UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number 0-24532
FLAG FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-2094179
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(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 3007
LaGrange, Georgia 30241
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(Address of principal executive offices) (Zip Code)
(706) 845-5000
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(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Common stock, par value $1 per share: 6,561,879 shares
Outstanding as of August 10, 1999
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
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Table of Contents
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998..............................................3
Consolidated Statements of Earnings for the Six Months and
Quarter Ended June 30, 1999 and 1998...........................4
Consolidated Statements of Comprehensive Income for the
Six Months and Quarter Ended June 30, 1999 and 1998............5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998...................................6
Notes to Consolidated Financial Statements.......................7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations......................................9
PART II Other Information
Item 1. Legal Proceedings.................................................13
Item 2. Changes in Securities.............................................13
Item 3. Defaults Upon Senior Securities...................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
Item 5. Other Information.................................................14
Item 6. Exhibits and Reports on Form 8-K..................................14
2
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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June 30, December 31,
1999 1998
---- ----
ASSETS (UNAUDITED)
Cash and due from banks ............................$ 22,012,855 $ 25,246,090
Federal funds sold ................................. -- 23,330,000
---------- ----------
Total cash and cash equivalents ................ 22,012,855 48,576,090
---------- ----------
Interest-bearing deposits .......................... 676,094 1,695,167
Investment securities held-to-maturity ............. 4,004,621 4,234,998
Investment securities available-for-sale ........... 62,860,368 72,291,309
Investment securities trading ...................... 527,625 --
Other investments .................................. 7,655,195 6,382,443
Mortgage loans held for sale ....................... 3,621,265 5,941,739
Loans, net ......................................... 408,924,874 377,359,122
Premises and equipment, net ........................ 14,220,573 14,887,215
Mortgage servicing rights .......................... 1,804,614 1,683,291
Accrued interest receivable ........................ 6,741,317 6,518,916
Cash surrender value of life insurance ............. 4,175,989 4,188,824
Other assets ....................................... 7,585,501 7,022,471
--------- ---------
Total assets ................................$544,810,891 $550,781,585
============ ============
LIABILITIES
Non interest-bearing deposits ......................$ 53,366,625 $ 55,744,640
Interest-bearing deposits .......................... 365,178,179 391,053,685
Federal funds purchased ............................ 15,919,816 --
Other borrowed funds ............................... 870,982 --
Advances from Federal Home Loan Bank ............... 53,830,805 48,398,478
Other liabilities .................................. 8,013,102 7,720,125
--------- ---------
Total liabilities ........................... 497,179,509 502,916,928
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized,
none issued and outstanding) .................. -- --
Common stock ($1 par value, 20,000,000 shares
authorized 6,561,879 and 6,560,004 shares
issued and outstanding in 1999 and 1998,
respectively................................... 6,561,879 6,560,004
Additional paid-in capital ......................... 10,499,506 10,487,618
Retained earnings .................................. 30,373,648 28,886,607
Accumulated other comprehensive income ............. 196,349 1,930,428
------- ---------
Total stockholders' equity .................. 47,631,382 47,864,657
---------- ----------
Total liabilities and stockholders' equity.. $544,810,891 $550,781,585
============ ============
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest Income (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and fees on loans .................. $ 9,612,220 $ 9,514,140 $ 19,238,694 $ 18,589,513
Interest on securities ...................... 1,005,221 1,471,609 2,121,324 3,082,291
Interest on federal funds sold and
interest-bearing deposits .................. 80,483 57,502 314,479 124,256
------- ------ ------ -------
Total interest income ................. 10,697,924 11,043,251 21,674,497 21,796,060
---------- ---------- ---------- ----------
Interest Expense
Interest on deposits ........................ 4,169,708 4,647,818 8,621,668 9,204,325
Interest on borrowings ...................... 734,282 838,719 1,401,685 1,603,862
------- ------- --------- ---------
Total interest expense ................ 4,903,990 5,486,537 10,023,353 10,808,187
--------- --------- ---------- ----------
Net interest income before
provision for loan losses ........... 5,793,934 5,556,714 11,651,144 10,987,873
Provision for Loan Losses ........................ 1,056,639 257,000 1,401,639 509,000
--------- ------- --------- -------
Net interest income after
provision for loan losses ........... 4,737,295 5,299,714 10,249,505 10,478,873
