SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|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 on March 25, 1998, was $34,165,600. There were
2,036,990 shares of Common Stock outstanding as of March 25, 1998.
Transitional Small Business Disclosure Format. Yes X No
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.
<PAGE>
FLAG FINANCIAL CORPORATION
Annual Report on Form 10-K
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 in and Disagreements with Accountants on Accounting and
Financial Disclosures ............................................... 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 the holding company for First
Federal Savings Bank of LaGrange (the "Bank"). The Company was incorporated
under the laws of the State of Georgia on February 9, 1993 at the direction of
the Bank for the purpose of becoming the holding company for the Bank. On March
1, 1994, FLAG Interim Corporation, a wholly-owned subsidiary of the Company
organized for the purpose of effecting the Reorganization, was merged with and
into the Bank, and the Company issued shares of its common stock to shareholders
of the Bank in exchange for all of the outstanding common stock of the Bank (the
"Reorganization"). As a result, shareholders of the Bank became shareholders of
the Company, with the same proportional interests in the Company as they
previously held in the Bank (excluding the nominal effect on their ownership
interest of the exercise of dissenters' rights by certain shareholders of the
Bank).
Following the Reorganization, the Bank continued its business operations as
a federally-chartered stock savings bank under the same name, charter and
bylaws. The directors, officers and employees of the Bank were unchanged
following the Reorganization. The directors of the Bank also serve as the
directors of the Company, and the Chairman of the Board, President and Chief
Executive Officer of the Bank serves as the Chairman of the Board, President and
Chief Executive Officer of the Company.
As a unitary thrift holding company, the Company is intended to facilitate
the Bank's ability to serve its customers' requirements for financial services.
The holding company structure permits diversification by the Company into a
broader range of financial services and other business activities than currently
are permitted to the Bank under applicable law. The holding company structure
also provides greater financial and operating flexibility than is permitted to
the Bank. Additionally, the Articles of Incorporation and Bylaws of the Company
contain terms that provide a degree of anti-takeover protection to the Company
that is currently unavailable to the Bank and its shareholders under regulations
of the Office of Thrift Supervision (the "OTS") but is permissible for the
Company under Georgia law. See "Supervision and Regulation" below. The Bank
On October 28, 1997, the Company entered into an Agreement and Plan of
Merger with Middle Georgia Bankshares, Inc., parent company of Citizens Bank,
Vienna, Georgia ("MGB"), purusant to which MGB will be merged with and into the
Company (the "Merger") and shareholders of MGB will receive 15.75 shares of
1
<PAGE>
Company common stock for each share of MGB common stock. The Merger is subject
to regulatory approval and approval by the shareholders of both corporations and
will be accounted for as a pooling of interests. Upon consummation of the
Merger, subject to the approval of the Board of Governors of the Federal Reserve
System (the "Federal Reserve") the Company would become a bank holding company,
and the Federal Reserve would replace the OTS as the Company's primarly federal
regulator. The combination is projected to be completed at the end of the first
quarter of 1998. See "Supervision and Regulation" below.
The Bank is a federally chartered stock savings bank headquartered in
LaGrange, Troup County, Georgia. The Bank was originally chartered by the State
of Georgia in January 1927 under the name "Home Building and Loan Association."
The Bank received its federal charter and changed its name to First Federal
Savings and Loan Association of LaGrange in 1955, and at that time its deposits
became insured by the Federal Savings and Loan Insurance Corporation (the
"FSLIC"). In December 1986, the Bank converted from a federal mutual savings and
loan association to a federal stock savings and loan association by selling
805,000 shares of Common Stock to the public pursuant to a plan of conversion
approved by the members of the institution. In June 1989, the Bank converted
from a federal stock savings and loan association to a federal stock savings
bank and changed its name to "First Federal Savings Bank of LaGrange." Based on
total assets of approximately $248 million at December 31, 1997, the Bank is the
7th largest of 34 thrift institutions headquartered in Georgia and the largest
financial institution headquartered in Troup County.
The Bank's deposits are now insured by the Federal Deposit Insurance
Corporation (the "FDIC"), as the successor to the FSLIC. Primarily for the
protection of depositors, the Bank is subject to comprehensive examination,
supervision and regulation by the OTS and the FDIC.
The Bank's business consists primarily of attracting deposits from the
general public and, with these and other funds, making residential mortgage
loans and, to a lesser extent, consumer loans, commercial loans, commercial real
estate loans, residential construction loans and securities investments. In
addition to deposits, sources of funds for the Bank's loans and other
investments include amortization and prepayment of loans, loan origination and
commitment fees, sales of loans or participations in loans, fees received for
servicing loans sold to others and advances from the Federal Home Loan Bank of
Atlanta ("FHLBA"). The principal sources of income for the Bank are interest and
fees collected on loans, including fees received for originating and selling
loans and for servicing loans sold to others, and, to a lesser extent, interest
and dividends collected on other investments and service charges on deposit
accounts. In addition, the Bank's wholly owned service corporation subsidiary,
Piedmont Mortgage Service, Inc., operates a full-service appraisal office under
the name of Piedmont Appraisal Service and offers certain securities brokerage
services under the name of Piedmont Investment Service. The principal expenses
of the Bank are interest paid on deposits, interest paid on FHLBA advances,
employee compensation, federal deposit insurance premiums, office expenses and
other overhead expenses.
The Company's financial performance has been determined primarily by the
results of operations of the Bank because the Company's only significant asset
is the common stock of the Bank. For information regarding the consolidated
financial condition and results of operations of the Company, the Bank and the
Bank's wholly owned subsidiary, Piedmont Mortgage Service, Inc., as of December
31, 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" and the Consolidated Financial Statements of the Company and the
related notes thereto which are contained in the Company's 1997 Annual Report
(the "1997 Annual Report"). The 1997 Annual Report is filed as Exhibit 13 to
this report. All average balances presented in this report were derived based on
monthly averages.
Employees
- ---------
As of December 31, 1997, the Bank had 116 full-time and 16 part-time
employees. The employees are not represented by any collective bargaining unit,
and the Bank considers its relationship with its employees to be good.
Competition
- -----------
The banking business is highly competitive. The Bank competes with
several other banking organizations in Troup and surrounding counties. The Bank
also competes with other financial service organizations including credit
unions, finance companies, and certain governmental agencies. To the extent that
2
<PAGE>
the Bank must maintain non interest earning reserves against deposits, it may
have 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
Bank competes may have substantially greater resources and lending capabilities
due to the size of the organization.
Supervision and Regulation
General
- -------
As a federal savings bank, the Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary regulator, and the FDIC,
as its deposit insurer. The Bank is a member of the FDIC's Savings Association
Insurance Fund ("SAIF"), and its deposit accounts are insured up to applicable
limits by the FDIC. The deposit premiums paid by the Bank to the FDIC currently
paid to the SAIF. The Bank is also a member of the FHLBA. The Bank must file
reports with the OTS and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approvals prior to entering into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions. The OTS and the FDIC conduct periodic examinations to assess the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings association can engage and is intended primarily for the protection of
the insurance fund and depositors. The Company, as a unitary thrift holding
company is subject to the regulation, examination and supervision of the OTS and
files certain reports with, and otherwise complies with, the rules and
regulations of the OTS and the Securities and Exchange Commission under the
federal securities laws.
The OTS and the FDIC have significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate allowance for loan losses for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the United States Congress, could have
a material adverse impact on the Company, the Bank, and the operations of both.
Upon consummation of the Merger, subject to the approval of the Federal
Reserve, the Company would become a bank holding company, and the Federal
Reserve would replace the OTS as the Company's primary federal regulator. This
change in primary regulators will likely result in an increased regulatory
burden for the Company. For example, the Company would be subject to certain
minimum capital requirements administered by the Federal Reserve. Failure to
meet the minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by the Federal Reserve that, if
undertaken, could have a direct material effect on the financial position or
results of operations of the Company. The Company anticipates that it would be
able to satisfy such minimum capital requirements.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their holding
companies generally and does not purport to be a comprehensive description of
all such statutes and regulations.
Regulation of Unitary Thrift Holding Companies
- ----------------------------------------------
As a unitary thrift holding company, the Company is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
association subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings association.
The Home Owners' Loan Act, as amended ("HOLA") prohibits a unitary thrift
holding company, directly or indirectly, or through one or more subsidiaries,
from acquiring another savings association or holding company thereof, without
prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5.0% of a non-subsidiary savings association, a
non-subsidiary holding company or a non-subsidiary company engaged in activities
other than those permitted by HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating an
application by a holding company to acquire a savings association, the OTS must
3
<PAGE>
consider the financial and managerial resources and future prospects of the
company and savings association involved, the effect of the acquisition on the
risk to the FDIC's insurance funds, the convenience and needs of the community
and competitive factors.
As a unitary thrift holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to satisfy the qualified thrift
lender ("QTL") test. See "Regulation of Federal Savings Associations -- QTL
Test" for a discussion of the QTL requirements. Upon any non-supervisory
acquisition by the Company of another savings association or savings bank that
meets the QTL test, is deemed to be a savings association by the OTS and will be
held as a separate subsidiary, the Company would become a multiple thrift
holding company and would be subject to limitations on the types of business
activities in which it could engage. HOLA limits the activities of a multiple
thrift holding company and its non-insured association subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.
The OTS is prohibited from approving any acquisition that would result in a
multiple thrift holding company controlling savings associations in more than
one state, subject to two exceptions: an acquisition of a savings association in
another state (i) in a supervisory transaction, and (ii) pursuant to authority
under the laws of the state of the association to be acquired that specifically
permit such acquisitions. The conditions imposed upon interstate acquisitions by
those states that have enacted authorizing legislation vary. Some states impose
conditions of reciprocity, which have the effect of requiring that the laws of
both the state in which the acquiring holding company is located (as determined
by the location of its subsidiary savings association) and the state in which
the association to be acquired is located, have each enacted legislation
allowing its savings associations to be acquired by out-of-state holding
companies on the condition that the laws of the other state authorize such
transactions on terms no more restrictive than those imposed on the acquirer by
the state of the target association. Some of these states also impose regional
limitations, which restrict such acquisitions to states within a defined
geographic region. Other states allow full nationwide banking without any
condition of reciprocity. Some states do not authorize interstate acquisitions
of savings associations.
Transactions between the Bank and the Company and its other subsidiaries
are also subject to various conditions and limitations. See "Regulation of
Federal Savings Associations -- Transactions with Related Parties." The Bank is
required to give 30-days written notice to the OTS prior to any declaration of
the payment of any dividends or other capital distributions to the Company. See
"Regulation of Federal Savings Associations -- Limitation on Capital
Distributions."
Congress has recently entertained various industry restructuring proposals
that would require all federal savings banks to convert to national or state
bank charters and to be subject to regulation as commercial banks. Under such
proposals all thrift holding companies, in turn, would be required to register
as bank holding companies under the BHC Act, and those holding companies that
were not unitary thrift holding companies on a specified date would become
subject to the activities restrictions set forth in the BHC Act as well as the
restrictions on affiliations with entities primarily engaged in securities
underwriting contained in the Glass-Steagall Act. While the outcome of the
ongoing efforts to merge the thrift industry into the banking industry and to
reorganize and consolidate the federal regulatory structure are uncertain at
this time, the foregoing proposal, if enacted, would cause the Company to be
regulated as a bank holding company. As such, the Company would be subject to
examination, regulation and periodic reporting under the BHC Act, as
administered by the Federal Reserve. The end result of such initiatives, and the
resulting impact on the Company's business and operations, are unclear at this
time.
Regulation of Federal Savings Associations
Business Activities
-------------------
The Bank derives its lending and investment powers from the HOLA, and the
regulations of the OTS thereunder. Under these laws and regulations, the Bank
may invest in mortgage loans secured by residential and commercial real estate,
commercial and consumer loans, certain types of debt securities, and certain
other assets. The Bank may also establish service corporations that may engage
in activities not otherwise permissible for the Bank, including certain real
estate equity investments and securities and insurance brokerage. These
investment powers are subject to various limitations, including: (i) a
prohibition against the acquisition of any corporate debt security that is not
4
<PAGE>
rated in one of the four highest rating categories; (ii) a limit of 400% of an
association's capital on the aggregate amount of loans secured by nonresidential
real estate property; (iii) a limit of 20% of an association's assets on
commercial loans provided that amounts in excess of 10% of total assets are used
only for small business loans; (iv) a limit of 35% of an association's assets on
the aggregate amount of consumer loans and acquisitions of certain debt
securities; (v) a limit of 5.0% of assets on non-conforming loans (loans in
excess of the specific limitations of HOLA); and (vi) a limit of the greater of
5.0% of assets or an association's capital on certain construction loans made
for the purpose of financing what is or is expected to become residential
property.
Loans to One Borrower
---------------------
Under HOLA, savings associations are generally subject to the same limits
on loans to one borrower as are imposed on national banks. Generally, under
these limits, a savings association may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus. An additional amount may be lent, equal to 10%
of unimpaired capital and surplus, if such loan or extension of credit is fully
secured by readily-marketable collateral. Such collateral is defined to include
certain debt and equity securities and bullion, but generally does not include
real estate.
