
Brown is a federally chartered savings bank headquartered in Cobbtown,
Georgia with additional offices in Metter and Reidsville, doing business in
Tattnall, Toombs and Candler Counties in Southeast Georgia.
Brown began business in 1946 under the rules of the GDBF. In January
1995, management and the Board converted the charter to a federal savings bank
operating under the regulation of the OTS, in an effort to allow Brown to grow
outside of its then defined market area of north Tattnall County.
Brown is community oriented, with an emphasis on retail banking, and
offers such customary banking services as consumer and commercial checking
accounts, NOW accounts, savings accounts, certificates of deposit, lines of
credit, Mastercard and VISA accounts, and money transfers. In addition, Brown
finances agriculture, commercial and consumer transactions, makes secured and
unsecured loans, including residential mortgage loans, and provides a variety of
other banking services, including the recent opening of an internet branch.
Brown's primary service area is in Tattnall, Toombs and Candler
Counties, Georgia and surrounding counties. The service area has experienced
minimal growth for the past several years. The area's economic base is dependent
upon cyclical factors, such as agriculture and real estate activities.
The following discussion focuses on significant changes in the
financial condition and results of operations of Brown during the past three
years. The discussion and analysis is intended to supplement and highlight
information contained in the accompanying consolidated financial statements and
the selected financial data presented elsewhere in this report.
42
<PAGE>
Financial Highlights
- --------------------
Net earnings decreased significantly during 1997 as compared to 1996 as
Brown reported a net loss of just over $131,000. Net earnings for 1996 were
approximately $167,000, which was a significant improvement over 1995's loss of
$13,000. These unusual fluctuations in earnings were the result of significant
growth during the periods, with 1997 also being effected primarily by an
increase in Brown's provision for loan losses for normal growth as well as for
one specific potential problem credit.
Total assets at December 31, 1997 were $30.8 million compared to $24.9
million at the end of 1996, an increase of approximately 24%. Total loans were
approximately $24.7 million at December 31, 1997, an increase of over 30% from
the 1996 balance, and total deposits at December 31, 1997 were $28.3 million as
compared to $22.0 million in 1996, an increase of 29%. Brown continues to fund
the majority of its assets with deposits acquired in its local marketplace. Core
deposits, which exclude certificates of deposit of $100,000 or more, increased
by 40% during the past twelve months. Brown also held approximately $1.6 million
of public fund deposits at December 31, 1997.
Net Interest Income
- -------------------
Net interest income (the difference between interest earned on assets and
interest paid on deposits and liabilities) is the largest component and most
important source of Brown's earnings. Brown actively manages this income source
to provide the largest possible amount of income while balancing interest rate,
credit and liquidity risks. Net interest income for 1997 increased by 24% from
1996 and by 93% in 1996 as compared to 1995. The increased volume of earning
assets was the primary reason for the increase in each of these years.
Interest income increased 30% in 1997 and 86% in 1996. The increase in
1997 was primarily a result of an increase in interest and fees on loans of
approximately $642,000 or 33%, and an increase in interest on investment
securities of approximately $16,000 or 9%.
Average earning assets in 1997 increased 35% when compared to 1996 due to
increases in average loans of over $6.6 million and average investment
securities of $220,000. Increases in average earning assets of 74% were also
experienced between 1996 and 1995 due to increases in average loans of $7.1
million and a $1.3 million increase in average investment securities. The
average earning asset mix remained relatively consistent during 1997 with loans
at 85%, investment securities at 13% and other earning assets at 2% of the
total. In 1996, loans accounted for 81%, investment securities 17% and other
earning assets 2%. The mix of earning assets is monitored on a continuing basis
in order to react to favorable interest rate movements and to maximize the
return on earning assets.
43
<PAGE>
Table 1 presents net interest income, yields and rates, and average balances for
1997, 1996 and 1995. Non-accrual loans and the interest income which was
recorded on these loans (both prior and subsequent to the time the loans were
placed on non-accrual status, if any) are included in the yield calculation for
loans in all periods reported.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balances Interest Cost Balance Interest Cost
------- -------- ---- -------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Federal funds sold $ 320,411 18,391 5.74% 277,842 14,289 5.14% 385,795 17,381 4.51%
Loans 22,244,188 2,610,117 11.73% 15,672,528 1,968,520 12.56% 8,586,677 1,038,961 12.10%
Taxable investment securities 3,233,868 181,413 5.61% 3,213,170 176,258 5.49% 1,903,259 95,767 5.03%
Non-taxable investment securities 211,135 10,339 4.90% - - - -
Other earning assets 109,794 7,588 6.91% 188,792 11,108 5.88% 252,848 14,342 5.67%
------- --------- ------- -------- ------- ------
Total interest-earning assets 26,119,396 2,827,848 10.83% 19,352,332 2,170,175 11.21% 11,128,579 1,166,451 10.48%
Non-interest-earning assets 2,731,028 2,036,436 1,658,265
--------- --------- ---------
Total assets $28,850,424 21,388,768 12,786,844
========== ========== ==========
Interest-bearing liabilities:
Demand $ 3,724,481 104,123 2.80% 3,887,598 123,295 3.17% 1,820,619 55,051 3.02%
Savings 929,568 22,634 2.43% 865,966 26,877 3.10% 623,377 20,440 3.28%
Time 19,818,464 1,173,534 5.92% 13,067,847 791,523 6.06% 7,339,021 461,830 6.29%
Federal funds purchased and repos 285,007 18,257 6.41% 364,044 19,904 5.47% 65,370 4,038 6.18%
FHLB advances 229,167 15,434 6.73% - - - -
------- --------- ------- ------ ------ ------
Total interest-bearing liabilities 24,986,687 1,333,982 5.34% 18,185,455 961,599 5.29% 9,848,387 541,359 5.50%
Noninterest-bearing liabilities
Deposits 1,707,459 1,498,419 1,463,226
Other noninterest-bearing liabilities 517,429 207,884 645,478
------- ------- -------
Total liabilities 27,211,575 19,891,758 11,957,091
Equity 1,638,849 1,497,010 829,753
--------- --------- -------
Total liabilities and shareholders' equity $28,850,424 21,388,768 12,786,844
========== ========== ==========
Net interest-earning assets $ 1,132,709 1,166,877 1,280,192
========= ========= =========
Net interest income / interest rate spread 1,493,866 5.49% 1,208,576 5.93% 625,092 4.98%
========= ========= =======
Net interest margin 5.72% 6.25% 5.62%
Ratio of average interest-earning assets to
Average interest-bearing liabilities 104.53% 106.42% 113.00%
</TABLE>
44
<PAGE>
Consolidated Average Balances, Interest and Rates
- -------------------------------------------------
The net cost of funds, defined as interest expense divided by average
earning assets, increased 14 basis points in 1997, while the yield on total
earning assets decreased 38 basis points and earning assets to total assets
remained constant. The rate paid on interest-bearing liabilities increased 5
basis points from 1996 levels. During 1996, the yield on total earning assets
increased 73 basis points while the rate paid on interest-bearing liabilities
decreased 21 basis points and the net cost of funds increased 11 basis points.
The banking industry uses two key ratios to measure relative
profitability of net interest income. The net interest rate spread measures the
difference between the average yield on earning assets and the average rate paid
on interest bearing sources of funds. The interest rate spread eliminates the
impact of noninterest-bearing deposits and gives a direct perspective on the
effect of market interest rate movements. The net interest margin is defined as
net interest income as a percentage of average total earning assets and takes
into account the positive impact of investing noninterest-bearing funding
sources.
The net interest spread decreased 44 basis points to 5.49% from the
1996 spread of 5.93% as the yield on interest-earning assets decreased while the
rates paid on interest-bearing liabilities increased. The increase in 1996 was
95 basis points from the 4.98% reflected in 1995. The net interest margin also
showed a decline as reflected by the 5.72% earned in 1997, a 53 basis point
decrease from 1996. The net interest margin for 1996 increased 63 basis points
from the 5.62% shown in 1995. Table 2 shows the change in net interest income
for the past two years due to changes in volumes and rates.
Table 2 - Analysis of the Changes in Net Interest Income
<TABLE>
<CAPTION>
1997/1996 1996/1995
Change Attributable To Change Attributable To
---------------------- ----------------------
Total Total
Rate/ Increase/ Rate/ Increase/
Volume Rate Volume Decrease Volume Rate Volume Decrease
------ ---- ------ -------- ------ ---- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Federal funds sold $ 2,189 1,659 254 4,102 (4,864) 2,460 (688) (3,092)
Loans 825,422 (129,517) (54,308) 641,597 857,366 39,553 32,640 929,559
Taxable investment securities 1,135 3,994 26 5,155 65,911 8,636 5,944 80,491
Non-taxable investment securities - - 10,339 10,339 - - - -
Other earning assets (4,648) 1,940 (812) (3,520) (3,633) 535 (136) (3,234)
------------------------------------ ------------------------------------
Total net change in income on
Interest-earning assets 824,098 (121,925) (44,501) 657,673 914,780 54,184 37,760 1,003,724
------------------------------------ ------------------------------------
Interest-bearing liabilities
Deposits (5,173) (14,612) 613 (19,172) 62,500 2,690 3,054 68,244
Savings 1,974 (5,792) (425) (4,243) 7,954 (1,092) (425) 6,437
Ftime 408,887 (17,721) (9,154) 382,011 360,504 (17,304) (13,507) 329,693
Federal funds purchased and repos (4,321) 3,416 (742) (1,647) 18,450 (464) (2,120) 15,866
FHLB advances - - 15,434 15,434 - - - -
------------------------------------ ------------------------------------
Total net change in expense on
Interest-bearing liabilities 401,366 (34,709) 5,726 372,383 449,408 (16,170) (12,998) 420,240
------------------------------------ ------------------------------------
Net change in net interest income $ 422,732 (87,216) (50,226) 285,290 465,372 67,354 50,758 583,484
==================================== ====================================
</TABLE>
45
<PAGE>
Loans
- -----
Average loans increased over 42% in 1997 with much of the increase
concentrated in the real estate mortgage category, which accounts for 57% of the
total loan portfolio. Total gross loans outstanding at year end increased 29%
over the previous year end levels. The growth in the portfolio resulted from
Brown's ongoing efforts to increase the loan portfolio through the origination
of quality loans. Consumer installment loans also increased 31% from year end
1996.
Table 3 breaks down the composition of the loan portfolio for each of
the past five years while Table 4 shows the amount of loans outstanding for
selected categories as of December 31, 1997, with maturities based on the
remaining scheduled repayments of principal.
Table 3- Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Percent of Percent of Percent of Percent of Percent of
Balance Total Balance Total Balance Total Balance Total Balance Total
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 4,459,310 18.07% 3,065,606 16.21% 2,781,725 21.63% 634,000 13.24% 650,000 15.19%
Real estate-construction 895,550 3.63% 245,308 1.30% 396,394 3.08% - 0.00% - 0.00%
Real estate-mortgage 13,946,009 56.51% 11,355,063 60.05% 5,389,873 41.91% 3,317,000 69.28% 2,616,000 61.14%
Leases 4,449 0.02% 151,284 0.80% 750,327 5.83% - 0.00% - 0.00%
Consumer 5,371,837 21.77% 4,090,783 21.64% 3,541,064 27.54% 837,000 17.48% 1,013,000 23.67%
--------- ----- --------- ----- --------- ----- ------- ----- --------- -----
Total Loans 24,677,155 100.00% 18,908,044 100.00% 12,859,383 100.00% 4,788,000 100.00% 4,279,000 100.00%
Allowance for Loan Losses 650,711 2.71% 222,245 1.19% 127,723 1.00% 58,000 1.23% 50,000 1.18%
------- ------- ------- ------ ------
Total Loans, net $ 24,026,444 18,685,799 12,731,660 4,730,000 4,229,000
========== ========== ========== ========= =========
</TABLE>
Table 4 - Loan Portfolio Maturity
<TABLE>
<CAPTION>
Maturity Rate Structure
-------- --------------
Over One
One Year Due Predetermined Floating or
Year or Through After Interest Adjustable
Less Five Years Five Years Total Rate Rate
---- ---------- ---------- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,285,228 684,048 490,034 4,459,310 4,459,310 -
Real estate - construction 895,550 - - 895,550 895,550 -
---------- ----------- ----------- ---------- ---------- ------
$ 3,374,778 684,048 490,034 5,354,860 5,354,860 -
========= ======= ======= ========= ========= ======
</TABLE>
46
<PAGE>
Investment Securities
- ---------------------
The composition of Brown's investment securities portfolio reflects its
investment strategy of maximizing portfolio yields commensurate with risk and
liquidity considerations. The primary objectives of Brown's investment strategy
are to maintain an appropriate level of liquidity and provide a tool to assist
in controlling Brown's interest rate position while at the same time producing
adequate levels of interest income. Management of the maturity of the portfolio
is necessary to provide liquidity and to control interest rate risk. Brown's
classification of its entire portfolio as available-for-sale indicates its
desire to maintain a high level of liquidity and provide more flexibility in
meeting liquidity needs. During 1997 and 1996, there were no investment
securities sales. Maturities, calls and paydowns were $1.8 million and $109
thousand during 1997 and 1996, respectively, representing 50% and 3% of the
average total portfolio for each year. Gross unrealized gains in the total
portfolio amounted to approximately $11,000 at year end 1997 and gross
unrealized losses amounted to approximately $28,000.
Total average investment securities increased 7% during 1997. Average
investment securities during 1996 increased 69% from the 1995 average levels.
Total investment securities decreased $700,000, or approximately 20%, during
1997.
Table 5 reflects the carrying amount of the investment securities
portfolio for the past three years.
Table 5 - Carrying Value of Securities Available-for-Sale
<TABLE>
<CAPTION>
December 31
-----------
1997 1996 1995
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury $ 499,219 17.8% 997,913 28.5% 514,375 19.6%
U.S. Government agencies 1,672,735 59.7% 2,160,982 61.7% 1,140,625 43.4%
Mortgage-backed securities 266,816 9.5% 341,452 9.8% 973,455 37.0%
State, county and municipals 362,714 12.9% - 0.0% - 0.0%
----------------------------------------------------------------
Total $ 2,801,484 100.0% 3,500,247 100.0% 2,628,455 100.0%
==================================================================
</TABLE>
Table 6 presents the expected maturity of the total investment securities
portfolio by maturity date and average yields at December 31, 1997. It should be
noted that the composition and maturity/repricing distribution of investment
securities available-for-sale is subject to change depending on rate
sensitivity, capital needs, and liquidity needs.
Table 6 - Expected Maturity of Investment Securities
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Totals
Amount Yield Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 499,219 5.13% - - - - - - 499,219
U.S. Government agencies 689,203 3.38% 983,532 5.53% - - - - 1,672,735
State, county and municipal - - 50,685 4.50% 108,849 7.00% 203,180 5.48% 362,714
Mortgage-backed securities - - - - - - 266,816 7.06% 266,816
---------- ----- ------- ----- ------- ----- ------- ----- -------
Total $1,188,422 4.11% 1,031,217 5.48% 108,849 7.00% 469,996 6.38% 2,801,484
========= ==== ========= ==== ======= ==== ======= ===== =========
</TABLE>
47
<PAGE>
Deposits
- --------
As reflected in Table 1, total average interest-bearing liabilities
increased 37% during 1997. The largest dollar increase in average
interest-bearing deposits was in the time deposit category, rising over $6.7
million or 51% from 1996. Average interest-bearing demand deposits decreased by
$164,000 or 4%. Average noninterest-bearing demand deposits increased over
$209,000 or approximately 14% during 1997 after increasing 2% during 1996.
Savings deposits, interest-bearing demand deposits and noninterest-bearing
demand deposits accounted for 24% and 32% of total average deposits during 1997
and 1996, respectively. The maturities of time deposits of $100,000 or more
issued by Brown at December 31, 1997 are summarized in Table 7. Management is of
the opinion that its time deposits of $100,000 or more are customer-relationship
oriented and represent a reasonably stable source of funds.
Table 7 - Maturities of Time Deposits Over $100,000
Within 3 months $ 3,068,556
After 3 through 6 months 947,373
After 6 through 12 months 2,162,887
After 12 months 300,000
----------
$ 6,478,816
Liquidity Management
- --------------------
The objective of liquidity management is to ensure that sufficient
funding is available, at reasonable cost, to meet the ongoing operational cash
needs of Brown and to take advantage of income producing opportunities as they
arise. While the desired level of liquidity will vary depending upon a variety
of factors, it is the primary goal of Brown to maintain a high level of
liquidity in all economic environments. Liquidity is defined as the ability of a
company to convert assets into cash or cash equivalents without significant loss
and to raise additional funds by increasing liabilities. Liquidity management
involves maintaining Brown's ability to meet the day to day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, Brown would not be able to perform the primary function of
a financial intermediary and would, therefore, not be able to meet the needs of
the communities it serves. Daily monitoring of the sources and uses of funds is
necessary to maintain an acceptable cash position that meets both requirements.
In a banking environment, both assets and liabilities are considered sources of
liquidity funding and both are monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments, maturities of securities and, to a lesser
extent, sales of securities available-for-sale. Commercial and real
estate-construction loans that mature in one year or less amounted to $4.5
million or 19% of the total loan portfolio at December 31, 1997. Securities
available-for-sale maturing in the same time frame totaled over $1.2 million or
42% of the total investment securities portfolio at year end 1997 (including
estimated maturities of mortgage backed securities). Other short-term
investments such as federal funds sold and maturing interest bearing deposits
with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts.
Federal funds purchased are additional sources of liquidity and represent
Brown's incremental borrowing capacity. This source of liquidity is short-term
in nature and is used as necessary to fund asset growth and meet short-term
liquidity needs.
48
<PAGE>
As disclosed in Brown's Consolidated Statement of Cash Flows included
elsewhere herein, net cash provided by operating activities for 1997 decreased
by approximately $90,000 primarily due to increases in other assets. Net cash
used in investing activities for 1997 decreased by $1.5 million, primarily due
to additional maturities of securities available-for-sale of $1.6 million. This
resulted from management's continued efforts to maximize the return on its
yielding assets by moving more funds into loans from investment securities. The
$600,000 decrease for 1997 in net cash provided by financing activities
consisted primarily of the $750,000 increase in demand, savings and time
deposits netted against the $1.2 million change in other borrowed funds.
Management considers Brown's liquidity position at the end of 1997 to
be sufficient to meet its foreseeable cash flow requirements. Reference is made
to the Consolidated Statements of Cash Flows appearing in the Consolidated
Financial Statements for a three year analysis of the changes in cash and cash
equivalents resulting from operating, investing and financing activities.
Interest Rate Sensitivity Management
- ------------------------------------
The absolute level and volatility of interest rates can have a significant
impact on Brown's profitability. The objective of interest rate risk management
is to identify and manage the sensitivity of net interest income to changing
interest rates, in order to achieve Brown's overall financial goals. Based on
economic conditions, asset quality and various other considerations, management
establishes tolerance ranges for interest rate sensitivity and manages within
these ranges.
Brown uses income simulation modeling prepared by a third party as a
primary tool in measuring interest rate risk and managing interest rate
sensitivity. Simulation modeling considers not only the impact of changing
market rates of interest on future net interest income, but also such other
potential causes of variability as earning asset volume, mix, and general market
conditions.
Interest rate sensitivity is a function of the repricing
characteristics of Brown's portfolio of assets and liabilities. These repricing
characteristics are the time frames within which the interest-bearing assets and
liabilities are subject to change in interest rates either at replacement,
repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and
liabilities and their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity management seeks to
ensure that both assets and liabilities respond to changes in interest rates
within an acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in Brown's current
portfolio that are subject to repricing at various time horizons: immediate
through three months, four to twelve months, one to five years and on a
cumulative basis. The differences are known as interest sensitivity gaps. Table
8 shows interest sensitivity gaps for these different intervals as of December
31, 1997.
49
<PAGE>
Table 8 - Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
Within Three to More than More than Over
Three Twelve one year to three years to five
Months months three years five years years Total
------ ------ ----------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Federal funds sold $ 250,000 - - - - 250,000
Loans 7,090,577 8,203,421 6,799,697 1,272,980 1,310,480 24,677,155
Investment securities available-for-sale - 1,188,422 486,122 548,095 578,845 2,801,484
Other earning assets 16,891 - - - 98,300 115,191
-----------------------------------------------------------------------
Total interest-earning assets 7,357,468 9,391,843 7,285,819 1,821,075 1,987,625 27,843,830
-----------------------------------------------------------------------
Interest-bearing liabilities:
Demand 3,389,451 - - - - 3,389,451
Savings 719,542 - - - - 719,542
Time 8,335,879 12,765,815 989,986 224,996 - 22,316,676
FHLB advances - - - - 500,000 500,000
------------------------------------------------------------------------
Total interest-bearing liabilities 12,444,872 12,765,815 989,986 224,996 500,000 26,925,669
------------------------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (5,087,404) (3,373,972) 6,295,833 1,596,079 1,487,625
-----------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities $ (5,087,404) (8,461,376) (2,165,543) (569,464) 918,161
-----------------------------------------------------------
Cumulative excess (deficiency) of interest-
earning assets over interest-bearing liabilities
as a percent of total assets -1.18% -1.96% -0.50% -0.13% 0.21%
</TABLE>
As seen in Table 8, 90% of earning asset funding sources will reprice
within one year compared to 60 % of all interest-earning assets. Changes in the
mix of earning assets or supporting liabilities can either increase or decrease
the net interest margin without affecting interest rate sensitivity. In
addition, the interest rate spread between an asset and its supporting liability
can vary significantly while the timing of repricing for both the asset and the
liability remains the same, thus impacting net interest income. This
characteristic is referred to as basis risk and generally relates to the
possibility that the repricing characteristics of short-term assets tied to
Brown's prime lending rate are different from those of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create changes in prepayment
levels of assets and liabilities which are not reflected in the interest rate
sensitivity analysis report. These prepayments may have significant effects on
Brown's net interest margin. Because of these factors an interest sensitivity
gap report may not provide a complete assessment of Brown's exposure to changes
in interest rates.
Table 8 indicates Brown is in a liability sensitive or negative gap
position after twelve months. This liability sensitive position would generally
indicate that Brown's net interest income would decrease should interest rates
rise and would increase should interest rates fall. Due to the factors cited
previously, current simulation results indicate only minimal sensitivity to
parallel shifts in interest rates. Management also evaluates the condition of
the economy, the pattern of market interest rates and other economic data to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce an optimal net interest margin.
50
<PAGE>
Capital Resources
- -----------------
Stockholders' equity at December 31, 1997 decreased 6% from December
31, 1996. The net loss for 1997 net of the change in the unrealized loss on the
securities available-for-sale portfolio, net of tax, accounted for the decrease
in stockholders' equity.
No dividends have been declared on Brown's common stock in 1997 or 1996,
as Brown has strived to retain earnings in order to keep pace with the rate of
asset growth.
Average stockholders' equity as a percentage of total average assets is
one measure used to determine capital strength. The ratio of average
stockholders' equity to average assets for 1997 was 5.7% compared to 7% in 1996.
The decrease in the ratio is the result of 1997's net loss coupled with the
overall growth experienced. Table 9 summarizes these and other key ratios of
Brown for each of the last three years.
Table 9 - Key Ratios
1997 1996 1995
-------------------------------------
Return on average assets (.46)% .78% (.11)%
Return on average equity (8.01)% 11.18% (1.62)%
Dividend payout ratio .00% .00% .00%
Average equity to average assets 5.68% 7.00% 6.49%
The OTS has issued guidelines for the implementation of risk-based capital
requirements by U.S. banks. These risk-based capital guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk adjusted assets to determine the risk based capital ratios. The guidelines
require an 8% total risk-based capital ratio, of which 4% must be Tier I
capital.
Brown's Tier I capital, which consists of stockholders' equity net of
unrealized gains and losses on securities available-for-sale and intangible
assets, amounted to $1.5 million at December 31, 1997. Tier II capital includes
supplemental capital components such as qualifying allowance for loan losses.
Tier I capital plus Tier II capital components is referred to as Total
Risk-based Capital and was $1.8 million at December 31, 1997. The percentage
ratios, as calculated under the guidelines, were 6.3% and 7.5% for Tier I and
Total Risk-based Capital, respectively, at December 31, 1997.
A minimum leverage ratio is required in addition to the risk-based
capital standards and is defined as Tier 1 capital divided by average assets
adjusted for the unrealized gain/loss on the investment securities investment
portfolio and intangible assets. Although a minimum leverage ratio of 3% has
been established, the OTS will require a bank to maintain a leverage ratio
greater than 3% if it is experiencing or anticipating significant growth or is
operating with less than well-diversified risks in the opinion of the OTS. The
OTS uses the leverage ratio in tandem with the risk-based capital ratios to
assess capital adequacy of banks. Brown's leverage ratios at December 31, 1997
and 1996 were 5% and 6.7%, respectively. Risk-based and leverage capital
positions as of December 31, 1997 and 1996 are presented in Table 10.
51
<PAGE>
Table 10 - Analysis of Capital Adequacy
1997 1996
---- ----
Risk-based capital ratios:
Tier I capital to risk-adjusted assets 6.3% 9.4%
Tier II capital to risk-adjusted assets 1.2% 1.2%
--- -----
Total capital to risk-adjusted assets 7.5% 10.6%
=== ====
Leverage ratio 5.0% 6.7%
=== ===
Tier I capital $ 1,537,000 1,668,000
Tier II capital 308,000 222,000
----------- ------------
Total capital $ 1,845,000 1,890,000
=========== ===========
Total risk-adjusted assets $ 24,500,000 17,800,000
========== ==========
All three of the capital ratios of Brown exceed the minimum ratios
required as defined by federal regulators and are deemed to be adequately
capitalized. Brown monitors these ratios to ensure that the Bank remains within
regulatory guidelines. Increased regulatory activity in the financial industry
as a whole will continue to impact the structure of the industry, however,
management does not anticipate any negative impact on the capital resources or
operations of Brown.
Provision and Allowance for Loan Losses
- ---------------------------------------
Brown manages asset quality and controls risk through diversification
of the loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices. Brown's loan administration function
is charged with monitoring asset quality, establishing credit policies and
procedures, and enforcing the consistent application of these policies and
procedures.
The provision for loan losses is the annual cost of providing an
adequate allowance for anticipated potential future losses on loans. The amount
each year is dependent upon many factors including loan growth, net charge-offs,
changes in the composition of the loan portfolio, delinquencies, management's
assessment of loan portfolio quality, the value of collateral and economic
factors and trends.
During the past year, Brown has strengthened its review process of the
larger loans in its portfolio and has imposed stricter underwriting standards in
order to minimize the impact an economic downturn might have on credit quality.
Loan review procedures, including such techniques as loan grading and on-site
reviews, are continually utilized in order to ensure that potential problem
loans are identified early in order to lessen any potentially negative impact
such problem loans may have on Brown's earnings. Management's involvement
continues throughout the process and includes participation in the workout
process and recovery activity. These formalized procedures are monitored
internally by the loan review committee. Such review procedures are quantified
in quarterly reports to senior management and are used in determining whether
such loans represent potential loss to Brown. Management monitors the entire
loan portfolio in an attempt to identify problem loans so that risks in the
portfolio can be identified on a timely basis and an appropriate allowance
maintained.
The provision for loan losses increased 480% in 1997 compared to a 38%
increase in 1996. The increased provision for 1997 and 1996 is a direct result
of management's efforts to maintain an adequate allowance given the increase in
52
<PAGE>
loans outstanding and certain problem credits. The allowance for loan losses as
a percentage of gross loans outstanding at year end totaled 2.64% and 1.18% for
1997 and 1996, respectively.
Brown does not allocate the allowance for loan losses to the various
loan categories. The entire allowance is available to absorb losses from any and
all loans. Table 11 sets forth information with respect to Brown's allowance for
loan losses for each of the last five years.
Table 11 - Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31
-----------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 222,245 127,723 58,161 50,001 49,798
Provisions charged to Expense 580,000 100,000 72,400 12,648 36,672
Chargeoffs:
Real estate 928 1,406 326 - 35,928
Commercial and agricultural 99,523 - 656 2,562 -
Consumer and other 53,673 5,419 3,844 4,183 3,040
-------------------------------------------------------
Total charge-offs 154,124 6,825 4,826 6,745 38,968
--------------------------------------------------------
Recoveries:
Real estate 1,406 - - - -
Commercial and agricultural 27 - - 2,257 -
Consumer and other 1,157 1,347 1,988 - 2,499
------------------------------------------------------
Total recoveries 2,590 1,347 1,988 2,257 2,499
------------------------------------------------------
Net loan charge-offs 151,534 5,478 2,838 4,488 36,469
--------------------------------------------------------
Balance at end of period $ 650,711 222,245 127,723 58,161 50,001
========================================================
Allowance for loan losses to total
loans at end of period 2.64% 1.18% 0.99% 1.21% 1.17%
Allowance for loan losses to total
non-performing assets 61.87% 28.92% 63.62% 527.27% 5000.00%
Net charge-offs to average loans 0.68% 0.03% 0.03% 0.11% 0.85%
Recoveries as a percentage
of charge-offs 1.68% 19.74% 41.19% 33.46% 6.41%
</TABLE>
53
<PAGE>
Asset Quality
- -------------
Nonperforming assets, comprised of nonaccrual loans, loans 90 days or
more past due and other real estate owned totaled $1,051,743 at December 31,
1997. At December 31, 1996, nonperforming assets amounted to $768,421. There
were no related party loans which were considered nonperforming at December 31,
1997 or 1996. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful. When a loan is placed on nonaccrual status, previously
accrued and uncollected interest is charged to interest income on loans. Loans
made by Brown to facilitate the sale of other real estate are made on terms
comparable to loans of similar risk. An adequate investment by the buyer is
required prior to the removal of other real estate from nonperforming assets.
There were no commitments to lend additional funds on nonaccrual loans
at December 31, 1997. There were no other foreclosed or repossessed assets at
December 31, 1997. Table 12 summarizes Brown's' risk elements for each of the
last five years.
Table 12 - Risk Elements
<TABLE>
<CAPTION>
December 31
-----------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $ 1,051,743 386,939 35,955 11,000 1,000
Loans Past Due 90 Days
And Still Accruing - 381,482 164,802 - -
Other Real Estate Owned - - - - -
---------------------------------------------------
Total Non-Performing Assets $ 1,051,743 768,421 200,757 11,000 1,000
==================================================
Non-performing assets to net
loans and other real estate 4.38% 4.11% 1.58% 0.23% 0.02%
Allowance for loan losses to total loans
at end of period 2.64% 1.18% 0.99% 1.21% 1.17%
Allowance for loan losses to non-
performing assets 61.87% 28.92% 63.62% 527.27% 5000.00%
</TABLE>
A loan is placed on nonaccrual status when, in management's judgment,
the collection of interest appears doubtful. As a result of management's ongoing
review of the loan portfolio, loans are classified as nonaccrual generally when
they are past due in principal or interest payments for more than 90 days or it
is otherwise not reasonable to expect collection of principal and interest under
the original terms. Exceptions are allowed for 90 day past due loans when such
loans are well secured and in process of collection.
There may be additional loans within Brown's portfolio that become
classified as conditions dictate; however, management was not aware of any such
loans that are material in amount at December 31, 1997. At December 31, 1997,
management was unaware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on Brown's
liquidity, capital resources or operations.
54
<PAGE>
Noninterest Income
- ------------------
Noninterest income consists primarily of revenues generated from
service charges and fees on deposit accounts. Noninterest income increased 87%
during 1997 as compared to 1996 primarily due to new accounts. Total noninterest
income for 1996 showed an increase of 72 % compared to 1995.
Noninterest Expense
- -------------------
Noninterest expense for 1997 increased 38% following an increase of 50%
in 1996. Total salaries and employee benefits increased 36% during 1997 and 63%
in 1996 due largely to employee additions required to support Brown's branch
growth.
Net occupancy expense increased 28% in 1997 following an increase of
85% in 1996. The 1996 increase in occupancy expense was due to expenses related
to branch renovations, including depreciation and maintenance expenses, as well
as increases due to investments in technology upgrades.
Other operating expense increased by approximately $176,000 or 43%
compared to a 30% increase in 1996. The largest components of other operating
expenses include data processing and stationary and supplies, which increased
88% in 1997. Management continues to evaluate other operating expense details in
efforts to further decrease the cost of providing expanded banking services to a
growing customer base.
Income Taxes
- ------------
Income tax expense decreased $150,000 in 1997 due to Brown's net loss.
The effective tax rate as a percentage of pretax income was 34% in 1997 and 33%
in 1996. See Note 7 to Brown's Consolidated Financial Statements for an analysis
of income taxes.
Impact of Inflation and Changing Prices
- ---------------------------------------
A bank's asset and liability structure is substantially different from
that of an industrial company in that primarily all assets and liabilities of a
bank are monetary in nature. Management believes the impact of inflation on
financial results depends on Brown's ability to react to changes in interest
rates and, by such reaction, reduce the inflationary impact on performance.
Interest rates do not necessarily move in the same direction, or at the same
magnitude, as the prices of other goods and services. As discussed previously,
management seeks to manage the relationship between interest-sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Year 2000 Issues
- ----------------
Brown is aware of the issues relating to its computer systems as the
Year 2000 approaches. The Year 2000 issue is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the
two-digit value to 00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail.
Brown has appointed a Year 2000 committee comprised of several key
senior executives. The committee meets on a monthly basis to provide direction
and monitor the progress being made relating to Brown's Year 2000 efforts.
55
<PAGE>
Brown managers and supervisors have identified hardware and software
used in their area of responsibility impacted by the Year 2000 issue and have
identified vendors whom Brown relies upon to provide financial information or
services which may be impacted by the Year 2000 issue. Brown has conducted a
risk assessment for each product, and has categorized the risks associated with
each product as "catastrophic," "serious," or "minimal."
Brown plans to convert from its current ProVesa software system to an
application system provided by Phoenix International Ltd., Inc. ("Phoenix") in
December 1998. Phoenix has represented in their contract that the Phoenix
application system is Year 2000 compliant. Brown will test the system for Year
2000 compliance prior to conversion. The Phoenix application system will include
many critical applications, including the general ledger, loan application
system, deposit application system, and accounts receivable and payable.
Brown is in the initial stages of determining the impact of the Year
2000 on its larger loan customers. For those loan customers with a significant
risk to their ongoing operations arising from possible Year 2000 issues, Brown
will monitor and document their Year 2000 compliance efforts. Brown is in the
process of developing a questionnaire for its lending officers to use in
assessing the Year 2000 risk for larger loan customers. Brown plans to conduct
Year 2000 seminars for its commercial customers. Brown also intends to add a
provision to its standard loan agreement relating to the borrower's Year 2000
compliance.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 requires that companies (1) classify
items of other comprehensive income by their nature in a financial statement and
(2) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the statement of financial condition. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 specifies the
presentation and disclosure of operating segment information reported in the
annual report and interim reports issued to stockholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management
believes that the adoption of these statements will have no material impact on
Brown's financial position, results of operation, or liquidity.
56
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations For Each of the Six Months Ended June 30, 1998 and 1997
Financial Condition
- -------------------
Total assets at June 30, 1998 were approximately $28.7 million,
representing a 7% decrease from December 31, 1997. Deposits decreased
approximately $2.4 million, or 8.4% from December 31, 1997, while net loans
decreased approximately $1.8 million, or 7.5%. The allowance for loan losses at
June 30, 1998 totaled $594,302, representing 2.6% of total loans compared to the
December 31, 1997 total of $650,711, representing 2.6% of total loans.
Securities available-for-sale decreased 37% from December 31, 1997. The
decreases in assets, loans and deposits are primarily due to management's
attempt to manage the Bank's capital position and current capital ratios for
regulatory purposes.
The total of nonperforming assets, which includes nonaccrual loans,
repossessed collateral and loans for which payments are more than 90 days past
due, decreased from $1,051,743 at December 31, 1997 to $858,075 at June 30,
1998. There were no related party loans which were considered nonperforming at
June 30, 1998.
Brown was most recently examined by its primary regulatory authority in
April 1998. There were no recommendations by the regulatory authority that in
management's opinion will have material effects on Brown's liquidity, capital
resources or operations.
Results of Operations
- ---------------------
Net interest income increased $ 116,000, or 18%, in the first six
months of 1998 compared to the same period for 1997. Interest income for the
first six months of 1998 was $1,472,000, representing an increase of $168,000,
or 13%, over the same period in 1997. Interest expense for the first six months
of 1998 increased approximately $97,000, or 17%, compared to the same period in
1997. This increase in interest income and interest expense during the first six
months of 1998 compared to the same period in 1997 is primarily attributable to
the increase in the volume of both loans and deposits.
The provision for loan losses for the first six months of 1998
decreased $45,000 compared to the same period for 1997. It is management's
belief that the allowance for loan losses is adequate to absorb probable losses
in the loan portfolio.
Noninterest income increased 18% to approximately $146,000 for the six
month period ended June 30, 1998, as compared to the same period in 1997.
Noninterest expenses for the first six months of 1998 increased
approximately $132,000, or 23%, compared to the first six months of 1997. The
net increase is primarily attributable to employee additions required to
maintain growth.
Capital Resources
- -----------------
Brown is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory- and possibly additional
discretionary -actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines,
Brown must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Brown's capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
57
<PAGE>
Quantitative measures established by regulation to ensure capital
adequacy require Brown to maintain minimum amounts and ratios of total and Tier
1 capital (as defined) to risk-weighted assets and of Tier 1 capital (as
defined) to average assets. As of June 30, 1998, Brown met all capital adequacy
requirements to which it is subject.
The following tables present Brown's regulatory capital position at June 30,
1998:
Risk-Based Capital Ratios
-------------------------
Tier 1 Capital 7.54%
Tier 1 Capital minimum requirement 4.00%
-----
Excess 3.54%
=====
Total Capital 8.80%
Total Capital minimum requirement 8.00%
-----
Excess .80%
====
Leverage Ratio
--------------
Tier 1 Capital to adjusted total assets 5.65%
Minimum leverage requirement 3.00%
---------------------------- -----
Excess 2.65%
=====
Certain Transactions And Business Relationships
- -----------------------------------------------
Several of Brown's directors, executive officers and their affiliates,
including corporations and firms of which they are directors or officers or in
which they and/or their families have an ownership interest, are customers of
Brown. These persons, corporations and firms have had transactions in the
ordinary course of business with Brown including borrowings, all of which, in
the opinion of Brown management, were on substantially the same terms including
interest rates and collateral as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than the normal
risk of collectibility or present other unfavorable features. Brown expects to
have such transactions on similar terms with its directors, executive officers,
and their affiliates in the future. The aggregate amount of loans outstanding by
Brown to directors, executive officers, and related parties of Brown as of June
30, 1998, was approximately $138,320, which represented approximately 8.3% of
consolidated shareholders' equity on that date.
Year 2000 Issues
- ----------------
Brown currently has computer systems, software products or other
business systems, or those of suppliers or customers that might not accept input
of, store, manipulate and output dates in the years 1999, 2000 or thereafter
without error or interruption. Brown has conducted reviews of their business
systems, including their computer systems, to attempt to identify ways in which
their systems could be affected by problems resulting from incorrectly
processing date information. Brown is also requesting assurances from all
software vendors that they have dealt with or plan to possibly purchase software
58
<PAGE>
from that the software will correctly process all date information at all times.
Additionally, Brown is querying their customers and suppliers as to their
progress in identifying and addressing problems that their computer systems will
face in processing date information as the year 2000 approaches and is reached.
There can be no assurances, however, that Brown will identify all date-handling
problems with their business systems or those of their customers and suppliers
in advance of their occurrence, or that Brown will be able to successfully
remedy problems that are discovered. The expenses of Brown's efforts to identify
and address such problems, or the expenses or liabilities to which Brown may
become subject as result of such problems, could have a material adverse effect
on Brown's results of operations and financial condition.
BUSINESS OF FLAG
General
FLAG is a bank holding company headquartered in LaGrange, Georgia. FLAG
is the sole shareholder of the following depository institutions: Citizens Bank,
Bank of Milan and First Federal Savings Bank of LaGrange. Citizens Bank and Bank
of Milan are state banks organized under the laws of the State of Georgia, with
ten banking offices located in the cities of Unadilla, Vienna, Byromville,
Montezuma, Oglethorpe, Cordele, Pinehurst, Milan and McRae. First Federal
Savings Bank of LaGrange is a federal savings bank, with five offices in
LaGrange, Georgia, which serve markets located in western Georgia. As of June
30, 1998, FLAG had total consolidated assets of $442,878,940, total consolidated
deposits of $339,245,243, and total consolidated shareholders' equity of
$38,582,093. Through its subsidiaries, FLAG offers a full array of deposit
accounts and retail and commercial banking services, engages in small business
lending, residential and commercial real estate lending, mortgage banking
services, brokerage services and performs real estate appraisal services.
As a routine part of its business, FLAG evaluates opportunities to
acquire bank holding companies, banks and other financial institutions. Thus, at
any particular point in time, including the date of this Proxy
Statement/Prospectus, discussions and, in some cases, negotiations and due
diligence activities looking toward or culminating in the execution of
preliminary or definitive documents respecting potential acquisitions may occur
or be in progress. These transactions may involve FLAG acquiring such financial
institutions in exchange for cash or capital stock, and depending upon the terms
of these transactions, they may have a dilutive effect upon the FLAG common
stock to be issued to holders of Brown common stock in the merger.
Directors and Executive Officers
The directors of FLAG as the surviving corporation of the merger will
be:
Dennis D. Allen Kelly R. Linch
Dr. A. Glenn Bailey J. Preston Martin
Leonard H. Bateman J. Daniel Speight, Jr.
H. Speer Burdette, III John W. Stewart, Jr.
Patti S. Davis Donald M. Thigpen
Fred A. Durand, III Robert E. Thigpen, Jr.
John S. Holle Robert W. Walters
James W. Johnson
The executive officers of FLAG as the surviving corporation of the
merger will be:
John S. Holle Chairman of the Board
59
<PAGE>
J. Daniel Speight, Jr. President and Chief Executive Officer
Patti S. Davis Chief Financial Officer, Senior Vice President
and Assistant Secretary
Ellison C. Rudd Senior Vice President, Treasurer and Secretary
J. Preston Martin Senior Vice President
Charles O. Hinely Chief Operating Officer and Senior Vice President
Upon completion of the merger of Empire with and into FLAG, Leonard H.
Bateman, President and Chief Executive Officer of Empire, will be elected as a
member of FLAG's Board of Directors. Upon the completion of the merger of Heart
with and into FLAG, Donald M. Thigpen, President and Chief Financial Officer of
Heart, and Robert E. Thigpen, a director of Heart, will be elected as members of
FLAG's Board of Directors. Upon completion of the merger of Brown with and into
Citizens, Dennis D. Allen, President and Chief Executive Officer of Brown, will
be elected as a member of FLAG's Board of Directors. Additional persons may be
elected as directors or executive officers following the merger. See "SUMMARY -
Recent Developments in FLAG's Business."
The following section sets forth certain information regarding each of
the persons who, after the consummation of the merger, will be a director or
executive officer of FLAG. Except as otherwise indicated, each of the named
persons has been engaged in his or her present principal occupation for more
than five years.
Dennis D. Allen. Mr. Allen has been a director of Brown since 1981 and
has served as the President and Chief Executive Officer of Brown since 1991.
Following the merger, Mr. Allen will serve as a member of the Board of Directors
of FLAG . Mr. Allen is 42 years old.
Dr. A. Glenn Bailey. Dr. Bailey is a physician and surgeon in LaGrange
and is a director, and from 1980 to 1989 was President, of Clark-Holder Clinic,
a LaGrange medical clinic. He has been a director of First Federal since 1982
and a director of FLAG since 1994. Following the merger, Dr. Bailey will
continue to serve as a member of the Boards of Directors of both FLAG and First
Federal. Dr. Bailey is 63 years old.
Leonard H. Bateman. Mr. Bateman has served as President and Chief
Executive Officer of Empire and Empire Banking Corp. since 1986. Following
consummation of the merger of Empire and FLAG, Mr. Bateman will serve as a
member of the Board of Directors of FLAG and as President and a director of
Empire Banking Company. Mr. Bateman is 50 years old.
H. Speer Burdette, III. Mr. Burdette is an owner, director and Vice
President/Treasurer of J.K. Boatwright & Co., P.C., an accounting firm located
in LaGrange. He has been a director of First Federal since 1993 and a director
of FLAG since 1994. Following the merger, Mr. Burdette will continue to serve as
a member of the Boards of Directors of both FLAG and First Federal. Mr. Burdette
is 45 years old.
Patti S. Davis. Ms. Davis served as Executive Vice President and Chief
Financial Officer of Middle Georgia since 1994 until Middle Georgia merged with
FLAG in March 1998. Ms. Davis has been Senior Vice President and Chief Financial
Officer of Citizens since 1990. Following the consummation of the merger of
Middle Georgia and FLAG, Ms. Davis has served as a Senior Vice President and as
a member of the Board of Directors of FLAG and, since July 1998, has served as
Chief Financial Officer of FLAG. In addition, Ms. Davis continues to act as
Senior Vice President and Chief Financial Officer and a director of Citizens.
Following the merger, Ms. Davis will continue to act in these capacities. Ms.
Davis and J. Daniel Speight, Jr. are cousins. Ms. Davis is 41 years old.
Fred A. Durand, III. Mr. Durand is President, Chief Executive Officer
and a director of Durand-Wayland, Inc., a manufacturer of produce sorting and
spray equipment. He has been a director of First Federal since 1990 and director
60
<PAGE>
of FLAG since 1994. Following the merger, Mr. Durand will continue to serve as a
member of the Boards of Directors of both FLAG and First Federal. Mr. Durand is
56 years old.
Charles O. Hinely. Mr. Hinely has served as Senior Vice President and
Chief Operating Officer of FLAG since December 1997. Mr. Hinely has 30 years of
banking and financial industry related experience. He has worked for Citizens
and Southern National Bank and was a principal of Bank Management Resources,
Inc. (BMR Financial Group) and LSI Partners, Inc. Following the merger, Mr.
Hinely will continue to serve as Senior Vice President and Chief Operating
Officer of FLAG. Mr. Hinely is 51 years old.
John S. Holle. Mr. Holle served as Chairman of the Board, President,
Chief Executive Officer and as a director of FLAG since 1993, and he has been
President, Chief Executive Officer and a director of First Federal since 1985
and Chairman of the Board of First Federal since 1990. Following the merger of
FLAG and Middle Georgia, Mr. Holle has served as Chairman of the Board of FLAG
and President, Chief Executive Officer and a member of the Board of Directors of
First Federal and as a director of Citizens. Mr. Holle also has been Chairman of
the Board and President of First Federal's wholly-owned subsidiary, Piedmont,
since 1986. Following the merger, Mr. Holle will continue to be the Chairman of
the Board of FLAG and will continue to serve as a member of the Board of
Directors of FLAG. In addition, Mr. Holle will continue to act as President,
Chief Executive Officer and a member of the Board of Directors of First Federal
and as a director of Citizens following the merger. Mr. Holle is 47 years old.
James W. Johnson. Mr. Johnson is the president of McCannie Motor and
Tractor Company, Inc., a retail seller of tractors and implement equipment, and
served as a director of Middle Georgia and Citizens since 1982 until the merger
of FLAG and Middle Georgia. Following the merger of FLAG and Middle Georgia, Mr.
Johnson has served as a member of the Board of Directors of FLAG and continues
to serve as a director of Citizens. Following the merger, Mr. Johnson will
continue in these capacities. Mr. Johnson is 56 years old.
Kelly R. Linch. Mr. Linch is owner of Linch's, Inc., a retail appliance
and electronics store in LaGrange. He has been a director of First Federal since
1986 and a director of FLAG since 1994. Following the merger, Mr. Linch will
continue to serve as a member of the Boards of Directors of both FLAG and First
Federal. Mr. Linch also is a director of Key Distributors of Georgia, Inc. Mr.
Linch is 55 years old.
J. Preston Martin. Mr. Martin served as the President and Chief
Executive Officer of Three Rivers and as President of Milan from 1986 until May
1998 when Three Rivers merged with and into FLAG. Mr. Martin currently serves as
Senior Vice President, on the Boards of Directors of FLAG, Citizens and Milan
and as President of Milan. Following the merger, Mr. Martin will continue to act
in these capacities. Mr. Martin is 44 years old.
Ellison C. Rudd. Mr. Rudd served as Executive Vice President, Chief
Financial Officer and Treasurer of FLAG since 1994. Mr. Rudd has also been
Executive Vice President of First Federal since 1993 and Chief Financial Officer
and Treasurer of First Federal since 1989 when he joined First Federal as a Vice
President. Following the merger of FLAG and Middle Georgia and until July 1998,
Mr. Rudd served as Senior Vice President and Chief Financial Officer of FLAG.
Mr. Rudd currently serves as Senior Vice President, Secretary and Treasurer of
FLAG. Following the merger, Mr. Rudd will continue to act in these capacities.
In addition, Mr. Rudd will continue to act as Chief Financial Officer, Treasurer
and Executive Vice President of First Federal. Mr. Rudd is 53 years old.
J. Daniel Speight, Jr. Mr. Speight served as Chief Executive Officer
and as a director of Middle Georgia since 1989 and has been President and Chief
Executive Officer of Citizens since 1984. Following the merger of FLAG and
61
<PAGE>
Middle Georgia, Mr. Speight has served as the President and Chief Executive
Officer of FLAG, and as a member of the Board of Directors of FLAG. In addition,
Mr. Speight serves as President and Chief Executive Officer and a director of
Citizens and as a director of First Federal. Following the merger of Empire with
FLAG, Mr. Speight will serve as a director of Empire Banking Corp. Following the
merger, Mr. Speight will continue to act in these capacities. Mr. Speight is 41
years old.
John W. Stewart, Jr. Mr. Stewart is an owner, Chairman of the Board
and President of Stewart Wholesale Hardware Company, a wholesale grocery and
hardware business in LaGrange. He has been a director of First Federal since
1982 and a director of FLAG since 1994. Following the merger, Mr. Stewart will
continue to serve as a member of the Boards of Directors of both FLAG and First
Federal. Mr. Stewart is 63 years old.
Donald M. Thigpen. Mr. Thigpen is Chief Executive Officer and a
director of Heart. He also serves as President and a director of Mount Vernon
Bank. Following the merger of Heart with FLAG, Mr. Thigpen will continue to
serve as President and a director of Mount Vernon Bank and will serve as a
director of FLAG. Mr. Thigpen is 56 years old.
Robert E. Thigpen, Jr. Mr. Thigpen is a partner with the accounting
firm Thigpen, Jones & Seaton & Co., P.C. located in Dublin, Georgia. Mr. Thigpen
serves as Secretary and a director of Heart and Chief Financial Officer and a
director of Mount Vernon Bank. Following the merger of Heart with FLAG, Mr.
Thigpen will continue to serve as Chief Financial Officer and a director of
Mount Vernon Bank and as a director of FLAG. Mr. Thigpen is 55 years old.
Robert W. Walters. Mr. Walters retired in March 1996 as owner and
director of The Mill Store, Inc., a retail and contract floor covering business
in LaGrange. He has been a director of First Federal since 1982 and a director
of FLAG since 1994. Following the merger, Mr. Walters will continue to serve as
a member of the Boards of Directors of both FLAG and First Federal. Mr. Walters
is 65 years old.
Management Stock Ownership
The following table presents information about each of the directors
and executive officers of FLAG and all executive officers and directors as a
group. Unless otherwise indicated, each person has sole voting and investment
powers over the indicated shares. Information relating to beneficial ownership
of the FLAG common stock is based upon "beneficial owner" concepts set forth in
rules promulgated under the Exchange Act. Under such rules, a person is deemed
to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities.
62
<PAGE>
Amount and
Nature of Beneficial Percent
Name Ownership of Class (%)
---- --------- ------------
(a) Directors
Dr. A. Glenn Bailey 92,577 (1) 1.78
H. Speer Burdette, III 24,576 (2) .47
Patti S. Davis 145,868 (3) 2.81
Fred A. Durand, III 27,657 (4) .53
John S. Holle 87,991.1821 (5) 1.68
James W. Johnson 145,103 (6) 2.80
Kelly R. Linch 58,677 (7) 1.13
Preston Martin 288,000 (8) 5.57
J. Daniel Speight, Jr. 261,588 (9) 4.99
John W. Stewart, Jr. 29,838.391 (10) .58
Robert W. Walters 140,115.669 (11) 2.70
(b) Executive Officers
Charles O. Hinely 0 0
Ellison C. Rudd 34,522.1356 (12) .67
(c) All Directors and Executive
Officers as a group
(13 persons) 1,336,463.377 24.6
- -------------------
(1) Consists of (i) 36,555 shares held by Dr. Bailey, (ii) 35,055 shares
held by Dr. Bailey's spouse as to which beneficial ownership is shared,
(iii) 975 shares held by Chattahoochee Land Investment as to which
beneficial ownership is shared, (iv) 1,125 shares held by a broker for
the benefit or Chattahoochee Land Investment as to which beneficial
ownership is shared, and (e) 18,867 shares of immediately exercisable
options.
(2) Consists of (i) 1,402 shares held by Mr. Burdette, (ii) 674 shares held
by a broker for the benefit of Mr. Burdette, (iii) 3,633 shares held in
Individual Retirement Accounts for the benefit of Mr. Burdette, and
(iv) 18,867 shares of immediately exercisable options.
(3) Consists of (i) 108,439 shares held by Ms. Davis, (ii) 4,063 shares
held in an Individual Retirement Account for the benefit of Ms. Davis,
(iii) 7,866 shares held by Speight Futures, Inc. as to which beneficial
63
<PAGE>
ownership is shared and (iv) 25,500 shares of immediately exercisable
options. Ms. Davis is also an executive officer of FLAG.
(4) Consists of (i) 8,625 shares held by a broker for the benefit of Mr.
Durand, (ii) 165 shares held by a broker for the benefit of Mr.
Durand's spouse as to which beneficial ownership is shared, and (iii)
18,867 shares of immediately exercisable options.