--------- --------- ---------- ----------
Other Income
Fees and service charge ..................... 791,408 1,065,161 1,996,353 2,318,313
Gain on available for sale securities ....... 996,146 81,043 1,105,442 155,410
Gain on trading securities .................. 483,151 -- 800,512 --
Gain on sale of loans ....................... 504,873 453,569 646,479 899,755
Loss on sale of real estate, net ............ (17,806) (42,655) (5,306) (24,918)
Other income ................................ 641,289 252,690 961,769 949,499
------- ------- ------- -------
Total other income .................... 3,399,061 1,809,808 5,505,249 4,298,059
--------- --------- --------- ---------
Other Expenses
Salaries and employee benefit ............... 3,348,552 2,692,004 6,444,589 5,240,717
Occupancy ................................... 916,089 864,168 1,887,640 1,908,904
Other operating ............................. 2,018,742 1,889,413 4,041,727 3,829,879
--------- --------- --------- ---------
Total other expenses .................. 6,283,383 5,445,585 12,373,956 10,979,500
--------- --------- ---------- ----------
Earnings before provision for
Income taxe ....................... 1,852,973 1,663,937 3,380,798 3,797,432
Provision for income taxes .................. 628,034 453,159 1,105,122 1,106,992
------- ------- --------- ---------
Net earnings .......................... $ 1,224,939 $ 1,210,778 $ 2,275,676 $ 2,690,440
============ ============ ============ ============
Basic earnings per share .................... $ 0.19 $ 0.19 $ 0.35 $ 0.41
Diluted earnings per share .................. $ 0.19 $ 0.18 $ 0.35 $ 0.41
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings.......................................... $ 1,224,939 $ 1,210,778 $ 2,275,676 $ 2,690,440
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available-for-sale:
Unrealized gains (losses) arising
during the period, net of tax of
$(538,104), $82,691, $(338,560)
and $191,229, respectively.................. (877,959) 134,918 (552,388) 312,006
Less: Reclassification adjustment for gains
included in net earnings, net of tax
of $562,133, $30,796, $724,263 and
$59,056, respectively........................ (917,164) (50,247) (1,181,691) (96,354)
------- ------ --------- ------
Other comprehensive income............................. (1,795,123) 84,671 (1,734,079) 215,652
---------- ------ ---------- -------
Comprehensive income................................... $ (570,184) $ 1,295,449 $ 541,597 $ 2,906,092
========== =========== ========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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<TABLE>
<CAPTION>
June 30,
--------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings .............................................. $ 2,275,676 $ 2,690,440
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion .......... 1,226,113 1,363,835
Provision for loan losses ......................... 1,401,639 509,000
Gain on sale of investment securities
available-for-sale ............................ (1,331,518) (154,800)
Proceeds from sale of trading securities
292,487 --
Gain on sales of loans ............................ (646,479) (899,755)
Loss on sale of other real estate.................. 5,306 24,918
Change in:
Mortgage loans held for sale ............... 2,966,953 (1,924,737)
Other ...................................... (298,135) 8,165,149
-------- ---------
Net cash provided by operating activities 5,892,042 9,774,050
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits ................... 1,019,073 (423,528)
Proceeds from sales and maturities of investment
securities available-for-sale ......................... 29,854,423 41,774,429
Proceeds from maturities of investment securities
held-to-maturity ..................................... 225,329 437,518
Proceeds from sale of other investments ................... 2,548,248 --
Purchases of other investments ............................ (3,821,000) (706,360)
Purchases of investment securities available-for-sale ..... 22,200,574) (36,885,637)
Net change in loans ....................................... (32,967,391) (29,317,253)
Proceeds from sale of ORE ................................. 979,501
Net increases of premises and equipment ................... (429,472) (2,299,760)
Purchases of cash surrender value life insuranc ........... 12,835 (135,921)
------ --------
Net cash used in investing activities ... (24,779,028) (27,556,512)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits .................................... (28,253,521) 12,015,562
Increase (decrease) in federal funds purchased ............ 15,919,816 (170,000)
Proceeds from FHLB advances ............................... 22,350,000 38,500,000
Payments of FHLB advances ................................. (16,917,673) (32,497,553)
Proceeds from exercise of stock options ................... 13,764 26,438
Cash dividends paid ....................................... (788,635) (547,872)
-------- --------
Net cash provided by financing activities (7,676,249) 17,326,575
---------- ----------
Net change in cash and cash equivalents .. (26,563,235) (455,887)
Cash and cash equivalents at beginning of period .......... 48,576,090 29,072,230
---------- ----------
Cash and cash equivalents at end of period ................ 22,012,855 28,616,343
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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The accompanying consolidated financial statements have not been audited. The
results of operations are not necessarily indicative of the results of
operations for the full year or any other interim periods.