QTL Test
--------
Under the QTL test, a savings association is required to maintain at least
65% of its "portfolio assets" in certain "qualified thrift investments" in at
least 9 months of the most recent 12-month period. "Portfolio assets" mean, in
general, an association's total assets less the sum of (i) specified liquid
assets up to 20% of total assets, (ii) certain intangibles, including goodwill
and credit card and purchased mortgage servicing rights, and (iii) the value of
property used to conduct the association's business. "Qualified thrift
investments" include various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans up to 10% of the
association's portfolio assets. At December 31, 1997, the Bank maintained 69.02%
of its portfolio assets in qualified thrift investments.
A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (i) engaging in any new activity not
permissible for a national bank, (ii) paying dividends not permissible under
national bank regulations, (iii) obtaining new advances from any FHLB, and (iv)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings association does not requalify under the QTL
test within the three-year period after it failed the QTL test, it would be
required to terminate any activity and to dispose of any investment not
permissible for a national bank and would have to repay as promptly as possible
any outstanding advances from an FHLB. A savings association that has failed the
QTL test may requalify under the QTL test and be free of such limitations, but
it may do so only once.
Capital Requirements
--------------------
The OTS regulations require savings associations to meet three minimum
capital standards: a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations, a leverage ratio requirement of 4.0% of
core capital to such adjusted total assets, and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. In determining the amount of risk-weighted assets for purposes of the
risk-based capital requirement, a savings association must compute its
risk-based assets by multiplying its assets and certain off-balance sheet items
by risk-weights, which range from 0% for cash and obligations issued by the
United States Government or its agencies to 100% for consumer and commercial
loans, as assigned by the OTS based on the risks the OTS believes are inherent
in the type of asset.
5
<PAGE>
Tangible capital is defined generally as common stockholders' equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain purchased
mortgage servicing rights and investments in and loans to subsidiaries engaged
in activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes purchased credit
card relationships. Supplementary capital currently includes cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. The allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of supplementary capital that may be included as total capital
cannot exceed the amount of core capital.
When determining its compliance with the risk-based capital requirement, a
savings association with "above normal" interest rate risk is required to deduct
a portion of such capital from its total capital to account for the "above
normal" interest rate risk. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) resulting from a hypothetical 2.0%
increase or decrease in market rates of interest, divided by the estimated
economic value of the association's assets, as calculated in accordance with
guidelines set forth by the OTS. At the times when the 3-month Treasury bond
equivalent yield falls below 4.0%, an association may compute its interest rate
risk on the basis of a decrease equal to one-half of that Treasury rate rather
than on the basis of 2.0%. A savings association whose measured interest rate
risk exposure exceeds 2.0% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the difference
between the association's measured interest rate risk and 2.0%, multiplied by
the estimated economic value of the association's assets. That dollar amount is
deducted from an association's total capital in calculating its risk-based
capital . Any required deduction for interest rate risk becomes effective on the
last day of the third quarter following the reporting date of the association's
financial data on which the interest rate risk was computed. The regulations
authorize the Director of the OTS to waive or defer an association's interest
rate risk component on a case-by-case basis. At December 31, 1997, the Bank was
not required to maintain any additional risk-based capital under this rule.
At December 31, 1997, the Company met each of the OTS capital requirements,
in each case on a fully phased-in basis. The table below presents the Company's
regulatory capital as compared to the OTS regulatory capital requirements at
December 31, 1997:
December 31,
Actual Required Excess
Amount % Amount % Amount %
------ - ------ - ------ -
(dollars in thousands)
Tier 1 capital......... $22,130 8.90% $6,471 4.00% $15,659 4.90%
Tangible capital....... 22,130 8.90 3,856 1.50 18,274 7.40
Risk-based capital..... 24,127 13.70 12,941 8.00 11,186 5.70
The OTS has adopted the Federal Financial Institutions Examination
Council's ("FFIEC") updated statement of policy entitled "Uniform Financial
Institutions Rating System" ("UFIRS") effective January 1, 1997. UFIRS is an
internal rating system used by the federal and state regulators for assessing
the soundness of financial institutions on a uniform basis and for identifying
those institutions requiring special supervisory attention. Under the previous
UFIRS, each financial institution was assigned a confidential composite rating
based on an evaluation and rating of five essential components of an
institution's financial condition and operations including Capital adequacy,
Asset quality, Management, Earnings, and Liquidity (the "CAMEL Rating"). In
updating UFIRS, the FFIEC increased its emphasis on the quality of risk
management practices and added a sixth component for sensitivity to market risk.
For most institutions, the FDIC has indicated that market risk primarily
reflects exposures to changes in interest rates. When regulators evaluate this
component, consideration is expected to be given to: management's ability to
identify, measure, monitor, and control market risk; the institution's size; the
nature and complexity of its activities and its risk profile; and the adequacy
of its capital and earnings in relation to its level of market risk exposure.
Market risk is rated based upon, but not limited to: an assessment of the
sensitivity of the financial institution's earnings or the economic value of its
capital to adverse changes in interest rates, foreign exchange rates, commodity
prices, or equity prices; management's ability to identify, measure, monitor,
and control exposure to market risk; and the nature and complexity of interest
rate risk exposure arising from nontrading positions.
6
<PAGE>
Limitation on Capital Distributions
-----------------------------------
OTS regulations currently impose limitations upon capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger, and other distributions charged against capital. At least
30-days written notice must be given to the OTS of a proposed capital
distribution by a savings association, and capital distributions in excess of
specified earnings or by certain institutions are subject to approval by the
OTS. An association that has capital in excess of all fully phased-in regulatory
capital requirements before and after a proposed capital distribution and that
is not otherwise restricted in making capital distributions, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
earnings for the previous four quarters. Any additional capital distributions
would require prior OTS approval. In addition, the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice. Furthermore, under the OTS prompt corrective action
regulations, the Bank would be prohibited from making any capital distribution
if, after the distribution, the Bank failed to meet its minimum capital
requirements, as described above. See "Prompt Corrective Regulatory Action."
The OTS has proposed regulations that would simplify the existing
procedures governing capital distributions by savings associations. Under the
proposed regulations, the approval of the OTS would be required only for an
association that is deemed to be in troubled condition or that is
undercapitalized or would be undercapitalized after the capital distribution. A
savings association would be able to make a capital distribution without notice
to or approval of the OTS if it is not held by a thrift holding company, is not
deemed to be in troubled condition, has received either of the two highest
composite supervisory ratings and would continue to be adequately capitalized
after such distribution. Notice would have to be given to the OTS by any
association that is held by a savings and loan holding company or that had
received a composite supervisory rating below the highest two composite
supervisory ratings. An association's capital rating would be determined under
the prompt corrective action regulations. See "Prompt Corrective Regulatory
Action."
Liquidity
---------
The Bank is required to maintain an average daily balance of liquid assets
(cash, certain time deposits, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than a specified percentage of its net withdrawable deposit
accounts plus short-term borrowings. This liquidity requirement may be changed
from time to time by the OTS to any amount within the range of 4.0% to 10.0%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5.0%. OTS regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable deposit
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The Bank's liquidity
ratio at December 31, 1997 was 9.68%, and its short-term liquidity ratio was
6.71%, which exceeded the applicable requirements.
Assessments
-----------
Savings associations are required by OTS regulation to pay assessments to
the OTS to fund the operations of the OTS. The general assessment, paid on a
semi-annual basis, is computed upon the savings association's total assets,
including consolidated subsidiaries, as reported in the association's latest
quarterly Thrift Financial Report.
Branching
---------
Subject to certain limitations, HOLA and the OTS regulations permit
federally chartered savings associations to establish branches in any state of
the United States. The authority to establish such a branch is available (i) in
states that expressly authorize branches of savings associations located in
7
<PAGE>
another state and (ii) to an association that qualifies as a "domestic building
and loan association" under the Code of Federal Regulations, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "QTL Test." The authority for a federal savings association to
establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment
----------------------
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings association has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings association, to assess the association's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such association. The CRA also
requires all institutions to make public disclosure of their CRA ratings.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended CRA
regulations substitute for the prior process-based assessment factors a new
evaluation system that would rate an institution based on its actual performance
in meeting community needs. In particular, the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's record of making
loans in its service areas; (ii) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing and programs benefiting low or moderate income individuals and
businesses; and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.
The joint agency CRA regulations provide that an institution evaluated
under a given test receive one of five ratings for that test: outstanding; high
satisfactory; low satisfactory; needs to improve; or substantial non-compliance.
The ratings for each test are then combined to produce an overall composite
rating of either outstanding, satisfactory (including both high and low
satisfactory,) needs to improve, or substantial non-compliance. In the case of a
retail-oriented institution, its lending test rating forms the basis for its
composite rating. That rating is then increased by up to two levels in the case
of outstanding or high satisfactory investment performance, increased by one
level in the case of outstanding service, and decreased by one level in the case
of substantial non-compliance in service. An institution found to have engaged
in illegal lending discrimination is rebuttably presumed to have a
less-than-satisfactory composite CRA rating. The Bank received an "outstanding"
CRA rating in its most recent examination.
Small savings associations are to be assessed pursuant to a streamlined
approach focusing on a lesser range of information and performance standards.
The term "small savings association" is defined as including associations with
less than $250 million in assets or an affiliate of a holding company with
banking and thrift assets of less than $1.0 billion, which would include the
Bank. An institution's CRA performance record is considered in certain
regulatory applications and may be used as a basis for denying an application.
Transactions with Related Parties
---------------------------------
The Bank's authority to engage in transactions with its "affiliates" is
limited by the OTS regulations and by Sections 23A and 23B of the Federal
Reserve Act ("FRA"). In general, an affiliate of the Bank is any company that
controls the Bank or any other company that is controlled by a company that
controls the Bank, excluding the Bank's subsidiaries other than those that are
insured depository institutions. The OTS regulations prohibit a savings
association (i) from lending to any of its affiliates that are engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act and (ii) from purchasing the securities of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of transactions
8
<PAGE>
with any individual affiliate to 10% of the capital and surplus of the savings
association and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings association's capital and surplus. Extensions
of credit to affiliates are required to be secured by collateral in an amount
and of a type described in Section 23A, and the purchase of low quality assets
from affiliates is generally prohibited. Section 23B provides that certain
transactions with affiliates, including loans and asset purchases, must be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the association as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In the absence of comparable transactions, such transactions may only occur
under terms and circumstances, including credit standards, that in good faith
would be offered to or would apply to nonaffiliated companies.
The Bank's authority to extend credit to its directors, executive officers
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve thereunder. Among other things, these
provisions require that extensions of credit to insiders (i) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features with the exceptions of (1) the
benefit compensation must be widely available to employees of the bank and (2)
the benefit or compensation does not give preference to any insider over other
employees of the bank and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the association's capital. In addition,
extensions of credit in excess of certain limits must be approved by the
association's board of directors.
Enforcement
-----------
Under the Federal Deposit Insurance Act, as amended (the "FDI Act"), the
OTS has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any stockholder, attorney,
appraiser and accountant who knowingly or recklessly participates in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other wrongful actions that causes or is likely to cause a more than a minimal
loss or other significant adverse effect on an insured savings association.
Civil penalties cover a wide range of violations and actions and range from
$5,000 for each day during which violations of law, regulations, orders and
certain written agreements and conditions continue, up to $1,000,000 per day for
such violations if the person obtained a substantial pecuniary gain as a result
of such violation or knowingly or recklessly caused a substantial loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $10 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements, particularly
with respect to its capital requirements. Possible enforcement actions range
from the imposition of a capital plan and capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS that enforcement
action be taken with respect to a particular savings association. If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness
----------------------------------
The FDI Act, as amended by the Federal Deposit Insurance Corporation
Improvement Act of 1991, as amended ("FDICIA") and the Riegle Community
Development and Regulatory Improvement Act of 1994 ("Community Development
Act"), requires the OTS, together with the other federal bank regulatory
agencies, to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits and
such other operational and managerial standards as the agencies deem
appropriate. The OTS and the federal bank regulatory agencies have adopted,
effective August 9, 1995, a set of guidelines prescribing safety and soundness
standards pursuant to FDICIA. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the risks
and exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
stockholder. The OTS and the other agencies determined that stock valuation
standards were not appropriate. In addition, the OTS adopted regulations that
authorize, but do not require, the OTS to order an institution that has been
given notice by the OTS that it is not satisfying any of such safety and
soundness standards to submit a compliance plan. If, after being so notified, an
9
<PAGE>
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. See "Prompt
Corrective Regulatory Action." If an institution fails to comply with such an
order, the OTS may seek to enforce such order in judicial proceedings and to
impose civil money penalties.
Real Estate Lending Standards
-----------------------------
The OTS and the other federal banking agencies adopted regulations to
prescribe standards for extensions of credit that (i) are secured by real estate
or (ii) are made for the purpose of financing the construction of improvements
on real estate. The OTS regulations require each savings association to
establish and maintain written internal real estate lending standards that are
consistent with safe and sound banking practices and appropriate to the size of
the association and the nature and scope of its real estate lending activities.