(5) Consists of (i) 15,000 shares held by Mr. Holle, (ii) 238.392 shares
issued to Mr. Holle pursuant to FLAG's dividend reinvestment plan,
(iii) 27,702.7901 shares issued pursuant to First Federal's profit
sharing plan, and (iv) 45,000 shares of immediately exercisable
options. Mr. Holle is also an executive officer of FLAG.
(6) Consists of (i) 58,377 shares held by Mr. Johnson, (ii) 2,716 shares
held by Mr. Johnson's spouse as to which beneficial ownership is
shared, and (iii) 84,010 held by McCrannie Motor and Tractor Company,
Inc. Profit Sharing Plan for the benefit of Mr. Johnson.
(7) Consists of (i) 33,750 shares held by Mr. Linch, (ii) 6,060 shares held
by a broker for the benefit of Mr. Linch, and (iii) 18,867 shares of
immediately exercisable options.
(8) Consists of (i) 192,000 shares held by Mr. Martin, and (ii) 96,000
shares held by a broker for the benefit of Mr. Martin. Mr. Martin is
also an executive officer of FLAG.
(9) Consists of (i) 99,997 shares held by Mr. Speight, (ii) 49,998 shares
held by a broker for the benefit of Mr. Speight, (iii) 2,362 shares
held by Mr. Speight as trustee for Patricia Ruth Davis, (iv) 589 shares
held by Mr. Speight as trustee for Anna Davis, (v) 1,677 shares held by
a broker for the benefit of Mr. Speight as custodian for Alex Speight,
(vi) 1,677 shares held by a broker for the benefit of Mr. Speight as
custodian for J. Daniel Speight, III, (vii) 7,371 shares held in an
Individual Retirement Account for the benefit of Mr. Speight, (viii)
34,917 shares held by Sp8Co., Inc. as to which beneficial ownership is
shared, and (ix) 63,000 shares of immediately exercisable options. Mr.
Speight is also an executive officer of FLAG.
(10) Consists of (i) 9,486 shares held by Mr. Stewart, (ii) 15 shares held
by Mr. Stewart as custodian for Tristran Daugherty, (iii) 1,469.901
shares issued to Mr. Stewart pursuant to FLAG's dividend reinvestment
plan, (iv) .490 shares issued to Mr. Stewart as custodian for Tristran
Daugherty pursuant to FLAG'S dividend reinvestment plan, and (v) 18,867
shares of immediately exercisable options.
(11) Consists of (i) 37,125 shares held by Mr. Walters, (ii) 41,700 shares
held jointly by Mr. Walters and his spouse, (iii) 42,000 shares held by
Mr. Walters' spouse as to which beneficial ownership is shared, (iv)
375 shares held by Mr. Walters as custodian for Myles D. Oliver, (v)
48.669 shares issued to Mr. Walter's as custodian for Myles D. Oliver
pursuant to FLAG's dividend reinvestment plan, and (vi) 18,867 shares
of immediately exercisable options.
(12) Consists of (i) 10,000 shares held by Mr. Rudd, (ii) 4,000 shares held
by a broker for the benefit of Mr. Rudd, (iii) 14,897.1356 shares
issued pursuant to First Federal's profit sharing plan, and (iv) 5,625
shares of immediately exercisable options.
Additional information about FLAG and its subsidiaries is included in documents
incorporated by reference in this Proxy Statement/Prospectus. See "WHERE YOU CAN
FIND MORE INFORMATION ABOUT FLAG."
64
<PAGE>
Voting Securities and Principal Shareholders of FLAG
The following lists each shareholder of record that directly or
indirectly owned, controlled, or held with power to vote 5% or more of the
5,174,807 outstanding shares of FLAG common stock as of June 30, 1998. Unless
otherwise indicated, each person has sole voting and investment powers over the
indicated shares. Information relating to beneficial ownership of the FLAG
common stock is based upon "beneficial owner" concepts set forth in rules
promulgated under the Exchange Act. Under such rules, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose or to direct the
disposition of such security. Under the rules, more than one person may be
deemed to be a beneficial owner of the same securities.
Amount and
Nature of Beneficial Percent of
Name and Address Ownership Class (%)
---------------- --------- ---------
Donovan B. Bell, Jr. 289,440 5.59
2316 Peacock Drive
Dublin, Georgia 31021
Wendell S. Dunaway 259,732(1) 5.01
P.O. Box 1007
Hawkinsville, Georgia 31036
J. Preston Martin 288,000(2) 5.57
P.O. Box 38
Mt. Zion Street
Milan, Georgia 31091
- --------------------
(1) Consists of (i) 258,835 shares owned by Mr. Dunaway, and (ii) 897
shares owned by Dunaway Brothers, as to which beneficial ownership is
shared.
(2) Consists of (i) 192,000 shares held by Mr. Martin, and (ii) 96,000
shares held by a broker for the benefit of Mr.Martin.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet
as of June 30, 1998 (the "Pro Forma Balance Sheet"), and the unaudited pro forma
consolidated statements of earnings for the six months ended June 30, 1998, and
for each of the three years in the period ended December 31, 1997 (collectively,
the "Pro Forma Earnings Statements"), combine the historical financial
statements of FLAG with Brown after giving effect to the merger using the
pooling of interests method of accounting. Pro forma adjustments to the Pro
Forma Balance Sheet are computed as if the merger occurred at June 30, 1998,
while the pro forma adjustments to the Pro Forma Earnings Statements are
computed as if the merger were consummated on January 1, 1995, the earliest
beginning of the period presented. The following financial statements do not
reflect any anticipated cost savings which may be realized by FLAG after
consummation of the merger.
The pro forma information does not purport to represent what FLAG's and
Brown's combined results of operations actually would have been if the merger
had occurred on January 1, 1995.
65
<PAGE>
<TABLE>
<CAPTION>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1998
(Dollars in thousands)
(Unaudited)
Pro Other
Pro Forma Forma Pending Pro Forma Pro Forma
FLAG Brown Adjustments Combined Acquisitions Adjustments Combined
---- ----- ----------- -------- ------------ ----------- --------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 11,724 1,680 13,404 2,935 16,339
Federal funds sold 10,070 110 10,180 4,080 14,260
Interest-bearing deposits 3,508 - 3,508 - 3,508
Securities available-for-sale, at fair value 66,712 1,756 68,468 14,613 83,081
Securities held to maturity 2,720 - 2,720 6,484 9,204
Other investments 5,755 - 5,755 - 5,755
Loans held for sale 6,306 - 6,306 - 6,306
Loans, net 306,527 22,213 328,740 69,606 398,346
Premises and equipment, net 12,512 1,338 13,850 2,500 16,350
Other assets 17,044 1,562 18,606 3,099 21,705
-------- ------- -------- ------ --------
Total assets $442,878 28,659 471,537 103,317 574,854
======= ====== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing $ 26,509 2,400 28,909 14,490 43,399
Interest-bearing 312,736 23,526 336,262 73,610 409,872
------- ------ ------- ------ -------
Total deposits 339,245 25,926 365,171 88,100 453,271
Other borrowings 55,830 500 56,330 3,925 60,255
Accrued expenses and other liabilities 9,221 560 9,781 769 10,550
--------- -------- --------- -------- --------
Total liabilities 404,296 26,986 431,282 92,794 524,076
Stockholders' Equity
Common stock 5,175 175 88 5,438 490 1,080 7,008
Additional paid-in capital 8,817 1,180 (88) 9,909 3,754 (1,264) 12,399
Retained earnings 24,381 327 24,708 6,384 31,092
Unrealized gains (losses) on
securities available-for-sale, net of tax 209 (9) 200 79 279
-------- --------- -------- -------- --------
38,582 1,673 40,255 10,707 50,778
Less treasury stock - - (184) 184 -
Total stockholders' equity 38,582 1,673 40,255 10,523 50,778
-------- ------- -------- -------- --------
Total stockholders'
equity and liabilities $ 442,878 28,659 471,537 103,317 574,854
======= ====== ======= ======= =======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
66
<PAGE>
<TABLE>
<CAPTION>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Six Months Ended June 30, 1998
(In thousands, except per share data)
(Unaudited)
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Brown Adjustments Combined Acquisitions Adjustments Combined
---- ----- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 17,674 1,472 19,146 4,129 23,275
Interest expense 8,678 679 9,357 2,150 11,507
-------- ------ ----- ----- ------
Net interest income 8,996 793 9,789 1,979 11,768
Provision for loan losses 444 30 474 47 521
-------- ------- ------- ------- --------
Net interest income after
provision for loan losses 8,552 763 9,315 1,932 11,247
Noninterest income:
Fees and service charges 1,826 102 1,928 349 2,277
Net realized gains on
the sale of assets 1,023 7 1,030 7 1,037
Other operating income 869 37 906 59 965
-------- ------ ------- ------ -------
Total noninterest income 3,718 146 3,864 415 4,279
Noninterest expense:
Salaries and employee benefits 4,355 325 4,680 827 5,507
Net occupancy and equipment expenses 1,548 128 1,676 293 1,969
Other operating expenses 3,323 247 3,570 459 4,029
------- ----- ------- ------ ------
Total noninterest expense 9,226 700 9,926 1,579 11,505
Income before income taxes 3,044 209 3,253 768 4,021
Income tax expense 929 64 993 183 1,176
-------- ------ -------- ------ ------
Net income $ 2,115 145 2,260 585 2,845
===== ====== ======= ====== ======
Net income per common
share outstanding $ .41 .83 .42 .41
====== ====== ====== ======
Weighted average outstanding shares 5,172 175 5,435 6,997
======= ======= ======= ======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
67
<PAGE>
<TABLE>
<CAPTION>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Year Ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Brown Adjustments Combined Acquisitions Adjustments Combined
---- ----- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 30,643 2,828 33,471 7,715 41,186
Interest expense 14,646 1,334 15,980 3,992 19,972
------ ----- ------ ----- ------
Net interest income 15,997 1,494 17,491 3,723 21,214
Provision for loan losses 765 580 1,345 275 1,620
-------- ------ ------- ------ ------
Net interest income after
provision for loan losses 15,232 914 16,146 3,448 19,594
Noninterest income:
Fees and service charges 3,568 215 3,783 703 4,486
Net realized gains on
the sale of assets 910 - 910 - 910
Other operating income 854 56 910 150 1,060
------- ------- -------- ------ -----
Total noninterest income 5,332 271 5,603 853 6,456
Noninterest expense:
Salaries and employee benefits 7,256 614 7,870 1,528 9,398
Net occupancy and equipment expenses 2,779 181 2,960 589 3,549
Other operating expenses 4,985 589 5,575 1,001 6,576
-------- ------- ------- ------ ------
Total noninterest expense 15,020 1,384 16,405 3,118 19,523
Income (loss) before income taxes 5,544 (199) 5,344 1,183 6,527
Income tax expense (benefit) 1,795 (68) 1,727 216 1,943
------- --------- ------- ------ ------
Net income (loss) $ 3,749 (131) 3,617 967 4,584
======= ======== ======= ====== ======
Net income (loss) per common
share outstanding $ .73 (.75) .67 .66
======= ======== ======= ======
Weighted average outstanding shares 5,167 175 5,429 6,972
======= ======== ======= ======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
68
<PAGE>
<TABLE>
<CAPTION>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Year Ended December 31, 1996
(In thousands, except per share data)
(Unaudited)
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Brown Adjustments Combined Acquisitions Adjustments Combined
---- ----- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 27,951 2,170 30,121 6,734 36,855
Interest expense 13,194 962 14,156 3,472 17,628
------ ------- ------ ----- ------
Net interest income 14,757 1,208 15,965 3,262 19,227
Provision for loan losses 3,744 100 3,844 656 4,500
------- ------- ------- ------ -------
Net interest income after
provision for loan losses 11,013 1,108 12,121 2,606 14,727
Noninterest income:
Fees and service charges 3,301 120 3,421 587 4,008
Net realized gains on
the sale of assets 748 - 748 4 752
Other operating income 588 25 613 218 831
------- ------- -------- ------ ------
Total noninterest income 4,637 145 4,782 809 5,591
Noninterest expense:
Salaries and employee benefits 6,172 450 6,622 1,385 8,007
Net occupancy and equipment expenses 2,228 141 2,369 469 2,838
Other operating expenses 5,618 413 6,031 879 6,910
------- ------ ------- ------- ------
Total noninterest expense 14,018 1,004 15,022 2,733 17,755
Income before income taxes 1,632 249 1,881 682 2,563
Income tax expense 347 82 429 132 561
-------- ------- -------- ------ ------
Net income $ 1,285 167 1,452 550 2,002
======= ====== ======= ====== ======
Net income per common
share outstanding $ .25 .98 .27 .29
======= ====== ======= ======
Weighted average outstanding shares 5,124 175 5,380 6,927
======= ======= ======= ======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
69
<PAGE>
<TABLE>
<CAPTION>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Year Ended December 31, 1995
(In thousands, except per share data)
(Unaudited)
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Brown Adjustments Combined Acquisitions Adjustments Combined
---- ----- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 27,311 1,166 28,477 4,502 32,979
Interest expense 13,378 541 13,919 2,022 15,941
------ ------- ------ -------- ------
Net interest income 13,933 625 14,558 2,480 17,038
Provision for loan losses 775 72 847 643 1,490
--------- ------ ------- ------- ------
Net interest income after
provision for loan losses 13,158 553 13,711 1,837 15,548
Noninterest income
Fees and service charges 2,971 68 3,039 358 3,397
Net realized gains (losses) on
the sale of assets 350 5 355 (17) 338
Other operating income 385 16 401 44 445
-------- ------ -------- -------- ------
Total noninterest income 3,706 89 3,795 385 4,180
Noninterest expense:
Salaries and employee benefits 5,749 276 6,025 860 6,885
Net occupancy and equipment expenses 1,825 76 1,901 252 2,153
Other operating expenses 4,112 318 4,430 547 4,977
------- ------ -------- ------- ------
Total noninterest expense 11,686 670 12,356 1,659 14,015
Income (loss) before income taxes 5,178 (28) 5,150 563 5,713
Income tax expense (benefit) 1,707 (15) 1,692 (17) 1,675
------- ------- ------- ------- ------
Net income (loss) $ 3,471 (13) 3,458 580 4,038
======= ======= ======= ======= ======
Net income (loss) per common
share outstanding $ .68 (.12) .66 .59
======= ======= ======= ======
Weighted average outstanding shares 5,088 175 5,259 6,809
======= ======= ======= ======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
70
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Pro Forma Financial Statements
(1) The unaudited pro forma condensed consolidated balance sheet as of June 30,
1998 and condensed consolidated statements of earnings for the six months
ended June 30, 1998 and for the years ended December 31, 1997, 1996 and
1995 have been prepared based on the historical consolidated balance sheets
and statements of earnings, which give effect to the merger of Brown with
and into FLAG accounted for as a pooling of interests, based on the
exchange of 1.5 shares of FLAG common stock for each outstanding share of
Brown common stock.
(2) In the opinion of management of the respective companies included above,
all adjustments considered necessary for a fair presentation of the
financial position and results for the period presented have been included.
Adjustments, if any, are normal and recurring nature.
71
<PAGE>
SHAREHOLDER PROPOSALS
Proposals of shareholders of FLAG intended to be presented at the 1999
annual meeting of shareholders must be received by FLAG at its principal
executive offices on or before the date that is 120 calendar days in advance of
the date of FLAG's 1998 proxy statement released to security holders in order to
be included in FLAG's proxy statement and proxy relating to the 1999 annual
meeting of shareholders. As of the date of the mailing of this Proxy
Statement/Prospectus, FLAG's 1998 proxy statement has not been completed. The
specific date by which proposals of shareholders of FLAG intended to be
represented at the 1999 annual meeting of shareholders must be received by FLAG
in order to be included in FLAG's 1999 proxy statement will be set forth in
FLAG's 1998 proxy statement.
EXPERTS
The restated consolidated financial statements of FLAG and subsidiaries
as of December 31, 1997 and 1996, and for each of the years in the three year
period ended December 31, 1997, incorporated by reference herein and in the
Registration Statement, have been audited by Porter Keadle Moore, LLP,
independent certified public accountants, which are included in the FLAG Annual
Report to Shareholders which is incorporated by reference in FLAG's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997. The financial
statements audited by Porter Keadle Moore, LLP have been incorporated herein by
reference in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
The consolidated financial statements of FLAG and subsidiary as of
December 31, 1996 and each of the years in the two-year period ended December
31, 1996, included in the restated consolidated financial statements of FLAG,
incorporated herein and in the Registration Statement by reference, have been
audited by Robinson, Grimes and Company, P.C. independent certified public
accountants. The financial statements audited by Robinson, Grimes and Company
P.C., have been incorporated herein by reference in reliance upon the authority
of said firm as experts in accounting and auditing in giving said reports.
The consolidated financial statements of Middle Georgia Bankshares,
Inc. as of December 31, 1997 and 1996 and for each of the years in the three
year period ended December 31, 1997, included in the restated consolidated
financial statements of FLAG, incorporated herein and in the Registration
Statement by reference, have been audited by Porter Keadle Moore, LLP,
independent certified public accountants. The financial statements audited by
Porter Keadle Moore, LLP have been incorporated herein by reference in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The consolidated financial statements of Three Rivers Bancshares, Inc.
as of December 31, 1997 and 1996 and for each of the years in the three year
period ended December 31, 1997, included in the restated consolidated financial
statements of FLAG, incorporated herein and in the Registration Statement by
reference, have been audited by Thigpen, Jones, Seaton & Co., P.C., independent
certified public accountants. The financial statements audited by Thigpen,
Jones, Seaton & Co., P.C. have been incorporated herein by reference in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The consolidated financial statements of Brown as of December 31, 1997
and 1996, and for each of the years in the three year period ended December 31,
1997, are contained herein and in the Registration Statement in reliance upon
72
<PAGE>
the report of Porter Keadle Moore, LLP, independent certified public
accountants, upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the shares of FLAG common stock to be issued in the
merger and certain tax consequences of the merger will be passed upon by Powell,
Goldstein, Frazer & Murphy LLP, Atlanta, Georgia.
OTHER MATTERS
Management of Brown does not know of any matters to be brought before
the Special Meeting other than those described above. If any other matters
properly come before the Special Meeting, the persons designated as Proxies will
vote on such matters in accordance with their best judgment.
WHERE YOU CAN FIND MORE INFORMATION ABOUT FLAG
FLAG files annual, quarterly and special reports, proxy statements and
other information with the SEC. You can receive copies of such reports, proxy
and information statements, and other information, at prescribed rates, from the
SEC by addressing written requests for to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In
addition, you can read such reports, proxy and information statements, and other
information at the public reference facilities and at the regional offices of
the SEC, Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
The SEC also maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants such as FLAG that file
electronically with the SEC. The address of the SEC Web site is
http://www.sec.gov.
FLAG has filed with the SEC a registration statement on Form S-4 to
register the shares that FLAG will issue to Brown shareholders. This document is
a part of the registration statement. This Proxy Statement/Prospectus does not
include all of the information contained in the Registration statement. For
further information about FLAG and the securities offered in this Proxy
Statement/ Prospectus . You should review the registration statement. You can
inspect or copy the registration statement, at prescribed rates, at the SEC's
public reference facilities at the addresses listed above.
The SEC allows FLAG to "incorporate by reference" information into the
Proxy Statement/Prospectus, which means that FLAG can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered part of this
Proxy Statement/Prospectus, except for any information superseded by information
contained directly in this Proxy Statement/Prospectus or in later filed
documents incorporated by reference in this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates by reference the documents
listed below that FLAG previously filed with the SEC. These documents contain
important information about FLAG and its finances. Some filings have been
amended by later filings, which are also listed.
(a) Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
73
<PAGE>
(b) Annual Report on Form 10-K for the fiscal year ended December 31, 1997;
(c) Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998; and
(d) Current Reports on Form 8-K dated February 18, 1998, April 18, 1998,
May 12, 1998, May 14, 1998, May 18, 1998, May 28, 1998, June 1, 1998,
August 10, 1998, August 11, 1998 and August 19, 1998.
FLAG also incorporates by reference additional documents that it may
file with the SEC between the date of this Proxy Statement/Prospectus and the
completion of the merger or the termination of the Merger Agreement. These
additional documents include periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
proxy statements.
We are providing you with a copy of FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and a copy of
FLAG's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. These
documents provide more information about FLAG and its finances.
Shareholders may obtain documents incorporated by reference in this
Proxy Statement/Prospectus by requesting them from:
Investor Relations
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia
(telephone: (706) 845-5000)
In order to ensure timely delivery of the documents, you should make a
request for documents no later than __________, 1998.
74
<PAGE>
INDEX TO BROWN FINANCIAL DATA
Page
----
Consolidated Balance Sheets as of June 30, 1998 and 1997 (Unaudited).........F-2
Consolidated Statements of Earnings for the Six Months
Ended June 30, 1998 and 1997 (Unaudited)................................F-3
Consolidated Statements of Comprehensive Income for the Six Months Ended
June 30, 1998 and 1997 (Unaudited)......................................F-4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 (Unaudited)......................................F-5
Notes to Consolidated Financial Statements (Unaudited).......................F-6
Report of Independent Certified Public Accountants...........................F-7
Consolidated Balance Sheets as of December 31, 1997
and 1996................................................................F-8
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996 and 1995........................................F-9
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...................F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................................F-11
Notes to Consolidated Financial Statements..................................F-12
F-1
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Balance Sheet
June 30, 1998 and 1997
Assets
1998 1997
---- ----
Cash and due from banks $ 1,679,868 853,589
Federal funds sold 110,000 -
------------ -----------
Cash and cash equivalents 1,789,868 853,589
Securities available-for-sale 1,756,007 3,693,510
Loans,net 22,213,264 21,250,336
Premises and equipment,net 1,338,374 1,241,759
Accrued interest receivable and other assets 1,561,826 1,103,355
---------- ----------
$ 28,659,339 28,142,549
========== ==========
Liabilities and Stockholders' Equity
Deposits:
Demand $ 2,399,609 1,674,729
Interest-bearing demand 3,323,090 3,649,028
Savings 752,340 1,065,067
Time 19,450,741 19,397,100
---------- ----------
Total deposits 25,925,780 25,785,924
Federal Home Loan Bank advances 500,000 -
Federal funds purchased - 130,000
Accrued interest payable and other liabilities 559,949 451,279
---------- ----------
Total liabilities 26,985,729 26,367,203
---------- ----------
Shareholders' equity:
Common stock 175,000 175,000
Capital surplus 1,180,396 1,180,396
Retained earnings 326,855 448,054
Unrealized loss on securities available-for-sale (8,641) (28,104)
---------- ----------
Total shareholders' equity 1,673,610 1,775,346
---------- ----------
$ 28,659,339 28,142,549
========== ==========
F-2
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Statements of Earnings
For the Six Months Ended June 30, 1998 and 1997
1998 1997
---- ----
Interest income:
Loans $ 1,406,359 1,197,898
Federal funds sold 15,502 10,000
Investment - taxable 46,709 92,211
Investment - nontaxable 3,475 4,078
Deposits with other banks 269 332
------------- -------------
Total interest income 1,472,314 1,304,519
--------- ---------
Interest expense:
Demand 48,280 57,713
Savings 9,319 12,087
Time 606,679 503,214
Other 14,896 9,126
----------- ------------
Total interest expense 679,174 582,140
Net interest income 793,140 722,379
Provision for loan losses 30,000 75,000
---------- ----------
Net interest income after
provision for loan losses 763,140 647,379
---------- ----------
Non interest income:
Service charges on deposits 101,492 88,719
Gain on sales of securities 7,368 -
Other 37,375 35,178
---------- ----------
Total non interest income 146,235 123,897
--------- ---------
Non interest expenses:
Salaries and employee benefits 324,576 261,410
Occupancy 128,375 102,602
Other 246,943 203,881
----------- ----------
Total non interest expense 699,894 567,893
----------- ----------
Income before income taxes 209,481 203,383
Income tax expense 64,000 68,000
----------- -----------
Net earnings $ 145,481 135,383
=========== ===========
Net earnings per share $ 0.83 0.77
=========== ===========
Average shares outstanding 175,000 175,000
=========== ===========
F-3
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
Net earnings $ 145,481 135,383
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available-for-sale:
Holding gains (losses) arising during
period, net of tax of $4,217 and $6 9,651 17
Realized gains and losses, net of tax
of $1,842 and $0 (5,526) -
Comprehensive income ---------- ---------
$ 149,606 135,400
========== =========
F-4
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 145,481 135,383
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion 55,446 37,237
Provision for loan losses 30,000 75,000
Gain on sales of investment securities (7,368) -
Change in other (76,052) (286,023)
---------- ----------
Net cash provided (used) by
operating activities 147,507 (38,403)
---------- ----------
Cash flows from investing activities:
Proceeds from sales of securities
available-for-sale 503,938 -
Proceeds from calls and maturities
available-for-sale 663,169 264,130
Purchases of investments available-for-sale (110,280) (461,509)
Net change in loans 1,783,180 (2,639,537)
Purchase of premises and equipment (177,376) (181,968)
---------- ----------
Net cash provided (used) by
investing activities 2,662,631 (3,018,884)
---------- ----------
Cash flows from financing activities:
Net change in deposits (2,381,607) 3,790,480
Net change in fed funds purchased - (700,000)
---------- ----------
Net cash provided (used) by
financing activities (2,381,607) 3,090,480
---------- ----------
Net increase in cash 428,531 33,193
Cash and cash equivalents at beginning
of period 1,361,337 820,396
---------- ----------
Cash and cash equivalents at end of period $ 1,789,868 853,589
========== ==========
F-5
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements include the accounts of The Brown
Bank (the Bank) and its wholly-owned subsidiary, The Brown Bank Service
Corporation. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The consolidated financial information furnished herein reflects all
adjustments which are, in the opinion of management, necessary to present a
fair statement of the results of operations and financial position for the
periods covered herein. All such adjustments are of a normal, recurring
nature.
(2) Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). SFAS 128 simplifies current standards by eliminating the
presentation of primary earnings per share (EPS) and requiring the
presentation of basic EPS, which includes no potential common shares and
thus no dilution. The Statement also requires entities with complex capital
structures to present basic and diluted EPS on the face of the income
statement and also eliminates the modified treasury stock method of
computing potential common shares. The Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. Early application is not permitted. Upon adoption,
restatement of all prior-period EPS data presented is required. Based upon
the current capital structure of the Bank, this Statement will have no
effect on the EPS calculation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 131
specifies the presentation and disclosure of operating segment information
reported in the annual report and interim reports issued to stockholders.
The provisions of both statements will be effective for fiscal years
beginning after December 15, 1997. The management of the Bank believes that
the adoption of these statements will not have a material impact on the
Bank's financial position, results of operations, or liquidity.
F-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
The Brown Bank
We have audited the accompanying consolidated balance sheets of The Brown Bank
and subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these 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 The Brown Bank and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
Atlanta, Georgia
March 27, 1998, except for note 12 as to which
the date is May 14, 1998
F-7
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets
1997 1996
---- ----
Cash and due from banks $ 1,111,337 820,396
Federal funds sold 250,000 -
---------- -------
Cash and cash equivalents 1,361,337 820,396
Securities available-for-sale 2,801,484 3,500,247
Loans, net 24,026,444 18,685,799
Premises and equipment, net 1,214,176 1,092,887
Accrued interest receivable and other assets 1,446,390 768,858
----------- ------------
$ 30,849,831 24,868,187
========== ==========
Liabilities and Stockholders' Equity
Deposits:
Demand $ 1,881,718 1,751,048
Interest-bearing demand 3,389,451 3,225,463
Savings 719,542 934,350
Time 22,316,676 16,084,583
---------- ----------
Total deposits 28,307,387 21,995,444
Federal funds purchased - 830,000
Federal Home Loan Bank advances 500,000 -
Accrued interest payable and other liabilities 518,440 402,797
----------- ------------
Total liabilities 29,325,827 23,228,241
---------- ----------
Commitments
Stockholders' equity:
Common stock, par value $1; authorized
25,000,000 shares; issued and
outstanding 175,000 shares 175,000 175,000
Additional paid in capital 1,180,396 1,180,396
Retained earnings 181,374 312,671
Unrealized losses on securities
available-for-sale, net of tax (12,766) (28,121)
------------ ------------
Total stockholders' equity 1,524,004 1,639,946
---------- -----------
$ 30,849,831 24,868,187
========== ==========
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Interest income:
Interest and fees on loans $ 2,610,117 1,968,520 1,038,961
Interest on federal funds sold 18,391 14,289 17,381
Interest on taxable securities 181,413 176,258 95,767
Interest on tax-free securities 10,339 - -
Interest on deposits with other banks 7,588 11,108 14,342
----------- ----------- --------
Total interest income 2,827,848 2,170,175 1,166,451
--------- --------- --------
Interest expense:
Interest-bearing demand deposits 104,123 123,295 55,051
Savings deposits 22,634 26,877 20,440
Time deposits 1,173,534 791,523 461,830
Other 33,691 19,904 4,038
----------- ----------- --------
Total interest expense 1,333,982 961,599 541,359
--------- ---------- --------
Net interest income 1,493,866 1,208,576 625,092
Provision for loan losses 580,000 100,000 72,400
---------- ---------- --------
Net interest income after
provision for loan losses 913,866 1,108,576 552,692
---------- --------- -------
Other income:
Service charges 214,952 119,938 68,002
Securities gains - - 5,391
Other 56,254 24,776 16,164
----------- ----------- ---------
Total other income 271,206 144,714 89,557
---------- ---------- --------
Other expenses:
Salaries and employee benefits 613,649 450,568 276,606
Occupancy 180,737 140,667 75,965
Other operating 589,495 412,815 318,154
---------- ---------- -------
Total other expenses 1,383,881 1,004,050 670,725
--------- --------- -------
Earnings (loss) before
income taxes (198,809) 249,240 (28,476)
Income tax expense (benefit) (67,512) 81,857 (15,000)
----------- ---------- --------
Net earnings (loss) $ (131,297) 167,383 (13,476)
========== ========== ========
Net earnings per share $ (0.75) 0.98 (0.12)
========== ========== ========
Weighted average number of
shares outstanding 175,000 170,532 108,667
========== ========== ========
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Losses on
Securities
Additional Available-
Common Paid In Retained For-Sale,
Stock Capital Earnings Net of Tax Total
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 100,000 550,000 158,764 (76,829) 731,935
Issuance of 55,555 shares, net of
offering costs of $35,409 55,555 464,586 - - 520,141
Change in net unrealized losses
on securities available-for-sale - - - 33,799 33,799
Net loss - - (13,476) - (13,476)
-------- --------- ------- -------- --------
Balance, December 31, 1995 155,555 1,014,586 145,288 (43,030) 1,272,399
Issuance of 19,445 shares, net of
offering costs of $9,195 19,445 165,810 - - 185,255
Change in net unrealized losses
on securities available-for-sale - - - 14,909 14,909
Net earnings - - 167,383 - 167,383
-------- --------- ------- -------- ---------
Balance, December 31, 1996 175,000 1,180,396 312,671 (28,121) 1,639,946
Change in net unrealized losses on
securities available-for-sale - - - 15,355 15,355
Net loss - - (131,297) - (131,297)
-------- --------- ------- -------- ---------
Balance, December 31, 1997 $ 175,000 1,180,396 181,374 (12,766) 1,524,004
======= ========= ======= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> ` <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (131,297) 167,383 (13,476)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation, amortization and accretion 100,845 107,335 55,150
Provision for loan losses 580,000 100,000 72,400
Provision for deferred taxes (96,125) 63,212 (13,598)
Writedown of other real estate - 1,406 -
(Gain) loss on sale of premises and equipment (3,890) 3,083 -
Securities gains - - (5,391)
Change in:
Accrued interest receivable (196,942) (212,322) (219,112)
Accrued interest payable 117,077 68,905 167,844
Other assets (248,905) (83,455) (55,249)
Other liabilities 14,680 9,210 47,000
---------- ---------- ----------
Net cash provided by operating activities 135,443 224,757 35,568
---------- ---------- ----------
Cash flows from investing activities:
Change in interest-bearing deposits with other banks - 100,000 99,000
Proceeds from sales of investment securities - - 255,391
Proceeds from maturities, paydowns and calls
of investment securities 1,776,662 109,045 504,120
Purchases of investment securities (1,061,512) (983,438) (1,678,906)
Change in loans (5,982,396) (6,087,545) (8,073,847)
Proceeds from sale of premises and equipment 12,500 15,000 -
Purchases of premises and equipment (227,503) (196,738) (817,774)
Purchase of first lien on other real estate (78,082) - (68,643)
----------- ---------- -----------
Net cash used by investing activities (5,560,331) (7,043,676) (9,780,659)
----------- ---------- -----------
Cash flows from financing activities:
Change in deposits 6,311,943 5,571,961 9,834,475
Change in federal funds purchased (830,000) 830,000 -
Proceeds from Federal Home Loan Bank advances 500,000 - -
Payments for deferred compensation (16,114) (4,360) (2,880)
Proceeds from issuance of common stock, net
of offering costs - 185,255 520,141
--------- --------- ----------
Net cash provided by financing activities 5,965,829 6,582,856 10,351,736
--------- --------- ----------
Net change in cash and cash equivalents 540,941 (236,063) 606,645
Cash and cash equivalents at beginning of year 820,396 1,056,459 449,814
--------- ---------- ----------
Cash and cash equivalents at end of year $ 1,361,337 820,396 1,056,459
========= ========== ==========
Supplemental schedule of noncash investing
and financing activities:
Transfers from loans to other real estate $ 96,751 32,000 -
Financed sale of other real estate $ 35,000 - -
Change in unrealized losses on securities
available-for-sale, net of tax $ 15,355 14,909 33,799
Cash paid during the year for:
Interest $ 1,216,906 892,694 373,515
Income taxes $ - 35,000 50,189
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of The Brown
Bank (the "Bank") and its wholly-owned subsidiary, The Brown Bank
Service Corporation (the "Service Corp"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Bank commenced business in 1946 upon receipt of its banking charter
from the Georgia Department of Banking and Finance. In January 1995 the
Bank converted its charter to a federal savings bank, and is primarily
regulated by the Office of Thrift Supervision (the "OTS") and undergoes
periodic examinations by this regulatory agency. The Bank provides a
full range of commercial, mortgage and consumer banking services
throughout Tattnall, Toombs and Candler Counties in southeast Georgia.
In April 1996, the Bank obtained approval from the OTS to acquire a
100% interest in the Service Corp through the purchase of $10,000 of
newly issued shares. The Service Corp was established for the purpose
of marketing nontraditional products to the Bank's existing and
prospective customers.
The accounting principles followed by the Bank, and the methods of
applying these principles, conform with generally accepted accounting
principles (GAAP) and with general practices in the banking industry.
In preparing the financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect
the reported amounts in the financial statements. Actual results could
differ significantly from these statements. Material estimates common
to the banking industry that are particularly susceptible to
significant change in the near term include, but are not limited to,
the determination of the allowance for loan losses and the valuation
allowance associated with the realization of deferred tax assets which
are based on future taxable income.
Investment Securities
---------------------
The Bank classifies its securities in one of three categories: trading,
available-for-sale, or held to maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held to maturity securities are those securities for which the Bank has
the ability and intent to hold the security until maturity. All other
securities not included in trading or held to maturity are classified
as available for sale. At December 31, 1997 and 1996, the Bank has
classified all of its securities as available for sale.
Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, on securities
available-for-sale are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
A decline in the market value of any available-for-sale securities
below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and
losses for securities are included in earnings and are derived using
the specific identification method for determining the cost of
securities sold.
Loans and Allowance for Loan Losses
-----------------------------------
Loans are stated at principal amount outstanding, net of the allowance
for loan losses. Interest on loans is calculated by using the simple
interest method on daily balances of the principal amount outstanding.
F-12
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Loans and Allowance for Loan Losses, continued
----------------------------------------------
A loan is considered impaired when, based on current information and
events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected. Impaired
loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or at the
loan's observable market price, or at the fair value of the collateral
of the loan if the loan is collateral dependent. Interest income is
recognized using the cash basis method of accounting during the period
in which the loans are deemed to be impaired.
The allowance for loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance
for loan losses when management believes that the collectibility of the
principal is unlikely. The allowance represents an amount which, in
management's judgement, will be adequate to absorb probable losses on
existing loans that may become uncollectible.
Management's judgement in determining the adequacy of the allowance is
based on evaluations of the collectibility of loans. These evaluations
take into consideration such factors as changes in the nature and
volume of the loan portfolio, current economic conditions that may
affect the borrower's ability to pay, overall portfolio quality, and
review of specific problem loans.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on
judgements different than those of management.
Premises and Equipment
----------------------
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in income for the period. The cost
of maintenance and repairs is charged to expense as incurred, whereas
significant renewals and betterments are capitalized. The range of
estimated useful lives for buildings and improvements is 15 to 40
years, and for furniture and equipment, 3 to 10 years.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Bank's assets and
liabilities results in a deferred tax asset, an evaluation of the
probability of being able to realize the future benefits indicated by
such asset is required. A valuation allowance is provided for the
portion of the deferred tax asset when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. In
assessing the realizability of the deferred tax asset, management
considers the scheduled reversals of deferred tax liabilities,
projected future taxable income, and tax planning strategies.
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Net Earnings Per Share
----------------------
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings
Per Share" became effective for the Bank for the year ended December
31, 1997. This new standard specifies the computation, presentation and
disclosure requirements for earnings per share and is designed to
simplify previous earnings per share standards and to make domestic and
international practices more compatible. Earnings per common share are
based on the weighted average number of common shares outstanding
during the period while the effects of potential common shares
outstanding during the period are included in diluted earnings per
share. All earnings per common share amounts have been restated to
conform to the provisions of SFAS No. 128.
Net earnings per share is calculated as net earnings divided by average
number of shares outstanding. The Bank has no potentially dilutive
securities outstanding.
(2) Investment Securities
Investment securities available-for-sale at December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 498,597 622 - 499,219
U.S. Government agencies 1,695,809 4,016 27,090 1,672,735
Mortgage-backed securities 265,489 2,233 906 266,816
State, county and municipals 358,610 4,104 - 362,714
---------- ------- ----------- ----------
$ 2,818,505 10,975 27,996 2,801,484
========= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 994,840 2,973 - 997,813
U.S. Government agencies 2,203,287 5,014 47,319 2,160,982
Mortgage-backed securities 339,615 3,500 1,663 341,452
---------- ------- ------- ----------
$ 3,537,742 11,487 48,982 3,500,247
========= ====== ====== =========
</TABLE>
The amortized cost and fair value of securities available-for-sale at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
have the right to call or prepay certain obligations with or without
call or prepayment penalties.
Amortized Estimated
Cost Fair Value
---- ----------
Due within one year $ 1,198,597 1,188,422
Due after one year through five years 1,152,860 1,143,066
Due after five years through ten years 201,559 203,180
Mortgage-backed securities 265,489 266,816
---------- ----------
$ 2,818,505 2,801,484
========= =========
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(2) Investment Securities, continued
No securities were sold during 1997 and 1996. Proceeds from sales of
securities during 1995 were $255,391. Gross gains of $5,391 were
realized on those sales.
Securities with a carrying value of approximately $1,628,000 and
$3,500,000 at December 31, 1997 and 1996, respectively, were pledged to
secure public deposits or for other purposes.
(3) Loans
Major classifications of loans at December 31, 1997 and 1996 are summarized
as follows:
1997 1996
---- ----
Commercial and agricultural $ 4,459,310 3,065,606
Real estate - mortgage 13,946,009 11,355,063
Real estate - construction 895,550 245,308
Leases 4,449 151,284
Consumer 5,371,837 4,090,783
------------ ----------
Total loans 24,677,155 18,908,044
Less allowance for loan losses 650,711 222,245
------------ ----------
Total net loans $ 24,026,444 18,685,799
============ ==========
The Bank grants loans and extensions of credit primarily to individuals
and a variety of firms and corporations located in certain Georgia
counties including Tattnall, Toombs and Candler. Although the Bank has
a diversified loan portfolio, a substantial portion of the loan
portfolio is collateralized by improved and unimproved agricultural
real estate and is dependent upon the agriculture market.
Changes in the allowance for loan losses were as follows:
1997 1996 1995
---- ---- ----
Balance at beginning of year $ 222,245 127,723 58,161
Amounts charged off (154,124) (6,825) (4,826)
Recoveries on amounts previously charged off 2,590 1,347 1,988
Provision charged to operations 580,000 100,000 72,400
------- ------- -------
Balance at end of year $ 650,711 222,245 127,723
======= ======= =======
At December 31, 1997 and 1996, the recorded investment in loans that
are considered to be impaired was approximately $1,483,000 and
$387,000, respectively. The related allowance for loan losses for each
of these years was approximately $373,000 and $58,000, respectively.
The average investment in impaired loans during 1997 and 1996 was
approximately $935,000 and $212,000, respectively.
(4) Premises and Equipment
Major classifications of premises and equipment are summarized as
follows:
1997 1996
Land $ 129,130 97,050
Buildings and improvements 781,091 761,139
Furniture and equipment 758,244 607,441
--------- --------
1,668,465 1,465,630
Less accumulated depreciation 454,289 372,743
--------- --------
$ 1,214,176 1,092,887
========= =========
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(4) Premises and Equipment, continued
Depreciation expense was $96,757, $71,125 and $41,739 for the years
ended December 31, 1997, 1996 and 1995, respectively.
(5) Deposits
The aggregate amount of time deposits, each with a minimum denomination
of $100,000, was $6,478,816 and $3,847,276 at December 31, 1997 and
1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
1998 $ 21,156,739
1999 882,187
2000 52,750
2001 15,000
2002 and thereafter 210,000
------------
$ 22,316,676
(6) Federal Home Loan Bank Advances
During 1995, the Bank entered into an agreement with the Federal Home
Loan Bank (FHLB) to provide the Bank credit facilities. Any amounts
advanced by the FHLB are secured under a blanket floating lien covered
by all of the Bank's 1-4 family first mortgage loans. The Bank may draw
advances up to 75% of the outstanding balance of these loans based on
the agreement with the FHLB. At December 31, 1997, the Bank has a note
payable under this agreement amounting to $500,000 with monthly
interest at a fixed rate of 6.8% which matures in July 2007. The Bank
had no borrowings from the FHLB outstanding as of December 31, 1996.
(7) Income Taxes
The components of income tax expense (benefit) for the years ended
December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Current $ 31,425 18,645 (1,402)
Deferred (98,937) 63,212 (6,408)
Reduction of valuation allowance - - (7,190)
--------- -------- -------
$ (67,512) 81,857 (15,000)
========= ======== =======
The differences between income tax expense and the amount computed by
applying the statutory federal income tax rate (34%) to earnings before
income taxes are as follows:
1997 1996 1995
---- ---- ----
Pretax income (loss) at statutory rates $(67,595) 84,742 (9,682)
Add (deduct):
Increase in cash surrender value (2,040) (2,040) (2,950)
Non-deductible insurance premiums 3,280 3,280 3,280
Change in valuation allowance - - (15,000)
Benefit of net operating loss
not recognized - - 8,800
Other (1,157) (4,125) (552)
-------- ------- -------
$(67,512) 81,857 (9,904)
====== ====== ======
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred tax
asset (liability) at December 31, 1997 and 1996.
1997 1996
---- ----
Deferred income tax assets:
Allowance for loan losses $ 214,820 66,376
Deferred compensation payable 34,915 40,592
Contributions carryforward - 1,669
Unrealized losses on securities
available-for-sale 4,255 9,374
State tax loss carryforward 56,436 49,369
State income tax credits 11,104 8,317
-------- ---------
Total gross deferred tax assets 321,530 175,697
Less: valuation allowance (41,670) (20,865)
-------- --------
Net deferred tax assets 279,860 154,832
------- -------
Deferred income tax liabilities:
Conversion from cash basis to accrual basis (128,444) (107,983)
Premises and equipment (63,680) (52,931)
-------- --------
Total gross deferred tax liabilities (192,124) (160,914)
------- -------
Net deferred tax asset (liability) $ 87,736 (6,082)
======== ========
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Based upon the level of
historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible,
management believes it is more likely than not that the benefits of
these deductible differences will be realized, net of the existing
valuation allowance at December 31, 1997.
For tax purposes, the Bank has a state tax loss carryforward of
approximately $1,425,000 and state tax credits of approximately $16,800
at December 31, 1997. The carryforwards expire beginning in 1999.
(8) Related Party Transactions
The Bank conducts transactions with directors and executive officers,
including companies in which they have beneficial interest, in the
normal course of business. It is the policy of the Bank that loan
transactions with directors and executive officers be made on
substantially the same terms as those prevailing at the time made for
comparable loans to other persons. The following is a summary of
activity for related party loans for 1997:
Beginning balance $ 122,809
New loans 284,526
Repayments (216,942)
-------
Ending balance $ 190,393
=======
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(9) Commitments
The 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, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
In most cases, the Bank requires collateral or other security to
support financial instruments with credit risk. Commitments to extend
credit at December 31, 1997 and 1996 were approximately $1,617,000 and
$618,000, respectively.
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 may expire without being drawn upon, 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 of collateral obtained, if deemed necessary by the Bank, upon
extension of credit is based on management's credit evaluation.
Collateral held varies but may include unimproved and improved real
estate, certificates of deposit, or personal property.
(10) Employee and Director Benefit Programs
The Bank has a 401(k) plan which covers substantially all employees
subject to certain minimum age and service requirements. Contributions
to this plan by employees is voluntary; however, the Bank will match up
to 5% of the employee's gross salary. Contributions to this plan
charged to expense for the years ended December 31, 1997, 1996 and 1995
amounted to $19,945, $15,638 and $8,422, respectively.
The Bank has a deferred compensation agreement with certain of its
current Directors. In return for the Directors foregoing certain
current fees, the agreement calls for the Bank to pay the participating
Directors or their beneficiaries a specified monthly income for 10
years beginning at the earlier of age 65 (or later, depending on their
age at the inception of the plan) or death. Compensation expense
relating to this agreement was $4,592, $12,052 and $24,603 for 1997,
1996 and 1995, respectively.
(11) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgements by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital (as defined) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as
defined) and of Tangible capital to tangible assets. Management
believes, as of December 31, 1997 and 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(11) Regulatory Matters, continued
As of December 31, 1997, the most recent notification from the OTS
categorized the Bank as adequately capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following
table. Since that notification, management has made certain adjustments
to the allowance for loan losses which resulted in the Bank being at
less than the 8% stated requirement to be considered adequately
capitalized. This change in the institution's category at December 31,
1997 is mitigated by its achievement of adequately capitalized
classification as of March 31, 1998.
The Bank's actual capital amounts and ratios are presented below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $ 1,845,000 7.5% 1,966,000 >8.0% 2,457,000 >10.0%
- -
Tier 1 Capital
(to Risk Weighted Assets) $ 1,537,000 6.3% 983,000 >4.0% 1,474,000 > 6.0%
- -
Tier 1 Capital
(to Adjusted Assets) $ 1,537,000 5.0% 1,243,000 >4.0% 1,554,000 > 5.0%
- -
Tangible Capital
(to Tangible Assets) $ 1,537,000 5.0% 466,000 >1.5% N/A N/A
-
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $ 1,890,000 10.6% 1,425,000 >8.0% 1,781,000 >10.0%
- -
Tier 1 Capital
(to Risk Weighted Assets) $ 1,668,000 9.4% 712,000 >4.0% 1,069,000 > 6.0%
- -
Tier 1 Capital
(to Adjusted Assets) $ 1,668,000 6.7% 995,000 >4.0% 1,243,000 > 5.0%
- -
Tangible Capital
(to Tangible Assets) $ 1,668,000 6.7% 373,000 >1.5% N/A N/A
-
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) $ 1,443,152 12.6% 916,055 >8.0% 1,145,000 >10.0%
- -
Tier 1 Capital
(to Risk Weighted Assets) $ 1,315,429 11.5% 458,028 >4.0% 687,000 > 6.0%
- -
Tier 1 Capital
(to Adjusted Assets) $ 1,315,429 7.3% 720,997 >4.0% 901,000 > 5.0%
- -
Tangible Capital
(to Tangible Assets) $ 1,315,429 7.3% 270,374 >1.5% N/A N/A
-
</TABLE>
Thrift regulations limit the amount of dividends the Bank can pay to the
shareholders without prior regulatory approval. These limitations are a
function of excess regulatory capital and net earnings in the year the
dividend is declared. In 1998, the Bank can pay dividends totalling
approximately $38,500 plus net earnings during 1998.
<PAGE>
THE BROWN BANK AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(12) Business Combination
During May 1998, the Board of Directors of the Bank approved a merger
agreement between the Bank and FLAG Financial Corporation (FLAG)
whereby all of the Bank's outstanding common stock would be acquired by
FLAG in a business combination accounted for as a pooling of interests.
FLAG, a multi-bank holding company headquartered in LaGrange, Georgia,
is the parent company of First Federal Savings Bank of LaGrange,
Citizens Bank (headquartered in Vienna) and Bank of Milan. Pursuant to
the merger agreement, each share of Bank common stock will be converted
into 1.5 shares of FLAG common stock (262,500 shares in total). The
merger agreement is subject to the approval of regulatory authorities
and The Brown Bank shareholders.
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN FLAG FINANCIAL CORPORATION,
CITIZENS BANK
AND THE BROWN BANK
DATED AS OF JULY 24, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1. TRANSACTIONS AND TERMS OF MERGER.......................2
1.1 Merger........................................................2
1.2 Time and Place of Closing.....................................2
1.3 Effective Time................................................2
ARTICLE 2. TERMS OF MERGER........................................2
2.1 Charter.......................................................2
2.2 Bylaws........................................................2
2.3 Directors and Officers........................................3
ARTICLE 3. MANNER OF CONVERTING SHARES............................3
3.1 Conversion of Shares..........................................3
3.2 Anti-Dilution Provisions......................................3
3.3 Shares Held by BROWN BANK or FLAG.............................4
3.4 Dissenting Shareholders.......................................4
3.5 Fractional Shares.............................................4
ARTICLE 4. EXCHANGE OF SHARES.....................................4
4.1 Exchange Procedures...........................................4
4.2 Rights of Former Shareholders of BROWN BANK...................5
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BROWN BANK...........6
5.1 Organization, Standing, and Power.............................6
5.2 Authority of BROWN BANK; No Breach By Agreement...............6
5.3 Capital Stock.................................................7
5.4 BROWN BANK Subsidiaries.......................................8
5.5 Financial Statements..........................................8
5.6 Absence of Undisclosed Liabilities............................9
5.7 Absence of Certain Changes or Events..........................9
5.8 Tax Matters...................................................9
5.9 Allowance for Possible Loan Losses...........................11
5.10 Assets.......................................................11
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5.11 Intellectual Property........................................12
5.12 Environmental Matters........................................12
5.13 Compliance with Laws.........................................13
5.14 Labor Relations..............................................14
5.15 Employee Benefit Plans.......................................14
5.16 Material Contracts...........................................16
5.17 Legal Proceedings............................................17
5.18 Reports......................................................17
5.19 Statements True and Correct..................................17
5.20 Accounting, Tax and Regulatory Matters.......................18
5.21 Charter Provisions...........................................18
5.22 Board Recommendation.........................................18
5.23 Y-2K.........................................................18
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF FLAG AND CITIZENS...18
6.1 Organization, Standing, and Power............................18
6.2 Authority of FLAG and CITIZENS; No Breach By Agreement.......19
6.3 Capital Stock................................................20
6.4 FLAG Subsidiaries............................................20
6.5 SEC Filings, Financial Statements............................21
6.6 Absence of Undisclosed Liabilities...........................21
6.7 Absence of Certain Changes or Events.........................22
6.8 Tax Matters..................................................22
6.9 Allowance for Possible Loan Losses...........................23
6.10 Assets.......................................................24
6.11 Intellectual Property........................................24
6.12 Environmental Matters........................................25
6.13 Compliance with Laws.........................................25
6.14 Labor Relations..............................................26
6.15 Employee Benefit Plans.......................................26
6.16 Material Contracts...........................................28
6.17 Legal Proceedings............................................29
6.18 Reports......................................................29
6.19 Statements True and Correct..................................29
6.20 Accounting Tax and Regulatory Matters........................30
6.21 Charter Provisions...........................................30
6.22 Board Recommendation.........................................30
6.23 Y2K..........................................................30
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ARTICLE 7. CONDUCT OF BUSINESS PENDING CONSUMMATION..............31
7.1 Affirmative Covenans of BROWN BANK...........................31
7.2 Negative Covenants of BROWN BANK.............................31
7.3 Affirmative Covenants of FLAG................................33
7.4 Negative Covenants of FLAG...................................33
7.5 Adverse Changes in Condition.................................33
7.6 Reports......................................................34
ARTICLE 8. ADDITIONAL AGREEMENTS.................................34
8.1 Registration Statement.......................................34
8.2 Nasdaq Listing...............................................34
8.3 Shareholder Approval.........................................34
8.4 Applications.................................................35
8.5 Filings with State Offices...................................35
8.6 Agreement as to Efforts to Consummate........................35
8.7 Investigation and Confidentiality............................35
8.8 Press Releases...............................................36
8.9 Certain Actions..............................................36
8.10 Accounting and Tax Treatment.................................37
8.11 Charter Provisions...........................................37
8.12 Agreements of Affiliates.....................................37
8.13 Employee Benefits and Contracts..............................38
8.14 Indemnification..............................................38
ARTICLE 9. CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE.....39
9.1 Conditions to Obligations of Each Party......................39
9.2 Conditions to Obligations of FLAG............................41
9.3 Conditions to Obligations of BROWN BANK......................42
ARTICLE 10. TERMINATION...........................................43
10.1 Termination..................................................43
10.2 Effect of Termination........................................44
10.3 Non-Survival of Representations and Covenants................44
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ARTICLE 11. MISCELLANEOUS.........................................44
11.1 Definitions..................................................44
11.2 Expenses.....................................................52
11.3 Brokers and Finders..........................................53
11.4 Entire Agreement.............................................53
11.5 Amendments...................................................53
11.6 Waivers......................................................53
11.7 Assignment...................................................54
11.8 Notices......................................................54
11.9 Governing Law................................................55
11.10 Counter Parts................................................55
11.11 Captions, Articles and Sections..............................55
11.12 Interpretations..............................................55
11.13 Enforcement of Agreement.....................................55
11.14 Severability.................................................56
iv
<PAGE>
LIST OF EXHIBITS
Exhibit
Number Description
- ------ -----------
1. Form of Agreement of Affiliates of THE BROWN BANK. (SS 8.12, SS 9.2(f)).
2. Matters as to which Morris, Manning & Martin, L.L.P. will opine.
(SS 9.2(d)).