The accounting principles followed by FLAG Financial Corporation ("FLAG") and
its bank subsidiaries and the methods of applying these principles conform with
generally accepted accounting principles and with general practices within the
banking industry. Certain principles, which significantly affect the
determination of financial position, results of operations, and cash flows are
summarized below and in FLAG's annual report on Form 10-K for the year ended
December 31, 1998.
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of FLAG and its
wholly-owned subsidiaries, First Flag Bank (LaGrange) and Citizens Bank
(Vienna). All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain items in prior period's financial
statements have been reclassified to conform to the current financial statement
presentation.
The consolidated financial information furnished herein represents all
adjustments that are, in the opinion of management, necessary to present a fair
statement of the results of operations, and financial position for the periods
covered herein and are normal and recurring in nature. For further information,
refer to the consolidated financial statements and footnotes included in FLAG's
annual report on Form 10-K for the year ended December 31, 1998.
Note 2. Business Combinations
On February 23, 1999, FLAG announced the signing of a letter of intent to merge
with First Hogansville Bankshares, Inc. ("FHB"), a $31 million asset bank
holding company based in Hogansville, Georgia. The merger agreement provides,
among other things, for the merger of FHB with and into FLAG and the exchange of
each share of FHB common stock for 6.08 shares of FLAG common stock. Total
outstanding shares of FLAG will increase by approximately 575,000 additional
shares at closing.
On March 31, 1999, FLAG announced the execution of a definitive agreement to
merge with Abbeville Capital Corporation ("Abbeville"), a $58 million asset bank
holding company based in Abbeville, South Carolina. The merger agreement
provides, among other things, for the merger of Abbeville with and into FLAG and
the exchange of each share of Abbevile common stock for a minimum of 3.48
shares. If FLAG common stock is trading below $11.00 on average near the time
the merger is to be completed, the exchange ratio will increase. The total
market value of FLAG commons stock to be issued to Abbeville shareholders will
not be less thatn $9,110,250. Total outstanding shares of FLAG will increase by
a minimum of 826,000 additional shares at closing.
7
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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On May 7, 1999, FLAG announced the execution of a definitive agreement to merge
with Thomaston Federal Savings Bank ("TFSB"), a $53 million asset thrift based
in Thomaston, Georgia. The merger agreement provides, among other things, for
the merger of TFSB with and into a wholly-owned subsidiary of FLAG and the
exchange of each share of TFSB common stock for 1.7275 shares of FLAG common
stock. Total outstanding shares of FLAG will increase by approximately 1.1
million additional shares at closing.
Note 3. Earnings Per Share
Net earnings per common share are based on the weighted average number of common
shares outstanding during each period. The calculation of basic and diluted
earnings per share is as follows:
June 30,
-----------------------------
1999 1998
-----------------------------
Basic earnings per share:
Net earnings............................... 2,275,676 2,690,440
Weighted Average Common shares
Outstanding............................. 6,561,309 6,542,559
Per share amount............................ 0.35 0.41
Diluted earnings per share:
Net earnings................................ 2,275,676 2,690,440
Effect of dilutive securities -
stock options *......................... -- 42,329
Diluted earnings per share.................. 0.35 0.41
* Stock options were anti-dilutive as of 6/30/99
Note 4. Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and reporting
standards for hedging activities and for derivative instruments including
derivative instruments embedded in other contracts. It requires the fair value
recognition of derivatives as assets or liabilities in the financial statements.
