POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET, N.E.
SIXTEENTH FLOOR
ATLANTA, GEORGIA 30303
(404 572-6600)
July ___, 1999
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: FLAG Financial Corporation - Registration Statement on Form S-4
Ladies and Gentlemen:
As counsel to FLAG Financial Corporation, a Georgia corporation, we enclose
for filing with the Commission under the Securities Act of 1933, as amended,
FLAG's Registration Statement on Form S-4 registering 1,012,240 shares of its
common stock for issuance in connection with the proposed merger of Abbeville
Capital Corporation with and into FLAG.
Neither FLAG nor Abbeville will distribute the Registration Statement or
the related proxy statement/prospectus prior to effectiveness of the
Registration Statement, except that, as noted below, FLAG will furnish copies to
certain bank regulatory agencies pursuant to their filing requirements.
The transactions described in the Registration Statement are also subject
to certain filings with and approvals by the Federal Reserve Bank of Atlanta,
the Georgia Department of Banking and Finance and the South Carolina Board of
Financial Institutions Examining Division. We will advise you promptly if a
favorable approval is not obtained from any of these entities, although FLAG and
Abbeville do not expect any difficulty in obtaining such approvals.
If you have any questions or comments concerning the Registration
Statement, please call me at 404/572-4514 or Walter G. Moeling at 404/572-6629.
Our fax number is 404/572-6999.
Sincerely,
/s/ Lynn M. Sumlin
For POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
Enclosures
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY ___, 1999
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------
FLAG FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Georgia 6060 58-2094179
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization)Classification Code Number) Identification No.)
101 NORTH GREENWOOD STREET
LAGRANGE, GEORGIA 30240
(706) 845-5000
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
J. Daniel Speight, Jr.
President and Chief Executive Officer
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Walter G. Moeling, IV P. Thomas Parrish
Powell, Goldstein, Frazer & Murphy LLP Gerrish & McCreary P.C.
Suite 1600 700 Colonial Road
191 Peachtree Street, N.E. Suite 200
Atlanta, Georgia 30303 Memphis, Tennessee 38124
(404) 572-6600 (901) 767-0900
--------------------
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| _____________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| ----------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum
of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered (1) Per Unit Offering Price(2) Registration Fee
- ----------------------------- -------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 1,012,240 N/A 21,489,855 $5,975
=====================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares of the
common stock of the Registrant which is expected to be issued in connection
with the merger.
(2) Pursuant to Rule 457(f)(2), the registration fee was computed on the basis
of the aggregate book value of the common stock of Abbeville Capital
Corporation to be exchanged in the merger.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the securities act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
ABBEVILLE CAPITAL CORPORATION
203 S. Main Street
Abbeville, South Carolina 29620
Merger Proposed - Your Vote is Very Important
The Board of Directors of Abbeville Capital Corporation has unanimously
approved a merger combining Abbeville Capital Corporation and FLAG Financial
Corporation. In the merger, Abbeville stockholders will receive a minimum of
3.48 shares of FLAG common stock for each share of Abbeville common stock, and
generally will not recognize federal income tax gain or loss for the FLAG common
stock they receive. 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. On
_________ __, 1999, the closing price of FLAG common stock was $_____. If $____
is the average trading price of FLAG near the time the merger is completed, the
exchange ratio will be adjusted up to ____. This will make the value of ____
shares of common stock equal to $____. The trading price of FLAG will, however,
fluctuate between now and the completion of the merger, and the exchange ratio
may fluctuate too but will not be less than 3.48.
I cordially invite you to attend our special meeting of stockholders to
consider and vote on the merger. The merger cannot be completed unless holders
of at least two-thirds of Abbeville common stock approve it. The Board of
Directors believes the merger is in the best interests of stockholders and
unanimously recommends that stockholders vote to approve the merger. No vote of
FLAG stockholders is required to approve the merger.
The date and place of the meeting are: __________,__________ __, 1999,
_____ __.m.
The Bank of Abbeville
203 South Main Street
Abbeville, South Carolina
This proxy statement/prospectus provides you with detailed information
about the proposed merger. We encourage you to read this entire document
carefully. You can also obtain other information about FLAG from documents filed
with the Securities and Exchange Commission.
Whether or not you plan to attend the meeting, please take the time to vote
by completing and mailing the enclosed proxy card to us. If you fail to return
your signed card or vote in person, the effect will be a vote against approval
of the merger. Your vote is very important. You can revoke your proxy by writing
to me any time before the meeting or by attending the meeting and voting in
person.
We enthusiastically support the merger and urge you to vote "FOR" approval
and adoption of the merger agreement.
Thomas D. Sherard, Jr.,
President and Chief Executive Officer
This proxy statement/prospectus is dated __________ __, 1999 and was first
mailed to stockholders of Abbeville on __________ __, 1999.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the FLAG common stock to be issued in the merger or
determined if this proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION ABOUT FLAG
FLAG files annual, quarterly and special reports, proxy statements and
other information with the SEC. You can receive copies of such reports, proxy
and information statements, and other information, at prescribed rates, from the
SEC by addressing written requests for to the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In
addition, you can read such reports, proxy and information statements, and other
information at the public reference facilities and at the regional offices of
the SEC, Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
The SEC also maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants such as FLAG that file
electronically with the SEC. The address of the SEC Web site is
http://www.sec.gov.
FLAG has filed with the SEC a registration statement on Form S-4 to
register the shares that FLAG will issue to Abbeville stockholders. This
document is a part of the registration statement. This proxy
statement/prospectus does not include all of the information contained in the
registration statement. For further information about FLAG and the securities
offered in this proxy statement/prospectus, you should review the registration
statement. You can inspect or copy the registration statement, at prescribed
rates, at the SEC's public reference facilities at the addresses listed above.
The SEC allows FLAG to "incorporate by reference" information into the
proxy statement/prospectus, which means that FLAG can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered part of this
proxy statement/prospectus, except for any information superseded by information
contained directly in this proxy statement/prospectus or in later filed
documents incorporated by reference in this proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the documents
listed below that FLAG previously filed with the SEC. These documents contain
important information about FLAG and its finances. Some filings have been
amended by later filings, which are also listed.
o Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
o Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
and
o Current Reports on Form 8-K dated January 8, 1999, January 11, 1999,
March 2, 1999, March 18, 1999, April 7, 1999, May 10, 1999 and June 4,
1999.
FLAG also incorporates by reference additional documents that it may file
with the SEC between the date of this proxy statement/prospectus and the
completion of the merger or the termination of the merger agreement. These
additional documents include periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
proxy statements.
We are providing you with a copy of FLAG's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and a copy of FLAG's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999. These documents provide more
information about FLAG and its finances.
Stockholders may obtain documents incorporated by reference in this proxy
statement/prospectus by requesting them from:
Investor Relations
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia
Telephone: (706) 845-5000
In order to ensure timely delivery of the documents, you should make a
request for documents no later than __________, 1999.
<PAGE>
We have not authorized anyone to give any information or make any
representation about the merger or our companies that differs from, or adds to,
the information in the proxy statement/prospectus or in documents that are
publicly filed with the Securities and Exchange Commission. Therefore, if anyone
does give you different or additional information, you should not rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by this
proxy statement/prospectus or to ask for proxies, or if you are a person to whom
it is unlawful to direct such activities, then the offer presented by this proxy
statement/prospectus does not extend to you.
The information contained in this proxy statement/prospectus speaks only as
of its date unless the information specifically indicates that another date
applies.
Information in this proxy statement/prospectus about FLAG Financial
Corporation has been supplied by FLAG Financial Corporation, and information
about Abbeville Capital Corporation has been supplied by Abbeville Capital
Corporation.
A Warning About Forward-Looking Statements
Each company makes forward-looking statements that are subject to risks and
uncertainties in this document. FLAG Financial Corporation's public documents
also contain forward-looking statements. These forward-looking statements
include information about possible or assumed future results of operations or
the performance of FLAG Financial Corporation after the merger. When we use
words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions, we are making forward-looking statements. Many possible
events or factors could affect the financial results and performance of each of
our companies. This could cause results or performances to differ materially
from those expressed in our forward-looking statements.
You should consider these risks when you vote on the merger. These possible
events or factors include the following:
o our cost savings from the merger are less than we expect, or we are
unable to obtain those cost savings as soon as we expect;
o we lose more deposits, customers, or business than we expect;
o competition in the banking industry increases significantly;
o our restructuring costs are higher than we expect or our operating
costs after the merger are greater than we expect;
o technological changes and systems integration are harder to make or
more expensive than we expect;
o changes in the interest rate environment reduce our margins;
o general economic or business conditions are worse than we expect;
o legislative or regulatory changes occur which adversely affect our
business;
o changes occur in business conditions and inflation;
o changes occur in the securities markets; and
o we have more trouble obtaining regulatory approvals for the merger
than we expect.
See also "Risk Factors" in this proxy statement/prospectus, page __.
<PAGE>
PROPOSED MERGER OF ABBEVILLE CAPITAL CORPORATION WITH
FLAG FINANCIAL CORPORATION
NOTICE OF SPECIAL MEETING OF ABBEVILLE STOCKHOLDERS
TO BE HELD _________________, 1999
Abbeville Capital Corporation will hold a Special Meeting of stockholders
at the main office of The Bank of Abbeville, located at 203 S. Main Street,
Abbeville, South Carolina, on __________, ___________, 1999, at _____ p.m., to
vote on:
1. Agreement and Plan of Merger, dated as of March 31, 1999, between
Abbeville and FLAG Financial Corporation and the Amendment to the Agreement and
Plan of Merger. The merger agreement provides that Abbeville will merge with
FLAG Financial Corporation. Each outstanding share of Abbeville common stock at
the effective time of the merger will be exchanged for a minimum of 3.48 shares
of FLAG Financial Corporation common stock, as more fully described in the
accompanying proxy statement/prospectus. A copy of the merger agreement is
attached to the accompanying proxy statement/prospectus as Appendix A.
2. Any other business as may come properly before the Special Meeting, or
any adjournments or postponements.
Only stockholders who hold their stock at the close of business on
____________, 1999, will be entitled to notice of and to vote at the Special
Meeting or any adjournment or postponement thereof. Approval of the merger
agreement and the transactions contemplated therein requires the affirmative
vote of at least two-thirds of the issued and outstanding shares of Abbeville
common stock.
The Board of Directors of Abbeville recommends that stockholders vote FOR
approval of the merger agreement.
BY ORDER OF THE BOARD OF DIRECTORS
Thomas D. Sherard, Jr.
President and Chief Executive Officer
Abbeville, South Carolina
_____________ __, 1999
Whether or not you plan to attend the Special Meeting, please complete,
date, and sign the enclosed form of proxy and promptly return it in the enclosed
postage paid return envelope in order to ensure that your shares will be
represented at the Special Meeting.
--------------------
Each stockholder has the right to dissent from the merger agreement and
demand payment of the fair value of his shares in cash if the merger is
consummated. The right of any shareholder to receive such payment is contingent
upon strict compliance with the requirements of Title 33, Chapter 13 of the
South Carolina Business Corporation Act of 1988. We have included the full text
of Chapter 13 that describes the right to dissent as Appendix B to the
accompanying proxy statement/prospectus. See "DESCRIPTION OF MERGER--Dissenters'
Rights" in the accompanying proxy statement/prospectus, page 26.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY........................................................................1
THE COMPANIES...............................................................1
THE MERGER..................................................................1
OUR REASONS FOR THE MERGER..................................................1
OPINION OF ABBEVILLE'S FINANCIAL ADVISOR....................................2
RECOMMENDATION TO ABBEVILLE STOCKHOLDERS....................................2
ABBEVILLE CAPITAL CORPORATION SPECIAL STOCKHOLDER MEETING...................2
RECORD DATE FOR SPECIAL STOCKHOLDER MEETING.................................3
VOTE REQUIRED...............................................................3
WHAT ABBEVILLE STOCKHOLDERS WILL RECEIVE....................................3
REGULATORY APPROVALS........................................................3
CONDITIONS TO THE MERGER....................................................3
TERMINATION OF THE MERGER AGREEMENT.........................................4
DISSENTERS' RIGHTS..........................................................4
OTHER INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER THAT ARE
DIFFERENT FROM YOURS........................................................4
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER.....................5
ACCOUNTING TREATMENT OF THE MERGER..........................................5
DIFFERENCES IN STOCKHOLDERS' RIGHTS.........................................5
COMPARATIVE MARKET PRICES OF COMMON STOCK...................................6
DIVIDENDS AFTER THE MERGER..................................................6
LISTING OF FLAG COMMON STOCK................................................6
RISK FACTORS................................................................6
COMPARATIVE PER SHARE DATA..................................................7
SELECTED FINANCIAL DATA.....................................................9
SELECTED CONDENSED AND CONSOLIDATED PRO FORMA FINANCIAL DATA...............10
RECENT DEVELOPMENTS IN FLAG'S BUSINESS.....................................12
RISK FACTORS..................................................................13
THERE IS LIMITED MARKET FOR SHARES OF FLAG COMMON STOCK....................13
THERE ARE RESTRICTIONS ON FLAG'S ABILITY TO PAY DIVIDENDS..................13
THERE MAY BE POSSIBLE COSTS ASSOCIATED WITH THE INTEGRATION OF FLAG'S
PENDING ACQUISITIONS.......................................................13
FLAG IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION.......................13
THE FINANCIAL INSTITUTION INDUSTRY IS VERY COMPETITIVE.....................13
MANAGEMENT OF FLAG HOLDS A LARGE PORTION OF FLAG COMMON STOCK..............14
FLAG'S ARTICLES OF INCORPORATION AND BYLAWS MAY PREVENT TAKEOVER BY
ANOTHER COMPANY............................................................14
YEAR 2000 PROBLEMS MAY HAVE ADVERSE EFFECT ON FLAG'S OPERATIONS............14
MEETING OF ABBEVILLE STOCKHOLDERS.............................................14
DATE, PLACE, TIME, AND PURPOSE.............................................14
RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES.....15
i
<PAGE>
DESCRIPTION OF THE MERGER.....................................................16
GENERAL....................................................................16
BACKGROUND OF AND REASONS FOR THE MERGER...................................17
THE ABBEVILLE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT ABBEVILLE
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT...................20
OPINION OF ABBEVILLE'S FINANCIAL ADVISOR, SOUTHARD FINANCIAL...............20
EFFECTIVE DATE OF THE MERGER...............................................22
DISTRIBUTION OF FLAG CERTIFICATES..........................................23
CONDITIONS TO CONSUMMATION OF THE MERGER...................................23
REGULATORY APPROVALS.......................................................24
WAIVER, AMENDMENT, AND TERMINATION.........................................25
DISSENTERS' RIGHTS.........................................................26
CONDUCT OF BUSINESS PENDING THE MERGER.....................................29
MANAGEMENT AND OPERATIONS AFTER THE MERGER; INTERESTS OF CERTAIN
PERSONS IN THE MERGER......................................................31
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................33
ACCOUNTING TREATMENT.......................................................34
EXPENSES AND FEES..........................................................35
RESALES OF FLAG COMMON STOCK...............................................35
DESCRIPTION OF FLAG COMMON STOCK..............................................38
EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS................................39
AUTHORIZED CAPITAL STOCK...................................................39
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS..........................40
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING.............41
REMOVAL OF DIRECTORS.......................................................42
INDEMNIFICATION............................................................42
SPECIAL MEETINGS OF STOCKHOLDERS...........................................43
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING..................................43
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS...............................44
STOCKHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS..........................45
DIVIDENDS..................................................................45
COMPARATIVE MARKET PRICES AND DIVIDENDS.......................................46
BUSINESS OF ABBEVILLE.........................................................47
GENERAL....................................................................47
MANAGEMENT STOCK OWNERSHIP.................................................48
VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS OF ABBEVILLE..................48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR EACH OF THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998..................................................49
BUSINESS OF FLAG..............................................................61
GENERAL....................................................................61
DIRECTORS AND EXECUTIVE OFFICERS...........................................61
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION..................................64
STOCKHOLDERS PROPOSALS........................................................71
ii
<PAGE>
EXPERTS.......................................................................71
LEGAL MATTERS.................................................................71
OTHER MATTERS.................................................................72
INDEX TO ABBEVILLE FINANCIAL DATA............................................F-1
Appendix A -- AGREEMENT AND PLAN OF MERGER BY AND BETWEEN FLAG
FINANCIAL CORPORATION AND ABBEVILLE CAPITAL
CORPORATION AND AMENDMENT TO AGREEMENT AND PLAN
OF MERGER DATED AS OF JULY 22, 1999...........................A-1
Appendix B -- DISSENTERS' RIGHTS............................................B-1
Appendix C -- OPINION OF SOUTHARD FINANCIAL.................................C-1
iii
<PAGE>
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus. Because this is a summary, it does not contain all of the
information that may be important to you. You should read the entire proxy
statement/prospectus and its appendices carefully before you decide to vote.
The Companies (Page 47 for Abbeville, Page 61 for FLAG)
Abbeville Capital Corporation
203 S. Main Street
Abbeville, South Carolina 29620
864-459-9676
Abbeville is a bank holding company located in Abbeville, South Carolina.
Abbeville has one banking office located in South Carolina. Abbeville offers a
broad range of banking and banking-related services. The Bank of Abbeville is
the sole shareholder of BOA Financial Services Corporation, which provides
brokerage and investment services. As of June 30, 1999, Abbeville's total assets
were about $59 million, deposits were about $45 million and shareholder's equity
was about $5 million.
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
706-845-5000
FLAG is a bank holding company headquartered in LaGrange, Georgia. FLAG is
the sole shareholder of Citizens Bank and First Flag Bank. Through its
subsidiaries, FLAG offers a full array of deposit accounts and retail and
commercial banking services, engages in small business lending, residential and
commercial real estate lending, mortgage banking services, brokerage services
and performs real estate appraisal services. As of June 30, 1999, FLAG's total
assets were about $545 million, deposits were about $419 million and
stockholders' equity was about $48 million.
The Merger (Page 16)
The merger agreement provides for the merger of Abbeville and FLAG. After
the merger, The Bank of Abbeville will be a wholly-owned subsidiary of FLAG.
A copy of the merger agreement is included as Appendix A to this proxy
statement/prospectus. We encourage you to read the merger agreement since it is
the legal document that governs the merger.
Our Reasons for the Merger (Page 17)
The Abbeville Board of Directors unanimously approved the merger agreement.
In deciding to approve the merger agreement, the Abbeville Board of Directors
considered a number of factors, including:
o The ability to expand and to diversify lending risks,
o The liquidity and dividends paid on FLAG common stock,
o The characteristics of the markets in which FLAG currently operates,
and
o FLAG and Abbeville's shared vision for future expansion.
1
<PAGE>
The FLAG Board of Directors believes that the merger is in the best
interests of FLAG and its stockholders. The FLAG Board of Directors unanimously
approved the merger agreement. In deciding to approve the merger agreement and
the issuance of shares of FLAG common stock to Abbeville stockholders in the
merger, the FLAG Board of Directors considered a number of factors, including:
(1) The financial condition of Abbeville,
(2) The likelihood of regulators approving the merger without undue
conditions or delay,
(3) The financial and nonfinancial terms of the merger, and
(4) The compatibility and the community bank orientation of FLAG and
Abbeville.
The Boards of Directors of Abbeville and FLAG believe that the merger will
result in a company with expanded opportunities for profitable growth and that
the combined resources and capital of Abbeville and FLAG will provide greater
ability to compete in the changing and competitive financial services industry.
Opinion of Abbeville's Financial Advisor (Page 20)
Southard Financial has given an opinion to Abbeville that, based on and
subject to the procedures, matters and limitations described in its opinion and
such other matters as it considered relevant, as of the date of its opinion, the
merger is fair, from a financial point of view, to the stockholders of
Abbeville. The opinion of Southard Financial is attached as Appendix C to this
proxy statement/ prospectus. We urge you to read the opinion in its entirety for
a description of the procedures that Southard Financial followed, matters
Southard Financial considered, and limitations on the reviews of Southard
Financial. See "Description of the Merger - Opinion of Abbeville's Financial
Advisor."