The standards also must be consistent with accompanying OTS guidelines, which
include loan-to-value ratios for the different types of real estate loans.
Associations are also permitted to make a limited amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed and justified appropriately. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standards are
justified.
Prompt Corrective Regulatory Action
-----------------------------------
Under the OTS prompt corrective action regulations, the OTS is required to
take certain, and is authorized to take other, supervisory actions against
undercapitalized savings associations. For this purpose, a savings association
would be placed in one of five categories based on the association's capital.
Generally, a savings association is treated as "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10.0%, its ratio of Tier 1
(core) capital to risk-weighted assets is at least 6.0%, its ratio of Tier 1
(core) capital to total assets is at least 5.0%, and it is not subject to any
order or directive by the OTS to meet a specific capital level. A savings
association will be treated as "adequately capitalized" if its ratio of total
capital to risk-weighted assets is at least 8.0%, its ratio of Tier 1 (core)
capital to risk-weighted assets is at least 4.0%, and its ratio of Tier 1 (core)
capital to total assets is at least 4.0% (3.0% if the association receives the
highest rating on the CAMEL financial institutions rating system).
A savings association that has a total risk-based capital ratio of less
than 8.0% or a leverage ratio or a Tier 1 (core) capital ratio that is less than
4.0% (3.0% leverage ratio if the association receives the highest rating on the
CAMEL financial institutions rating system) is considered to be
"undercapitalized." A savings association that has a total risk-based capital
ratio of less than 6.0% or a Tier 1 (core) risk-based capital ratio or a
leverage ratio of less than 3.0% is considered to be "significantly
undercapitalized." A savings association that has a tangible capital to assets
ratio equal to or less than 2.0% is deemed to be "critically undercapitalized."
The elements of an association's capital for purposes of the prompt corrective
action regulations are defined generally as they are under the regulations for
minimum capital requirements. See "Capital Requirements."
The severity of the action authorized or required to be taken under the
prompt corrective action regulations increases as an association's capital
deteriorates within the three undercapitalized categories. All associations are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
association would be undercapitalized. An undercapitalized association is
required to file a capital restoration plan within 45 days of the date the
association receives notice that it is within any of the three undercapitalized
categories. The OTS is required to monitor closely the condition of an
undercapitalized association and to restrict the asset growth, acquisitions,
branching and new lines of business of such an association. Significantly
undercapitalized associations are subject to restrictions on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or provide compensation to any senior executive officer at a rate
exceeding the officer's average rate of compensation (excluding bonuses, stock
options and profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, to forced changes in the
composition of its board of directors or senior management, additional
restrictions on transactions with affiliates, restrictions on acceptance of
deposits from correspondent associations, further restrictions on asset growth,
10
<PAGE>
restrictions on rates paid on deposits, forced termination or reduction of
activities deemed risky and any further operational restrictions deemed
necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver for
an association, the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository association holding company or
combine with another depository association. The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or conservator for an
insured depository association. Under FDICIA, the OTS is required to appoint a
receiver (or with the concurrence of the FDIC, a conservator) for a critically
undercapitalized association within 90 days after the association becomes
critically undercapitalized or, with the concurrence of the FDIC, to take such
other action that would better achieve the purposes of the prompt corrective
action provisions. Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on average during the quarter that begins 270 days after it first became
critically undercapitalized, a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC from, among other things, entering into certain material transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.
Where appropriate, the OTS can impose corrective action by a thrift holding
company under the "prompt corrective action" provisions of FDICIA.
Insurance of Deposit Accounts
-----------------------------
Pursuant to FDICIA, the FDIC established a new risk-based assessment
system for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of (i)
well capitalized, (ii) adequately capitalized or (iii) undercapitalized. The
FDIC also assigns an institution to one of three supervisory subcategories
within each capital group. The supervisory subgroup to which an institution is
assigned is based on a supervisory evaluation provided to the FDIC by the
institution's primary federal regulator and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds. An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. Under the
regulation, there are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment rates
are applied. Assessment rates originally ranged from 0.04% (for the Bank
Insurance Fund (the "BIF"), which primarily insures commercial banks) or 0.23%
(for the SAIF) of deposits for an institution in the highest category (i.e.,
well-capitalized and financially sound, with no more than a few minor
weaknesses) to 0.31% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory concern). These rates were
established for both funds to achieve a designated ratio of reserves to insured
deposits (i.e., 1.25%) within a specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so that,
beginning in 1996, the deposit insurance premiums for 92% of all BIF members in
the highest capital and supervisory categories were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the assessment rate range
of 23 to 31 basis points for SAIF members given the undercapitalized nature of
that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates have
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits, in July 1995, the FDIC, the
Treasury Department, and the OTS released statements outlining a proposed plan
to recapitalize the SAIF, the principal feature of which was a special one-time
assessment on depository institutions holding SAIF-insured deposits, which was
intended to recapitalize the SAIF at a reserve ratio of 1.25%. This proposal
contemplated elimination of the disparity between the assessment rates on BIF
and SAIF deposits following recapitalization of the SAIF.
11
<PAGE>
A variation of this proposal designated the Deposit Insurance Funds Act of
1996 (the "Funds Act") was enacted by Congress as part of omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC has implemented a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's SAIF-insured deposits
held as of March 31, 1995, (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Bank recorded charges
against earnings for the special assessment in the quarter ended September 30,
1996 in the amount of approximately $1,156,000.
In addition, on December 24, 1996, in order to avoid collecting more than
needed to maintain the SAIF's capitalization rate at 1.25 percent of aggregate
insured deposits, the FDIC adopted in final a revision in the SAIF assessment
rate schedule which retroactively effected, as of December 11, 1996, (i) a
widening in the assessment rate spread among institutions in the different
capital and risk assessment categories, (ii) an overall reduction of the
assessment rate range assessable on SAIF deposits of from 0 to 27 basis points,
and (iii) a special interim assessment rate range for the last quarter of 1996
of from 18 to 27 basis points on institutions subject to assessments with
respect to certain bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the now-defunct FSLIC. Effective January 1, 1997, FICO
assessments are imposed on both BIF- and SAIF-insured deposits in annual amounts
presently estimated at 1.29 basis points and 6.44 basis points, respectively.
The Bank anticipates that the net effect of the decrease in the premium
assessment rate on SAIF deposits will result in a reduction in their total
deposit insurance premium assessments, assuming no further changes in announced
premium assessment rates. During 1997, SAIF assessments totalled approximately
$186,000 for the Bank.
Accounting for Bad Debt Reserves
--------------------------------
The Small Business Job Protection Act of 1996 repealed the reserve method
of accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. As a result, large thrift institutions with more than $500
million in assets are no longer able to deduct additions to a reserve for bad
debts but are permitted to deduct bad debts only as they occur. In addition, a
large thrift institution generally is required to recapture (i.e., take into
income) its post-1987 additions to its bad debt reserve, that is, the amount by
which its bad debt reserve exceeds the balance of such reserve as of the end of
its last taxable year ending before 1988.
Small thrift institutions with not more than $500 million in assets, such
as the Bank, are no longer permitted to make additions to their bad debt
reserves based upon a percentage of the Bank's taxable income (the "PTI Method")
but may make additions to their bad debt reserves based upon the Bank's actual
loss experience (the "Experience Method") in lieu of deducting bad debts only as
they occur. In the case of a small thrift institution, the recapture of
post-1987 additions to its bad debt reserve is limited to the amount of
recapture that reduces the reserve to the balance it would have had if the
institution had always computed its additions to reserves under the Experience
Method.
The excess reserves are recaptured into income over a period of six
years, which may be extended to seven or eight years if the thrift meets a
residential loan requirement. The Bank had no excess reserves. Thus, it was not
subject to any recapture.
The remainder of the Bank's pre-1988 bad debt reserves is subject to
recapture if the Bank ceases to qualify as a bank for federal income tax
purposes, or if the Bank makes certain distributions to the Company in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, or distributions in partial or complete liquidation. In the
event of a distribution considered to be made from its bad debt reserves, the
amount restored to income would be the amount which, when reduced by the amount
of tax on such income, is equal to the amount of the distribution. The Bank does
not intend to make any distribution that would result in recapture of any
portion of its pre-1988 bad debt reserves.
Federal Home Loan Bank System
-----------------------------
The Bank is a member of the FHLBA, which is one of the regional FHLBs
composing the FHLB System. Each FHLB provides a central credit facility
primarily for its member institutions. The Bank, as a member of the FHLBA, is
required to acquire and hold shares of capital stock in the FHLBA in an amount
at least equal to the greater of 1.0% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year or 1/20 of its advances (borrowings) from the FHLBA. The Bank was in
compliance with this requirement at December 31, 1997, with an investment in
FHLBA stock of $2,081,900. Any advances from a FHLB must be secured by specified
types of collateral, and all long-term advances may be obtained only for the
purpose of providing funds for residential housing finance.
12
<PAGE>
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.
Federal Reserve System
----------------------
The Bank is subject to provisions of the FRA and the Federal Reserve's
regulations pursuant to which depository institutions may be required to
maintain non-interest-earning reserves against their deposit accounts and
certain other liabilities. Currently, reserves must be maintained against
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve regulations generally require that reserves be maintained in the amount
of 3.0% of the aggregate of transaction accounts up to $52.0 million. The amount
of aggregate transaction accounts in excess of $52.0 million are currently
subject to a reserve ratio of 10.0%, which ratio the Federal Reserve may adjust
between 8.0% and 12.0%. The Federal Reserve regulations currently exempt $4.3
million of otherwise reservable balances from the reserve requirements, which
exemption is adjusted by the Federal Reserve at the end of each year. The Bank
is in compliance with the foregoing reserve requirements. Because required
reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank, or a pass-through
account as defined by the Federal Reserve, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements imposed by the OTS. FHLB System
members are also authorized to borrow from the Federal Reserve discount window,
but Federal Reserve regulations require such institutions to exhaust all FHLB
sources before borrowing from a Federal Reserve Bank.
ITEM 2. PROPERTIES
The Company and the Bank 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. The Bank owns both the building and the land.
The Bank also operates three full-service branch offices and one
drive-through facility in LaGrange. 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 the
Bank for $3,000 per month pursuant to a lease that expires in August 2001. 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 the Bank. 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 the Bank. 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 the
Bank.
The Bank leases approximately 2,760 square feet of office space at 5669
Whitesville Road, Suite A, Columbus, Georgia, where its loan production office
is located. The monthly lease payments are $3,133 for 1998, $3,251 for 1999, and
$3,329 for the 2000. The lease expires on December 31, 2000.
The Bank 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. The lease requires monthly lease payments of $1,000 and expires on
March 15, 1999.
The Bank 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 the Bank's Deposit Operations and Leasing department. The lease
requires monthly lease payments of $1,939 and expires in December 2001.
The net book value of the Company's investment in land, premises,
furniture, fixtures and equipment, totaled approximately $6.4 million at
December 31, 1997. See Note 4 of Notes to Consolidated Financial Statements
13
<PAGE>
contained in the Company's 1997 Annual Report, which information is incorporated
by reference in Item 8 hereof. Most of the Bank's data processing equipment is
held by the Bank under capitalized leases, and the Bank uses an independent
service bureau for most of its data processing needs.
All of the Company's and the Bank's offices are in good condition and
are adequate for the Company's and the Bank's current and foreseeable needs.
The Bank is unaware of any potential environmental liability that it
may incur in connection with any properties or other assets owned by it.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Bank is periodically involved as plaintiff or defendant in various
legal actions in the ordinary course of its business. During August 1992 through
October 1995, the Bank 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 has 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.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A discussion of the consolidated financial condition and results of
operations of the Company and its subsidiaries at and for the dates and periods
covered by the financial statements set forth in the 1997 Annual Report is set
forth under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 5 through 13 of the 1997 Annual
Report. Such discussion is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries, together with the Report of Independent Certified Public
Accountants thereon, which are set forth on pages 14 through 37 of the 1997
Annual Report, are incorporated herein by reference:
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1997
15
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity for each of
the three years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1997
Notes to Consolidated Financial Statements
The Company is not required to furnish the supplementary financial
information specified by Item 302 of Regulation S-K.
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, 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.
<PAGE>
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.
16
<PAGE>
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.
PART IV
Exhibit No. Description
- ---------- -----------
2 Agreement and Plan of Merger, dated October 28, 1997, by and
between the Company and Middle Georgia Bankshares, Inc. (Annex A
to the Joint Proxy Statement/Prospectus included in the Company's
Registration Statement on Form S-4, as amended (File No.