3. Form of Claims Letter (SS 9.2(g)).
4. Matters as to which Powell, Goldstein, Frazer & Murphy LLP will opine.
(SS 9.3(d)).
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<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of July 24, 1998, by and among FLAG FINANCIAL CORPORATION ("FLAG"), a
Georgia corporation located in LaGrange, Georgia, and CITIZENS BANK
("CITIZENS"), a commercial bank organized under the laws of the State of Georgia
and located in Vienna, Georgia, and a wholly-owned subsidiary of FLAG, and THE
BROWN BANK ("BROWN BANK"), a federally-chartered savings bank whose home office
is located in Cobbtown, Georgia.
Preamble
--------
This Agreement provides for the acquisition of BROWN BANK by FLAG, pursuant
to the merger of BROWN BANK with and into CITIZENS, a wholly-owned subsidiary of
FLAG. The respective Boards of Directors of BROWN BANK, CITIZENS and FLAG are of
the opinion that the transactions described herein are in the best interests of
the parties to this Agreement and their respective shareholders. At the
effective time of such merger, the outstanding shares of the capital stock of
BROWN BANK shall be converted into the right to receive shares of the common
stock of FLAG (except as provided herein). As a result, shareholders of BROWN
BANK shall become shareholders of FLAG, and CITIZENS shall conduct the business
and operations of BROWN BANK. The transactions described in this Agreement are
subject to (a) approval of the shareholders of BROWN BANK, (b) approval of FLAG,
as the sole shareholder of CITIZENS, (c) approval of the Federal Deposit
Insurance Corporation and the Georgia Department of Banking and Finance,
(d) notice to the Office of Thrift Supervision of the merger of BROWN BANK, and
(e) satisfaction of certain other conditions described in this Agreement. It is
the intention of the parties to this Agreement that the merger, for federal
income tax purposes, shall qualify as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code, and, for accounting purposes, shall
qualify for treatment as a pooling of interests.
Certain terms used in this Agreement are defined in Section 11.1 hereof.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, the parties agree
as follows:
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ARTICLE 1.
TRANSACTIONS AND TERMS OF MERGER
--------------------------------
1.1 Merger. Subject to the terms and conditions of this Agreement, and in
accordance with the applicable provisions of the Bank Merger Act (12 U.S.C.
Section 1828(c)) and Title 7 of the Official Code of Georgia Annotated (the
"OCGA"), BROWN BANK will merge with and into CITIZENS (the "Merger"), and the
outstanding shares of BROWN BANK Common Stock will be converted into the right
to receive shares of FLAG Common Stock. CITIZENS shall be the Surviving Bank
resulting from the Merger and shall continue to be governed by the Laws of the
State of Georgia. The Merger shall be consummated pursuant to the terms of this
Agreement, which has been approved and adopted by the respective Boards of
Directors of BROWN BANK, CITIZENS, and FLAG, as set forth herein.
1.2 Time and Place of Closing. The closing of the transactions contemplated
hereby (the "Closing") will take place at 9:00 A.M. on the date that the
Effective Time occurs (or the immediately preceding day if the Effective Time is
earlier than 9:00 A.M.), or at such other time as the Parties, acting through
their authorized officers, may mutually agree. The Closing shall be held at such
location as may be mutually agreed upon by the Parties.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time the Certificate of
Merger reflecting the Merger shall become effective with the Secretary of State
of the State of Georgia (the "Effective Time"). Subject to the terms and
conditions hereof, unless otherwise mutually agreed upon in writing by the
authorized officers of each Party, the Parties shall use their reasonable
efforts to cause the Effective Time to occur on the fifth business day following
the last to occur of (i) the effective date (including expiration of any
applicable waiting period) of the last required Consent of any Regulatory
Authority having authority over and approving or exempting the Merger, and (ii)
the earliest date on which the shareholders of BROWN BANK have approved this
Agreement to the extent such approval is required by applicable Law; provided,
however, that the date of the Effective Time shall not extend past the
termination date set forth in SS 10.1(e) hereof.
ARTICLE 2.
TERMS OF MERGER
---------------
2.1 Charter. The Articles of Incorporation of CITIZENS in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Bank until duly amended or repealed.
2.2 Bylaws. The Bylaws of CITIZENS in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Bank until duly amended or
repealed.
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<PAGE>
2.3 Directors and Officers.
(a) The directors of the Surviving Bank shall be (i) the directors of the
Surviving Bank immediately prior to the Effective Time and (ii) Dennis D. Allen,
together with such additional persons as may thereafter be elected. Such persons
shall serve as the directors of the Surviving Bank from and after the Effective
Time in accordance with the Bylaws of the Surviving Bank.
(b) The executive officers of the Surviving Bank shall be (i) the executive
officers and of the Surviving Bank immediately prior to the Effective Time and
(ii) Dennis D. Allen, together with such additional persons as may thereafter be
elected. Such persons shall serve as the executive officers of the Surviving
Bank from and after the Effective Time in accordance with the Bylaws of the
Surviving Bank.
(c) At the Effective Time, the directors of BROWN BANK immediately prior to
the Effective Time shall become advisory directors to CITIZENS with respect to
the Candler and Tattnall County operations of CITIZENS, which operations will
conduct business under the trade name "BROWN BANK".
ARTICLE 3.
MANNER OF CONVERTING SHARES
---------------------------
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of BROWN BANK, or the shareholders of the foregoing, the shares of BROWN BANK
shall be converted as follows:
(a) Each share of capital stock of CITIZENS issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding from
and after the Effective Time.
(b) Each share of BROWN BANK Common Stock (excluding shares held by any
BROWN BANK Entity or any FLAG Entity, in each case other than in a fiduciary
capacity or as a result of debts previously contracted, and excluding shares
held by shareholders who perfect their statutory dissenters' rights as provided
in Section 3.4) issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted into and exchanged for the
right to receive 1.5 shares of FLAG Common Stock (the "Exchange Ratio").
3.2 Anti-Dilution Provisions. In the event FLAG changes the number of
shares of FLAG Common Stock issued and outstanding prior to the Effective Time
as a result of a stock split, stock dividend, or similar recapitalization with
respect to such stock and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization for which a record date is not established) and prior to the
Effective Time, the Exchange Ratio shall be proportionately adjusted.
3
<PAGE>
3.3 Shares Held By BROWN BANK or FLAG. Each of the shares of BROWN BANK
Common Stock held by any BROWN BANK Entity or by any FLAG Entity, in each case
other than in a fiduciary capacity or as a result of debts previously
contracted, shall be canceled and retired at the Effective Time and no
consideration shall be issued in exchange therefor.
3.4 Dissenting Shareholders. Any holder of shares of BROWN BANK Common
Stock who perfects his dissenters' rights in accordance with and as contemplated
by Part 552 of the OTS Regulations, 12 C.F.R. Section 552.14, shall be entitled
to receive the value of such shares in cash as determined pursuant to such
Regulatory provision; provided, that no such payment shall be made to any
dissenting shareholder unless and until such dissenting shareholder has complied
with the applicable provisions of Part 552 of the OTS Regulations and
surrendered to FLAG the certificates or certificates representing the shares for
which payment is being made. In the event that after the Effective Time, a
dissenting shareholder of BROWN BANK fails to perfect, or effectively withdraws
or loses, his right to appraisal of and payment for his shares, FLAG shall issue
and deliver the consideration to which such holder of shares of BROWN BANK
Common Stock is entitled under this Article 3 (without interest) upon surrender
by such holder of the certificate or certificates representing shares of BROWN
BANK Common Stock held by him. If and to the extent required by applicable Law,
BROWN BANK will establish (or cause to be established) an escrow account with an
amount sufficient to satisfy the maximum aggregate payment that may be required
to be paid to dissenting shareholders. Upon satisfaction of all claims of
dissenting shareholders, the remaining escrowed amount, reduced by payment of
the fees and expenses of the escrow agent, will be returned to FLAG.
3.5 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of BROWN BANK Common Stock exchanged pursuant
to the Merger who would otherwise have been entitled to receive a fraction of a
share of FLAG Common Stock (after taking into account all certificates delivered
by such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of FLAG Common Stock multiplied
by the market value of one share of FLAG Common Stock at the Effective Time. The
market value of one share of FLAG Common Stock at the Effective Time shall be
the last sale price of such common stock on the Nasdaq National Market (as
reported by The Wall Street Journal or, if not reported thereby, any other
authoritative source selected by FLAG) on the last trading day preceding the
Effective Time. No such holder will be entitled to dividends, voting rights, or
any other rights as a shareholder in respect of any fractional shares.
ARTICLE 4.
EXCHANGE OF SHARES
------------------
4.1 Exchange Procedures. Promptly after the Effective Time, FLAG shall
cause the exchange agent selected by FLAG (the "Exchange Agent") to mail to each
holder of record of a certificate or certificates which represented shares of
BROWN BANK Common Stock immediately prior to the Effective Time (the
"Certificates") appropriate transmittal materials and instructions (which shall
specify that delivery shall be effected, and risk of loss and title to such
Certificates shall pass, only upon proper delivery of such Certificates to the
Exchange Agent). The Certificate or Certificates of BROWN BANK Common Stock so
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<PAGE>
delivered shall be duly endorsed as the Exchange Agent may require. In the event
of a transfer of ownership of shares of BROWN BANK Common Stock represented by
Certificates that are not registered in the transfer records of BROWN BANK, the
consideration provided in Section 3.1 may be issued to a transferee if the
Certificates representing such shares are delivered to the Exchange Agent,
accompanied by all documents required to evidence such transfer and by evidence
satisfactory to the Exchange Agent that any applicable stock transfer taxes have
been paid. If any Certificate shall have been lost, stolen, mislaid or
destroyed, upon receipt of (i) an affidavit of that fact from the holder
claiming such Certificate to be lost, mislaid, stolen or destroyed, (ii) such
bond, security or indemnity as FLAG and the Exchange Agent may reasonably
require, and (iii) any other documents necessary to evidence and effect the bona
fide exchange thereof, the Exchange Agent shall issue to such holder the
consideration into which the shares represented by such lost, stolen, mislaid or
destroyed Certificate shall have been converted. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate. After the Effective Time, each
holder of shares of BROWN BANK Common Stock (other than shares to be canceled
pursuant to Section 3.3 or as to which statutory dissenters' rights have been
perfected as provided in Section 3.4) issued and outstanding at the Effective
Time shall surrender the Certificate or Certificates representing such shares to
the Exchange Agent and shall promptly upon surrender thereof receive in exchange
therefor the consideration provided in Section 3.1, together with all
undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2. FLAG shall not be obligated to
deliver the consideration to which any former holder of BROWN BANK Common Stock
is entitled as a result of the Merger until such holder surrenders such holder's
Certificate or Certificates for exchange as provided in this Section 4.1. Any
other provision of this Agreement notwithstanding, neither FLAG nor the Exchange
Agent shall be liable to a holder of BROWN BANK Common Stock for any amounts
paid or property delivered in good faith to a public official pursuant to any
applicable abandoned property, escheat or similar Law. Approval of this
Agreement by the shareholders of BROWN BANK shall constitute ratification of any
reasonable Exchange Agent appointed by FLAG.
4.2 Rights of Former Shareholders of BROWN BANK. At the Effective Time, the
stock transfer books of BROWN BANK shall be closed as to holders of BROWN BANK
Common Stock immediately prior to the Effective Time and no transfer of BROWN
BANK Common Stock by any such holder shall thereafter be made or recognized.
Until surrendered for exchange in accordance with the provisions of Section 4.1,
each Certificate theretofore representing shares of BROWN BANK Common Stock
(other than shares to be canceled pursuant to Sections 3.3 and 3.4) shall from
and after the Effective Time represent for all purposes only the right to
receive the consideration provided in Section 3.1 in exchange therefor, subject,
however, to FLAG's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which have been
declared or made by BROWN BANK in respect of such shares of BROWN BANK Common
Stock in accordance with the terms of this Agreement and which remain unpaid at
the Effective Time. To the extent permitted by Law, former shareholders of
record of BROWN BANK shall be entitled to vote after the Effective Time at any
meeting of FLAG shareholders the number of whole shares of FLAG Common Stock
into which their respective shares of BROWN BANK Common Stock are converted,
regardless of whether such holders have exchanged their Certificates for
certificates representing FLAG Common Stock in accordance with the provisions of
5
<PAGE>
this Agreement. Whenever a dividend or other distribution is declared by FLAG on
the FLAG Common Stock, the record date for which is at or after the Effective
Time, the declaration shall include dividends or other distributions on all
shares of FLAG Common Stock issuable pursuant to this Agreement, but no dividend
or other distribution payable to the holders of record of FLAG Common Stock as
of any time subsequent to the Effective Time shall be delivered to the holder of
any Certificate until such holder surrenders such Certificate for exchange as
provided in Section 4.1. However, upon surrender of such Certificate, both the
FLAG Common Stock certificate (together with all such undelivered dividends or
other distributions without interest) and any undelivered dividends and cash
payments payable hereunder (without interest) shall be delivered and paid with
respect to each share represented by such Certificate. No interest shall be
payable with respect to any cash to be paid under Section 3.1 of this Agreement
except to the extent required in connection with the exercise of dissenters'
rights.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF BROWN BANK
--------------------------------------------
BROWN BANK hereby represents and warrants to FLAG as follows:
5.1 Organization, Standing, and Power. BROWN BANK is a federal savings bank
duly organized, validly existing, and in good standing under the Laws of the
United States, and has the corporate power and authority to carry on its
business as now conducted and to own, lease and operate its material Assets.
BROWN BANK is duly qualified or licensed to transact business as a foreign
corporation in good standing in the United States and foreign jurisdictions
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed is not reasonably likely to
have, individually or in the aggregate, a BROWN BANK Material Adverse Effect.
The minute book and other organizational documents for BROWN BANK have been made
available to FLAG for its review and, except as disclosed in Section 5.1 of
BROWN BANK Disclosure Memorandum, are true and complete in all material respects
as in effect as of the date of this Agreement and accurately reflect in all
material respects all amendments thereto and all proceedings of the Board of
Directors and shareholders thereof.
5.2 Authority of BROWN BANK; No Breach By Agreement.
(a) BROWN BANK has the corporate power and authority necessary to execute,
deliver, and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of BROWN BANK, subject to the
approval of this Agreement by the holders of two-thirds of the outstanding
voting stock of BROWN BANK, which is the only shareholder vote required for
approval of this Agreement, and consummation of the Merger by BROWN BANK.
Subject to such requisite shareholder approval, this Agreement represents a
legal, valid, and binding obligation of BROWN BANK, enforceable against BROWN
BANK in accordance with its terms (except in all cases as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
6
<PAGE>
receivership, conservatorship, moratorium, or similar Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by BROWN BANK, nor
the consummation by BROWN BANK of the transactions contemplated hereby, nor
compliance by BROWN BANK with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of BROWN BANK's Charter or Bylaws or
the certificate or articles of incorporation or bylaws of any BROWN BANK
Subsidiary or any resolution adopted by the board of directors or the
shareholders of any BROWN BANK Entity, or (ii) except as disclosed in Section
5.2 of BROWN BANK Disclosure Memorandum, constitute or result in a Default
under, or require any Consent pursuant to, or result in the creation of any Lien
on any Asset of any BROWN BANK Entity under, any Contract or Permit of any BROWN
BANK Entity, where such Default or Lien, or any failure to obtain such Consent,
is reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect, or (iii) subject to receipt of the requisite Consents
referred to in Section 9.1(b), constitute or result in a Default under or
require any Consent pursuant to, any Law or Order applicable to any BROWN BANK
Entity or any of their respective material Assets (including any FLAG Entity or
any BROWN BANK Entity becoming subject to or liable for the payment of any Tax
or any of the Assets owned by any FLAG Entity or any BROWN BANK Entity being
reassessed or revalued by any Taxing authority).
(c) Other than in connection or compliance with the provisions of
applicable federal banking laws, and other than Consents required from
Regulatory Authorities, and other than notices to or filings with the Internal
Revenue Service or the Pension Benefit Guaranty Corporation with respect to any
employee benefit plans, or under the HSR Act, and other than Consents, filings,
or notifications which, if not obtained or made, are not reasonably likely to
have, individually or in the aggregate, a BROWN BANK Material Adverse Effect, no
notice to, filing with, or Consent of, any public body or authority is necessary
for the consummation by BROWN BANK of the Merger and the other transactions
contemplated in this Agreement.
5.3 Capital Stock.
(a) As of the date of this Agreement, the authorized capital stock of BROWN
BANK consists of 25,000,000 shares of BROWN BANK Common Stock, of which 175,000
shares are issued and outstanding. All of the issued and outstanding shares of
capital stock of BROWN BANK are duly and validly issued and outstanding and are
fully paid and nonassessable under the HOLA. None of the outstanding shares of
capital stock of BROWN BANK has been issued in violation of any preemptive
rights of the current or past shareholders of BROWN BANK.
(b) Except as set forth in Section 5.3(a), there are no shares of capital
stock or other equity securities of BROWN BANK outstanding and no outstanding
Equity Rights relating to the capital stock of BROWN BANK.
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5.4 BROWN BANK Subsidiaries. BROWN BANK has disclosed in Section 5.4 of
BROWN BANK Disclosure Memorandum all of BROWN BANK Subsidiaries that are
corporations (identifying its jurisdiction of incorporation, each jurisdiction
in which the character of its Assets or the nature or conduct of its business
requires it to be qualified and/or licensed to transact business, and the number
of shares owned and percentage ownership interest represented by such share
ownership) and all of BROWN BANK Subsidiaries that are general or limited
partnerships, limited liability companies, or other non-corporate entities
(identifying the Law under which such entity is organized, each jurisdiction in
which the character of its Assets or the nature or conduct of its business
requires it to be qualified and/or licensed to transact business, and the amount
and nature of the ownership interest therein). Except as disclosed in Section
5.4 of BROWN BANK Disclosure Memorandum, BROWN BANK or one of its wholly-owned
Subsidiaries owns all of the issued and outstanding shares of capital stock (or
other equity interests) of each BROWN BANK Subsidiary. No capital stock (or
other equity interest) of any BROWN BANK Subsidiary is or may become required to
be issued (other than to another BROWN BANK Entity) by reason of any Equity
Rights, and there are no Contracts by which any BROWN BANK Subsidiary is bound
to issue (other than to another BROWN BANK Entity) additional shares of its
capital stock (or other equity interests) or Equity Rights or by which any BROWN
BANK Entity is or may be bound to transfer any shares of the capital stock (or
other equity interests) of any BROWN BANK Subsidiary (other than to another
BROWN BANK Entity). There are no Contracts relating to the rights of any BROWN
BANK Entity to vote or to dispose of any shares of the capital stock (or other
equity interests) of any BROWN BANK Subsidiary. All of the shares of capital
stock (or other equity interests) of each BROWN BANK Subsidiary held by a BROWN
BANK Entity are fully paid and (except pursuant to 12 U.S.C. Section 55 in the
case of national banks and comparable, applicable state Law, if any, in the case
of state depository institutions) nonassessable and are owned by BROWN BANK
Entity free and clear of any Lien. Except as disclosed in Section 5.4 of BROWN
BANK Disclosure Memorandum, each BROWN BANK Subsidiary is a corporation, and
each such Subsidiary is duly organized, validly existing, and in good standing
under the Laws of the jurisdiction in which it is incorporated or organized, and
has the corporate power and authority necessary for it to own, lease, and
operate its Assets and to carry on its business as now conducted. Each BROWN
BANK Subsidiary is duly qualified or licensed to transact business as a foreign
corporation in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect. The minute book and other organizational documents for
each BROWN BANK Subsidiary have been made available to FLAG for its review, and,
except as disclosed in Section 5.4 of BROWN BANK Disclosure Memorandum, are true
and complete in all material respects as in effect as of the date of this
Agreement and accurately reflect in all material respects all amendments thereto
and all proceedings of the Board of Directors and shareholders thereof.
5.5 Financial Statements. Each of BROWN BANK Financial Statements
(including, in each case, any related notes) was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements), and fairly
presented in all material respects the consolidated financial position of BROWN
BANK and its Subsidiaries as at the respective dates and the consolidated
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results of operations and cash flows for the periods indicated, except that the
unaudited interim financial statements as of March 31, 1998 were or are subject
to normal and recurring year-end adjustments which were not or are not expected
to be material in amount or effect.
5.6 Absence of Undisclosed Liabilities. No BROWN BANK Entity has any
Liabilities that are reasonably likely to have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect, except Liabilities which are
accrued or reserved against in the consolidated balance sheets of BROWN BANK as
of December 31, 1997 or March 31, 1998, included in BROWN BANK Financial
Statements or reflected in the notes thereto. No BROWN BANK Entity has incurred
or paid any Liability since March 31, 1998, except for such Liabilities incurred
or paid (i) in the ordinary course of business consistent with past business
practice and which are not reasonably likely to have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement.
5.7 Absence of Certain Changes or Events. Since December 31, 1997, except
as disclosed in BROWN BANK Financial Statements delivered prior to the date of
this Agreement or as disclosed in Section 5.7 of BROWN BANK Disclosure
Memorandum, (i) there have been no events, changes, or occurrences which have
had, or are reasonably likely to have, individually or in the aggregate, a BROWN
BANK Material Adverse Effect, and (ii) BROWN BANK Entities have not taken any
action, or failed to take any action, prior to the date of this Agreement, which
action or failure, if taken after the date of this Agreement, would represent or
result in a material breach or violation of any of the covenants and agreements
of BROWN BANK provided in Article 7.
5.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any BROWN BANK
Entities have been timely filed or requests for extensions have been timely
filed, granted, and, to the Knowledge of BROWN BANK, have not expired for such
periods, except to the extent that all such failures to file, taken together,
are not reasonably likely to have a BROWN BANK Material Adverse Effect, and all
Tax Returns filed are complete and accurate in all material respects. All Taxes
shown on filed Tax Returns have been paid. There is no audit examination,
deficiency, or refund Litigation with respect to any Taxes that is reasonably
likely to result in a determination that would have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect, except as reserved against in
BROWN BANK Financial Statements delivered prior to the date of this Agreement or
as disclosed in Section 5.8 of BROWN BANK Disclosure Memorandum. All Taxes and
other Liabilities due with respect to completed and settled examinations or
concluded Litigation have been paid. There are no Liens with respect to Taxes
upon any of the Assets of BROWN BANK Entities, except for any such Liens which
are not reasonably likely to have a BROWN BANK Material Adverse Effect or with
respect to which the Taxes are not yet due and payable.
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(b) None of BROWN BANK Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due (excluding
such statutes that relate to years currently under examination by the Internal
Revenue Service or other applicable taxing authorities) that is currently in
effect.
(c) The provision for any Taxes due or to become due for any of BROWN BANK
Entities for the period or periods through and including the date of the
respective BROWN BANK Financial Statements that has been made and is reflected
on such BROWN BANK Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of BROWN BANK Entities have been provided for in
accordance with GAAP.
(e) Except as disclosed in Section 5.8 of BROWN BANK Disclosure Memorandum,
none of BROWN BANK Entities is a party to any Tax allocation or sharing
agreement and none of BROWN BANK Entities has been a member of an affiliated
group filing a consolidated federal income Tax Return (other than a group the
common parent of which was BROWN BANK) or has any Liability for Taxes of any
Person (other than BROWN BANK and its Subsidiaries) under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign Law) as a
transferee or successor or by Contract or otherwise.
(f) Each of BROWN BANK Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances of
noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, a BROWN BANK Material Adverse Effect.
(g) Except as disclosed in Section 5.8 of BROWN BANK Disclosure Memorandum,
none of BROWN BANK Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Sections 28OG or 162(m)
of the Internal Revenue Code.
(h) Exclusive of the Merger, there has not been an ownership change, as
defined in Internal Revenue Code Section 382(g), of BROWN BANK Entities that
occurred during or after any Taxable Period in which BROWN BANK Entities
incurred a net operating loss that carries over to any Taxable Period ending
after December 31, 1997.
(i) No BROWN BANK Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.
(j) All material elections with respect to Taxes affecting BROWN BANK
Entities have been or will be timely made.
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5.9 Allowance for Possible Loan Losses. The allowance for possible loan or
credit losses (the "Allowance") shown on the consolidated balance sheets of
BROWN BANK included in the most recent BROWN BANK Financial Statements dated
prior to the date of this Agreement was, and the Allowance shown on the
consolidated balance sheets of BROWN BANK included in BROWN BANK Financial
Statements as of dates subsequent to the execution of this Agreement will be, as
of the dates thereof, adequate (within the meaning of GAAP and applicable
regulatory requirements or guidelines) to provide for all known or reasonably
anticipated losses relating to or inherent in the loan and lease portfolios
(including accrued interest receivables) of BROWN BANK Entities and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by BROWN BANK Entities as of the dates thereof, except where
the failure of such Allowance to be so adequate is not reasonably likely to have
a BROWN BANK Material Adverse Effect.
5.10 Assets.
(a) Except as disclosed in Section 5.10 of BROWN BANK Disclosure Memorandum
or as disclosed or reserved against in BROWN BANK Financial Statements delivered
prior to the date of this Agreement, BROWN BANK Entities have good and
marketable title, free and clear of all Liens, to all of their respective
Assets, except for any such Liens or other defects of title which are not
reasonably likely to have a BROWN BANK Material Adverse Effect. All tangible
properties used in the businesses of BROWN BANK Entities are usable in the
ordinary course of business consistent with BROWN BANK's past practices.
(b) All Assets which are material to BROWN BANK's business on a
consolidated basis, held under leases or subleases by any of BROWN BANK
Entities, are held under valid Contracts enforceable against BROWN BANK in
accordance with their respective terms (except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium, or other Laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceedings
may be brought), and, assuming the enforceability of such Contract against the
third party thereto, each such Contract is in full force and effect.
(c) BROWN BANK Entities currently maintain the insurance policies described
in Section 5.10(c) of BROWN BANK Disclosure Memorandum. None of BROWN BANK
Entities has received written notice from any insurance carrier that (i) any
policy of insurance will be canceled or that coverage thereunder will be reduced
or eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no claims for amounts
exceeding in any individual case $25,000 pending under such policies of
insurance and no written notices of claims in excess of such amounts have been
given by any BROWN BANK Entity under such policies.
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(d) The Assets of BROWN BANK Entities include all material Assets required
to operate the business of BROWN BANK Entities as presently conducted.
5.11 Intellectual Property. Each BROWN BANK Entity owns or has a license to
use all of the Intellectual Property used by such BROWN BANK Entity in the
ordinary course of its business. Each BROWN BANK Entity is the owner of or has a
license to any Intellectual Property sold or licensed to a third party by such
BROWN BANK Entity in connection with such BROWN BANK Entity's business
operations, and such BROWN BANK Entity has the right to convey by sale or
license any Intellectual Property so conveyed. No BROWN BANK Entity is in
material Default under any of its Intellectual Property licenses. No proceedings
have been instituted, or are pending or, to the Knowledge of BROWN BANK,
threatened, which challenge the rights of any BROWN BANK Entity with respect to
Intellectual Property used, sold or licensed by such BROWN BANK Entity in the
course of its business, nor has any person claimed or alleged any rights to such
Intellectual Property. To the Knowledge of BROWN BANK, the conduct of the
business of BROWN BANK Entities does not infringe any Intellectual Property of
any other person. Except as disclosed in Section 5.11 of BROWN BANK Disclosure
Memorandum, no BROWN BANK Entity is obligated to pay any recurring royalties to
any Person with respect to any such Intellectual Property
5.12 Environmental Matters.
(a) Except as disclosed in Section 5.12 of BROWN BANK Disclosure
Memorandum, to the Knowledge of BROWN BANK, each BROWN BANK Entity, its
Participation Facilities, and its Operating Properties are, and have been, in
compliance with all Environmental Laws, except for violations which are not
reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of BROWN BANK,
threatened, before any court, governmental agency, or authority or other forum
in which any BROWN BANK Entity or any of its Operating Properties or
Participation Facilities (or BROWN BANK in respect of such Operating Property or
Participation Facility) has been or, with respect to threatened Litigation, may
be named as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the emission,
migration, release, discharge, spillage, or disposal into the environment of any
Hazardous Material, whether or not occurring at, on, under, adjacent to, or
affecting (or potentially affecting) a site owned, leased, or operated by any
BROWN BANK Entity or any of its Operating Properties or Participation Facilities
or any neighboring property, except for such Litigation pending or threatened
that is not reasonably likely to have, individually or in the aggregate, a BROWN
BANK Material Adverse Effect, nor, to the Knowledge of BROWN BANK, is there any
reasonable basis for any Litigation of a type described in this sentence, except
such as is not reasonably likely to have, individually or in the aggregate, a
BROWN BANK Material Adverse Effect.
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(c) Except as disclosed in Section 5.12 of BROWN BANK Disclosure
Memorandum, during the period of (i) any BROWN BANK Entity's ownership or
operation of any of their respective current Assets, or (ii) any BROWN BANK
Entity's participation in the management of any Participation Facility or any
Operating Property, to the Knowledge of BROWN BANK, there have been no
emissions, migrations, releases, discharges, spillages, or disposals of
Hazardous Material in, on, at, under, adjacent to, or affecting (or potentially
affecting) such properties or any neighboring properties, except such as are not
reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect. Except as disclosed in Section 5.12 of BROWN BANK
Disclosure Memorandum, prior to the period of (i) any BROWN BANK Entity's
ownership or operation of any of their respective current properties, (ii) any
BROWN BANK Entity's participation in the management of any Participation
Facility or any Operating Property, to the Knowledge of BROWN BANK, there were
no releases, discharges, spillages, or disposals of Hazardous Material in, on,
under, or affecting any such property, Participation Facility or Operating
Property, except such as are not reasonably likely to have, individually or in
the aggregate, a BROWN BANK Material Adverse Effect.
5.13 Compliance with Laws. BROWN BANK is duly incorporated as a federal
savings bank under the HOLA. Each BROWN BANK Entity has in effect all Permits
necessary for it to own, lease, or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect, and, to the Knowledge of BROWN BANK, there has occurred
no Default under any such Permit, other than Defaults which are not reasonably
likely to have, individually or in the aggregate, a BROWN BANK Material Adverse
Effect. Except as disclosed in Section 5.13 of BROWN BANK Disclosure Memorandum,
none of BROWN BANK Entities:
(a) is in Default under any of the provisions of its Charter, Articles of
Incorporation or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect; or
(c) since January 1, 1995, has received any written notification or written
communication from any agency or department of federal, state, or local
government or any Regulatory Authority or the staff thereof (i) asserting that
any BROWN BANK Entity is not in compliance with any of the Laws or Orders which
such governmental authority or Regulatory Authority enforces, where such
noncompliance is reasonably likely to have, individually or in the aggregate, a
BROWN BANK Material Adverse Effect, (ii) threatening to revoke any Permits, the
revocation of which is reasonably likely to have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect, or (iii) requiring any BROWN
BANK Entity to enter into or consent to the issuance of a cease and desist
order, formal agreement, directive, commitment, or memorandum of understanding,
or to adopt any Board resolution or similar undertaking, which restricts
materially the conduct of its business or in any material manner relates to its
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capital adequacy, its credit or reserve policies, its management, or the payment
of dividends. Copies of all material reports, correspondence, notices and other
documents relating to any inspection, audit, monitoring or other form of review
or enforcement action by a Regulatory Authority have been made available to
FLAG.
5.14 Labor Relations. No BROWN BANK Entity is the subject of any Litigation
asserting that it or any other BROWN BANK Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other BROWN BANK Entity to bargain
with any labor organization as to wages or conditions of employment, nor is any
BROWN BANK Entity party to any collective bargaining agreement, nor is there any
strike or other labor dispute involving any BROWN BANK Entity, pending or
threatened, or to the Knowledge of BROWN BANK, is there any activity involving
any BROWN BANK Entity's employees seeking to certify a collective bargaining
unit or engaging in any other organization activity.
5.15 Employee Benefit Plans.
(a) BROWN BANK has disclosed in Section 5.15 of BROWN BANK Disclosure
Memorandum, and has delivered or made available to FLAG prior to the execution
of this Agreement copies in each case of, all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee benefit
plans or fringe benefit plans, including "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any BROWN BANK Entity or ERISA
Affiliate (as defined in subparagraph (c) below) thereof for the benefit of
employees, retirees, dependents, spouses, directors, independent contractors, or
other beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, "BROWN BANK Benefit Plans"). Each BROWN BANK Benefit
Plan which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, is referred to herein as a "BROWN BANK ERISA Plan." Each
BROWN BANK ERISA Plan which is also a "defined benefit plan" (as defined in
Section 4140 of the Internal Revenue Code) is referred to herein as a "BROWN
BANK Pension Plan." No BROWN BANK Pension Plan is or has been a multiemployer
plan within the meaning of Section 3(37) of ERISA.
(b) All BROWN BANK Benefit Plans are in compliance with the applicable
terms of ERISA, the Internal Revenue Code, and any other applicable Laws the
breach or violation of which are reasonably likely to have, individually or in
the aggregate, a BROWN BANK Material Adverse Effect. Each BROWN BANK ERISA Plan
which is intended to be qualified under Section 401(a) of the Internal Revenue
Code has received a favorable determination letter from the Internal Revenue
Service, and BROWN BANK has no Knowledge of any circumstances likely to result
in revocation of any such favorable determination letter. To the Knowledge of
BROWN BANK, no BROWN BANK Entity has engaged in a transaction with respect to
any BROWN BANK Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject any BROWN BANK Entity
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to a Tax imposed by either Section 4975 of the Internal Revenue Code or Section
502(i) of ERISA in amounts which are reasonably likely to have, individually or
in the aggregate, a BROWN BANK Material Adverse Effect.
(c) No BROWN BANK Pension Plan has any "unfunded current liability," as
that term is defined in Section 302(d)(8)(A) of ERISA, based on actuarial
assumptions set forth for such plan's most recent actuarial valuation. Since the
date of the most recent actuarial valuation, there has been (i) no material
change in the financial position of any BROWN BANK Pension Plan, (ii) no change
in the actuarial assumptions with respect to any BROWN BANK Pension Plan, and
(iii) no increase in benefits under any BROWN BANK Pension Plan as a result of
plan amendments or changes in applicable Law which is reasonably likely to have,
individually or in the aggregate, a BROWN BANK Material Adverse Effect or
materially adversely affect the funding status of any such plan. Neither any
BROWN BANK Pension Plan nor any "single employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any BROWN BANK
Entity, or the single-employer plan of any entity which is considered one
employer with BROWN BANK under Section 4001 of ERISA or Section 414 of the
Internal Revenue Code or Section 302 of ERISA (whether or not waived) (an "ERISA
Affiliate") has an "accumulated funding deficiency" within the meaning of
Section 412 of the Internal Revenue Code or Section 302 of ERISA, which is
reasonably likely to have a BROWN BANK Material Adverse Effect. No BROWN BANK
Entity has provided, or is required to provide, security to a BROWN BANK Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any BROWN BANK Entity with respect to any ongoing, frozen, or
terminated single-employer plan or the single-employer plan of any ERISA
Affiliate, which Liability is reasonably likely to have a BROWN BANK Material
Adverse Effect. No BROWN BANK Entity has incurred any withdrawal Liability with
respect to a multiemployer plan under Subtitle B of Title IV of ERISA
(regardless of whether based on contributions of an ERISA Affiliate), which
Liability is reasonably likely to have a BROWN BANK Material Adverse Effect. No
notice of a "reportable event," within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been required to
be filed for any BROWN BANK Pension Plan or by any ERISA Affiliate within the
12-month period ending on the date hereof.
(e) Except as disclosed in Section 5.15 of BROWN BANK Disclosure
Memorandum, no BROWN BANK Entity has any Liability for retiree health and life
benefits under any of BROWN BANK Benefit Plans and there are no restrictions on
the rights of such BROWN BANK Entity to amend or terminate any such retiree
health or benefit Plan without incurring any Liability thereunder, which
Liability is reasonably likely to have a BROWN BANK Material Adverse Effect.
(f) Except as disclosed in Section 5.15 of BROWN BANK Disclosure
Memorandum, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any BROWN BANK Entity
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from any BROWN BANK Entity under any BROWN BANK Benefit Plan or otherwise, (ii)
increase any benefits otherwise payable under any BROWN BANK Benefit Plan, or
(iii) result in any acceleration of the time of payment or vesting of any such
benefit, where such payment, increase, or acceleration is reasonably likely to
have, individually or in the aggregate, a BROWN BANK Material Adverse Effect.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any BROWN BANK Entity and their respective beneficiaries, other
than entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on BROWN BANK Financial Statements to the extent
required by and in accordance with GAAP.
5.16 Material Contracts. Except as disclosed in Section 5.16 of BROWN BANK
Disclosure Memorandum or otherwise reflected in BROWN BANK Financial Statements,
none of BROWN BANK Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting, or retirement
Contract providing for aggregate payments to any Person in any calendar year in
excess of $50,000, (ii) any Contract relating to the borrowing of money by any
BROWN BANK Entity or the guarantee by any BROWN BANK Entity of any such
obligation (other than Contracts evidencing deposit liabilities, purchases of
federal funds, fully-secured repurchase agreements, Federal Home Loan Bank
advances and trade payables and Contracts relating to borrowings or guarantees
made in the ordinary course of business), (iii) any Contract which prohibits or
restricts any BROWN BANK Entity from engaging in any business activities in any
geographic area, line of business or otherwise in competition with any other
Person, (iv) any Contract between or among BROWN BANK Entities, (v) any Contract
relating to the provision of data processing, network communication, or other
technical services to or by any BROWN BANK Entity, (vi) any exchange traded or
over-the-counter swap, forward, future, option, cap, floor, or collar financial
Contract, or any other interest rate or foreign currency protection Contract not
included on its balance sheet which is a financial derivative Contract, and
(vii) any other Contract or amendment thereto that would be required to be filed
as an exhibit to a Form 10-K filed by BROWN BANK with the SEC (assuming BROWN
BANK were subject to the reporting requirements of the 1934 Act) as of the date
of this Agreement (together with all Contracts referred to in Sections 5.10 and
5.15(a), the "BROWN BANK Contracts"). With respect to each BROWN BANK Contract
and except as disclosed in Section 5.16 of BROWN BANK Disclosure Memorandum: (i)
assuming the enforceability of such Contract against the third party thereto,
each such Contract is in full force and effect; (ii) no BROWN BANK Entity is in
Default thereunder, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a BROWN BANK Material Adverse Effect; (iii) no
BROWN BANK Entity has repudiated or waived any material provision of any such
Contract; and (iv) no other party to any such Contract is, to the Knowledge of
BROWN BANK, in Default in any respect, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect, or has repudiated or waived any material provision
thereunder. Except as disclosed in Section 5.16 of BROWN BANK Disclosure
Memorandum, no officer, director or employee of any BROWN BANK Entity is party
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to any Contract which restricts or prohibits such officer, director or employee
from engaging in activities competitive with any Person, including any BROWN
BANK Entity. All of the indebtedness of any BROWN BANK Entity for money borrowed
is prepayable at any time by such BROWN BANK Entity without penalty or premium.
5.17 Legal Proceedings. There is no Litigation instituted or pending or, to
the Knowledge of BROWN BANK, threatened (or unasserted but considered probable
of assertion and which if asserted would have at least a reasonable probability
of an unfavorable outcome) against any BROWN BANK Entity, or against any
director, employee or employee benefit plan (acting in such capacity) of any
BROWN BANK Entity, or against any Asset, interest, or right of any of them, that
is reasonably likely to have, individually or in the aggregate, a BROWN BANK
Material Adverse Effect, nor are there any Orders of any Regulatory Authorities,
other governmental authorities, or arbitrators outstanding against any BROWN
BANK Entity, that are reasonably likely to have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect. Section 5.17 of BROWN BANK
Disclosure Memorandum contains a summary of all Litigation as of the date of
this Agreement to which any BROWN BANK Entity is a party and which names a BROWN
BANK Entity as a defendant or cross-defendant or for which, to the Knowledge of
BROWN BANK, any BROWN BANK Entity has any potential Liability.
5.18 Reports. Since January 1, 1995, or the date of organization if later,
each BROWN BANK Entity has timely filed all reports and statements, together
with any amendments required to be made with respect thereto, that it was
required to file with Regulatory Authorities, except for such filings which the
failure to so file is not reasonably likely to have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect. As of their respective dates,
each of such reports and documents, including the financial statements,
exhibits, and schedules thereto, complied in all material respects with all
applicable Laws. As of its respective date, each such report and document did
not, in all material respects, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
5.19 Statements True and Correct. No statement, certificate, instrument, or
other writing furnished or to be furnished by any BROWN BANK Entity to FLAG
pursuant to this Agreement or any other document, agreement, or instrument
referred to herein contains or will contain any untrue statement of material
fact or will omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the information supplied or to be supplied by any BROWN BANK
Entity for inclusion in the registration statement to be filed by FLAG with the
SEC in accordance with Section 8.1 will, when such registration statement
becomes effective, be false or misleading with respect to any material fact, or
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omit to state any material fact necessary to make the statements therein not
misleading. All documents that any BROWN BANK Entity is responsible for filing
with any Regulatory Authority in connection with the transactions contemplated
hereby will comply as to form in all material respects with the provisions of
applicable Law. No documents to be filed by a BROWN BANK Entity with any
Regulatory Authority in connection with the transactions contemplated hereby,
will, at the respective time such documents are filed, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
5.20 Accounting, Tax and Regulatory Matters. No BROWN BANK Entity has taken
or agreed to take any action or has any Knowledge of any fact or circumstance
that is reasonably likely to (i) prevent the Merger from qualifying for pooling
of interest accounting treatment and as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, or (ii) materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section 9.1(b)
or result in the imposition of a condition or restriction of the type referred
to in the last sentence of such Section.
5.21 Charter Provisions. Each BROWN BANK Entity has taken all action so
that the entering into of this Agreement and the consummation of the Merger and
the other transactions contemplated by this Agreement do not and will not result
in the grant of any rights to any Person under the Charter, Articles of
Incorporation, Bylaws or other governing instruments of any BROWN BANK Entity or
restrict or impair the ability of FLAG or any of its Subsidiaries to vote, or
otherwise to exercise the rights of a shareholder with respect to, shares of any
BROWN BANK Entity that may be directly or indirectly acquired or controlled by
them.
5.22 Board Recommendation.
The Board of Directors of BROWN BANK, at a meeting duly called and held,
has by unanimous vote of those directors present (who constituted all of the
directors then in office) (i) determined that this Agreement and the
transactions contemplated hereby are fair to and in the best interests of the
shareholders and (ii) resolved to recommend that the holders of the shares of
BROWN BANK Common Stock approve this Agreement.
5.23 Y-2K.
BROWN BANK has formed a committee to review policies and directives issued
by Regulatory Authorities with respect to preparedness for year 2000 data
processing and other operations, and intends to implement such committee's
recommendations for ensuring compliance with such policies and directives.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF FLAG AND CITIZENS
---------------------------------------------------
FLAG and CITIZENS respectively hereby represent and warrant to BROWN BANK
as follows:
6.1 Organization, Standing, and Power. Each of FLAG and CITIZENS is duly
organized, validly existing, and in good standing under the Laws of the State of
Georgia, and each has the corporate power and authority to carry on their
business as now conducted and to own, lease and operate their material Assets.
Each of FLAG and CITIZENS is duly qualified or licensed to transact business as
a foreign corporation in good standing in the States of the United States and
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foreign jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect. The minute book and other organizational documents for FLAG and
for CITIZENS have been made available to BROWN BANK for its review and, except
as disclosed in Section 6.1 of the FLAG Disclosure Memorandum, are true and
complete in all material respects as in effect as of the date of this Agreement
and accurately reflect in all material respects all amendments thereto and all
proceedings of the Boards of Directors and shareholders thereof.
6.2 Authority of FLAG and CITIZENS; No Breach By Agreement.
(a) Each of FLAG and CITIZENS has the corporate power and authority
necessary to execute, deliver and perform their obligations under this Agreement
and to consummate the transactions contemplated hereby. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of FLAG and
CITIZENS. This Agreement represents a legal, valid, and binding obligation of
FLAG and CITIZENS, enforceable against each Party in accordance with its terms
(except in all cases as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership, conservatorship,
moratorium, or similar Laws affecting the enforcement of creditors' rights
generally and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by FLAG and by
CITIZENS, nor the consummation by FLAG and by CITIZENS of the transactions
contemplated hereby, nor compliance by FLAG and by CITIZENS with any of the
provisions hereof, will (i) conflict with or result in a breach of any provision
of FLAG's or CITIZENS' Articles of Incorporation or Bylaws or the certificate or
articles of incorporation or bylaws of any FLAG Entity or any resolution adopted
by the board of directors or the shareholders of any FLAG Entity, or (ii)
constitute or result in a Default under, or require any Consent pursuant to, or
result in the creation of any Lien on any Asset of any FLAG Entity under, any
Contract or Permit of any FLAG Entity, where such Default or Lien, or any
failure to obtain such Consent, is reasonably likely to have, individually or in
the aggregate, a FLAG Material Adverse Effect, or (iii) subject to receipt of
the requisite Consents referred to in Section 9. 1 (b), constitute or result in
a Default under, or require any Consent pursuant to, any Law or Order applicable
to any FLAG Entity or any of their respective material Assets (including any
FLAG Entity becoming subject to or liable for the payment of any Tax or any of
the Assets owned by any FLAG Entity being reassessed or revalued by any Taxing
authority).
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
or under the HSR Act, and other than Consents, filings, or notifications which,
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if not obtained or made, are not reasonably likely to have, individually or in
the aggregate, a FLAG Material Adverse Effect, no notice to, filing with, or
Consent of, any public body or authority is necessary for the consummation by
FLAG or by CITIZENS of the Merger and the other transactions contemplated in
this Agreement.
6.3 Capital Stock.
(a) The authorized capital stock of FLAG consists of (i) 20,000,000 shares
of FLAG Common Stock, of which 5,174,807 shares are issued and outstanding as of
the date of this Agreement, and (ii) 10,000,000 shares of FLAG Preferred Stock,
of which no shares are issued and outstanding. All of the issued and outstanding
shares of FLAG Capital Stock are, and all of the shares of FLAG Common Stock to
be issued in exchange for shares of BROWN BANK Common Stock upon consummation of
the Merger, when issued in accordance with the terms of this Agreement, will be,
duly and validly issued and outstanding and fully paid and nonassessable under
the GBCC. None of the outstanding shares of FLAG Capital Stock has been, and
none of the shares of FLAG Common Stock to be issued in exchange for shares of
BROWN BANK Common Stock upon consummation of the Merger will be, issued in
violation of any preemptive rights of the current or past shareholders of FLAG.
(b) Except as set forth in Section 6.3(a), or as disclosed in Section 6.3
of the FLAG Disclosure Memorandum, there are no shares of capital stock or other
equity securities of FLAG outstanding and no outstanding Equity Rights relating
to the capital stock of FLAG.
6.4 FLAG Subsidiaries. FLAG has disclosed in Section 6.4 of the FLAG
Disclosure Memorandum all of the FLAG Subsidiaries that are corporations
(identifying its jurisdiction of incorporation, each jurisdiction in which the
character of its Assets or the nature or conduct of its business requires it to
be qualified and/or licensed to transact business, and the number of shares
owned and percentage ownership interest represented by such share ownership) and
all of the FLAG Subsidiaries that are general or limited partnerships, limited
liability companies, or other non-corporate entities (identifying the Law under
which such entity is organized, each jurisdiction in which the character of its
Assets or the nature or conduct of its business requires it to be qualified
and/or licensed to transact business, and the amount and nature of the ownership
interest therein). Except as disclosed in Section 6.4 of the FLAG Disclosure
Memorandum, FLAG or one of its wholly-owned Subsidiaries owns all of the issued
and outstanding shares of capital stock (or other equity interests) of each FLAG
Subsidiary. No capital stock (or other equity interest) of any FLAG Subsidiary
are or may become required to be issued (other than to another FLAG Entity) by
reason of any Equity Rights, and there are no Contracts by which any FLAG
Subsidiary is bound to issue (other than to another FLAG Entity) additional
shares of its capital stock (or other equity interests) or Equity Rights or by
which any FLAG Entity is or may be bound to transfer any shares of the capital
stock (or other equity interests) of any FLAG Subsidiary (other than to another
FLAG Entity). There are no Contracts relating to the rights of any FLAG Entity
to vote or to dispose of any shares of the capital stock (or other equity
interests) of any FLAG Subsidiary. All of the shares of capital stock (or other
equity interests) of each FLAG Subsidiary held by a FLAG Entity are fully paid
and nonassessable under the applicable corporation Law of the jurisdiction in
which such Subsidiary is incorporated or organized and are owned by the FLAG
Entity free and clear of any Lien. Each FLAG Subsidiary is either a bank,
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savings association or a corporation, and is duly organized, validly existing,
and (as to corporations) in good standing under the Laws of the jurisdiction in
which it is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease and operate its Assets and to carry on its
business as now conducted. Each FLAG Subsidiary is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of the
United States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect. Each FLAG Subsidiary that is a depository
institution is an "insured institution" as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder. The minute book and other
organizational documents for each FLAG Subsidiary have been made available to
BROWN BANK for its review, and, except as disclosed in Section 6.4 of the FLAG
Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the Board of Directors
and shareholders thereof.
6.5 SEC Filings, Financial Statements.
(a) FLAG has timely filed and made available to BROWN BANK all SEC
Documents required to be filed by FLAG since December 31, 1993 (the "FLAG SEC
Reports"). The FLAG SEC Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Laws and other
applicable Laws and (ii) did not, at the time they were filed (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such FLAG SEC Reports or necessary in
order to make the statements in such FLAG SEC Reports, in light of the
circumstances under which they were made, not misleading. No FLAG Subsidiary is
required to file any SEC Documents.
(b) Each of the FLAG Financial Statements (including, in each case, any
related notes) contained in the FLAG SEC Reports, including any FLAG SEC Reports
filed after the date of this Agreement until the Effective Time, complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited interim statements, as permitted by Form 10-Q of the SEC), and fairly
presented in all material respects the consolidated financial position of FLAG
and its Subsidiaries as at the respective dates and the consolidated results of
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in amount
or effect.
6.6 Absence of Undisclosed Liabilities. No FLAG Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a FLAG
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of FLAG as of December 31, 1997 and
March 31, 1998, included in the FLAG Financial Statements delivered prior to the
date of this Agreement or reflected in the notes thereto. No FLAG Entity has
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incurred or paid any Liability since March 31, 1998, except for such Liabilities
incurred or paid (i) in the ordinary course of business consistent with past
business practice and which are not reasonably likely to have, individually or
in the aggregate, a FLAG Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement.
6.7 Absence of Certain Changs in Events. Since December 31, 1997, except as
disclosed in the FLAG Financial Statements delivered prior to the date of this
Agreement or as disclosed in Section 6.7 of the FLAG Disclosure Memorandum, (i)
there have been no events, changes or occurrences which have had, or are
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, and (ii) the FLAG Entities have not taken any action, or failed
to take any action, prior to the date of this Agreement, which action or
failure, if taken after the date of this Agreement, would represent or result in
a material breach or violation of any of the covenants and agreements of FLAG
provided in Article 7.
6.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the FLAG
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before December 31,
1997, and on or before the date of the most recent fiscal year end immediately
preceding the Effective Time, except to the extent that all such failures to
file, taken together, are not reasonably likely to have a FLAG Material Adverse
Effect, and all Tax Returns filed are complete and accurate in all material
respects. All Taxes shown on filed Tax Returns have been paid. There is no audit
examination, deficiency, or refund Litigation with respect to any Taxes that is
reasonably likely to result in a determination that would have, individually or
in the aggregate, a FLAG Material Adverse Effect, except as reserved against in
the FLAG Financial Statements delivered prior to the date of this Agreement or
as disclosed in Section 6.8 of the FLAG Disclosure Memorandum. All Taxes and
other Liabilities due with respect to completed and settled examinations or
concluded Litigation have been paid. There are no Liens with respect to Taxes
upon any of the Assets of the FLAG Entities, except for any such Liens which are
not reasonably likely to have a FLAG Material Adverse Effect or with respect to
which the Taxes are not vet due and payable.
(b) None of the FLAG Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due (excluding
such statutes that relate to veers currently under examination by the Internal
Revenue Service or other applicable taxing authorities) that is currently in
effect.
(c) The provision for any Taxes due or to become due for any of the FLAG
Entities for the period or periods through and including the date of the
respective FLAG Financial Statements that has been made and is reflected on such
FLAG Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the FLAG Entities have been provided for in
accordance with GAAP.
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(e) None of the FLAG Entities is a party to any Tax allocation or sharing
agreement and none of the FLAG Entities has been a member of an affiliated group
filing a consolidated federal income Tax Return (other than a group the common
parent of which was FLAG) or has any Liability for Taxes of any Person (other
than FLAG and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign, Law) as a transferee or
successor or by Contract or otherwise.
(f) Each of the FLAG Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances of
noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect.
(g) Except as disclosed in Section 6.8 of the FLAG Disclosure Memorandum,
none of the FLAG Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Sections 28OG or 162(m)
of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue
Code Section 382(g), of the FLAG Entities that occurred during or after any
Taxable Period in which the FLAG Entities incurred a net operating loss that
carries over to any Taxable Period ending after December 31, 1997.
(i) No FLAG Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.
(j) All material elections with respect to Taxes affecting the FLAG
Entities have been or will be timely made.