SFAS No. 133 is effective for all fiscal quarters in fiscal years beginning
after June 15, 1999, but initial application of the statement must be made as of
the beginning of the quarter. At the date of initial application, an entity may
transfer any held-to-maturity security into the available-for-sale or trading
categories without calling into question the entity's intent to hold other
securities to maturity in the future. FLAG believes the adoption of SFAS No. 133
will not have a material impact on its financial position, results of operations
or liquidity.
8
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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Results of Operations
Quarters ended June 30, 1999 and 1998
Overview
Net earnings for the six months ended June 30, 1999 decreased $415,000 or 15
percent compared to the first six months of 1998. Net earnings per common share
decreased 15 percent for the first six months of 1999 and are $0.35 compared to
$0.41 in the first six months of 1998. Net interest income increased 6 percent
for the six months ended June 30, 1999 over the same period of 1998 to $11.7
million. Non-interest income increased 28 percent for the first six months of
1999 compared to the same period of 1998 and non-interest expense increased 13
percent for the first six months of 1999 compared to 1998.
Net Interest Income
Net interest income for the six months ended June 30, 1999 increased $663,000
compared to the first six months of 1998. This increase resulted from a $785,000
or 7 percent decrease in interest expense offset by a $122,000 or 1 percent
decrease in interest income. The increase in net interest income reflects the
company's continuing focus on balance sheet management.
Non-Interest Income and Expense
Non-interest income for the first six months of 1999 increased $ 1,207,000 or 28
percent compared to the first six months of 1998. Other income in the first six
months of 1998 included a one time fee of $530,000 that FLAG received for its
assistance in originating, finding participants and selling an R&D loan.
Increases in other income in the first six months of 1999 include gains in
investment securities and loan related income.
Non-interest expense increased $ 1,394,000 or 13 percent in the first six months
of 1999 compared to the same period in 1998. Salaries and employee benefits
increased $ 1,204,000, a 23 percent increase over the first six months of 1998.
The increase was primarily due to additional staffing requirements, the use of
temporary employees for special projects and the improvement of our employee
benefit package. The benefits currently offered are, in the opinion of
management, necessary to effectively compete in hiring and maintaining a quality
staff. Management also believes consolidation efficiencies will be realized from
its mergers and reduce the need for some personnel.
9
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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Income Taxes
Income tax expense for the first six months was $ 1,105,000 in 1999 compared to
$ 1,107,000 in 1998. The effective tax rate for the first six months ended June
30, 1999 was 33 percent and for the first six months of 1998 was the effective
tax rate was 29 percent.
Provision and Allowance for Possible Loan and Lease Losses
The adequacy of the allowance for loan and lease losses is determined through
management's informed judgment concerning the amount of risk inherent in FLAG's
loan and lease portfolios. This judgment is based on such factors as the change
in levels of non-performing and past due loans and leases, historical loan loss
experience, borrowers' financial condition, concentration of loans to specific
borrowers and industries, estimated values of underlying collateral, and current
and prospective economic conditions. The allowance for loan and lease losses at
June 30, 1999 was $5.5 million compared to $5.8 million at December 31, 1998.
The ratio of the allowance for loan losses to outstanding loans at June 30, 1999
was 1.36 percent compared to 1.48 percent at December 31, 1998.
Non-Performing Assets and Past Due Loans
Non-performing assets, comprised of real estate owned, non-accrual loans and
loans for which payments are more than 90 days past due, totaled $15.6 million
at June 30, 1999 compared to $10.1 million at December 31, 1998. Non-performing
assets as a percentage of total loans and real estate owned at June 30, 1999 and
December 31, 1998 were 3.75 percent and 2.68 percent, respectively.
FLAG has a loan review function that continually monitors selected accruing
loans for which general economic conditions or changes within a particular
industry could cause the borrowers financial difficulties. The loan review
function also identifies loans with high degrees of credit or other risks. The
focus of loan review as well as FLAG management is to maintain a low level of
non-performing assets and return current non-performing assets to earning
status.