333-44011)
3.1 (i) Articles of Incorporation of the Company, as amended through
October 15, 1993 (Exhibit 3.1(i) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993)
(ii) Bylaws of the Company, as amended through September 16, 1993
(Exhibit 3.1(ii) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993)
Tax Sharing Agreement dated March 1, 1994, among the Company, the
Bank and Piedmont Mortgage Service, Inc. (Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
10.2 Management Contracts and Compensatory Plans:
a. Employment Agreement between John S. Holle and the Bank
dated as of January 1, 1993 (Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
b. Employment Agreement between Ellison C. Rudd and the Bank
dated as of January 1, 1995 - (Exhibit 10.3b to the
Company's 10-K for the fiscal year ended December 31, 1995)
c. 1986 Stock Option and Incentive Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration
No. 33-58392)
d. FLAG Financial Corporation 1994 Employees Stock Incentive Plan
(Exhibit 10.6 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993)
e. FLAG Financial Corporation 1994 Directors Stock Incentive Plan
(Exhibit 10.7 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993)
f. Profit Sharing Thrift Plan, as amended through November 1,
1992 (Exhibit 10.2 to the Company's Registration Statement
on Form S-4, Registration No. 33-58392)
g. Pension Retirement Plan (Exhibit 10.3 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
11 Statement regarding computation of per share earnings
13 1997 Annual Report
21 Subsidiaries (Exhibit 21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994)
17
<PAGE>
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated October 28, 1997 regarding the
merger with Middle Georgia Bankshares, Inc. was filed in the
fourth quarter, 1997.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
- ------------------
+ All or portions of page 4 and pages 5 through 40 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: March 30, 1998 By: /S/ John S. Holle
--------------------------------
John S. Holle
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 30, 1998.
Signature Title
/s/ John S. Holle
- ------------------- Chairman of the Board, President and
John S. Holle Chief Executive Officer
/s/ Ellison C. Rudd Executive Vice President, Chief Financial
- ------------------- Officer, Treasurer and Director
Ellison C. Rudd (Principal Financial and Accounting Officer)
/s/ Dr. Albert Glenn Bailey
- ---------------------------
Dr. Albert Glenn Bailey Director
/s/ H. Speer Burdette, III
- ---------------------------
H. Speer Burdette, III Director
/s/ Fred A. Durand, III
- ---------------------------
Fred A. Durand, III Director
/s/ Kelly R. Linch
- ---------------------------
Kelly R. Linch Director
/s/ Gordon M. Smith
- ---------------------------
Gordon M. Smith Director
18
<PAGE>
/s/ John W. Stewart, Jr.
- ---------------------------
John W. Stewart, Jr. Director
/s/ Dr. Steven P. Teaver
- ---------------------------
Dr. Steven P. Teaver Director
/s/ Robert W. Walters
- ---------------------------
Robert W. Walters Director
19
<PAGE>
FLAG FINANCIAL CORPORATION
Index of Exhibits
The following exhibits are filed as part of or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
Exhibit No. Description
3.1 (i) Articles of Incorporation of the Company, as amended
through October 15, 1993 (Exhibit 3.1(i) to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
(ii) Bylaws of the Company, as amended through September
16, 1993 (Exhibit 3.1(ii) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
10.1 Agreement and Plan of Merger and Reorganization dated
February 28, 1994 among the Bank, the Company and FLAG
Interim Savings Bank (Exhibit 2.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
10.2 Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Exhibit 10.1 of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993)
10.3 Management Contracts and Compensatory Plans:
a. Employment Agreement between John S. Holle and the Bank
dated as of January 1, 1993 (Exhibit 10.4 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
b. Employment Agreement between Ellison C. Rudd and the Bank
dated as of January 1, 1995 - (Exhibit 10.3 b to the
Company's 10-K for the fiscal year ended December 31, 1995)
c. 1986 Stock Option and Incentive Plan (Exhibit 10.1 to the
Company's Registration Statement on Form S-4, Registration
No. 33-58392)
d. FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Exhibit 10.6 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
20
<PAGE>
e. FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1993)
f. Profit Sharing Thrift Plan, as amended through November 1,
1992 (Exhibit 10.2 to the Company's Registration Statement
on Form S-4, Registration No. 33-58392)
g. Pension Retirement Plan (Exhibit 10.3 to the Company's
Registration Statement on Form S-4, Registration No.
33-58392)
11 Statement regarding computation of per share earnings -
13 1997 Annual Report
21 Subsidiaries (Exhibit 21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994)
- ---------------
+ All or portions of page 4 and pages 5 through 40 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 1996 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.
21
<PAGE>
COMPUTATION OF PER SHARE EARNINGS
COMPUTATION OF PER SHARE EARNINGS
1997 1996 1995
Basic earnings per share:
Net earnings (loss)......................... $2,033,114 $(177,626) $2,026,007
Common shares............................... 2,036,990 2,010,798 1,990,724
Per share amount............................ 1.00 (.09) 1.02
Diluted earnings per share:
Net earnings (loss)......................... $2,033,114 $(177,626) $2,026,007
Effect of dilutive securities - stock options 19,576 8,099 71,773
Diluted earnings (loss) per share........... .99 (.09) .98
1997 ANNUAL REPORT
Management's Discussion and Analysis of Financial
Condition and Results of Operation
GENERAL
- -------
FLAG Financial Corporation ("FLAG") is a unitary thrift holding company
that owns 100 percent of the common stock of First Federal Savings Bank of
LaGrange (the "Bank"). The Bank is a federally chartered stock savings bank
doing business in West Central Georgia. The Bank is a full-service, retail
oriented community bank primarily engaged in retail banking, small business,
residential and commercial real estate lending, and mortgage banking.
Because the primary activity of FLAG is the ownership and operation of the
Bank, FLAG's financial performance has been determined primarily by the
operation of the Bank. Accordingly, the discussion below relates principally to
the operation of the Bank. As used herein, the term "FLAG" includes FLAG and,
where appropriate, the Bank. 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
- --------------
In October 1995, FLAG purchased and retired 128,100 shares of its common
stock in the open market for $12.75 per share. During 1997 and 1996, FLAG did
not purchase or issue any shares of its common stock.
PENDING ACQUISITIONS
- --------------------
On October 28, 1997, the Company announced the signing of an agreement to
merge with Middle Georgia Bankshares, Inc. ("MGB"), a $120 million asset bank
holding company based in Unadilla, Georgia. The merger agreement provides, among
other things, for the merger of MGB with and into FLAG and the exchange of each
share of MGB common stock for 15.75 shares of FLAG common stock. Total
outstanding shares of FLAG will increase from approximately 2,037,000 to
approximately 3,049,000 at closing.
Additionally, on February 12, 1998, the Company signed an agreement to
merge with Three Rivers Bancshares, Inc. ("TRB"), a $34 million asset bank
holding company based in Milan, Georgia. The merger agreement provides, among
other things, for the merger of TRB with and into FLAG and the exchange of each
share of TRB common stock for 48 shares of FLAG common stock. Total outstanding
shares of the Company will increase by approximately 398,000 additional shares
at closing.
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. The Company 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 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. The Company 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
5
<PAGE>
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 liabiities) 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 decreased 2.0% in 1997, from $8.7 million in 1996 to
$8.5 million in 1997. Net interest income increased 6.0% in 1996 compared to
1995.
Total interest income has remained steady over the past three years at
approximately $18 million. Interest expense decreased approximately 7.0% in 1996
compared to 1995, but increased approximately 2.0% 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).
<TABLE>
Table 1 - Consolidated Average Balances, Interest, and Rates
(dollars in thousands)
<CAPTION>
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.................. $155,241 $14,706 9.47% $151,084 $14,589 9.66% $146,144 $13,809 9.45%
Investment securities
and FHLB stock........ 48,002 3,033 6.32 51,256 3,156 6.16 65,246 4,162 6.38
Interest-bearing deposits
in other Banks....... 2,515 158 6.28 1,692 90 5.32 2,959 138 4.66
Federal funds sold..... 667 32 4.80 1,342 77 5.73 333 18 5.41
- ----------------------------------------------------------------------------------------------------------------
Total interest-
earning assets...... $206,425 $17,929 8.68% $205,375 $17,912 8.72% $214,682 $18,127 8.44%
Other assets............. 25,287 19,978 17,013
Total assets......... $231,712 $225,353 $231,695
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits............ $ 41,695 $1,043 2.50% $38,571 $1,078 2.79% $ 33,425 $1,069 3.20%
Savings deposits ...... 16,233 395 2.43 16,937 408 2.41 16,352 404 2.47
Other time deposits.... 113,896 6,574 5.77 114,371 6,525 5.71 114,793 6,551 5.71
Federal Funds purchased 1,002 68 6.79 207 12 5.80 - - -
FHLB advances.......... 23,086 1,307 5.66 21,531 1,168 5.42 31,962 1,862 5.83
-------- ----- ---- ------ ----- ---- ------ ----- ----
Total interest-
bearing liabilities $195,912 $9,387 4.79% $191,617 $9,191 4.80% $196,532 $9,886 5.03%
Noninterest bearing
demand deposits..... 9,743 11,063 10,066
Other liabilities........ 4,770 2,490 4,380
Stockholders' equity..... 21,287 20,183 20,717
Total liabilities and
stockholders' equity $231,712 $225,353 $231,695
======== ======== ========
Net interest income...... $8,542 $8,721 $8,241
====== ====== ======
Interest rate spread..... 3.89% 3.92% 3.41%
Net interest margin...... 4.14% 4.25% 3.84%
Interest-earning assets/
interest-bearing liabilities 105% 107% 109%
</TABLE>
6
<PAGE>
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 $206.4 million in 1997, versus $205.4
million in 1996 and $214.7 million in 1995. Average interest-bearing liabilities
were $195.9 million in 1997, versus $191.6 million in 1996 and $196.5 million in
1995. The interest rate spread was 3.89% in 1997, versus 3.92% in 1996 and 3.41%
in 1995, while the net interest margin was 4.14% in 1997, 4.25% in 1996 and
3.84% 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
(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........................ $394 $(277) $117 $477 $303 $780
Investment securities
and FHLB stock ............ (206) 83 (123) (861) (145) (1,006)
Interest-bearing deposits in
other banks................ 52 16 68 (67) 19 (48)
Federal funds sold........... (32) (13) (45) 58 1 59
----- ------ ------ ------ ----- ------
Total interest income..... $207 $(190) $ 17 $(394) $179 $(215)
---- ------ ------ ------ ---- ------
Interest expense:
Interest bearing demand
deposits. ................. $ 78 $(113) $ (35) $144 $(135) $ 9
Savings deposits............. (17) 4 (13) 14 (10) 4
Other time deposits.......... (27) 76 49 (24) (2) (26)
Federal funds purchased...... 54 2 56 12 - 12
FHLB advances................ 88 51 139 (566) (128) (694)
---- ----- ----- ----- ------- -----
Total interest expense.... $ 176 $ 20 $ 196 $ (420) $(275) $ (695)
----- ----- ------ ------- ------ -----
Net interest income........... $ 32 $(211) $ (179) $ 26 $ 454 $ 480
===== ====== ====== ====== ====== =====
NONINTEREST INCOME
- ------------------
Other income increased to $3.7 in 1997 from $3.3 in 1996 and $2.6 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 $659,000 in 1997 versus $588,000 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 $1.8 million in 1997 from
$1.6 million in 1996 and $1.4 million in 1995.
NONINTEREST EXPENSES
- --------------------
Other expenses were $8.6 million in 1997, versus $9.0 million in 1996 and
$7.1 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 $4.1 million in 1997 from $3.5
million in 1996 and $3.3 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 $1.4 million in 1997 from $1.2 million in
1996 and $1.0 million in 1995, while other operating expenses were $3.1 million
7
<PAGE>
in 1997, versus $4.4 million in 1996 and $2.7 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 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 $7.2 million to $51.7 million at December
31, 1997 from $44.5 million at December 31, 1996. At December 31, 1997, $49.1
million, approximately 95% 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 $378,000 and gross unrealized losses amounted to $559,000.
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:
Mortgage-backed securities ... $ 103 $ 118 $ 131
Collateralized mortgage
obligations ................ 2,505 3,092 3,766
------------------------------------
2,608 3,210 3,897
-------------------------------------
Securities Available-for-sale:
U.S. Treasuries and agencies .. 9,028 3,993 9,244
Corporate debt securities...... 1,000 990 -
State and municipal............ - 115 -
Mortgage-backed securities .... 21,788 17,544 17,865
Collateralized mortgage
obligations ................. 15,854 16,705 22,343
Equity securities.............. 1,413 1,959 5,311
--------------------------------------
49,083 41,306 54,763
--------------------------------------
Total........... $51,691 $44,516 $58,660
======================================
CARRYING VALUE OF INVESTMENTS
- -----------------------------
The December 31, 1997, market value of securities held to maturity, as a
percentage of amortized cost was 98.5%, up from 96.9% 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.
LOANS
- -----
Gross loans receivable increased by approximately $10.6 million in 1997 to
$167.8 million from $157.2 million at December 31, 1996. This increase was the
result of growth in real estate construction loans, real estate mortgages and
lease financings. As shown in Table 4, real estate construction loans increased
approximately $2.4 million, real estate mortgages increased approximately $9.4
million and lease financings increased by approximately $1.7 million. The
decrease in commercial, financial, and agricultural loans and installment loans
to individuals primarily resulted from the normal paydown and prepayment of
these loans.