6.9 Allowance for Possible Loan Losses. The Allowance shown on the
consolidated balance sheets of FLAG included in the most recent FLAG Financial
Statements dated prior to the date of this Agreement was, and the Allowance
shown on the consolidated balance sheets of FLAG included in the FLAG Financial
Statements as of dates subsequent to the execution of this Agreement will be, as
of the dates thereof, adequate (within the meaning of GAAP and applicable
regulatory requirements or guidelines) to provide for all known or reasonably
anticipated losses relating to or inherent in the loan and lease portfolios
(including accrued interest receivables) of the FLAG Entities and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by the FLAG Entities as of the dates thereof, except where the
failure of such Allowance to be so adequate is not reasonably likely to have a
FLAG Material Adverse Effect.
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6.10 Assets
(a) Except as disclosed in Section 6.10 of the FLAG Disclosure Memorandum
or as disclosed or reserved against in the FLAG Financial Statements delivered
prior to the date of this Agreement, the FLAG Entities have good and marketable
title, free and clear of all Liens, to all of their respective Assets, except
for any such Liens or other defects of title which are not reasonably likely to
have a FLAG Material Adverse Effect. All tangible properties used in the
businesses of the FLAG Entities are in good condition, reasonable wear and tear
excepted, and are usable in the ordinary course of business consistent with
FLAG's past practices.
(b) All Assets which are material to FLAG's business on a consolidated
basis, held under leases or subleases by any of the FLAG Entities, are held
under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceedings may be brought), and each such
Contract is in full force and effect.
(c) The FLAG Entities currently maintain insurance similar in amounts,
scope and coverage to that maintained by other peer banking organizations. None
of the FLAG Entities has received notice from any insurance carrier that (i) any
policy of insurance will be cancelled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such policies of
insurance will be substantially increased. There are presently no claims for
amounts exceeding in any individual case $25,000 pending under such policies of
insurance and no notices of claims in excess of such amounts have been given by
any FLAG Entity under such policies.
(d) The Assets of the FLAG Entities include all Assets required to operate
the business of the FLAG Entities as presently conducted.
6.11 Intellectual Property. Each FLAG Entity owns or has a license to use
all of the Intellectual Property used by such FLAG Entity in the course of its
business. Each FLAG Entity is the owner of or has a license to any Intellectual
Property sold or licensed to a third party by such FLAG Entity in connection
with such FLAG Entity's business operations, and such FLAG Entity has the right
to convey by sale or license any Intellectual Property so conveyed. No FLAG
Entity is in Default under any of its Intellectual Property licenses. No
proceedings have been instituted, or are pending or to the Knowledge of FLAG
threatened, which challenge the rights of any FLAG Entity with respect to
Intellectual Property used, sold or licensed by such FLAG Entity in the course
of its business, nor has any person claimed or alleged any rights to such
Intellectual Property. The conduct of the business of the FLAG Entities does not
infringe any Intellectual Property of any other person. Except as disclosed in
Section 6.11 of the FLAG Disclosure Memorandum, no FLAG Entity is obligated to
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pay any recurring royalties to any Person with respect to any such Intellectual
Property. Except as disclosed in Section 6.11 of the FLAG Disclosure Memorandum,
no officer, director or employee of any FLAG Entity is party to any Contract
which restricts or prohibits such officer, director or employee from engaging in
activities competitive with any Person, including any FLAG Entity.
6.12 Environmental Matters.
(a) To the Knowledge of FLAG, each FLAG Entity, its Participation
Facilities, and its Operating Properties are, and have been, in compliance with
all Environmental Laws, except for violations which are not reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect.
(b) To the Knowledge of FLAG, there is no Litigation pending or threatened
before any court, governmental agency, or authority or other forum in which any
FLAG Entity or any of its Operating Properties or Participation Facilities (or
FLAG in respect of such Operating Property or Participation Facility) has been
or, with respect to threatened Litigation, may be named as a defendant (i) for
alleged noncompliance (including by any predecessor) with any Environmental Law
or (ii) relating to the emission, migration, release, discharge, spillage, or
disposal into the environment of any Hazardous Material, whether or not
occurring at, on, under, adjacent to, or affecting (or potentially affecting) a
site owned, leased, or operated by any FLAG Entity or any of its Operating
Properties or Participation Facilities or any neighboring property, except for
such Litigation pending or threatened that is not reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, nor is there
any reasonable basis for any Litigation of a type described in this sentence,
except such as is not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect.
(c) During the period of (i) any FLAG Entity's ownership or operation of
any of their respective current properties, (ii) any FLAG Entity's participation
in the management of any Participation Facility or any Operating Property, there
have been no emissions, migrations, releases, discharges, spillages, or
disposals of Hazardous Material in, on, at, under, adjacent to, or affecting (or
potentially affecting) such properties or any neighboring properties, except
such as are not reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect. Prior to the period of (i) any FLAG Entity's
ownership or operation of any of their respective current properties, (ii) any
FLAG Entity's participation in the management of any Participation Facility or
any Operating Property, to the Knowledge of FLAG, there were no releases,
discharges, spillages, or disposals of Hazardous Material in, on, under, or
affecting any such property, Participation Facility or Operating Property,
except such as are not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect.
6.13 Compliance with Laws. FLAG is duly registered as a bank holding
company under the Federal and state bank holding company statutes. Each FLAG
Entity has in effect all Permits necessary for it to own, lease or operate its
material Assets and to carry on its business as now conducted, except for those
Permits the absence of which are not reasonably likely to have, individually or
in the aggregate, a FLAG Material Adverse Effect, and there has occurred no
Default under any such Permit, other than Defaults which are not reasonably
likely to have, individually or in the aggregate, a FLAG Material Adverse
Effect. Except as disclosed in Section 6.11 of the FLAG Disclosure Memorandum,
none of the FLAG Entities:
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(a) is in Default under any of the provisions of its Articles of
Incorporation or Bylaws (or other governing instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to, have, individually or in the aggregate, a FLAG Material
Adverse Effect; or
(c) since January 1, 1995, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i) asserting that any FLAG Entity is
not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance is
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, (ii) threatening to revoke any Permits, the revocation of which
is reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, or (iii) requiring any FLAG Entity to enter into or consent to
the issuance of a cease and desist order, formal agreement, directive,
commitment or memorandum of understanding, or to adopt any Board resolution or
similar undertaking, which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy, its credit or reserve policies,
its management, or the payment of dividends. Copies of all material reports,
correspondence, notices and other documents relating to any inspection, audit,
monitoring or other form of review or enforcement action by a Regulatory
Authority have been made available to BROWN BANK.
6.14 Labor Relations. No FLAG Entity is the subject of any Litigation
asserting that it or any other FLAG Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other FLAG Entity to bargain with any
labor organization as to wages or conditions of employment, nor is any FLAG
Entity party to any collective bargaining agreement, nor is there any strike or
other labor dispute involving any FLAG Entity, pending or threatened, or to the
Knowledge of FLAG, is there any activity involving any FLAG Entity's employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
6.15 Employee Benefit Plans.
(a) FLAG has disclosed in Section 6.12 of the FLAG Disclosure Memorandum
and has delivered or made available to BROWN BANK prior to the execution of this
Agreement copies in each case of all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance pay,
vacation, bonus, or other incentive plan, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health plans,
all life insurance plans, and all other employee benefit plans or fringe benefit
plans, including "employee benefit plans" as that term is defined in Section
3(3) of ERISA, currently adopted, maintained by, sponsored in whole or in part
by, or contributed to by any FLAG Entity or ERISA Affiliate thereof for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
are eligible to participate (collectively, the "FLAG Benefit Plans"). Each FLAG
Benefit Plan which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as a "FLAG ERISA Plan."
Each FLAG ERISA Plan which is also a "defined benefit plan" (as defined in
Section 4140) of the Internal Revenue Code) is referred to herein as a "FLAG
Pension Plan." No FLAG Pension Plan is or has been a multiemployer plan within
the meaning of Section 3(37) of ERISA.
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(b) All FLAG Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect. Each FLAG ERISA Plan which is
intended to be qualified under Section 401(a) of the Internal Revenue Code has
received a favorable determination letter from the Internal Revenue Service, and
FLAG is not aware of any circumstances likely to result in revocation of any
such favorable determination letter. To the Knowledge of Flag, no FLAG Entity
has engaged in a transaction with respect to any FLAG Benefit Plan that,
assuming the taxable period of such transaction expired as of the date hereof,
would subject any FLAG Entity to a Tax imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA in amounts which are reasonably
likely to have, individually or in the aggregate, a FLAG Material Adverse
Effect.
(c) No FLAG Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions set
forth for such plan's most recent actuarial valuation. Since the date of the
most recent actuarial valuation, there has been (i) no material change in the
financial position of a FLAG Pension Plan, (ii) no change in the actuarial
assumptions with respect to any FLAG Pension Plan, and (iii) no increase in
benefits under any FLAG Pension Plan as a result of plan amendments or changes
in applicable Law which is reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect or materially adversely affect the
funding status of any such plan. Neither any FLAG Pension Plan nor any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any FLAG Entity, or the single-employer plan
of any ERISA Affiliate has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
which is reasonably likely to have a FLAG Material Adverse Effect. No FLAG
Entity has provided, or is required to provide, security to a FLAG Pension Plan
or to any single-employer plan of an ERISA Affiliate pursuant to Section 40 1
(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any FLAG Entity with respect to any ongoing, frozen or terminated
single-employer plan or the single-employer plan of any ERISA Affiliate, which
Liability is reasonably likely to have a FLAG Material Adverse Effect. No FLAG
Entity has incurred any withdrawal Liability with respect to a multiemployer
plan under Subtitle B of Title IV of ERISA (regardless of whether based on
contributions of an ERISA Affiliate), which Liability is reasonably likely to
have a FLAG Material Adverse Effect. No notice of a "reportable event," within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any FLAG Pension Plan or
by any ERISA Affiliate within the 12-month period ending on the date hereof.
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(e) Except as disclosed in Section 6.15 of the FLAG Disclosure. Memorandum,
no FLAG Entity has any Liability for retiree health and life benefits under any
of the FLAG Benefit Plans and there are no restrictions on the rights of such
FLAG Entity to amend or terminate any such retiree health or benefit Plan
without incurring any Liability thereunder, which Liability is reasonably likely
to have a FLAG Material Adverse Effect.
(f) Except as disclosed in Section 6.12 of the FLAG Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, or otherwise) becoming
due to any director or any employee of any FLAG Entity from any FLAG Entity
under any FLAG Benefit Plan or otherwise, (ii) increase any benefits otherwise
payable under any FLAG Benefit Plan, or (iii) result in any acceleration of the
time of payment or vesting of any such benefit, where such payment, increase, or
acceleration is reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any FLAG Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the FLAG Financial Statements to the extent
required by and in accordance with GAAP.
6.16 Material Contracts. Except as disclosed in Section 6.16 of the FLAG
Disclosure Memorandum or otherwise reflected in the FLAG Financial Statements,
none of the FLAG Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting or retirement
Contract providing for aggregate payments to any Person in any calendar year in
excess of $50,000, (ii) any Contract relating to the borrowing of money by any
FLAG Entity or the guarantee by any FLAG Entity of any such obligation (other
than Contracts evidencing deposit liabilities, purchases of federal funds,
fully-secured repurchase agreements, and Federal Home Loan Bank advances of
depository institution Subsidiaries, trade payables and Contracts relating to
borrowings or guarantees made in the ordinary course of business), (iii) any
Contract which prohibits or restricts any FLAG Entity from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other Person, (iv) any Contract between or among FLAG
Entities, (v) any Contract relating to the provision of data processing, network
communication, or other technical services to or by any FLAG Entity, (vi) any
exchange-traded or over-the-counter swap, forward, future, option, cap, floor,
or collar financial Contract, or any other interest rate or foreign currency
protection Contract not included on its balance sheet which is a financial
derivative Contract, or (vii) any other Contract or amendment thereto that would
be required to be filed as an exhibit to a Form 10-K filed by FLAG with the SEC
as of the date of this Agreement that has not been filed as an exhibit to FLAG's
Form 10-K filed for the fiscal year ended December 31, 1997, or in an SEC
Document and identified to BROWN BANK (together with all Contracts referred to
in Sections 6.10 and 6.15(a), the "FLAG Contracts"). With respect to each FLAG
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Contract and except as disclosed in Section 6.16 of the FLAG Disclosure
Memorandum: (i) the Contract is in full force and effect; (ii) no FLAG Entity is
in Default thereunder, other than Defaults which are not reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect; (iii) no
FLAG Entity has repudiated or waived any material provision of any such
Contract; and (iv) no other party to any such Contract is, to the Knowledge of
FLAG, in Default in any respect, other than Defaults which are not reasonably
likely to have, individually or in the aggregate, a FLAG Material Adverse
Effect, or has repudiated or waived any material provision thereunder. All of
the indebtedness of any FLAG Entity for money borrowed is prepayable at any time
by such FLAG Entity without penalty or premium.
6.17 Legal Proceedings. There is no Litigation instituted or pending, or,
to the Knowledge of FLAG, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any FLAG Entity, or against any director,
employee or employee benefit plan of any FLAG Entity, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, nor are there
any Orders of any Regulatory Authorities, other governmental authorities, or
arbitrators outstanding against any FLAG Entity, that are reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect. Section
6.17 of the FLAG Disclosure Memorandum contains a summary of all Litigation as
of the date of this Agreement to which any FLAG Entity is a party and which
names a FLAG Entity as a defendant or cross-defendant or for which any FLAG
Entity has any potential Liability.
6.18 Reports. Since January 1, 1993, each FLAG Entity has timely filed all
reports and statements, together with any amendments required to be made with
respect thereto, that it was required to file with Regulatory Authorities
(except, in the case of state securities authorities, failures to file which are
not reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect). As of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all applicable Laws. As of its respective
date, each such report and document did not, in all material respects, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
6.19 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any FLAG Entity to BROWN BANK
pursuant to this Agreement or any other document, agreement or instrument
referred to herein contains or will contain any untrue statement of material
fact or will omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the information supplied or to be supplied by any FLAG
Entity for inclusion in the Registration Statement to be filed by FLAG with the
SEC, will, when such Registration Statement becomes effective, be false or
misleading with respect to any material fact, or omit to state any material fact
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necessary to make the statements therein not misleading. None of the documents
to be filed by any FLAG Entity with the SEC or any other Regulatory Authority in
connection with the transactions contemplated hereby, will, at the respective
time such documents are filed, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. All documents that any FLAG Entity thereof is responsible for
filing with any Regulatory Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable Law.
6.20 Accounting, Tax and Regulatory Matters. No FLAG Entity has taken or
agreed to take any action or has any knowledge of any fact or circumstance that
is reasonably likely to (i) prevent the Merger from qualifying for pooling of
interests accounting treatment and as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, or (ii) materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section 9.l(b)
or result in the imposition of a condition or restriction of the type referred
to in the last sentence of such Section.
6.21 Charter Provisions. Each FLAG Entity has taken all action so that the
entering into of this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement do not and will not result in the
grant of any rights to any Person under the Charter, Articles of Incorporation,
Bylaws or other governing instruments of any FLAG Entity or restrict or impair
the ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise
the rights of a shareholder with respect to, shares of any FLAG Entity that may
be directly or indirectly acquired or controlled by them.
6.22 Board Recommendation. The Board of Directors of FLAG, at a meeting
duly called and held, has by unanimous vote of those directors present (who
constituted all of the directors then in office) determined that this Agreement
and the transactions contemplated hereby, including the Merger, taken together,
are fair to and in the best interests of the FLAG shareholders.
6.23 Y-2K.
Each FLAG Entity is in compliance with all policies and directives issued
by Regulatory Authorities with respect to preparedness for year 2000 data
processing and other operations. Section 6.23 of the FLAG Disclosure Memorandum
sets forth a summary of the steps taken by FLAG to ensure such compliance. FLAG
has entered into an agreement with Phoenix International Ltd., Inc. ("Phoenix")
to license the Phoenix Retail Banking System, and FLAG is scheduled to convert
each of the existing FLAG Entities, as well as the BROWN BANK Subsidiaries, to
the Phoenix Retail Banking System prior to March 31, 1999. Phoenix has
represented to FLAG that the Phoenix Retail Banking System is year 2000
compliant.
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ARTICLE 7.
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
7.1 Affirmative Covenants of BROWN BANK. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
unless the prior written consent of FLAG shall have been obtained, and except as
otherwise expressly contemplated herein, BROWN BANK shall, and shall cause each
of its Subsidiaries to (a) operate its business only in the usual, regular, and
ordinary course, (b) preserve intact its business organization and Assets and
maintain its rights and franchises, and (c) take no action which would (i)
materially adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement.
7.2 Negative Covenants of BROWN BANK. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, unless
the prior written consent of FLAG shall have been obtained, and except as
otherwise expressly contemplated herein, BROWN BANK covenants and agrees that it
will not do or agree or commit to do, or permit any of its Subsidiaries to do or
agree or commit to do, any of the following:
(a) amend the Charter, Articles of Incorporation, Bylaws or other governing
instruments of any BROWN BANK entity, or
(b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of a BROWN BANK Entity to another BROWN BANK
Entity) in excess of an aggregate of $100,000 (for BROWN BANK Entities on a
consolidated basis) except in the ordinary course of the business of BROWN BANK
Subsidiaries consistent with past practices (which shall include, for BROWN BANK
Subsidiaries that are depository institutions, creation of deposit liabilities,
purchases of federal funds, advances from the Federal Reserve Bank or Federal
Home Loan Bank, and entry into repurchase agreements fully secured by U.S.
government or agency securities), or impose, or suffer the imposition, on any
Asset of any BROWN BANK Entity of any Lien or permit any such Lien to exist
(other than in connection with deposits, repurchase agreements, bankers
acceptances, "treasury tax and loan" accounts established in the ordinary course
of business, the satisfaction of legal requirements in the exercise of trust
powers, and Liens in effect as of the date hereof that are disclosed in Section
7.2(b) of BROWN BANK Disclosure Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of the
capital stock of any BROWN BANK Entity, or declare or pay any dividend or make
any other distribution in respect of BROWN BANK's capital stock; or
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(d) except for this Agreement, or pursuant to the exercise of stock options
outstanding as of the date hereof and pursuant to the terms thereof in existence
on the date hereof, or as disclosed in Section 7.2(d) of BROWN BANK Disclosure
Memorandum, issue, sell, pledge, encumber, authorize the issuance of, enter into
any Contract to issue, sell, pledge, encumber, or authorize the issuance of, or
otherwise permit to become outstanding, any additional shares of BROWN BANK
Common Stock or any other capital stock of any BROWN BANK Entity, or any stock
appreciation rights, or any option, warrant, or other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any BROWN
BANK Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of BROWN BANK Common Stock, or sell,
lease, mortgage or otherwise dispose of or otherwise encumber any Asset having a
book value in excess of $100,000 other than in the ordinary course of business
for reasonable and adequate consideration or any shares of capital stock of any
BROWN BANK Subsidiary (unless any such shares of stock are sold or otherwise
transferred to another BROWN BANK Entity); or
(f) except for loans made in the ordinary course of its business, make any
material investment, either by purchase of stock or securities, contributions to
capital, Asset transfers, or purchase of any Assets, in any Person other than a
wholly owned BROWN BANK Subsidiary, or otherwise acquire direct or indirect
control over any Person, other than in connection with (i) foreclosures in the
ordinary course of business, (ii) acquisitions of control by a depository
institution Subsidiary in its fiduciary capacity, or (iii) the creation of new
wholly owned Subsidiaries organized to conduct or continue activities otherwise
permitted by this Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any BROWN BANK Entity, except in accordance with past practice
specifically disclosed in Section 7.2(g) of BROWN BANK Disclosure Memorandum or
as required by Law; pay any severance or termination pay or any bonus other than
pursuant to written policies or written Contracts in effect on the date of this
Agreement and disclosed in Section 7.2(g) of BROWN BANK Disclosure Memorandum;
and enter into or amend any severance agreements with officers of any BROWN BANK
Entity; grant any material increase in fees or other increases in compensation
or other benefits to directors of any BROWN BANK Entity except in accordance
with past practice disclosed in Section 7.2(g) of BROWN BANK Disclosure
Memorandum; or voluntarily accelerate the vesting of any stock options or other
stock-based compensation or employee benefits or other Equity Rights; or
(h) enter into or amend any employment Contract between any BROWN BANK
Entity and any Person having a salary thereunder in excess of $50,000 per year
(unless such amendment is required by Law) that BROWN BANK Entity does not have
the unconditional right to terminate without Liability (other than Liability for
services already rendered), at any time on or after the Effective Time; or
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(i) adopt any new employee benefit plan of any BROWN BANK Entity or
terminate or withdraw from, or make any material change in or to, any existing
employee benefit plans of any BROWN BANK Entity other than any such change that
is required by Law or that, in the opinion of counsel, is necessary or advisable
to maintain the tax qualified status of any such plan, or make any distributions
from such employee benefit plans, except as required by Law, the terms of such
plans or consistent with past practice; or
(j) make any significant change in any Tax or accounting methods or systems
of internal accounting controls, except as may be appropriate to conform to
changes in Tax Laws or regulatory accounting requirements or GAAP; or
(k) commence any Litigation other than in accordance with past practice or
except as set forth in Section 7.2(k) of BROWN BANK Disclosure Memorandum,
settle any Litigation involving any Liability of any BROWN BANK Entity for
material money damages or restrictions upon the operations of any BROWN BANK
Entity; or
(l) except in the ordinary course of business, enter into, modify, amend or
terminate any material Contract (including any loan Contract with an unpaid
balance exceeding $50,000) or waive, release, compromise or assign any material
rights or claims.
7.3 Affirmative Covenants of FLAG. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, unless
the prior written consent of BROWN BANK shall have been obtained, and except as
otherwise expressly contemplated herein, FLAG shall and shall cause each of its
Subsidiaries to (a) operate its business only in the usual, regular, and
ordinary course, (b) preserve intact its business organization and Assets and
maintain its rights and franchises, and (c) take no action which would (i)
materially adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement.
7.4 Negative Covvenants of FLAG. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of BROWN BANK shall have been obtained, and except as
otherwise expressly contemplated herein, FLAG covenants and agrees that it will
not amend the Articles of Incorporation or Bylaws of FLAG in any manner adverse
to the holders of BROWN BANK Common Stock, or take any action which will
materially adversely impact the ability of FLAG Entities to consummate the
transactions contemplated by this Agreement.
7.5 Adverse Changes in Condition. Each of FLAG and BROWN BANK agrees to
give written notice promptly to the other upon becoming aware of the occurrence
or impending occurrence of any event or circumstance relating to it or any of
its Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a BROWN BANK Material Adverse Effect or a FLAG Material Adverse
Effect, as applicable, or (ii) would cause or constitute a material breach of
any of its representations, warranties, or covenants contained herein, and to
use its reasonable efforts to prevent or promptly to remedy the same.
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7.6 Reports. Each of FLAG and BROWN BANK and their Subsidiaries shall file
all reports required to be filed by it with Regulatory Authorities between the
date of this Agreement and the Effective Time and shall deliver to the other
copies of all such reports promptly after the same are filed. If financial
statements are contained in any such reports filed with the SEC, such financial
statements will fairly present the consolidated financial position of the entity
filing such statements as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity, and cash flows for the periods then
ended in accordance with GAAP (subject in the case of interim financial
statements to normal recurring year-end adjustments that are not material). As
of their respective dates, such reports filed with the SEC will comply in all
material respects with the Securities Laws and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with Laws applicable to such reports.
ARTICLE 8.
ADDITIONAL AGREEMENTS
---------------------
8.1 Registration Statement. As soon as reasonably practicable after
execution of this Agreement, FLAG shall prepare and file the Registration
Statement with the SEC, and shall use its reasonable efforts to cause the
Registration Statement to become effective under the 1933 Act and take any
action required to be taken under the applicable state Blue Sky or securities
laws in connection with the issuance of the shares of FLAG Common Stock upon
consummation of the Merger. BROWN BANK shall cooperate in the preparation and
filing of the Registration Statement and shall furnish all information
concerning it and the holders of its capital stock as FLAG may reasonably
request in connection with such action. FLAG and BROWN BANK shall make all
necessary fillings with respect to the Merger under the Securities Laws.
8.2 Nasdaq Listing. FLAG shall use its reasonable efforts to list, prior to
the Effective Time, on the Nasdaq National Market the shares of FLAG Common
Stock to be issued to the holders of BROWN BANK Common Stock pursuant to the
Merger, and FLAG shall give all notices and make all filings with the NASD
required in connection with the transactions contemplated herein.
8.3 Shareholder Approval. BROWN BANK shall call a Shareholders' Meeting, to
be held as soon as reasonably practicable after the Registration Statement is
declared effective by the SEC, for the purpose of voting upon approval of this
Agreement and such other related matters as it deems appropriate. In connection
with the Shareholders' Meeting, the Board of Directors of BROWN BANK shall
recommend to its shareholders, subject to the conditions in such authorization
and recommendation by the Board of Directors, the approval of the matters
submitted for approval (subject to the Board of Directors of BROWN BANK, after
having consulted with and considered the advice of outside counsel, reasonably
determining in good faith that the making of such recommendation, or the failure
to withdraw or modify its recommendation, would constitute a breach of fiduciary
duties of the members of such Board of Directors to BROWN BANK's shareholders,
under applicable law), and the Board of Directors and officers of BROWN BANK
shall use their reasonable efforts to obtain such shareholders' approval
(subject to the Board of Directors of BROWN BANK, after having consulted with
and considered the advice of outside counsel, reasonably determining in good
faith that the taking of such actions would constitute a breach of fiduciary
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duties of the members of such Board of Directors to BROWN BANK shareholders,
under applicable law).
8.4 Applications. FLAG and CITIZENS shall promptly prepare and file, and
BROWN BANK shall cooperate in the preparation and, where appropriate, filing of,
applications with all Regulatory Authorities having Jurisdiction over the
transactions contemplated by this Agreement seeking the requisite Consents
necessary to consummate the transactions contemplated by this Agreement. The
Parties shall deliver to each other copies of all filings, correspondence and
orders to and from all Regulatory Authorities in connection with the
transactions contemplated hereby.
8.5 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, FLAG shall cause to be filed with the Georgia
Department of Banking and Finance the Articles of Merger and the Applications
required under the Laws and Regulations of the State of Georgia.
8.6 Agrement as to Efforts in Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including using its reasonable efforts to lift
or rescind any Order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 9; provided, that nothing herein shall preclude either
Party from exercising its rights under this Agreement. Each Party shall use, and
shall cause each of its Subsidiaries to use, its reasonable efforts to obtain
all Consents necessary or desirable for the consummation of the transactions
contemplated by this Agreement.
8.7 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep each of the other
Parties advised of all material developments relevant to its business and to
consummation of the Merger and shall permit each of the other Parties to make or
cause to be made such investigation of the business and properties of it and its
Subsidiaries and of their respective financial and legal conditions as the Party
reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby, and shall not interfere
unnecessarily with normal operations. No investigation by a Party shall affect
the representations and warranties of any other Party.
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(b) Each Party shall, and shall cause its advisers and agents to, maintain
the confidentiality of all confidential information furnished to it by each of
the other Parties concerning its and its Subsidiaries' businesses, operations,
and financial positions and shall not use such information for any purpose
except in furtherance of the transactions contemplated by this Agreement. If
this Agreement is terminated prior to the Effective Time, each Party shall
promptly return or certify the destruction of all documents and copies thereof,
and all work papers containing confidential information received from the other
Party.
(c) Each Party shall use its reasonable efforts to exercise its rights
under confidentiality agreements entered into with Persons which were
considering an Acquisition Proposal with respect to such Party to preserve the
confidentiality of the information relating to such Party and its Subsidiaries
provided to such Persons and their Affiliates and Representatives.
(d) Each Party agrees to give each of the other Parties notice as soon as
practicable after any determination by it of any fact or occurrence relating to
any other Party which it has discovered through the course of its investigation
and which represents, or is reasonably likely to represent, either a material
breach of any representation, warranty, covenant or agreement of the other Party
or which has had or is reasonably likely to have a BROWN BANK Material Adverse
Effect or a FLAG Material Adverse Effect, as applicable.
8.8 Press Releases. Prior to the Effective Time, BROWN BANK and FLAG shall
consult with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.8
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's disclosure
obligations imposed by Law.
8.9 Certain Actions. Except with respect to this Agreement and the
transactions contemplated hereby, no BROWN BANK Entity nor any Representatives
thereof retained by any BROWN BANK Entity shall directly or indirectly solicit
any Acquisition Proposal by any Person. Except to the extent the Board of
Directors of BROWN BANK, after having consulted with and considered the advice
of outside counsel, reasonably determines in good faith that the failure to take
such actions would constitute a breach of fiduciary duties of the members of
such Board of Directors to BROWN BANK's shareholders, under applicable Law, no
BROWN BANK Entity or Representative thereof shall furnish any non-public
information that it is not legally obligated to furnish, negotiate with respect
to, or enter into any Contract with respect to, any Acquisition Proposal, but
BROWN BANK may communicate information about such an Acquisition Proposal to its
shareholders if and to the extent that it is required to do so in order to
comply with its legal obligations. BROWN BANK shall promptly advise FLAG
following the receipt of any Acquisition Proposal and the details thereof, and
advise FLAG of any developments with respect to such Acquisition Proposal.
Promptly upon the occurrence thereof, BROWN BANK shall (i) immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any Persons conducted heretofore with respect to any of the foregoing, and (ii)
direct and use its reasonable efforts to cause its Representatives not to engage
in any of the foregoing.
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8.10 Accounting and Tax Treatment. Each of the Parties undertakes and
agrees to use its reasonable efforts to cause the Merger to, and to take no
action which would cause the Merger not to, qualify for pooling of interests
accounting treatment and as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code for federal income tax purposes.
8.11 Charter Provisions. Each Party shall take, and shall cause its
Subsidiaries to take, all necessary action to ensure that the entering into of
this Agreement and the consummation of the Merger and the other transactions
contemplated hereby do not and will not result in the grant of any rights to any
Person under the charter, articles of incorporation, bylaws or other governing
instruments of such Party or any of its Subsidiaries or restrict or impair the
ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise the
rights of a shareholder with respect to, shares of any BROWN BANK Entity that
may be directly or indirectly acquired by them.
8.12 Agreements of Affiliates. BROWN BANK has disclosed in Section 8.12 of
BROWN BANK Disclosure Memorandum each Person whom it reasonably believes is an
"affiliate" of BROWN BANK for purposes of Rule 145 under the 1933 Act. BROWN
BANK shall use its reasonable efforts to cause each such Person to deliver to
FLAG not later than 30 days after the date of this Agreement a written
agreement, substantially in the form of Exhibit 1, providing that such Person
will not sell, pledge, transfer, or otherwise dispose of the shares of BROWN
BANK Common Stock held by such Person except as contemplated by such agreement
or by this Agreement and will not sell, pledge, transfer, or otherwise dispose
of the shares of FLAG Common Stock to be received by such Person upon
consummation of the Merger except in compliance with applicable provisions of
the 1933 Act and the rules and regulations thereunder and until such time as
financial results covering at least 30 days of combined operations of CITIZENS
and BROWN BANK have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies, except that transfers may be
made in compliance with Staff Accounting Bulletin No. 76 issued by the SEC.
Except for transfers made in compliance with Staff Accounting Bulletin No. 76,
shares of FLAG Common Stock issued to such affiliates of BROWN BANK shall not be
transferable until such time as financial results covering at least 30 days of
combined operations of CITIZENS and BROWN BANK have been published within the
meaning of Section 201.01 of the SEC's Codification of Financial Reporting
Policies, regardless of whether each such affiliate has provided the written
agreement referred to in this Section 8.12. FLAG shall be entitled to place
restrictive legends upon certificates for shares of FLAG Common Stock issued to
affiliates of BROWN BANK pursuant to this Agreement to enforce the provisions of
this Section 8.12, subject to the provisions of Section 8.1 of this Agreement.
FLAG shall not be required to maintain the effectiveness of the Registration
Statement under the 1933 Act for the purposes of resale of FLAG Common Stock by
such affiliates.
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8.13 Employee Benefits and Contracts. Following the Effective Time, FLAG
shall either (i) continue to provide to officers and employees of BROWN BANK
Entities employee benefits under BROWN BANK's existing employee benefit and
welfare plans or, (ii) if FLAG shall determine to provide to officers and
employees of BROWN BANK Entities employee benefits under other employee benefit
plans and welfare plans, provide generally to officers and employees of BROWN
BANK Entities employee benefits under employee benefit and welfare plans, on
terms and conditions which when taken as a whole are substantially similar to
those currently provided by the FLAG Entities to their similarly situated
officers and employees. For purposes of participation and vesting (but not
accrual of benefits) under FLAG's employee benefit plans, (i) service under any
qualified defined benefit plan of BROWN BANK shall be treated as service under
FLAG's defined benefit plan, if any, (ii) service under any qualified defined
contribution plans of BROWN BANK shall be treated as service under FLAG's
qualified defined contribution plans, and (iii) service under any other employee
benefit plans of BROWN BANK shall be treated as service under any similar
employee benefit plans maintained by FLAG. With respect to officers and
employees of BROWN BANK Entities who, at or after the Effective Time, become
employees of a FLAG Entity and who, immediately prior to the Effective Time, are
participants in one or more employee welfare benefit plans maintained by BROWN
BANK Entities, FLAG shall cause each comparable employee welfare benefit plan
which is substituted for a BROWN BANK welfare benefit plan to waive any evidence
of insurability or similar provision, to provide credit for such participation
prior to such substitution with regard to the application of any pre-existing
condition limitation, and to provide credit towards satisfaction of any
deductible or out-of-pocket provisions for expenses incurred by such
participants during the period prior to such substitution, if any, that overlaps
with the then current plan year for each such substituted employee welfare
benefit plans. FLAG also shall cause the Surviving Bank and its Subsidiaries to
honor in accordance with their terms all employment, severance, consulting and
other compensation Contracts disclosed in Section 8.13 of BROWN BANK Disclosure
Memorandum to FLAG between any BROWN BANK Entity and any current or former
director, officer, or employee thereof, and all provisions for vested benefits
or other vested amounts earned or accrued through the Effective Time under BROWN
BANK Benefit Plans.
8.14 Indemnification.
(a) Subject to the conditions set forth in paragraph (b) below, for a
period of six years after the Effective Time, FLAG shall indemnify, defend and
hold harmless each person entitled to indemnification from a BROWN BANK Entity
(each, an "Indemnified Party") against all Liabilities arising out of actions or
omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under Georgia Law and by BROWN BANK's Charter and Bylaws as in effect on the
date hereof, including provisions relating to advances of expenses incurred in
the defense of any Litigation. Without limiting the foregoing, in any case in
which approval by FLAG is required to effectuate any indemnification, FLAG shall
direct, at the election of the Indemnified Party, that the determination of any
such approval shall be made by independent counsel mutually agreed upon between
FLAG and the Indemnified Party.
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(b) Any Indemnified Party wishing to claim indemnification under
paragraph (a)of this Section 8.14, upon learning of any such Liability or
Litigation, shall promptly notify FLAG thereof. In the event of any such
Liability or Litigation (whether arising before or after the Effective Time),
(i) FLAG shall have the right to assume the defense thereof (provided FLAG
acknowledges responsibility for such indemnification) and FLAG shall not be
liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if FLAG elects not to assume
such defense or counsel for the Indemnified Parties advises that there are
substantive issues which raise conflicts of interest between FLAG and the
Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to
them, and FLAG shall pay all reasonable fees and expenses of such counsel for
the Indemnified Parties promptly as statements therefor are received; provided,
that FLAG shall be obligated pursuant to this paragraph (b) to pay for only one
firm of counsel for all Indemnified Parties in any jurisdiction, (ii) the
Indemnified Parties will cooperate in the defense of any such Litigation, and
(iii) FLAG shall not be liable for any settlement effected without its prior
written consent; and provided further that FLAG shall not have any obligation
hereunder to any Indemnified Party when and if a court of competent jurisdiction
shall determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable Law.
ARTICLE 9.
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
-------------------------------------------------
9.1 Conditions to Obligations of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6:
(a) Shareholder Approval. The shareholders of BROWN BANK shall have
approved this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, as and to the extent required by Law or by the
provisions of any governing instruments. FLAG, as the sole shareholder of
CITIZENS, shall have approved this Agreement, and the consummation of the
transactions contemplated hereby, including the Merger, as and to the extent
required by Law or by the provisions of any governing instruments. The
shareholders of FLAG shall have approved the issuance of shares of FLAG Common
Stock pursuant to the Merger, as and to the extent required by Law, by the
provisions of any governing instruments, or by the rules of the NASD.
(b) Regulatory Approvals. All Consents of, filings and registrations with,
and notifications to, all Regulatory Authorities required for consummation of
the Merger shall have been obtained or made and shall be in full force and
effect and all waiting periods required by Law shall have expired. No Consent
obtained from any Regulatory Authority which is necessary to consummate the
transactions contemplated hereby shall be conditioned or restricted in a manner
(including requirements relating to the raising of additional capital or the
disposition of Assets) which in the reasonable judgment of the Board of
Directors of any Party would so materially adversely impact the economic or
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business benefits of the transactions contemplated by this Agreement that, had
such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(c) Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those referred to
in Section 9.1(b)) or for the preventing of any Default under any Contract or
Permit of such Party which, if not obtained or made, is reasonably likely to
have, individually or in the aggregate, a BROWN BANK Material Adverse Effect or
a FLAG Material Adverse Effect, as applicable. No Consent so obtained which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner which in the reasonable judgment of the
Board of Directors of any Party would so materially adversely impact the
economic or business benefits of the transactions contemplated by this Agreement
that, had such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(d) Legal Proceedings. No court or governmental or regulatory authority of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any Law or Order (whether temporary, preliminary or permanent) or taken
any other action which prohibits, restricts or makes illegal consummation of the
transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall be effective
under the 1933 Act, and no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and all necessary approvals under state securities
laws or the 1933 Act or 1934 Act relating to the issuance or trading of the
shares of FLAG Common Stock issuable pursuant to the Merger shall have been
received.
(f) Nasdaq Listing. The shares of FLAG Common Stock issuable pursuant to
the Merger shall have been approved for listing on the Nasdaq National Market.
(g) Tax Matters. Each Party shall have received a written opinion of
counsel from Powell, Goldstein, Frazer & Murphy LLP, in form reasonably
satisfactory to such Parties (the "Tax Opinion"), to the effect that (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code, (ii) the exchange in the Merger of BROWN BANK Common
Stock for FLAG Common Stock will not give rise to gain or loss to the
shareholders of BROWN BANK with respect to such exchange (except to the extent
of any cash received), and (iii) neither BROWN BANK nor FLAG will recognize gain
or loss as a consequence of the Merger (except for amounts resulting from any
required change in accounting methods and any income and deferred gain
recognized pursuant to Treasury regulations issued under Section 1502 of the
Internal Revenue Code). In rendering such Tax Opinion, such counsel shall be
entitled to rely upon representations of officers of BROWN BANK and FLAG
reasonably satisfactory in form and substance to such counsel.
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(h) Employment Matters. Dennis D. Allen, Rhonda Hendrix, and Barbara L.
Rich shall have negotiated a mutually satisfactory employment relationship with
FLAG, and any previously existing agreements between each of Mr. Allen, Ms.
Hendrix, and Ms. Rich and BROWN BANK concerning employment, severance,
consulting and any other compensation, including post termination payments
subsequent to a change in ownership, shall have been terminated.
9.2 Conditions to Obligations of FLAG. The obligations of FLAG to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by FLAG pursuant to Section 11.6(a):
(a) Representations and Warranties. For purposes of this Section 9.2(a),
the accuracy of the representations and warranties of BROWN BANK set forth in
this Agreement shall be assessed as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth in
Section 5.3 shall be true and correct (except for inaccuracies which are de
minimus in amount). The representations and warranties set forth in Sections
5.20 and 5.21 shall be true and correct in all material respects. There shall
not exist inaccuracies in the representations and warranties of BROWN BANK set
forth in this Agreement (including the representations and warranties set forth
in Sections 5.3, 5.20 and 5.21) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a BROWN BANK Material Adverse
Effect; provided that, for purposes of this sentence only, those representations
and warranties which are qualified by references to "material" or "Material
Adverse Effect" or to the "Knowledge" of any Person shall be deemed not to
include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the agreements
and covenants of BROWN BANK to be performed and complied with pursuant to this
Agreement and the other agreements contemplated hereby prior to the Effective
Time shall have been duly performed and complied with in all material respects.
(c) Certificates. BROWN BANK shall have delivered to FLAG (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its secretary, to the effect that to the best of
their Knowledge the conditions set forth in Section 9.1 as relates to BROWN BANK
and in Section 9.2(a) and 9.2(b) have been satisfied; provided, however, that
the representations, warranties and covenants to which such certificate relates
shall not been deemed to have survived the Closing, and (ii) certified copies of
resolutions duly adopted by BROWN BANK's Board of Directors and shareholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the consummation of
the transactions contemplated hereby, all in such reasonable detail as FLAG and
its counsel shall request.
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(d) Opinion of Counsel. FLAG shall have received an opinion of Morris,
Manning & Martin, L.L.P., counsel to BROWN BANK, dated as of the Closing Date,
in form reasonably satisfactory to FLAG, as to the matters set forth in Exhibit
2.
(e) Pooling Letters. FLAG shall have received an opinion of Porter Keadle
Moore, LLP, dated as of the date of filing of the Registration Statement with
the SEC and as of the Effective Time, addressed to FLAG and in form and
substance reasonably acceptable to FLAG, to the effect that the Merger, for
accounting purposes, shall qualify for treatment as a pooling of interests.
(f) Affiliates Agreements. FLAG shall have received from each affiliate of
BROWN BANK the affiliates letter referred to in Section 8.12 and Exhibit 1.
(g) Claims Letters. Each of the directors and officers of BROWN BANK shall
have executed and delivered to FLAG letters in substantially the form of Exhibit
3.
9.3 Conditions to Obligations of BROWN BANK. The obligations of BROWN BANK
to perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by BROWN BANK pursuant to Section 11.6(b):
(a) Representations and Warranties. For purposes of this Section 9.3(a),
the accuracy of the representations and warranties of FLAG and of CITIZENS set
forth in this Agreement shall be assessed as of the date of this Agreement and
as of the Effective Time with the same effect as though all such representations
and warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth in
Section 6.3 shall be true and correct (except for inaccuracies which are de
minimus in amount). The representations and warranties of FLAG set forth in
Section 6.16 and 6.17 shall be true and correct in all material respects. There
shall not exist inaccuracies in the representations and warranties of FLAG set
forth in this Agreement (including the representations and warranties set forth
in Sections 6.3, 6.16 and 6.17) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a FLAG Material Adverse
Effect; provided that, for purposes of this sentence only, those representations
and warranties which are qualified by references to "material" or "Material
Adverse Effect" or to the "Knowledge" of any Person shall be deemed not to
include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the agreements
and covenants of FLAG to be performed and complied with pursuant to this
Agreement and the other agreements contemplated hereby prior to the Effective
Time shall have been duly performed and complied with in all material respects.
(c) Certificates. FLAG shall have delivered to BROWN BANK (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that to
the best of their knowledge the conditions set forth in Section 9.1 as relates
to FLAG and in Section 9.3(a) and 9.3(b) have been satisfied, provided, however,
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that the representations, warranties and covenants to which such certificate
relates shall not been deemed to have survived the Closing, and (ii) certified
copies of resolutions duty adopted by FLAG's Board of Directors and shareholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the consummation of
the transactions contemplated hereby, all in such reasonable detail as BROWN
BANK and its counsel shall request.
(d) Opinion of Counsel. BROWN BANK shall have received an opinion of
Powell, Goldstein, Frazer & Murphy LLP, counsel to FLAG, dated as of the Closing
Date, in form reasonably acceptable to BROWN BANK, as to the matters set forth
in Exhibit 4.
ARTICLE 10.
TERMINATION
-----------
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the shareholders of BROWN
BANK, CITIZENS, and FLAG, this Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time.
(a) By mutual consent of FLAG and BROWN BANK; or
(b) By any Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event of a material breach by any other
Party of any representation or warranty contained in this Agreement which cannot
be or has not been cured within 30 days after the giving of written notice to
the breaching Party of such breach and which breach is reasonably likely, in the
opinion of the non-breaching Party, to have, individually or in the aggregate, a
BROWN BANK Material Adverse Effect or a FLAG Material Adverse Effect, as
applicable, on the breaching Party; or
(c) By any Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event of a material breach by any other
Party of any covenant or agreement contained in this Agreement which cannot be
or has not been cured within 30 days after the giving of written notice to the
breaching Party of such breach; or
(d) By any Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event (i) any Consent of any Regulatory
Authority required for consummation of the Merger and the other transactions
contemplated hereby shall have been denied by final non-appealable action of
such authority or if any action taken by such authority is not appealed within
the time limit for appeal, or (ii) the shareholders of BROWN BANK fail to vote
their approval of the matters relating to this Agreement and the transactions
contemplated hereby at the Shareholders' Meeting where such matters were
presented to such shareholders for approval and voted upon; or
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(e) By any Party in the event that the Merger shall not have been
consummated by December 31, 1998, if the failure to consummate the transactions
contemplated hereby on or before such date is not caused by any breach of this
Agreement by the Party electing to terminate pursuant to this Section 10.1(e).
10.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 10.1, this Agreement shall become void and
have no effect, except that (i) the provisions of this Section 10.2 and Article
11 and Section 8.5(b) shall survive any such termination and abandonment, and
(ii) a termination pursuant to Sections 10.1(b), 10.1(c) or 10.1(e) shall not
relieve the breaching Party from Liability for an uncured willful breach of a
representation, warranty, covenant, or agreement giving rise to such
termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except this Section 10.3 and
Articles 1, 2, 3, 4 and 11 and Section 8.10.
ARTICLE 11.
MISCELLANEOUS
-------------
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Acquisition Proposal" with respect to a Party shall mean any tender offer
or exchange offer or any proposal for a merger, acquisition of all of the stock
or assets of, or other business combination involving the acquisition of such
Party or any of its Subsidiaries or the acquisition of a substantial equity
interest in, or a substantial portion of the assets of, such Party or any of its
Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting interest of such Person; or (iii) any other Person for which a Person
described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits, the FLAG Disclosure Memorandum and BROWN BANK Disclosure Memorandum
delivered pursuant hereto and incorporated herein by reference.
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"Assets" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or contingent,
or otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, or any Affiliate of such Person and wherever located.
"BROWN BANK Common Stock" shall mean the $1.00 par value common stock of
BROWN BANK.
"BROWN BANK Disclosure Memorandum" shall mean the written information
entitled "BROWN BANK Disclosure Memorandum" delivered prior to execution of this
Agreement, to FLAG describing in reasonable detail the matters contained therein
and, with respect to each disclosure made therein, specifically referencing each
Section of this Agreement under which such disclosure is being made. Information
disclosed with respect to one Section shall not be deemed to be disclosed for
purposes of any other Section not specifically referenced with respect thereto,
unless it is clear from the disclosure of such information that it applies to
other Sections.
"BROWN BANK Entities" shall mean, collectively, BROWN BANK and all BROWN
BANK Subsidiaries.
"BROWN BANK Financial Statements" shall mean (i) the consolidated
statements of condition (including related notes and schedules, if any) of BROWN
BANK as of March 31, 1998, and as of December 31, 1997 and the related
statements of income, changes in shareholders' equity, and cash flows (including
related notes and schedules, if any) for the three months ended March 31, 1998,
and for the Fiscal year ended December 31, 1997, and (ii) the consolidated
statements of condition of BROWN BANK (including related notes and schedules, if
any) and related statements of income, changes in shareholders' equity, and cash
flows (including related notes and schedules, if any) with respect to periods
ended subsequent to March 31, 1998.
"BROWN BANK Material Adverse Effect" shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on (i) the financial position,
business, or results of operations of BROWN BANK and its Subsidiaries, taken as
a whole, or (ii) the ability of BROWN BANK to perform its obligations under this
Agreement or to consummate the Merger or the other transactions contemplated by
this Agreement, provided that a "BROWN BANK Material Adverse Effect" shall not
be deemed to include the impact of (a) changes in banking and similar Laws of
general applicability or interpretations thereof by courts or governmental
authorities, (b) changes in generally accepted accounting principles or
regulatory accounting principles generally applicable to banks and their holding
companies, and (c) actions and omissions of BROWN BANK (or any of its
Subsidiaries) taken with the prior informed written Consent of FLAG in
contemplation of the transactions contemplated hereby.
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"BROWN BANK Subsidiaries" shall mean the Subsidiaries of BROWN BANK, which
shall include BROWN BANK Subsidiaries described in Section 5.4 and any
corporation, bank, savings association, or other organization acquired as a
Subsidiary of BROWN BANK in the future and held as a Subsidiary by BROWN BANK at
the Effective Time.
"Certificate of Merger" shall mean the Certificate of Merger to be executed
by CITIZENS and BROWN BANK and filed with the Secretary of State of the State of
Georgia relating to the Merger as contemplated by Section 1.1.
"Closing Date" shall mean the date on which the Closing occurs.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement (provided such oral
agreement is, in any one year period, in excess of $5,000 individually, or
$25,000 in the aggregate), arrangement, authorization, commitment, contract,
indenture, instrument, lease, obligation, plan, practice, restriction,
understanding, or undertaking of any kind or character, or other document to
which any Person is a party or that is binding on any Person or its capital
stock, Assets or business.
"Default" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, after
failing to cure any such breach, violation, default, contravention or conflict
within any applicable grace or cure period (ii) any occurrence of any event that
with the passage of time or the giving of notice or both would constitute a
breach or violation of, default under, contravention of, or conflict with, any
Contract, Law, Order, or Permit, or (iii) any occurrence of any event that with
or without the passage of time or the giving of notice would give rise to a
right of any Person to exercise any remedy or obtain any relief under, terminate
or revoke, suspend, cancel, or modify or change the current terms of, or
renegotiate, or to accelerate the maturity or performance of, or to increase or
impose any Liability under, any Contract, Law, Order, or Permit.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface, or subsurface strata) and which are
administered, interpreted, or enforced by the United States Environmental
Protection Agency and other federal, state and local agencies with jurisdiction
over, and including common law in respect of, pollution or protection of the
environment, including the Comprehensive Environmental Response Compensation and
Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and
other Laws relating to emissions, migrations, discharges, releases, or
threatened releases of any Hazardous Material, or otherwise relating to the
manufacture, processing, distribution use, treatment, storage, disposal,
generation, recycling, transport, or handling of any Hazardous Material.
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"Equity Rights" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, understandings, warrants, or other
binding obligations of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of a
Person or by which a Person is or may be bound to issue additional shares of its
capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exhibits 1 through 4," inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"FLAG Capital Stock" shall mean, collectively, the FLAG Common Stock, the
FLAG Preferred Stock and any other class or series of capital stock of FLAG.
"FLAG Common Stock" shall mean the $1.00 par value common stock of FLAG.
"FLAG Disclosure Memorandum" shall mean the written information entitled
"FLAG Financial Corporation Disclosure Memorandum" delivered prior to execution
of this Agreement, to BROWN BANK describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto, unless it is clear from the
disclosure of such information that it applies to other Sections.
"FLAG Entities" shall mean, collectively, FLAG and all FLAG Subsidiaries.
"FLAG Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of FLAG as of March 31, 1998 and
as of December 31, 1997 and 1996, and the related statements of income, changes
in shareholders' equity, and cash flows (including related notes and schedules,
if any) for the three months ended March 31, 1998, and for each of the three
fiscal years ended December 31, 1997, 1996 and 1995, as filed by FLAG in SEC
Documents, and (ii) the consolidated balance sheets of FLAG (including related
notes and schedules, if any) and related statements of income, changes in
shareholders' equity, and cash flows (including related notes and schedules, if
any) included in SEC Documents filed with respect to periods ended subsequent to
March 31, 1998.
"FLAG Material Adverse Effect" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results of
operations of FLAG and its Subsidiaries, taken as a whole, or (ii) the ability
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of FLAG Entities to perform their obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this Agreement,
provided that "Material Adverse Effect" shall not be deemed to include the
impact of (a) changes in banking and similar Laws of general applicability or
interpretations thereof by courts or governmental authorities, (b) changes in
generally accepted accounting principles or regulatory accounting principles
generally applicable to savings associations, banks, and their holding
companies, and (c) actions and omissions of FLAG (or any of its Subsidiaries)
taken with the prior informed written Consent of BROWN BANK in contemplation of
the transactions contemplated hereby.
"FLAG Preferred Stock" shall mean the shares of preferred stock of FLAG.
"FLAG Subsidiaries" shall mean the Subsidiaries of FLAG, which shall
include the FLAG Subsidiaries described in Section 6.4 and any corporation,
bank, savings association, or other organization acquired as a Subsidiary of
FLAG in the future and held as a Subsidiary by FLAG at the Effective Time.
"GAAP" shall mean generally accepted accounting principles, consistently
applied during the periods involved.
"GBCC" shall mean the Georgia Business Corporation Code.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
constituent, hazardous waste, solid waste, special waste, regulated substance,
or toxic substance (as those terms are listed, defined or regulated by any
applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants,
petroleum, petroleum products, or oil (and specifically shall include asbestos
requiring abatement. removal, or encapsulation pursuant to the requirements of
governmental authorities and any polychlorinated biphenyls).
"HOLA" shall mean the Home Owners' Loan Act of 1933, as amended.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, and licenses, computer
software (including any source or object codes therefor or documentation
relating thereto), trade secrets, franchises, inventions, and other intellectual
property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
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"Knowledge" as used with respect to a FLAG Entity (including references to
being aware of a particular matter) shall mean those facts that are known or
should reasonably have been known after due inquiry by the chairman, president,
chief financial officer, chief accounting officer, chief operating officer,
chief credit officer, general counsel, any assistant or deputy general counsel,
or any senior, executive or other vice president of such FLAG Entity.
"Knowledge" as used with respect to a BROWN BANK Entity (including references to
being aware of a particular matter) shall mean those facts that are actually
known (with no obligation of inquiry) by the president and chief executive
officer of such BROWN BANK Entity.