Recommendation to Abbeville Stockholders (Page 20)
The Abbeville Board believes that the merger of Abbeville and FLAG is in
the best interests of Abbeville and Abbeville's stockholders. The Abbeville
Board unanimously recommends that you vote FOR the merger.
Abbeville Capital Corporation Special Stockholder Meeting (Page 14)
The Special Meeting will be held at the main office of The Bank of
Abbeville, located at 203 S. Main Street, Abbeville, South Carolina, on
__________, _________, 1999, at ____ p.m. The Abbeville Board of Directors is
soliciting proxies for use at the Special Meeting of Abbeville stockholders. At
the Special Meeting the Abbeville Board of Directors will ask the Abbeville
stockholders to vote on a proposal to approve the merger of Abbeville and FLAG.
2
<PAGE>
Record Date for Special Stockholder Meeting (Page 15)
You may vote at the Special Meeting if you owned Abbeville common stock as
of the close of business on ____________, 1999. You will have one vote for each
share of Abbeville common stock you owned on ____________, 1999. You can revoke
your proxy at any time prior to the vote at the Special Meeting.
Vote Required (Page 15)
In order to approve the merger, stockholders holding at least two-thirds of
the outstanding shares of Abbeville common stock must approve the merger
agreement. As of _______________, 1999, all directors and executive officers of
Abbeville as a group (10 persons) could vote approximately 42,675 shares of
Abbeville common stock, constituting approximately 17.96% of the total number of
shares of Abbeville common stock outstanding at that date. The Abbeville
directors and executive officers have committed to vote their shares of
Abbeville common stock in favor of the merger. As of _______________, 1999, FLAG
held no shares of Abbeville common stock.
What Abbeville Stockholders will Receive (Page 16)
In the merger, FLAG will pay Abbeville stockholders a minimum of 3.48
shares of FLAG common stock for each share of Abbeville common stock that they
own. If FLAG common stock is trading below $11.00 on average just prior to
completion of the merger, the exchange ratio will be increased so that Abbeville
shareholders in the aggregate receive shares of FLAG common stock having a
market value of $9,110,250. Abbeville stockholders will not receive fractional
shares. Instead, they will receive a check in payment for any fractional shares
based on the market value of FLAG common stock. The market value is determined
by the last sale price of FLAG common stock on the Nasdaq National Market (as
reported by The Wall Street Journal) on the last trading day before the merger
becomes effective.
Once the merger is complete, FLAG's transfer agent will mail to you
materials and instructions for use to exchange your Abbeville stock certificates
for FLAG stock certificates.
Abbeville stockholders should not send in their stock certificates until
they are instructed to do so after the merger.
Regulatory Approvals (Page 24)
We cannot complete the merger until we receive approval of the Federal
Reserve Bank of Atlanta (the "Federal Reserve"), the Georgia Department of
Banking and Finance (the "Georgia Department of Banking") and the South Carolina
Board of Financial Institutions Examining Division (the "South Carolina Board").
FLAG and Abbeville filed applications with the Federal Reserve, the Georgia
Department of Banking and the South Carolina Board seeking approval of the
merger. It is possible that the approvals of the bank regulators will impose
conditions or restrictions that FLAG or Abbeville believe to materially
adversely affect the economic or business benefits of the merger.
Conditions to the Merger (Page 23)
The completion of the merger depends upon FLAG and Abbeville satisfying a
number of conditions, including:
o Abbeville stockholders must approve the merger agreement; o FLAG and
Abbeville must receive a legal opinion confirming the tax-free nature
of the merger;
3
<PAGE>
o FLAG and Abbeville must receive a letter from FLAG's independent
accountants stating that the merger will qualify for
pooling-of-interests accounting treatment, and
o FLAG and Abbeville must receive all required regulatory approvals and
any waiting periods required by law must have passed.
Termination of the Merger Agreement (Page 25)
Either FLAG or Abbeville can terminate the merger agreement without
completing the merger if, among other things any of the following occurs:
o The merger is not completed by December 31, 1999;
o The holders of at least two-thirds of Abbeville common stock do not
approve the merger or;
o The other party breaches or materially fails to comply with any of its
representations or warranties or obligations under the merger
agreement.
In certain instances, including a breach of a representation, warranty,
covenant or agreement or failure of the Abbeville stockholders to approve the
merger agreement, the merger agreement requires either FLAG or Abbeville to pay
the other party actual costs of the other party incurred in connection with the
merger plus $100,000. If Abbeville fails to consummate the merger because the
merger agreement is terminated because the Abbeville stockholders do not approve
the merger or because a meeting of the Abbeville stockholders is not held or is
cancelled as a result of Abbeville pursuing another acquisition, then Abbeville
must pay FLAG the amount of FLAG's actual out of pocket expenses incurred in
connection with the merger transaction plus $500,000. If the merger is not
consummated, FLAG will continue to operate as a bank holding company under its
present management and Abbeville will continue to operate as a bank holding
company under its present management.
Dissenters' Rights (Page 26 and Appendix B)
The South Carolina Business Corporation Act of 1988 provides that an
Abbeville shareholder may receive cash for the "fair value" of his or her shares
if the Abbeville shareholder does not vote in favor of the merger and complies
with certain notice requirements and other procedures. If you wish to dissent,
you must precisely follow specific procedures to exercise the right to dissent
or the right to dissent may be lost. The procedures to exercise dissenters'
rights are described in this proxy statement/prospectus and the provisions of
the South Carolina Business Corporation Act that describe the procedures are
attached as Appendix B.
Interests of Officers and Directors in the Merger That Are Different From Yours
(Page 31)
There are members of Abbeville's management and Board of Directors who have
interests in the merger that are different from your interests. The merger
agreement states that, as a condition to completing the merger, FLAG will
provide Thomas D. Sherard, Jr., President and Chief Executive Officer of
Abbeville, Patricia P. Howie, Executive Vice President, and C. William Knapp,
Jr., Senior Vice President, with Separation Agreements. The Separation
Agreements provide that if the individual is involuntarily terminated, he or she
4
<PAGE>
will receive severance payments. In addition, the Separation Agreements provide
that the individual will agree not to compete with FLAG during the term of the
Separation Agreement and for one year after the termination of the Separation
Agreement or the termination of the individual's status as an employee of FLAG.
The merger agreement provides that Mr. Sherard and Joseph L. Savitz, Jr. will be
appointed to the Board of Directors of FLAG when the merger is complete.
Abbeville's Board will designate which one of its non-management members will go
on the FLAG Board prior to the completion of the merger.
The merger agreement also states that FLAG will indemnify the Abbeville
directors and officers. FLAG has also agreed to provide the officers and
employees of Abbeville with certain employee benefits that FLAG already provides
to its officers and employees. The FLAG and Abbeville Boards of Directors were
aware of these interests and took them into account in approving the merger
agreement.
Important Federal Income Tax Consequences of the Merger (Page 33)
We expect that FLAG, Abbeville and their stockholders will not recognize
any gain or loss for U.S. federal income tax purposes in the merger, except in
connection with any cash that Abbeville stockholders receive instead of
fractional shares. Both companies have received a legal opinion that this will
be the case. This legal opinion is filed as an exhibit to the registration
statement of which this proxy statement/prospectus is a part. The opinion will
not bind the Internal Revenue Service, which could take a different view. This
tax treatment will not apply to any Abbeville shareholder who exercises
dissenters' rights. Determining the actual tax consequences of the merger to you
as an individual taxpayer can be complicated. The tax treatment also may depend
upon facts that are unique to your specific situation and many variables not
within our control. Accordingly, you should consult your own tax advisor for a
full understanding of the merger tax consequences.
Accounting Treatment of the Merger (Page 34)
FLAG and Abbeville intend for the merger to be accounted for as a
"pooling-of-interests", which means that, for accounting and financial reporting
purposes, we will treat Abbeville and FLAG as if they had always been one
company. Both FLAG and Abbeville have the right not to complete the merger if it
does not receive a letter from FLAG's independent public accountants that the
merger will qualify as a "pooling-of-interests."
Differences in Stockholders' Rights (Page 39)
The rights of FLAG stockholders differ from the rights of Abbeville
stockholders in several important respects, some of which constitute additional
anti-takeover provisions provided for in FLAG's governing documents.
Stock Option Agreement (Page 36)
Abbeville, as issuer, and FLAG, as grantee, entered into a stock option
agreement that provides for Abbeville to grant FLAG an option to purchase, under
certain circumstances and subject to certain adjustments and limitations, up to
47,285 shares of Abbeville common stock at a price of $24.00 per share. The
option agreement is exercisable upon the occurrence of certain events that
create the potential for another party to acquire control of Abbeville. To the
best knowledge of Abbeville, no such event which would permit exercise of the
option agreement has occurred as of the date of this proxy statement/prospectus.
Abbeville granted the option agreement as a condition of and in consideration
for FLAG's entering into the amendment to the merger agreement and is intended
to increase the likelihood that the merger will take place by making it more
5
<PAGE>
difficult and more expensive for a third party to acquire control of Abbeville.
See "Description of the Merger - Stock Option Agreement."
Comparative Market Prices of Common Stock (Page 46)
FLAG common stock is traded in the over-the-counter market and quoted on
the Nasdaq National Market under the symbol "FLAG." Abbeville common stock is
not traded in any established market. On March 30, 1999, the last day prior to
public announcement of the merger between FLAG and Abbeville, the last reported
sale price per share of FLAG common stock on the Nasdaq National Market was
$10.25. The resulting equivalent pro forma price per share of Abbeville common
stock (based on the 3.48 exchange ratio) was $35.67.
On _________, 1999, the last reported sale price per share of FLAG common
stock on the Nasdaq National Market was $________. The resulting equivalent pro
forma price per share of Abbeville common stock was $______. The equivalent per
share price of a share of Abbeville common stock at each specified date
represents the closing sale price of a share of FLAG common stock on that date
multiplied by the exchange ratio of 3.48 and assumes no adjustment of the
exchange ratio.
To the knowledge of Abbeville, the most recent trade of Abbeville common
stock prior to March 30, 1999, the last day prior to public announcement of the
merger between FLAG and Abbeville, was on November 5, 1998 of 510 shares for a
purchase price of $24.00 per share. To the knowledge of Abbeville, there have
been no trades since the announcement of the merger. We can make no assurance as
to what the market price of the FLAG common stock will be if and when the merger
is completed.
Dividends After the Merger (Page 46)
Abbeville has paid annual dividends since 1993. FLAG has paid regular cash
dividends every quarter since 1987. Although FLAG currently plans to continue to
pay quarterly cash dividends, FLAG cannot assure that it will always pay
dividends.
Listing of FLAG Common Stock (Page 23)
FLAG will list the shares of FLAG common stock to be issued in connection
with the merger on the Nasdaq National Market.
Risk Factors (Page 13)
In determining whether to approve the merger agreement, you should consider
the various risks associated with an investment in FLAG common stock. Such as:
o There is a limited market for shares of FLAG common stock;
o FLAG's only sources of income are dividends and other payments from
its subsidiaries;
o FLAG may have difficulties integrating new banks into FLAG;
o FLAG and its subsidiaries must comply with extensive governmental
regulations;
o The financial industry is very competitive;
6
<PAGE>
o Before the merger, FLAG's management controls about 21% of FLAG common
stock;
o FLAG's Articles of Incorporation and Bylaws contain provision that
will make it difficult for another company to obtain control of FLAG,
and
o FLAG may experience some problems and losses as a result of Year 2000
technology problems.
Comparative Per Share Data
The following table shows certain data relating to income, cash dividends,
and book value on:
o An historical basis for FLAG and Abbeville;
o A pro forma combined basis per share of FLAG common stock, giving
effect to the merger; and
o An equivalent pro forma basis per share of Abbeville common stock,
giving effect to the merger.
The Abbeville and FLAG pro forma combined information and the Abbeville pro
forma equivalent information give effect to the merger on a pooling-of-interests
accounting basis and reflects the exchange ratio of 3.48 shares of FLAG common
stock for each share of Abbeville common stock. You should not rely on the pro
forma information as being indicative of the historical results that we would
have achieved or the future results we will achieve after the merger.
7
<PAGE>
Comparative Per Share Data
<TABLE>
<CAPTION>
As of and for the
------------------
Three Months Ended
March 31, Year Ended December 31,
--------- -----------------------
1999 1998 1998 1997 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Income Per Common Share
FLAG historical ............................. .16 .23 .30 .66 .26
Abbeville historical ........................ .64 .60 2.61 2.49 2.44
FLAG and Abbeville pro forma combined (1) ... .18 .22 .35 .67 .31
Abbeville pro forma equivalent (2) .......... .63 .77 1.22 2.33 1.08
Dividends Declared Per Common Share
FLAG historical ............................. .06 .04 .20 .13 .13
Abbeville historical ........................ .80 -- .80 .52 .52
FLAG and Abbeville pro forma combined (1) (4) .06 .04 .20 .13 .13
Abbeville pro forma equivalent (3) .......... .21 .14 .70 .45 .45
Book Value Per Common Share (period end)
FLAG historical ............................. 7.41 7.14 7.30 6.91 6.24
Abbeville historical ........................ 21.15 20.29 21.37 19.82 17.63
FLAG and Abbeville pro forma combined (1) ... 7.26 7.00 7.17 6.77 6.18
Abbeville pro forma equivalent (2) .......... 25.25 24.36 24.95 23.56 21.51
</TABLE>
(1) Represents the pro forma combined information of FLAG and Abbeville as if
the merger was consummated at the beginning of the period, and were
accounted for as a pooling-of-interests.
(2) Represents the pro forma combined per common share amounts multiplied by
the exchange ratio of 3.48 shares of FLAG common stock for each share of
Abbeville common stock.
(3) Represents historical dividends declared per share by FLAG multiplied by
the exchange ratio of 3.48 shares of FLAG common stock for each share of
Abbeville common stock.
(4) Represents historical dividends paid by FLAG, as it is assumed that FLAG
will not change its dividend policy as a result of the merger.
On August __, 1999, the closing price of FLAG common stock was $_____. If
the average trading price of FLAG common stock is $____ near the time the merger
is to be completed, the exchange ratio will increase to __________. Based on an
exchange ratio of __________, the Abbeville and FLAG pro forma combined
information and the Abbeville pro forma equivalent information would be as
follows:
<TABLE>
<CAPTION>
As of and for the
Three Months Ended
March 31, Year Ended December 31,
--------- -----------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Per Common Share
FLAG and Abbeville pro forma combined (1)
Abbeville pro forma equivalent (2)
Dividends Declared Per Common Share
FLAG and Abbeville pro forma combined (1)(4)
Abbeville pro forma equivalent (3)
BookValue Per Common Share (period end)
FLAG and Abbeville pro forma combined (1)
Abbeville pro forma equivalent (2)
</TABLE>
8
<PAGE>
Selected Financial Data
The following tables show certain selected historical financial information
for FLAG and Abbeville. FLAG has derived the selected historical financial
information from the consolidated financial statements (and related notes) of
FLAG and Abbeville, contained in or incorporated by reference to this proxy
statement/prospectus. This information is only a summary and should be read in
conjunction with each companies' historical financial statements (and related
notes), and other financial information concerning FLAG and Abbeville contained
in or incorporated by reference to this proxy statement/prospectus.
Interim unaudited data for the three month periods ended March 31, 1999 and
1998 of FLAG and Abbeville reflect, in the opinion of the managements of FLAG
and Abbeville, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information. Results for the three
month periods ended March 31, 1999 and 1998 are not necessarily indicative of
results which may be expected for any other interim period or for the year as a
whole.
Summary Consolidated Financial Information
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31, As of and for the Year Ended December 31,
--------------- -----------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
FLAG
Balance Sheet Data
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets 531,514 530,530 550,782 512,087 435,976 407,361 381,250
Loans, net 395,074 363,515 377,359 348,774 298,124 265,563 244,949
Deposits 421,618 419,889 446,798 412,454 367,036 329,799 296,583
Stockholders' equity 48,595 46,765 47,865 45,075 41,198 39,563 34,989
Statement of Earnings Data
Net interest income 5,857 5,431 22,823 20,106 18,235 16,877 14,400
Provision for loan losses 345 252 3,382 1,596 4,475 1,490 634
Noninterest income 2,106 2,488 7,439 6,144 5,216 4,148 3,320
Noninterest expense 6,091 5,534 24,617 18,523 16,825 13,867 11,489
Net earnings 1,051 1,480 1,960 4,311 1,700 4,007 3,863
Per Share Data
Book value (period end) 7.41 7.41 7.30 6.91 6.24 6.24 5.49
Net earnings .16 .23 .30 .66 .26 .62 .60
Dividends .06 .04 .20 .13 .13 .13 .12
Total shares outstanding 6,562 6,524 6,560 6,524 6,516 6,341 6,374
Weighted average shares outstanding 6,561 6,533 6,555 6,519 6,481 6,448 6,406
Ratios
Return on average assets .78% 1.14% .36% .93% .41% 1.02% 1.06%
Return on average stockholders' equity 8.72% 12.89% 4.19% 9.97% 4.24% 10.55% 7.13%
Average equity to average assets 8.91% 8.81% 8.64% 9.31% 9.70% 9.67%` 9.41%
Average loans to average deposits 88.95% 85.58% 88.87% 83.44% 81.76% 82.97% 82.16%
</TABLE>
9
<PAGE>
Summary Consolidated Financial Information
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31, As of and for the Year Ended December 31,
--------------- -----------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
Abbeville
Balance Sheet Data
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets 59,476 52,400 58,541 49,052 45,877 39,161 33,641
Loans, net 28,499 29,615 28,444 29,394 27,148 25,092 22,843
Deposits 45,371 40,313 44,463 38,058 35,278 32,261 26,758
Stockholders' equity 5,021 4,816 5,073 4,930 4,385 4,006 3,439
Statement of Earnings Data
Net interest income 488 484 1,916 1,936 1,817 1,642 1,533
Provision for loan losses 18 10 41 65 57 75 50
Noninterest income 101 69 352 300 285 281 272
Noninterest expense 347 326 1,348 1,242 1,140 1,059 1,048
Net earnings 153 145 620 619 606 519 463
Per Share Data
Book value (period end) 21.15 20.29 21.37 19.82 17.63 16.10 13.82
Net earnings .64 .60 2.61 2.49 2.44 2.09 1.86
Dividends .80 - .80 .52 .52 - -
Total shares outstanding 237 237 237 249 249 249 249
Weighted average shares outstanding 237 241 238 249 249 249 249
Ratios
Return on average assets 1,04% 1.14% 1.15% 1.30% 1.42% 1.43% 1.47%
Return on average stockholders' equity 10.13% 11.90% 12.40% 13.29% 14.44% 13.94% 14.19%
Average equity to average assets 8.55% 9.61% 9.31% 9.82% 9.15% 10.23% 10.37%
Average loans to average deposits 63.39% 75.29% 69.88% 76.93% 74.80% 81.22% 81.72%
</TABLE>
Selected Condensed and Consolidated Pro Forma Financial Data
The following selected unaudited pro forma financial data give effect to
the merger as of the dates and for the periods indicated, assuming the merger is
accounted for as a pooling-of-interests. You should not rely on the pro forma
information as being indicative of the historical results that we would have
achieved or the future results we will achieve after the merger. The information
should be read in conjunction with the unaudited pro forma financial information
appearing elsewhere in this proxy statement/prospectus.
10
<PAGE>
Selected Pro Forma Financial Data
(Dollars in thousands, except per share amounts)
For the
Three Months Ended For the Year Ended
March 31, December 31,
--------- ------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
Earnings Data
Interest income ......... 12,011 11,738 48,707 42,455 38,023
Interest expense ........ 5,666 5,823 23,968 20,413 17,972
Net interest income ..... 6,345 5,915 24,739 22,042 20,051
Provision for loan losses 363 262 3,423 1,661 4,532
Noninterest income ...... 2,207 2,557 7,791 6,443 5,500
Noninterest expense ..... 6,438 5,859 25,965 19,767 17,966
Income taxes ............ 548 726 562 2,130 750
Net earnings ............ 1,203 1,625 2,580 4,930 2,303
Earnings per common share .18 .22 .35 .67 .31
As of
March 31, 1999
--------------
Balance Sheet Data
Total assets 590,990
Federal funds sold 5,975
Investment securities 101,997
Loans, net 423,573
Deposits 466,990
Other borrowings 60,161
Stockholders' equity 53,616
11
<PAGE>
Recent Developments in FLAG's Business
On June 1, 1999, FLAG and First Hogansville Bankshares, Inc. entered into
an Agreement and Plan of Merger, which provides that Hogansville will merge with
FLAG. The Hogansville agreement provides that FLAG will exchange 6.08466 shares
of FLAG common stock for each share of Hogansville common stock outstanding.