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 $574,000 in 1997, $3,484,000 in 1996, and $630,000
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
$506,000. 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 Bank also provides 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
8
<PAGE>
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.
<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 $9,924 5.9% $10,209 6.5% $10,262 6.9% $5,707 4.0% $2,497 1.8%
Real estate construction....... 11,590 6.9 9,149 5.8 4,686 3.1 4,163 2.9 3,886 2.9
Real estate mortgage........... 128,539 76.6 119,178 75.8 112,694 75.6 116,362 81.6 114,871 84.6
Installment loans to individuals 8,441 5.0 11,094 7.1 14,732 9.9 8,066 5.7 7,914 5.8
Lease financings............... 9,304 5.5 7,572 4.8 6,654 4.5 8,354 5.9 6,553 4.8
------------------------------------------------------------------------------------------
Total loans............... 167,798 100.0% 157,202 100.0% 149,028 100.0% 142,652 100.0% 135,721 100.0%
Less:
Deferred loan fees and discounts 398 (219) (287) (309) (330)
Allowance for loan losses...... (2,254) (4,339) (1,339) (1,244) (882)
------- ------- ------- ------- --------
Total net loans........... $165,942 $152,644 $147,402 $141,099 $134,509
======== ======== ======== ======== ========
</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 or
One Year Through Over Five Adjustable Predetermined
or Less Five Years Years Total Interest Rate Rate
<S>
Commercial, financial, and <C> <C> <C> <C> <C> <C>
agricultural............... $1,577 $3,188 $5,159 $9,924 $4,758 $3,589
Real estate - construction.... 10,674 916 - 11,590 - 916
--------------------------------------------------------------------
$12,251 $4,104 $5,159 $21,514 $4,758 $4,505
====================================================================
</TABLE>
As shown in Table 6, the year-end allowance for loan losses decreased to
$2,254,000 at December 31, 1997, from $4,339,000 at December 31, 1996. The
allowance for loan losses was $1,339,000 at December 31, 1995. The decline in
the allowance for losses in 1997 was primarily due to a $2,465,000 charge-offs
associated with the Bennett Funding assets. Total charge-offs in 1997, including
those related to Bennett Funding, were $2,713,000, up from $521,000 in 1996, and
$573,000 in 1995. If Bennett Funding assets had not been charged-off to their
net realizable value, 1997 charge-offs would have been approximately $248,000.
The allowance for loan losses was 1.36% of net outstanding loans at December 31,
1997, versus 2.84% of net outstanding loans at December 31, 1996, and 0.91% 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.
<TABLE>
ASSET QUALITY
- -------------
At December 31, 1997, non-performing assets (non-accrual loans and other
real estate owned) totaled $5.0 million compared to $7.2 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, FLAG Financial
Corporation, 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
9
<PAGE>
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.
Table 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Average net loans........................$155,043 151,084 $146,144 $141,640 $139,008
Allowance for loan losses, beginning
of the period.......................... 4,339 1,339 1,244 882 683
Charge-offs for the period:
Commercial/financial/agricultural...... 46 - - - -
Real estate construction loans ........ - 22 23 2 -
Real estate mortgage loans............. 105 412 432 35 245
Installment loans to individuals....... 97 87 118 88 227
Lease financings....................... 2,465 - - - -
---------------------------------------------
Total charge-offs........................$ 2,713 $ 521 $ 573 $ 125 $ 472
---------------------------------------------
Recoveries for the period:
Commercial/financial/agricultural......$ 1 $ - $ - $ - $ -
Real estate construction loans......... - - - 1 -
Real estate mortgage loans............. 5 - - - 5
Installment loans to individuals....... 48 37 38 46 46
Lease financings....................... - - - - -
---------------------------------------------
Total recoveries....................$ 54 $ 37 $ 38 $ 47 $ 51
---------------------------------------------
Net charge-offs for the period.... 2,659 484 535 78 421
Provision for loan losses................ 574 3,484 630 440 620
---------------------------------------------
Allowance for loan losses, end of period $ 2,254 $ 4,339 $ 1,339 $1,244 $ 882
============================================
Ratio of allowance for loan losses to
total net loans outstanding ............ 1.36% 2.84% 0.91% 0.88% 0.66%
Ratio of net charge-offs during the
period to average net loans outstanding
during the period ...................... 1.72% 0.32% 0.37% 0.06% 0.30%
</TABLE>
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.
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.
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 Bank's
or FLAG's liquidity, capital resources, or operations.
DEPOSITS
- --------
Total deposits remained essentially unchanged during 1997, totaling $180.7
million at December 31, 1997, versus $180.7 million at December 31, 1996. The
maturities of time deposits of $100,000 or more issued by the Bank at December
31, 1997, are summarized in Table 8.
At December 31, 1997, the Bank was a shareholder in the Federal Home Loan
Bank of Atlanta ("FHLBA"). Through this affiliation, advances totaling $41.6
million were outstanding at rates competitive with time deposits of like
10
<PAGE>
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.
Table 7 - Risk Elements
(dollars in thousands)
December 31,
--------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Loans on nonaccrual...................... $4,578 $6,688 $1,394 $2,751 $3,280
Loans past due 90 days and still accruing - - - - -
Other real estate owned.................. 425 525 801 244 405
Total non-performing assets.............. $5,003 $7,213 $2,195 $2,995 $3,685
======================================
Total non-performing loans as a
percentage of net loans............. 2.76% 4.38% 0.95% 1.95% 2.44%
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less.................. $14,164
Over three months through six months.. 5,937
Over six months through twelve months. 9,472
Over twelve months.................... 3,904
--------
$33,477
=======
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
(i.e., the interest rate sensitivity). As presented in this table, at December
31, 1997, the assets subject to rate changes within one year exceeded its
liabilities 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 an increase in net
interest income if market interest rates rise and a decrease in net interest
income if market interest rates decline.
Management carefully measures and monitors interest rate sensitivity and
believes that its operating strategies offer protection against interest rate
risk. As required by regulations of the Office of Thrift Supervision ("OTS"),
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 105% in 1997,
107% in 1996, and 109% in 1995.
Table 10 represents the expected maturity of the total invesment 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.
LIQUIDITY
- ---------
The Bank is 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 Bank's
average liquidity in December 1997 was 7.88% of the aggregate of the prior
month's daily average deposits and short-term borrowings. The Bank's liquidity
was 9.68% at December 31, 1997, and 7.75% at December 31, 1996.
The Bank's 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 Bank. Advances from the FHLBA
were $41,637,000 and $17,371,000, respectively, at December 31, 1997 and 1996.
Subject to certain limitations, the Bank may borrow funds from the FHLBA in
the form of advances. Credit availability from the FHLBA to the Bank is based on
the Bank's financial and operating condition. Credit availability from the FHLBA
to the Bank was approximately $58.0 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 $16.0 million. The Bank uses FHLBA advances for both
11
<PAGE>
long-term and short-term liquidity needs. Other than normal banking operations,
the Bank has no long-term liquidity needs. The Bank has never been involved with
highly leveraged transactions that may cause unusual potential long-term
liquidity needs.
The Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, detail FLAG's sources and uses of funds for those periods.
<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 Over
or Less 3 Years 5 Years 5 Years Total
--------- -------- --------- ------- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Adjustable rate mortgages.......... $ 61,930 $ - $ - $ - $ 61,930
Fixed rate mortgages............... 21,061 11,290 10,448 23,810 66,609
Other loans........................ 19,971 7,486 9,939 1,863 39,259
Investment securities.............. 34,798 2,998 1,971 11,924 51,691
Federal Home Loan Bank stock....... 2,082 - - - 2,082
Interest-bearing deposits
in other banks................... 3,168 - - - 3,168
----------------------------------------------------
Total interest-earning assets.. $143,010 $21,774 $22,358 $37,597 $224,739
---------------------------------------------------
Interest-bearing liabilities:
Fixed maturity deposits............ $ 86,422 $20,207 $ 3,576 $ 5,523 $115,728
NOW and money market demand
accounts........................ 20,809 6,576 4,424 9,074 40,883
Passbook accounts.................. 8,508 648 592 5,331 15,079
Federal funds purchased............ 70 - - - 70
FHLB advances...................... 40,783 167 167 521 41,638
----------------------------------------------------
Total interest-bearing
liabilities .................. $156,592 $27,598 $8,759 $20,449 $213,398
----------------------------------------------------
Interest rate sensitivity gap.......$(13,582) $ (5,824) $13,599 $17,148 $ 11,341
Cumulative interest rate
sensitivity gap .................$(13,582) $(19,406) $(5,807) $11,341 -
Cumulative interest rate
sensitivity gap to total assets.. -5.48% -7.83% -2.34% 4.57% -
</TABLE>
CAPITAL RESOURCES AND DIVIDENDS
- -------------------------------
Stockholders' equity at December 31, 1997, increased 8.0% from December 31,
1996. All of this growth resulted from 1997 earnings. Dividends of $692,577 or
$0.34 per share were declared and paid in 1997, compared to $0.33 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 9.19% for 1997 and 8.96% 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 Bank's actual capital levels. The Bank 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.
PROVISION FOR INCOME TAXES.
- ---------------------------
The provision for income taxes was $998,000 in 1997, versus a benefit of
$311,000 in 1996, and a provision of $1,045,000 in 1995. The effective actual
tax rates for 1997, 1996, and 1995 (tax provision as a percentage of income
before taxes) were 32.9%, (63.7%), and 34.0%, respectively. The income tax
benefit recorded in 1996 resulted from the net loss before income taxes during
the year. Management deemed the items creating the 1996 loss to be temporary in
nature, therefore resulting in the recording of a deferred tax asset
representing the tax effect of future taxable benefits which could be
recognized.
12
<PAGE>
<TABLE>
Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)
<CAPTION>
-------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years Totals
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------
Securities held-to-maturity:
<S> <C> <C> <C>
Mortgage-backed securities ..$ 103 6.98% - - - - - - $ 103
------------------------------------------------------------------------------------------------------------
Collateralized mortgage
obligations .............. - - 77 8.85% - - 2,428 7.22% 2,505
------------------------------------------------------------------------------------------------------------
103 6.98% 77 8.85% - - 2,428 7.22% 2,608
------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
U.S. Treasury and agencies .. 998 5.44% 1,008 6.45% 7,022 6.78% - - 9,028
------------------------------------------------------------------------------------------------------------
Corporate debt securities ... - - 1,000 6.86% - - - - 1,000
------------------------------------------------------------------------------------------------------------
Equity securities............ 1,413 4.61% - - - - - - 1,413
------------------------------------------------------------------------------------------------------------
Mortgage-backed securities .. 1,264 5.37% 1,882 6.55% 1,814 6.89% 16,828 6.69% 21,788
------------------------------------------------------------------------------------------------------------
Collateralized mortgage
obligations .............. - - 1,272 5.98% 3,858 5.53% 10,724 6.18% 15,854
------------------------------------------------------------------------------------------------------------
3,675 5.10% 5,162 6.45% 12,694 6.42% 27,552 6.49% 49,083
------------------------------------------------------------------------------------------------------------
Total ...................... $3,778 5.15% $5,239 6.49% $12,694 6.42% $29,980 6.55% $51,691
------------------------------==============================================================================
</TABLE>
Table 11 - Equity Ratios
Years Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------
Return on average assets........... 0.88% -0.08% 0.87%
Return on average equity........... 9.55% -0.88% 9.78%
Dividend payout ratio.............. 34.06% -377.18% 29.56%
Average equity to average assets... 9.19% 8.96% 8.94%
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.
13
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(with Independent Accountants' Report thereon)
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, 1997, and the related statements
of operations, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of FLAG's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The consolidated financial statements for the years 1996 and 1995
were audited by other auditors whose report dated January 31, 1997 expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 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, 1997, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 22, 1998
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
14
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets
------
1997 1996
---- ----
Cash and due from banks,
including reserve requirements
of $848,000 and $826,000 ...................... $ 5,733,644 4,757,815
Interest-bearing deposits .................... 3,168,353 1,327,108
Investment securities available-for-sale ..... 49,083,251 41,306,496
Investment securities held-to-maturity
(fair value of $2,569,143 in 1997
and $3,108,722 in 1996) .................. 2,607,835 3,209,696
Other investments ............................ 3,556,900 3,370,900
Mortgage loans held for sale ................. 3,481,678 1,505,798
Loans, net ................................... 165,942,045 152,644,436
Premises and equipment, net .................. 6,449,328 5,417,962
Mortgage servicing rights .................... 1,174,292 1,703,710
Accrued interest receivable .................. 2,048,940 1,763,345
Cash surrender value of life insurance ....... 2,114,118 1,910,657
Other assets ................................. 2,624,894 3,039,958
--------- ---------
$247,985,278 221,957,881
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand ..................................... $ 8,971,567 11,062,348
Interest-bearing demand .................... 40,882,982 36,986,770
Savings .................................... 15,079,485 16,514,007
Time ....................................... 82,251,315 83,028,319
Time, over $100,000 ........................ 33,476,509 33,100,319
---------- ----------
Total deposits .................... 180,661,858 180,691,763
----------- -----------
Federal funds purchased ...................... 70,000 2,210,000
Advances from Federal Home Loan Bank ......... 41,637,494 17,370,833
Accrued interest payable ..................... 371,066 323,783
Other liabilities ............................ 3,182,280 850,308
--------- -------
Total liabilities ................. 225,922,698 201,446,687
=========== ===========
Stockholders' equity:
Preferred stock (10,000,000 shares
authorized; none issued and outstanding) -- --
Common stock ($1 par value, 20,000,000
shares authorized, 2,036,990
shares issued and outstanding) ......... 2,036,990 2,036,990
Additional paid-in capital ............... 8,037,630 8,037,630
Retained earnings ........................ 12,073,529 10,732,992
Unrealized loss on securities
available-for-sale, net of tax ......... (85,569) (296,418)
------- --------
Total stockholders' equity ...... 22,062,580 20,511,194
---------- ----------
$ 247,985,278 221,957,881
============= ===========
See accompanying notes to consolidated financial statements.