"Law" shall mean any code, law (including common law), ordinance,
regulation, decision, judicial interpretation, reporting or licensing
requirement, rule, or statute applicable to a Person or its Assets, Liabilities,
or business, including those promulgated, interpreted or enforced by any
Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course of
business) of any type, whether accrued, absolute or contingent, liquidated or
unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable, (ii) for depository institution Subsidiaries of a Party, pledges to
secure deposits and other Liens incurred in the ordinary course of the banking
business, and (iii) Liens which do not materially impair the use of or title to
the Assets subject to such Lien.
"Litigation" shall mean any action, arbitration, cause of action. claim,
complaint investigation hearing, criminal prosecution, governmental or other
examination or other administrative or other proceeding relating to or affecting
a Party, its business. its Assets (including Contracts related to it), or the
transactions contemplated by this Agreement. but shall not include regular.
periodic examinations of depository institutions and their Affiliates by
Regulatory Authorities.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq National Market" shall mean the National Market System of the
National Association of Securities Dealers Automated Quotations System.
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"Operating Property" shall mean any property owned, leased, or operated by
the Party in question or by any of its Subsidiaries and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
"OTS" shall mean the Office of Thrift Supervision.
"Participation Facility" shall mean any facility or property in which the
Party in question or any of its Subsidiaries participates in the management and,
where required by the context, said term means the owner or operator of such
facility or property, but only with respect to such facility or property.
"Party" shall mean either BROWN BANK, CITIZENS, or FLAG, and "Parties"
shall mean BROWN BANK, CITIZENS, and FLAG.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets, or
business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Registration Statement" shall mean the Registration Statement on Form S-4,
or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by FLAG under the 1933 Act
with respect to the shares of FLAG Common Stock to be issued to the shareholders
of BROWN BANK in connection with the transactions contemplated by this
Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the NASD, the
Federal Trade Commission, the United States Department of Justice, the Board of
the Governors of the Federal Reserve System, the Office of Thrift Supervision
(including its predecessor, the Federal Home Loan Bank Board), the Federal
Deposit Insurance Corporation, the Georgia Department of Banking and Finance,
and all other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
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<PAGE>
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"Shareholders Meeting" shall mean the meeting of the shareholders of BROWN
BANK to be held pursuant to Section 8.3, including any adjournment or
adjournments thereof.
"Subsidiaries" shall mean all those corporations, associations, or other
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided, there
shall not be included any such entity the equity securities of which are owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves
as a general partner, (iii) in the case of a limited liability company, serves
as a managing member, or (iv) otherwise has the ability to elect a majority of
the directors, trustees or managing members thereof.
"Surviving Bank" shall mean CITIZENS as the surviving bank resulting from
the Merger.
"Tax Return" shall mean any report, return, information return, or other
information required to be supplied to a taxing authority in connection with
Taxes, including any return of an affiliated or combined or unitary group that
includes a Party or its Subsidiaries.
"Tax" or "Taxes" shall mean any federal, state, county, local, or foreign
taxes, charges, fees, levies, imposts, duties, or other assessments, including
income, gross receipts, excise, employment, sales, use, transfer, license,
payroll, franchise, severance, stamp, occupation, windfall profits,
environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business
and unemployment, disability, real property, personal property, registration, ad
valorem, value added, alternative or add-on minimum, estimated, or other tax or
governmental fee of any kind whatsoever, imposed or required to be withheld by
the United States or any state, county, local or foreign government or
subdivision or agency thereof, including any interest, penalties, and additions
imposed thereon or with respect thereto.
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(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
Allowance Section 5.9
BROWN BANK Benefit Plans Section 5.15(a)
BROWN BANK Contracts Section 5.16
BROWN BANK ERISA Plan Section 5.15(a)
BROWN BANK Pension Plan Section 5.15(a)
Certificates Section 4.1
Closing Section 1.2
Effective Time Section 1.3
ERISA Affiliate Section 5.15(c)
Exchange Agent Section 4.1
Exchange Ratio Section 3.1(b)
FLAG Benefit Plans Section 6.15(a)
FLAG ERISA Plan Section 6.15(a)
FLAG Pension Plan Section 6.15(a)
FLAG SEC Reports Section 6.5(a)
Merger Section 1.1
Tax Opinion Section 9.1(e)
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the Parties
shall bear and pay all direct costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel.
(b) If this Agreement is terminated by FLAG pursuant to Sections 10.1(b),
(c) or (d)(ii), BROWN BANK shall pay to FLAG an amount equal to the lesser of
$100,000 or FLAG's actual out of pocket expenses incurred in connection with the
transactions contemplated by this Agreement.
(c) If this Agreement is terminated by BROWN BANK pursuant to Sections
10.1(b) or (c), FLAG shall pay to BROWN BANK an amount equal to the lesser of
$100,000 or BROWN BANK's actual out of pocket expenses incurred in connection
with the transactions contemplated by this Agreement.
(d) Nothing contained in this Section 11.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a Party of the
terms of this Agreement or otherwise limit the rights of the nonbreaching Party.
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<PAGE>
11.3 Brokers and Finders. Each of the Parties represents and warrants that
neither it nor any of its officers, directors, employees, or Affiliates has
employed any broker or finder or incurred any Liability for any financial
advisory fees, investment bankers' fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the transactions contemplated
hereby. In the event of a claim by any broker or finder based upon his or its
representing or being retained by or allegedly representing or being retained by
BROWN BANK or by FLAG, each of BROWN BANK and FLAG, as the case may be, agrees
to indemnify and hold the other Party harmless of and from any Liability in
respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement,
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after shareholder approval of this
Agreement has been obtained; provided, that after any such approval by the
holders of BROWN BANK Common Stock, there shall be made no amendment that,
pursuant to Section 552.13(h) of the OTS Regulations, requires further approval
by such shareholders without the further approval of such shareholders; and
further provided, that after any such approval by the holders of FLAG Common
Stock, the provisions of this Agreement relating to the manner or basis in which
shares of BROWN BANK Common Stock will be exchanged for shares of FLAG Common
Stock shall not be amended after the Shareholders' Meeting in a manner adverse
to the holders of FLAG Common Stock without any requisite approval of the
holders of the issued and outstanding shares of FLAG Common Stock entitled to
vote thereon.
11.6 Waivers.
(a) Prior to or at the Effective Time, FLAG, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
BROWN BANK, to waive or extend the time for the compliance or fulfillment by
BROWN BANK of any and all of its obligations under this Agreement, and to waive
any or all of the conditions precedent to the obligations of FLAG under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of FLAG.
(b) Prior to or at the Effective Time, BROWN BANK, acting through its Board
of Directors, chief executive officer or other authorized officer, shall have
the right to waive any Default in the performance of any term of this Agreement
by FLAG or by CITIZENS, to waive or extend the time for the compliance or
fulfillment by FLAG or by CITIZENS, of any and all of its obligations under this
53
<PAGE>
Agreement, and to waive any or all of the conditions precedent to the
obligations of BROWN BANK under this Agreement, except any condition which, if
not satisfied, would result in the violation of any Law. No such waiver shall be
effective unless in writing signed by a duly authorized officer of BROWN BANK.
(c) The failure of any Party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more instances shall be deemed to be or construed as a further or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
BROWN BANK: BROWN BANK
Railroad Street
Cobbtown, Georgia 30420
Telecopy Number: (912) 934-0105
Attention: Dennis D. Allen
Copy to Counsel: Morris, Manning & Martin, L.L.P.
1600 Atlanta Financial Center
3343 Peachtree Road, NE
Atlanta, GA 30326
Telecopy Number: (404) 365-9532
Attention: T. Daniel Brannan, Esq.
FLAG: FLAG Financial Corporation
101 North Greenwood St.
LaGrange, GA 30240
Telecopy Number: (706) 845-5155
Attention: J. Daniel Speight, Jr.
54
<PAGE>
CITIZENS: Citizens Bank
100 Union Street
Vienna, GA 31092
Telecopy Number: (912) 268-7383
Attention: J. Daniel Speight, Jr.
Copy to Counsel: Powell Goldstein Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy Number: (404) 572-5958
Attention: Walter G. Moeling IV, Esq.
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Georgia, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions, Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether under
any rule of construction or otherwise. No party to this Agreement shall be
considered the draftsman. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all parties
hereto.
11.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
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<PAGE>
11.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
[SIGNATURES APPEAR ON NEXT PAGE]
56
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SIGNATURES TO AGREEMENT AND PLAN OF MERGER
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
FLAG FINANCIAL CORPORATION
By: /s/J. Daniel Speight, Jr.
-----------------------------------
J. Daniel Speight, Jr.
President & Chief Executive Officer
CITIZENS BANK
By: /s/J. Daniel Speight, Jr.
----------------------------------
J. Daniel Speight, Jr.
President
THE BROWN BANK
By: /s/Dennis D. Allen
---------------------------------
Dennis D. Allen
President
57
<PAGE>
Exhibit 1
12.1 AFFILIATE AGREEMENT
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
Attention: J. Daniel Speight, Jr.
Gentlemen:
The undersigned is a shareholder of THE BROWN BANK, a federal savings bank,
and will become a shareholder of FLAG Financial Corporation ("FLAG"), a Georgia
corporation, pursuant to the transactions described in the Agreement and Plan of
Merger, dated as of July 24, 1998 (the "Agreement"), by and among FLAG, CITIZENS
BANK ("CITIZENS"), and THE BROWN BANK. Under the terms of the Agreement, THE
BROWN BANK will be merged into and with CITIZENS, a wholly-owned subsidiary of
FLAG (the "Merger"), and the shares of the $1.00 par value common stock of THE
BROWN BANK ("BROWN BANK Common Stock") will be converted into and exchanged for
shares of the $1.00 par value common stock of FLAG ("FLAG Common Stock"). This
Affiliate Agreement represents an agreement between the undersigned and FLAG
regarding certain rights and obligations of the undersigned in connection with
the shares of FLAG to be received by the undersigned as a result of the Merger.
In consideration of the Merger and the mutual covenants contained herein,
the undersigned and FLAG hereby agree as follows:
1. Affiliate Status. The undersigned understands and agrees that as to THE
BROWN BANK he is an "affiliate" under Rule 145(c) as defined in Rule 405 of the
Rules and Regulations of the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933, as amended ("1933 Act"), and the undersigned
anticipate that he will be such an "affiliate" at the time of the Merger.
2. Initial Restrictions on Disposition.
The undersigned agrees that he will not sell, transfer or otherwise dispose
of his interests in, or reduce his risk relative to, any of the shares of FLAG
Common Stock into which his shares of BROWN BANK Common Stock are converted upon
consummation of the Merger until such time as FLAG notifies the undersigned that
the requirements of SEC Accounting Series Release Nos. 130 and 135 ("ASR 130 and
135") have been met, except that transfers may be made in compliance with Staff
Accounting Bulletin No. 76 issued by the SEC. The undersigned understands that
ASR 130 and 135 relate to publication of financial results of post-Merger
<PAGE>
combined operations of CITIZENS and THE BROWN BANK. FLAG agrees that it will
publish such results within 45 days after the end of the first fiscal quarter of
FLAG containing the required period of post-Merger combined operations and that
it will notify the undersigned promptly following such publication.
3. Covenants and Warranties of Undersigned. The undersigned represents,
warrants and agrees that:
(a) At any meeting of shareholders of THE BROWN BANK called to vote upon
the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with respect to
the Merger and the Merger Agreement is sought (the "Shareholders' Meeting"), the
undersigned shall vote (or cause to be voted) the Shareholder's Shares in favor
of the Merger, the execution and delivery by THE BROWN BANK of the Merger
Agreement, and the approval of the terms thereof and each of the other
transactions contemplated by the Merger Agreement, provided that the terms of
the Merger Agreement shall not have been amended to reduce the consideration
payable in the Merger to a lesser amount of FLAG Common Stock or otherwise to
materially and adversely impair the Shareholder's rights or increase the
Shareholder's obligations thereunder. The undersigned hereby waives any rights
of appraisal, or rights to dissent from the Merger, that the undersigned may
have.
(b) The FLAG Common Stock received by the undersigned as a result of the
Merger will be taken for his own account and not for others, directly or
indirectly, in whole or in part.
(c) FLAG has informed the undersigned that any distribution by the
undersigned of FLAG Common Stock has not been registered under the 1933 Act and
that shares of FLAG Common Stock received pursuant to the Merger can only be
sold by the undersigned (1) following registration under the 1933 Act, or (2) in
conformity with the volume and other requirements of Rule 145(d) promulgated by
the SEC as the same now exist or may hereafter be amended, or (3) to the extent
some other exemption from registration under the 1933 Act might be available.
The undersigned understands that FLAG is under no obligation to file a
registration statement with the SEC covering the disposition of the
undersigned's shares of FLAG Common Stock or to take any other action necessary
to make compliance with an exemption from such registration available.
(d) The undersigned will, and will cause each of the other parties whose
shares are deemed to be beneficially owned by the undersigned pursuant to
Section 9 hereof, have all shares of BROWN BANK Common Stock beneficially owned
by the undersigned registered in the name of the undersigned or such parties, as
applicable, prior to the effective date of the Merger and not in the name of any
bank, broker-dealer, nominee or clearinghouse.
(e) During the thirty (30) days immediately preceding the Effective Time
of the Merger, the undersigned has not sold, transferred, or otherwise disposed
of his interests in, or reduced his risk relative to, any of the shares of BROWN
BANK Common Stock beneficially owned by the undersigned as of the record date
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<PAGE>
for determination of shareholders entitled to vote at the Shareholders' Meeting
of THE BROWN BANK held to approve the Merger.
(f) The undersigned is aware that FLAG intends to treat the Merger as a
tax-free reorganization under Section 368 of the Code for federal income tax
purposes.
4. Restrictions on Transfer. The undersigned understands and agrees that
stop-transfer instructions with respect to the shares of FLAG Common Stock
received by the undersigned pursuant to the Merger will be given to FLAG's
Transfer Agent and that there will be placed on the certificates for such
shares, or shares issued in substitution thereof, a legend stating in substance:
The shares represented by this certificate were issued pursuant to a
business combination which is accounted for as a "pooling of interests" and may
not be sold, nor may the owner thereof reduce his risks relative thereto in any
way, until such time as FLAG Financial Corporation ("FLAG") has published the
financial results covering at least 30 days of combined operations after the
effective date of the merger through which the business combination was
effected. In addition, the shares represented by this certificate may not be
sold, transferred or otherwise disposed of except or unless (1) covered by an
effective registration statement under the Securities Act of 1933, as amended,
(2) in accordance with (i) Rule 145(d) (in the case of shares issued to an
individual who is an affiliate of FLAG) of the Rules and Regulations of such
Act, or (3) in accordance with a legal opinion satisfactory to counsel for FLAG
that such sale or transfer is otherwise exempt from the registration
requirements of such Act.
Such legend will also be placed on any certificate representing FLAG
securities issued subsequent to the original issuance of FLAG Common Stock
pursuant to the Merger as a result of any transfer of such shares or any stock
dividend, stock split, or other recapitalization as long as the FLAG Common
Stock issued to the undersigned pursuant to the Merger has not been transferred
in such manner as to justify the removal of the legend therefrom. Upon the
request of the undersigned, FLAG shall cause the certificates representing the
shares of FLAG Common Stock issued to the undersigned in connection with the
Merger to be reissued free of any legend relating to restrictions on transfer by
virtue of ASR 130 and 135 as soon as practicable after the requirements of ASR
130 and 135 have been met. In addition, if the provisions of Rules 144 and 145
are amended to eliminate restrictions applicable to the FLAG Common Stock
received by the undersigned pursuant to the Merger, or at the expiration of the
restrictive period set forth in Rule 145(d), FLAG, upon the request of the
undersigned, will cause the certificates representing the shares of FLAG Common
Stock issued to the undersigned in connection with the Merger to be reissued
free of any legend relating to the restrictions set forth in Rules 144 and
145(d) upon receipt by FLAG of an opinion of its counsel to the effect that such
legend may be removed.
5. Understanding of Restrictions on Disposition. The undersigned has
carefully read the Agreement and this Affiliate Agreement and has discussed
their requirements and impact upon his ability to sell, transfer or otherwise
dispose of the shares of FLAG Common Stock received by the undersigned, to the
3
<PAGE>
extent he believes necessary, with his counsel or counsel for THE BROWN BANK.
6. Filing of Reports by FLAG. FLAG agrees, for a period of three years
after the effective date of the Merger, to file on a timely basis all reports
required to be filed by it pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended, so that the public information provisions of Rule 145(d)
promulgated by the SEC as the same are presently in effect will be available to
the undersigned in the event the undersigned desires to transfer any shares of
FLAG Common Stock issued to the undersigned pursuant to the Merger.
7. Transfer Under Rule 145(d). If the undersigned desires to sell or
otherwise transfer the shares of FLAG Common Stock received by him in connection
with the Merger at any time during the restrictive period set forth in Rule
145(d), the undersigned will provide the necessary representation letter to the
transfer agent for FLAG Common Stock, together with such additional information
as the transfer agent may reasonably request. If FLAG's counsel concludes that
such proposed sale or transfer complies with the requirements of Rule 145(d),
FLAG shall cause such counsel to provide such opinions as may be necessary to
FLAG's transfer agent so that the undersigned may complete the proposed sale or
transfer.
8. Certain Actions. The undersigned covenants and agrees with FLAG that,
for a period of two (2) years after the effective time of the Merger, the
undersigned shall not, without the prior written consent of FLAG, directly or
indirectly serve as a consultant to, serve as a management official of, or be or
become a major shareholder of any financial institution having an office in
Candler and Tatnall Counties, Georgia. It is expressly understood that the
covenants contained in this paragraph 8 do not apply to (i) "management
official" positions which the undersigned holds with financial institutions
(other than FLAG, THE BROWN BANK, and their subsidiaries) as of the date of this
Agreement, (ii) securities holdings which cause the undersigned to be deemed a
major shareholder of a financial institution (other than FLAG, THE BROWN BANK,
and their subsidiaries) as of the date of this Agreement, or (iii) advisory
relationships with a financial institution which the undersigned has as of the
date of this Agreement or may have after the date hereof solely in the capacity
as legal counsel. For the purposes of the covenants contained in this paragraph
8, the following terms shall have the following respective meanings:
(a) The term "management official" shall refer to service of any type which
gives the undersigned the authority to participate, directly or indirectly, in
policy-making functions of the financial institution. This includes, but is not
limited to, service as an organizer, officer, director, or advisory director of
the financial institution. It is expressly understood that the undersigned may
be deemed a management official of the financial institution whether or not he
holds any official, elected, or appointed position with such financial
institution.
(b) The term "financial institution" shall refer to any bank, bank holding
company, savings and loan association, savings and loan holding company,
banking-related company, or any other similar financial institution which
engages in the business of accepting deposits or making loans or which owns or
4
<PAGE>
controls a company which engages in the business of accepting deposits or making
loans. It is expressly understood that the term "financial institution" shall
include any financial institution as defined herein that, after the date of this
Agreement, makes application for an appropriate federal or state regulatory
authority for approval to organize.
(c) The term "major shareholder" shall refer to the beneficial ownership of
five percent (5%) or more of any class of voting securities or the ownership of
five percent (5%) of the total equity interest in such company, however
denominated.
The provisions of this paragraph 8 shall be of no further force and effect
if the undersigned is not offered employment as a director of FLAG or any of its
subsidiaries (to include the subsidiaries of THE BROWN BANK acquired at the
Effective Time of the Merger) at the Effective Time of the Merger or, if the
undersigned is so employed, the undersigned's employment is terminated by FLAG
after the Effective Time of the Merger.
9. Acknowledgments. The undersigned recognizes and agrees that the
foregoing provisions also apply to all shares of the capital stock of THE BROWN
BANK and FLAG that are deemed to be beneficially owned by the undersigned
pursuant to applicable federal securities laws, which the undersigned agrees may
include, without limitation, shares owned or held in the name of (i) the
undersigned's spouse, (ii) any relative of the undersigned or of the
undersigned's spouse who has the same home as the undersigned, (iii) any trust
or estate in which the undersigned, the undersigned's spouse and any such
relative collectively own at least a ten-percent (10%) beneficial interest or of
which any of the foregoing serves as trustee, executor, or in any similar
capacity, and (iv) any corporation or other organization in which the
undersigned, the undersigned's spouse and any such relative collectively own at
least ten-percent (10%) of any class of equity securities or of the equity
interest. The undersigned further recognizes that, in the event that the
undersigned is a director or officer of FLAG or becomes a director or officer of
FLAG upon consummation of the Merger, among other things, any sale of FLAG
Common Stock by the undersigned within a period of less than six (6) months
following the Effective Time of the Merger may subject the undersigned to
liability pursuant to Section 16(b) of the Securities Exchange Act of 1934, as
amended.
10. Miscellaneous. This Affiliate Agreement is the complete agreement
between FLAG and the undersigned concerning the subject matter hereof. Any
notice required to be sent to any party hereunder shall be sent by registered or
certified mail, return receipt requested, using the addresses set forth herein
or such other address as shall be furnished in writing by the parties. This
Affiliate Agreement shall be governed by the laws of the State of Georgia.
SIGNATURES CONTAINED ON NEXT PAGE
5
<PAGE>
This Affiliate Agreement is executed as of the _________ day of
________________, 1998.
Very truly yours,
_________________________________________
Signature
_________________________________________
Print Name
_________________________________________
Address:
_________________________________________
_________________________________________
[add below the signatures of all registered
owners of shares deemed beneficially owned
by the affiliate]
_________________________________________
Name
_________________________________________
Name
_________________________________________
Name
AGREED TO AND ACCEPTED as of
the _______ day of _____________________, 1998.
FLAG FINANCIAL CORPORATION
By: _____________________________________
6
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Exhibit 2
13.1 MATTERS AS TO WHICH MORRIS, MANNING & MARTIN, L.L.P. WILL OPINE
1. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the Articles of
Incorporation or Bylaws of THE BROWN BANK or, to our knowledge but without any
independent investigation, result in any conflict with, breach of, or default or
acceleration under any Contract disclosed in the Agreement, Law, Order or Permit
(subject to the approval of Regulatory Authorities) to which THE BROWN BANK is a
party or by which THE BROWN BANK is bound.
2. The Agreement has been duly and validly executed and delivered by THE
BROWN BANK and, assuming valid authorization, execution and delivery by FLAG,
constitutes a valid and binding agreement of THE BROWN BANK enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; provided, however, that we express no opinion as to the
availability of the equitable remedy of specific performance.
3. The authorized capital stock of THE BROWN BANK consists of 25,000,000
shares of the BROWN BANK Common Stock, of which 175,000 shares were issued and
outstanding as of _______________________, 1998. The shares of the BROWN BANK
Common Stock that are issued and outstanding were not issued in violation of any
statutory preemptive rights of shareholders, were duly issued, and are fully
paid and nonassessable under the OTS Regulations. To our knowledge, except as
set forth above, or as disclosed in Section 5.3 of the BROWN BANK Disclosure
Memorandum, as of ______________, 1998, there were no shares of capital stock or
other equity securities of THE BROWN BANK outstanding and no outstanding Equity
Rights relating to the capital stock of THE BROWN BANK.
<PAGE>
Exhibit 3
____________________, 1998
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
RE: THE BROWN BANK
Ladies and Gentlemen:
This letter is delivered pursuant to Section 9.2(g) of the Agreement and
Plan of Merger, dated as of July 24, 1998, by and among FLAG Financial
Corporation, Citizens Bank, and The Brown Bank.
In my capacity as an officer or a director of The Brown Bank, and as of the
date of this letter, I do not, to the best of my knowledge, have any claims, and
I am not aware of any facts or circumstances that I believe are likely to give
rise to any claim, for indemnification under The Brown Bank's Charter or Bylaws
as existing on the date hereof or as may be afforded by the laws of the State of
Georgia or the United States.
Very truly yours,
_____________________________________
14.1 Signature of Officer or Director
_____________________________________
14.2 Name of Officer or Director
_____________________________________
Position at The Brown Bank
<PAGE>
Exhibit 4
MATTERS AS TO WHICH POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
WILL OPINE
1. FLAG Financial Corporation ("FLAG") is a corporation duly organized,
validly existing and in good standing under the laws of the State of Georgia
with full corporate power and authority to carry on the business in which it is
engaged, and to own and use its Assets.
2. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the Articles of
Incorporation or Bylaws of FLAG or, to our knowledge but without any independent
investigation, result in any conflict with, breach of, or default under any
Contract disclosed in the Agreement, Law, Order or Permit (subject to the
approval of Regulatory Authorities) to which FLAG is a party or by which FLAG is
bound.
3. The Agreement has been duly and validly executed and delivered by FLAG,
and assuming valid authorization, execution and delivery by THE BROWN BANK,
constitutes a valid and binding agreement of FLAG enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, or similar laws affecting creditors' rights generally, provided,
however, that we express no opinion as to the availability of the equitable
remedy of specific performance.
4. The authorized capital stock of FLAG consists of 20,000,000 shares of
FLAG Common Stock, of which 5,174,807 shares are issued and outstanding as of
____________ 1998, and (ii) 10,000,000 shares of FLAG Preferred Stock, of which
no shares are issued and outstanding as of _____________________ 1998. The
shares of FLAG Common Stock that are issued and outstanding were not issued in
violation of any statutory preemptive rights of shareholders, were duly issued
and are fully paid and nonassessable under the Georgia Business Corporation
Code. To our knowledge, except as set forth above, or as disclosed in Section
6.3 of the FLAG Disclosure Memorandum, as of _________________________, 1998,
there were no shares of capital stock or other equity securities of FLAG
outstanding and no outstanding Equity Rights relating to the capital stock of
FLAG. The shares of FLAG Common Stock to be issued to the shareholders of THE
BROWN BANK as contemplated by the Agreement have been registered under the
Securities Act of 1933, as amended, and when properly issued and delivered
following consummation of the Merger will be fully paid and non-assessable under
the Georgia Business Corporation Code.
<PAGE>
APPENDIX B
DISSENTER'S RIGHTS
Pursuant to 12 C.F.R. Section 552.14 of the Regulations of the Office of Thrift
Supervision
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TITLE 12 -- BANKS AND BANKING
CHAPTER V -- OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY
SUBCHAPTER A -- ORGANIZATION AND PROCEDURES
PART 552 -- INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL STOCK
ASSOCIATIONS
12 C.F.R. 552.14
Section 552.14 Dissenter and appraisal rights.
(a) Right to demand payment of fair or appraised value. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with Section 552.13 of this part shall have
the right to demand payment of the fair or appraised value of his stock:
Provided, That such stockholder has not voted in favor of the combination and
complies with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to Section 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) Procedure
(1) Notice. Each constituent Federal stock association shall
notify all stockholders entitled to rights under this section, not less than
twenty days prior to the meeting at which the combination agreement is to be
submitted for stockholder approval, of the right to demand payment of appraised
value of shares, and shall include in such notice a copy of this section. Such
written notice shall be mailed to stockholders of record and may be part of
management's proxy solicitation for such meeting.
(2) Demand for appraisal and payment. Each stockholder
electing to make a demand under this section shall deliver to the Federal stock
association, before voting on the combination, a writing identifying himself or
herself and stating his or her intention thereby to demand appraisal of and
payment for his or her shares. Such demand must be in addition to and separate
from any proxy or vote against the combination by the stockholder.
(3) Notification of effective date and written offer. Within
ten days after the effective date of the combination, the resulting association
shall:
(i) Give written notice by mail to stockholders of
constituent Federal stock associations who have complied with
the provisions of paragraph (c)(2) of this section and have
not voted in favor of the combination, of the effective date
of the combination;
(ii) Make a written offer to each stockholder to pay
for dissenting shares at a specified price deemed by the
resulting association to be the fair value thereof; and
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(iii) Inform them that, within sixty days of such
date, the respective requirements of paragraphs (c)(5) and
(c)(6) of this section (set out in the notice) must be
satisfied.
The notice and offer shall be accompanied by a balance sheet and
statement of income of the association the shares of which the dissenting
stockholder holds, for a fiscal year ending not more than sixteen months before
the date of notice and offer, together with the latest available interim
financial statements.
(4) Acceptance of offer. If within sixty days of the effective
date of the combination the fair value is agreed upon between the resulting
association and any stockholder who has complied with the provisions of
paragraph (c)(2) of this section, payment therefor shall be made within ninety
days of the effective date of the combination.
(5) Petition to be filed if offer not accepted. If within
sixty days of the effective date of the combination the resulting association
and any stockholder who has complied with the provisions of paragraph (c)(2) of
this section do not agree as to the fair value, then any such stockholder may
file a petition with the Office, with a copy by registered or certified mail to
the resulting association, demanding a determination of the fair market value of
the stock of all such stockholders. A stockholder entitled to file a petition
under this section who fails to file such petition within sixty days of the
effective date of the combination shall be deemed to have accepted the terms
offered under the combination.
(6) Stock certificates to be noted. Within sixty days of the
effective date of the combination, each stockholder demanding appraisal and
payment under this section shall submit to the transfer agent his certificates
of stock for notation thereon that an appraisal and payment have been demanded
with respect to such stock and that appraisal proceedings are pending. Any
stockholder who fails to submit his or her stock certificates for such notation
shall no longer be entitled to appraisal rights under this section and shall be
deemed to have accepted the terms offered under the combination.
(7) Withdrawal of demand. Notwithstanding the foregoing, at
any time within sixty days after the effective date of the combination, any
stockholder shall have the right to withdraw his or her demand for appraisal and
to accept the terms offered upon the combination.
(8) Valuation and payment. The Director shall, as he or she
may elect, either appoint one or more independent persons or direct appropriate
staff of the Office to appraise the shares to determine their fair market value,
as of the effective date of the combination, exclusive of any element of value
arising from the accomplishment or expectation of the combination. Appropriate
staff of the Office shall review and provide an opinion on appraisals prepared
by independent persons as to the suitability of the appraisal methodology and
the adequacy of the analysis and supportive data. The Director after
consideration of the appraisal report and the advice of the appropriate staff
shall, if he or she concurs in the valuation of the shares, direct payment by
the resulting association of the appraised fair market value of the shares, upon
surrender of the certificates representing such stock. Payment shall be made,
together with interest from the effective date of the combination, at a rate
deemed equitable by the Director.
(9) Costs and expenses. The costs and expenses of any
proceeding under this section may be apportioned and assessed by the Director as
he or she may deem equitable against all or some of the parties. In making this
determination the Director shall consider whether any party has acted
arbitrarily, vexatiously, or not in good faith in respect to the rights provided
by this section.
(10) Voting and distribution. Any stockholder who has demanded
appraisal rights as provided in paragraph (c)(2) of this section shall
thereafter neither be entitled to vote such stock for any purpose nor be
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entitled to the payment of dividends or other distributions on the stock (except
dividends or other distribution payable to, or a vote to be taken by
stockholders of record at a date which is on or prior to, the effective date of
the combination): Provided, That if any stockholder becomes unentitled to
appraisal and payment of appraised value with respect to such stock and accepts
or is deemed to have accepted the terms offered upon the combination, such
stockholder shall thereupon be entitled to vote and receive the distributions
described above.
(11) Status. Shares of the resulting association into which
shares of the stockholders demanding appraisal rights would have been converted
or exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The FLAG Articles and Bylaws generally provide that any director who is
deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding in which the director was made a party by reason of the
fact he is or was a director, to the fullest extent authorized by the GBCC;
provided, however, that FLAG will not indemnify any director for any liability
or expenses incurred by such director (i) for any appropriation, in violation of
his duties, of any business opportunity of FLAG; (ii) for any acts or omissions
which involve intentional misconduct or a knowing violation of law; (iii) for
the types of liability set forth in Section 14-2-832 of the GBCC or successor
provisions; or (iv) for any transaction from which the director derives an
improper personal benefit. FLAG's Articles and Bylaws provide for the
advancement of expenses to its directors at the outset of a proceeding, upon the
receipt from such director of the written affirmation and repayment promise
required by Section 14-2-856 of the GBCC, the purchase of insurance by FLAG
against any liability of the director arising from his duties and actions as a
director, the survival of such indemnification to the director's heirs,
executors and administrators, and the limitation of the directors' liability to
the corporation (except under the four situations described above). The
indemnification provisions are non-exclusive, and shall not impair any other
rights to which those seeking indemnification or advancement of expenses may be
entitled. The FLAG Bylaws also provide for a similar amount of indemnification
for the officers of FLAG. In the Bylaws of FLAG, shareholders are entitled to
notification of any indemnification paid to the directors. The GBCC's provisions
for indemnification are summarized below.
Section 14-2-851 of the GBCC empowers a corporation to indemnify any
person who was or is a party to any proceeding by reason of the fact that he is
or was a director of the corporation or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, or agent of
another domestic or foreign corporation, partnership, joint venture, trust,
employee benefit plan, or other entity against liability incurred in connection
with such proceeding, if he: (i) conducted himself in good faith; and (ii)
reasonably believed (a) in the case of conduct in his official capacity, that
such conduct was in the best interests of the corporation, (b) in all other
cases, that such conduct was at least not opposed to the best interests of the
corporation (for example, this Section states that a director's conduct with
respect to an employee benefit plan for a purpose he believed in good faith to
be in the interests of the participants in and beneficiaries of the plan is
conduct that satisfies this requirement), and (c) in the case of any criminal
proceeding, that he had no reasonable cause to believe his conduct was unlawful.
This Section further provides that the termination of proceeding by judgment,
order, settlement, or conviction or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the director did not meet the
standards of conduct described above. This Section also provides that a
corporation is not permitted to indemnify any director of the corporation under
this Section in connection with a proceeding by or in the right of the
corporation (except for reasonable expenses incurred in connection with the
proceeding if it is determined that the director has met the standards of
conduct as outlined in this Section), nor may a corporation indemnify a director
under this Section in connection with any proceeding with respect to conduct for
which he or she was adjudged liable on the basis that improper personal benefit
was received by him (whether or not the conduct involved action in his official
capacity).
Section 14-2-852 requires a corporation to indemnify a director against
reasonable expenses incurred by the director in connection with any proceeding
to which he was a party because he was a director of the corporation where the
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director is wholly successful, on the merits or otherwise, in the defense of
such proceeding.
Section 14-2-853 empowers a corporation to advance funds to a director,
before the final disposition of a proceeding to which he was a party because he
was a director of the corporation, in order to pay for or reimburse the
reasonable expenses incurred by the director if the director delivers to the
corporation a written affirmation to the corporation of his belief that he has
satisfied the relevant standard of conduct described in Section 14-2-851 (or
that the proceeding involves conduct for which a director's liability has been
eliminated under the corporation's articles of incorporation), and a written
undertaking by the director to repay any funds so advanced (which must be an
unlimited general obligation of the director, but which need not be secured, and
which may be accepted by the corporation without reference to the financial
ability of the director to repay the advancement) if it is ultimately determined
that the director is not entitled to indemnification under the provisions of the
GBCC. This Section further provides that any advancement of expenses to be made
pursuant to this Section must be authorized (i) by the Board of Directors: (a)
when there are two or more disinterested directors, by a majority vote of all
the disinterested directors (a majority of whom will constitute a quorum for
such purposes) or by a majority of the members of a committee consisting of two
or more disinterested directors who are appointed by such a vote; or (b) if
there are fewer than two disinterested directors, by majority vote of a quorum
of the Board of Directors, in which authorization the directors who do not
qualify as disinterested directors may take part; or (ii) by the shareholders of
the corporation, but no shares owned by a director who does not qualify as a
disinterested director may be voted on the authorization.
Section 14-2-854 provides that a director who is a party to a
proceeding by virtue of the fact that he is a director may apply to the court
conducting the proceeding or another court of competent jurisdiction for
indemnification or the advancement of expenses. Once a court receives such an
application, and after the court gives any notice which it deems necessary, the
court considering the application must order indemnification or advance for
expenses (i) if the court determines that the director is entitled to such
indemnification, or (ii) if the court determines that, taking into account all
of the relevant circumstances, it is fair and reasonable to indemnify the
director or to advance expenses to the director, even if the director failed to
satisfy the standards of conduct set forth in Section 14-2-851, failed to comply
with the requirements of Section 14-2-853, or was adjudged liable in any
proceeding by or in right of the corporation or any proceeding initiated on the
basis that improper personal benefit was received by the director (provided
that, if the director is adjudged so liable, the indemnification must be limited
to the reasonable expenses incurred by the director in connection with such
proceeding). In addition, Section 14-2-851 states that, if the court determines
that the director is entitled to indemnification or advance for expenses, the
court may also direct the corporation to pay the director's reasonable expenses
incurred in connection with obtaining such court-ordered indemnification or
advance for expenses.
Section 14-2-855 states that a corporation may not indemnify a director
under Section 14-2-851 unless such indemnification is authorized thereunder and
a determination is made that the indemnification of the director in a particular
proceeding is permissible due to the fact that the director has satisfied the
relevant standard of conduct set forth in Section 14-2-851. Such a determination
must be made: (i) if there are two or more disinterested directors, by the board
of directors by a majority vote of all such disinterested directors (a majority
of whom constitutes a quorum for such purposes) or by a majority of the members
of a committee of two or more disinterested directors appointed by such a vote;
(ii) by special legal counsel selected in the manner described in (i) above, or,
if there are fewer than two disinterested directors, selected by the board of
directors (including the directors who are not considered disinterested
directors); or (iii) by the shareholders of the corporation, but no shares owned
by a director who does not qualify as a disinterested director may be voted on
the determination. The authorization of indemnification and evaluation as to the
reasonableness of the expenses involved with such indemnification must be
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obtained in the same manner as the determination that indemnification is
permissible (as described above), except that, if there are fewer than two
disinterested directors, or the determination as to the permissibility of the
indemnification is made by special legal counsel, then the authorization of such
indemnification and the evaluation as to the reasonableness of the expenses
involved must be made by the board of directors (in which authorization and
evaluation directors who do not qualify as disinterested directors may
participate).
Section 14-2-856 states that, if authorized by the corporation's
articles of incorporation or a bylaw, contract, or resolution approved or
ratified by the shareholders by a majority of the votes entitled to be cast, a
corporation will be permitted to indemnify a director made a party to a
proceeding (including a proceeding brought by or in right of the corporation),
without regard to the other limitations on indemnification contained within
Title 14, Chapter 2, Article 8, Part 5 of the GBCC, but any director, who at the
time does not qualify as a disinterested director with respect to an existing or
threatened proceeding that would be covered by such authorization, will not be
permitted to vote the shares owned or voted under the control of such director
with respect to such authorization. However, Section 14-2-856 further states
that no corporation may indemnify a director under Section 14-2-856 for any
liability incurred in a proceeding in which the director is adjudged liable to
the corporation (or is subjected to injunctive relief in favor of the
corporation): (i) for any appropriation, in violation of his duties, of any
business opportunity of the corporation; (ii) for any acts or omissions
involving intentional misconduct or a knowing violation of law; (iii) for the
types of liability set forth in Section 14-2-832 of the GBCC (relating to
unlawful distributions); or (iv) for any transaction from which he received an
improper personal benefit. Where approved or authorized in the manner described
above, a corporation may advance or reimburse expenses incurred by the director
in advance of final disposition of the proceeding only if the director delivers
a written affirmation to the corporation which indicates his good faith belief
that his conduct does not fall within any of the four categories of conduct
listed above, and a written undertaking by the director (executed personally or
on his behalf) to repay any advances made to him by the corporation if it is
ultimately determined that the director is not entitled to indemnification under
this Section.
Section 14-2-857 provides that a corporation may indemnify and advance
expenses to an officer of the corporation who is made a party to a proceeding by
virtue of his status as an officer of the corporation. A corporation's officers
may be indemnified to the same extent as the corporation's directors (as
discussed above), and any officer who is not also a director (or who was made a
party to a proceeding solely due to an act or omission committed in his role as
an officer) may be indemnified to any further extent as provided in the articles
of incorporation, the bylaws, a resolution of the board of directors, or
contract except for liability arising out of conduct which constitutes: (i) an
appropriation, in violation of his duties as an officer, of any business
opportunity of the corporation; (ii) any acts or omissions which involve
intentional misconduct or a knowing violation of law; (iii) the types of
liability set forth in Section 14-2-832; or (iv) the receipt of an improper
personal benefit. In addition, this Section provides that a corporation may
indemnify and advance expenses to its employees or agents (who are not also
directors) to the extent provided in the corporation's articles of
incorporation, bylaws, general or specific action of its board of directors, or
contract (so long as such indemnification or advancement of expenses is
consistent with public policy).
Section 14-2-858 provides that the corporation is empowered to purchase
and maintain insurance on behalf of any person who is a director, officer,
employee, or agent of the corporation or who, while a director, officer,
employee or agent of the corporation serves at the request of the corporation as
a director, officer, partner, trustee, employee, or agent of another domestic or
foreign corporation, partnership, joint venture, trust, employee benefit plan,
or other entity against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such, whether or not the
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corporation would have the power to indemnify him or advance expenses against
such liability under the provisions of Title 14, Chapter 2, Article 8, Part 5 of
the GBCC.
The Registrant maintains an insurance policy insuring the Registrant
and directors and officers of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933.
Item 21. Exhibits And Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - Agreement and Plan of Merger, dated as of July 24, 1998, by
and among FLAG, Citizens Bank and Brown (included in
Appendix A to the Proxy Statement/Prospectus and
incorporated by reference herein).
2.2 - Agreement and Plan of Merger dated as of July 30, 1998, by
and between FLAG and Empire Bank Corp. (incorporated by
reference herein from the registrant's Current Report on
Form 8-K filed August 10, 1998)
2.3 - Agreement and Plan of Merger dated as of August 19, 1998, by
and between FLAG and Heart of Georgia Bancshares, Inc.
(incorporated by reference herein from the registrant's
Current Report on Form 8-K filed August 25, 1998)
4.1 - Articles of Incorporation of FLAG, as amended (incorporated
herein by reference from Exhibit 3.1(i) of the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
4.2 - Bylaws of FLAG, as amended (incorporated herein by
reference from Exhibit 3.1(ii) of the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
5 - Opinion of Powell, Goldstein, Frazer & Murphy LLP (including
consent)
8 - Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
federal income tax matters (including consent)
10.1 - Employment Agreement between J. Daniel Speight, Jr. and the
Company dated as of April 1, 1998*+
10.2 - Employment Agreement between John S. Holle and the Company
dated as of April 1, 1998*+
10.3 - Employment Agreement between Ellison C. Rudd and the Company
dated as of April 1, 1998*+
10.4 - Employment Agreement between Patti S. Davis and the Company
dated as of April 1, 1998*+
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10.5 - Separation Agreement between Charles O. Hinely and the
Company dated April 1, 1998*+
10.6 - Separation Agreement between J. Preston Martin and the
Company dated May 13, 1998*+
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight,
Jr. and Citizens Bank dated November 2, 1992*+
10.8 - Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank)for individuals listed
on exhibit cover page*+
10.10 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.11 - Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Incorporated herein by reference from Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.12 - Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995*+
10.13 - Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.14 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Fee Continuation Program of First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.15 - Form of Indexed Executive Salary Continuation Plan Agreement
by and between First Federal Savings Bank of LaGrange and
individuals listed on exhibit coverage page*+
10.16 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.17 - Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William
F. Holle, Jr. dated February 3, 1995*+
10.18 - FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)*
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10.19 - FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993)*
11 - Statement regarding Computation of Per Share Earnings+
13 - Registrant's Annual Report for the fiscal year ended
December 31, 1997 (incorporated herein by reference from
Exhibit 13 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
21 - Subsidiaries of the registrant +
23.1 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of FLAG Financial Corporation)
23.2 - Consent of Robinson, Grimes and Company, P.C. (with respect
to financial statements of FLAG Financial Corporation)
23.3 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of Middle Georgia Bankshares, Inc.)
23.4 - Consent of Thigpen, Jones, Seaton & Co., P.C. (with respect
to financial statements of Three Rivers Bancshares, Inc.)
23.5 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of The Brown Bank)
23.6 - Consents of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibits 5 and 8)
24 - Powers of Attorney (appears on the signature page to this
Registration Statement)
99.1 - Form of Proxy of Brown
99.2 FLAG Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997 (without exhibits)
99.3 FLAG Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
*The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Registration Statement on Form S-4.
+Incorporated by reference from exhibit of the same number from the
Registrant's Amendment No. 1 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
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(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10
(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the Registrant's Articles of Incorporation
or Bylaws, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
II-7
<PAGE>
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of LaGrange, State of Georgia, on October 14, 1998.
FLAG FINANCIAL CORPORATION
By: /s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Daniel Speight, Jr. and John S. Holle,
and each of them, as true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith,
including any Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
which said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities indicated on October 14, 1998.
Signature Title
--------- -----
/s/ Dr. A. Glenn Bailey Director
----------------------------
Dr. A. Glenn Bailey
/s/ H. Speer Burdette, III Director
- -----------------------------
H. Speer Burdette, III
/s/ Patti S. Davis Director, Senior Vice President,
- ------------------------------ Chief Financial Officer and
Patti S. Davis Director(principal financial and
accounting officer)
<PAGE>
/s/ Fred A. Durand, III Director
- ------------------------------
Fred A. Durand, III
/s/ John S. Holle Chairman of the Board and Director
- ------------------------------
John S. Holle
/s/ James W. Johnson Director
- ------------------------------
James W. Johnson
Director
- ------------------------------
Kelly R. Linch
Director
- ------------------------------
J. Preston Martin
/s/ Ellison C. Rudd Senior Vice President, Secretary
- ------------------------------ and Treasurer
Ellison C. Rudd
/s/ J. Daniel Speight President, Chief Executive Officer
- ------------------------------ and Director(principal executive
J. Daniel Speight officer)
/s/ John W. Stewart, Jr. Director
- ----------------------------
John W. Stewart, Jr.
Director
- -----------------------------
Robert W. Walters
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - Agreement and Plan of Merger, dated as of July 24, 1998, by
and among FLAG, Citizens Bank and Brown (included in
Appendix A to the Proxy Statement/Prospectus and
incorporated by reference herein)
2.2 - Agreement and Plan of Merger dated as of July 30, 1998, by
and between FLAG and Empire Bank Corp. (incorporated by
reference herein from the registrant's Current Report on
Form 8-K filed August 10, 1998)
2.3 - Agreement and Plan of Merger dated as of August 19, 1998, by
and between FLAG and Heart of Georgia Bancshares, Inc.
(incorporated by reference herein from the registrant's
Current Report on Form 8-K filed August 25, 1998)
4.1 - Articles of Incorporation of FLAG, as amended (incorporated
herein by reference from Exhibit 3.1(i) of the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
4.2 - Bylaws of FLAG, as amended (incorporated herein by
reference from Exhibit 3.1(ii) of the registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
5 - Opinion of Powell, Goldstein, Frazer & Murphy LLP (including
consent)
8 - Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
federal income tax matters (including consent)
10.1 - Employment Agreement between J. Daniel Speight, Jr. and the
Company dated as of April 1, 1998*+
10.2 - Employment Agreement between John S. Holle and the Company
dated as of April 1, 1998*+
10.3 - Employment Agreement between Ellison C. Rudd and the Company
dated as of April 1, 1998*+
10.4 - Employment Agreement between Patti S. Davis and the Company
dated as of April 1, 1998*+
10.5 - Separation Agreement between Charles O. Hinely and the
Company dated April 1, 1998*+
10.6 - Separation Agreement between J. Preston Martin and the
Company dated May 13, 1998*+
<PAGE>
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight,
Jr. and Citizens Bank dated November 2, 1992*+
10.8 - Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.10 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.11 - Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Incorporated herein by reference from Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.12 - Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995*+
10.13 - Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.14 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Fee Continuation Program of First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.15 - Form of Indexed Executive Salary Continuation Plan Agreement
by and between First Federal Savings Bank of LaGrange and
individuals listed on exhibit coverage page*+
10.16 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.17 - Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William
F. Holle, Jr. dated February 3, 1995*+
10.18 - FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)*
10.19 - FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993)*
11 - Statement regarding Computation of Per Share Earnings+
<PAGE>
13 - Registrant's Annual Report for the fiscal year ended
December 31, 1997 (incorporated herein by reference from
Exhibit 13 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
21 - Subsidiaries of the registrant +
23.1 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of FLAG Financial Corporation)
23.2 - Consent of Robinson, Grimes and Company, P.C. (with respect
to financial statements of FLAG Financial Corporation)
23.3 - Consent of Porter Keadle Moore LLP (with Respect to
financial statements of Middle Georgia Bankshares, Inc.)
23.4 - Consent of Thigpen, Jones, Seaton & Co., P.C. (with respect
to financial statements of Three Rivers Bancshares, Inc.)
23.5 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of The Brown Bank)
23.6 - Consents of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibits 5 and 8)
24 - Powers of Attorney (appears on the signature page to this
Registration Statement)
99.1 - Form of Proxy of Brown
99.2 FLAG Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997 (without exhibits)
99.3 FLAG Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
*The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Registration Statement on Form S-4.
+Incorporated by reference from exhibit of the same number from the
Registrant's Amendment No. 1 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
EXHIBIT 5
[LETTERHEAD OF POWELL, GOLDSTEIN, FRAZER & MURPHY LLP]
October 14, 1998
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30204
Ladies and Gentlemen:
This opinion is given in connection with the filing of a Registration Statement
on Form S-4 (the "Registration Statement") with the Securities and Exchange
Commission, by FLAG Financial Corporation, a corporation organized and existing
under the laws of the State of Georgia ("FLAG"), with respect to the
registration under the Securities Act of 1933, as amended, of 262,500 shares of
the $1.00 par value common stock of FLAG (the "FLAG common stock") to be issued
in connection with the proposed merger of The Brown Bank ("Brown") with Citizens
Bank, a wholly-owned subsidiary of FLAG (the "Merger").
The Merger is intended to be effected pursuant to an Agreement and Plan
of Merger dated as of July 24, 1998 among FLAG, Citizens Bank and Brown,
pursuant to which each outstanding share of $1.00 par value common stock of
Brown (other than shares held by FLAG, Brown or their subsidiaries or by
shareholders who perfect dissenters' rights) will be converted into and
exchanged for the right to receive 1.5 shares of FLAG common stock.
In rendering this opinion, we have examined such corporate records and
documents as we have deemed relevant and necessary as the basis for the opinion
set forth herein.
Based upon the foregoing, it is our opinion that the shares of FLAG
common stock when issued to holders of Brown common stock on the terms and upon
fulfillment of the conditions set forth in the Agreement, will be validly
issued, fully paid and nonassessable under the Georgia Business Corporation
Code.
We consent to the use of this opinion and to the reference made to the
firm in the Proxy Statement/Prospectus of FLAG and Brown constituting part of
the Registration Statement.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
EXHIBIT 8
OPINION OF POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
October 14, 1998
The Brown Bank
Railroad Street
Cobbtown, Georgia 30420
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
Ladies and Gentlemen:
You have requested our opinion with respect to certain federal income
tax consequences of the merger of The Brown Bank, a federally-chartered savings
bank located in Cobbtown, Georgia ("Brown Bank"), with and into Citizens Bank, a
commercial bank organized and existing under the laws of the state of Georgia
("Citizens"), with Citizens as the survivor of the merger (the "Merger"). FLAG
Financial Corporation, a corporation organized and existing under the laws of
the state of Georgia ("FLAG"), owns all of the issued and outstanding stock of
Citizens. For purposes of rendering this opinion, we have reviewed and relied on
the Agreement and Plan of Merger by and between Flag, Citizens, and Brown Bank,
dated as of July 24, 1998 (the "Merger Agreement"), the certificates attached
hereto, and such other documents as we have considered appropriate. Unless
otherwise indicated, terms used in this opinion have the same meaning as in the
Merger Agreement.
For purposes of this opinion, we have assumed that the Merger will be
consummated at the Effective Time pursuant to the terms and conditions set forth
in the Merger Agreement. We have assumed that the cash paid to Brown Bank
shareholders pursuant to the Merger (including pursuant to a shareholder's
statutory right to dissent) does not exceed more than fifty percent (50%) of the
value of all shares of Brown Bank Common Stock outstanding as of the Effective
Time.
In addition, we have assumed with your permission that the facts and
representations certified to us in writing by Brown Bank, Citizens and FLAG
which are set forth in the certificates attached hereto, apply as of the
Effective Time. Copies of such certificates are attached hereto and incorporated
herein by reference. We have neither investigated nor verified the accuracy of
any of the facts that have been certified to us, upon which this opinion is
based.
This opinion is based also on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, Internal Revenue Service rulings,
judicial decisions, and other applicable authority, all as in effect on the date
of this opinion. The legal authorities on which this opinion is based may be
changed at any time. Any such changes may be retroactively applied and could
modify the opinions expressed herein. This opinion does not address any tax
considerations under foreign, state, or local laws, or the tax considerations to
certain Brown Bank shareholders in light of their particular circumstances,
including, persons who are not United States persons, dealers in securities,
tax-exempt entities, shareholders who do not hold Brown Bank Common Stock as
"capital assets" within the meaning of Code Section 1221, and shareholders who
acquired their shares of Brown Bank Common Stock pursuant to the exercise of
Brown Bank options or otherwise as compensation.
<PAGE>
The Brown Bank
FLAG Financial Corporation
October 14, 1998
Page 2
Based upon and subject to the foregoing, we are of the opinion that the
Merger will constitute a reorganization within the meaning of Code Section
368(a)(1)(A) and (a)(2)(D), and that the following are certain federal income
tax consequences that will result:
(a) No gain or loss will be recognized for federal income tax
purposes by Brown Bank shareholders upon the exchange of their shares
of Brown Bank Common Stock for FLAG Common Stock, except with respect
to any cash received in lieu of fractional shares. Cash paid in lieu of
fractional shares will be treated as if the fractional shares had been
issued in the Merger and redeemed by FLAG. Generally, the deemed
redemption of FLAG fractional shares will give rise to the recognition
of capital gain or loss (equal to the difference between the cash
received by a Brown Bank shareholder and such shareholder's basis
allocable to the fractional share), so long as the FLAG stock is a
capital asset in the hands of the Brown Bank shareholder and the
shareholder meets the requirements of Code Section 302(b)(1).