FLAG expects to issue approximately 575,000 shares of FLAG common stock to
Hogansville stockholders. The parties expect the merger to be accounted for as a
pooling-of-interests and expect to consummate the transaction in the third
quarter of 1999. The merger of Hogansville with FLAG is subject to approval of
Hogansville stockholders, approval of various regulatory authorities and other
customary conditions of closing.
Hogansville is a bank holding company located in Hogansville, Georgia and
is the sole shareholder of The Citizens Bank, which has two bank offices located
in Hogansville, Georgia.
On May 7, 1999, FLAG and Thomaston Federal Savings Bank entered into an
Agreement and Plan of Merger, which provides that Thomaston will merge with a
wholly-owned interim subsidiary of FLAG. The Thomaston agreement provides that
FLAG will exchange 1.7275 shares of FLAG common stock for each share of
Thomaston common stock outstanding. FLAG expects to issue approximately
1,175,000 shares of FLAG common stock to Thomaston stockholders. The parties
expect the merger to be accounted for as a pooling-of-interests and expect to
consummate the transaction during the third quarter of 1999. The merger of
Thomaston with FLAG is subject to approval of Thomaston stockholders, approval
of various regulatory authorities and other customary conditions of closing.
Thomaston is a federal savings bank located in Thomaston, Georgia.
You can find additional information about the Hogansville and Thomaston
transactions in FLAG's Current Reports on Form 8-K dated March 2, 1999, March
18, 1999 and June 4, 1999. The FLAG 8-Ks include or incorporate by reference
certain forward-looking statements, estimates, and projections concerning the
transactions with Hogansville and Thomaston. The parties made certain
assumptions in making estimates and projections concerning the future financial
performance of FLAG following the transactions with Hogansville and Thomaston.
You should consider the estimates and projections only as estimates and
understand that they are uncertain and may be inaccurate. Future events may
cause FLAG's actual experience to differ materially from such estimates and
projections.
12
<PAGE>
RISK FACTORS
In deciding whether to approve the merger agreement, you should consider
the various risks associated with an investment in FLAG common stock, including,
but not limited to the following:
There is a limited market for shares of FLAG common stock
While FLAG common stock is listed and traded on the Nasdaq National Market,
there has only been limited trading activity of FLAG common stock. The average
daily trading volume of FLAG common stock over the three-month period ending
June 30, 1999 was approximately 6,209 shares, and on some days the trading
volume for shares of FLAG common stock was zero. FLAG does not anticipate that
FLAG's acquisition of Abbeville will cause any significant change in the trading
of FLAG common stock.
There are restrictions on FLAG's ability to pay dividends
FLAG must comply with Georgia corporate law and rules and regulations of
bank regulators before it can pay any dividends. The Board of Directors of FLAG
must authorize FLAG to pay any dividends and FLAG must have sufficient funds to
pay dividends. FLAG's only sources of income are dividends and other payments
that First Flag Bank and Citizens Bank and the other subsidiaries of FLAG make
to FLAG. Certain statutes and regulations restrict the ability of FLAG's
subsidiaries to pay dividends to FLAG.
There may be possible costs associated with the integration of FLAG's pending
acquisitions
The ability of FLAG, as the corporation surviving the merger, to perform
with financial success is dependent upon the integration of Abbeville,
Hogansville, Thomaston and their subsidiaries into FLAG. There may be
significant, unanticipated costs associated with the integration of these
companies with FLAG. See "SUMMARY - Recent Developments in FLAG's Business."
FLAG is subject to extensive governmental regulation
FLAG, Abbeville, and their subsidiaries are currently subject to extensive
governmental regulation. FLAG and Abbeville, as bank holding companies, are
primarily regulated by the Federal Reserve. Citizens Bank and First Flag Bank
are primarily regulated by the FDIC and the Georgia Department of Banking and
Finance. The Bank of Abbeville is primarily regulated by the FDIC and the South
Carolina Board. The federal and state bank regulators of these entities have the
ability, should the situation require, to place significant regulatory and
operational restrictions upon FLAG and its subsidiaries. Any restrictions that
the federal and state bank regulators impose could affect the profitability of
FLAG and its subsidiaries.
The financial institution industry is very competitive
FLAG and its subsidiaries compete directly with financial institutions that
are well established. Many of FLAG's competitors have significantly greater
resources and lending limits than FLAG and its subsidiaries. As a result of
those greater resources, the large financial institutions that FLAG competes
with may be able to provide a broader range of services to their customers than
FLAG and may be able to afford newer and more sophisticated technology than
FLAG. The long-term success of FLAG will be dependent on the ability of FLAG's
subsidiaries to compete successfully with other financial institutions in their
service areas.
13
<PAGE>
Management of FLAG holds a large portion of FLAG common stock
The directors and executive officers of FLAG beneficially own about
1,379,739 shares of FLAG common stock, or 21%, of the total outstanding shares
of FLAG. As a result, FLAG's management has significant control of FLAG.
FLAG's Articles Of Incorporation and Bylaws may prevent takeover by another
company
FLAG's Articles of Incorporation permit the Board of Directors of FLAG to
issue preferred stock without shareholder action. The ability to issue preferred
stock could discourage a company from attempting to obtain control of FLAG by
means of a tender offer, merger, proxy contest or otherwise. Additionally,
FLAG's Articles of Incorporation and Bylaws divide the Board of Directors of
FLAG into three classes, as nearly equal in size as possible, with staggered
three-year terms. One class is elected each year. The classification of the
Board of Directors could have the effect of making it more difficult for a
company to acquire control of FLAG. FLAG is also subject to certain provisions
of the Georgia Business Corporation Code and the FLAG Articles of Incorporation
which relate to business combinations with interested stockholders.
Year 2000 problems may have adverse effect on FLAG's operations
FLAG's and Abbeville's current computer systems, software products or other
business systems, or those of FLAG's or Abbeville's suppliers or customers, may
not process date information in the years 1999, 2000 or thereafter without error
or interruption. FLAG and Abbeville have reviewed their business systems,
including their computer systems, to identify ways in which problems in
correctly processing date information could affect their systems. In addition,
FLAG and Abbeville are requesting assurances from all software vendors that they
have purchased or from which they may purchase software that the software sold
to FLAG and Abbeville will correctly process all date information at all times.
FLAG and Abbeville are questioning their customers and suppliers as to their
progress in identifying and addressing problems that their computer systems will
face in correctly processing date information as the year 2000 approaches and is
reached. However, FLAG and Abbeville cannot assure that FLAG and Abbeville will
identify all date-handling problems in their business systems before any
problems occur, or that FLAG and Abbeville will be able to successfully remedy
problems that are discovered. The expenses of FLAG's and Abbeville's efforts to
identify and address such problems, or the expenses or liabilities to which FLAG
and Abbeville may experience as a result of Year 2000 problems, could have a
material adverse effect on FLAG's results of operations and financial condition.
MEETING OF ABBEVILLE STOCXHOLDERS
Date, Place, Time, And Purpose
The Abbeville Board of Directors is sending you this proxy
statement/prospectus in connection with the solicitation by the Abbeville Board
of Directors of proxies for use at the Special Meeting. At the Special Meeting,
the Abbeville Board of Directors will ask you to vote on a proposal to approve
the merger agreement. Abbeville will pay the costs associated with the
solicitation of proxies for the Special Meeting. The Special Meeting will be
held at the main office of The Bank of Abbeville, located at 203 South Main
Street, Abbeville, South Carolina, on _________, ________________, 1999, at
______ p.m.
14
<PAGE>
Record Date, Voting Rights, Required Vote, And Revocability Of Proxies
Abbeville has set the close of business on _____________, 1999, as the
record date for determining holders of outstanding shares of Abbeville common
stock entitled to notice of and to vote at the Special Meeting. Only holders of
Abbeville common stock of record on the books of Abbeville at the close of
business on _______________, 1999 are entitled to notice of and to vote at the
Special Meeting. As of _______________, 1999, there were 237,615 shares of
Abbeville common stock issued and outstanding and entitled to vote at the
Special Meeting, which shares were held by approximately 430 holders of record.
FLAG holds no shares of Abbeville common stock.
You are entitled to one vote for each share of Abbeville common stock you
own on _______________, 1999. The vote required for the approval of the merger
agreement is at least two-thirds of the issued and outstanding shares of
Abbeville common stock entitled to vote at the Special Meeting. Abstentions and
broker non-votes will be counted as part of the base number of votes to be used
in determining if the proposal has received the required number of base votes
for approval. As a result, an abstention or a broker non-vote will have the same
effect as a vote "against" such proposal.
The designated proxy holder will vote shares of Abbeville common stock, if
such proxies are properly executed, received in time and not revoked, in
accordance with the instructions on the proxies. If the proxy does not contain
instructions of how to vote, the proxy holders will vote for approval of the
merger agreement. Additionally, if you do not include instructions with your
proxy, the proxy holder will use his or her discretion to vote on any other
matter which may properly come before the Special Meeting. Further, if you do
not include instructions with your proxy as to how to vote at the Special
Meeting, you will not be entitled to assert dissenters' rights. If necessary,
the proxy holder may vote in favor of a proposal to adjourn the Special Meeting
in order to permit further solicitation of proxies in the event there are not
sufficient votes to approve the proposal at the time of the Special Meeting. No
proxy that is voted against the approval of the merger agreement will be voted
in favor of an adjournment of the Special Meeting in order to permit further
solicitation of proxies.
- --------------------------------------------------------------------------------
Failure either to vote by proxy or in person at the Special Meeting will
have the effect of a vote cast against approval of the merger agreement.
- --------------------------------------------------------------------------------
An Abbeville stockholder who has given a proxy may revoke it at any time
prior to its exercise at the Special Meeting by:
o Giving written notice of revocation to the Secretary of Abbeville,
o Properly submitting to Abbeville a duly executed proxy bearing a later
date, or
o Attending the Special Meeting and voting in person.
All written notices of revocation and other communications with respect to
revocation of proxies should be addressed as follows: The Bank of Abbeville, 203
South Main Street, Abbeville, South Carolina 29620; Attention: Thomas D.
Sherard, Jr.
As of _______________, 1999, all directors and executive officers of
Abbeville as a group (10 persons) were entitled to vote approximately 42,675
shares of Abbeville common stock, constituting approximately 17.96% of the total
number of shares of Abbeville common stock outstanding at that date, and have
committed to vote their shares of Abbeville common stock in favor of the merger
agreement. See "BUSINESS OF ABBEVILLE -- Management."
15
<PAGE>
DESCRIPTION OF THE MERGER
The following information describes various aspects of the merger. This
description may not contain all of the information that is important to you. The
merger agreement is attached as Appendix A to this proxy statement/prospectus
and is incorporated in this proxy statement/prospectus by reference. You are
urged to read the Appendices.
General
The merger agreement provides for the merger of FLAG and Abbeville. FLAG
will survive the merger and the separate existence of Abbeville will cease. On
the effective date of the merger, each share of Abbeville common stock then
issued and outstanding will be converted into and exchanged for the right to
receive a minimum of 3.48 shares of FLAG common stock. If FLAG common stock is
trading below $11.00 on average just prior to completion of the merger, the
exchange ratio will be increased so that Abbeville shareholders in the aggregate
receive shares of FLAG common stock having a market value of $9,110,250. Shares
held by Abbeville, FLAG, or their subsidiaries, other than shares held in a
fiduciary capacity or in satisfaction of debts previously contracted will not be
converted to FLAG common stock. Shares held by Abbeville stockholders who
perfect their dissenters' rights will not be converted to FLAG common stock.
FLAG will not issue fractional shares. FLAG will pay cash without interest
instead of issuing any fractional share to which any Abbeville shareholder would
otherwise be entitled upon consummation of the merger. FLAG will calculate the
cash value of any fractional shares as the amount equal to the fractional part
of a share of FLAG common stock multiplied by the last sale price of FLAG common
stock on the Nasdaq National Market (as reported by The Wall Street Journal or,
if not reported thereby, any other authoritative source selected by FLAG) on the
last trading day preceding the effective date of the merger.
As of _______________, 1999, Abbeville had 237,615 shares of Abbeville
common stock outstanding. Based on the number of shares of Abbeville common
stock outstanding on the record date and the exchange ratio of _____ (based on
the last reported sale price of FLAG common stock on August __, 1999 of $____),
FLAG anticipates that FLAG will issue approximately __________ shares of FLAG
common stock to holders of Abbeville common stock once the merger is complete.
Accordingly, FLAG would then have issued and outstanding approximately
__________ shares of FLAG common stock based on the number of shares of FLAG
common stock issued and outstanding on _______________, 1999. Following the
merger, and assuming no exercise of dissenters' rights, the current stockholders
of Abbeville will beneficially own approximately _____% of the FLAG common
stock. After FLAG completes the mergers with Hogansville and Thomaston, the
current stockholders of Abbeville will beneficially own approximately _____% of
the FLAG common stock.
The merger agreement permits FLAG to pursue and consummate other mergers,
acquisitions or securities distributions. If FLAG issues or agrees to issue
additional shares of FLAG common stock between the date of this proxy
statement/prospectus and the effective date of the merger in connection with a
business acquisition or other securities distribution, the aggregate percentage
of FLAG common stock that the Abbeville stockholders will receive in the merger
will be decreased. Additionally, if FLAG pursues and consummates other mergers,
acquisitions or securities distributions, the value of the FLAG common stock
that the Abbeville stockholders receive in the merger may be reduced and the
consummation of the merger may be delayed substantially. As of the date of this
proxy statement/prospectus, FLAG had entered into two other merger agreements
through which FLAG will issue shares of FLAG common stock if these mergers are
consummated. See "SUMMARY -- Recent Developments in FLAG's Business."
16
<PAGE>
Background Of And Reasons For The Merger
Background of the Merger. Representatives from FLAG met with the Board of
Directors of Abbeville on January 27, 1999 to discuss a combination of Abbeville
and FLAG. Representatives of FLAG and Abbeville met several additional times
prior to signing the merger agreement.
In negotiating the final exchange ratio, Abbeville and FLAG considered the
relative book value and earnings of each entity, as well as certain special
factors relating to historical performance, market growth potential, ancillary
businesses and future growth plans. Abbeville and FLAG did not follow a precise
formula in the negotiation of the final exchange ratio, which was based on a
determination by management of each institution that the exchange ratio fairly
represented equivalent value for the stockholders of each institution
participating in the merger.
To assist the Board of Directors of Abbeville with its deliberations on
whether to approve and recommend the merger, the Board of Directors retained
special counsel to help in negotiating the terms of the merger agreement and the
Board of Directors retained the services of an independent financial valuation
consultant to review the proposed exchange ratio and determine whether the
proposed merger would be fair to Abbeville's stockholders from a financial point
of view.
The Board of Directors of Abbeville met on March 25, 1999, to discuss the
merger agreement and the merger. Prior to that meeting, the Board received a
special board package that contained a draft of the negotiated merger agreement,
a report by Abbeville's special counsel about its due diligence review of FLAG,
a fairness opinion prepared by the independent financial advisor, and various
other documents. On March 25, 1999, after review of the matters considered by
the Board of Directors and its advisors, the Board of Directors of Abbeville
unanimously approved the merger agreement and authorized the President and Chief
Executive Officer of Abbeville to take the appropriate actions necessary to
execute the merger agreement.
The Executive Committee of the Board of Directors of FLAG met on March 18,
1999, to discuss the merger agreement and related agreements. After review of
the matters relating to the merger, the Board of Directors of FLAG unanimously
approved by consent action the merger agreement and authorized the President and
Chief Executive Officer of FLAG to take the appropriate actions necessary to
execute the merger agreement in substantially the form approved by the Board.
The merger agreement was executed as of March 31, 1999. FLAG and Abbeville
each conducted a due diligence review of the material financial, operating and
legal information relating to the other party.
About three weeks after Abbeville and FLAG executed the merger agreement
and announced the merger, Abbeville received unsolicited written offers to
acquire Abbeville from two financial institutions. One offer came from TCB
Corporation of Greenwood, South Carolina. The other came from Community Capital
Corporation, also of Greenwood. Under the terms of the merger agreement,
Abbeville provided FLAG with copies of both offers.
After Abbeville received these unsolicited offers, the Board of Abbeville
sought the advice of its special counsel and retained its independent financial
advisor to analyze the unsolicited offers and compare them to the terms of the
merger and the merger agreement. As part of its analysis, the independent
financial advisor conducted interviews with officers of TCB Corporation and
Community Capital Corporation and reviewed financial records about both
companies. In a letter dated May 19, 1999 addressed to the Abbeville Board of
Directors, the independent financial advisor indicated that the unsolicited
offer by Community Capital Corporation was the highest of the three offers at
$10.0 million. The second highest was FLAG at $8.5 million based on FLAG's
trading price at that time. The lowest offer was TCB Corporation's, which has an
estimated value of $8.3 million. The financial advisor also indicated, however,
that there may be certain long-term non-financial factors that make the FLAG
offer more attractive. The financial advisor recommended that the Abbeville
Board carefully consider the unsolicited offers and the possibility of
negotiating the FLAG offer to make it more financially comparable to the
Community Capital Corporation offer.
17
<PAGE>
On May 24, 1999, representatives from FLAG and Abbeville met to discuss the
analysis prepared by Abbeville's financial advisor. At that meeting on behalf of
Abbeville were president Don Sherard, executive vice president Pattie Howie,
board member Joe Savitz and Jeff Gerrish from Gerrish & McCreary, P.C.,
Abbeville's special counsel. After extensive discussions, the representatives
from FLAG indicated they would take under advisement the possibility of
adjusting the price in the merger. The representatives from Abbeville indicated
that they would meet with Community Capital Corporation to explore more fully
with them the financial and non-financial considerations associated with
Community Capital's unsolicited offer.
On May 28, 1999, Mr. Sherard, Mrs. Howie, Mr. Savitz and Mr. Gerrish met
with representatives from Community Capital Corporation to discuss more fully
the unsolicited offer made by Community Capital to acquire Abbeville. In this
meeting, representatives from Community Capital confirmed its offer to acquire
Abbeville by exchanging no less than $10.0 million worth of Community Capital
shares for all of Abbeville shares with a minimum exchange ratio of 4.02 to 1.
Representatives of Community Capital also indicated that its willingness to move
forward with a transaction with Abbeville would be conditioned upon the
execution of employment agreements by Mr. Sherard, Mrs. Howie and Abbeville's
senior lending officer Bill Knapp. Following that meeting, on or about June 16,
1999, Abbeville received a letter from Community Capital reconfirming and
describing generally the major terms of its offer and requesting Abbeville's
acceptance of it. Special counsel for Abbeville reviewed that letter and sent to
Community Capital a letter seeking clarification of some matters contained in
Community Capital's letter.
On June 24, 1999, Abbeville received a letter from FLAG which contained a
proposed renegotiated price for which FLAG would acquire Abbeville. In that
letter, FLAG indicated that the minimum market value of FLAG shares to be issued
in the merger would be $9,110,250. In other words, if at the completion of the
merger the original exchange ratio of 3.48 would result in less than $9,110,250
of FLAG shares being issued, the exchange ratio would be increased to cause the
market value of the merger at completion to equal $9,110,250.
The Abbeville Board met on June 24, 1999 for its regular monthly meeting
and among other matters reviewed the Community Capital offer and the revised
FLAG offer. At that meeting, the Abbeville management indicated that it would
have Abbeville's financial advisor review FLAG's revised offer in light of the
offers that had been previously submitted by Community Capital Corporation and
TCB Corporation and determine whether the merger with FLAG, based on the revised
offer, would be fair to Abbeville's shareholders from a financial point of view.