The increases in the provision for loan losses are primarily the result of
management's increased focus on asset quality and loan review.
10
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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Financial Condition
Overview
Total assets were $544.8 million at June 30, 1999, a decrease of $6.0 million or
1.1 percent from December 31, 1998. This decrease is due primarily to a high
level of public deposits in December 1998.
Assets and Funding
At June 30, 1999 earning assets totaled $488 million, an increase of $20.4
million from December 31, 1998. The mix of interest earning assets remained
relatively the same in the first six months of 1999. Loans were at 84 percent of
earning assets and investment securities were 14 percent of earning assets at
June 30, 1999.
At June 30, 1999, interest-bearing deposits decreased $25.9 million compared to
December 1998. Non-interest bearing deposits decreased $2.4 million in the first
six months of 1999 and totaled $53.4 million at June 30, 1999. Federal Home Loan
Bank advances increased $5.4 million in the first six months of 1999 and totaled
$53.8 million at June 30, 1999. At June 30, 1999, deposits represented 84
percent of FLAG's interest-bearing liabilities and Federal Home Loan Bank
advances represented 12 percent. These changes in the mix reflect management's
continued emphasis on balance sheet restructuring.
Liquidity and Capital Resources
Net cash provided by operations totaled $5,892,000 for the quarter ended June
30, 1999. Net cash used by investing activities totaling $24,779,000 consisted
of $26,022,000 in investment securities purchases, a $32,967,000 net increase in
loans outstanding, and a $429,000 increase in premises and equipment offset by
cash flows of $32,628,000 of proceeds from sale and maturities of investment
securities plus a $1,019,000 increase in interest-bearing deposits. Net cash
used in financing activities consisted largely of $28,254,000 decrease in
deposits offset by a $5,432,000 increase in Federal Home Loan Bank advances and
a $15,920,000 increase in federal funds purchased.
Total stockholders' equity at June 30, 1999, was 8.74 percent of total assets
compared to 8.69 percent at December 31, 1998. The slight increase is attributed
to a $6.0 million decrease in total assets since December 31, 1998.
11
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
At June 30, 1999, FLAG and its banks were in compliance with various regulatory
capital requirements administered by Federal and state banking agencies. The
following is a table representing FLAG's consolidated Tier-1 Capital, Tangible
Capital, and Risk-Based Capital:
June 30, 1999
- --------------------------------------------------------------------------------
Actual Required Excess
Amount % Amount % Amount %
- --------------------------------------------------------------------------------
Tier 1 Capital $ 44,353 8.36% $ 21,230 4.0% $ 23,123 4.36%
Tangible Capital $ 44,353 8.36% $ 7,961 1.50% $ 36,392 6.86%
Risk-Based Capital $ 50,626 11.51% $ 35,194 8.00% $ 15,432 3.51%
Year 2000
Our Year 2000 Steering Committee, comprised of member bank executives and
directors has reported organizational readiness for year 2000. FLAG Financial
has successfully met all critical date testing requirements as scheduled for
June 30, 1999. Federal and state agencies, as well as independent auditors and
other industry experts have reviewed our comprehensive Y2K Event Plan and
Business Resumption Contingency Plans.
FLAG closely monitors the Year 2000 readiness of the pending merger partners to
ensure they are meeting critical date testing and compliance according to
schedule. Phase III readiness activities will continue to focus on areas of
inventory, assessment, planning, vendor testing and consumer awareness. Training
of the designated resumption team members has been conducted and will continue
throughout various phases of readiness preparation.
Mission critical tasks have been completed and all systems have been identified
to meet Y2K requirements. Final testing of ATM devices will be completed by
September 30, 1999. Recent activities have established partner banks as leaders
in the various communities to combine efforts with other banks in taking a more
active role in bringing the news to the people via direct contact with clergy,
police agencies, community civic groups and other marketing awareness programs.
FLAG Financial Corporation and its partner banks are excited about business
opportunities in the new century. Because we are taking prudent steps to prepare
for the Year 2000, we do not expect any interruptions in our ability to service
the financial needs for the communities we serve.
12
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II.