(b) The basis of the shares of FLAG Common Stock to be
received by Brown Bank shareholders will be the same as the basis of
Brown Bank Common Stock surrendered in exchange therefor, less any
basis allocable to the FLAG fractional shares that are redeemed for
cash if the redemption meets the requirements of Code Section
302(b)(1).
(c) The holding period of the FLAG Common Stock to be received
by each Brown Bank shareholder will include the period during which the
shares of Brown Bank Common Stock surrendered in exchange therefor had
been held, provided such shares were held by such shareholders as a
capital asset at the Effective Time of the Merger.
(d) Brown Bank shareholders who receive solely cash pursuant
to their statutory right to dissent will be treated as having received
such payment in redemption of their Brown Bank Common Stock, as
provided in Section 302(a) of the Internal Revenue Code, of their
stock. Generally, any gain or loss recognized by any such Brown Bank
shareholder will be capital gain or loss, provided (i) the Brown Bank
Common Stock constitutes a capital asset in the hands of such
shareholder, and (ii) the requirements of Code Section 302(b)(1), (2)
or (3) are met. Each affected Brown Bank shareholder should consult
such shareholder's own tax advisor for the tax effect of such
redemption (i.e., exchange treatment or dividend).
(e) No gain or loss will be recognized for federal income tax
purposes by Brown Bank, Citizens, or FLAG as a consequence of the
Merger, except for deferred gain or loss recognized pursuant to
Treasury Regulations issued under Code Section 1502.
This opinion is being rendered solely to the parties to whom it is
addressed and may be relied upon by them and the shareholders of Brown Bank.
This opinion may not be relied upon by any other party without the express
written permission of our Firm.
Very truly yours,
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<PAGE>
CERTIFICATE OF
THE BROWN BANK
In connection with the merger (the "Merger") of The Brown Bank ("Brown
Bank") with and into Citizens Bank ("Citizens"), a wholly-owned subsidiary of
FLAG Financial Corporation ("FLAG"), with Citizens as the surviving corporation,
in accordance with the Agreement and Plan of Merger by and between Brown Bank,
Citizens, and FLAG dated as of July 24, 1998 (the "Agreement'), Brown Bank,
through Dennis D. Allen and Barbara Rich, the President and the Senior Vice
President, respectively, of Brown Bank, makes the following certifications.
Unless otherwise indicated, terms used in this certificate have the same
meanings as in the Agreement.
1. The undersigned are the President and Senior Vice President,
respectively, of Brown Bank, a federally-chartered savings bank located in
Cobbtown, Georgia, and in such capacities have access to the information
contained herein.
2. The following facts and representations, made on behalf of the
management of Brown Bank and presented to Powell, Goldstein, Frazer & Murphy LLP
in connection with rendering the tax opinion referred to in the Agreement, are
on the date hereof true, correct and complete.
3. The Merger is expected to permit Brown Bank (a) avoid business
concerns of remaining an independent financial institution in light of current
economic conditions and the competition presented by larger financial
institutions, (b) develop a more liquid trading market for Brown Bank's
shareholder's investment, and (c) strengthen the Brown Bank banking franchise
and thereby make a long-term contribution to earnings per share.
4. Brown Bank has not made and will not make any extraordinary
distributions within the meaning of Treasury Regulations Section 1.368-1T(e)
with respect to its stock prior to or in connection with the Merger.
5. Brown Bank has paid or will pay expenses it incurred or incurs in
connection with the Merger. FLAG did not and will not pay the expenses of Brown
Bank or any shareholder of Brown Bank incurred in connection with the Merger.
6. There is no indebtedness outstanding between FLAG and Brown Bank or
between Citizens and Brown Bank that was issued, acquired, or will be settled at
a discount.
7. Not more than twenty-five percent (25%) of the fair market value of
Brown Bank's total assets consist of stock and securities of any one issuer, and
not more than fifty percent (50%) of the fair market value of its total assets
consists of stock and securities of five or fewer issuers. For purposes of the
preceding sentence, (a) a corporation's total assets exclude cash, cash items
(including accounts receivable and cash equivalents), and United States
government securities, (b) a corporation's total assets exclude stock and
securities issued by any subsidiary at least fifty percent (50%) of the voting
power or fifty percent (50%) of the total fair market value of the stock of
which is owned by the corporation, but the corporation is treated as owning
directly a ratable share (based on the percentage of the fair market value of
the subsidiary's stock owned by the corporation) of the assets owned by any such
subsidiary, and (c) all corporations that are members of the same "controlled
group" within the meaning of section 1563(a) of the Code are treated as a single
issuer.
<PAGE>
8. The fair market value of the assets of Brown Bank transferred to
FLAG equaled or exceeded the sum of the liabilities, if any, assumed by FLAG
plus the liabilities, if any, to which the transferred assets are subject.
9. The liabilities of Brown Bank, if any, assumed by FLAG and the
liabilities, if any, to which the transferred assets of Brown Bank are subject
were incurred by Brown Bank in the ordinary course of its business.
10.The transfer of assets pursuant to the Agreement does not constitute
a transfer in a "title 11 or similar case" as such term is defined in Section
368(a)(3) of the Code.
11. None of the shares of FLAG Common Stock, if any, received by any
shareholder-employee of Brown Bank is separate consideration for, or allocable
to, any services to be provided by such shareholder-employee under any
employment agreement with FLAG; none of the compensation to be received by any
shareholder-employee of the Brown Bank under an employment agreement with FLAG
will be separate consideration for, or allocable to, any shares of FLAG Common
Stock to be received by such shareholder-employee in the Merger; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
12. The fair market value of the FLAG Common Stock and other
consideration received by the shareholders of Brown Bank will be, in each
instance, approximately equal to the fair market value of the Brown Bank Common
Stock surrendered in exchange therefor.
13. The payment of cash in lieu of fractional shares of stock of Brown
Bank was not separately bargained for consideration and is being made for the
purpose of saving FLAG the expense and inconvenience of issuing fractional
shares.
14. No stock of Citizens will be issued in the Merger.
15. To the best knowledge of the undersigned, the shareholders of Brown
Bank have no plan or intention to sell, exchange, or otherwise dispose of any
FLAG shares to be received by them in the Merger. In addition, the undersigned
is not aware of any transfers of Brown Bank stock by Brown Bank shareholders
prior to the Effective Date which were made in contemplation of the Merger.
16. To the best of the knowledge of the undersigned, FLAG has no
present plan or intention to redeem any of its Common Stock issued in the Merger
and there is no present plan or intention on the part of the Brown Bank's
shareholders to sell any of the FLAG Common Stock received in the Merger to a
person related (as defined in Treasury Regulation Section 1.368-1(e)(3)) to
FLAG.
.
17. To the best of the knowledge of the undersigned, FLAG has no plan
or intention to sell or otherwise dispose of the assets of Brown Bank acquired
in the Merger except for dispositions made in the ordinary course of business or
transfers to a corporation controlled by FLAG. For purposes of the foregoing,
FLAG is considered to control a corporation in which it holds at least eighty
percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of all
other classes of stock.
18. Brown Bank has not and will not redeem, purchase or acquire any of
the outstanding shares of Company Common Stock prior to or in connection with
the Merger, and to the best of the knowledge of the undersigned, FLAG has no
<PAGE>
plan or intention to sell or otherwise dispose of an amount of Citizens stock
which would cause FLAG to no longer "control" the stock of Citizens. For
purposes of the foregoing, control means at least eighty percent (80%) of the
total combined voting power of all classes of stock entitled to vote and at
least eighty percent (80%) of the total number of all other classes of stock.
19. Brown Bank will merge with and into Citizens and, as a result of
the Merger, Citizens will acquire "substantially all" of the properties of Brown
Bank. For purposes of this Certificate, "substantially all" of Brown Bank's
properties shall mean at least ninety percent (90%) of the fair market value of
the net assets and at least seventy percent (70%) of the fair market value of
the gross assets held by Brown Bank immediately prior to the Merger. For
purposes of determining the percentage of Brown Bank's net and gross assets
acquired by Citizens, the following assets will be treated as property held by
Brown Bank immediately prior to, but not after, the Merger: (i) assets disposed
of by Brown Bank prior to the Merger, or by Citizens after the Merger, which
disposition was in contemplation of the Merger, including without limitation any
asset disposed of by Brown Bank or Citizens, other than in the ordinary course
of business, pursuant to a plan or intent existing during the period beginning
with the commencement of negotiations (whether formal or informal) with FLAG
regarding the Merger and ending on the Effective Time (the "Pre-Merger Period"),
(ii) assets used by Brown Bank to pay expenses or liabilities incurred in
connection with the Merger, and (iii) assets used in making any distribution,
redemption, or other payment with respect to Brown Bank Common Stock or rights
to acquire such stock that are made during the Pre-Merger Period or in
contemplation of the Merger.
20. Brown Bank has not made any transfer of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the Pre-Merger Period, and has no
intention to make any transfer or disposition of any of its assets prior to the
Merger, other than (i) in the ordinary course of business, and (ii) payments for
expenses incurred in connection with the Merger.
21. Any cash or other property paid to Brown Bank employees during the
Pre-Merger Period has been or will be in the ordinary course of business or
pursuant to agreements entered into prior to the Pre-Merger Period.
22. There has not been, nor will there be, any issuance of Brown Bank
Common Stock during the Pre-Merger Period, other than shares of Brown Bank
Common Stock issued as compensation to present or former service providers
(including, without limitation, employees and directors) of Brown Bank or as the
result of the exercise of options granted to present or former service providers
(including, without limitation, employees and directors) of Brown Bank under
options, warrants, or agreements that were entered into prior to the Pre-Merger
Period,.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
this 8th day of October, 1998.
/s/ Dennis D. Allen
-------------------
Dennis D. Allen
President
/s/ Barbara Rich
----------------
Barbara Rich
Senior Vice President
<PAGE>
CERTIFICATE OF
FLAG FINANCIAL CORPORATION
In connection with the merger (the "Merger") of The Brown Bank ("Brown
Bank") with and into Citizens Bank ("Citizens"), a wholly-owned subsidiary of
FLAG Financial Corporation ("FLAG"), with Citizens as the surviving corporation,
in accordance with the Agreement and Plan of Merger by and between Brown Bank,
Citizens and FLAG dated as of July 24, 1998 (the "Agreement"), FLAG, through J.
Daniel Speight, Jr. and Patti S. Davis, the President and Chief Executive
Officer and the Chief Financial Officer, respectively, of FLAG, makes the
following certifications. Unless otherwise indicated, terms used in this
certificate have the same meaning as in the Agreement.
1. The undersigned are the President and Chief Executive
Officer and Chief Financial Officer, respectively, of FLAG, a corporation
organized and existing under the laws of the State of Georgia, and in such
capacities have knowledge of the affairs of FLAG and Citizens, access to the
information contained herein.
2. The following facts and representations made on behalf of
the management of FLAG and Citizens presented to Powell, Goldstein, Frazer &
Murphy LLP in connection with rendering the tax opinion referred to in the
Agreement, are on the date hereof true, correct, and complete.
3. The Merger is expected to permit FLAG to expand its
operations into areas in and in and around Candler and Tattnall Counties
currently served by Brown Bank to strengthen the franchise and thereby make a
long-term contribution to earnings per share.
4. Following the Effective Time, FLAG intends that it will
either (i) continue the historic business of Brown Bank or (ii) use, in a going
concern, a significant portion of Brown Bank's business assets.
5. FLAG has paid or will pay expenses it incurred in
connection with the Merger. FLAG did not and will not pay the expenses of Brown
Bank or any shareholder of Brown Bank incurred in connection with the Merger.
6. There is no indebtedness outstanding between FLAG and Brown
Bank or between Citizens and Brown Bank that was issued, acquired, or will be
settled at a discount.
7. Not more than twenty-five percent (25%) of the fair market
value of FLAG's total assets consist of stock and securities of any one issuer,
and not more than fifty percent (50%) of the fair market value of its total
assets consists of stock and securities of five or fewer issuers. For purposes
of the preceding sentence, (a) a corporation's total assets exclude cash, cash
items (including accounts receivable and cash equivalents), and United States
government securities, (b) a corporation's total assets exclude stock and
securities issued by any subsidiary at least fifty percent (50%) of the voting
power or fifty percent (50%) of the total fair market value of the stock of
which is owned by the corporation, but the corporation is treated as owning
directly a ratable share (based on the percentage of the fair market value of
the subsidiary's stock owned by the corporation) of the assets owned by any such
subsidiary, and (c) all corporations that are members of the same "controlled
group" within the meaning of section 1563(a) of the Code are treated as a single
issuer.
<PAGE>
8. The fair market value of the assets of Brown Bank
transferred to FLAG equaled or exceeded the sum of the liabilities, if any,
assumed by FLAG plus the liabilities, if any, to which the transferred assets
are subject.
9. To the best knowledge of the undersigned, the shareholders
of Brown Bank have no plan or intention to sell, exchange, or otherwise dispose
of any FLAG shares to be received by them in the Merger. In addition, the
undersigned is not aware of any transfers of Brown Bank stock by Brown Bank
shareholders prior to the Effective Date which were made in contemplation of the
Merger.
10. To the best knowledge of the undersigned, the liabilities
of Brown Bank, if any, assumed by FLAG and the liabilities, if any, to which the
transferred assets of Brown Bank are subject were incurred by Brown Bank in the
ordinary course of its business.
11. The transfer of assets pursuant to the Merger Agreement
does not constitute a transfer in a "title 11 or similar case" as such term is
defined in Section 368(a)(3) of the Code.
12. The payment of cash in lieu of fractional shares of FLAG
Common Stock is solely for the purpose of avoiding the expense and inconvenience
to FLAG of issuing fractional shares and is not separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the Brown Bank shareholders in lieu of issuing fractional shares of FLAG Common
Stock will not exceed one percent (1%) of the total consideration that will be
issued in the Merger to the Brown Bank shareholders in exchange for their shares
of Brown Bank Common Stock. The fractional share interests of each Brown Bank
shareholder will be aggregated, and no Brown Bank shareholder will receive cash
in an amount equal to or greater than the value of one full share of FLAG Common
Stock.
13. None of the shares of FLAG Common Stock, if any, received
by any shareholder-employee of Brown Bank is separate consideration for, or
allocable to, any services to be provided by such shareholder-employee under any
employment agreement with FLAG; none of the compensation to be received by any
shareholder-employee of the Brown Bank under an employment agreement with FLAG
will be separate consideration for, or allocable to, any shares of FLAG Common
Stock to be received by such shareholder-employee in the Merger; and the
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
14. The fair market value of the FLAG Common Stock and other
consideration received in the Merger by the shareholders of Brown Bank will be,
in each instance, approximately equal to the fair market value of the Brown Bank
Common Stock surrendered in exchange therefor.
15. FLAG has no present plan or intention to reacquire any of
its common stock issued to the Brown Bank shareholders in the Merger. In
addition, no person who is related to FLAG as determined under Treas. Reg.
Section 1.368-1(e)(3) will own any of the Brown Bank Common Stock immediately
prior to the Merger or will acquire any of the FLAG Common Stock issued in the
Merger.
<PAGE>
16. FLAG has no plan or intention to sell or otherwise dispose
of the assets of Brown Bank acquired in the Merger except for dispositions made
in the ordinary course of business or transfers to a corporation controlled by
FLAG. For purposes of the foregoing, FLAG is considered to control a corporation
in which it holds at least eighty percent (80%) of the total combined voting
power of all classes of stock entitled to vote and at least eighty percent (80%)
of the total number of all other classes of stock.
17. FLAG has no plan or intention to sell or otherwise dispose
of an amount of Citizens stock which would cause FLAG to no longer "control" the
stock of Citizens. For purposes of the foregoing, control means at least eighty
percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of all
other classes of stock.
18. Brown Bank will merge with and into Citizens and, as a
result of the Merger, Citizens will acquire "substantially all" of the
properties of Brown Bank. For purposes of this Certificate, "substantially all"
of Brown Bank's properties shall mean at least ninety percent (90%) of the fair
market value of the net assets and at least seventy percent (70%) of the fair
market value of the gross assets held by Brown Bank immediately prior to the
Merger. For purposes of determining the percentage of Brown Bank's net and gross
assets acquired by Citizens, the following assets will be treated as property
held by Brown Bank immediately prior to, but not after, the Merger: (i) assets
disposed of by Brown Bank prior to the Merger, or by Citizens after the Merger,
which disposition was in contemplation of the Merger, including without
limitation any asset disposed of by Brown Bank or Citizens, other than in the
ordinary course of business, pursuant to a plan or intent existing during the
period beginning with the commencement of negotiations (whether formal or
informal) with FLAG regarding the Merger and ending on the Effective Time (the
"Pre-Merger Period"), (ii) assets used by Brown Bank to pay expenses or
liabilities incurred in connection with the Merger, and (iii) assets used in
making any distribution, redemption, or other payment with respect to Brown Bank
Common Stock or rights to acquire such stock that are made during the Pre-Merger
Period or in contemplation of the Merger.
19. No stock of Citizens will be issued in the Merger.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of this 13 day of October, 1998.
/s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President and Chief Executive Officer
FLAG Financial Corporation
/s/ Patti S. Davis
------------------
Patti S. Davis
Chief Financial Officer
FLAG Financial Corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1998, except for note 2 as
to which the date is May 8, 1998 and note 10 as to which the date is June 3,
1998, accompanying the consolidated financial statements of FLAG Financial
Corporation and subsidiaries incorporated by reference in the Form S-4
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in this Form S-4 Registration Statement and Prospectus and
to the use of our name as it appears under the caption "Experts."
/s/ PORTER KEADLE MOORE, LLP
----------------------------
PORTER DEADLE MOORE, LLP
Atlanta, Georgia
October 13, 1998
EXHIBIT 23.2
CONSENT OF INDEPENENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 31, 1997, accompanying the
consolidated financial statements of FLAG Financial Corporation and subsidiaries
incorporated by reference in the Form S-4 Registration Statement and Prospectus.
We consent to the use of the aforementioned report in this Form S-4 Registration
Statement and Prospectus and to the use of our name as it appears under the
caption "Experts."
/s/ ROBINSON, GRIMES AND COMPANY, P.C.
--------------------------------------
ROBINSON, GRIMES AND COMPANY, P.C.
Columbus, Georgia
October 13, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 23, 1998, accompanying the
consolidated financial statements of Middle Georgia Bankshares, Inc. and
subsidiary incorporated by reference in the Form S-4 Registration Statement and
Prospectus. We consent to the use of the aforementioned report in this Form S-4
Registration Statement and Prospectus and to the use of our name as it appears
under the caption "Experts."
/s/ PORTER KEADLE MOORE, LLP
----------------------------
PORTER KEADLE MOORE, LLP
Atlanta, Georgia
October 13, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 28, 1998, except for note S as
to which the date is February 18, 1998, accompanying the consolidated financial
statements of Three Rivers Bancshares, Inc. and subsidiaries incorporated by
reference in the Form S-4 Registration Statement and Prospectus. We consent to
the use of the aforementioned report in this Form S-4 Registration Statement and
Prospectus and to the use of our name as it appears under the caption "Experts."
/s/ THIGPEN, JONES, SEATON & CO., P.C.
--------------------------------------
THIGPEN, JONES, SEATON & CO., P.C.
Dublin, Georgia
October 13, 1998
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 27, 1998, except for note 12 as
to which the date is May 14, 1998, accompanying the consolidated financial
statements of The Brown Bank and subsidiary contained in the Form S-4
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in this Form S-4 Registration Statement and Prospectus and
to the use of our name as it appears under the caption "Experts."
/s/ PORTER KEADLE MOORE, LLP
----------------------------
PORTER KEADLE MOORE, LLP
Atlanta, Georgia
October 13, 1998
EXHIBIT 99.1
PROXY
THE BROWN BANK
SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby constitutes and appoints Dennis D. Allen and
Barbara L. Rich, or either of them, as proxies, each with full power of
substitution, to vote the number of shares of common stock of The Brown Bank, a
federal savings bank ("Brown"), which the undersigned would be entitled to vote
if personally present at the Special Meeting of Brown Shareholders to be held at
the main office of Brown located at Railroad Street, Cobbtown, Georgia, on
____________, ________________, 1998, at _____ p.m., local time, and at any
adjournment or postponement thereof (the "Special Meeting") upon the proposals
described in the Proxy Statement/Prospectus and the Notice of Special Meeting of
Shareholders, dated ________, 1998, the receipt of which is acknowledged in the
manner specified below.
1. Merger. To approve, ratify, confirm and adopt the Agreement and Plan of
Merger, dated as of July 24, 1998 (the "Merger Agreement"), by and
among FLAG Financial Corporation ("FLAG"), Citizens Bank and Brown
pursuant to which (i) Brown will merge (the "Merger") with and into
Citizens Bank, and (ii) each share of the $_____ par value common stock
of Brown ("Brown Common Stock") issued and outstanding at the effective
time of the Merger will be exchanged for 1.5 shares of $1.00 par value
common stock of FLAG ("FLAG Common Stock").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In the discretion of the proxies on such other matters as may properly
come before the Special Meeting or any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 ABOVE.
Please sign this proxy exactly as your name appears below. When shares
are held jointly, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
DATED: , 1998
---------------------
-----------------------------------
Signature
-----------------------------------
Signature if held jointly
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE BROWN BANK,
AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
I _____will _____will not attend the Special Meeting.
EXHIBIT 99.2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT 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, 1997
|_| 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 was approximately $64,397,580 based on the last
reported sale price by Nasdaq National Market on June 30, 1998. There were
5,174,807 shares of Common Stock outstanding as of June 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders to be held on May 13, 1998, are incorporated by
reference in Part III hereof.
FLAG Financial Corporation (the "Company") is filing this amendment to its
annual report on Form 10-K for the year ended December 31, 1997 to reflect the
acquisitions by the Company of Middle Georgia Bankshares, Inc. ("Middle
Georgia") and Three Rivers Bancshares, Inc. ("Three Rivers"). The merger of
Middle Georgia with the Company became effective on March 31, 1998 and the
merger of Three Rivers with the Company became effective on May 12, 1998. The
financial data included in this Amendment have been restated to account for the
mergers with Middle Georgia and Three Rivers.
<PAGE>
FLAG FINANCIAL CORPORATION
Annual Report on Form 10-K/A
For the Fiscal Year Ended December 31, 1997
Table of Contents
Item Page
Number Number
PART I
1. Business.............................................................. 1
2. Properties............................................................ 13
3. Legal Proceedings..................................................... 14
4. Submission of Matters to a Vote of Security Holders................... 14
PART II
5. Market for Registrant's Common Stock and Related Shareholder Matters.. 15
6. Selected Financial Data............................................... 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 15
8. Financial Statements and Supplementary Data .......................... 15
9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................ 15
PART III
10. Directors and Executive Officers of the Registrant ................... 16
11. Executive Compensation................................................ 16
12. Security Ownership of Certain Beneficial Owners and Management........ 16
13. Certain Relationships and Related Transactions........................ 16
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 17
Signatures................ 20
Index of Exhibits ............ 22
<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 a multi-bank holding
company headquartered in LaGrange, Georgia and is registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The Company is the sole
shareholder of the following depository institutions: First Federal Savings Bank
of LaGrange ("First Federal"), Citizens Bank ("Citizens") and Bank of Milan
("Milan") (collectively, the "Banks"). The Company acquired Citizens through a
merger with Middle Georgia Bankshares, Inc. ("Middle Georgia'") and acquired
Milan through a merger with Three Rivers Bancshares, Inc. ("Three Rivers"),
which mergers were consummated in March 1998 and May 1998, respectively. The
Company also has a one-third ownership interest in ProImage, Inc., a Georgia
corporation that provides data processing and check imaging services for
community banks. The Company obtained its ownership interest in ProImage, Inc.
through its acquisition of Middle, Georgia.
The Company was incorporated under the laws of the State of Georgia on
February 9, 1993 at the direction of First Federal for the purpose of becoming
the holding company for First Federal (the "Reorganization"). 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 First
Federal, and the Company issued shares of its common stock to shareholders of
First Federal in exchange for all of the outstanding common stock of First
Federal. As a result, shareholders of First Federal became shareholders of the
Company, with the same proportional interests in the Company as they previously
held in First Federal (excluding the nominal effect on their ownership interest
of the exercise of dissenters' rights by certain shareholders of First Federal).
Following the Reorganization, First Federal continued its business operations as
a federally-chartered stock savings bank under the same name, charter and
bylaws.
1
<PAGE>
As a bank holding company, the Company facilitates the Banks' abilities
to serve their 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 Banks under applicable law. The holding company structure also provides
greater financial and operating flexibility than is available to the Banks.
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 Banks and their shareholders under regulations of
the Federal Deposit Insurance Corporation (the "FDIC") and the Office of Thrift
Supervision (the "OTS"), but is permissible for the Company under Georgia law.
See "Supervision and Regulation" below.
A substantial portion of the Company's growth has been through
acquisitions of other financial institutions and the assets and deposits
thereof. As part of its ongoing strategic plan, the Company continually
evaluates business combination opportunities and frequently conducts due
diligence activities in connection with possible business combinations. As a
result, business combination discussions, and in some cases negotiations,
frequently take place, and future business combinations involving cash, debt or
equity securities can be expected. Any future business combination that the
Company might undertake may be material, in terms of assets acquired or
liabilities assumed, to the Company's financial condition. Recent business
combinations in the banking industry have typically involved the payment of a
premium over book and market values. This practice could result in dilution of
book value and net income per share for the acquirer. It is the Company's
practice to avoid possible dilution except where projections indicate a
relatively short payback period.
The Banks
First Federal Savings Bank of LaGrange. First Federal is a federally
chartered savings bank headquartered in LaGrange, Troup County, Georgia with
five offices in LaGrange, Georgia. First Federal was originally chartered by the
State of Georgia in January 1927 under the name "Home Building and Loan
Association." First Federal 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, First Federal 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,
First Federal 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 $248 million at December
31, 1997, First Federal is the 7th largest of 34 thrift institutions
headquartered in Georgia and the largest financial institution headquartered in
Troup County. First Federal'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.
Citizens Bank. Citizens Bank is a state bank organized under the laws
of the State of Georgia with banking offices in the cities of Unadilla, Vienna,
Byromville, Montezuma, Cordele, Oglethorpe and Pinehurst, Georgia. Citizens Bank
was originally chartered in 1931 and became a wholly-owned subsidiary of Middle
Georgia in 1989. On March 31, 1998, Middle Georgia merged with and into the
Company and Citizens Bank became a wholly-owned subsidiary of the Company. At
December 31, 1997, Citizens Bank had total assets of approximately $128 million.
Citizens is the sole shareholder of CB Financial Group, Inc. ("CB Financial"), a
Georgia corporation, which provides pawn, title pawn and check cashing services.
CB Financial is currently winding up its business operations.
2
<PAGE>
Bank of Milan. Milan is a state bank organized under the laws of the
State of Georgia with banking offices in the cities of Milan and McRae, Georgia.
Milan was originally chartered in 1906 and became a wholly-owned subsidiary of
Three Rivers in 1987. On May 8, 1998, Three Rivers merged with and into the
Company and Milan became a wholly-owned subsidiary of the Company. At December
31, 1997, Milan had total assets of approximately $35 million.
The Banks' businesses consist primarily of attracting deposits from the
general public and, with these and other funds, making residential mortgage
loans, consumer loans, commercial loans, commercial real estate loans,
residential construction loans and securities investments. In addition to
deposits, sources of funds for the Banks' 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
("FHLBA"). The principal sources of income for the Banks 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. The principal expenses of the Banks are interest paid on deposits,
interest paid on FHLBA advances, employee compensation, federal deposit
insurance premiums, office expenses and other overhead expenses.
While the Banks attempt to avoid concentrations of loans to a single
industry or based on a single type of collateral, the various types of loans the
Banks make have certain risks associated with them. Consumer and commercial
loans present risks which, among other things, include fraud, bankruptcy,
economic downturn, deteriorated or non-existing collateral, changes in interest
rates and customer financial problems. Real estate loans present risks related
to, among other things, whether the builder is able to sell the property,
whether the buyer is able to obtain permanent financing and the nature of
changing economic conditions.
The Company's financial performance has been determined primarily by
the results of operations of the Banks because the common stock of the Banks are
the Company's primary significant assets. For information regarding the
consolidated financial condition and results of operations of the Company, the
Banks and their subsidiaries, as of December 31, 1997 and 1996 and for the three
years in the period ended December 31, 1997, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as restated, and the
Consolidated Financial Statements of the Company, as restated, and the related
notes thereto which are contained herein. All average balances presented in this
report were derived based on monthly averages.
Pending Acquisitions
Effective July 24, 1998, the Company and The Brown Bank ("Brown")
entered into an Agreement and Plan of Merger (the "Brown Agreement") pursuant to
which Brown will merge with and into the Company's wholly-owned bank subsidiary,
Citizens. The Brown Agreement provides that the Company will exchange 1.5 shares
of Company Common Stock for each share of Brown Common Stock outstanding, with
approximately 262,500 shares of Company Common Stock expected to be issued to
Brown shareholders. The parties expect the merger to be accounted for as a
pooling of interests and expect to consummate the transaction during the fourth
quarter of 1998, subject to approval of Brown shareholders in accordance with
applicable law, approval of various regulatory authorities and other customary
conditions of closing.
Brown is a federal savings bank located in Cobbtown, Georgia. Brown has
two bank offices located in Cobbtown and Metter, Georgia.
Effective July 30, 1998, the Company and Empire Bank Corp. ("Empire")
entered into an Agreement and Plan of Merger (the "Empire Agreement") pursuant
to which Empire will merge with and into the Company. The Empire Agreement
provides that the Company will exchange 42.5 shares of Company Common Stock for
each share of Empire Common Stock outstanding, with approximately 1,124,125
3
<PAGE>
shares of Company Common Stock expected to be issued to Empire shareholders. The
parties expect the merger to be accounted for as a pooling of interests and
expect to consummate the transaction during the third quarter of 1998, subject
to approval of Empire shareholders in accordance with applicable law, approval
of various regulatory authorities and other customary conditions of closing.
Empire is a bank holding company located in Homerville, Georgia and is the sole
shareholder of Empire Banking Company. Empire Banking Company has two offices
located in Homerville and Waycross, Georgia.
Additional information with respect to the Brown transaction and the
Empire transaction is set forth in FLAG's Current Reports on Form 8-K dated May
14, 1998, May 28, 1998 August 10, 1998 and August 12, 1998 (the "FLAG 8-Ks").
The FLAG 8-Ks include or incorporate by reference certain forward looking
statements, estimates, and projections concerning the transactions with Brown
and Empire which are subject to various uncertainties and risks. Estimates and
projections concerning the future financial performance of the Company following
the transactions with Brown and Empire are predicated on certain assumptions and
depend upon future events, the course of which cannot be ascertained with
certainty, and therefore such estimates and projections should be considered
only as estimates and understood to be uncertain and subject to risks of
inaccuracy. Future events may cause the Company's actual experience to differ
materially from such estimates and projections.
Employees
As of June 30, 1998, the Company (including the Banks) had 192
full-time and 29 part-time employees. The employees are not represented by any
collective bargaining unit, and the Company considers its relationship with its
employees to be good.
Competition
The banking business in Georgia is highly competitive. The Banks
compete not only with other banks and thrifts that are located in the same
counties as the Banks and in surrounding counties, but with other financial
service organizations including, credit unions, finance companies, and certain
governmental agencies. To the extent that the Banks must maintain non-interest
earning reserves against deposits, it may be at a competitive disadvantage when
compared with other financial service organizations that are not required to
maintain reserves against substantially equivalent sources of funds. Also, other
financial institutions with which the Banks compete may have substantially
greater resources and lending capabilities due to the size of the organization.
Supervision and Regulation
The following discussion sets forth the material elements of the
regulatory framework applicable to bank holding companies and their bank and
thrift subsidiaries and provides certain specific information related to the
Company.
General
In connection with its acquisition of Middle Georgia, the Company
became a bank holding company registered with the Board of Governors of the
Federal Reserve System (the "Federal Reserve") under BHC Act. As such, the
Company and its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve. In addition, as a savings and loan holding company, the
Company is also registered with the OTS and is subject to the regulation,
supervision, examination, and reporting requirements of the OTS.
4
<PAGE>
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (a) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the voting shares of the bank; (b) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (c) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve
any transaction that would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which
may be substantially to lessen competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy and consideration of convenience and needs issues including the
parties' performance under the Community Reinvestment Act of 1977 (the "CRA"),
both of which are discussed below.
The BHC Act, as amended by the interstate banking provisions of 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 the Company, and any other bank holding
company located in Georgia may now acquire a bank located in any other state,
and any bank holding company located outside Georgia may lawfully acquire any
Georgia-based bank, regardless of state law to the contrary, in either case
subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, as of
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 had the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether.
In response to the Interstate Banking Act, the Georgia General Assembly
adopted the Georgia Interstate Banking Act, which was effective on July 1, 1995.
The Georgia Interstate Banking Act provides that (a) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (b) interstate acquisitions of institutions
located in Georgia will be permitted by institutions in states that allow
national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted
the Georgia Interstate Branching Act which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch network.
The Georgia Interstate Branching Act also allows banks to establish de novo
branches on a limited basis as of July 1, 1996. As of July 1, 1998, the number
of de novo branches that may be established is no longer limited.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
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banking practices. For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. The BHC Act does
not place territorial limitations on permissible non-banking activities of bank
holding companies. Despite prior approval, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
The bank and thrift subsidiaries of the Company are members of the
FDIC, and as such, their deposits are insured by the FDIC to the maximum extent
provided by law. Such subsidiaries are also subject to numerous state and
federal statutes and regulations that affect their businesses, activities, and
operations, and they are supervised and examined by one or more state or federal
bank regulatory agencies.
All of the Company's depository institution subsidiaries that are
state-chartered banks and are not members of the Federal Reserve System are
subject to supervision and examination by the FDIC and the Georgia Department of
Banking and Finance. The Company's subsidiary that is a federal savings bank is
subject to regulation, supervision, and examination by the OTS and the FDIC. The
federal banking regulator for each of the Company's subsidiaries, as well as the
Georgia Department of Banking and Finance for each of the subsidiary banks that
is a state chartered bank, regularly examines the operations of the subsidiary
banks and is given authority to approve or disapprove mergers, consolidations,
the establishment of branches, and similar corporate actions. The federal and
state banking regulators also have the power to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law.
Payment of Dividends
The Company is a legal entity separate and distinct from its
subsidiaries. The principal sources of cash flow of the Company, including cash
flow to pay dividends to its shareholders, are dividends by its bank and thrift
subsidiaries. There are statutory and regulatory limitations on the payment of
dividends by such subsidiaries to the Company as well as by the Company to its
shareholders.
As to the payment of dividends, all of the Company's depository
institution subsidiaries that are state nonmember banks are subject to the laws
and regulations of the state of Georgia and to the regulations of the FDIC. The
Company's depository institution subsidiary that is a federal savings bank is
subject to the OTS' capital distributions regulation.
If, in the opinion of the applicable federal banking regulator, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution, could include the payment of
dividends), such authority may require, after notice and hearing, that such
institution cease and desist from such practice. The federal banking agencies
have indicated that paying dividends that deplete a depository institution's
capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), a depository institution may not pay any dividend if payment
would cause it to become undercapitalized or if it already is undercapitalized.
See "-- Prompt Corrective Action." Moreover, the federal agencies have issued
policy statements that provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
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At June 30, 1998, under dividend restrictions imposed under federal and
state laws, the bank and thrift subsidiaries of the Company, without obtaining
governmental approvals, could declare aggregate dividends to the Company of up
to approximately $4,100,000.
The payment of dividends by the Company and its subsidiaries may also
be affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Capital Adequacy
The Company and its depository institution subsidiaries are required
to comply with the capital adequacy standards established by the Federal Reserve
and the appropriate federal banking regulator in the case of its depository
institution subsidiaries. There are two basic measures of capital adequacy for
bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital
Ratio") of total capital ("Total Capital") to risk-weighted assets (including
certain off-balance-sheet items, such as standby letters of credit) is 8%. At
least half of Total Capital must comprise common stock, minority interests in
the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier 1 Capital"). The
remainder may consist of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves ("Tier 2 Capital"). At June 30, 1998, the Company's
consolidated Total Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital
Ratio (i.e., the ratio of Tier 1 Capital to risk-weighted assets) were 12.72%
and 8.03%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at June 30, 1998 was 8.50%. The guidelines also provide
that bank holding companies experiencing internal growth or making acquisitions
will be expected to maintain strong capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a "tangible
Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other indicia of
capital strength in evaluating proposals for expansion or new activities.
The Company's depository institution subsidiaries are subject to
risk-based and leverage capital requirements adopted by their applicable federal
regulators, which are substantially similar to those adopted by the Federal
Reserve for bank holding companies. Such subsidiaries were in compliance with
applicable minimum capital requirements as of June 30, 1998. The Company has not
been advised by any federal banking agency of any specific minimum capital ratio
requirement applicable to it or its subsidiary depository institutions.
Failure to meet capital guidelines could subject an institution to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
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brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements.
See "-- Prompt Corrective Action."
Community Reinvestment
The Company's subsidiaries are subject to the provisions of the CRA.
Under the terms of the CRA, the subsidiaries have a continuing and affirmative
obligation consistent with their safe and sound operation to help meet the
credit needs of their entire communities, 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 each appropriate federal bank regulatory agency, in connection with its
examination of a subsidiary depository institution, to assess such institution's
record in assessing and meeting the credit needs of the community served by that
institution, including low- and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to:
(a) charter a national bank; (b) obtain deposit insurance coverage for a newly
chartered institution; (c) establish a new branch office that will accept
deposits; (d) relocate an office; or (e) merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or other bank holding company, the Federal Reserve will assess
the records of each subsidiary depository institution of the applicant bank
holding company, and such records may be the basis for denying the application.
All of the Company's subsidiary depository institutions received at least a
"satisfactory" CRA rating in their most recent examinations.
In April 1995, the federal banking agencies adopted amendments
revising their CRA regulations, with a phase-in schedule applicable to various
provisions. Among other things, the amended CRA regulations, implemented on July
1, 1997, substitute for the prior process-based assessment factors a new
evaluation system that rates an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests: (a) a
lending test, to evaluate the institution's record of making loans in its
service areas; (b) an investment test, to evaluate the institution's record of
investing in community development projects; and (c) a service test, to evaluate
the institution's delivery of services through its branches, ATM's and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance will be considered in the application process.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a
source of financial strength for, and to commit resources to support, each of
its banking subsidiaries. This support may be required at times when, absent
such Federal Reserve policy, the Company may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any of its depository
institution subsidiaries are subordinate in right of payment to deposits and to
certain other indebtedness of such banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a depository institution
subsidiaries will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (a) the default of a commonly controlled FDIC-insured depository
institution or (b) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
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assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors, secured creditors, and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The subsidiary depository institutions of the Company are subject
to these cross-guarantee provisions. As a result, any loss suffered by the FDIC
in respect of these subsidiaries would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against the
depository institution's banking affiliates, and a potential loss of the
Company's investment in such other subsidiary depository institutions.
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires the regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
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The capital levels established for each of the categories are as
follows:
<TABLE>
<CAPTION>
========================== ==================== ========================= ====================== ===================
Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
========================== ==================== ========================= ====================== ===================
<S> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
========================== -------------------- ------------------------- ---------------------- ===================
Adequately Capitalized 4% or more 8% or more 4% or more --
========================== -------------------- ------------------------- ---------------------- ===================
Undercapitalized Less than 4% less than 8% less than 4% --
========================== -------------------- ------------------------- ---------------------- ===================
Significantly Less than 3% less than 6% less than 3% --
Undercapitalized
========================== ==================== ========================= ====================== ===================
Critically 2% or less -- -- --
Undercapitalized tangible equity
========================== ==================== ========================= ====================== ===================
</TABLE>
For purposes of the regulation, the term "tangible equity" includes
core capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling holding company under FDICIA to fund a capital
restoration plan is limited to the lesser of 5% of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
At June 30, 1998, the Company's depository institution subsidiaries had
the requisite capital levels to qualify as well capitalized.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (a) well capitalized;
(b) adequately capitalized; and (c) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
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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 which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Pursuant to the Deposit Insurance Funds Act of 1996, the FDIC
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) and adopted revisions to the assessment rate
schedules that would generally eliminate the disparity between assessment rates
applicable to the deposits insured by the Bank Insurance Fund ("BIF") and the
SAIF. The revisions in the assessment rate schedules reduced assessment rates on
SAIF-insured deposits and would generally equalize BIF and SAIF assessment rates
by January, 2000. The Company anticipates that the net effect of the decrease in
the premium assessment rate on SAIF deposits will result in a reduction in its
total deposit insurance premium assessments through 1999 as compared to years
prior to 1997, assuming no further changes in announced premium assessment
rates. The Company recorded a charge against earnings for the special assessment
in the quarter ended September 30, 1996, in the pre-tax amount of approximately
$1,150,000.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Proposed Legislation and Regulatory Action
New statutes and regulations are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company may be affected by such statute or
regulation.
ITEM 2. PROPERTIES
The Company and First Federal operate from a main office which contains
approximately 28,400 square feet of usable office space and is located on
approximately two acres of land at 101 North Greenwood Street, LaGrange,
Georgia.
First Federal owns both the building and the land.
First Federal also operates three full-service branch offices and one
drive-through facility in LaGrange, Georgia. One of the full-service branches
contains approximately 360 square feet of office space in the Winn-Dixie
Marketplace grocery store at 908 Hogansville Road in LaGrange. This office is
leased by First Federal. A second full-service branch office is located at 1795
West Point Road at Lee's Crossing in LaGrange. This office contains
approximately 2,700 square feet of office space on one acre of land, and both
the land and the building are owned by First Federal. The third full-service
branch office is located at 1417 LaFayette Parkway in LaGrange. This office
contains approximately 2,300 square feet of office space on 1.2 acres of land,
and it has three drive through lanes. Both the building and the land are owned
by First Federal. The drive-through facility is located at 306 Vernon Street in
LaGrange. This facility contains approximately 1,800 square feet of space, and
both the building and the land are owned by First Federal.
First Federal leases approximately 2,760 square feet of office space at
5669 Whitesville Road, Suite A, Columbus, Georgia, where its loan production
office is located.
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First Federal leases approximately 600 square feet of office space at
200 Broad Street, Suite D, LaGrange, Georgia. This office space is where
Piedmont Mortgage Service, Inc., operating under the name "Piedmont Appraisal
Service," is located.
First Federal leases approximately 2,500 square feet of office space at
205 North Lewis Street, Suites 2 and 3, LaGrange, Georgia. This office space is
the location for First Federal's Deposit Operations and Leasing department.
Citizens operates three full-service offices in Vienna, Unadilla,
Montezuma, and Cordele. It also operates three limited-service offices in
Byromville, Oglethorpe, and Pinehurst, and it operates a consumer loan office in
Unadilla.
One of the full-service offices contains 10,500 square feet of office
space on .85 acres of land that is owned by Citizens and is located at 100 Union
Street, Vienna, Georgia. The second full-service office has 10,718 square feet
of office space and is located on 1.3 acres of land that is owned by Citizens
and is located at 102 West Railroad Street, Montezuma, Georgia. The third office
located at 602 East 16th Avenue, Suite G., Cordele, Georgia, with 2000 square
feet of office space and is leased by Citizens.
One of the limited-service offices has 1,750 square feet of office
space on .07 acres and is located on Main Street, Byromville, Georgia. The next
limited-service office has 2,500 square feet on .6 acres of land and is located
at 201 Macon Street, Oglethorpe, Georgia. The third limited-service office has
843 square feet of office space on .55 acres and is located on Fullington
Avenue, Pinehurst, Georgia. Citizens owns each of these properties.
Citizens leases 2000 square feet of office space for its consumer
loan office at 1180 Pine Street, Unadilla, Georgia.
Citizens owns three warehouse/meeting facilities located in Vienna,
Georgia at the following locations: (i) 2nd Street, Vienna, Georgia with 4,100
square feet of space on .10 acres of land, (ii) 3rd Street, Vienna, Georgia,
with 2,940 square feet of office space on .09 acres of land, and (iii) 3rd
Street, Vienna, Georgia, with 1,755 square feet of office space on .05 acres of
land.
Citizens also owns an office parking lot at the corner of Union Street
and 2nd Street, Vienna Georgia. The lot is on .42 acres of land. Another lot
owned by Citizens is located at Fullington Avenue and Highway 41, Pinehurst,
Georgia. Citizens also owns a lot located at the corner of Fullington Avenue and
Cyprus Avenue, Vienna, Georgia with 370 square feet of a vacant building on .23
acres of land.
Milan operates two full service offices in Milan and McRae, Georgia.
The office located at 1 Mt. Zion Street, Milan, Georgia has 5,124 square feet of
office space on .18 acres of land. Milan also leases a full service office with
1,360 square feet of office space located at 850 East Oak Street, McRae,
Georgia.
The net book value of the Company's investment in land, premises,
furniture, fixtures and equipment totaled approximately $12.5 million at June
30, 1998. See Note 4 of Notes to Consolidated Financial Statements contained
herein. Most of the Company's data processing equipment is held by the Company
under capitalized leases, and it uses an independent service bureau for most of
its data processing needs.
All of the Company's offices are in good condition and are adequate for
the Company's current and foreseeable needs.
The Company is unaware of any potential environmental liability that it
may incur in connection with any properties or other assets owned by it.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Flag and the Banks are periodically involved as plaintiff or defendant
in various legal actions in the ordinary course of its business. During August
1992 through October 1995, First Federal entered into a series of leases and
secured loans with Bennett Funding Group, Inc. and certain of its affiliates
("Bennett Funding"). Bennett Funding allegedly operated in a fraudulent manner
and are now the subject of bankruptcy proceedings, In re Bennett Funding Group,
Inc., et al, Case No. 96-61376 et seq., which are pending in the United States
Bankruptcy Court for the Northern District of New York. These leases and loans
have an aggregate principal balance of $2.05 million.
After a series of negotiations, the Bank settled its disputes with the
bankruptcy trustee under the terms of a Settlement Agreement. The Settlement
Agreement has been approved by the Bankruptcy Court and executed by the Bank and
the trustee. The settlement provides for a "split" between the Bank and the
trustee on all cash collections on leases which collateralize the loans at
issue.
First Federal is named as the defendant in a suit filed on June 29,
1998 in the Circuit Court of Elmore County, Alabama. The plaintiffs contend that
a loan officer of First Federal told them that their construction and permanent
loans in the amount of $95,000 had been approved and that the approval was not
subject to any conditions. First Federal later declined the permanent loan based
on that fact that the plaintiff did not meet certain conditions. The plaintiffs
obtained a loan from another source but at an interest rate that was 2.25%
higher than the First Federal rate. First Federal believes it has a meritorious
defense to the claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of its shareholders
during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Information relating to the market for, holders of and dividends paid
on the Company's Common Stock is set forth under the caption "Corporate
Information-Stock Prices and Dividends" on page 40 of the Company's 1997 Annual
Report. Such information is incorporated herein by reference. The 1997 Annual
Report is filed as Exhibit 13 to this report.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the Company and its subsidiaries
for each year of the five-year period ended December 31, 1997 is set forth under
the caption "Financial Highlights" on page 4 of the 1997 Annual Report. Such
financial data is incorporated herein by reference.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
FLAG Financial Corporation ("FLAG") is a multi-bank holding company
that owns 100 percent of the common stock of First Federal Savings Bank of
LaGrange ("FFSB"), Citizens Bank ("Citizens"), and Bank of Milan ("Milan"),
(collectively, the "Banks"). FFSB is a federally chartered stock savings bank
doing business in West Central Georgia. Citizens is a commercial bank that
serves Dooly, Macon, Crisp and surrounding counties in Middle Georgia. Citizens
also owns 100% of CB Financial Group, Inc. a pawn shop and check cashing
operation located in Unadilla, Georgia. Milan is a commercial bank that serves
Dodge, Telfair and surrounding counties in Middle Georgia. The Banks are
full-service, retail oriented community banks primarily engaged in retail
banking, small business, residential and commercial real estate lending, and
mortgage banking.
The following discussion focuses on significant changes in the
financial condition and results of operations of FLAG and the Banks during the
three years ended December 31, 1997. 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.
CAPITAL ISSUES
Effective June 3, 1998, FLAG declared a 3-for-2 stock split. All per
share amounts and prices have been restated to reflect this stock split as if it
had occurred at the beginning of the earliest period presented.
In October 1995, FLAG purchased and retired 192,150 shares of its
common stock in the open market for $8.50 per share. During 1996 and 1995, FLAG
issued 8,375 and 7,211 shares, respectively, of its common stock. FLAG received
$44,269 and $59,486 in 1996 and 1995, respectively, in connection with these
issuances. During 1997, FLAG did not purchase or issue any shares of its common
stock.
RESTATEMENT OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Effective March 30, 1998, FLAG completed the acquisition of Middle
Georgia Bankshares, Inc., the parent company of the $129 million Citizens Bank
in Vienna, Georgia. FLAG issued approximately 1.5 million shares of its common
stock in connection with this acquisition.
Effective May 8, 1998, FLAG completed the acquisition of Three Rivers
Bancshares, Inc., the parent company of the $35 million Bank of Milan in Milan,
Georgia. FLAG issued approximately 597,000 shares of its common stock in
connection with this acquisition.
These acquisitions were accounted for as poolings of interests and,
accordingly, the consolidated financial statements and management's discussion
and analysis for all periods have been restated to include the financial
position and results of operations as if the combination had occurred at the
beginning of the earliest period presented.
PENDING ACQUISITIONS
On May 14, 1998, FLAG announced the signing of an agreement to merge
with The Brown Bank ("Brown"), a $28 million asset savings bank based in Metter,
Gergia. The merger agreement provides, among other things, for the merger of
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<PAGE>
Brown with and into FLAG and the exchange of each share of Brown common stock
for 1.5 shares of FLAG common stock. Total outstanding shares of FLAG will
increase by approximately 263,000 additional shares at closing.
On May 28, 1998, FLAG announced the signing of an agreement to merge
with Heart of Georgia Bancshares, Inc. ("HGB"), a $33 million asset bank holding
company based in Mt. Vernon, Georgia. The merger agreement provides, among other
things, for the merger of HGB with and into FLAG and the exchange of each share
of HGB common stock for 2.025 shares of FLAG common stock. Total outstanding
shares of FLAG will increase by approximately 446,000 additional shares at
closing.
On June 1, 1998, FLAG announced the signing of an agreement to merge
with Empire Bank Corp. ("Empire"), a $70 million asset bank holding company
based in Homerville, Georgia. The merger agreement provides, among other things,
for the merger of Empire with and into FLAG and the exchange of each share of
Empire common stock for 42.5 shares of FLAG common stock. Total outstanding
shares of FLAG will increase by approximately 1,145,000 additional shares at
closing.
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YEAR 2000 ISSUES
FLAG is aware of the issues relating to its computer systems as the
Year 2000 approaches. The Year 2000 issue is pervasive and complex as virtually
every computer operation will be affected in some way by the rollover of the
two-digit value to 00. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail.
FLAG has appointed a Year 2000 committee comprised of three outside
directors and several key senior executives. The committee meets on a monthly
basis to provide direction and monitor the progress being made relating to
FLAG's Year 2000 efforts.
FLAG managers and supervisors have identified hardware and software
used in their area of responsibility impacted by the Year 2000 issue and have
identified vendors whom FLAG relies upon to provide financial information or
services which may be impacted by the Year 2000 issue. FLAG has conducted a risk
assessment for each product, and has categorized the risks associated with each
product as "catastrophic," "serious," or "minimal." FLAG's overall risk is
considered to be serious to minimal. A separate plan and action date has been
established for hardware/software that are considered critical to the FLAG's
on-going operations. The next steps in the process will be to develop a test for
the hardware/software, to test the hardware/software as it becomes Year 2000
compliant, and to document those tests accordingly.
FLAG plans to convert from its current NCR Starcom software system to
an application system provided by Phoenix International Ltd., Inc. ("Phoenix")
in August 1998. Phoenix has represented in their contract with FLAG that the
Phoenix application system is Year 2000 compliant. FLAG will test the system for
Year 2000 Compliance prior to conversion. The Phoenix application system will
include many critical applications, including the general ledger, loan
application system, deposit application system, and accounts receivable and
payable. The third party application system used to process FLAG's payroll has
already been certified as Year 2000 Compliant.
FLAG is in the initial stages of determining the impact of the Year
2000 on its larger loan customers. For those loan customers with a significant
risk to their on-going operations arising from possible Year 2000 issues, FLAG
will monitor and document their Year 2000 compliance efforts. FLAG is in the
process of developing a questionnaire for its lending officers to use in
assessing the Year 2000 risk for larger loan customers. FLAG plans to conduct
Year 2000 seminars for its commercial customers. FLAG also intends to add a
provision to its standard loan agreement relating to the borrower's Year 2000
compliance.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on
assets and the interest paid on deposits and other interest-bearing liabilities)
is the single largest component of FLAG's operating income. The management of
net interest income is of most importance in the banking industry. FLAG manages
this income source while it controls credit, liquidity, and interest rate risks.
Net interest income increased 8.4% in 1997, from $14.8 million in 1996 to
$16.0 million in 1997. Net interest income increased 5.9% in 1996 compared to
1995.
Total interest income increased 9.6% in 1997 and 2.4% in 1996. Interest
expense decreased approximately 1.4% in 1996 compared to 1995, but increased
approximately 11.0% in 1997 compared to 1996. The interest expense variances
from year to year have been primarily influenced by the average balances of
interest bearing liabilities (see Tables 1 & 2).