After reviewing the revised offer from FLAG, the financial advisor orally
indicated to the Abbeville Board of Directors that it could reaffirm its
fairness opinion on the merger. The financial advisor delivered to the Abbeville
Board of Directors on June 28, 1999 a draft letter (issued in final form on July
6, 1999) in which the financial advisor reaffirmed its fairness opinion and
stated that "given the relative financial performance and condition of FLAG and
Community Capital, the revised offer by FLAG is comparable to the Community
Capital offer, despite the fact that its value is slightly lower." The full text
of the opinions of Abbeville's financial advisor are included as Appendix C to
this document. You are urged to read them carefully.
On July 1, 1999, the Abbeville Board held a special meeting to review and
discuss the revised offer by FLAG and the offers made by Community Capital
Corporation and TCB Corporation and to determine whether to accept and pursue
one of the offers or reject them all and remain independent. Based on the
reasons described below, including the reaffirmation by Abbeville's financial
advisor as to the fairness from a financial point of view of the FLAG offer, as
revised, to Abbeville's stockholders, the Board voted to accept FLAG's revised
offer and instructed management and special counsel to negotiate the documents
necessary to move forward with the merger with FLAG as revised.
18
<PAGE>
After the July 1, 1999 meeting of Abbeville's Board, FLAG delivered
proposed documents for review including a proposed stock option agreement and an
amendment to the merger agreement. Abbeville's Board met on July 15, 1999 to
review these documents and instructed counsel and management for Abbeville to
negotiate various changes to those documents. On July 19, 1999 FLAG delivered to
Abbeville revised drafts of the stock option agreement and the amendment to the
merger agreement which Abbeville's Board approved at a special meeting on July
22, 1999 and authorized management to execute.
Abbeville's Reasons for the Merger and Recommendation of Directors. The
Abbeville Board of Directors, with the assistance of outside legal and financial
advisors, evaluated the financial, legal and market considerations bearing on
the decision to recommend the merger to the stockholders of Abbeville. In
reaching its conclusion that the merger agreement is in the best interests of
Abbeville and its stockholders, the Abbeville Board of Directors carefully
considered the following material factors:
o The business, operations, earnings and financial condition, including
the capital levels and asset quality, of FLAG on an historical,
prospective, and pro forma basis and in comparison to other financial
institutions in the area;
o The demographic, economic and financial characteristics of the markets
in which FLAG operates, including the similarity to the markets in
which Abbeville operates, existing competition, history of the market
areas with respect to financial institutions, and average demand for
credit, on an historical and prospective basis;
o The local autonomy that FLAG provides its subsidiary banking
operations;
o The results of Abbeville's due diligence review of FLAG and a variety
of factors affecting and relating to the overall strategic focus of
Abbeville, including Abbeville's desire to expand into markets outside
the general vicinity of its core markets;
o FLAG stock is traded in the over-the-counter market and quoted on the
Nasdaq National Market, thus creating a far more liquid security for
Abbeville stockholders;
o The vision shared by Abbeville and FLAG relating to future expansion;
and
o The likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay.
o The fairness opinion and the reaffirmation of the fairness opinion
issued by Abbeville's financial advisor.
While each member of the Abbeville Board of Directors individually
considered the foregoing and other factors, the Abbeville Board of Directors did
not collectively assign any specific or relative weights to the factors
considered and did not make any determination with respect to any individual
factor. The Abbeville Board of Directors collectively made its determination
with respect to the merger based on the unanimous conclusion reached by its
members, in light of the factors that each of them consider as appropriate, that
the merger is in the best interests of the Abbeville stockholders.
The terms of the merger, including the exchange ratio, were the result of
arm's-length negotiations between representatives of Abbeville and
representatives of FLAG. Based upon its consideration of the foregoing factors,
the Board of Directors of Abbeville approved the merger agreement and the merger
as being in the best interests of Abbeville and its stockholders.
19
<PAGE>
The Abbeville Board of Directors unanimously recommends that Abbeville
stockholders vote "FOR" approval of the merger agreement.
FLAG's Reasons for the Merger. Since the completion of the merger of Middle
Georgia Bankshares, Inc. with FLAG in March 1998, FLAG has explored
opportunities that would further FLAG's goal of building a strong presence
primarily in Georgia through a partnership of community banks. The FLAG Board of
Directors evaluated the financial, legal and market considerations relating to
the merger, including the opportunity to expand into South Carolina. In reaching
its conclusion that the merger agreement is in the best interests of FLAG and
its stockholders, the FLAG Board of Directors carefully considered the following
material factors:
o The information presented to the directors by the management of FLAG
concerning the business, operations, earnings, asset quality, and
financial condition of Abbeville, including the composition of the
earning assets portfolio of Abbeville;
o The financial terms of the merger, including the relationship of the
value of the consideration issuable in the merger to the market value,
tangible book value, and earnings per share of Abbeville common stock;
o The nonfinancial terms of the merger, including the treatment of the
merger as a tax-free exchange of Abbeville common stock for FLAG
common stock for federal income tax purposes;
o The likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay;
o The opportunity for reducing the noninterest expense of the operations
of Abbeville and the ability of the operations of Abbeville after the
effective date of the merger to contribute to the earnings of FLAG;
o The attractiveness of the Abbeville franchise, the market position of
Abbeville in Abbeville, South Carolina, the compatibility of the
franchise of Abbeville with the operations of FLAG and the ability of
Abbeville to contribute to the business strategy of FLAG;
o The compatibility of the community bank orientation of the operations
of Abbeville to that of FLAG; and
o The opportunity to leverage the infrastructure of FLAG.
While each member of the FLAG Board of Directors individually considered
the foregoing and other factors, the Board of Directors did not collectively
assign any specific or relative weights to the factors considered and did not
make any determination with respect to any individual factor. The FLAG Board of
Directors collectively made its determination with respect to the merger based
on the unanimous conclusion reached by its members, in light of the factors that
each of them consider as appropriate, that the merger is in the best interests
of the FLAG stockholders.
The terms of the merger, including the exchange ratio, were the result of
arm's-length negotiations between representatives of FLAG and representatives of
Abbeville. Based upon its consideration of the foregoing factors, the Board of
Directors of FLAG approved the merger agreement and the merger as being in the
best interests of FLAG and its stockholders.
Opinion of Abbeville's Financial Advisor, Southard Financial
Abbeville retained Southard Financial, a Memphis, Tennessee financial
valuation consulting firm, to render its opinion as to the fairness from a
financial point of view to the holders of Abbeville common stock of the
consideration to be paid in the merger. In connection with this engagement,
Southard evaluated the financial terms of the merger, but was not asked to, and
did not recommend the exchange ratio formula between FLAG's and Abbeville's
20
<PAGE>
respective common stocks and did not assist in the merger negotiations. The
ratio of exchange formula was determined by FLAG and Abbeville after arm's
length negotiations. Nevertheless, Southard evaluated and compared two
unsolicited offers received by the Abbeville Board and provided calculations and
related services to the Abbeville Board (See "- Background of and Reasons for
the Merger"). Abbeville did not place any limitations on the scope of Southard's
investigation or review.
Southard provided the Abbeville Board with a fairness opinion letter and
supporting documentation. That fairness opinion letter and the full text of the
opinion letter of Southard, dated March 22, 1999, states assumptions that
Southard made, matters that Southard considered, and limitations on the review
that Southard performed. The fairness opinion letter is attached as Appendix C
and we urge you to read it carefully. This summary of the opinion of Southard in
this prospectus/proxy statement is qualified in its entirety by reference to the
opinion.
In arriving at its opinion, Southard conducted interviews with officers of
FLAG and Abbeville and reviewed the documents listed in the fairness letter.
Southard did not independently verify the accuracy or the completeness of the
financial and other information reviewed in rendering its opinion. Southard did
not, and was not requested to, solicit third party indications of interest in
acquiring any or all of the assets of Abbeville.
In connection with giving its opinion, Southard performed a variety of
financial analyses, which are summarized below. Southard believes you should
consider its analyses as a whole and that considering only selected factors
could create an incomplete view of the analyses and the process underlying the
opinion. In its analyses, Southard made numerous assumptions, many of which are
beyond the control of Abbeville and FLAG. Any estimates contained in the
analyses prepared by Southard do not necessarily indicate future results or
values, which may vary significantly from such estimates. Estimates of value of
companies do not purport to be appraisals or necessarily reflect the prices at
which companies or their securities may actually be sold. Southard did not
assign a greater significance to any analysis over another.
The summary of Southard's analysis below is based on the floor value stated
in the amendment to the merger agreement dated July 22, 1999. The amendment to
merger agreement states that Abbeville shareholders are to receive a minimum of
3.48 shares of FLAG common stock for each share of Abbeville common stock
outstanding. However, if the price of FLAG stock for purposes of the merger is
less than $11.00 per share, then Abbeville shareholders will receive shares of
FLAG stock equivalent to the floor value of $38.34 per share of Abbeville common
stock.
Based upon the merger terms, Abbeville shareholders will receive 180.9% of
Abbeville book value at March 31, 1999, 14.7 times Abbeville's reported 1998
earnings, and 15.30% of Abbeville's assets at March 31, 1999. Based upon the
review conducted by Southard Financial, the pricing for Abbeville in the merger
is below the average, but within the range of multiples seen in recent bank
acquisitions. However, the merger price represents a significant premium to the
most recent transaction prices for Abbeville common stock. Southard's conclusion
was that the terms of the proposed merger pursuant to the merger agreement are
fair, from a financial viewpoint, to the shareholders of Abbeville.
In conjunction with its fairness opinion, Southard also provided Abbeville
shareholders with the following analyses:
ANALYSIS OF LIQUIDITY: Unlike Abbeville common stock, FLAG shares are
traded on the NASDAQ national market system under the ticker symbol "FLAG". The
stock is actively traded, has several institutional holders, and is followed by
at least four investment analysts.
ANALYSIS OF ALTERNATIVES: Recent transactions in Abbeville common stock
have been at prices well below the merger price. Abbeville stock is not traded
on a stock exchange and no party makes a market for the stock on an ongoing
basis. Further, unlike FLAG, Abbeville does not have a dividend reinvestment
plan.
21
<PAGE>
DISCOUNTED CASH FLOW ANALYSIS: Southard Financial prepared a pro-forma
discounted cash flow analysis to determine a range of present values of
Abbeville assuming Abbeville continued to operate as a stand-alone entity. Using
this analysis, the implied value of Abbeville was at or below the proposed price
in the merger.
FUNDAMENTAL ANALYSIS: Southard Financial reviewed the impact of the
proposed acquisition on the per share earnings, dividends, and book value of
FLAG. The analysis indicated that the merger will have a slightly dilutive
impact on earnings per share and dividends per share in the first year after the
merger. However, the analysis indicated that the adverse impact on earnings is
expected to be short-lived, given the expected faster rate of earnings growth at
FLAG than at Abbeville and the synergies of the merger and other mergers
currently underway by FLAG. Further, the merger will have a highly positive
impact on book value per share for Abbeville shareholders.
Southard is a financial valuation consulting firm specializing in the
valuation of closely-held companies and financial institutions. Since its
founding in 1987, Southard has provided approximately 2,000 valuation opinions
for clients in 43 states. Further, Southard provides valuation services for
approximately 120 financial institutions annually. For rendering its opinion,
Southard received a fee of $12,000 plus out-of-pocket expenses. Further, for
providing consulting services to the Abbeville Board, Southard received a fee of
$4,000 plus out-of-pocket expenses. Southard has never been engaged previously
by Abbeville or FLAG, and neither Southard nor its principals own an interest in
the securities of Abbeville or FLAG.
Effective Date Of The Merger
The effective date of the merger will occur on the date and at the time
that the Secretary of State of the State of Georgia and Secretary of State of
South Carolina declare the Certificate of Merger effective. Unless Abbeville and
FLAG otherwise agree in writing, and subject to the conditions to the
obligations of FLAG and Abbeville to effect the merger, the parties will use
their reasonable efforts to cause the effective date of the merger to occur on
the fifth business day following:
o the effective date (including expiration of any applicable waiting
period) of the last required consent of any regulatory authority
having authority over and approving or exempting the merger, and
o the date on which the stockholders of Abbeville approve the merger
agreement, whichever is the last to occur.
FLAG and Abbeville cannot assure that they can obtain the necessary
shareholder and regulatory approvals or that they can or will satisfy other
conditions precedent to the merger. FLAG and Abbeville anticipate that they will
satisfy all conditions to consummation of the merger so that the merger can be
completed during the third quarter of 1999. However, delays in the consummation
of the merger could occur.
The Board of Directors of either FLAG or Abbeville may terminate the merger
agreement if the merger is not consummated by December 31, 1999, unless the
failure to consummate by that date is the result of a breach of the merger
agreement by the party seeking termination. See "-- Conditions to Consummation
of the Merger" and "-- Waiver, Amendment, and Termination."
Distribution of FLAG Certificates
Promptly after the effective date of the merger, FLAG will mail appropriate
transmittal materials and instructions for use in exchanging Abbeville stock
certificates for FLAG stock certificates representing shares of FLAG common
stock to each holder of record of an Abbeville stock certificate, which,
immediately prior to the effective date of the merger, represented outstanding
shares of Abbeville common stock.
22
<PAGE>
Holders of Abbeville Common Stock should NOT send in their Abbeville stock
certificates until they receive the appropriate transmittal materials and
instructions.
FLAG's exchange agent will issue and mail to each holder of Abbeville
common stock (other than shares as to which holders have perfected dissenters'
rights) a FLAG stock certificate representing the number of shares of FLAG
common stock to which such holder is entitled after the exchange agent receives
the Abbeville stock certificates and properly completed transmittal materials.
The exchange agent will also send Abbeville stockholders a check for the amount
to be paid for any fractional shares without interest, and all undelivered
dividends or distributions in respect of such shares without interest.
After the effective date of the merger, to the extent permitted by law,
holders of Abbeville common stock of record as of the effective date of the
merger will be entitled to vote at any meeting of FLAG stockholders the number
of whole shares of FLAG common stock they will receive in the merger, regardless
of whether such stockholders have surrendered their Abbeville stock
certificates. Whenever FLAG declares a dividend or other distribution on FLAG
common stock, the record date for which is at or after the effective date of the
merger, the declaration will include dividends or other distributions on all
shares issuable pursuant to the merger agreement. FLAG will not pay any dividend
or other distribution payable after the effective date of the merger with
respect to FLAG common stock to the holder of any unsurrendered Abbeville stock
certificate until the holder duly surrenders such Abbeville stock certificate.
In no event will the holder of any surrendered Abbeville stock certificate(s) be
entitled to receive interest on any cash to be issued to such holder. In no
event will FLAG or the exchange agent be liable to any holder of Abbeville
common stock for any amounts paid or property delivered in good faith to a
public official pursuant to any applicable abandoned property, escheat, or
similar law.
After the effective date of the merger, no transfers of shares of Abbeville
common stock on Abbeville's stock transfer books will be recognized. If
Abbeville stock certificates are presented for transfer after the effective date
of the merger, they will be canceled and exchanged for the shares of FLAG common
stock and a check for the amount due in lieu of fractional shares, if any.
After the effective date of the merger, holders of Abbeville stock
certificates will have no rights with respect to the shares of Abbeville common
stock other than the right to surrender such Abbeville stock certificates and
receive in exchange the shares of FLAG common stock, if any, to which such
holders are entitled. After the effective date of the merger, holders of
Abbeville stock certificates who have complied with the South Carolina Business
Corporation Act relating to dissenters' rights still have the right to perfect
their dissenters' rights.
If an Abbeville shareholder wishes to have a FLAG Certificate issued in a
name other than that in which the Abbeville stock certificate surrendered for
exchange is issued, the surrendered Abbeville stock certificate shall be
properly endorsed and otherwise in proper form for transfer. The person
requesting such exchange must include any requisite stock transfer tax stamps to
the Abbeville stock certificates surrendered, provide funds for the purchase of
any stock transfer tax stamps, or establish to the exchange agent's satisfaction
that such taxes are not payable.
Conditions To Consummation of The Merger
Consummation of the merger is subject to various conditions, including:
o Approval of the merger agreement by the stockholders of Abbeville as
required by any law or by the provisions of any governing instruments
of Abbeville;
o Receipt of regulatory approvals required for consummation of the
merger (see "-- Regulatory Approvals");
23
<PAGE>
o Receipt of all consents required for consummation of the merger or for
the preventing of any default under any contract or permit which, if
not obtained or made, is reasonably likely to have, individually or in
the aggregate, a material adverse effect;
o The absence of any law or order or any action taken by any court,
governmental, or regulatory authority prohibiting, restricting, or
making illegal the consummation of the transactions contemplated by
the merger agreement;
o The registration statement being declared effective and the receipt of
all necessary SEC and state approvals relating to the issuance or
trading of the shares of FLAG common stock issuable pursuant to the
merger agreement;
o Approval of the shares of FLAG common stock issuable pursuant to the
merger agreement for listing on the Nasdaq National Market;
o Receipt of an opinion of Powell, Goldstein, Frazer & Murphy LLP as to
the qualification of the merger as a tax-free reorganization (see "--
Certain Federal Income Tax Consequences");
o The accuracy, as of the date of the merger agreement and as of the
effective date of the merger, of the representations and warranties of
Abbeville and FLAG as set forth in the merger agreement;
o The performance of all agreements and the compliance with all
covenants of Abbeville and FLAG as set forth in the merger agreement;
o Receipt by FLAG of a letter from Porter Keadle Moore, LLP to the
effect the merger will qualify for pooling-of-interests accounting
treatment; and
o Satisfaction of numerous other conditions, including the receipt of
agreements of the affiliates of Abbeville, the execution of claims
letters by the directors and officers of Abbeville, the receipt of
opinion letters from counsel for FLAG and counsel for Abbeville, and
receipt of various certificates from the officers of Abbeville and
FLAG.
FLAG and Abbeville cannot assure you as to when or if all of the conditions
to the merger can or will be satisfied. In the event the merger is not complete
on or before December 31, 1999, the merger agreement may be terminated and the
merger abandoned by either Abbeville or FLAG, unless the failure to consummate
the merger by that date is the result of a breach of the merger agreement by the
party seeking termination. See "-- Waiver, Amendment, and Termination."
Regulatory Approvals
FLAG and Abbeville cannot complete the merger until they receive regulatory
approvals from the Federal Reserve, the Georgia Department of Banking and
Finance and the South Carolina Board. FLAG and Abbeville cannot assure whether
or when they will receive the regulatory approvals. Additionally, FLAG and
Abbeville cannot assure that the regulatory approvals will not impose conditions
or be restricted in a way that in the reasonable judgment of the Board of
Directors of FLAG or Abbeville would so materially adversely impact the economic
or business benefits of the merger that, had such condition or requirement been
known, either of FLAG or Abbeville would not, in its reasonable judgment, have
entered into the merger agreement.
FLAG and Abbeville are not aware of any material governmental approvals or
actions that are required for consummation of the merger, except as described
below.
24
<PAGE>
The merger will require the prior approval of the Federal Reserve. FLAG has
filed all required applications with the Federal Reserve. In evaluating the
merger, the Federal Reserve must consider, among other factors, the financial
and managerial resources and future prospects of the institutions and the
convenience and needs of the communities to be served. The relevant statutes
prohibit the Federal Reserve from approving the merger if:
o It would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States, or
o Its effect in any section of the country may be to substantially
lessen competition or to tend to create a monopoly, or if it would be
a restraint of trade in any other manner, unless the Federal Reserve
finds that any anticompetitive effects are outweighed clearly by the
public interest and the probable effect of the transaction in meeting
the convenience and needs of the communities to be served.
The parties may not complete the merger until the 30th day (which the
Federal Reserve may reduce to 15 days) following the date of the Federal Reserve
approval, during which time the United States Department of Justice may
challenge the transaction on antitrust grounds. If the Department of Justice
brings an antitrust action, then any regulatory approval would not be effective
unless a court of competent jurisdiction over the matter specifically orders
otherwise. FLAG and Abbeville cannot assure when or whether the Federal Reserve
will approve the merger.