15
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Interest income:
Interest and fees on loans ....... $14,705,426 14,588,559 13,808,744
Interest on investment securities. 3,033,292 3,156,090 4,161,455
Interest-bearing deposits. ....... 190,476 167,587 156,610
------- ------- -------
Total interest income .......... 17,929,194 17,912,236 18,126,809
---------- ---------- ----------
Interest expense:
Deposits ......................... 8,011,567 8,011,016 8,024,187
Borrowings ....................... 1,375,263 1,179,628 1,861,506
--------- --------- ---------
Total interest expense ......... 9,386,830 9,190,644 9,885,693
--------- --------- ---------
Net interest income before
provision for loan losses... 8,542,364 8,721,592 8,241,116
Provision for loan losses .......... 574,000 3,484,529 630,000
------- --------- -------
Net interest income after
provision for loan losses... 7,968,364 5,237,063 7,611,116
--------- --------- ---------
Other income:
Fees and service charges ......... 2,602,468 2,415,810 2,171,617
Gain on sales of investment
securities ..................... 144,925 219,379 228,215
Gain on sales of loans ........... 658,723 587,499 55,881
Gain (loss) on other
real estate, net ............... (82,719) (79,643) 32,764
Other ............................ 334,542 169,662 99,679
------- ------- ------
Total other income ........... 3,657,939 3,312,707 2,588,156
--------- --------- ---------
Other expenses:
Salaries and employee benefits.... 4,067,287 3,485,457 3,348,125
Occupancy ........................ 1,401,759 1,177,618 1,036,269
Other operating .................. 3,126,376 4,375,543 2,743,960
--------- --------- ---------
Total other expenses ......... 8,595,422 9,038,618 7,128,354
--------- --------- ---------
Earnings (loss) before
provision (benefit) for
income taxes ............... 3,030,881 (488,848) 3,070,918
Provision (benefit) for
income taxes .................. 997,767 (311,222) 1,044,911
------- -------- ---------
Net earnings (loss) ................ 2,033,114 (177,626) 2,026,007
========= ======== =========
Basic earnings (loss)
per share......................... 1.00 (.09) 1.02
==== ==== ====
Diluted earnings (loss)
per share......................... .99 (.09) .98
=== ==== ===
See accompanying notes to consolidated financial statements.
16
<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
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $2,012,500 7,867,500 11,157,835 (2,026,409) 19,011,426
Exercise of stock options 26,793 97,605 - - 124,398
Issuance of common stock 4,807 54,679 - - 59,486
Repurchase of common stock (128,100) (500,783) (1,004,389) - (1,633,272)
Change in unrealized
loss on securities
available-for-sale - - - 1,709,045 1,709,045
Net earnings - - 2,026,007 - 2,026,007
Dividends declared - - (598,874) - (598,874)
Balance, December 31, 1995 1,916,000 7,519,001 11,580,579 (317,364) 20,698,216
Exercise of stock options 120,207 510,422 - - 630,629
Issuance of common stock 783 8,207 - - 8,990
Change in unrealized
loss on securities
available-for-sale - - - 20,946 20,946
Net loss - - (177,626) - (177,626)
Dividends declared - - (669,961) - (669,961)
Balance, December 31, 1996 2,036,990 8,037,630 10,732,992 (296,418) 20,511,194
Change in unrealized
loss on securities
available-for-sale - - - 210,849 210,849
Net earnings - - 2,033,114 - 2,033,114
Dividends declared - - (692,577) - (692,577)
Balance, December 31, 1997 $2,036,990 8,037,630 12,073,529 (85,569) 22,062,580
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
FLAG FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from
operating activities:
Net earnings (loss) ................ $ 2,033,114 (177,626) 2,026,007
Adjustments to reconcile
net earnings (loss) to net cash
provided by operating activities:
Depreciation, amortization
and accretion .................. 757,867 703,007 709,943
Provision for loan losses ....... 574,000 3,484,529 630,000
Provision for deferred taxes .... 978,809 (1,033,206) (78,049)
Gains on sales of securities
available-for-sale ............. (144,925) (219,379) (219,067)
(Gain) loss on sales of loans ... (658,723) (587,499) (55,881)
(Gain) loss on other real estate 82,719 79,643 (32,518)
Change in:
Mortgage loans held for sale .. (1,317,157) (887,549) (1,281,363)
Other ......................... 1,827,301 1,437,864 (214,063)
--------- --------- --------
Net cash provided by
operating activities ........ 4,133,005 2,799,784 1,485,009
--------- --------- ---------
Cash flows from
investing activities:
Net change in interest-bearing
deposits .......................... (1,841,245) (211,493) (100,322)
Proceeds from sales and maturities
of securities available-for-sale .. 7,406,922 27,254,773 28,648,649
Proceeds from maturities of
securities held-to-maturity ....... 601,861 687,484 2,780,169
Proceeds from sale of other
investments ....................... -- -- 318,500
Purchases of other investments ..... (186,000) (475,000) (250,000)
Purchases of securities
available for sale ................ (14,827,903) (13,557,624) (18,425,216)
Net change in loans ................ (13,871,609) (8,726,929) (6,932,316)
Proceeds from sales of real estate.. -- 516,326 989,228
Purchases of premises and equipment. (1,639,920) (399,668) (1,060,304)
Purchase of cash surrender
value life insurance .............. (203,461) (24,002) (1,782,000)
-------- ------- ----------
Net cash provided by (used in)
investing activities ......... (24,561,355) 5,486,853 4,186,388
----------- --------- ---------
Cash flows from financing activities:
Net change in deposits ............. (29,905) 83,660 12,206,992
Change in federal funds purchased .. (2,140,000) 2,210,000 --
Proceeds from FHLB advances ........ 40,300,000 16,000,000 67,800,000
Payments of FHLB advances .......... (16,033,339) (28,133,334) (81,576,389)
Repurchase of common stock ......... -- -- (1,633,272)
Proceeds from exercise of
stock options ..................... -- 630,629 124,398
Proceeds from issuance of
common stock ...................... -- 8,990 59,486
Cash dividends paid ................ (692,577) (640,420) (606,209)
-------- -------- --------
Net cash provided by (used in)
financing activities ........ 21,404,179 (9,840,475) (3,624,994)
---------- ---------- ----------
Net change in cash and
cash equivalents ......... 975,829 (1,553,838) 2,046,403
Cash and cash equivalents at
beginning of year .................. 4,757,815 6,311,653 4,265,250
--------- --------- ---------
Cash and cash equivalents at
end of year ........................ $ 5,733,644 4,757,815 6,311,653
============ ========= =========
18
<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 ............................ $9,376,744 9,266,251 9,828,527
========== ========= =========
Income taxes ........................ $ 686,528 1,016,855 1,204,398
========== ========= =========
Supplemental schedule of noncash
investing and financing activities:
Real estate acquired
through foreclosure ................. $ 442,652 882,447 1,730,941
========== ======= =========
Change in unrealized loss on
securities available-for-sale,
net of tax........................... $ 210,849 20,946 1,709,045
========== ====== =========
Increase (decrease) in
dividends payable ................... $ -- 29,541 (7,335)
====== ====== ======
See accompanying notes to consolidated financial statements.
19
<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 subsidiary First Federal Savings Bank of
LaGrange (the "Bank") and the Bank's wholly-owned subsidiary Piedmont Mortgage
Service, Inc. ("Piedmont"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
FLAG is a unitary thrift holding company formed in 1994 and is primarily
regulated by the Office of Thrift Supervision ("OTS"). The Bank commenced
business in 1927 under a state banking charter and received its federal banking
charter in 1955. The Bank is primarily regulated by the OTS and the Federal
Deposit Insurance Corporation and undergoes periodic examinations by these
regulatory agencies. The Bank provides a full range of commercial, mortgage and
consumer banking services principally in Troup County, Georgia and has a loan
production facility in Columbus, Georgia.
Piedmont was formed in 1988 as an appraisal service company working principally
for the Bank and as a brokerage service to individuals.
The accounting principles followed by FLAG and its subsidiary, 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.
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
20
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
federally insured savings bank. FLAG 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 Bank's 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
- -------
The Bank 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.
21
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(1) 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.
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.
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.
22
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
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. 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 Ended
December 31, 1997 Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share ....... $ 2,033,114 2,036,990 1.00
Effect of dilutive securities
- stock options .............. -- 19,576 (.01)
------ ------ ----
Diluted earnings per share ..... $ 2,033,114 2,056,566 .99
============ ========= ===
For the Year Ended
December 31, 1996 Net Loss Common Share Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic loss per share ........... $ (177,626) 2,010,798 (.09)
Effect of dilutive securities
- stock options .............. -- 8,099 --
------ ----- ------
Diluted loss per share ......... $ (177,626) 2,018,897 (.09)
============ ========= ====
For the Year Ended
December 31, 1995 Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic earnings per share $ 2,026,007 1,990,724 1.02
Effect of dilutive securities
- stock options -- 71,773 (.04)
------ ------ ----
Diluted earnings per share $ 2,026,007 2,062,497 .98
============ ========= ===
Reclassifications
- -----------------
Certain items in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 financial statement presentation.
Recent Accounting Pronouncements
- --------------------------------
In 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.
23
<PAGE>
(2) 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 ............. $ 8,969,004 61,703 2,532 9,028,175
Corporate debt securities 989,300 10,700 -- 1,000,000
Equity securities ........ 1,293,623 121,670 1,817 1,413,476
Mortgage-backed securities 21,746,932 170,149 129,313 21,787,768
Collateralized mortgage
obligations .......... 16,226,434 11,031 383,633 15,853,832
---------- ------ ------- ----------
$49,225,293 375,253 517,295 49,083,251
=========== ======= ======= ==========
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
Mortgage-backed securities. $ 103,140 1,160 -- 104,300
Collateralized mortgage
obligations ........... 2,504,695 2,037 41,889 2,464,843
--------- ----- ------ ---------
$2,607,835 3,197 41,889 2,569,143
========== ===== ====== =========
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasuries and
agencies ............... $ 4,018,271 2,109 27,409 3,992,971
State, county and municipals 114,695 712 -- 115,407
Corporate debt securities .. 980,790 9,100 -- 989,890
Equity securities .......... 1,960,918 5,891 7,583 1,959,226
Mortgage-backed securities . 17,577,399 119,818 152,843 17,544,374
Collateralized mortgage
obligations ............ 17,132,514 17,921 445,807 16,704,628
---------- ------ ------- ----------
$41,784,587 155,551 633,642 41,306,496
=========== ======= ======= ==========
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
---- ----- ------ -----
Mortgage-backed securities $ 117,547 1,396 -- 118,943
Collateralized mortgage
obligations .......... 3,092,149 4,099 106,469 2,989,779
--------- ----- ------- ---------
$3,209,696 5,495 106,469 3,108,722
========== ===== ======= =========
24
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(2) Investment Securities, continued
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:
Within 1 year............ $ 999,941 997,410 - -
1 to 5 years............. 1,000,000 1,008,428 - -
5 to 10 years............ 6,969,063 7,022,337 - -
--------- --------- ------ ------
8,969,004 9,028,175 - -
Equity securities ............ 1,293,623 1,413,476 - -
Corporate debt securities..... 989,300 1,000,000 - -
Mortgage-backed securities.... 21,746,932 21,787,768 103,140 104,300
Collateralized mortgage
obligations .............. 16,226,434 15,853,832 2,504,695 2,464,843
---------- ---------- --------- ---------
$49,225,293 49,083,251 2,607,835 2,569,143
=========== ========== ========= =========
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
totalled approximately $7,407,000, $15,651,000, and $26,468,000, respectively.
Gross gains of approximately $140,000, $250,000, and $246,000 and gross losses
of approximately $13,000, $31,500, and $28,000 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
$26,425,000 and $17,920,000 at December 31, 1997 and 1996, respectively, were
pledged to secure advances from FHLB, U.S. Government, and other public
deposits.