16
<PAGE>
<TABLE>
<CAPTION>
Table 1 - Consolidated Average Balances, Interest, and Rates - Taxable Equivalent Basis
(dollars in thousands)
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Interest Weighted Interest Weighted Interest Weighted
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
ASSETS
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans.................. $253,809 $25,850 10.18% $225,774 $23,240 10.29% $215,208 $21,768 10.11%
Taxable investment
securities............ 64,800 4,081 6.30 65,261 4,042 6.19 77,077 4,889 6.34
Tax-free investment
securities............ 5,144 398 7.74 4,467 390 8.73 3,519 335 9.52
Interest-bearing deposits
in other banks....... 2,515 158 6.28 1,692 90 5.32 2,959 138 4.66
Federal funds sold..... 5,237 290 5.54 5,840 321 5.50 4,920 295 6.00
----------------------- ----------------------- ---- --------- ---------- ----
Total interest-
earning assets...... $331,505 $30,777 9.28% $303,034 $28,083 9.27% $303,683 $27,425 9.03%
Other assets............. 38,377 30,450 25,547
Total assets......... $369,882 $333,484 $329,230
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits............ $ 64,062 $1,679 2.62% $52,674 $1,461 2.77% $ 47,222 $1,466 3.10%
Savings deposits ...... 20,888 521 2.49 20,982 518 2.47 20,420 517 2.53
Other time deposits.... 190,706 10,977 5.76 174,726 10,014 5.73 166,637 9,521 5.71
Federal funds purchased 1,002 68 6.79 207 12 5.80 - - -
FHLB advances and
other borrowings.... 24,825 1,403 5.65 21,985 1,190 5.41 32,126 1,874 5.83
-------- ----- ---- ------ ----- ---- ------ ----- ----
Total interest-
bearing liabilities $301,483 $14,648 4.86% $270,574 $13,195 4.88% $266,405 $13,378 5.02%
Noninterest bearing
demand deposits..... 27,177 27,219 26,196
Other liabilities........ 6,129 3,278 5,269
Stockholders' equity..... 35,093 32,413 31,360
Total liabilities and
stockholders' equity $369,882 $333,484 $329,230
======== ======== ========
Tax-equivalent adjustment 133 132 114
Net interest income...... $15,996 $14,756 $13,933
======= ======= =======
Interest rate spread..... 4.43% 4.39% 4.01%
Net interest margin...... 4.83% 4.87% 4.59%
Interest-earning assets/
interest-bearing liabilities 110% 112% 114%
</TABLE>
CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES
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 (i.e., loans and investment securities) and the weighted
average interest rates paid on interest-bearing liabilities (i.e., deposits and
borrowings) 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 1 presents for the three years ended December 31, 1997, 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.
Average interest-earning assets were $331.5 million in 1997, versus $303.0
million in 1996 and $303.7 million in 1995. Average interest-bearing liabilities
17
<PAGE>
were $301.5 million in 1997, versus $270.6 million in 1996 and $266.4 million in
1995. The interest rate spread was 4.43% in 1997, versus 4.39% in 1996 and 4.01%
in 1995, while the net interest margin was 4.83% in 1997, 4.87% in 1996 and
4.59% in 1995.
Table 2 shows the change in net interest income from 1996 to 1997 and from
1995 to 1996 due to changes in volumes and rates.
Table 2 - Rate/Volume Variance Analysis - Taxable Equivalent Basis
(dollars in thousands)
Years Ended December 31,
1997 Compared to 1996 1996 Compared to 1995
----------------------- -----------------------
Rate/ Net Rate/ Net
Volume Yield Change Volume Yield Change
Interest income:
Loans 2,855 (245) 2,610 1,088 384 1,472
Taxable investment securities (29) 68 39 (732) (115) (847)
Tax-free investment securities 52 (44) 8 83 (28) 55
Interest-bearing deposits in
other banks 52 16 68 (67) 19 (48)
Federal funds sold (33) 2 (31) 51 (25) 26
---------------------------------------------
Total interest income 2,897 (203) 2,694 423 235 658
-----------------------------------------------
Interest expense:
Interest bearing demand deposits 298 (80) 218 151 (156) (5)
Savings deposits (2) 5 3 14 (13) 1
Other time deposits 920 43 963 464 29 493
Federal funds purchased 54 2 56 12 - 12
FHLB advances an other borrowings 161 52 213 (549) (135) (684)
---------------------------------------------
Total interest expense 1,431 22 1,453 92 (275) (183)
--------------------------------------------------
Net interest income 1,467 (226) 1,241 331 510 841
===== ===== ===== === === ===
NONINTEREST INCOME
Other income increased to $5.3 million in 1997 from $4.6 million in
1996 and $3.7 million in 1995. The increases in other income in 1997 and 1996
resulted from increased gains on the sale of loans and increased fee income
related to transaction deposit accounts.
Gain on sales of loans increased to $821,000 in 1997 versus $596,000 in
1996 and $56,000 in 1995. The increase in gain on sales of loans in 1997
primarily resulted from gains on the sale of SBA loans. The increase in gains on
sale of loans in 1996 resulted from increased mortgage banking activity in 1996
compared to 1995.
Fees and service charges on deposits increased to $3.6 million in 1997 from
$3.3 million in 1996 and $3.0 million in 1995.
NONINTEREST EXPENSES
Other expenses were $15.0 million in 1997, versus $14.0 million in 1996
and $11.7 million in 1995. The increase in other operating expenses from 1995 to
1996 and the decrease in those expenses from 1996 to 1997 was largely
attributable to the one-time SAIF assessment of $1,150,000 which occurred in
1996.
Salary and employee benefits increased to $7.3 million in 1997 from
$6.2 million in 1996 and $5.7 million in 1995. This increase in 1997 was
primarily due to normal increases in compensation levels as well as to the
hiring of several key individuals in mid- and late-1996 and in 1997.
Occupancy expenses increased to $2.8 million in 1997 from $2.2 million
in 1996 and $1.8 million in 1995, while other operating expenses were $5.0
million in 1997, versus $5.6 million in 1996 and $4.1 million in 1995. The
increase in 1997 occupancy expense was the result of a combination in higher
depreciation expenses and an increase in maintenance contract expenses, both of
which related to an increase in fixed assets and the relocation of the leasing
and the deposit operations center to off-premise leased office space. In
addition to the SAIF special assessment, 1996 operating expenses were higher
18
<PAGE>
than 1995 because of expenses related to the start-up of a new leasing operation
and research and attorney fees related to the Bennett Funding Group, Inc.
("Bennett Funding") bankruptcy.
INVESTMENT SECURITIES
The composition of the investment securities portfolio reflects
management's strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The portfolio also provides a
balance to interest rate risk and credit risk in other categories of FLAG's
balance sheet while providing a vehicle for the investment of available funds,
furnishing liquidity, and providing securities to pledge as required collateral
for certain deposits.
Investment securities increased $7.4 million to $74.6 million at
December 31, 1997 from $67.2 million at December 31, 1996. At December 31, 1997,
$71.7 million, approximately 96% of investment securities outstanding, was
classified as available-for-sale, while the remainder was classified as
held-to-maturity. The overall increase in the amount of investments was due to
the fact that new funds invested exceeded calls, sales, normal paydowns and
prepayments of securities. At December 31, 1997, gross unrealized gains in the
total portfolio amounted to $591,000 and gross unrealized losses amounted to
$642,000.
Table 3 reflects the carrying amount of the investment securities
portfolio for the past three years.
Table 3 - Carrying Value of Investments
(dollars in thousands)
December 31,
1997 1996 1995
- ---------------------------------------------------------------------
Securities held-to-maturity:
State, county and municipal $ 350 $ 515 $ 731
Mortgage-backed securities 103 118 131
Collateralized mortgage
obligations 2,505 3,092 3,766
----------------------------------------
2,958 3,725 4,628
----------------------------------------
Securities Available-for-sale:
U.S. Treasuries and agencies 16,825 15,874 14,766
Corporate debt securities. 1,000 990 -
State, county and municipal 6,405 4,147 3,735
Mortgage-backed securities 29,821 23,493 23,886
Collateralized mortgage
obligations 15,854 16,705 22,343
Equity securities.............. 1,761 2,253 5,311
----------------------------------------
71,666 63,462 70,041
----------------------------------------
Total........... $74,624 $67,187 $74,669
========================================
CARRYING VALUE OF INVESTMENTS
The December 31, 1997 market value of securities held to maturity, as a
percentage of amortized cost, was 99%, up from 98% at December 31, 1996. The
market value of the securities held-to-maturity will change as interest rates
change and such unrealized gains and losses will not flow through the earnings
statement unless the related securities become permanently impaired or they are
called at prices which differ from the carrying value at the time of the call.
19
<PAGE>
LOANS
Gross loans receivable increased by approximately $37.1 million in 1997
to $282.9 million from $245.8 million at December 31, 1996. This increase was
the result of growth in commercial, financial and agricultural loans, real
estate mortgages and lease financings. As shown in Table 4, commercial,
financial and agricultural loans increased approximately $12.4 million, real
estate mortgages increased approximately $28.0 million and lease financings
increased by approximately $1.7 million. The decrease in installment loans to
individuals primarily resulted from the normal paydown and prepayment of these
loans.
<TABLE>
Table 4 - Loan Portfolio
(dollars in thousands)
<CAPTION>
December 31,
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount Of Total Amount of Total Amount of Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial/financial/agricultural $47,373 16.7% $34,983 14.2% $31,409 14.3% $24,398 11.6% $18,863 9.8%
Real estate construction....... 11,768 4.2 10,539 4.3 4,891 2.2 6,849 3.3 4,772 2.5
Real estate mortgage........... 198,566 70.2 170,615 69.4 150,146 68.5 152,419 72.4 145,931 75.5
Installment loans to individuals 15,855 5.6 22,088 9.0 26,018 11.9 18,470 8.8 17,295
8.9
Lease financings............... 9,304 3.3 7,572 3.1 6,654 3.0 8,354 4.0 6,553 3.4
------------------------------------------------------------------------------------------
Total loans............... 282,866 100.0% 245,795 100.0% 219,118 100.0% 210,490 100.0% 193,414 100.0%
Less:
Deferred loan fees and discounts 236 (375) (322) (363) (383)
Allowance for loan losses...... (3,816) (5,767) (2,592) (2,412) (2,002)
------- ------- ------- ------- -------
Total net loans........... $279,286 $239,653 $216,204 $207,715 $191,029
======== ======== ======== ======== ========
</TABLE>
Table 5 represents the expected maturities for commercial, financial, and
agricultural loans and real estate construction loans at December 31, 1997. The
table also presents the rate structure for these loans that mature after one
year.
<TABLE>
Table 5 - Loan Portfolio Maturity
(dollars in thousands)
<CAPTION>
Rate Structure for Loans
Maturity Maturity Over One Year
- --------------------------------------------------------------------------------------------------------
Over One Year Floating
One Year Through Over Five or Adjustable Predetermined
or Less Five Years Years Total Interest Rate Rate
Commercial, financial, and
<S> <C> <C> <C> <C> <C> <C>
agricultural............... $26,561 $12,020 $8,792 $47,373 $12,631 $8,181
Real estate - construction.... 10,815 946 7 11,768 37 916
---------------------------------------------------------------------
$37,376 $12,966 $8,799 $59,141 $12,668 $9,097
====================================================================
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Table 6 presents an analysis of activities in the allowance for loan
losses for the past five years. An allowance for possible losses is provided
through charges to FLAG's earnings in the form of a provision for loan losses.
The provision for loan losses was $765,000 in 1997, $3,744,000 in 1996, and
$775,000 in 1995. The large increase in the provision for loan losses from 1995
to 1996 is directly attributable to Bennett Funding. Excluding the provision
associated with Bennett Funding, the 1996 provision for loan losses would have
been $766,000. Management determines the level of the provision for loan losses
based on outstanding loan balances, the levels of nonperforming assets, and
reviews of assets classified as substandard, doubtful, or loss and larger
credits, together with an analysis of historical loss experience, and current
economic conditions. The responsible loan officers conduct these reviews, as
well as the loan review department.
Historically, the loan portfolio has consisted primarily of loans
secured by one-to-four family residential properties, and actual losses have not
been significant. The Banks also provide other services and loan products to
meet the growing financial needs of FLAG'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.
As shown in Table 6, the year-end allowance for loan losses decreased
to $3.8 million at December 31, 1997, from $5.8 million at December 31, 1996.
The allowance for loan losses was $2.6 million at December 31, 1995. The decline
in the allowance for losses in 1997 was primarily due to a $2,465,000 charge-off
associated with the Bennett Funding assets. Total charge-offs in 1997, including
those related to Bennett Funding, were $2,917,000, up from $628,000 in 1996, and
$647,000 in 1995. If Bennett Funding assets had not been charged-off to their
net realizable value, 1997 charge-offs would have been approximately $452,000.
The allowance for loan losses was 1.50% of net outstanding loans at December 31,
1997, versus 2.55% of net outstanding loans at December 31, 1996, and 1.20% of
net outstanding loans at December 31, 1995.
Management believes that the allowance for loan losses was both
adequate and appropriate. However, the future level of the allowance for loan
losses is highly dependent upon loan growth, loan loss experience, and other
factors, which cannot be anticipated with a high degree of certainty.
20
<PAGE>
<TABLE>
Table 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average net loans....................... $253,611 $225,774 $215,208 $204,200 $197,250
Allowance for loan losses, beginning
of the period......................... 5,768 2,592 2,412 2,002 1,545
Charge-offs for the period:
Commercial/financial/agricultural..... 167 8 6 88 59
Real estate construction loans ....... - 22 23 2 -
Real estate mortgage loans............ 126 432 432 36 284
Installment loans to individuals...... 159 166 186 102 241
Lease financings...................... 2,465 - - - -
-------------------------------------------------
Total charge-offs....................... $ 2,917 $ 628 $ 647 $ 228 $ 584
-------------------------------------------------
Recoveries for the period:
Commercial/financial/agricultural..... $ 2 $ - $ 4 $ 50 $ 11
Real estate construction loans........ - - - 10 -
Real estate mortgage loans............ 104 - - 5 13
Installment loans to individuals...... 94 61 48 83 62
Lease financings...................... - - - - -
-------------------------------------------------
Total recoveries................... $ 200 $ 61 $ 52 $ 148 $ 86
-------------------------------------------------
Net charge-offs for the period... 2,719 567 595 80 498
Provision for loan losses............... 765 3,743 775 490 955
--------------------------------------------------
Allowance for loan losses, end of period $ 3,816 $ 5,768 $ 2,592 $2,412 $ 2,002
=================================================
Ratio of allowance for loan losses to
total net loans outstanding ........... 1.50% 2.55% 1.20% 1.18% 1.01%
Ratio of net charge-offs during the
period to average net loans outstanding
during the period ..................... 1.07% 0.25% 0.28% 0.04% 0.25%
</TABLE>
ASSET QUALITY
At December 31, 1997, non-performing assets (non-accrual loans
and other real estate owned) totaled $5.5 million compared to $8.6 million at
year-end 1996. The decrease in 1997 is primarily due to the write-off of the
amount determined to be uncollectible from Bennett Funding. As was discussed in
last year's annual report, Bennett Funding was an equipment leasing and finance
company based in Syracuse, New York. For several years, FFSB, 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 were 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, FLAG
established a specific reserve for possible Bennett Funding losses of
approximately $3.0 million. In addition, 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% of the carrying value of the
asset. In 1997, management agreed to a settlement with the Trustee of Bennett
Funding. In general, the agreement provides for a sharing of the cashflows
generated by the leases. Subsequent to year-end 1997, FLAG received
approximately $2.0 million from the Trustee. According to the settlement, FLAG
will be receiving monthly remittances of cash collected by the Trustee until the
agreement is satisfied. Management believes that all of the remaining unreserved
balance of these leases will be recovered.
In 1997, the Bennett Funding receivables were charged-off by approximately
$2.5 million against the 1996 established reserve.
21
<PAGE>
There were no commitments to lend additional funds on nonaccrual loans at
December 31, 1997. Table 7 summarizes the non-performing assets for each of the
last five years.
Table 7 - Risk Elements
(dollars in thousands)
December 31,
--------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
Loans on nonaccrual...................... $4,669 $7,716 $2,296 $2,838 $3,976
Loans past due 90 days and still accruing 87 980 22 - 36
Other real estate owned.................. 817 862 892 364 504
Total non-performing assets.............. $5,573 $9,558 $3,210 $3,202 $4,516
======================================
Total non-performing loans as a
percentage of net loans............. 1.70% 3.63% 1.07% 1.37% 2.10%
RISK ELEMENTS
.........There may be additional loans within FLAG's loan portfolio that may
become classified as conditions may dictate; however, management was not aware
of any such loans that are material in amount at December 31, 1997. At December
31, 1997, 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
Banks' or FLAG's liquidity, capital resources, or operations.
DEPOSITS
Total deposits increased approximately $30.5 million during 1997, totaling
$324.9 million at December 31, 1997, versus $294.4 million at December 31, 1996.
The maturities of time deposits of $100,000 or more issued by the Banks at
December 31, 1997, are summarized in Table 8.
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less.................. $22,989
Over three months through six months.. 10,933
Over six months through twelve months. 17,885
Over twelve months.................... 5,864
--------
$57,671
At December 31, 1997, the Banks were shareholders in the Federal Home Loan
Bank of Atlanta ("FHLBA"). Through this affiliation, advances totaling $43.6
million were outstanding at rates competitive with time deposits of like
maturities. Management anticipates continued utilization of this short- and
long-term source of funds to minimize interest rate risk and to fund competitive
fixed rate loans to customers.
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 assets (primarily loans and investment securities) has exceeded the average
repricing period of liabilities (primarily deposits and borrowings). Table 9
provides information about the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1997, that are
expected to mature, prepay, or reprice in each of the future time periods shown
22
<PAGE>
(i.e., the interest rate sensitivity). As presented in this table, at December
31, 1997, the liabilities subject to rate changes within one year exceeded its
assets subject to rate changes within one year. This mismatched condition
subjects FLAG 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 a decrease in net
interest income if market interest rates rise and an increase in net interest
income if market interest rates decline.
Management carefully measures and monitors interest rate sensitivity
and believes that its operating strategies offer protection against interest
rate risk. As required by various regulatory authorities, FLAG's Board of
Directors 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.
Management has maintained positive ratios of average interest-earning
assets to average interest-bearing liabilities. As represented in Table 1 this
ratio, based on average balances for the respective years, was 110% in 1997,
112% in 1996, and 114% in 1995.
<TABLE>
Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands)
<CAPTION>
December 31, 1997
----------------------------------------------------------
Maturing or Repricing in
Over 1 Year Over 3 Years
One Year Through Through Over
or Less 3 Years 5 Years 5 Years Total
--------- -------- -------- ------- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Adjustable rate mortgages........... $ 82,892 $ - $ - $ - $ 82,892
Fixed rate mortgages................ 59,786 23,444 19,283 25,636 128,149
Other loans......................... 45,896 10,657 12,143 3,128 71,824
Investment securities............... 37,055 4,741 8,120 25,207 75,123
Federal Home Loan Bank stock........ 2,782 - - - 2,782
Interest-bearing deposits
in other banks.................... 9,068 - - - 9,068
----------------------------------------------------------
Total interest-earning assets..... $237,479 $38,842 $39,546 $53,971 $369,838
--------------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits............. $ 150,434 $35,660 $ 8,638 $ 5,802 $200,534
NOW and money market demand
accounts......................... 47,558 6,576 4,424 9,074 67,632
Passbook accounts................... 16,614 648 592 5,331 23,185
Federal funds purchased............. 170 - - - 170
FHLB advances....................... 40,783 2,167 167 521 43,638
Other borrowed funds................. 708 - - - 708
----------------------------------------------------------
Total interest-bearing liabilities $256,267 $45,051 $13,821 $20,728 $335,867
----------------------------------------------------------
Interest rate sensitivity gap........ $(18,788) $(6,209) $25,725 $33,243 $ 33,971
Cumulative interest rate
sensitivity gap .................. $(18,788) $(24,997) $728 $33,971 -
Cumulative interest rate sensitivity
gap to total assets............... -4.57% -6.08% -.18% 8.26% -
</TABLE>
Table 10 represents the expected maturity of the total investment securities by
maturity date and average yields based on amortized cost at December 31, 1997.
It should be noted that the composition and maturity/repricing distribution of
the investment portfolio is subject to change depending on rate sensitivity,
capital needs, and liquidity needs.
23
<PAGE>
<TABLE>
Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Totals
--------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
Securities held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State, county and municipals $ 51 11.10% 224 9.00% 52 8.00% 24 8.60% 351
Mortgage-backed securities.. 103 6.98% - - - - - - 103
Collateralized mortgage
obligations .............. - - 77 8.85% - - 2,428 7.22% 2,505
---------------------------------------------------------------------------
$ 154 8.34% 301 8.96% 52 8.00% 2,452 7.23% 2,959
---------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury and agencies.. $ 3,131 5.43% 4,689 6.41% 8,542 6.76% 462 6.50% 16,824
State, county and municipals 319 7.10% 2,585 6.50% 1,500 8.90% 2,001 9.00% 6,405
Corporate debt securities... - - 1,000 6.86% - - - - 1,000
Equity securities........... 1,761 4.53% - - - - - - 1,761
Mortgage-backed securities.. 1,264 5.37% 2,972 6.55% 4,171 6.98% 21,414 6.69% 29,821
Collateralized mortgage
obligations - - 1,272 5.98% 3,858 5.53% 10,724 6.18% 15,854
----------------------------------------------------------------------------
6,475 5.25% 12,518 6.45% 18,071 6.73% 34,601 6.66% 71,665
---------------------------------------------------------------------------
Total $ 6,629 5.33% 12,819 6.51% 18,123 6.73% 37,053 6.70% 74,624
===== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
LIQUIDITY
The Banks are required under federal regulations to maintain in cash
and eligible short-term investment securities a monthly average of 5.0% of net
withdrawable deposits and borrowings payable in one year or less. The Banks'
average liquidity in December 1997 was 11.68% of the aggregate of the prior
month's daily average deposits and short-term borrowings. The Banks' liquidity
was 13.03% at December 31, 1997, and 11.14% at December 31, 1996.
The Banks' primary sources of liquidity (funds) are deposit inflows,
loan repayments, proceeds from sales of loans and securities, advances from 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 Banks. Advances from the FHLBA
were $43,637,000 and $17,371,000, respectively, at December 31, 1997 and 1996.
Subject to certain limitations, the Banks may borrow funds from the
FHLBA in the form of advances. Credit availability from the FHLBA to the Banks
are based on the Banks' financial and operating condition. Credit availability
from the FHLBA to the Bank was approximately $68.0 million at December 31, 1997.
In addition to creditworthiness, the Bank must own a minimum amount of FHLBA
capital stock. This minimum is 5.0% of outstanding FHLBA advances. Unused
borrowing capacity at December 31, 1997, was $24.0 million. The Banks use FHLBA
advances for both long-term and short-term liquidity needs. Other than normal
banking operations, the Banks have no long-term liquidity needs. The Banks have
never been involved with highly leveraged transactions that may cause unusual
potential long-term liquidity needs.
The Consolidated Statements of Cash Flows for the three years ended
December 31, 1997 detail FLAG's sources and uses of funds for those periods.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity at December 31, 1997, increased 10.0% from
December 31, 1996. All of this growth resulted from 1997 earnings. Dividends of
$756,519 or $0.15 per share were declared and paid in 1997, compared to $0.14
per share in 1996.
Average stockholders' equity as a percent of total average assets is
one measure used to determine capital strength. The ratio of average
stockholders' equity to average total assets was 9.49% for 1997 and 9.72% for
1996. Table 11 summarizes these and other key ratios for FLAG for each of the
last three years.
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. Note 10 to the Consolidated
Financial Statements presents a summary of FDICIA's capital tiers compared to
FLAG's and the Banks' actual capital levels. The Banks exceeded all requirements
of a "well-capitalized" institution at December 31, 1997. The pending merger
(see "Pending Acquisitions") will not significantly reduce FLAG's capital ratios
and management will continue leveraging capital to increase return on
stockholders' equity.
24
<PAGE>
Table 11 - Equity Ratios
Years Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------
Return on average assets........... 1.01% .39% 1.05%
Return on average equity........... 10.68% 3.97% 11.07%
Dividend payout ratio.............. 20.18% 57.06% 19.09%
Average equity to average assets... 9.49% 9.72% 9.53%
PROVISION FOR INCOME TAXES.
The provision for income taxes was $1,795,000 in 1997, versus $347,000
in 1996, and $1,707,000 in 1995. The effective actual tax rates for 1997, 1996,
and 1995 (tax provision as a percentage of income before taxes) were 32.4%,
21.2%, and 33.0%, respectively. These tax rates are lower than the statutory
Federal tax rate of 34% primarily due to interest income on tax exempt
securities. See FLAG's consolidated financial statements for an analysis of
income taxes.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS No. 130 requires that companies (i) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the statement of financial condition. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 specifies the
presentation and disclosure of operating segment information reported in the
annual report and interim reports issued to stockholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management
believes that the adoption of these statements will have no material impact on
FLAG's financial position, results of operation, or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FLAG FINANCIAL CORPORATION
Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(with Independent Accountants' Report thereon)
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia
We have audited the accompanying consolidated balance sheets of FLAG Financial
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
statements of earnings, changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 and 1995 consolidated financial statements
of FLAG Financial Corporation and subsidiary and the 1997, 1996, and 1995
consolidated financial statements of Three Rivers Bancshares, Inc. and
subsidiary, all of which were pooled with Middle Georgia Bankshares, Inc. and
subsidiary in 1998 as explained in Note 2 to the accompanying consolidated
financial statements. Those statements are included in the accompanying
consolidated financial statements and reflect total assets of $34,548,811 and
$250,746,998 as of December 31, 1997 and 1996, respectively, and net earnings of
$662,466, $221,184, and $2,357,247 for each of the three years in the period
ended December 31, 1997. Those statements were audited by other auditors whose
reports have been furnished to us and our opinion, insofar as it relates to
these amounts, is based solely on the reports of the other auditors.
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, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of FLAG Financial Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 22, 1998, except for Note 2 as to which the date is May 8, 1998 and Note
10 as to which the date is June 3, 1998
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia
We have audited the accompanying consolidated balance sheet of FLAG Financial
Corporation and subsidiary as of December 31, 1996, and the related statements
of operations, changes in stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These financial statements are the
responsibility of FLAG's management. Our responsibility is to express an opinion
on these 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 subsidiary as of December 31, 1996, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995,
in conformity with generally accepted accounting principles.
/s/ Robinson, Grimes & Company, P.C.
Columbus, Georgia
January 31, 1997
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Middle Georgia Bankshares, Inc.
Vienna, Georgia
We have audited the accompanying consolidated balance sheets of Middle
Georgia Bankshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the
related statements of earnings, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 Middle
Georgia Bankshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 23, 1998
28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Three Rivers Bancshares, Inc.
Milan, Georgia
We have audited the accompanying consolidated balance sheets of Three
Rivers Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the
related statements of earnings, changes in stockholders' equity and cash flows
for each of the three years ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 fee 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 Three Rivers
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the three years ended
December 31, 1997, in conformity with generally accepted accounting principles.
/S/ Thigpen, Jones, Seaton & Co., P.C.
Dublin, Georgia
January 28, 1998
29
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets
1997 1996
---- ----
Cash and due from banks, including reserve
requirements of $1,664,000 and $1,435,000..........$ 13,350,755 10,447,593
Federal funds sold................................... 5,900,000 3,660,000
----------- -----------
Cash and cash equivalents.................... 19,250,755 14,107,593
-----------------------
Interest-bearing deposits in other banks............. 3,168,353 1,327,108
Investment securities available-for-sale............. 71,665,213 63,461,953
Investment securities held-to-maturity
(fair value of $2,929,229 in 1997
and $3,636,680 in 1996) ......................... 2,957,971 3,724,440
Other investments ................................... 4,756,655 4,018,460
Mortgage loans held for sale ........................ 3,481,678 1,505,798
Loans, net .......................................... 279,285,679 239,653,367
Premises and equipment, net ......................... 11,348,843 9,527,561
Mortgage servicing rights ........................... 1,174,292 1,703,710
Accrued interest receivable ......................... 4,713,021 3,809,317
Cash surrender value of life insurance .............. 3,864,612 3,544,386
Other assets ........................................ 5,618,002 4,134,862
------------ ------------
$411,285,074 350,518,555
Liabilities and Stockholders' Equity
Deposits:
Demand ............................................ $32,245,871 32,401,509
Interest-bearing demand ............................. 70,503,608 61,395,808
Savings.............................................. 20,315,119 20,472,906
Time ................................................ 144,116,285 130,174,492
Time, over $100,000 ................................. 57,671,160 49,975,738
----------- ------------
Total deposits.............................. 324,852,043 294,420,453
----------- -----------
Federal funds purchased............................... 170,000 2,210,000
Advances from Federal Home Loan Bank ................. 43,637,494 17,370,833
Accrued interest payable ............................ 1,312,319 940,139
Other liabilities..................................... 4,542,833 2,163,012
----------- ------------
Total liabilities ......................... 374,514,689 317,104,437
----------- -----------
Stockholders' equity:
Preferred stock (10,000,000 shares
authorized; none issued and outstanding) ....... - -
Common stock ($1 par value, 30,000,000 shares
authorized, 5,171,474 and 5,163,678 shares
issued and outstanding) ........................ 5,171,474 5,163,678
Additional paid-in capital ....................... 8,793,976 8,747,322
Retained earnings ................................ 22,813,421 19,821,242
Unrealized loss on investment securities
available-for-sale, net of tax ................ (8,486) (318,124)
----------- ------------
Total stockholders' equity .............. 36,770,385 33,414,118
----------- ------------
$411,285,074 350,518,555
=========== ===========
See accompanying notes to consolidated financial statements.
30
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Interest income:
Interest and fees on loans ......... $ 25,848,943 23,239,894 21,768,020
Interest on investment securities .. 4,345,060 4,298,842 5,101,783
Interest-bearing deposits........... 190,476 167,587 156,610
Interest on federal funds sold ..... 258,301 244,829 281,323
------- ------- -------
Total interest income ....... 30,642,780 27,951,152 27,310,880
---------- ---------- ----------
Interest expense:
Deposits ........................... 13,175,309 11,992,860 11,504,740
Borrowings ......................... 1,470,797 1,201,626 1,872,996
--------- --------- ---------
Total interest expense ....... 14,646,106 13,194,486 13,377,736
---------- ---------- ----------
Net interest income before
provision for loan losses .... 15,996,674 14,756,666 13,933,144
Provision for loan losses ............ 765,000 3,743,529 774,500
------- --------- -------
Net interest income after
provision for loan losses .... 15,231,674 11,013,137 13,158,644
---------- ---------- ----------
Other income:
Fees and service charges ........... 3,567,828 3,301,176 2,971,322
Gain on sales of investment
securities ....................... 171,119 232,097 261,659
Gain on sales of loans ............. 821,175 595,535 55,881
Gain (loss) on other
real estate, net ................. (82,719) (79,643) 32,764
Other .............................. 854,493 588,273 384,596
------- ------- -------
Total other income ............. 5,331,896 4,637,438 3,706,222
--------- --------- ---------
Other expenses:
Salaries and employee benefits ..... 7,256,333 6,171,879 5,749,479
Occupancy .......................... 2,778,741 2,227,851 1,824,663
Other operating .................... 4,985,253 5,618,052 4,112,422
--------- --------- ---------
Total other expenses ........... 15,020,327 14,017,782 11,686,564
---------- ---------- ----------
Earnings before provision for
income taxes ................. 5,543,243 1,632,793 5,178,302
Provision for income taxes ........... 1,794,545 346,545 1,706,668
--------- ------- ---------
Net earnings ................... $ 3,748,698 1,286,248 3,471,634
========= ========= =========
Basic earnings per share $ .73 .25 .68
========= ========== =========
Diluted earnings per share $ .72 .25 .67
========== ========== =========
See accompanying notes to consolidated financial statements.
31
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Securities
Additional Available-for
Common Paid-In Retained Sale,
Stock Capital Earnings Net of Tax Total
Balance, December 31, 1994,
<S> <C> <C> <C> <C> <C>
as previously stated, ....... $ 3,018,750 6,861,250 11,157,835 (2,026,409) 19,011,426
Adjustments to reflect
pooling of interests ........ 2,100,991 1,700,988 6,306,633 (379,922) 9,728,690
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994
as restated ............... 5,119,741 8,562,238 17,464,468 (2,406,331) 28,740,116
Exercise of stock options ...... 40,190 84,208 -- -- 124,398
Issuance of common stock ....... 7,211 52,275 -- -- 59,486
Repurchase of common stock ..... (192,150) (436,733) (1,004,389) -- (1,633,272)
Change in unrealized
loss on securities
available-for-sale ........... -- -- -- 2,133,702 2,133,702
Sale of treasury stock
by pooled entity .............. 3,473 16,582 -- -- 20,055
Net earnings ................... -- -- 3,471,634 -- 3,471,634
Dividends declared ............. -- -- (662,816) -- (662,816)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 ...... 4,978,465 8,278,570 19,268,897 (272,629) 32,253,303
Exercise of stock options ...... 180,311 450,318 -- -- 630,629
Issuance of common stock ....... 8,375 35,894 -- -- 44,269
Change in unrealized
loss on securities
available-for-sale ........... -- -- -- (45,495) (45,495)
Purchase of treasury
stock by pooled entity ..... (3,473) (17,460) -- -- (20,933)
Net earnings .................. -- -- 1,286,248 -- 1,286,248
Dividends declared .......... -- -- (733,903) -- (733,903)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 ...... 5,163,678 8,747,322 19,821,242 (318,124) 33,414,118
Change in unrealized
loss on securities
available-for-sale ........... -- -- -- 309,638 309,638
Sale of treasury
stock by pooled entity ........ 7,796 46,654 -- -- 54,450
Net earnings .................... -- -- 3,748,698 -- 3,748,698
Dividends declared ............. -- -- (756,519) -- (756,519)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ...... $ 5,171,474 8,793,976 22,813,421 (8,486) 36,770,385
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings .............................................. $ 3,748,698 1,286,248 3,471,634
Adjustments to reconcile net earnings to net cash
provided by operating activities
(net of effect of branch acquisition):
Depreciation, amortization and accretion ............... 1,481,999 1,286,440 1,117,375
Provision for loan losses .............................. 765,000 3,743,529 774,500
Provision for deferred taxes ........................... 993,957 (1,037,538) (115,896)
Gains on sales of securities available-for-sale ........ (171,119) (232,097) (261,659)
Gain on sales of loans ................................. (821,175) (595,535) (55,881)
(Gain) loss on other real estate ....................... 82,719 79,643 (32,764)
Change in:
Mortgage loans held for sale ......................... (1,317,157) (887,549) (1,281,363)
Other ................................................ 1,460,150 2,076,657 (553,563)
---------- ---------- ----------
Net cash provided by operating activities ........... 6,223,072 5,719,798 3,062,383
---------- ---------- ----------
Cash flows from investing activities (net of effect of branch
acquisition):
Net change in interest-bearing deposits .................. (1,841,245) 311,725 (100,554)
Proceeds from sales and maturities
of securities available-for-sale ........................ 50,693,161 32,263,333 33,853,994
Proceeds from maturities of
securities held-to-maturity ............................. 766,861 1,137,484 2,804,939
Proceeds from sale of other investments .................. 225,400 -- 318,500
Purchases of other investments ........................... (963,595) (517,810) (342,450)
Purchases of securities available for sale ............... (58,301,833) (25,763,577) (25,846,485)
Net change in loans ...................................... (39,239,491) (27,531,311) (9,230,803)
Proceeds from sales of other real estate ................. 22,590 599,937 1,003,688
Purchases of premises and equipment ...................... (2,554,591) (1,082,945) (3,440,321)
Proceeds from sale of premises and equipment ............. 67,023 75,930 19,977
Purchase of cash surrender value life insurance .......... (243,652) (72,962) (2,892,307)
Cash acquired in branch acquisition, net of premium paid . 25,416,547 -- --
---------- ---------- ----------
Net cash used in investing activities ................ (25,952,825) (20,580,196) (3,851,822)
---------- ---------- ----------
Cash flows from financing activities (net of effect of branch
acquisition):
Net change in deposits .................................... 1,348,323 21,111,643 22,558,324
Change in federal funds purchased ......................... (2,040,000) 2,210,000 --
Proceeds from FHLB advances ............................... 42,300,000 16,000,000 67,800,000
Payments of FHLB advances ................................. (16,033,339) (28,213,334) (82,056,389)
Repurchase of common stock ................................ -- -- (1,633,272)
Proceeds from exercise of stock options ................... -- 630,629 124,398
Proceeds from issuance of common stock .................... -- 44,269 59,486
Proceeds from sale of treasury stock of pooled entity ..... 54,450 -- 20,005
Purchase of treasury stock of pooled entity ............... -- (20,933) --
Cash dividends paid ....................................... (756,519) (704,362) (669,903)
---------- ---------- ----------
Net cash provided by financing activities .......... 24,872,915 11,057,912 6,202,699
---------- ---------- ----------
Net change in cash and cash equivalents .......... 5,143,162 (3,802,486) 5,413,260
Cash and cash equivalents at beginning of year .............. 14,107,593 17,910,079 12,496,819
---------- ---------- -----------
Cash and cash equivalents at end of year .................... $19,250,755 14,107,593 17,910,079
========== ========== ==========
</TABLE>
33
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
----- ------ ----
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $14,311,123 13,208,236 13,100,360
========== ========== ==========
Income taxes $ 1,494,210 1,541,745 1,915,325
========= ========= =========
Supplemental schedule of noncash
investing and financing activities:
Real estate acquired
through foreclosure 607,898 1,228,775 1,807,018
======= ========= =========
Change in unrealized loss on
securities available-for-sale,
net of tax $ 309,638 (45,495) 2,133,702
======= ======== =========
Increase (decrease) in
dividends payable -- 29,541 (7,335)
======= ====== ========
Deposit liabilities assumed in branch
acquisition $29,083,191 -- --
========== ====== ========
Assets acquired in branch acquisition,
other than cash and cash equivalents $ 1,660,756 -- --
========= ======= ========
See accompanying notes to consolidated financial statements.
34
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of FLAG Financial
Corporation ("FLAG"), its wholly-owned subsidiaries First Federal Savings Bank
of LaGrange ("FFSB"), FFSB's wholly-owned subsidiary Piedmont Mortgage Service,
Inc. ("Piedmont"), Citizen's Bank ("Citizens"), Citizens' wholly owned
subsidiary CB Financial Group, Inc. ("CB Financial"), and Bank of Milan
("Milan") (FFSB, Citizens and Milan "the Banks", collectively). All significant
intercompany accounts and transactions have been eliminated in consolidation.
FLAG is a multi-bank holding company whose business is conducted by its
wholly-owned subsidiaries. FLAG is subject to regulation under the Bank Holding
Company Act of 1956. FFSB is a federal savings bank and is primarily regulated
by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). Citizens and Milan are commercial banks and are primarily
regulated by the Georgia Department of Banking and Finance ("DBF") and the FDIC.
The Banks provide a full range of commercial, mortgage and consumer banking
services in West-Central and Middle Georgia. Piedmont is an appraisal service
company working principally for FFSB and as a brokerage service to individuals.
CB Financial is a pawn shop and check cashing operation.
The accounting principles followed by FLAG and its subsidiaries, and the methods
of applying these principles, conform with generally accepted accounting
principles ("GAAP") and with general practices within the banking industry. In
preparing financial statements in conformity with GAAP, management is required
to make estimates and assumptions that affect the reported amounts in the
financial statements. Actual results could differ significantly from those
estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include, but are
not limited to, the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with or in lieu of foreclosure
on loans, the valuation allowance for mortgage servicing rights and valuation
allowances associated with the realization of deferred tax assets which are
based on future taxable income.
Cash and Cash Equivalents
- --------------------------------------------------------------------------------
Cash equivalents include amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
Investment Securities
FLAG classifies its securities in one of three categories: trading,
available-for-sale, or held-to-maturity. There were no trading securities at
December 31, 1997 and 1996. Securities held-to-maturity are those securities for
which FLAG has the ability and intent to hold to maturity. All other securities
are classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at cost, adjusted for the amortization or accretion of
premiums or discounts. Unrealized holding gains and losses, net of the related
tax effect, on securities available-for-sale are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer.
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses are included
in earnings and the cost of securities sold are derived using the specific
identification method.
35
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
- --------------------------------------------------------------------------------
Summary of Significant Accounting Policies, continued
Other Investments
- --------------------------------------------------------------------------------
Other investments include Federal Home Loan Bank ("FHLB") stock, other equity
securities with no readily determinable fair value and an investment in a
limited partnership. An investment in FHLB stock is required by law for a
federally insured savings bank. FFSB owns a 39.6% interest in a limited
partnership, which invests in multi-family real estate and passes low income
housing credits to the investors. FLAG recognizes these tax credits in the year
received. These investments are carried at cost, which approximates fair value.
Mortgage Loans Held for Sale
- --------------------------------------------------------------------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. The amount by which cost
exceeds market value is accounted for as a valuation allowance. Changes, if any,
in the valuation allowance are included in the determination of net earnings in
the period in which the change occurs. Gains and losses from the sale of loans
are determined using the specific identification method.
Loans, Loan Fees and Interest Income
- --------------------------------------------------------------------------------
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are reported at their outstanding unpaid principal
balances, net of the allowance for loan losses, deferred fees or costs on
originated loans and unamortized premiums or discounts on purchased loans.
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized in interest income using the level-yield method over
the contractual lives of the loans, adjusted for estimated prepayments based on
the Banks' historical prepayment experience. Commitment fees and costs relating
to commitments whose likelihood of exercise is remote are recognized over the
commitment period on a straight-line basis. If the commitment is subsequently
exercised during the commitment period, the remaining unamortized commitment fee
at the time of exercise is recognized over the life of the loan as an adjustment
to the yield. Premiums and discounts on purchased loans are amortized over the
remaining lives of the loans using the level-yield method. Fees arising from
servicing loans for others are recognized as earned.
FLAG considers a loan impaired when, based on current information and events, it
is probable that all amounts due according to the contractual terms of the loan
agreement will not be collected. Impaired loans are measured based on the
present value of expected future cash flows, discounted at the loan's effective
interest rate or at the loan's observable market price, or the fair value of the
collateral of the loan if the loan is collateral dependent. Interest income from
impaired loans is recognized using a cash basis method of accounting during the
time within that period in which the loans were impaired.
Leasing
- --------------------------------------------------------------------------------
FFSB originates commercial and consumer leases through its leasing division.
Interest income on leases is recorded on the accrual basis and a provision for
possible losses on leases is recorded as a charge to earnings.
Allowance for Loan Losses
- --------------------------------------------------------------------------------
The allowance for loan losses is established through provisions for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collection of the principal is unlikely. The
allowance is an amount which, in management's judgment, will be adequate to
absorb losses on existing loans that may become uncollectible. The allowance is
established through consideration of such factors as changes in the nature and
volume of the portfolio, adequacy of collateral, delinquency trends, loan
concentrations, specific problem loans, and economic conditions that may affect
the borrower's ability to pay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review FLAG's allowance for loan losses.
Such agencies may require FLAG to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
36
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Summary of Significant Accounting Policies, continued
Other Real Estate Owned
- --------------------------------------------------------------------------------
Real estate acquired through foreclosure is carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs to
dispose. Fair value is defined as the amount that is expected to be received in
a current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
Premises and Equipment
- --------------------------------------------------------------------------------
Premises and equipment are stated at cost less accumulated depreciation. Major
additions and improvements are charged to the asset accounts while maintenance
and repairs that do not improve or extend the useful lives of the assets are
expensed currently. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any gain
or loss is reflected in earnings for the period.
Depreciation expense is computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements ............................. 15-40 years
Furniture and equipment ................................ 3-10 years
Mortgage Servicing Rights
- --------------------------------------------------------------------------------
FLAG's mortgage banking division accounts for mortgage servicing rights as a
separate asset regardless of whether the servicing rights are acquired through
purchase or origination. FLAG's mortgage servicing rights represent the
unamortized cost of purchased and originated contractual rights to service
mortgages for others in exchange for a servicing fee and ancillary loan
administration income. Mortgage servicing rights are amortized over the period
of estimated net servicing income and are periodically adjusted for actual and
anticipated prepayments of the underlying mortgage loans. Impairment analysis is
performed quarterly after stratifying the rights by interest rate. Impairment,
defined as the excess of the asset's carrying value over its current fair value,
is recognized through a valuation allowance. At December 31, 1997 and 1996, no
valuation allowances were required for FLAG's mortgage servicing rights.
FLAG recognized approximately $418,000 and $451,000 in servicing assets during
1997 and 1996, respectively, and recognized amortization expense relating to
servicing assets of approximately $149,000 and $204,000 during 1997 and 1996,
respectively. The risk characteristics that FLAG uses to stratify recognized
servicing assets for purposes of measuring impairment include the interest rate
and term of the underlying loans serviced.
Core Deposit Intangible
- --------------------------------------------------------------------------------
During 1997, Citizens entered into a Purchase and Assumption agreement with
Wachovia Bank of Georgia, N.A. to acquire certain loans, deposits and other
liabilities of a branch in Montezuma, Georgia and a former branch in Oglethorpe,
Georgia ("branch acquisition") for a net purchase price approximating
$1,956,000. The purchased core deposit intangible and the associated expenses
have been capitalized and are being amortized using the straight-line method
over the 15 year estimated average life of the deposit base acquired and is
included as a component of other assets. Amortization expense approximated
$58,000 for the year ended December 31, 1997.
Income Taxes
- --------------------------------------------------------------------------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits, such as net operating loss carryforwards, are recognized to the extent
that realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the assets and liabilities are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the period that
includes the enactment date.
37
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Summary of Significant Accounting Policies, continued
Income Taxes, continued
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of FLAG's assets and liabilities results in
deferred tax assets, an evaluation of the probability of being able to realize
the future benefits indicated by such assets is required. A valuation allowance
is provided when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In assessing the realizability of the
deferred tax assets, management considers the scheduled reversals of deferred
tax liabilities, projected future taxable income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note 7. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Net Earnings Per Common Share
- --------------------------------------------------------------------------------
SFAS No. 128 "Earnings Per Share" became effective for FLAG for the year ended
December 31, 1997. This new standard specifies the computation, presentation and
disclosure requirements for earnings per share and is designed to simplify
previous earnings per share standards and to make domestic and international
practices more compatible. Basic earnings per common share are based on the
weighted average number of common shares outstanding during the period while the
effects of potential common shares outstanding during the period are included in
diluted earnings per share. All earnings per common share amounts have been
restated to conform to the provisions of SFAS No. 128.
SFAS No. 128 requires the presentation of earnings per common share on the face
of the statement of operations with and without the dilutive effects of
potential common stock issuances from instruments such as options, convertible
securities, and warrants. Additionally, the new statement requires the
reconciliation of the amounts used in the computation of both "basic earnings
per share" and "diluted earnings per share" for the years ended December 31,
1997, 1996, and 1995 as follows:
For the Year EndedDecember 31, 1997 Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
Basic earnings per share .................... 3,748,698 5,166,857 .73
Effect of dilutive securities - stock options - 29,364 (.01)
--------------------------------
Diluted earnings per share .................. $3,748,698 5,196,221 .72
========= ========= ===
For the Year EndedDecember 31, 1996 Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
Basic earnings per share .................... 1,286,248 5,124,474 .25
Effect of dilutive securities - stock options - 12,149 -
--------------------------------
Diluted earnings per share .................. 1,286,248 5,136,623 .25
========= ========= ===
For the Year Ended December 31, 1995 Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
Basic earnings per share .................... $3,471,634 5,095,568 .68
Effect of dilutive securities - stock options - 107,660 (.01)
---------------------------------
Diluted earnings per share .................. $3,471,634 5,203,227 .67
========= ========= ===
38
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Summary of Significant Accounting Policies, continued
Recent Accounting PronouncementsIn June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. SFAS
No. 131 specifies the presentation and disclosure of operating segment
information reported in the annual report and interim reports issued to
stockholders. The provisions of both statements are effective for fiscal years
beginning after December 15, 1997. FLAG believes that the adoption of these
statements will not have a material impact on FLAG's financial position, results
of operations, or liquidity.
2. Business Combinations
Effective March 30, 1998, FLAG acquired, for approximately 1.5 million shares of
its common stock, all of the outstanding stock of Middle Georgia Bankshares,
Inc., the holding company of the $129 million Citizens Bank, located in Vienna,
Georgia. Effective May 8, 1998, FLAG acquired, for approximately 597,000 shares
of its common stock all of the outstanding stock of Three Rivers Bancshares,
Inc., the holding company of the $35 million Bank of Milan, located in Milan,
Georgia. These acquisitions were accounted for as poolings of interests and
accordingly, the consolidated financial statements for all periods presented
have been restated to include the financial position and results of operations
as if the combination had occurred on January 1, 1995.
The following is a reconciliation of the amounts of net interest income and net
earnings previously reported with the restated amounts:
1997 1996 1995
-------------------------------------
Net interest income:
FLAG, as previously reported .. $ 8,542,364 8,721,592 8,241,116
Citizens ...................... 5,623,192 4,667,851 4,529,064
Milan ......................... 1,831,118 1,367,223 1,162,964
----------------------------------
As restated ................... $ 15,996,674 14,756,666 13,933,144
========== ========== ==========
Net earnings (loss):
FLAG, as previously reported .. $ 2,033,114 (177,626) 2,026,007
Citizens ...................... 1,053,118 1,065,064 1,114,387
Milan ......................... 662,446 398,810 331,240
----------------------------------
As restated ................... $ 3,748,698 1,286,248 3,471,634
========= ========= =========
39
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
3. Investment Securities
Investment securities at December 31, 1997 and 1996 are summarized as follows:
December 31, 1997
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
U.S. Treasuries and
agencies ............... $16,732,501 94,820 2,532 16,824,789
State, county and municipals 6,318,621 121,973 35,859 6,404,735
Corporate debt securities .. 989,300 10,700 -- 1,000,000
Equity securities .......... 1,637,584 125,370 1,817 1,761,137
Mortgage-backed securities . 29,782,954 214,379 176,613 29,820,720
Collateralized mortgage
obligations ............ 16,226,434 11,031 383,633 15,853,832
---------- ------ ------- ----------
$71,687,394 578,273 600,454 71,665,213
=========== ======= ======= ==========
December 31, 1997
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
State, county and municipals $ 350,136 9,950 -- 360,086
Mortgage-backed securities . 103,140 1,160 -- 104,300
Collateralized mortgage
obligations ............ 2,504,695 2,037 41,889 2,464,843
--------- ----- ------ ---------
$2,957,971 13,147 41,889 2,929,229
========== ====== ====== =========
December 31, 1996
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
U.S. Treasuries and
agencies ................ $15,930,393 20,885 76,881 15,874,397
State, county and municipals 4,085,310 75,208 13,631 4,146,887
Corporate debt securities .. 980,790 9,100 -- 989,890
Equity securities .......... 2,254,878 5,891 7,583 2,253,186
Mortgage-backed securities . 23,591,986 139,129 238,150 23,492,965
Collateralized mortgage
obligations ............. 17,132,514 17,921 445,807 16,704,628
----------- --------- ---------- -----------
$63,975,871 268,134 782,052 63,461,953
=========== ========= ========== ===========
40
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
3. Investment Securities, continued
December 31, 1996
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
State, county and municipals ..... $ 514,744 13,214 - 527,958
Mortgage-backed securities ....... 117,547 1,396 - 118,943
Collaterlized mortgage
obligations ................... 3,092,149 4,099 106,469 2,989,779
-------------------------------------------
$ 3,724,440 18,709 106,469 3,636,680
========= ====== ======= =========
The amortized cost and estimated fair value of securities available for sale and
securities held to maturity at December 31, 1997, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Securities Securities
Available-for-Sale Held-to-Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
U.S. Treasuries and agencies and
State, county and municipals:
Within 1 year .................$ 3,445,247 3,449,288 49,708 51,154
1 to 5 years .................. 6,914,084 6,962,123 224,944 230,403
5 to 10 years ................. 10,302,166 10,355,504 50,575 52,403
After 10 years ................ 2,389,625 2,462,609 24,909 26,126
--------- --------- ------ ------
23,051,122 23,229,524 350,136 360,086
Equity securities ................ 1,637,584 1,761,137 - -
Corporate debt securities ........ 989,300 1,000,000 - -
Mortgage-backed securities ....... 29,782,954 29,820,720 103,140 104,300
Collateralized mortgage
obligations .................. 16,226,434 15,853,832 2,504,695 2,464,843
---------- ---------- ---------- ---------
$71,687,394 71,665,213 2,957,971 2,929,229
========== ========== ========= =========
There were no sales of securities held-to-maturity during 1997, 1996, and 1995.
Proceeds from sales of securities available-for-sale during 1997, 1996, and 1995
totaled approximately $50,693,000, $32,263,000, and $33,854,000, respectively.
Gross gains of approximately $185,000, $263,000, and $308,000 and gross losses
of approximately $14,000, $31,000, and $46,000 were realized on those sales for
the years ended December 31, 1997, 1996, and 1995, respectively.
Securities and interest-bearing deposits with a carrying value of approximately
$43,578,000 and $45,988,000 at December 31, 1997 and 1996, respectively, were
pledged to secure advances from FHLB, U.S. Government deposits, and other public
deposits.
41
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
4. Loans
Major classifications of loans at December 31, 1997 and 1996 are summarized as
follows:
1997 1996
---- ----
Commercial, financial and agricultural ......... $ 47,373,360 34,983,271
Real estate - construction ...................... 11,767,846 10,538,752
Real estate - mortgage .......................... 198,565,814 170,614,612
Installment loans to individuals ................ 15,854,704 22,087,539
Lease financings ................................ 9,303,764 7,571,427
--------- ---------
Gross loans ................................ 282,865,488 245,795,601
Less:
Deferred loan costs (fees) - net .............. 236,092 (374,198)
Allowance for loan losses ..................... (3,815,901) (5,768,036)
---------- ----------
$ 279,285,679 239,653,367
============= ===========
The Banks concentrate their lending activities in the origination of permanent
residential mortgage loans, commercial mortgage loans, agricultural loans,
commercial business loans, and consumer installment loans. The majority of the
Banks' real estate loans are secured by real property located in Troup, Dooly,
Macon, Dodge, Telfair and surrounding counties in Georgia.