The merger will also require the prior approval of the Georgia Department
of Banking and the South Carolina Board. FLAG has filed all applications
required to be filed with the Georgia Department of Banking and the South
Carolina Board in connection with the merger. FLAG and Abbeville cannot assure
when or whether the Georgia Department of Banking and the South Carolina Board
will approve the merger.
Waiver, Amendment, and Termination
FLAG and Abbeville may amend the merger agreement by written agreement at
any time before approval of the merger agreement by the Abbeville stockholders.
In addition, prior to or at the effective date of the merger, either Abbeville
or FLAG, or both, acting through their Boards of Directors, chief executive
officers or other authorized officers, may waive any default in the performance
of any term of the merger agreement by the other party, may waive or extend the
time for the compliance or fulfillment by the other party of any and all of its
obligations under the merger agreement, and may waive any of the conditions
precedent to the obligations of such party under the merger agreement, except
any condition that, if not satisfied, would result in the violation of any
applicable law or governmental regulation. No waiver will be effective unless
written and unless signed by a duly authorized officer of Abbeville or FLAG, as
the case may be.
FLAG and Abbeville may terminate the merger agreement and abandon the
merger at any time prior to the effective date of the merger by:
o The mutual agreement of Abbeville and FLAG; or
o By FLAG or Abbeville:
o In the event of any material breach of any representation or
warranty of the other party contained in the merger agreement
which cannot be or has not been cured within 30 days after giving
written notice to the breaching party of the inaccuracy and which
breach is reasonably likely, in the opinion of the non-breaching
party, to have, individually or in the aggregate, a Material
Adverse Effect (as defined in the merger agreement), as
applicable, on the breaching party (provided that the terminating
party is not then in material breach of any representation,
warranty, covenant, or other agreement contained in the merger
agreement),
25
<PAGE>
o In the event of a material breach by the other party of any
covenant or agreement contained in the merger agreement which
cannot be or has not been cured within 30 days after the giving
of written notice to the breaching party of such breach (provided
that the terminating party is not then in material breach of any
representation, warranty, covenant, or other agreement contained
in the merger agreement),
o If the merger is not consummated by December 31, 1999, provided
that the failure to consummate is not due to a breach by the
party electing to terminate, or
o Provided that the terminating party is not then in material
breach of any representation, warranty, covenant, or other
agreement contained in the merger agreement, if:
o Any approval of any regulatory authority required for
consummation of the merger and the other transactions
contemplated by the merger agreement has been denied by
final nonappealable action, or if any action taken by such
authority is not appealed within the time limit for appeal,
or
o The stockholders of Abbeville fail to vote their approval of
the matters submitted for the approval by such stockholders
at the Special Meeting.
If FLAG and Abbeville terminate the merger as described in this section,
the merger agreement will become void and have no effect, except that certain
provisions of the merger agreement will survive, including those relating to the
obligations to maintain the confidentiality of certain information. In addition,
termination of the merger agreement will not relieve any breaching party from
liability for any uncured willful breach of a representation, warranty,
covenant, or agreement giving rise to such termination.
Dissenters' Rights
If the merger becomes effective, any stockholder of Abbeville who properly
dissents from the merger in connection with the Special Meeting may be entitled
to receive in cash the fair value of such stockholder's shares of Abbeville
common stock determined immediately prior to the merger, excluding any
appreciation or depreciation in anticipation of the merger.
- --------------------------------------------------------------------------------
FAILURE TO COMPLY WITH THE PROCEDURES PRESCRIBED BY APPLICABLE LAW WILL
RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
- --------------------------------------------------------------------------------
Any stockholder of Abbeville entitled to vote on the merger agreement has
the right to receive payment of the fair value of his or her shares of Abbeville
common stock upon compliance with the applicable provisions of Sections
33-13-101 through 33-13-310 of the South Carolina Business Corporation Act. Any
Abbeville stockholder intending to enforce the right to dissent:
o May not vote in favor of the merger agreement; and
o Must give written notice of his or her intent to demand payment for
his or her shares if the merger becomes effective.
An Abbeville stockholder should send the notice of intent to demand payment
to Abbeville Capital Corporation, 203 S. Main Street, Abbeville, South Carolina
29620 (telephone: (864) 459-9676), Attention: Thomas D. Sherard, Jr.), before
the vote on the proposal to approve the merger agreement is taken at the
meeting. The notice of intent to demand payment must state that the stockholder
will demand payment for his or her shares of Abbeville common stock if the
26
<PAGE>
merger takes place. A vote against approval of the merger agreement, in and of
itself, will not constitute a notice of intent to demand payment satisfying the
requirements of Section 33-13-210.
If the Abbeville's stockholders approve the merger agreement at the Special
Meeting, each stockholder who properly filed a notice of intent to demand
payment and who did not vote in favor of the merger agreement will receive
notice from FLAG that the merger has occurred within ten days of the effective
date of the merger. The dissenters' notice from FLAG will:
o State where the stockholder should send his or her payment demand and
the Abbeville stock certificates;
o Inform holders of uncertificated shares of how shares can be
transferred after FLAG receives the payment demand;
o Supply a form for demand payment that:
o Includes the date of the first press release or announcement to
Abbeville stockholders of the terms of the merger,
o Requires that the person asserting dissenters' rights certify
whether or not he or she (or, if the person is a nominee
asserting dissenters' rights on behalf of a beneficial
stockholder, the beneficial stockholder) acquired beneficial
ownership of the shares before the date of the first press
release or announcement of the terms of the Merger
o Set a date by which FLAG must receive the payment demand, which may
not be fewer than thirty nor more than sixty days after the date of
the notice and set a date by which the shareholder must deposit his or
her stock certificates, which may not be earlier than twenty days
after the demand date; and
o Include a copy of the South Carolina statutes relating to dissenters'
rights.
A shareholder who receives a dissenters' notice from FLAG must:
o Demand payment;
o Certify that he or she acquired beneficial ownership before the date
set forth in the dissenters' notice; and
o Deposit his or her stock certificates as directed by the dissenter's
notice.
Any stockholder who demands payment and deposits his or her share
certificates as required by the South Carolina Business Corporation Act retains
all other rights of a stockholder until the merger takes place. Any stockholder
who does not comply with the requirements that he or she demand payment and
deposit his or her stock certificates, by the date set in the dissenters'
notice, is not entitled to payment for his or her shares.
FLAG will pay each dissenting stockholder who substantially complied with
the rules of the South Carolina Business Corporation Act the amount that FLAG
estimates to be the fair value of the dissenting stockholder's Abbeville common
stock with interest. FLAG will deliver payment after the merger takes place or
after receiving a payment demand from a dissenting stockholder.
FLAG will send with the payment:
27
<PAGE>
o FLAG's balance sheet for December 31, 1998, an income statement for
1998, a statement of changes in stockholders' equity for 1998 and the
latest available interim financial statements;
o A statement of FLAG's estimate of the fair value of the shares and an
explanation of how FLAG calculated the fair value;
o An explanation of how FLAG calculated the interest;
o A statement of the dissenter's right to demand additional payment
under Section 33-13-280; and
o A copy of the South Carolina statutes relating to dissenters' rights.
FLAG may withhold payment from a dissenting stockholder for shares of
Abbeville common stock that the dissenting stockholder (or the beneficial owner
on whose behalf such dissenter is asserting dissenters' rights) was not the
beneficial owner on the date the press release or announcement of the merger. If
FLAG elects to withhold payment, FLAG shall estimate the fair value of the
shares with interest, and shall pay this amount to each dissenting shareholder
who agrees to accept it in full satisfaction of his or her demand. FLAG shall
send with its offer a statement of its estimate of the fair value of the shares
an explanation of how FLAG calculated the fair value and interest, and a
statement of the dissenter's right to demand additional payment under Section
33-13-280 of the South Carolina Business Corporation Act.
If a dissenting stockholder is not satisfied with the amount FLAG estimated
as the fair value of the shares, Section 33-13-280 of the South Carolina
Business Corporation Act provides that a dissenting stockholder may notify FLAG
in writing of his or her own estimate of the fair value of his or her shares and
the interest due, and may demand payment of that estimate if:
o The dissenting stockholder believes that the amount offered by FLAG is
less than the fair value of the shares or that FLAG calculated the
interest due incorrectly; or
o FLAG fails to pay as required by Section 33-13-250 or to offer payment
under Section 33-13-270 within sixty days after the date set for
demanding payment.
A dissenting stockholder waives his or her right to demand payment under
Section 33-33-280 unless he or she notifies FLAG in writing within 30 days after
FLAG makes or offers payment for the dissenting stockholder's shares.
If a demand for payment under Section 33-13-280 remains unsettled, FLAG
must begin a proceeding in the Circuit Court of Abbeville County, South
Carolina, within 60 days after receiving the demand for additional payment and
must petition the court to determine the fair value of the shares and accrued
interest. If FLAG does not begin the proceeding within those 60 days, it is
required to pay each dissenting stockholder whose demand remains unsettled, the
amount demanded. FLAG must make all dissenting stockholders whose demand remain
unsettled parties to the proceeding and serve a copy of the petition upon each
dissenting stockholder. The court may appoint appraisers to receive evidence and
to recommend a decision on fair value. Each dissenting stockholder who is a
party to the proceeding is entitled to judgment for the amount that the court
finds the fair value of shares with interest exceeds the amount paid by FLAG.
28
<PAGE>
The court in an appraisal proceeding must determine the costs of the
proceeding, excluding fees and expenses of attorneys and experts for the
parties, and must assess those costs against FLAG. The court may assess the
costs against all or some of the dissenting stockholders to the extent the court
finds they acted arbitrarily or not in good faith in demanding payment under
Section 33-13-280. The court also may assess the fees and expenses of attorneys
and experts for the parties against FLAG if the court finds that FLAG did not
substantially comply with the requirements of specified provisions of Chapter 13
of the South Carolina Business Corporation Act, or against either FLAG or a
dissenting stockholder if the court finds that either acted arbitrarily,
vexatiously, or not in good faith with respect to the rights provided by Chapter
13 of the South Carolina Business Corporation Act.
If the court finds that the services of counsel for any dissenting
stockholder were of substantial benefit to other dissenting stockholders
similarly situated, and that the fees for those services should not be assessed
against FLAG, the court may award to these counsel reasonable fees to be paid
out of the amounts awarded the dissenting stockholders who received the benefit
of the attorney's services.
This is a summary of the material rights of a dissenting stockholder of
Abbeville, but you should read Chapter 13 of the South Carolina Business
Corporation Act, included in Appendix B to this proxy statement/prospectus. Any
Abbeville stockholder who intends to dissent from approval of the Agreement
should carefully review the text of such provisions and should also consult with
his or her attorney. You will not receive further notice of the events giving
rise to dissenters' rights or any steps associated with dissenting stockholders
except as described in this section.
Any dissenting Abbeville stockholder who perfects dissenters' right to be
paid the value of such holder's shares will recognize taxable gain or loss upon
receipt of cash for such shares for federal income tax purposes. See "-- Certain
Federal Income Tax Consequences."
Conduct Of Business Pending The Merger
FLAG and Abbeville have agreed in the merger agreement that unless the
other party gives prior written consent, and except as otherwise expressly
contemplated in the merger agreement, each of FLAG and Abbeville will, and will
cause its respective subsidiaries to:
o Operate its business only in the usual, regular, and ordinary course;
o Preserve intact its business organization and assets and maintain its
rights and franchises; and
o Take no action which would:
o Materially adversely affect the ability of any party to obtain
any consents required for the transactions contemplated by the
merger agreement without the imposition of a condition or
restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c) of the merger agreement, or
o Materially adversely affect the ability of any party to perform
its covenants and agreements under the merger agreement.
In addition, Abbeville has agreed that, from the date of the merger
agreement until the earlier of the effective date of the merger or the
termination of the merger agreement, unless FLAG has given prior written
consent, and except as otherwise expressly contemplated by the merger agreement,
Abbeville will not do or agree or commit to do, or permit any of its
subsidiaries to do or agree or commit to do, any of the following:
o Amend the Articles of Incorporation, Bylaws or other governing
instruments of any Abbeville entity;
29
<PAGE>
o Incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of an Abbeville entity to another
Abbeville entity) in excess of an aggregate of $100,000 (for the
Abbeville entities on a consolidated basis) except in the ordinary
course of the business of the Abbeville subsidiaries consistent with
past practices (which shall include, for Abbeville subsidiaries that
are depository institutions, creation of deposit liabilities,
purchases of federal funds, advances from the Federal Reserve Bank or
Federal Home Loan Bank, and entry into repurchase agreements fully
secured by U.S. government or agency securities), or impose, or suffer
the imposition, on any asset of any Abbeville entity of any lien or
permit any such lien to exist (other than in connection with deposits,
repurchase agreements, bankers acceptances, "treasury tax and loan"
accounts established in the ordinary course of business, the
satisfaction of legal requirements in the exercise of trust powers,
and liens in effect as of the date of the merger agreement that were
previously disclosed to FLAG by Abbeville);
o Repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans),
directly or indirectly, any shares, or any securities convertible into
any shares, of the capital stock of any Abbeville entity, or declare
or pay any dividend or make any other distribution in respect of
Abbeville's capital stock;
o Except for the merger agreement, or pursuant to the exercise of stock
options outstanding as of the date thereof and pursuant to the terms
thereof in existence on the date thereof, or as previously disclosed
to FLAG by Abbeville, issue, sell, pledge, encumber, authorize the
issuance of, enter into any contract to issue, sell, pledge, encumber,
or authorize the issuance of, or otherwise permit to become
outstanding, any additional shares of Abbeville common stock or any
other capital stock of any Abbeville entity, or any stock appreciation
rights, or any option, warrant, or other equity right;
o Adjust, split, combine or reclassify any capital stock of any
Abbeville entity or issue or authorize the issuance of any other
securities in respect of or in substitution for shares of Abbeville
common stock, or sell, lease, mortgage or otherwise dispose of or
otherwise encumber any asset having a book value in excess of $100,000
other than in the ordinary course of business for reasonable and
adequate consideration or any shares of capital stock of any Abbeville
subsidiary (unless any such shares of stock are sold or otherwise
transferred to another Abbeville entity);
o Enter into or amend any employment contract between any Abbeville
entity and any person having a salary thereunder in excess of $50,000
per year (unless such amendment is required by law) that the Abbeville
entity does not have the unconditional right to terminate without
liability (other than liability for services already rendered), at any
time on or after the effective date of the merger;
o Except for loans made in the ordinary course of its business, make any
material investment, either by purchase of stock or securities,
contributions to capital, asset transfers, or purchase of any assets,
in any entity other than a wholly-owned Abbeville subsidiary, or
otherwise acquire direct or indirect control over any entity, other
than in connection with:
o Foreclosures in the ordinary course of business,
o Acquisitions of control by a depository institution subsidiary in
its fiduciary capacity, or
o The creation of new wholly-owned subsidiaries organized to
conduct or continue activities otherwise permitted by the merger
agreement;
o Grant any increase in compensation or benefits to the employees or
officers of any Abbeville entity, except in accordance with past
practice previously disclosed to FLAG by Abbeville or as required by
law; pay any severance or termination pay or any bonus other than
pursuant to written policies or written contracts in effect on the
30
<PAGE>
date of the merger agreement and previously disclosed to FLAG by
Abbeville; enter into or amend any severance agreements with officers
of any Abbeville entity; grant any material increase in fees or other
increases in compensation or other benefits to directors of any
Abbeville entity except in accordance with past practice previously
disclosed to FLAG by Abbeville; or voluntarily accelerate the vesting
of any stock options or other stock-based compensation or employee
benefits or other equity rights;
o Adopt any new employee benefit plan of any Abbeville entity or
terminate or withdraw from, or make any material change in or to, any
existing employee benefit plans of any Abbeville entity other than any
such change that is required by law or that, in the opinion of
counsel, is necessary or advisable to maintain the tax qualified
status of any such plan, or make any distributions from such employee
benefit plans, except as required by law, the terms of such plans or
consistent with past practice;
o Make any significant change in any tax or accounting methods or
systems of internal accounting controls, except as may be appropriate
to conform to changes in tax laws or regulatory accounting
requirements or GAAP;
o Commence any litigation other than in accordance with past practice or
except as previously disclosed to FLAG by Abbeville, settle any
litigation involving any liability of any Abbeville entity for
material money damages or restrictions upon the operations of any
Abbeville entity; or
o Except in the ordinary course of business, enter into, modify, amend
or terminate any material contract (including any loan contract with
an unpaid balance exceeding $50,000) or waive, release, compromise or
assign any material rights or claims.
The merger agreement also provides that from the date of the merger
agreement until the earlier of the effective date of the merger or the
termination of the merger agreement, unless Abbeville has given prior written
consent, and except as otherwise expressly contemplated by the merger agreement,
FLAG will not amend the Articles of Incorporation or Bylaws of FLAG in any
manner adverse to the holders of Abbeville common stock or take any action that
will materially adversely impact the ability of the FLAG entities to consummate
the merger.
Management And Operations After The Merger; Interests Of Certain Persons In The
Merger
FLAG will be the surviving corporation resulting from the merger. There are
members of Abbeville's management and the Abbeville Board of Directors who have
interests in the merger in addition to their interests as stockholders of
Abbeville generally. These include, among other things, provisions in the merger
agreement relating to indemnification of directors and officers and eligibility
for certain FLAG employee benefits. Promptly after the effective date of the
merger, Thomas D. Sherard, Jr., President and Chief Executive of Abbeville, and
Joseph L. Savitz, Jr., a member of Abbeville's Board of Directors, will become
members of FLAG's Board of Directors. Additionally, the merger agreement
provides that Mr. Sherard, Patricia P. Howie, Executive Vice President and C.
William Knapp, Jr., Senior Vice President , will sign Separation Agreements with
FLAG. As of _______________, 1999, none of the directors and officers of
Abbeville beneficially owned any shares of FLAG common stock.
31
<PAGE>
Indemnification and Advancement of Expenses. The merger agreement provides
that FLAG will indemnify, defend and hold harmless each person entitled to
indemnification from an Abbeville entity against all liabilities arising out of
actions or omissions occurring at or prior to the effective date of the merger
(including the transactions contemplated by the merger agreement) to the fullest
extent permitted under Georgia law and by Abbeville's Articles of Incorporation
and Bylaws as in effect on the date of the merger agreement, including
provisions relating to advances of expenses incurred in the defense of any
litigation. Without limiting the foregoing, in any case in which approval by
FLAG is required to effectuate any indemnification, FLAG will direct, at the
election of the indemnified party, that the determination of any such approval
shall be made by independent counsel mutually agreed upon between FLAG and the
indemnified party.
Separation Agreements. The merger agreement provides that, as a condition
to consummation of the merger, FLAG will provide Mr. Sherard, Ms. Howie and Mr.
Knapp with separation agreements. Mr. Sherard's Separation Agreement will
provide that he will receive severance payments equal to his annual base salary
and bonus paid over the previous three fiscal years in the event he is
involuntarily terminated, as that term is defined in the separation agreement.
The Separation Agreements for Ms. Howie and Mr. Knapp will provide that they
will receive severance payments equal to the average of his or her annual base
salary and bonus paid over the previous three fiscal years in the event he or
she is involuntarily terminated as that term is defined in the Separation
Agreement. In addition, pursuant to the terms of the Separation Agreement, each
individual will make certain covenants not to compete with FLAG during the term
of the Separation Agreement and for a 12-month period following the termination
of the Separation Agreement or the termination of the individual's status as an
employee of FLAG.
Other Matters Relating to Employee Benefit Plans. The merger agreement also
provides that, after the effective date of the merger, FLAG will either:
o Continue to provide to officers and employees of the Abbeville
entities employee benefits under Abbeville's existing employee benefit
and welfare plans or,
o If FLAG determines to provide to officers and employees of the
Abbeville entities employee benefits under other employee benefit
plans and welfare plans, provide generally to officers and employees
of the Abbeville entities employee benefits under employee benefit and
welfare plans (other than stock option or other plans involving the
potential issuance of FLAG common stock), on terms and conditions
which, when taken as a whole are substantially similar to those
currently provided by the FLAG entities to their similarly situated
officers and employees.