Item 1. Legal Proceedings
The Company and the Banks are periodically involved as plaintiff or
defendant in various legal actions in the ordinary course of its business.
First Flag Bank is a named defendant in a suit filed in December 1998 in
Superior Court of the State of California for the County of Los Angeles. The
plaintiffs leased ATM machines from First Flag Bank and other defendants.
Another named defendant arranged the leases and agreed to manage the ATMs and
leases on behalf of the plaintiffs. The plaintiffs allege that this defendant
has breached his contract with the plaintiffs. First Flag Bank leased the
plaintiffs ten ATMs having an original value of approximately $20,000 each. The
plaintiffs allege, among other things, that First Flag Bank and the other lessor
defendants are liable for fraud, restitution, recission and negligent
misrepresentation. The parties currently are exploring settlement. If the
parties do not reach a settlement, First Flag Bank intends to vigorously defend
the claims and pursue counterclaims against the plaintiffs.
First Flag Bank purchased certain warehouse loans of Gulf Properties
Financial Services, Inc., a residential mortgage broker. The loans that Gulf
Properties sold to First Flag Bank were fraudulent. Gulf Properties filed
Chapter 11 bankruptcy on December 30, 1998. First Flag Bank is serving on the
creditors' committee and is assisting in the liquidation of assets, which will
be distributed on a pro rata basis among the creditors. First Flag Bank is also
pursuing a claim under its fidelity bond regarding this matter. The perpetrators
of the fraud have pled guilty to criminal charges. First Flag Bank is seeking a
restitution order as part of the criminal sentence. First Flag Bank's exposure
as a result of the fraud is approximately $3 million. Several other banks also
purchased fraudulent loans from Gulf Properties and the total amount of exposure
of all banks is approximately $32 million.
Tad Moore Golf, Inc. is a borrower of First Flag Bank. An investor in Tad
Moore Golf, Inc., who is also a lender to Tad Moore Golf, Inc., has sued First
Flag Bank in Southern District Court in New York alleging that First Flag Bank
fraudulently induced the investor into allegedly subordinating his loan to the
loan of First Flag Bank. The investor is also a borrower of First Flag Bank. The
plaintiff is claiming $1.6 million in consequential damages and $10 million in
punitive damages. First Flag Bank has succeeded in having the venue of this
matter transferred from New York to United States District Court in Newnan,
Georgia. The Bank intends to vigorously defend this claim and pursue
counterclaims against the investor.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
13
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 5. Other Information
Pursuant to Rule 14a-14(c)(1) promulgated under the Securities Exchange Act
of 1934, as amended, shareholders desiring to present a proposal for
consideration at the Company's 2000 Annual Meeting of Shareholders must notify
the Company in writing at its principal office at 101 N. Greenwood Street,
LaGrange, Georgia 30241 of the contents of such proposal no later than February
15, 2000. Failure to timely submit such a proposal will enable the proxies
appointed by management to exercise their discretionary voting authority when
the proposal is raised at the Annual Meeting of Shareholders without any
discussion of the matter in the proxy statement.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K filed during Second Quarter 1999
A Current Report on Form 8-K filed April 7, 1999 regarding execution of an
Agreement and Plan of Merger with Abbeville Capital Corporation, Parent company
of the Bank of Abbeville, located in Abbeville, South Carolina.
A Current Report on Form 8-K filed May 10, 1999 regarding execution of an
Agreement and Plan of Merger with Thomaston Federal Savings Bank, located in
Thomaston, Georgia.
A Current Report on Form 8-K filed June 4, 1999 regarding execution of an
Agreement and Plan of Merger with First Hogansville Bankshares, Inc., parent
company of The Citizens Bank, located in Hogansville, Georgia.
An amendment on Form 8-K filed June 22, 1999 to amend the Current Report on
Form 8-K dated January 8, 1999 regarding inclusion of financial statements
required to Item 7 of Form 8-K related to the merger of Empire Bank Corp., with
and into FLAG Financial Corporation, effective December 11, 1998.
Reports on Form 8-K filed since Second Quarter End 1999 to Present
None
14
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAG Financial Corporation
By:_____________________
Patti S. Davis
(Chief Financial Officer)
15
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