FLAG has recognized impaired loans of approximately $10,579,000 and $15,495,000
at December 31, 1997 and 1996, respectively, with a total allowance for loan
losses related to these loans of $1,358,000 and $4,159,000, respectively.
Interest income on impaired loans of approximately $117,000 and $148,000 was
recognized for cash payments received in 1997 and 1996, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended December 31, 1997, 1996, and 1995:
1997 1996 1995
---- ---- ----
Balance at beginning of year ...... $ 5,768,036 2,592,080 2,411,662
Provisions charged to operations .. 765,000 3,743,529 774,500
Loans charged-off ................. (2,916,157) (628,456) (646,749)
Recoveries on loans previously
charged-off .................. 199,022 60,883 52,667
----------- ----------- -----------
Balance at end of year ............ $ 3,815,901 5,768,036 2,592,080
=========== =========== ===========
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. Unpaid principal balances of these loans at
December 31, 1997 and 1996 approximate $166,823,000 and $247,963,000,
respectively. Custodial escrow balances maintained in connection with loan
servicing, and included in demand deposits, were approximately $618,000 and
$710,000 at December 31, 1997 and 1996, respectively.
Mortgage loans secured by 1-4 family residences totalling approximately
$71,523,000 were pledged as collateral for outstanding FHLB advances as of
December 31, 1997.
42
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
5. Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 are summarized as follows:
1997 1996
----------------------------
Land and land improvements ................. $ 1,498,806 1,379,570
Buildings and improvements ................. 7,904,767 7,324,271
Furniture and equipment .................... 9,906,584 7,674,472
-----------
19,310,157 16,378,313
Less accumulated depreciation .............. 7,961,314 6,850,752
-----------
$11,348,843 9,527,561
=========== ===========
Depreciation expense approximated $1,320,000, $1,139,000, and $891,000 at
December 31, 1997, 1996, and 1995, respectively
6. Time Deposits
At December 31, 1997, contractual maturities of time deposits are summarized as
follows:
Year ending December 31,
- --------------------------------------------------------------------------------
1998 $ 160,906,809
1999 19,126,468
2000 9,462,305
2001 5,089,325
2002 and thereafter 7,202,538
---- ---------
$ 201,787,445
=================
7. FHLB Advances
FHLB advances are collateralized by FHLB stock, certain investment securities,
and first mortgage loans. Advances from the FHLB outstanding at December 31,
1997, mature and bear fixed and variable interest rates as follows:
Year Amount Interest Rate
---------- ----------- -------------
1998 $25,700,000 5.74% - 5.87%
2000 5,000,000 5.59%
2002 7,000,000 5.53%
Thereafter 5,937,494 5.23% - 6.75%
-------------
$43,637,494 5.23% - 6.75%
=========== =============
43
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
8. Income Taxes
The following is an analysis of the components of income tax expense (benefit)
for the years ended December 31, 1997, 1996, and 1995:
1997 1996 1995
----------------------------------------
Current ............ $ 800,588 1,384,083 1,822,564
Deferred ........... 993,957 (1,037,538) (115,896)
----------
Total provision $1,794,545 346,545 1,706,668
========== ========== ==========
The differences between income tax expense (benefit) and the amount computed by
applying the statutory federal income tax rate to earnings before taxes for the
years ended December 31, 1997, 1996, and 1995 are as follows:
1997 1996 1995
--------------------------------------------
Pretax income at statutory rate ... $ 1,884,701 555,150 1,760,623
Add (deduct):
Tax-exempt interest income ..... (116,667) (104,743) (105,598)
State income taxes, net of
federal effect ............... 164,353 (34,123) 129,403
Increase in cash surrender value
of life insurance ............ (76,432) (16,304) (17,000)
Other .......................... (61,410) (53,435) (60,760)
------- ------- -------
$ 1,794,545 346,545 1,706,668
=========== =========== ===========
The following summarizes the net deferred tax asset. The deferred tax asset is
included as a component of other assets at December 31, 1997 and 1996.
1997 1996
----------------------
Deferred tax assets:
Allowance for loan losses ......... $ 939,085 2,047,499
Allowance for other
real estate owned ............... 21,208 41,818
Net deferred loan fees ............ -- 82,959
Net operating loss carryforwards
and credits ..................... 397,021 --
Unrealized loss on securities
available-for-sale .............. 13,694 195,796
Other .......................... 30,657 32,357
----------
Total gross deferred tax assets 1,401,665 2,400,429
----------
Deferred tax liabilities:
Premises and equipment ............ 361,564 341,109
Net deferred loan fees ............ 151,375 --
Other ............................. 189,250 183,885
----------
Total gross deferred tax
liabilities ................. 702,189 524,994
---------- ----------
Net deferred tax asset ........ $ 699,476 1,875,435
========== ==========
44
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
8. Income Taxes, continued
The Internal Revenue Code ("IRC") was amended during 1996 and the IRC section
593 reserve method for loan losses for thrift institutions was repealed.
Effective January 1, 1996, FFSB now computes its tax bad debt reserve under the
rules of IRC section 585, which applies to commercial banks. In years prior to
1996, FFSB obtained tax bad debt deductions approximating $2 million in excess
of its financial statement allowance for loan losses for which no provision for
federal income tax was made. These amounts were then subject to federal income
tax in future years pursuant to the prior IRC section 593 provisions if used for
purposes other than to absorb bad debt losses. Effective January 1, 1996,
approximately $2 million of the excess reserve is subject to recapture only if
FFSB ceases to qualify as a bank pursuant to the provisions of IRC section 585.
9. Employee and Director Benefit Plans
Defined Contribution Plans
- --------------------------------------------------------------------------------
FLAG has an established retirement plan qualified pursuant to Internal Revenue
Code section 401(k). The plan allows eligible employees to defer a portion of
their income by making contributions into the plan on a pretax basis. The plan
provides a matching contribution based on a percentage of the amount contributed
by the employee. During the years ended 1997, 1996, and 1995, the Company
contributed approximately $59,000, $49,000, and $48,000, respectively, to this
plan. Citizens also sponsors a 401(k) plan with similar terms. Citizens
contributed approximately $24,000, $19,000 and $21,000 in 1997, 1996 and 1995,
respectively, to the plan.
FLAG has established a profit-sharing plan for which substantially all employees
are eligible. The Board of Directors makes discretionary contributions up to 15%
of eligible compensation. The plan allows participants to direct up to 75% of
their account balance and/or contributions to be invested in the common stock of
FLAG. The trustee of the plan is required to purchase the FLAG stock at market
value and may not acquire more than 25% of the issued and outstanding shares.
During the years ended December 31, 1997, 1996, and 1995, FLAG recognized
$196,000, $185,000, and $182,000, respectively, in expense related to its
obligations under the plan.
Directors' Retirement Plan
- --------------------------------------------------------------------------------
During 1995, FLAG initiated a defined contribution postretirement benefit plan
to provide retirement benefits to its Board of Directors and to provide death
benefits for their designated beneficiaries. Under this plan, FLAG purchased
split-dollar whole life insurance contracts on the lives of each Director. The
increase in cash surrender value of the contracts, less FFSB's cost of funds,
constitutes FLAG's contribution to the plan each year. In the event the
insurance contracts fail to produce positive returns, FLAG has no obligation to
contribute to the plan. At December 31, 1997 and 1996, the cash surrender value
of the insurance contracts was approximately $2,114,000 and $1,911,000. Expenses
incurred for benefits were approximately $4,000 and $43,000 during 1997 and
1996, respectively. Citizens sponsors a similar plan covering its Board of
Directors. At December 31, 1997 and 1996, the cash surrender value of Citizens'
insurance contracts was approximately $1,358,000 and $1,283,000, respectively,
and expenses incurred for benefits were approximately $13,000 and $11,000 during
1997 and 1996, respectively.
Defined Benefit Plan
- --------------------------------------------------------------------------------
FLAG has a trusteed defined benefit pension plan which covers substantially all
employees. The benefits are based on years of service and the employee's
compensation during the last five years of employment. FLAG's policy is to fund
pension cost as actuarially determined on an annual basis. The plan is subject
to the Employee Retirement Income Security Act of 1974 (ERISA). FLAG's 1997 and
1996 contribution exceeded the minimum funding requirements of ERISA.
Assets of the plan are invested primarily in a common trust fund.
45
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
9. Employee and Director Benefit Plans, continued
Defined Benefit Plan, continued
- --------------------------------------------------------------------------------
The following is a reconciliation of the funded status of the plan using the
latest actuarial information applicable for each plan year:
1997 1996
---- ------
Accumulated benefit obligation
including vested benefits
of $1,050,965 and $850,898 ................ $ 1,062,575 872,174
=========== =======
Projected benefit obligation for
services rendered to date ................. 1,635,798 1,342,926
Plan assets at fair value ................... 1,379,263 1,224,542
--------- ---------
Projected benefit obligation in
excess of plan assets ..................... (256,535) (118,384)
Unrecognized transition obligation .......... 15,755 17,888
Unrecognized prior service cost ............. 141,472 151,530
Unrecognized net loss ....................... (6,457) (139,286)
------ --------
Accrued pension liability ............... $ (105,765) (88,252)
=========== =======
Net pension expense is summarized as follows:
1997 1996 1995
--------- --------- ---------
Service cost - benefits earned ....... $ 93,676 71,238 84,835
Interest cost on projected
benefit obligation ................. 116,072 95,648 98,476
Actual return on plan assets ......... (99,024) (85,327) (68,476)
Net amortization ..................... 12,191 12,191 21,401
--------- --------- ---------
$ 122,915 93,750 136,236
========= ========= =========
The assumed rate of return on assets was 8% for 1997, 1996 and 1995, with an
assumed discount rate of 8% and an assumed rate of compensation increase of 4.5%
in 1997 and 5.5% in 1996 and 1995. Prior service costs are generally amortized
over a period of 17 years.
46
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
9. Employee and Director Benefit Plans, continued
Stock Option Plan
- --------------------------------------------------------------------------------
FLAG has an employee stock incentive plan and a director stock incentive plan.
The plans were adopted for the benefit of directors and key officers and
employees in order that they may purchase FLAG stock at a price equal to the
fair market value on the date of grant. A total of 301,875 shares were reserved
for possible issuance under the employee plan and 150,938 shares were reserved
under the director plan. The options generally vest over a four-year period and
expire after ten years.
SFAS 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 1997, 1996, or 1995 related 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.
1997 1996
---- ----
Net earnings As reported ........ $ 3,748,698 1,286,248
Pro forma ...... $ 3,679,211 1,272,893
Basic earnings per share As reported ........ $ .73 .25
Pro forma ...... $ .71 .25
Diluted earnings per share As reported ........ $ .72 .25
Pro forma ...... $ .71 .25
The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of 2%
and 3%, respectively; volatility of .4269 and .2811, respectively; risk free
interest rate of 6% and an expected life of 5 years.
47
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
A summary of activity in these stock option plans is presented below:
1997 1996 1995
-------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Option Option Option
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
Outstanding, beginning
of year .............. 69,000 $ 6.68 240,311 $4.27 286,126 $ 4.16
Granted during
the year ............. 42,000 7.58 9,000 9.00 -
Cancelled during
the year ............. (1,875) 7.50 - (5,625) 3.59
Exercised during
the year - (180,311 3.59 (40,190) 3.59
-------------------------------------------------------
Outstanding, end
of year 109,125 $ 7.01 69,000 $6.68 240,311 $ 4.27
======= ==== ====== ==== ======= ====
Number of shares
Exercisable 109,125 69,000 240,311
======= ====== =======
48
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
9. Employee and Director Benefit Plans, continued
The weighted average grant-date fair value of options granted in 1997 and 1996
was $1.10 and $1.15, respectively. For these employee and director stock
options, options outstanding at December 31, 1997 are exercisable at option
prices ranging from $6.33 to $9.00 as presented in the table above. Such options
have a weighted average remaining contractual life of approximately 7.5 years as
of December 31, 1997.
10. Stockholders' Equity
Shares of preferred stock may be issued from time to time in one or more series
as established by resolution of the Board of Directors of FLAG, up to a maximum
of 10,000,000 shares. Each resolution shall include the number of shares issued,
preferences, special rights, and limitations as determined by the Board.
On May 18, 1998, FLAG declared a three for two stock split, payable on June 3,
1998 to shareholders of record on May 22, 1998. All per share amounts have been
restated to reflect this stock split as if it had occurred on January 1, 1995.
11. Regulatory Matters
FLAG is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on FLAG's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, FLAG and the Banks must meet specific
capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require FLAG to maintain minimum amounts and ratios of total and Tier 1 capital
(as defined) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997 and 1996, that FLAG meets all capital adequacy requirements to which it is
subject.
As of December 31, 1997 and 1996, the Banks were categorized as well capitalized
or adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Banks must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since that notification
that management believes have changed the Banks' category.
49
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
11. Regulatory Matters, continued
The Banks' actual capital amounts and ratios as well as those of FLAG on a
consolidated basis are presented below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
<S> <C> <C> <C> <C>
FLAG consolidated ... $ 37,546,000 13.2% 22,760,000 >/=8.0% N/A N/A
FFSB ................ $ 22,408,000 13.9% 12,871,000 >/=8.0% 16,089,000 >/=10.0%
Citizens ............ $ 9,326,000 9.4% 7,981,000 >/=8.0% 9,976,000 >/=10.0%
Milan ............... $ 3,077,000 13.8% 1,790,000 >/=8.0% 2,238,000 >/=10.0%
Tier 1 Capital (to Risk Weighted Assets)
FLAG consolidated ... $ 33,968,000 11.9% 11,380,000 >/=4.0% N/A N/A
FFSB ................ $ 20,382,000 12.7% 6,436,000 >/=4.0% 9,653,000 >/=6.0%
Citizens ............ $ 8,053,000 8.1% 3,990,000 >/=4.0% 5,986,000 >/=6.0%
Milan ............... $ 2,798,000 12.5% 895,000 >/=4.0% 1,343,000 >/=6.0%
Tier 1 Capital (to Average Assets)
FLAG consolidated ... $ 33,968,000 8.4% 16,091,000 >/=4.0% N/A N/A
FFSB ................ $ 20,382,000 8.3% 9,883,000 >/=4.0% 12,354,000 >/=5.0%
Citizens ............ $ 8,053,000 6.6% 4,881,000 >/=4.0% 6,101,000 >/=5.0%
Milan ............... $ 2,798,000 8.8% 1,270,000 >/=4.0% 1,587,000 >/=5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
FLAG consolidated .... $ 36,229,000 14.5% 19,981,000 >/=8.0% N/A N/A
FFSB ................. $ 21,568,000 14.4% 12,000,000 >/=8.0% 15,000,000 >/=10.0%
Citizens ............. $ 9,875,000 12.4% 6,379,000 >/=8.0% 7,934,000 >/=10.0%
Milan ................ $ 2,524,000 12.7% 1,587,000 >/=8.0% 1,983,000 >/=10.0%
Tier 1 Capital (to Risk Weighted Assets)
FLAG consolidated .... $ 33,115,000 13.3% 9,990,000 >/=4.0% N/A N/A
FFSB ................. $ 19,694,000 13.1% 6,000,000 >/=4.0% 9,000,000 >/=6.0%
Citizens ............. $ 8,876,000 11.1% 3,189,000 >/=4.0% 4,784,000 >/=6.0%
Milan ................ $ 2,283,000 11.5% 793,000 >/=4.0% 1,190,000 >/=6.0%
Tier 1 Capital (to Average Assets)
FLAG consolidated .... $ 33,115,000 9.4% 13,454,000 >/=4.0% N/A N/A
FFSB ................. $ 19,694,000 8.8% 8,907,000 >/=4.0% 11,134,000 >/=5.0%
Citizens ............. $ 8,876,000 10.3% 3,441,000 >/=4.0% 4,302,000 >/=5.0%
Milan ................ $ 2,283,000 8.5% 1,078,000 >/=4.0% 1,348,000 >/=5.0%
</TABLE>
Banking regulations limit the amount of dividends the Banks can pay to FLAG
without prior regulatory approval. These limitations are a function of excess
regulatory capital and net earnings in the year the dividend is declared. In
1998, FFSB can pay dividends totaling approximately $3,160,000 plus net earnings
during 1998, Citizens can pay dividends totaling approximately $607,000, and
Milan can pay dividends totaling approximately $333,000.
50
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
12. Commitments and Contingencies
- --------------------------------------------------------------------------------
The Banks lease certain banking facilities under operating lease arrangements
expiring through 2000. Approximate future minimum payments required for all
operating leases with remaining terms in excess of one year are presented below:
Year Ending December 31,
---------------------------------
1998 $ 77,000
1999 74,000
2000 65,000
---------------------------------
$ 216,000
=================================
Total rent expense was approximately $112,000, $71,000, and $66,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
FLAG has a partially self-insured health care plan for the benefit of eligible
employees and their eligible dependents, administered by a 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. FLAG is responsible for any claims less than $15,000 per person
annually.
FLAG 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 and to
manage its cost of funds. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amounts recognized in
the consolidated statements of financial condition. The contract amounts of
these instruments reflect the extent of involvement the Banks have in particular
classes of financial instruments.
Commitments to originate first mortgage loans and 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 upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks upon extension of credit, is based on management's credit evaluation
of the counterparty. The Banks' loans are primarily collateralized by
residential and other real properties, automobiles, savings deposits, accounts
receivable, inventory, and equipment located in West-Central and Middle Georgia.
Standby letters of credit are written conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
FLAG's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
Banks use the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. All standby letters of
credit are secured at December 31, 1997 and 1996.
1997 1996
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to originate first
mortgage loans $ 17,609,000 9,932,000
Commitments to extend credit $ 36,673,000 23,490,000
Standby letters of credit $ 1,237,000 1,205,000
51
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
13. Related Party Transactions
- --------------------------------------------------------------------------------
At December 31, 1997, deposits from directors, executive officers, and their
related interests aggregated approximately $206,000. These deposits were taken
in the normal course of business at market interest rates.
The Banks conduct transactions with directors and executive officers, including
companies in which they have beneficial interest, in the normal course of
business. It is the policy of the Banks that loan transactions with directors
and executive officers be made on substantially the same terms as those
prevailing at the time for comparable loans to other persons. The following is a
summary of activity for related party loans for 1997.
Balance at December 31, 1996 $ 3,321,000
New loans 3,835,000
Repayments (1,024,000)
-----------
Balance at December 31, 1997 $ 6,132,000
=========
14. Miscellaneous Operating Expenses
- --------------------------------------------------------------------------------
Components of other operating expenses in excess of 1% of interest and other
income for the years ended December 31, 1997, 1996, and 1995 are as follows:
1997 1996 1995
---- ---- ----
Advertising $ 371,000 285,000 249,000
Data processing expense $ 579,000 598,000 586,000
Federal deposit insurance premiums $ 199,000 1,670,000 552,000
52
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
15. FLAG Financial Corporation (Parent Company Only) Financial Information
Balance Sheets
December 31, 1997 and 1996
Assets
1997 1996
---- ----
Cash $ 919,188 1,374,516
Investment securities available-for-sale 1,042,883 458,885
Investment in subsidiaies 33,856,585 31,048,129
Equipment, net 536,282 -
Other assets 837,891 724,928
-------- -------
$ 37,192,829 33,606,458
========== ==========
Liabilities and Stockholders' Equity
Accounts payable and
accrued expenses 422,444 192,340
Stockholders' equity 36,770,385 33,414,118
---------- ----------
$ 37,192,829 33,606,458
========== ==========
53
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Income:
Dividend income from Banks $ 1,455,000 1,282,484 2,992,949
Interest income 7,357 - 167
Other 147,890 136,757 119,937
--------- ------- -------
Total income 1,610,247 1,419,241 3,113,053
--------- --------- ---------
Operating expenses:
Interest expense 1,333 347 9,692
Other 594,294 428,892 411,133
------- ------- -------
Total operating expenses 595,627 429,239 420,825
------- ------- -------
Earnings before income tax benefit
and equity in undistributed
earnings of Banks 1,014,620 990,002 2,692,228
Income tax b 153,918 97,505 74,295
------- ------ ------
Earnings before equity in
undistributed earnings of Banks 1,168,538 1,087,507 2,766,523
Equity in undistributed earnings
of Banks 2,580,160 198,741 705,111
--------- ------- -------
Net earnings $ 3,748,698 1,286,248 3,471,634
========= ========= =========
54
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(14) FLAG Financial Corporation (Parent Company Only) Financial Information,
continued
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating activities:
Net earnings $ 3,748,698 1,286,248 3,471,634
Adjustments to reconcile net
earnings to net cash
provided by operating activities:
Amortization 26,588 26,587 26,587
Equity in undistributed earnings
of Banks (2,580,160) (198,741) (705,111)
Change in other assets
and liabilities 90,562 (151,474) 73,833
------ ------- --------
Net cash provided by
operating activities 1,285,688 962,620 2,866,943
------------ ------- ---------
Cash flows from investing activities:
Purchase of securities
available-for-sale (502,665) (214,752) (75,750)
Proceeds from securities - 25,000 -
available for sale
Purchase of equipment (536,282) - -
--------- --------- ---------
Net cash used in investing activities
activities (1,038,947) (189,752) (75,750)
---------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt - (80,000) (480,000)
Repurchase of common stock - - (1,633,272)
Exercise of stock options - 630,629 124,398
Issuance of common stock - 44,269 59,486
Proceeds from sale of treasury
stock of pooled entity 54,450 - 20,055
Purchase of treasury stock
of pooled entity - (20,933) -
Dividends paid (756,519) (704,362) (669,903)
---------- -------- ---------
Net cash used in
financing activities (702,069) (130,397) (2,579,236)
--------- --------- -----------
Net change in cash (455,328) 642,471 211,957
Cash at beginning of year 1,374,516 732,045 520,088
----------- --------- --------
Cash at end of year $ 919,188 1,374,516 732,045
======= ========= =======
55
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
16. Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
FLAG is required to disclose 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 FLAG'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 FLAG or its Banks, but rather
a good-faith estimate of the increase or decrease in value of financial
instruments held by FLAG since purchase, origination, or issuance.
Cash and Cash Equivalents
- --------------------------------------------------------------------------------
For cash, due from banks, federal funds sold and interest-bearing deposits with
other banks the carrying amount is a reasonable estimate of fair value.
Securities Held-to-Maturity and Securities Available-for-Sale
- --------------------------------------------------------------------------------
Fair values for securities held-to-maturity and securities available-for-sale
are based on quoted market prices.
Other investments
- --------------------------------------------------------------------------------
The carrying value of other investments approximates fair value.
Loans and Mortgage Loans Held for Sale
- --------------------------------------------------------------------------------
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.
Cash Surrender Value of Life Insurance
- --------------------------------------------------------------------------------
The carrying value of cash surrender value of life insurance approximates fair
value.
Deposits
- --------------------------------------------------------------------------------
The fair value of demand deposits, savings accounts, NOW accounts and certain
money market deposits 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.
FHLB Advances
- --------------------------------------------------------------------------------
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.
Commitments to Originate First Mortgage Loans,
Commitments to Extend Credit, and Standby Letters of Credit
- --------------------------------------------------------------------------------
Because commitments to originate first mortgage loans, commitments to extend
credit and standby letters of credit are made using variable rates, the contract
value is a reasonable estimate of fair value.
56
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Fair Value of Financial Instruments, continued
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 FLAG's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of FLAG'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.
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 the mortgage banking operation,
deferred income taxes, and premises and equipment. 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 FLAG's financial instruments at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents ..... $ 19,250,755 19,250,755 14,107,593 14,107,593
Interest-bearing deposits in
other banks ................ 3,168,353 3,168,353 1,327,108 1,327,108
Investment securities ........ 74,623,184 74,594,442 67,186,393 67,098,633
Other investments ............ 4,756,655 4,756,655 4,018,460 4,018,460
Mortgage loans held for sale . 3,481,678 3,841,678 1,505,798 1,505,798
Loans, net ................... 279,285,679 280,794,907 239,653,367 242,002,221
Mortgage servicing rights .... 1,174,292 1,174,292 1,703,710 1,703,710
Cash surrender value of life
insurance .................. 3,864,612 3,864,612 3,544,386 3,544,386
Liabilities:
Deposits ..................... 324,852,043 326,263,733 294,420,453 295,412,619
Federal funds purchased ...... 170,000 170,000 2,210,000 2,210,000
FHLB advances ................ 43,637,494 42,927,033 17,370,833 17,370,833
Unrecognized financial
instruments:
Commitments to originate first
mortgage loans ............. 17,609,000 17,609,000 9,932,000 9,932,000
Commitments to extend credit . 36,673,000 36,673,000 23,490,000 23,490,000
Standby letters of credit .... 1,237,000 1,237,000 1,205,000 1,205,000
</TABLE>
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
------------------------
On February 20, 1997, the Company engaged Porter Keadle Moore, LLP as
independent accountants to audit the Company's financial statements for the
fiscal year ending December 31, 1997, and elected not to renew the engagement of
the Company's previous independent accountants, Robinson, Grimes & Company, P.C.
No adverse opinions or disclaimers of opinion were given by Robinson, Grimes &
Company, P.C. during the fiscal years ended December 31, 1995, and 1996, nor
were any of their opinions qualified as to uncertainty, audit scope, or
accounting principle, during the time Robinson, Grimes & Company was engaged.
There were no disagreements or "reportable events" of any nature between the
Company and Robinson, Grimes & Company, P.C during the fiscal years ended
December 31, 1995, 1996, and the subsequent interim period through February 20,
1997, as described in Items 304(a) (1) (iv) and (v) of Regulation S-K. The
decision was approved by the Company's Audit Committee and Board of Directors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Information relating to the directors of the Company is set forth under
the captions "Proposal 1 - Election of Directors-Nominees" and "Proposal 1 -
Election of Directors-Information Regarding Nominees and Continuing Directors"
in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders to
be held on May 13, 1998. Such information is incorporated herein by reference.
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10-K, information relating to the executive officers of
the Company and the Bank is set forth in Item 4(A) of this report under the
caption "Executive Officers of the Registrant." Information regarding compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, by
directors and executive officers of the Company and the Bank is set forth under
the caption "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement referred to in Item 10 above. Such information is
incorporated herein by reference. To the Company's knowledge, no person was the
beneficial owner of more than 10% of the Company's common stock during 1997.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information relating to executive compensation and the sale of stock to
certain directors is set forth under the captions "Proposal 1 - Election of
Directors - Director Compensation" and "Executive Compensation" in the Proxy
Statement referred to above. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information regarding ownership of the Company's common stock as of
December 31, 1997, by certain persons is set forth under the captions "Voting -
Stock Ownership" and "Proposal 1 - Election of Directors - Information Regarding
Nominees and Continuing Directors" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain transactions between the Bank and
affiliates of the Company and the Bank is set forth under the caption "Executive
Compensation - Loans to Management" in the Proxy Statement referred to in Item
10 above. Such information is incorporated herein by reference.
58
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
------------------------------------------------------
(a)(1) and (2) The lists called for by this portion of Item 14 are submitted as
a separate part of this report.
(a)(3) Exhibit List
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated July 30, 1998, by and
between the Company and Empire Banking Corp. (incorporated by
reference herein from Exhibit 2.1 to the Company's Current
Report on Form 8-K dated August 10, 1998).
2.2 Agreement and Plan of Merger, dated July 24, 1998, by and
between the Company and The Brown Bank (incorporated by
reference herein from Exhibit 2.1 to the Company's Current
Report on Form 8-K dated August 12, 1998).
3.1 (i) Articles of Incorporation of the Company, as amended
through October 15, 1993 (Incorporated herein by reference
from 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 March 30, 1998
4.1 Instruments Defining the Rights of Security Holders (See
Articles of Incorporation at Exhibit 3.1 hereto and Bylaws
at Exhibit 3.2 hereto) 10.1
10.1 Employment Agreement between J. Daniel Speight, Jr. and the
Company dated as of April 1, 1998*
10.2 Employment Agreement between John S. Holle and the Company
dated as of April 1, 1998*
10.3 Employment Agreement between Ellison C. Rudd and the Company
dated as of April 1, 1998*
10.4 Employment Agreement between Patti S. Davis and the Company
dated as of April 1, 1998*
10.5 Separation Agreement between Charles D. Hinely and the Company
dated April 1, 1998*
10.6 Separation Agreement between J. Preston Martin and the Company
dated May 13, 1998*
10.7 Split Dollar Insurance Agreement between J. Daniel Speight,Jr.
and Citizens Bank dated November 2, 1992*
10.8 Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*
10.9 Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*
10.10 Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*
59
<PAGE>
10.11 Tax Sharing Agreement dated March 1, 1994, among the Company,
the Bank and Piedmont Mortgage Service, Inc. (Incorporated
herein by reference from Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
10.12 Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995.
10.13 Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*
10.14 Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed Fee
Continuation Program of First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*
10.15 Form of Indexed Executive Salary Continuation Plan Agreement
by and between First Federal Savings Bank of LaGrange and
individuals listed on exhibit cover page*
10.16 Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Federal Savings Bank of LaGrange)
for individuals listed on exhibit cover page*
10.17 Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William F.
Holle, Jr. dated February 3, 1995*
10.18 FLAG Financial Corporation 1994 Employees Stock Incentive Plan
(Incorporated herein by reference from Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)*
10.19 FLAG Financial Corporation 1994 Directors Stock Incentive Plan
(Incorporated herein by reference from Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)*
11 Statement regarding computation of per share earnings
13 1997 Annual Report to Shareholders**+
21 Subsidiaries
27 Financial Data Schedule
* The indicated exhibit is a compensatory plan required to be
filed as an exhibit to this Form 10-K.
** Previously filed with the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
60
<PAGE>
(b) Reports on Form 8-K.
Reports on Form 8-K filed during fourth quarter of 1997
* Current Report on Form 8-K filed October 28, 1997 regarding the
execution of Agreement and Plan of Merger with Middle Georgia
Bankshares, Inc.
Reports on Form 8-K filed since Year End 1997
* Current Report on Form 8-K filed January 28, 1998 regarding
execution of Letter of Intent on January 21, 1998 to merge Three
Rivers Bancshares, Inc. with FLAG Financial Corporation
* Current Report on Form 8-K filed February 18, 1998 regarding
execution of Agreement and Plan of Merger with Three Rivers
Bancshares, Inc.
* Current Report on Form 8-K filed April 15, 1998 regarding
consummation of merger with Middle Georgia Bankshares, Inc. on
March 31, 1998.
* Current Report on Form 8-K filed May 22, 1998 regarding
declaration on May 18, 1998 of a 3-for-2 stock split payable
June 3, 1998
* Current Report on Form 8-K filed May 22, 1998 regarding execution
of Letter of Intent on May 14, 1998 to merge The Brown Bank with
FLAG Financial Corporation
* Current Report on Form 8-K filed May 22, 1998 regarding
consummation of merger with Three Rivers Bancshares, Inc. on May
8, 1998
* Current Report on Form 8-K filed June 4, 1998 regarding execution
of Letter of Intent on May 28, 1998 to merge Heart of Georgia
Bancshares, Inc. with FLAG Financial Corporation
* Current Report on Form 8-K filed June 4, 1998 regarding execution
of Letter of Intent on June 1, 1998 to merge Empire Bank Corp.
with FLAG Financial Corporation
* Current Report on Form 8-K filed August 10, 1998 regarding the
execution of Agreement and Plan of Merger with Empire Bank Corp.
* Current Report on Form 8-K filed August 12, 1998 regarding the
execution of Agreement and Plan of Merger with The Brown Bank
(c) The Exhibits not incorporated herein by reference are submitted as
a separate part of this report.
(d) Financial Statements Schedules: None
- ------------------
+ Portions of the Company's 1997 Annual Report, as indicated in this report, are
incorporated herein by reference. Other than as noted herein, the Company's 1997
Annual Report is furnished to the Securities and Exchange Commission solely for
its information and is not deemed to be "filed" with the Securities and Exchange
Commission or subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934, as amended.
61
<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 Amendment to Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: August 12, 1998 By: /s/ J. Daniel Speight, Jr.
---------------------------
J. Daniel Speight, Jr.
President and Chief Executive Officer
EXHIBIT 99.3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number 0-24532
FLAG FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2094179
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 3007
LaGrange, Georgia 30241
- --------------------------------------------------------------------------------
(Address of principal executive (Zip Code)
offices)
(706) 845-5000
- --------------------------------------------------------------------------------
(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Common stock, par value $1 per share: 5,175,557, shares
Outstanding as of July 27, 1998
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Table of Contents
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997................................................... 1
Consolidated Statements of Earnings for the Six Months and
Quarter Ended June 30, 1998 and 1997................................ 2
Consolidated Statements of Comprehensive Income for the
Six Months and Quarter Ended June 30, 1998 and 1997................. 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997........................................ 4
Notes to Consolidated Financial Statements............................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 7
PART II Other Information
Item 1. Legal Proceedings.................................................. 11
Item 2. Changes in Securities.............................................. 11
Item 3. Defaults Upon Senior Securities.................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................ 11
Item 5. Other Information.................................................. 11
Item 6. Exhibits and Reports on Form 8-K................................... 11
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
June 30, December 31,
1998 1997
--------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks .................................. $ 11,724,475 $ 13,350,755
Federal funds sold ....................................... 10,070,000 5,900,000
---------- ---------
Total cash and cash equivalents ...................... 21,794,475 19,250,755
---------- ----------
Interest-bearing deposits ................................ 3,507,881 3,168,353
Investment securities held-to-maturity ................... 2,719,673 2,957,971
Investment securities available-for-sale ................. 66,712,172 71,063,805
Other investments ........................................ 5,755,363 5,358,063
Mortgage loans held for sale ............................. 6,306,170 3,481,678
Loans, net ............................................... 306,526,854 279,285,679
Premises and equipment, net .............................. 12,512,281 11,348,843
Mortgage servicing rights ................................ 1,443,083 1,174,292
Accrued interest receivable .............................. 5,079,802 4,713,021
Cash surrender value of life insurance ................... 4,000,533 3,864,612
Other assets ............................................. 6,520,653 5,618,002
--------- ---------
Total assets ................................... $ 442,878,940 $ 411,285,074
============= =============
LIABILITIES
Non interest-bearing deposits ............................ $ 26,508,839 $ 32,245,871
Interest-bearing deposits ................................ 312,736,404 292,606,172
Federal funds purchased .................................. -- 170,000
Other borrowed funds ..................................... 5,934,171 --
Advances from Federal Home Loan Bank ..................... 49,895,834 43,637,494
Accrued interest payable ................................. 1,649,688 1,312,319
Other liabilities ........................................ 7,571,911 4,542,310
--------- ---------
Total liabilities .............................. 404,296,847 374,514,166
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized none
issued and outstanding) ............................. -- --
Common stock ($1 par value, 20,000,000 shares authorized,
5,174,807 shares issued and outstanding ............ 5,174,807 5,171,432
Additional paid-in capital ............................... 8,817,080 8,794,541
Retained earnings ........................................ 24,380,729 22,813,421
Unrealized gain on investment securities
available-for-sale, net of tax ..................... 209,477 (8,486)
Total stockholders' equity ...................... 38,582,093 36,770,908
---------- ----------
Total liabilities and stockholders' equity ...... $ 442,878,940 $ 411,285,074
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
1
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
1998 1997 1998 1997
Interest Income (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and fees on loans..................... $7,716,882 $6,103,507 $15,037,255 $12,227,740
Interest on securities......................... 1,210,745 951,041 2,512,336 2,017,784
Interest interest-bearing deposits
and federal funds sold...................... 57,502 83,655 124,256 203,852
------------------------- --------------------------
Total interest income.................... 8,985,129 7,138,203 17,673,847 14,449,376
----------------------- -----------------------
Interest Expense
Interest on deposits........................... 3,658,644 3,193,758 7,197,151 6,287,004
Interest on borrowings......................... 777,719 237,430 1,480,862 478,300
------------------------- -------------------------
Total interest expense................... 4,436,363 3,431,188 8,678,013 6,765,304
----------------------- ----------------------
Net interest income before...............
provision for loan losses............ 4,548,766 3,707,015 8,995,834 7,684,072
Provision for Loan Losses........................... 222,000 163,000 444,000 407,000
------------------------- -----------------------
Net interest income after
provision for loan losses.............. 4,326,766 3,544,015 8,551,834 7,277,072
----------------------- ----------------------
Other Income
Fees and service charges........................ 834,225 927,580 1,825,835 1,801,538
Gain on sale of investment securities........... 84,043 24,631 148,042 104,899
Gain on sale of loans........................... 453,569 199,840 899,755 417,233
Gain (loss) on sale of real estate-net.......... (42,655) (26,531) (24,918) (36,017)
Other income.................................... 196,780 87,346 869,124 274,154
------------------------ -----------------------
Total other income........................ 1,525,962 1,212,866 3,717,838 2,561,807
----------------------- ----------------------
Other Expenses
Salaries and employee benefits................. 2,243,004 1,856,813 4,354,717 3,521,351
Occupancy ..................................... 690,168 657,563 1,547,904 1,232,906
Other operating................................ 1,602,600 1,081,468 3,322,879 2,186,976
----------------------- ----------------------
Total other expenses..................... 4,535,772 3,595,844 9,225,500 6,941,233
----------------------- ----------------------
Earnings before provision for income taxes 1,316,956 1,161,037 3,044,172 2,897,646
Provision for income taxes..................... 355,159 369,820 928,992 949,864
----------------------- -----------------------
Net earnings ........................... $961,797 $791,217 $2,115,180 $1,947,782
======================= =======================
Basic earnings per share....................... $0.19 $0.15 $0.41 $0.38
Diluted earnings per share..................... $0.18 $0.15 $0.41 $0.38
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings........................................... $961,797 $791,217 $2,115,180 $1,947,782
Other comprehensive income, net of tax:
nrealized gains (losses) on investment
securities available-for-sale:...................
Unrealized gains (losses) arising during the period, net
of tax of $133,590, $45,657, $64,857,
and ($10,057), respectively........... 74,493 105,787 217,963 (16,409)
Less: Reclassification adjustment for gains included
in net earnings, net of tax of $31,936, $9,360
$56,256, and $39,862 respectively. (52,107) (15,271) (91,786) (65,037)
-----------------------------------------------
Other comprehensive income......................... 22,386 90,516 126,177 (81,446)
-----------------------------------------------
Comprehensive income............................... $ 984,183 $881,733 $2,241,357 $1,866,336
===============================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
June 30,
1998 1997
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings ............................................... $ 2,115,180 $ 1,947,782
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion ........... 1,043,243 752,301
Provision for loan losses .......................... 444,000 407,000
Gain on sale of investment securities
available-for-sale ............................. (148,042) (104,899)
Gain on sales of loans ............................. (899,755) (417,233)
Loss on other real estate - net .................... 24,918 36,017
Change in:
Mortgage loans held for sale ................ (1,924,737) 1,368,790
Other ....................................... 7,422,490 (197,517)
--------- --------
Net cash provided by operating activities 8,077,297 3,792,241
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits .................... (339,528) (2,035,800)
Proceeds from sales and maturities of investment securities
available-for-sale ..................................... 36,456,520 47,577,205
Proceeds from maturities of investment securities
held-to-maturity ...................................... 231,555 521,387
Proceeds from sale of other investments .................... -- 643,100
Purchases of other investments ............................. (572,300) (777,595)
Purchases of investment securities available-for-sale ...... (31,492,377) (46,469,136)
Net change in loans ........................................ (27,685,175) (15,603,066)
Net increases of premises and equipment .................... (1,955,933) (1,823,685)
Purchases of cash surrender value life insurance ........... (135,921) (155,864)
-------- --------
Net cash used in investing activities .... (25,493,159) (18,123,454)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits ..................................... 14,393,200 18,040,153
Decrease in federal funds purchased ........................ (170,000) (2,210,000)
Proceeds from FHLB advances ................................ 38,500,000 7,500,000
Payments of FHLB advances .................................. (32,241,660) (7,991,669)
Proceeds from exercise of stock options .................... 26,438 --
Cash paid for fractional shares of acquired entity ......... (524) --
Cash dividends paid ........................................ (547,872) (410,231)
-------- --------
Net cash provided by financing activities . 19,959,582 14,928,253
---------- ----------
Net change in cash and cash equivalents ... 2,543,720 597,040
Cash and cash equivalents at beginning of period ......... 19,250,755 14,107,593
---------- ----------
Cash and cash equivalents at end of period ............... $21,794,475 $ 14,704,633
=========== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements have not been audited. The
results of operations are not necessarily indicative of the results of
operations for the full year or any other interim periods.
The accounting principles followed by FLAG Financial Corporation ("FLAG") and
its bank subsidiaries and the methods of applying these principles conform with
generally accepted accounting principles and with general practices within the
banking industry. Certain principles, which significantly affect the
determination of financial position, results of operations, and cash flows are
summarized below and in FLAG's annual report on Form 10-K for the year ended
December 31, 1997.
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of FLAG and its
wholly-owned subsidiaries, First Federal Savings Bank of LaGrange "LaGrange",
Citizens Bank "Vienna", and Bank of Milan "Milan". All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain items
in prior period's financial statements have been reclassified to conform to the
current financial statement presentation.
The consolidated financial information furnished herein represents all
adjustments that are, in the opinion of management, necessary to present a fair
statement of the results of operations, and financial position for the periods
covered herein and are normal and recurring in nature. For further information,
refer to the consolidated financial statements and footnotes included in FLAG's
annual report on Form 10-K for the year ended December 31, 1997.
Note 2. Business Combinations
On March 30, 1998, FLAG completed its merger with Middle Georgia Bankshares,
Inc. ("MGB"), the parent company of Vienna. Effective May 8, 1998, FLAG
completed its merger with Three Rivers Bancshares, Inc. ("TRB"), parent company
of Milan,. The acquisitions have been accounted for as pooling of interests, and
all prior period financial statements of FLAG have been restated to reflect the
mergers as if they had occurred at the beginning of the earliest period
presented.
On May 14, 1998, FLAG announced the execution of a Letter of Intent with The
Brown Bank in Metter, Georgia. The operations will be combined by means of a
tax-free merger. The Brown Bank operates three full service banking offices in
Metter, Cobbtown, and Reidsville, Georgia. The Letter of Intent provides, among
other things, for the merger of The Brown Bank with and into FLAG and the
exchange of each share of The Brown Bank's common stock for 1.5 shares of FLAG
common stock.
5
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
On May 28, 1998, FLAG announced the execution of a Letter of Intent with Heart
of Georgia Bancshares, Inc. ("Heart of Georgia") to combine their two operations
by means of a tax free merger. The Letter of Intent provides, among other
things, for the merger of Heart of Georgia with and into FLAG and the exchange
of each share of Heart of Georgia common stock for 2.025 shares of FLAG common
stock.
On June 1, 1998, FLAG announced the execution of a Letter of Intent with Empire
Banking Company ("Empire") in Homerville, Georgia. The operations will be
combined by means of a tax free merger. The Letter of Intent provides, among
other things, for the merger of Empire for 42.975 shares of FLAG common stock.
These three pending acquisitions are expected to be accounted for as poolings of
interests and are projected to be consummated during the third quarter of 1998,
pending execution of a definitive agreement, final due diligence, regulatory
approval, and shareholder approval.
Note 4. Earnings per share
Net earnings per common share are based on the weighted average number of common
shares outstanding during each period. The calculation of basic and diluted
earnings per share is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic earnings per share:
Net earnings....................... 961,797 791,217 2,115,180 1,947,782
Weighted Average Common shares
Outstanding....................5,173,258 5,163,716 5,172,389 5,172,995
Per share amount................... 0.19 0.15 0.41 0.38
Diluted earnings per share:
Net earnings....................... 961,797 791,217 2,115,180 1,947,782
Effect of dilutive securities -
Stock options................... 42,329 15,585 42,329 15,585
Diluted earnings per share......... 0.18 0.15 0.41 0.38
Note 5. Stock Split
On May 18, FLAG announced the declaration of a 3-for-2 stock split. The split
was payable on June 3, 1998 to shareholders of record on May 22, 1998. All per
share amounts have been restated to reflect this stock split as if it had
occurred at the beginning of the earliest period presented.
6
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Results of Operations
For the six months ended June 30, 1998 and 1997
Overview
Net earnings for the six months ended June 30, 1998, increased $167,000 or 9
percent compared to the first six months of 1997. Net earnings per common share,
both basic and fully diluted, increased 8 percent for the first six months of
1998. Net interest income increased 17% for the six months ended June 30, 1998,
over the same period of 1997 to approximately $9 million. Non-interest income
and expense rose 45 percent and 33 percent, respectively, for the first half of
1998 compared to the same period of 1997.
Net Interest Income
Net interest income for the six months ended June 30, 1998 increased $1,312,000
compared to the first half of 1997. This increase resulted from a $3,224,000, or
22 percent increase in interest income and a $1,913,000 or 28 percent increase
in interest expense. The increase in interest income resulted from an increase
in average earning assets of $61.6 million. The increase in interest expense was
primarily due to a $69.6 million increase in average interest bearing
liabilities.
Non-Interest Income and Expense
Non-interest income for the first six months of 1998 increased $1,156,000 or 45
percent compared to the first half of 1997. Other income includes a loan fee of
approximately $530,000 that FLAG received for its assistance in originating,
finding participants and selling an R&D loan in the first quarter of 1998.
Another contributing factor to the increase in 1998 non-interest income was
gains related to sales of currently originated residential mortgage loans. These
gains increased $483,000 in 1998, more than doubling first half 1997 gains, due
to an increased number of residential loan refinancings.
Non-interest expense increased almost $2.3 million or 33 percent in the first
six months of 1998 compared to the same period in 1997. Salaries and employee
benefits increased $833,000, a 24% increase over the first six months of 1997.
The increase was primarily due to additional staffing requirements. Many of the
additional positions were sales related, that management believes in the
long-term will increase revenues. Management also believes consolidation
efficiencies will be realized from its recent completed and pending mergers that
will reduce the need for some personnel. Other operating expenses increased
$1,136,000 or 52 percent during 1998 compared to the first six months in 1997.
Approximately $400,000 of this increase is due to additional legal and
professional fees related to FLAG's recent mergers. FLAG also experienced an
increase in data processing and communications expenses related to the
conversion of its data processing vendor.
7
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Income Taxes
Income tax expense for the first six months of 1998 was $929,000 in 1998
compared to $950,000 in 1997. The effective tax rates for the first six months
ended June 30, 1998 and 1997 were 31 percent and 33 percent, respectively.
FLAG's effective tax rate us lower than the statutory Federal tax rate of 34
percent primarily due to interest income on tax-exempt securities.
Provision and Allowance for Possible Loan Losses
The adequacy of the allowance for loan and losses is determined through
management's informed judgment concerning the amount of risk inherent in FLAG's
loan portfolios. This judgment is based on such factors as the change in levels
of non-performing and past due loans, historical loan loss experience,
borrowers' financial condition, concentration of loans to specific borrowers and
industries, estimated values of underlying collateral, and current and
prospective economic conditions. The allowance for loan losses at June 30, 1998,
was $3.9 million compared to $3.8 million at December 31, 1997. The allowance
for loan losses at June 30, 1998, was 1.23 percent of outstanding loans compared
to 1.35 percent at December 31, 1997. It is management's belief that the
allowance for loan losses is adequate to absorb possible loss in the loan
portfolio.
Non-Performing Assets and Past Due Loans
Non-performing assets, comprised of real estate owned, non-accrual loans and
loans for which payments are more than 90 days past due, totaled $5.9 million at
June 30, 1998, compared to $5.6 million at December 31, 1997. Non-performing
assets as a percentage of total loans and real estate owned at June 30, 1998,
and December 31, 1997, were 1.87 percent and 1.97 percent, respectively.
FLAG has a loan review function that continually monitors selected accruing
loans for which general economic conditions or changes within a particular
industry could cause the borrowers financial difficulties. The loan review
function also identifies loans with high degrees of credit or other risks. The
focus of loan review as well as FLAG management is to maintain a low level of
non-performing assets and return current non-performing assets to earning
status.
Management is unaware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on FLAG's
liquidity, capital resources or operations.
8
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Financial Condition
Overview
Total assets were $443 million at June 30, 1998, an increase of $31.6 million or
7.7 percent from December 31, 1997.
Assets and Funding
At June 30, 1998, earning assets totaled $402 million, an increase of more than
$30.4 million from December 31, 1997. The mix of interest earning assets
remained relatively the same in the first 6 months of 1998. Loans increased from
77 percent of earning assets at December 31, 1997, to 78 percent of earning
assets at June 30, 1998. Investment securities decreased to 17 percent of
earning assets from 20 percent at December 31, 1997.
At June 30, 1998, interest-bearing deposits increased $20.1 million compared to
December 31, 1997. Noninterest-bearing deposits decreased $5.7 million in the
first six months of 1998 and totaled $26.5 million at June 30, 1998. Federal
Home Loan Bank advances increased $6.3 million in the first half of 1998 and
totaled $49.9 million at June 30, 1998. At June 30, 1998, deposits represented
85 percent of FLAG's interest-bearing liabilities and Federal Home Bank advances
represented 14 percent.
Liquidity and Capital Resources
Net cash provided by operating activities totaled $8,077,000 for the six months
ended June 30, 1998. Net cash used in investing activities totaling $25,493,000
consisted of $36,688,000 of proceeds from sale and maturities of investment
securities, offset by cash flows of $31,492,000 in investment securities
purchases, a $340,000 increase in interest-bearing deposits, a $27,685,000 net
increase in loans outstanding, net additions in bank premises and equipment of
$1,956,000, and a net $136,000 increase in cash surrender value of life
insurance. Net cash provided by financing activities consisted largely of
$14,393,000 increases in deposits and a net increase in Federal Home Loan Bank
advances of $6,258,000.
Total stockholders' equity at June 30, 1998, was 8.71 percent of total assets
compared to 8.94 percent at December 31, 1997. The slight decrease is attributed
to an $32 million increase in total assets since December 31, 1997.
9
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
At June 30, 1998, FLAG and its banks were in compliance with various regulatory
capital requirements administered by Federal and state banking agencies. The
following is a table representing FLAG's consolidated Tier-1, tangible capital,
and risk-based capital.
June 30, 1998
-------------
Actual Required Excess
Amount % Amount % Amount %
Tier 1 capital $ 36,285 8.03% $ 18,185 4.00% $ 18,100 4.03%
Tangible capital 36,285 8.03% 6,819 1.50% $ 29,466 6.53%
Risk-based capital 40,101 12.72% 25,212 8.00% $ 14,889 4.72%
Year 2000
FLAG Financial Corporation and each partner bank have appointed a Year
2000 committee comprised of outside directors and key senior executives of the
partner banks. The committees meet on a regular basis to provide direction and
monitor the progress being made relating to each partner bank's year 2000
efforts.
FLAG and the partner bank's managers and supervisors have identified:
(i) hardware and software used in their areas of responsibility impacted by the
Year 2000 issue; and (ii) vendors upon whom FLAG and the partner banks rely to
provide financial information or services which may be impacted by the Year 2000
issue. FLAG and the partner banks have conducted a risk assessment for each
product, and have categorized the risks associated with each product as
"catastrophic," "serious," or "minimal." FLAG and the partner banks' overall
risk is considered to be serious to minimal. A separate plan and action date
have been established for hardware/software considered to be critical to FLAG
and the partner banks' ongoing operations. FLAG and the partner banks have
developed a testing plan for the hardware/software and electronic components
affected by the year 2000. The next steps in the process will be to test the
hardware/software as it becomes Year 2000 compliant and to document these tests
accordingly.
Each partner bank will convert their core application system to the
Phoenix International Ltd., Inc. application system. The core applications
include general ledger, loans, deposits and receivables/payables. The
conversions will begin in August 1998. FLAG has performed appropriate testing to
determine the Phoenix system is Year 2000 compliant. The payroll for FLAG and
the partner banks is processed by an outside vendor who has been identified as
being Year 2000 compliant.
Each partner bank will monitor their larger loan customer compliance
issues in becoming Year 2000 compliant. For those customers unable and/or
unwilling to become Year 2000 compliant, the partner banks along with FLAG
Credit Administration will evaluate FLAG's
10
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
options to minimize the company's risks associated with continuing to do
business with these customers on a case by case basis.
PART II.
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1998 Annual Meeting of Shareholders was held on May 13, 1998.
(b) Election of directors
The shareholders voted 2,449,565.596 shares in the affirmative and
7004 shares were withheld from the authority to vote for the election
of Dr. A. Glenn Bailey, Kelly R. Linch and J. Daniel Speight, Jr. as a
class of directors, each to serve a three year term as a director of
the Company.
(c) The shareholders voted 2,320,011.640 shares in the affirmative and
89,570.843 shares in the negative, with 33,022.113 shares abstaining
for the amendment of the 1994 Employee Stock Incentive Plan.
(d) The shareholders voted 2,448,658.560 shares in the affirmative and 0
shares in the negative, with 7,911.036 shares abstaining for the
ratification and appointment of Porter, Keadle, Moore LLP as
independent accountants of the Company for the fiscal year ending
December 31, 1998.
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
On June 4, 1998, FLAG filed a Form 8-K announcing the signing of a
Letter of Intent with Heart of Georgia Bancshares, Inc. to merge with and into a
wholly-owned subsidiary of the Registrant.
11
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
On June 4, FLAG also filed a Form 8-k announcing the execution of a
Letter of Intent with Empire Bank Corporation to merge with and into a
wholly-owned subsidiary of the Registrant.
On May 22, 1998, FLAG filed a Form 8-K announcing the completion of a
merger agreement with Three Rivers Bancshares, Inc. with and into FLAG on May
12, 1998.
On May 22, 1998, FLAG filed a Form 8-K announcing the execution of a
Letter of Intent with the Brown Bank to merge with and into a wholly-owned
subsidiary of the Registrant.
On April 15, 1998, FLAG filed a Form 8-K announcing the completion of a
merger agreement with Middle Georgia Bankshares with and into FLAG on March 31,
1998.
Exhibit 27 - Financial Data Schedule (for SEC use only)
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAG Financial Corporation
By:/s/ Patti S. Davis
---------------------
Patti S. Davis
(Chief Financial Officer)
Date: August 7, 1998