For purposes of participation and vesting (but not accrual of benefits)
under FLAG's employee benefit plans,
o Service under any qualified defined benefit plan of Abbeville will be
treated as service under FLAG's defined benefit plan, if any,
o Service under any qualified defined contribution plans of Abbeville
will be treated as service under FLAG's qualified defined contribution
plans, and
o Service under any other employee benefit plans of Abbeville will be
treated as service under any similar employee benefit plans maintained
by FLAG.
With respect to officers and employees of the Abbeville entities who, at or
after the effective date of the merger, become employees of a FLAG entity and
who, immediately prior to the effective date of the merger, are participants in
one or more employee welfare benefit plans maintained by the Abbeville entities,
FLAG will cause each comparable employee welfare benefit plan which is
substituted for an Abbeville welfare benefit plan to waive any evidence of
insurability or similar provision, to provide credit for such participation
prior to such substitution with regard to the application of any pre-existing
condition limitation, and to provide credit towards satisfaction of any
deductible or out-of-pocket provisions for expenses incurred by such
participants during the period prior to such substitution, if any, that overlaps
32
<PAGE>
with the then current plan year for each such substituted employee welfare
benefit plan. FLAG also will cause the surviving corporation and its
subsidiaries to honor in accordance with their terms all employment, severance,
consulting and other compensation contracts previously disclosed to FLAG by
Abbeville between any Abbeville entity and any current or former director,
officer, or employee thereof, and all provisions for vested benefits or other
vested amounts earned or accrued through the effective date of the merger under
the Abbeville benefit plans.
Certain Federal Income Tax Consequences
The following section summarizes the material anticipated federal income
tax consequences of the merger. This summary is based on the federal income tax
laws now in effect; it does not take into account possible changes in such laws
or interpretations, including amendments to applicable statutes or regulations
or changes in judicial decisions or administrative rulings, some of which may
have retroactive effect. This summary does not purport to address all aspects of
the possible federal income tax consequences of the merger and is not intended
as tax advice to any person. This summary does not address the federal income
tax consequences of the merger to stockholders in light of their particular
circumstances or status (for example, as foreign persons, tax-exempt entities,
dealers in securities, and insurance companies, among others). Nor does this
summary address any consequences of the merger under any state, local, estate,
or foreign tax laws. You are urged to consult your own tax advisors as to the
specific tax consequences of the merger to you, including tax return reporting
requirements, the application and effect of federal, foreign, state, local, and
other tax laws, and the implications of any proposed changes in the tax laws.
FLAG and Abbeville have not and will not request a federal income tax
ruling as to the tax consequences of this transaction from the Internal Revenue
Service. Instead, Powell, Goldstein, Frazer & Murphy LLP, counsel to FLAG, will
render an opinion to FLAG and Abbeville concerning material federal income tax
consequences of the proposed merger under federal income tax law. It is such
firm's opinion that, based upon the assumption the merger is consummated in
accordance with the merger agreement and the representations made by the
management of FLAG and Abbeville, the merger will constitute a reorganization
within the meaning of Section 368(a) of the Code.
Assuming the merger qualifies as a reorganization pursuant to Section
368(a) of the Code, the stockholders of Abbeville will have the following
federal income tax consequences:
o The stockholders of Abbeville will recognize no gain or loss upon the
exchange of all of their Abbeville common stock solely for shares of
FLAG common stock.
o The aggregate tax basis of the FLAG common stock received by the
Abbeville stockholders in the merger will, in each instance, be the
same as the aggregate tax basis of the Abbeville common stock
surrendered in exchange therefor, less the basis of any fractional
share of FLAG common stock settled by cash payment.
o The holding period of the FLAG common stock received by the Abbeville
stockholders will, in each instance, include the period during which
the Abbeville common stock surrendered in exchange therefor was held,
provided that the Abbeville common stock was held as a capital asset
on the date of the exchange.
o The payment of cash to Abbeville stockholders in lieu of fractional
share interests of FLAG common stock will be treated for federal
income tax purposes as if the fractional shares were distributed as
part of the exchange and then were redeemed by FLAG. These cash
payments will be treated as having been received as distributions in
full payment in exchange for the stock redeemed. Generally, any gain
or loss recognized upon such exchange will be capital gain or loss,
provided the fractional share constitutes a capital asset in the hands
of the exchanging stockholder.
33
<PAGE>
o Where solely cash is received by an Abbeville stockholder in exchange
for Abbeville common stock pursuant to the exercise of dissenters'
rights, the former Abbeville stockholder will be subject to federal
income tax as a result of such transaction. The cash will be treated
as having been received as a redemption in exchange for such holder's
Abbeville common stock.
Each Abbeville stockholder who receives FLAG common stock in the merger
will be required to attach a statement to such stockholder's federal income tax
return for the year of the merger which describes the facts of the merger,
including the stockholder's basis in the Abbeville common stock exchanged, and
the number of shares of FLAG common stock received in exchange for Abbeville
common stock. Each stockholder should also keep as part of such stockholder's
permanent records information necessary to establish such stockholder's basis
in, and holding period for, the FLAG common stock received in the merger.
If the merger fails to qualify as a tax-free reorganization for any reason,
the principal federal income tax consequences, under currently applicable law,
would be as follows:
o Gain or loss would be recognized by the holders of Abbeville common
stock upon the exchange of such shares in the merger for shares of
FLAG common stock, the amount of such gain or loss will be equal to
the difference between the fair market value of the shares of FLAG
common tock received in the merger, plus any cash in lieu of
fractional shares and your basis in the Thomaston Federal common stock
surrendered in the merger;
o The tax basis of the FLAG common stock to be received by the holders
of Abbeville common stock in the merger would be the fair market value
of such shares of FLAG common stock at the effective date of the
merger;
o The holding period of such shares of FLAG common stock to be received
by Abbeville stockholders pursuant to the merger would begin the day
after the effective date of the merger;
o No gain or loss would be recognized to Abbeville as a result of the
merger; and
o If the condition of receiving this tax opinion is waived by Abbeville,
Abbeville will resolicit its stockholders prior to proceeding with the
merger.
Certain tax consequences of the merger may vary depending upon your
particular circumstances. You are urged to consult your own tax advisors to
determine the particular tax consequences of the merger to you (including the
application and effect of federal, state, local and foreign income and other tax
laws).
Accounting Treatment
FLAG and Abbeville anticipate that the merger will be accounted for as a
pooling-of-interests. Under the pooling-of-interests method of accounting, the
recorded amounts of the assets and liabilities of Abbeville will be carried
forward at their previously recorded amounts.
In order for the merger to qualify for pooling-of-interests accounting
treatment, substantially all (90% or more) of the outstanding Abbeville common
stock must be exchanged for FLAG common stock with substantially similar terms.
There are other criteria that must be satisfied in order for the merger to
qualify as a pooling of interests, some of which criteria cannot be satisfied
until after the effective date of the merger.
For information concerning conditions to be imposed on the exchange of
Abbeville common stock for FLAG common stock in the merger by affiliates of
Abbeville and restrictions to be imposed on the transferability of the FLAG
common stock received by those affiliates in the merger in order, among other
things, to ensure the availability of pooling-of-interests accounting treatment,
see "-- Resales of FLAG Common Stock."
34
<PAGE>
Expenses And Fees
The merger agreement provides that each of the parties will bear and pay
all direct costs and expenses incurred by it or on its behalf in connection with
the transactions contemplated by the merger agreement, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel.
In the event FLAG terminates the merger agreement as a result of a material
breach by Abbeville of any representation, warranty, covenant or agreement,
which cannot be or has not been cured within 30 days after FLAG has given
Abbeville written notice of such breach, and the breach of any representation or
warranty, in the opinion of FLAG is reasonably likely to have a material adverse
effect or if the Abbeville stockholders do not approve the merger agreement,
then Abbeville shall pay to FLAG an amount equal to FLAG's actual out of pocket
expenses incurred in connection with the merger transaction plus $100,000.
In the event that Abbeville terminates the merger agreement as a result of
a material breach by FLAG of any representation, warranty, covenant or
agreement, which cannot or has not been cured within 30 days after Abbeville has
given FLAG written notice of such breach, and the breach of any representation
or warranty, in the opinion of Abbeville, is reasonably likely to have a
material adverse effect, then FLAG shall pay to Abbeville an amount equal to
Abbeville's actual out of pocket expenses incurred in connection with the merger
transaction plus $100,000. If Abbeville fails to consummate the merger agreement
because the merger agreement is terminated because the Abbeville stockholders
did not approve the merger or because a meeting of the Abbeville stockholders is
not held or is cancelled as a result of Abbeville pursuing another acquisition,
then Abbeville must pay FLAG the amount of FLAG's actual expenses incurred in
connection with the merger transaction plus $500,000.
Resales Of FLAG Common Stock
The FLAG common stock issued to stockholders of Abbeville in connection
with the merger will be registered under the Securities Act. The shares of FLAG
common stock that the holders of Abbeville common stock receive will be freely
transferable by those stockholders of Abbeville and FLAG not considered to be
"Affiliates" of Abbeville or FLAG. "Affiliates" generally are defined as persons
or entities who control, are controlled by, or are under common control with
Abbeville or FLAG at the time of the Special Meeting (generally, directors,
executive officers and 10% stockholders).
Rules 144 and 145 under the Securities Act restrict the sale of FLAG common
stock received in the merger by Affiliates and certain of their family members
and related interests. Generally speaking, during the one-year period following
the effective date of the merger, affiliates of Abbeville or FLAG may resell
publicly the FLAG common stock received by them in the merger within certain
limitations as to the amount of FLAG common stock sold in any three-month period
and as to the manner of sale. After this one-year period, affiliates of
Abbeville who are not Affiliates of FLAG may resell their shares without
restriction. The ability of affiliates to resell shares of FLAG common stock
received in the merger under Rule 144 or 145 as summarized in this proxy
statement/prospectus generally will be subject to FLAG's having satisfied its
Exchange Act reporting requirements for specified periods prior to the time of
sale. Affiliates will receive additional information regarding the effect of
Rules 144 and 145 on their ability to resell FLAG common stock received in the
merger. Affiliates also would be permitted to resell FLAG common stock received
in the merger pursuant to an effective registration statement under the
Securities Act or an available exemption from the Securities Act registration
requirements. This proxy statement/prospectus does not cover any resales of FLAG
common stock received by persons who may be deemed to be affiliates of Abbeville
or FLAG.
Abbeville has agreed to use its reasonable efforts to cause each person who
Abbeville considers to be an affiliate of Abbeville to sign and deliver to FLAG
prior to the effective date of the merger, an agreement providing that such
affiliate will not sell, pledge, transfer, or otherwise dispose of any FLAG
common stock obtained as a result of the merger (1) except in compliance with
35
<PAGE>
the Securities Act and the rules and regulations of the SEC and (2) in any case,
until after results covering 30 days of post-merger operations of FLAG have been
published. The receipt of the Abbeville Affiliate Agreements by FLAG is also a
condition to FLAG's obligations to consummate the merger. Abbeville stock
certificates surrendered for exchange by any person who is an Affiliate of
Abbeville for purposes of Rule 145(c) under the Securities Act shall not be
exchanged for FLAG stock certificates until FLAG has received such a written
agreement from such person. Prior to publication of such results, FLAG will not
transfer on its books any shares of FLAG common stock received by an affiliate
in the merger. The stock certificates representing FLAG common stock issued to
affiliates in the merger may bear a legend summarizing these restrictions. See
"-- Conditions to Consummation of the Merger."
Stock Option Agreement
On July 22, 1999, Abbeville and FLAG entered into a stock option agreement
to induce FLAG to amend the merger agreement. Under the terms of the stock
option agreement, Abbeville granted FLAG an option to purchase up to 47,285
shares of Abbeville common stock under the circumstances described below. If
FLAG were to exercise the option for all of the shares, FLAG's ownership would
represent 19.9% of the issued and outstanding shares of Abbeville common stock
before the exercise of the option. The purchase price of the option is $24.00
per share. This description of the stock option agreement and the option is a
summary. You should review the stock option agreement included in Appendix A as
an exhibit to the merger agreement.
FLAG may exercise the option, in whole or in part, if a Purchase Event (as
defined below) occurs, except that FLAG may not be in a material breach of the
stock option agreement or the merger agreement at the time it exercises the
option. FLAG may need to receive regulatory approval before exercising the
option. The stock option agreement defines "Purchase Event" as either of the
following events:
o without FLAG's written consent, Abbeville authorizing, recommending,
publicly proposing, or publicly announcing an intention to authorize,
recommend, or propose or entering into an agreement with any third
party to effect:
o a merger, consolidation, or similar transaction involving
Abbeville or any of its subsidiaries (other than transactions
solely between Abbeville subsidiaries),
o the disposition, by sale, lease, exchange, or otherwise, of 20%
or more of the consolidated assets of Abbeville and its
subsidiaries, except as permitted by the merger agreement, or
o the issuance, sale, or other disposition of (including by way of
merger, consolidation, share exchange, or any similar
transaction) securities representing 20% or more of the voting
power of Abbeville or any of its subsidiaries; or
o any third party acquiring beneficial ownership, or the right to
acquire beneficial ownership, of 20% or more of the outstanding shares
of Abbeville common stock.
The option will terminate on the earliest of:
o the effective date of the merger;
o termination of the merger agreement before a Purchase Event or a
Preliminary Purchase Event (as defined below) occurs, other than a
termination of the merger agreement involving a willful breach by
Abbeville, which the stock option agreement defines as Default
Termination;
o 6 months after a Default Termination and;
36
<PAGE>
o 6 months after termination of the merger agreement (other than as a
result of Default Termination) following a Purchase Event or a
Preliminary Purchase Event.
The stock option agreement defines "Preliminary Purchase Event" as either
of the following events:
o commencement of filing of a registration statement under the
Securities Act by any third party of a tender offer or exchange offer
to purchase any shares of Abbeville common stock such that, upon
consummation of the offer, that person would own or control 15% or
more of the then outstanding shares of Abbeville common stock; or
o stockholders of Abbeville do not approve the merger agreement,
Abbeville does not hold a shareholder meeting before the merger
agreement terminates, or Abbeville's Board of Directors withdraws or
modifies in a manner adverse to FLAG of its recommendation to the
Abbeville stockholders with respect to the merger agreement after
public announcement that a third party:
o made, or disclosed an intention to make, a proposal to engage in
an acquisition transaction,
o commenced a tender offer or filed a registration statement under
the Securities Act with respect to an exchange offer, or
o filed an application under certain federal statutes for approval
to engage in an acquisition transaction.
In the event of any change in Abbeville common stock because of a stock
dividend, split-up, recapitalization, exchange of shares, or similar
transaction, Abbeville will adjust the type and number of securities subject to
the option, and the purchase price per share appropriately. If any additional
shares of Abbeville common stock are issued after the date of the stock option
agreement, Abbeville will adjust the number of shares of Abbeville common stock
subject to the option so that, after that issuance, and together with any shares
of Abbeville common stock Abbeville previously issued pursuant to the option
agreement, the number of shares will equal 19.9% of the number of shares then
issued and outstanding, without giving effect to any shares subject to or issued
pursuant to the option.
If a Repurchase Event (as defined below) occurs prior to FLAG exercising
the option or termination of the option, Abbeville is obligated to repurchase
the option and any shares of Abbeville common stock purchased pursuant to the
option agreement at a specified price subject to regulatory restrictions. FLAG
must request that Abbeville repurchase the option or shares within 12 months of
the Repurchase Event.
The stock option agreement defines "Repurchase Event" as occurring if:
o any person (other than FLAG or any FLAG subsidiary) has acquired
beneficial ownership (as such term is defined in Rule 13d-3 under the
Exchange Act), or the right to acquire beneficial ownership, or any
"group" (as such term is defined under the Exchange Act), has been
formed which beneficially owns or has the right to acquire beneficial
ownership of 50% or more of the then-outstanding shares of Abbeville
common stock; or
o Abbeville consummates any of the following transactions:
o Abbeville consolidates with or merges into any person, other than
FLAG or one of FLAG's subsidiaries, and is not the continuing or
surviving corporation of such consolidation or merger;
o Abbeville permits any person, other than FLAG or one of FLAG's
subsidiaries, to merge into Abbeville and Abbeville is the
continuing or surviving corporation, but, in connection with that
merger, the then outstanding shares of Abbeville common stock are
changed into or exchanged for stock or other securities of
37
<PAGE>
Abbeville or any other person or cash or any other property or
the outstanding shares of Abbeville common stock immediately
prior to such merger shall after such merger represent less than
50% of the outstanding shares and share equivalents of the merged
company; or
o Abbeville sells or otherwise transfers all or substantially all
of its assets to any person, other than FLAG or one of FLAG's
subsidiaries.
If Abbeville enters into an agreement to engage in any of the transactions
described in clause (2) of the definition of Repurchase Event above before the
exercise or termination of the option, the agreement governing that transaction
must make proper provision so that the option will be converted into, or
exchanged for, an option with terms similar to the option, at the election of
FLAG, of either the acquiring person or any person that controls the acquiring
person.
After the occurrence of a Purchase Event, FLAG may assign the stock option
agreement and its rights under the stock option agreement in whole or in part.
Abbeville has agreed to file with the SEC and to cause to become effective
registration statements under the Securities Act with respect to dispositions by
FLAG and its assigns of all or part of the option and/or any shares of Abbeville
common stock into which the option is exercisable.
DESCRIPTION OF FLAG COMMON STOCK
FLAG's authorized capital stock consists of 20,000,000 shares of $1.00 par
value common stock, and 10,000,000 shares of preferred stock. The holders of the
FLAG common stock have unlimited voting rights and are entitled to one vote per
share for all purposes. Subject to such preferential rights as may be determined
by the Board of Directors of FLAG in connection with the future issuance of
shares of FLAG preferred stock, holders of FLAG common stock are entitled to
such dividends, if any, as may be declared by the Board of Directors of FLAG in
compliance with the provisions of the Georgia Business Corporation Code and the
regulations of the appropriate regulatory authorities, and to receive the net
assets of the corporation upon dissolution. The FLAG common stock does not have
any preemptive rights with respect to acquiring additional shares of FLAG common
stock, and the shares are not subject to any conversion, redemption or sinking
fund provisions. The outstanding shares of FLAG common stock are, and the shares
to be issued by FLAG in connection with the merger agreement will be, when
issued, fully-paid and nonassessable. The FLAG Board of Directors is divided
into three classes, as nearly equal in number as possible. FLAG common stock
does not have cumulative voting rights in the election of FLAG directors.
The Board of Directors is authorized to determine the series, preferences,
limitations, and relative rights, including par value, of any authorized but
unissued shares of FLAG preferred stock. No shares of FLAG preferred stock are
presently outstanding. Although such shares may be issued in the future, FLAG
has no present plans to issue any preferred stock. The FLAG preferred stock was
authorized for future flexibility, and could be issued in a manner that could
have an anti-takeover effect by discouraging a third party from seeking to
acquire FLAG. FLAG knows of no present attempts to acquire FLAG.
In order to approve certain "business combinations" with certain
"interested stockholders" (10% or more stockholders), or to amend the provisions
in the FLAG Articles of Incorporation relating to such business combinations,
the affirmative vote of two-thirds of the issued and outstanding shares of FLAG
common stock entitled to vote thereon is required, unless (1) at least
two-thirds of the directors of FLAG approve a memorandum of understanding with
the interested shareholder regarding the business combination prior to the date
on which such shareholder became an interested shareholder, or (2) the business
combination is unanimously approved by certain "continuing directors" of FLAG.
In addition, in order to amend certain provisions of FLAG's Articles of
Incorporation and Bylaws relating to the number, election, term and removal of
FLAG Directors, a two-thirds vote of the issued and outstanding shares of FLAG
is required, unless two-thirds of the directors then serving approve the
amendment.