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(3) Loans
Major classifications of loans at December 31, 1997 and 1996 are summarized as
follows:
1997 1996
---- ----
Commercial, financial and agricultural... $ 9,923,944 10,209,043
Real estate - construction .............. 11,589,408 9,149,042
Real estate - mortgage .................. 128,539,218 119,178,317
Installment loans to individuals ........ 8,441,194 11,094,228
Lease financings ........................ 9,303,764 7,571,427
--------- ---------
Gross loans ........................ 167,797,528 157,202,057
Less:
Deferred loan fees - net ............... 398,775 (218,314)
Allowance for loan losses .............. (2,254,258) (4,339,307)
---------- ----------
$ 165,942,045 152,644,436
============= ===========
The Bank concentrates its lending activities in the origination of permanent
residential mortgage loans, commercial mortgage loans, commercial business
loans, and consumer installment loans. The majority of the Bank's real estate
loans are secured by real property located in Troup County, Georgia and
surrounding counties.
FLAG has recognized impaired loans of approximately $8,179,000 and $13,095,000
at December 31, 1997 and 1996, respectively, with a total allowance for loan
25
<PAGE>
losses related to these loans of $974,000 and $3,775,000, 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 ........ $ 4,339,307 1,339,393 1,243,623
Provisions charged to operations .... 574,000 3,484,529 630,000
Loans charged-off ................... (2,712,767) (521,445) (572,843)
Recoveries on loans previously
charged-off..................... 53,718 36,830 38,613
------ ------ ------
Balance at end of year .............. $ 2,254,258 4,339,307 1,339,393
=========== ========= =========
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
$56,454,000 were pledged as collateral for outstanding FHLB advances as of
December 31, 1997.
(4) Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 are summarized as follows:
1997 1996
---- ----
Land and land improvements ............... $ 1,092,951 1,091,577
Buildings and improvements ............... 4,128,787 4,097,162
Furniture and equipment .................. 5,415,746 3,870,297
--------- ---------
10,637,484 9,059,036
Less accumulated depreciation ............ 4,188,156 3,641,074
--------- ---------
$ 6,449,328 5,417,962
=========== =========
Depreciation expense approximated $609,000, $554,000, and $506,000 at December
31, 1997, 1996, and 1995, respectively
(5) Time Deposits
At December 31, 1997, contractual maturities of time deposits are summarized as
follows:
Year ending December 31,
------------------------
1998................................. $ 86,422,095
1999................................. 12,204,318
2000................................. 8,002,731
2001................................. 3,576,000
202 and thereafter................... 5,522,680
---------
$ 115,727,824
===============
26
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(6) 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 interest rates as follows:
Year Amount Interest Rate
---- ------ -------------
1998............................ $ 23,700,000 5.74% -5.84%
2000............................ 5,000,000 5.59%
2002............................ 7,000,000 5.53%
Thereafter...................... 5,937,494 5.23% - 6.75%
---------
$ 41,637,494 5.23% - 6.75%
================
(7) 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
---- ---- ----
Federal
Current ............................ $ 17,000 620,845 1,024,824
Deferred ........................... 876,700 (841,930) (101,270)
------- -------- --------
Total federal provision (benefit). 893,700 (221,085) 923,554
------- -------- -------
State
Current ............................ 1,958 54,171 139,228
Deferred ........................... 102,109 (144,308) (17,871)
------- -------- -------
Total state provision (benefit)... 104,067 (90,137) 121,357
------- ------- -------
Total ......................... $ 997,767 (311,222) 1,044,911
========= ======== =========
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 (loss) at statutory rate. $ 1,030,499 (166,208) 1,044,112
Add (deduct):
State income taxes, net of
federal effect ................... 68,684 (64,549) 80,096
Increase in cash surrender value
of life insurance ................ (43,514) (16,304) (17,000)
Other .............................. (57,902) (64,161) (62,297)
------- ------- -------
$ 997,767 (311,222) 1,044,911
=========== ======== =========
27
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
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 ............ $ 498,657 1,648,937
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 ................. 56,472 181,675
Other ............................. 14,639 --
------ ------
Total gross deferred tax assets 987,997 1,955,389
------- ---------
Deferred tax liabilities:
Premises and equipment ............... 209,066 173,425
Net deferred loan fees ............... 151,375 --
Other .............................. 20,130 70,526
------ ------
Total gross deferred tax
liabilities .................... 380,571 243,951
------- -------
Net deferred tax asset ........... $ 607,426 1,711,438
========= =========
(7) 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, the Bank now computes its tax bad debt reserves under
the rules of IRC section 585, which apply to commercial banks. In years prior to
1996, the Bank 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 the Bank ceases to qualify as a bank pursuant to the
provisions of IRC section 585.
(8) 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.
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 the Bank'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
28
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
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.
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.
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 and 1996, 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.
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 201,250 shares were reserved
for possible issuance under the employee plan and 100,625 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
29
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(8) Employee and Director Benefit Plans, continued
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 (loss) As reported.... $ 2,033,114 (177,626)
Pro forma.... $ 1,963,627 (190,981)
Basic earnings (loss) per share As reported.... $ 1.00 (.09)
Pro forma.... $ .96 (.09)
Diluted earnings (loss) per share As reported.... $ .99 (.09)
Pro forma.... $ .95 (.09)
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.
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.. 46,000 $10.02 160,207 $ 6.41 190,750 $ 6.24
Granted during
the year......... 28,000 11.37 6,000 13.50 --
Cancelled during
the year....... (1,250) 11.25 -- (3,750) 5.38
Exercised during
the year....... -- (120,207) 5.38 (26,793) 5.38
------ -------- -------
Outstanding, end
of year........ 72,750 $10.52 46,000 $10.02 160,207 $6.41
====== ====== =======
Number of shares
exercisable.... 72,750 46,000 160,207
====== ====== =======
The weighted average grant-date fair value of options granted in 1997 and 1996
was $1.65 and $1.73, respectively. For these employee and director stock
options, options outstanding at December 31, 1997 are exercisable at option
prices ranging from $9.50 to $13.50 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.
(9) Preferred Stock
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.
(10) 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 Bank must meet specific
capital guidelines that involve quantitative measures of the assets,
30
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
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) and of Tangible capital to average
assets. 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 most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well 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. There are no conditions or events since
that notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios as well as those of FLAG on a
consolidated basis are presented below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
FLAG consolidated ..$24,127,000 14.9% 12,941,000 >/=8.0% N/A N/A
Bank ...............$22,408,000 13.9% 12,871,000 >/=8.0% 16,089,000 >/=10.0%
Tier 1 Capital (to Risk
Weighted Assets)
FLAG consolidated ..$22,130,000 13.7% 6,471,000 >/=4.0% N/A N/A
Bank ...............$20,382,000 12.7% 6,436,000 >/=4.0% 9,653,000 >/=6.0%
Tier 1 Capital (to
Adjusted Assets)
FLAG consolidated ..$22,130,000 8.9% 10,283,000 >/=4.0% N/A N/A
Bank ...............$20,382,000 8.3% 9,883,000 >/=4.0% 12,354,000 >/=5.0%
Tangible Capital (to
Tangible Assets)
FLAG consolidated ..$22,130,000 8.9% 3,856,000 >/=1.5% N/A N/A
Bank ...............$20,382,000 8.3% 3,706,000 >/=1.5% 3,706,000 >1.5%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
FLAG consolidated ...$23,704,000 15.8% 12,018,000 >/=8.0% N/A N/A
Bank ................$21,568,000 14.4% 12,000,000 >/=8.0% 15,000,000 >/=10.0%
Tier 1 Capital (to Risk
Weighted Assets)
FLAG consolidated ...$20,918,000 13.9% 6,009,000 >/=4.0% N/A N/A
Bank ................$19,694,000 13.1% 6,000,000 >/=4.0% 9,000,000 >/=6.0%
Tier 1 Capital (to
Adjusted Assets)
FLAG consolidated ...$20,918,000 9.4% 8,916,000 >/=4.0% N/A N/A
Bank ................$19,694,000 8.8% 8,907,000 >/=4.0% 11,134,000 >/=5.0%
Tangible Capital (to
Tangible Assets)
FLAG consolidated ...$20,918,000 9.4% 3,344,000 >/=1.5% N/A N/A
Bank ................$19,694,000 8.8% 3,340,000 >/=1.5% 3,340,000 >/=1.5%
31
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Thrift regulations limit the amount of dividends the Bank 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, the Bank can pay dividends totalling approximately $4,769,000 plus net
earnings during 1998.
(11) Commitments and Contingencies
The Bank leases 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 $83,000, $61,000, and $60,000 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, standby letters of credit, and an interest rate cap agreement.
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
Bank has 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 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 of
the counterparty. The Bank's loans are primarily collateralized by residential
and other real properties, automobiles, savings deposits, accounts receivable,
inventory, and equipment located in Troup County, Georgia and surrounding
counties.
Standby letters of credit are written conditional commitments issued by the Bank
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
Bank uses 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.
32
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
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..... $ 7,845,000 7,146,000
Standby letters of credit ....... $ 990,000 945,000
(12) 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 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 for comparable loans to other persons. The following is a summary of
activity for related party loans for 1997.
Balance at December 31, 1996.......... $ 1,647,900
New loans ............................ 203,318
Repayments ........................... (238,749)
--------
Balance at December 31, 1997.......... $ 1,612,469
===========
(13) 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 ........................ $ 265,131 210,190 178,394
Data processing expense ............ $ 488,703 520,762 480,209
Federal deposit insurance premiums.. $ 185,970 1,666,101 459,581
(14) FLAG Financial Corporation (Parent Company Only) Financial Information
Balance Sheets
December 31, 1997 and 1996
Assets
------
1997 1996
---- ----
Cash ........................... $ 263,101 489,869
Investment securities .......... 622,128 188,125
Investment in subsidiary........ 20,891,126 19,910,996
Equipment, net ................. 536,282 --
Other assets ................... 19,025 36,593
------ ------
$22,331,662 20,625,583
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable and
accrued expenses............... 269,082 114,389
Stockholders' equity............ 22,062,580 20,511,194
---------- ----------
$22,331,662 20,625,583
=========== ==========
33
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Income:
Dividend income from the Bank $ 1,305,000 525,008 2,282,699
Interest income 7,357 - --
Other 17,699 633 --
------ --- ------
Total income 1,330,056 525,641 2,282,699
--------- ------- ---------
Operating expenses:
Interest expense 1,333 - -
Other 212,196 145,445 132,824
------- ------- -------
Total operating expenses 213,529 145,445 132,824
------- ------- -------
Earnings before income tax benefit
and equity in undistributed
earnings of subsidiary 1,116,527 380,196 2,149,875
Income tax benefit 65,964 50,90 18,500
------ ----- ------
Earnings before equity in
undistributed earnings of
subsidiary or dividends
received in excess of
earnings of subsidiary 1,182,491 431,099 2,168,375
Dividends received in excess
of earnings (loss)
of subsidiary - (608,725) (142,368)
Equity in undistributed earnings
of subsidiary 850,623 -- --
------- ------ ------
Net earnings (loss) $ 2,033,114 (177,626) 2,026,007
============ ======== =========
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) .................... $ 2,033,114 (177,627) 2,026,007
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Amortization ........................ 14,420 14,419 14,419
Dividends received in excess of
(earnings) loss of subsidiaries .... -- 608,726 142,368
Equity in undistributed earnings
of subsidiaries ................... (850,623) -- --
Change in other assets
and liabilities.................... 157,850 (48,986) 154,585
------- ------- -------
Net cash provided by
operating activities ............. 1,354,761 396,532 2,337,379
--------- ------- ---------
Cash flows from investing activities:
Purchase of securities
svailable-for-sale................... 352,670 (194,742) --
Purchase of equipment ................. (536,282) -- --
-------- ------ ------
Net cash used in
investing activities ............. (888,952) (194,742) --
-------- -------- ------
Cash flows from financing activities:
Repurchase of common stock ............. -- -- 1,633,272)
Exercise of stock options .............. -- 637,727 124,398
Issuance of common stock ............... -- 8,990 59,486
Dividends paid ......................... (692,577) (640,420) (606,209)
-------- -------- --------
Net cash provided by (used in)
financing activities ............. (692,577) 6,297 (2,055,597)
-------- ----- ----------
Net change in cash ....................... (226,768) 208,087 281,782
Cash at beginning of year ................ 489,869 281,782 --
------- ------- ------
Cash at end of year ...................... $ 263,101 489,869 281,782
=========== ======= =======
34
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(15) 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 subsidiary, but
rather a good-faith estimate of the increase or decrease in value of financial
instruments held by FLAG since purchase, origination, or issuance.
(15) Fair Value of Financial Instruments, continued
Cash and Cash Equivalents
- -------------------------
For cash, due from banks, federal funds sold, interest-bearing deposits with
other banks, and proceeds receivable from secondary market, 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, certain money
market deposits, advances from borrowers, and advances payable to secondary
market is the amount payable on demand at the reporting date. The fair value of
fixed maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
Federal Funds Purchased
- -----------------------
For federal funds purchased, the carrying amount is a reasonable estimate of
fair value.