38
<PAGE>
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
As a result of the merger, holders of Abbeville common stock will be
exchanging their shares of a South Carolina corporation, which are governed by
the South Carolina Business Corporation Act, Abbeville's Articles of
Incorporation, and Bylaws, for shares of common stock of FLAG, a Georgia
corporation, which are governed by the Georgia Business Corporation Code, FLAG's
Articles of Incorporation, and Bylaws. Certain significant differences exist
between the rights of Abbeville stockholders and those of FLAG stockholders. The
differences that Abbeville and FLAG consider material are summarized below. The
following discussion is necessarily general. It is not intended to be a complete
statement of all the differences affecting the rights of stockholders, and their
respective entities, and it is qualified in its entirety by reference to the
Georgia Business Corporation Code, and the South Carolina Business Corporation
Act, as well as to FLAG's Articles and Bylaws and Abbeville's Articles and
Bylaws.
Authorized Capital Stock
FLAG. The FLAG Articles authorize the issuance of an aggregate of
20,000,000 shares of common stock, $1.00 par value, of which 6,561,879 shares
were issued and outstanding as of June 30, 1999. The FLAG Articles also
authorize the issuance, in one or more series, of not more than 10,000,000
shares of preferred stock with preferences, limitations and relative rights,
including par value, as the FLAG Board of Directors from time to time may
determine and set forth in an amendment to the FLAG Articles.
Shares of FLAG common stock have unlimited voting rights and are entitled
to receive the net assets of FLAG upon the dissolution of the corporation. The
FLAG Bylaws provide that each share of FLAG common stock is entitled to one vote
per share for all purposes.
FLAG's Board of Directors may authorize the issuance of authorized but
unissued shares of FLAG common stock without further action by FLAG's
stockholders, unless such action is required in a particular case by applicable
laws or regulations or by any stock exchange upon which FLAG's capital stock may
be listed. FLAG's stockholders do not have the preemptive right to purchase or
subscribe to any unissued authorized shares of FLAG common stock or FLAG
Preferred Stock or any option or warrant for the purchase thereof.
The authority to issue additional shares of FLAG common stock provides FLAG
with the flexibility necessary to meet its future needs without the delay
resulting from seeking shareholder approval. The authorized but unissued shares
of FLAG common stock will be issuable from time to time for any corporate
purpose, including, without limitation, stock splits, stock dividends, employee
benefit and compensation plans, acquisitions, and public or private sales for
cash as a means of raising capital. Such shares could be used to dilute the
stock ownership of persons seeking to obtain control of FLAG. In addition, the
sale of a substantial number of shares of FLAG common stock to persons who have
an understanding with FLAG concerning the voting of such shares, or the
distribution or declaration of a dividend of shares of FLAG common stock (or the
right to receive FLAG common stock) to FLAG stockholders, may have the effect of
discouraging or increasing the cost of unsolicited attempts to acquire control
of FLAG.
Abbeville. Abbeville's authorized capital stock consists of 1,000,000
shares of Abbeville common stock, $5.00 par value, of which 237,615 shares were
outstanding as of ___________, 1999. Each share of Abbeville common stock is
entitled to one vote per share for all purposes. Abbeville's stockholders do not
have the preemptive right to purchase or subscribe to any unissued authorized
shares of Abbeville common stock or any option or warrant for the purchase
thereof. In addition, the Board of Directors of Abbeville has the ability to
increase the number of issued and outstanding shares of Abbeville common stock
without the approval of the stockholders, within the maximum number of shares
authorized by Abbeville's Articles.
39
<PAGE>
Amendment Of Articles Of Incorporation And Bylaws
FLAG. The FLAG Articles and Bylaws are generally silent with respect to the
issue of amending the FLAG Articles, and thus, the Georgia Business Corporation
Code dictates the requirements for making such an amendment. The Georgia
Business Corporation Code generally provides that other than in the case of
certain routine amendments which may be made by a corporation's board of
directors without shareholder action (such as changing the corporate name), and
other amendments which the Georgia Business Corporation Code specifically allows
without shareholder action, the corporation's board of directors must recommend
any amendment of the FLAG Articles to the stockholders (unless the board elects
to make no such recommendation because of a conflict of interest or other
special circumstances, and the board communicates the reasons for its election
to the stockholders) and the affirmative vote of a majority of the votes
entitled to be cast on the amendment by each voting group entitled to vote on
the amendment (unless the Georgia Business Corporation Code, the articles of
incorporation, or the board require a greater vote or a vote by voting groups)
is required to amend the corporation's articles of incorporation. The FLAG
Articles provide that the provisions regarding the approval required for certain
business combinations may only be changed by the affirmative vote of at least
two-thirds of the issued and outstanding shares of the corporation entitled to
vote thereon at any regular or special meeting of the stockholders, and notice
of the proposed change must be contained in the notice of the meeting, unless
two-thirds of certain "continuing directors" approve the proposed amendment. The
FLAG Articles also provide that the provisions regarding the election, term and
removal of FLAG Directors may only be amended or rescinded by the affirmative
vote of the holders of at least two-thirds of the issued and outstanding shares
of FLAG entitled to vote in an election of directors or at any regular or
special meeting of the stockholders, and notice of any proposed change must be
contained in the notice of the meeting, unless two-thirds of the directors then
serving approve the proposed amendment.
The FLAG Bylaws generally provide that the Bylaws may be made, amended or
repealed by the FLAG Board of Directors unless the FLAG Articles or the Georgia
Business Corporation Code reserve the power to amend or repeal the Bylaws
exclusively to the stockholders in whole or in part, or the stockholders, in
amending or repealing a particular Bylaw, provide expressly that the FLAG Board
of Directors may not amend or repeal that Bylaw. Neither the FLAG Articles nor
Bylaws expressly permit the FLAG stockholders to make, alter or rescind any
Bylaws. Any amendment of the provisions in the FLAG Bylaws relating to the
number of directors of FLAG requires the affirmative vote of two-thirds of all
directors then in office or the affirmative vote of the holders of two-thirds of
the issued and outstanding shares of FLAG entitled to vote at any regular or
special meeting of the stockholders called for that purpose. Unless two-thirds
of the directors then serving approve, the provisions in the FLAG Bylaws
relating to the removal of FLAG directors by the FLAG stockholders may only be
amended or rescinded by the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of FLAG entitled to vote in an
election of directors or at any regular or special meeting of the stockholders,
and notice of any proposed change must be contained in the notice of the
meeting.
Abbeville. Similar to the Georgia Business Corporation Code, the South
Carolina Business Corporation Act provides that, other than in the case of
certain routine amendments which may be made by a corporation's Board of
Directors without shareholder action, Abbeville's Board of Directors must
recommend any amendment to Abbeville's Articles to the stockholders (unless the
Board determines that because of conflict of interest or other special
circumstances it should make no recommendation and communicates the basis of its
determination to the stockholders with the amendment). However, under the South
Carolina Business Corporation Act, the affirmative vote of at least two-thirds
of the votes entitled to be cast on the amendment is required to approve any
such amendment whereas the vote of only a majority of the votes entitled to be
cast on an amendment is required under the Georgia Business Corporation Code.
The Abbeville Articles provide that Articles 12 and 13 regarding the shareholder
approval required for certain business combinations may only be changed or
amended by the affirmative vote of at least 70% of the outstanding shares of the
corporation.
Under the South Carolina Business Corporation Act, a corporation's Bylaws
may be amended in whole or in part by the Board of Directors or the stockholders
unless the Articles of Incorporation reserves the power exclusively to
stockholders in whole or in part or the stockholders, in adopting, amending or
repealing a particular Bylaw, expressly provide that the Board of Directors may
40
<PAGE>
not adopt amend or repeal that Bylaw or any Bylaw on that subject. Abbeville's
Bylaws explicitly provide that the Board of Directors shall not adopt any Bylaw
which does any of the following:
o Requires for action by the stockholders any quorum or vote which is
greater than that which is permitted by law or the Articles of
Incorporation;
o Provides for the management of the corporation otherwise than by the
Board of Directors or its Executive Committee;
o Classifies or staggers the election of directors; or
o Denies, limits or impairs the power of stockholders to alter, amend or
repeal the Bylaws or adopt new Bylaws.
The stockholders may, at any regular or special meeting of stockholders,
adopt, amend or repeal the Bylaws.
Under the South Carolina Business Corporation Act, it is provided that in
the case of a corporation which is not a public corporation, if the holders of
at least 10% of any class of voting shares of the corporation propose amendments
to the Articles of Incorporation, the Board of Directors shall submit the
proposed amendments to the stockholders at the next possible special or annual
meeting.
Classified Board Of Directors And Absence Of Cumulative Voting
FLAG. FLAG's Bylaws generally provide that the number of directors
constituting the FLAG Board of Directors shall be between ten and twenty-five.
The Board of Directors fixes the precise number of directors. The number of
directors is currently set at thirteen. The FLAG Board of Directors is
classified. The FLAG Articles and Bylaws provide that FLAG's Board of Directors
is divided into three classes, with each class to be as nearly equal in number
as possible. The directors in each class serve three-year terms of office. The
effect of FLAG having a classified Board of Directors is that only approximately
one-third of the members of the Board of Directors are elected each year, which
effectively requires two annual meetings for FLAG's stockholders to change a
majority of the members of the Board of Directors. The FLAG Bylaws provide that
in the event of a vacancy on the FLAG Board of Directors, including any vacancy
created by reason of an increase in the number of directors, such vacancy may be
filled by the stockholders of FLAG, the FLAG Board of Directors, or, if the
directors remaining in office constitute fewer than a quorum of the Board of
Directors, by the affirmative vote of a majority of the remaining directors.
FLAG stockholders do not have cumulative voting rights with respect to the
election of directors. All elections for directors are decided by a plurality of
the votes cast by the shares entitled to vote in the election at a meeting at
which a quorum is present.
Abbeville. The Abbeville Articles provide that the number of directors
constituting the entire Board shall not be less than 8 nor more than 12 as fixed
from time to time by a vote of a majority of the stockholders or by the whole
Board. The stockholders have currently established the number of directors at
nine. The Abbeville Articles further provide that the Board is to be divided
into three classes as nearly equal in number as the then authorized number of
directors constituting the whole Board permits. The Abbeville Articles
specifically deny cumulative voting rights in the election of directors. The
members of each class shall be elected for the term of three years and until
their successors are elected and qualified with one class elected annually. The
Abbeville Articles provide that each holder of shares of Abbeville common stock
shall be entitled to one vote for each share held by such holder, including
votes for the election of directors. Abbeville stockholders are not entitled to
cumulate votes. All elections for directors are decided by the vote of a
majority (rather than a plurality) of the total outstanding shares of the
corporation.
41
<PAGE>
Removal Of Directors
FLAG. Under the FLAG Articles and Bylaws, any one or more directors of FLAG
may be removed from office, but only for cause (defined as final conviction of a
felony, request or demand for removal by any bank regulatory authority having
jurisdiction over FLAG, or breach of fiduciary duty involving personal profit).
Such removal must be effected by the affirmative vote of the holders of a
majority of the outstanding shares of FLAG.
Abbeville. The Abbeville Articles and Bylaws provide that a director may be
removed only for cause and upon the approval of the holders of a majority of the
outstanding stock of the corporation. The Abbeville Articles further provide
that cause is to be defined to mean fraudulent or dishonest acts, or gross abuse
of authority in the discharge of duties of the corporation, and must be
established after written notice of specific charges and the opportunity to meet
and refute such charges.
Indemnification
FLAG. The FLAG Articles and Bylaws generally provide that any director who
is deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding which is initiated against such person by reason of his
serving as a director, to the fullest extent authorized by the Georgia Business
Corporation Code; provided, however, that FLAG will not indemnify any director
for any liability or expenses incurred by such director
o for any appropriation, in violation of his duties, of any business
opportunity of FLAG;
o for any acts or omissions which involve intentional misconduct or a
knowing violation of law;
o for the types of liability set forth in Section 14-2-832 of the
Georgia Business Corporation Code or successor provisions; or
o for any transaction from which the director derives an improper
personal benefit.
FLAG's Articles and Bylaws provide for the advancement of expenses to its
directors at the outset of a proceeding, upon the receipt from such director of
the written affirmation and repayment promise required by Section 14-2-856 of
the Georgia Business Corporation Code, the purchase of insurance by FLAG against
any liability of the director arising from his duties and actions as a director,
the survival of such indemnification to the director's heirs, executors and
administrators, and the limitation of a director's liability to the corporation
itself. The indemnification provisions state that they are non-exclusive, and
shall not impair any other rights to which those seeking indemnification or
advancement of expenses may be entitled. The FLAG Bylaws also provide for
similar indemnification of the officers of FLAG. The FLAG Bylaws provide that,
stockholders are entitled to notification of any indemnification granted to the
directors.
Abbeville. Abbeville's Articles and Bylaws contain specific provisions
regarding the indemnification of officers and directors. These sections
generally provide that directors, officers, employees and agents will be
indemnified against liability and other expenses incurred in a proceeding which
is instituted against such person by reason of the fact that the person was
serving as a director of Abbeville, if it is determined that the director acted
in good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interest of the corporation and, with respect to any
criminal action or proceedings, had no reasonable cause to believe that his or
her conduct was unlawful. Abbeville's Articles and Bylaws provide for the
advancement of expenses to its directors and officers in defending a civil or
criminal action, suit or proceeding upon written affirmation of the officer or
director's good faith belief that he or she has met the standard of conduct
required under the South Carolina Business Corporation Act and makes an
undertaking to repay such amount if it is ultimately determined that the officer
or director is not entitled to be indemnified by the corporation. The
indemnification provided in the Articles of Incorporation and Bylaws is not to
be deemed exclusive of any other rights that an individual might have.
Abbeville's Articles of Incorporation and Bylaws further provide that the
company may purchase insurance for these purposes.
42
<PAGE>
Special Meetings Of Shareholders
FLAG. FLAG's Bylaws provide that special meetings of the stockholders may
be called at any time by a majority of the entire Board of Directors of FLAG,
the Chairman of the Board, the President, or, upon delivery to FLAG's Secretary
of a signed and dated written request setting out the purpose or purposes for
the meeting, the holders of a majority of the votes entitled to be cast on any
issue proposed to be considered at the proposed special meeting.
Abbeville. The Abbeville Bylaws provide that special meetings of the
stockholders may be called for any purpose, by the President, Chairman of the
Board of Directors, or a majority of the Board of Directors. Abbeville is
required to call a special meeting when requested in writing of not less than
10% of all shares of Abbeville entitled to vote at the meeting.
Actions by Shareholders Without a Meeting
FLAG. In accordance with Section 14-2-704 of the Georgia Business
Corporation Code, action required or permitted by the Georgia Business
Corporation Code to be taken at an annual or special meeting may be taken
without a meeting if the action is taken by all the stockholders entitled to
vote on the action.
The provisions of the Georgia Business Corporation Code do not affect the
special voting requirements contained in the FLAG Articles of Incorporation or
Bylaws for the approval of a business combination or the amendment of such
provision. The approval of a business combination or of an amendment to the
provision which sets forth the voting requirements of such combinations requires
the affirmative vote of the holders of two-thirds of all shares of FLAG common
stock outstanding and entitled to vote, unless (1) two-thirds of the directors
of FLAG approve a memorandum of understanding with the interested shareholder
prior to the date when such interested shareholder first became an interested
shareholder, or (2) the business combination is unanimously approved by the
continuing directors of FLAG.
Abbeville. The Abbeville Bylaws provide that any action required to be
taken at a meeting of the stockholders or any other action which may be taken at
a meeting of stockholders, may be taken without a meeting if consent in writing,
setting forth the action so taken, is given by all of the stockholders entitled
to vote with respect to the subject matter.
43
<PAGE>
Mergers, Consolidations, And Sales Of Assets
FLAG. The FLAG Articles generally require the affirmative vote of the
holders of at least two-thirds of all the issued and outstanding shares (other
than shares held by an "interested shareholder") of FLAG common stock entitled
to vote to approve a "business combination" with an interested shareholder
(basically, a 10% or more shareholder of FLAG), unless (1) two-thirds of the
directors of FLAG approve a memorandum of understanding with the interested
shareholder regarding the business combination prior to the date such
shareholder became an interested shareholder, or (2) the business combination is
unanimously approved by certain "continuing directors" of FLAG. In addition,
FLAG's Bylaws expressly provide that the terms and requirements of Sections
14-2-1110 through 14-2-1113 of the Georgia Business Corporation Code will be
applicable to FLAG and to any business combination approved or recommended by
the Board of Directors of FLAG. As a result, Section 14-2-1111 requires that the
business combination be (1) unanimously approved by the continuing directors,
provided that the continuing directors constitute at least three members of the
board of directors at the time of such approval, or (2) recommended by at least
two-thirds of the continuing directors and approved by a majority of the votes
entitled to be cast by the holders voting shares of the corporation (other than
the voting shares beneficially owned by the interested shareholder who is a
party to the business combination). These voting requirements are required in
addition to any vote otherwise required by law or the Articles of Incorporation
of FLAG. Further, Section 14-2-1112 states that the voting requirements in
Section 14-2-1111 do not apply as long as all of the stockholders of FLAG
receive a fair price in return for their stock as a result of the business
combination. However, the voting requirements contained within the FLAG Articles
of Incorporation would continue to apply to any such business combinations.
The provisions of the FLAG Articles of Incorporation and Bylaws relating to
business combinations and Sections 14-2-1110 through 14-2-1113 of the Georgia
Business Corporation Code are designed as anti-takeover measures, and for the
protection of the minority stockholders of FLAG against some of the inequities
which arise in certain hostile takeover attempts.
Abbeville. The relevant provisions of the South Carolina Business
Corporation Act generally require the affirmative vote of the holders of at
least two-thirds of all of the issued and outstanding shares of Abbeville in
order to approve mergers, consolidations, sales of assets and similar
transactions. However, the Abbeville Articles provide that the affirmative vote
of not less than 70% of the outstanding stock is required to approve such
transaction if the transaction has not been recommended to stockholders by at
least a majority of the entire Board of Directors. The Abbeville Articles
further provide that the affirmative vote of not less than 70% of the
outstanding stock, in addition to the affirmative vote of the holders of not
less than a majority of the outstanding stock held by stockholders other than a
"controlling party", is required to approve any business combination transaction
involving a controlling party (generally the owner of 20% or more of the
corporation's stock). Abbeville's Articles provide that those heightened voting
requirements do not apply if the transaction has been approved by a majority of
the "continuing directors" or if certain fair price provisions are met. These
provisions are designed as anti-takeover measures and for the protection of the
minority stockholders of Abbeville against some of the inequities which arise in
certain hostile takeover attempts.
44
<PAGE>
Shareholders' Rights To Examine Books And Records
FLAG. The FLAG Bylaws state that the Board of Directors of FLAG has the
power to determine which accounts and books of FLAG, if any, will be open to the
inspection of stockholders, except such books and records which are required by
law to be held open for inspection. The Georgia Business Corporation Code
provides that a shareholder is entitled to inspect and copy certain books and
records (such as the corporation's articles of incorporation or bylaws) upon
written demand at least five days before the date on which he wishes to inspect
such records. A shareholder is entitled to inspect certain other documents (such
as minutes of the meetings of the board of directors, accounting records and the
record of stockholders of the corporation) provided that such inspection must
occur during regular business hours at a reasonable location determined by FLAG,
and any such demand for inspection will only be permitted if the following
conditions are met:
o the demand for inspection is made in good faith, or made for a proper
purpose (a purpose reasonably relevant to such person's legitimate
interest as a shareholder);
o the shareholder describes with particularity his or her purpose for
the inspection and the documents which he wishes to inspect;
o the records requested for inspection by the shareholder are directly
connected with his or her stated purpose; and
o the records are to be used solely for the shareholder's stated
purpose.
The FLAG Bylaws also state that the Board has the power to prescribe
reasonable rules and regulations not in conflict with applicable law for the
inspection of corporate books or accounts.