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.
35
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
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.
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.
(15) Fair Value of Financial Instruments, continued
The carrying amount and estimated fair values of FLAG's financial instruments at
December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
Cash and cash equivalents .....$ 3,679,456 3,679,456 2,527,785 2,527,785
Interest-bearing deposits .... 5,222,541 5,222,541 3,557,138 3,557,138
Investment securities ........ 51,691,086 51,652,394 44,516,192 44,415,218
Other investments ............ 3,556,900 3,556,900 3,370,900 3,370,900
Mortgage loans held for sale.. 881,254 881,254 343,677 343,677
Loans, net ...................165,942,045 166,715,631 152,644,436 154,718,806
Mortgage servicing rights .... 1,174,292 1,174,292 1,703,710 1,703,710
Cash surrender value of life
insurance................... 2,114,118 2,114,118 1,910,657 1,910,657
Liabilities:
Deposits .....................180,661,858 180,817,190 180,691,763 181,213,971
Federal funds purchased ...... 70,000 70,000 2,210,000 2,210,000
FHLB advances ................ 41,637,494 40,927,033 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 . 7,845,000 7,845,000 7,146,000 7,146,000
Standby letters of credit .... 990,000 990,000 945,000 945,000
36
<PAGE>
FLAG FINANCIAL CORPORATION
Notes to Consolidated Financial Statements, continued
(16) Business Combination
On October 28, 1997, the Board of Directors of FLAG approved a merger agreement
whereby FLAG and Middle Georgia Bankshares, Inc. would combine and FLAG would
become a multi-bank holding company. Middle Georgia, a one-bank holding company
headquartered in Unadilla, Georgia, is the parent company of Citizens Bank which
has seven offices throughout Dooly and Macon counties. Middle Georgia
shareholders would receive 1,012,284 shares of FLAG stock.
The Agreement is subject to approval of applicable regulatory authorities and
shareholders and will be accounted for as a pooling of interests. As such,
historical financial information presented in future reports will be restated to
include Middle Georgia.
The following summarized operating data gives effect to the merger had it
occurred January 1, 1995:
As of and for the year ended (000's):
1997 1996 1995
---- ---- ----
Total assets ................... 376,728 321,730 315,196
Shareholders' equity ........... 33,260 30,580 29,849
Net earnings ................... 3,086 887 3,140
Basic earnings per share ....... 1.01 0.29 1.23
37
<PAGE>
Market Makers
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Newport Tower
Jersey City, New Jersey 07310
Interstate/Johnson Lane Corporation
121 West Trade Street
Interstate Tower - 12th Floor
Charlotte, North Carolina 28789
Morgan Keegan & Company, Inc.
One Buckhead Plaza
Suite 1600
3060 Peachtree Road, N.W.
Atlanta, Georgia 30305
The Robinson-Humphrey Company, Inc.
3333 Peachtree Road, N.E.
11th Floor
Atlanta, Georgia 30326
Sterne, Agee & Leach, Inc.
950 East Paces Ferry Road
Suite 1580
Atlanta, Georgia 30326
General Counsel
John M. Wyatt
16 North LaFayette Square
LaGrange, Georgia 30240
Special Counsel
Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Independent Auditors
Porter Keadle Moore, LLP
235 Peachtree Street, N.E.
Suite 1800
Atlanta, Georgia 30303
Transfer Agent
Shareholders who desire to change the name, address, or ownership of FLAG common
stock, to report lost certificates, or to consolidate accounts should contact
the Transfer Agent:
Reliance Trust Company
Investor Services
3384 Peachtree Road, N.E.
Suite 900
Atlanta, Georgia 30326
1-800-241-5568
1998 Annual Meeting
The Annual Meeting of Shareholders of FLAG Financial Corporation will be held on
Wednesday, May 13, 1998, at 2:00 p.m. at the Main Office of the Company, 101
North Greenwood Street, LaGrange, Georgia 30240.
39
<PAGE>
Investor Relations
Shareholders, analysts, investors, the news medida, and others desiring a copy
of the FLAG Financial Corporation 1997 Annual Report or 1997 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission, or general
information about the Company may obtain such information without charge by
contacting:
FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia 30240
1-706-845-5000
Dividend Reinvestment Plan
FLAG Financial Corporation offers a Dividend Reinvestment Plan for automatic
reinvestment of dividends in the common stock of the Company. For more
information concerning this convenient and economical way to purchase additional
common stock and to receive an authorization form, contact:
FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia 30240
1-706-845-5000
Stock Exchange Listing
The Company's common stock is traded and quoted on the Nasdaq National Market
under the symbol "FLAG".
Shareholders of Record
FLAG Financial Corporation has 2,036,990 shares of common stock outstanding.
There were approximately __ holders of record of the common stock as of December
31, 1997.
Stock Prices and Dividends
The following table sets forth the high and low closing sales prices of the
Company's common stock, as reported by Nasdaq, for each quarter for the past two
fiscal years and the cash dividends per share of the common stock paid by the
Company during such fiscal quarters.
Cash
Dividends
Quarter Ended High Low Per Share
March 31, 1996 $14.50 $12.83 $0.075
June 30, 1996 $13.50 $12.00 $0.085
September 30, 1996 $12.75 $9.50 $0.085
December 31, 1996 $11.75 $12.50 $0.085
March 31, 1997 $13.00 $10.25 $0.085
June 30, 1997 $14.63 $11.25 $0.085
September 30, 1997 $16.50 $14.00 $0.085
December 31, 1997 $21.50 $16.50 $0.085
40
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported) : October 28, 1997
FLAG Financial Corporation
(Exact name of registrant as specified in its charter)
Georgia 0-24532 58-2094179
- --------------------------------------------------------------------------------
(State of Incorporation) (Commission File (IRS Employer
Number) Identification
Number)
101 North Greenwood St., P.O. Box 3007
LaGrange, Georgia 30240
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including are code: (706) 845-5000
<PAGE>
Item 5. Other Events
On October 28, 1997, the Registrant entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Middle Georgia Bankshares, Inc. ("Middle
Georgia"), pursuant to which Middle Georgia agreed to merge with and into the
Registrant. Attached hereto is the press release regarding the announcement of
the merger
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits. The following exhibits are filed as part of this report:
99.1 Press release, dated October 28, 1997, issued by the Registrant.
1
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
99.1 Press release, dated October 28, 1997
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Dated: October 28, 1997
FLAG Financial Corporation
/s/ Ellison C. Rudd
By Ellison C. Rudd,
Chief Financial Officer
2
<PAGE>
FOR IMMEDIATE RELEASE
For further information contact:
FLAG Financial Corporation-John S. Holle (706/845-5005)
Middle Georgia Bankshares, Inc.-J. Daniel Speight, Jr. (912/268-2056)
FLAG FINANCIAL CORPORATION AND MIDDLE GEORGIA BANKSHARES, INC.
ANNOUNCE COMBINATION
(October 28, 1997) FLAG Financial Corporation, parent company of First Federal
Savings Bank of LaGrange, Georgia, and Middle Georgia Bankshares, Inc. (MGB),
parent company of Citizens Bank, Vienna, Georgia, today announced the execution
of a definitive agreement to combine their two operations by means of a tax-free
merger. The transaction will be accounted for as a pooling of interests.
The proposed combination is subject to final due diligence, regulatory approval
and approval by the shareholders of both corporations. The combination is
projected to be completed at the end of the first quarter of 1998. Under the
terms of the proposed agreement, shareholders of MGB will receive 15.75 shares
of FLAG Financial Corporation common stock for each share of MGB. Total
outstanding shares of FLAG Financial Corporation will increase from
approximately 2,037,000 to approximately 3,049,300 at closing.
John S. Holle, Chairman and Chief Executive Officer of FLAG Financial
Corporation, commented: "This combination represents the joining together of two
extremely competent and complementary organizations. Over the past several
years, FLAG has been aggressively restructuring its balance sheet by increasing
its commercial and consumer lending and decreasing its reliance on traditional
one-to-four-family mortgages. The ability to combine our operations with those
of a first-quality commercial banking organization like MGB, particularly given
their traditional emphasis on high earnings multiples, technology and
specialized lending opportunities, is a unique opportunity for FLAG."
Dan Speight, Chief Executive Officer of MGB, stated: "This combination will
provide the management team of the combined organization with an outstanding
holding company that will create an innovative vision for the future. John Holle
and I have worked together on a number of committees and boards over time. We
share a common view of the importance of customer service, community involvement
and the people we work with. We plan to grow in size and profitability by
emphasizing the local touch and creating an atmosphere of support from the
holding company to our respective banks. Our shared vision should be an
attractive alternative to other similarly situated financial institutions. We
are excited at the prospect of being able to work together to enhance value for
our shareholders."
Under the terms of the proposed combination, the Board of Directors of FLAG will
be restructured to include five members of the existing Board of Directors of
FLAG and two members of the existing Board of Directors of MGB. John S. Holle
will be Chairman of the Board of the resulting organization, and Dan Speight
will become President and Chief Executive Officer of FLAG. Mr. Holle continued,
"In banking today, there are few assets as valuable as human capital. We are not
only increasing our size by fifty percent, but we are dramatically increasing
our management depth and breadth by integrating Dan Speight and members of his
team into the Holding Company structure. This is a true merger of peers, one in
which we believe the whole will greatly exceed the sum of the parts."
FLAG Financial Corporation, which is based in LaGrange along the I-85 corridor
in west central Georgia, had assets at September 30, 1997 of $238,463,000,
deposits of $177,639,000, loans of $160,131,000 and net income for the quarter
of $502,000. First Federal Savings Bank of LaGrange has five offices, all of
which are located in LaGrange, Troup County, Georgia. Middle Georgia Bankshares,
Inc., based in Unadilla, Georgia along the I-75 corridor just south of Macon,
Georgia, had assets at September 30, 1997 of $119,948,000, deposits of
$104,488,000, loans of $86,597,000 and net income for the quarter of $320,000.
Citizens Bank has offices in Vienna, Unadilla, Pinehurst, Byromville and, as of
June 6, 1997, Montezuma, Georgia. Citizens Bank anticipates opening an office in
Oglethorpe, Georgia, by year end. The Montezuma and Oglethorpe offices were
acquired from Wachovia Bank. In addition to their full-service banking offices,
First Federal has a full-service mortgage operation, which includes a mortgage
production office in Columbus, Georgia, operating as Piedmont Mortgage Services,
and Citizens Bank has a consumer lending office. On a combined pro forma basis
at September 30, 1997, the organization would have had total assets of
$358,411,000, deposits of $282,127,000 and loans of $246,728,000. Both financial
institutions are recipients of The Quality Service Award given by Community
Bankers Association of Georgia, in recognition of outstanding service provided
to customers and the community.
Mr. Speight, commenting on the operational strength of the combined
organization, noted: "The combined organization will have greater financial
strength and depth than either bank could achieve independently in the short
term. This combination will allow us to expand our product lines and our
geographic scope. Though both institutions are oriented to the major interstate
corridors through central Georgia, each lending market has differing strengths,
providing greater asset diversification for the combined organization. Our goal
is to be able to put this greater financial strength to work to build a great
community-based banking organization."
Shares of FLAG trade on the NASDAQ National Market System under the symbol
"FLAG."
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<PERIOD-END> DEC-31-1997
<FISCAL-YEAR-END> DEC-31-1997
<CASH> 5,733,644
<INT-BEARING-DEPOSITS> 3,168,353
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,083,251
<INVESTMENTS-CARRYING> 2,607,835
<INVESTMENTS-MARKET> 2,569,143
<LOANS> 165,942,045
<ALLOWANCE> 2,254,258
<TOTAL-ASSETS> 247,985,278
<DEPOSITS> 180,661,858
<SHORT-TERM> 41,707,494
<LIABILITIES-OTHER> 3,553,346
<LONG-TERM> 0
0
0
<COMMON> 2,036,990
<OTHER-SE> 22,062,580
<TOTAL-LIABILITIES-AND-EQUITY> 247,985,278
<INTEREST-LOAN> 14,705,426
<INTEREST-INVEST> 3,033,292
<INTEREST-OTHER> 190,476
<INTEREST-TOTAL> 17,929,194
<INTEREST-DEPOSIT> 8,011,567
<INTEREST-EXPENSE> 9,386,830
<INTEREST-INCOME-NET> 8,542,364
<LOAN-LOSSES> 574,000
<SECURITIES-GAINS> 144,925
<EXPENSE-OTHER> 8,595,422
<INCOME-PRETAX> 3,030,881
<INCOME-PRE-EXTRAORDINARY> 2,033,114
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,033,114
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .99
<YIELD-ACTUAL> 3.89
<LOANS-NON> 4,578,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,927,809
<ALLOWANCE-OPEN> 4,339,000
<CHARGE-OFFS> 2,713,000
<RECOVERIES> 54,000
<ALLOWANCE-CLOSE> 2,254,000
<ALLOWANCE-DOMESTIC> 295,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,959,000
</TABLE>