Abbeville. The Abbeville Bylaws provide that before each meeting of
stockholders the Secretary shall prepare an alphabetical list of stockholders
entitled to vote at the meeting and the number of shares held by each. The list
is to be made available not less than 10 days before such meeting and any
shareholder may inspect the list any time during the usual business hours of the
corporation. The list also is to be produced and kept open at the time and place
of the meeting and any shareholder may inspect the list during the whole time of
the meeting. South Carolina law provides that a shareholder is entitled to
inspect and copy during regular business hours at the corporation's principal
office any of the records required by statute to be kept by the corporation if
the shareholder gives written demand to the corporation at least five business
days before the scheduled inspection. A shareholder may inspect and copy records
only if the demand is made in good faith and for a proper purpose, the
shareholder describes with reasonable particularity his purpose and the records
desired to be inspected, and the records are directly connected with the
purpose.
Dividends
FLAG. The FLAG Bylaws provide that dividends upon the capital stock of FLAG
may be declared by the FLAG Board of Directors, as long as the Board of
Directors complies with the requirements of the Georgia Business Corporation
Code and the applicable rules and regulations of any relevant regulatory
authorities. Such dividends may be paid in cash, property, or shares of FLAG's
capital stock. Section 14-2-640 of the Georgia Business Corporation Code
provides, generally, that no distribution, including dividends, may be made by a
corporation if, after giving the distribution effect: (1) the corporation would
not be able to pay its debts as they become due in the usual course of business;
or (2) the corporation's total assets would be less than the sum of its total
liabilities plus any amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the distribution.
45
<PAGE>
Abbeville. Under South Carolina law, Abbeville may provide dividends upon
its capital stock if, after giving effect to the distribution, Abbeville would
be able to pay its debts as they become due in the usual course of business or
Abbeville's total assets would not be less than the sum of its total liabilities
plus the amount that would be needed, if Abbeville were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution.
COMPARATIVE MARKET PRICES AND DIVIDENDS
FLAG common stock is traded in the over-the-counter market and is quoted on
the Nasdaq National Market under the symbol "FLAG." The following table sets
forth the high and low sale prices per share of FLAG common stock on the Nasdaq
National Market and the dividends paid per share of FLAG common stock for the
indicated periods. Effective June 3, 1998, FLAG declared a 3-for-2 stock split.
The amounts below have been adjusted to reflect the stock split.
Sale Price Per
Share of FLAG Dividends Declared
Common Stock Per Share of FLAG
Common Stock
----------------------
High Low
----------- ----------- ---------------
1996
First Quarter........................... $ 9.67 $ 8.33 $0.042
Second Quarter.......................... 9.00 8.00 0.034
Third Quarter........................... 8.50 6.33 0.034
Fourth Quarter.......................... 7.83 7.17 0.034
1997
First Quarter........................... $ 8.67 $ 6.83 $0.046
Second Quarter.......................... 9.75 7.50 0.034
Third Quarter........................... 11.00 9.33 0.034
Fourth Quarter.......................... 14.33 11.00 0.034
1998
First Quarter........................... $ 14.33 $ 11.92 $0.046
Second Quarter.......................... 19.38 12.67 0.060
Third Quarter........................... 19.38 12.50 0.060
Fourth Quarter.......................... 14.63 10.25 0.060
1999
First Quarter........................... 11.81 9.13 0.060
Second Quarter.......................... 11.00 9.00 0.060
Third Quarter (through _______, 1999)...
On March 30, 1999, the last day prior to the public announcement of the
proposed merger between FLAG and Abbeville, the last reported sale price per
share of FLAG common stock on the Nasdaq National Market was $10.25, as adjusted
for 3-for-2 stock split effective June 3, 1998, and the resulting equivalent pro
forma price per share of Abbeville common stock (based on a 3.75 exchange ratio
which reflects the increase in the exchange ratio since the FLAG Common Stock
was below $11.00) was $38.44. On _____________, 1999, the latest practicable
date prior to the mailing of this proxy statement/prospectus, the last reported
sale price per share of FLAG common stock on the Nasdaq National Market was
$______, and the resulting equivalent pro forma price per share of Abbeville
common stock was $_____. The equivalent per share price of a share of Abbeville
common stock at each specified date represents the last reported sale price of a
share of FLAG common stock on such date multiplied by the exchange ratio that
would be applicable because the reported sale price was less than $11.00.
46
<PAGE>
The market price of FLAG common stock on the effective date of the merger
may be higher or lower than the market price at the time the Merger Proposal was
announced, at the time the merger agreement was executed, at the time of mailing
of this proxy statement/prospectus, or at the time of the Special Meeting.
Holders of Abbeville common stock are not assured of receiving any specific
market value of FLAG common stock on the effective date of the merger except
that the total market value of FLAG common stock to be issued in the merger will
not be less than $9,110,250.
There is no established public trading market for the Abbeville common
stock, and no reliable information is available as to trades of such shares or
the prices at which such shares have traded. Abbeville has paid annual dividends
since 1993.
To the knowledge of Abbeville, the most recent trade of Abbeville common
stock prior to March 30, 1999, the last day prior to the public announcement of
the proposed merger between FLAG and Abbeville, was the sale of 510 shares on
November 5, 1998 at $24.00 per share. To the knowledge of Abbeville, there have
been no trades of Abbeville common stock since the announcement of the merger.
The information regarding Abbeville common stock is provided for
informational purposes only and, due to the absence of an active market for
Abbeville's shares you should not view it as indicative of the actual or market
value of Abbeville common stock.
The holders of FLAG common stock are entitled to receive dividends when and
if declared by the Board of Directors out of funds legally available therefor.
FLAG has paid regular quarterly cash dividends on its common stock since 1987.
Although FLAG currently intends to continue to pay quarterly cash dividends on
FLAG common stock, FLAG cannot assure that its dividend policy will not change
after consummation of the merger. Whether FLAG declares and pays dividends will
depend upon business conditions, operating results, capital and reserve
requirements, and the Board of Directors' consideration of other relevant
factors. For information with respect to the provisions of the merger agreement
relating to FLAG's and Abbeville's abilities to pay dividends on their
respective common stock during the pendency of the merger, see "DESCRIPTION OF
MERGER -- Conduct of the Business Pending the Merger."
FLAG is a legal entity separate and distinct from its subsidiaries and its
revenues depend in significant part on the payment of dividends from its
subsidiary depository institutions. FLAG's subsidiaries are subject to certain
legal restrictions on the amount of dividends they are permitted to pay.
BUSINESS OF ABBEVILLE
General
Abbeville is a bank holding company located in Abbeville, South Carolina.
Abbeville is the sole shareholder of The Bank of Abbeville which has one banking
office located in Abbeville, South Carolina. Abbeville offers a broad range of
banking and banking-related services. The Bank of Abbeville is the sole
shareholder of BOA Financial Services Corporation, which offers brokerage and
investment services. As of June 30, 1999, Abbeville had total consolidated
assets of approximately $59 million, total consolidated deposits of
approximately $45 million, and total consolidated stockholders' equity of
approximately $5 million.
47
<PAGE>
Management Stock Ownership
The following table presents information about each of the directors
and executive officers of Abbeville and all executive officers and directors as
a group. Unless otherwise indicated, each person has sole voting and investment
powers over the indicated shares. Information relating to beneficial ownership
of the Abbeville common stock is based upon "beneficial ownership" concepts set
forth in rules promulgated under the Securities Exchange Act of 1934, as
currently in effect (the "Exchange Act"). Under such rules, a person is
considered to be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities.
Number of Shares Percent
Beneficially Owned at Of
Name the Abbeville Record Date Class (%)
---- ------------------------- ---------
(a) Directors
David J. Herron 100 .04
Emily D. Hester 2,400 1.01
Thomas E. Hite, Jr. 4,861 (1) 2.05
Dr. Mark M. Horton 123 .05
Patricia P. Howie 6,169 (2) 2.59
Joseph L. Savitz, Jr. 8,646 (3) 3.64
Thomas D. Sherard, Jr. 14,065 (4) 5.92
J. Peter Trenholm 6,182 (5) 2.60
Roland L. White 100 .04
(b) Executive Officers
C. William Knapp, Jr. 29 .01
(c) Executive Officers and Directors 42,675 17.96
As a Group (10 persons)
(1) Includes 2,970 shares held individually, 1,768 shares held through a
brokerage account and 123 shares held jointly with his wife.
(2) Includes 123 shares held individually and 6,046 shares held jointly with
her husband.
(3) Includes 4,626 shares held individually and 4,000 shares held jointly with
his wife.
(4) Includes 195 shares held individually, 11,896 shares held jointly with his
wife and 1,974 shares voted by Mr. Sherard as joint trustee of the Anne R.
Sherard Family Trust.
(5) Includes 1,246 shares held individually and 4,936 shares held through a
brokerage account.
Voting Securities And Principal Shareholders of Abbeville
The following lists each shareholder of record that directly or indirectly
owned, controlled, or held with power to vote 5% or more of the 237,615
outstanding shares of Abbeville common stock as of _______________, 1999. Unless
otherwise indicated, each person has sole voting and investment powers over the
indicated shares. Information relating to beneficial ownership of the Abbeville
48
<PAGE>
common stock is based upon "beneficial ownership" concepts set forth in rules
under the Exchange Act. Under such rules, a person is considered to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose or to direct the
disposition of such security. Under the rules, more than one person may be
considered to be a beneficial owner of the same securities.
Number of Shares Percent
Beneficially Owned At Of
Name and Address the Abbeville Record Date Class (%)
- ---------------- ------------------------- ---------
Thomas D. Sherard, Jr. 14,065 5.92 (1)
126 Woodland Way
Abbeville, SC 29620
James S. Bradberry 12,094 5.09
2084 Flatrock Road
Abbeville, SC 29620
Morris Associates, Inc. 12,094 5.09
24007 Telegraph Road
Southfield, MI 48034
Mary B. Atkins 12,094 5.09
728 East Greenwood Street
Abbeville, SC 29620
(1) Includes 195 shares held individually, 11,896 shares held jointly with his
wife and 1,974 shares voted by Mr. Sherard as joint trustee of the Anne R.
Sherard Family Trust.
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations for Each of the Three Months Ended March 31, 1999 and 1998
Financial Condition
Total assets at March 31, 1999 were approximately $59.5 million, compared
to $58.4 million at December 31, 1998. Deposits increased approximately
$908,000, or 2.0% from December 31, 1998, while net loans increased
approximately $370,000, or 1.3%. The allowance for loan losses at March 31, 1999
totaled $322,000, representing 1.13% of total loans compared to the December 31,
1998 total of $315,000, representing 1.12% of total loans. Securities increased
18.0% from December 31, 1998. The increase in net loans was funded primarily
with deposit growth.
Results of Operations
Net interest income was $487,000 for the first three months of 1999
compared to $484,000 for 1998. Interest income for the first three months of
1999 was $1,034,000, representing an increase of $49,000, or 5.0%, over the same
period in 1998. Interest expense for the first three months of 1999 increased
approximately $46,000, or 9.2%, compared to the same period in 1998. This
increase in interest income and interest expense during the first three months
of 1999 compared to 1998 is primarily attributable to the large increase in
investment securities and the increase in total deposits. Abbeville recognized
$18,000 as a provision for loan losses in the first three months of 1999. It is
management's belief that the allowance for loan losses is adequate to absorb
probable losses in the loan portfolio. Noninterest income increased 4.6% to
49
<PAGE>
approximately $101,000 for the three month period ended March 31, 1999, as
compared to the same period in 1998 due to an increase in service charges and
fees as a result of the increase in total deposits. Noninterest expense for the
first three months of 1999 and 1998 totaled $347,000 and $326,000, respectively.
This increase of 6.7% was due to increases in other operating expenses.
Capital Resources
Abbeville is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines,
Abbeville must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Abbeville's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require Abbeville to
maintain minimum amounts and ratios of total and Tier 1capital (as defined) to
risk-weighted assets and of Tier 1 capital (as defined) to average assets. As of
March 31, 1999, Abbeville met all capital adequacy requirements to which it is
subject. The following tables present Abbeville's regulatory capital position at
March 31, 1999:
Risk-Based Capital Ratios
Tier 1 Capital 15.12%
Tier 1 Capital minimum requirement 4.00%
Excess 9.12%
Total Capital 16.11%
Total Capital minimum requirement 8.00%
Excess 8.11%
Leverage Ratio Tier 1 Capital to
adjusted total assets 8.08%
Minimum leverage requirement 3.00%
Excess 5.08%
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Years Ended December 31, 1998, 1997 and 1996.
General
Abbeville is a one bank holding company organized in 1997, as the parent
company of Bank of Abbeville, which was organized in 1987.
Year 2000 Considerations
Abbeville is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The year
2000 problem 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.
Abbeville is utilizing both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. All
mainframe systems have been year 2000 certified during 1998. To date, Abbeville
50
<PAGE>
has received confirmation from its primary processing vendors that plans are
being developed to address processing of transactions in the year 2000.
Management has not yet fully determined the year 2000 compliance expense
and related potential effect on Abbeville's earnings; however, Abbeville does
not expect its direct costs to be material to the consolidated results of
operations, and Abbeville will expense those costs when they are incurred.
Expenses in 1998 related to the year 2000 issue were not material to the
financial results of operations.
Financial Condition 1998 Compared to 1997
During 1998, average total assets increased $6.3 million or 13.2% over
1997. Average deposits increased $4.2 million or 11.4% in 1998 over 1997.
Average loans increased $329,000 or 1.2% in 1998 over 1997.
Total assets at December 31, 1998, were $58.5 million, representing a $9.5
million or 19.3% increase from December 31, 1997. Total deposits increased $6.4
million or 16.8% from 1997 to 1998 while total gross loans decreased $950,000 or
3.2% during 1998. Time deposits increased $4 million from 1997 to 1998 while all
other deposit accounts increased $2.2 million in 1998. In 1998 the Bank's
investments increased by approximately $6 million, the majority of this being
funded by the FHLB advance. In 1998 the Bank used these funds to leverage their
capital. Nonperforming assets at December 31, 1998 were $262,000 compared to
$137,000 at December 31, 1997. The majority of the increase is attributable to
an increase in nonaccrual loans. There were no related party loans which were
considered nonperforming at December 31, 1998.
Results of Operations 1998 Compared to 1997
Abbeville's operational results primarily depend on the earnings of the
Bank. Its earnings depend to a large degree on net interest income, which is the
difference between the interest income received from its investments (such as
loans, investment securities, federal funds sold, etc.) and the interest expense
which is paid on deposit liabilities.
Net interest income decreased by $19,000 or 1.02% in 1998. Net interest
income at December 31, 1998, was $1,917,000 compared to $1,936,000 in 1997. The
decrease is primarily attributable to the increase in interest expense on
securities sold under agreements to repurchase and the increase in interest
expense on FHLB advances. Net yield (tax equivalent) on interest earning assets
(3.9% in 1998 and 4.43% in 1997) decreased approximately .50% in 1998 over 1997.
The provision for loan losses in 1998 was $41,000 compared to $65,000 in
1997. The decrease in the provision for loan losses was primarily attributable
to no overall growth in the loan portfolio as compared to 1997. The provision
for loan losses continues to reflect management's estimate of potential loan
losses inherent in the portfolio and the creation of an allowance for loan
losses adequate to absorb such losses. The allowance for loan losses represented
approximately 1.12% and 1.14% of total loans outstanding at December 31, 1998
and 1997, respectively. Net chargeoffs were $57,000 and $44,000 during 1998 and
1997, respectively. The Bank outsources its loan review. Management believes
that these levels of allowance are appropriate based upon Abbeville's loan
portfolio and the current economic conditions.
Other operating income in 1998 of $352,000 increased over 1997 by $52,000
or 17.3%. Other operating expenses increased $105,000 or 8.5% in 1998 over 1997
principally due to increases in employee benefits, premises and equipment, and
other operating expense.
51
<PAGE>
Income taxes expressed as a percentage of earnings before income taxes were
29.5% and 33.4% in 1998 and 1997, respectively.
Financial Condition 1997 Compared to 1996
During 1997, average total assets increased $4.7 million or 10.9% over
1996. Average deposits increased $2.6 million or 7.7% in 1997 over 1996. Average
loans increased $2.8 million or 10.8% in 1997 over 1996.
Total assets at December 31, 1997, were $49 million, representing a $3.4
million or 7.5% increase from December 31, 1996. Total deposits increased $2.8
million or 7.9% from 1996 to 1997 while total gross loans increased $2.2 million
or 8.3% during 1997. Time deposits increased $1.3 million from 1996 to 1997
while all other deposit accounts increased $1.5 million in 1997. As the local
economy remains strong, loan demand increased and the Bank showed increases in
total gross loans. Nonperforming assets at December 31, 1997 were $137,000
compared to $114,000 at December 31, 1996. The majority of the increase is
attributable to an increase of nonaccrual loans. There were no related party
loans which were considered nonperforming at December 31, 1997.
Results of Operations 1997 Compared to 1996
Net interest income increased by $119,000 or 6.6% in 1997. Net interest
income at December 31, 1997, was $1.9 million compared to $1.8 million in 1996.
The increase is primarily attributable to the increase in interest and fees on
loans and interest on investment securities offset by increases in interest
expense on total deposits. Net yield (tax equivalent) on interest earning assets
(4.43% in 1997 and 4.58% in 1996) decreased approximately .15% in 1997 over
1996.
The provision for loan losses in 1997 was $65,000 compared to $57,000 in
1996. The significant increase in the provision for loan losses was primarily
attributable to the increase in the loan portfolio and an increase in
non-accrual loans as compared to 1996. The provision for loan losses continues
to reflect management's estimate of potential loan losses inherent in the
portfolio and the creation of an allowance for loan losses adequate to absorb
such losses. The allowance for loan losses represented approximately 1.14% and
1.15% of total loans outstanding at December 31, 1997 and 1996, respectively.
Net chargeoffs were $44,000 and $43,000 during 1997 and 1996, respectively. The
Bank outsources its loan review function. Management believes that these levels
of allowance are appropriate based upon Abbeville's loan portfolio and the
current economic conditions.
Other operating income in 1997 was $300,000, which was an increase over
1996 of $15,000 or 5.4%. Other operating expenses increased $103,000 or 9% in
1997 over 1996 principally due to increases in employee benefits, premises and
equipment and other operating expense.
Income taxes expressed as a percentage of earnings before income taxes was
33.4% and 33.0% in 1997 and 1996, respectively.
52
<PAGE>
Table 1 - Consolidated Average Balances, Interest, and Rates - Taxable
Equivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
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.............. $ 28,657 2,736 9.55% 28,328 2,712 9.57% 25,574 2,513 9.83%
Taxable investment
securities........ 12,362 727 5.88% 11,303 729 6.45% 9,554 616 6.45%
Tax-free investment
securities........ 3,528 255 7.22% 2,340 173 7.38% 1,975 145 7.34%
Federal funds sold... 6,805 345 5.07% 3,036 171 5.63% 3,647 190 5.21%
----- --- ---- ----- --- ---- ----- --- ----
Total interest-
earning assets.. 51,352 4,063 7.91% 45,007 3,785 8.41% 40,750 3,464 8.50%
Other assets......... 2,348 2,436 2,041
----- ----- -----
Total assets..... $ 53,700 47,443 42,792
======== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits........ $ 10,279 228 2.22% 9,227 225 2.44% 8,833 210 2.38%
Savings deposits .. 2,608 68 2.61% 2,189 58 2.65% 2,185 57 2.61%
Other time deposits 24,513 1,370 5.59% 22,147 1,233 5.57% 20,436 1,158 5.67%
FHLB advances and
other borrowings 6,236 393 6.30% 4,779 274 5.73% 3,854 173 4.49%
----- --- ---- ----- --- ---- ----- --- ----
Total interest-
bearing liabilities 43,636 2,059 4.72% 38,342 1,790 4.67% 35,308 1,598 4.53%
Noninterest bearing
demand deposits. 3,606 3,261 2,736
Other liabilities.... 1,456 1,183 554
Stockholders' equity. 5,002 4,658 4,196
----- ----- -----
Total liabilities and
stockholders' equity$53,700 47,444 42,794
======= ====== ======
Tax-equivalent adjustment 87 59 49
-- -- -- \
Net interest income.. 1,917 1,936 1,817
===== ===== =====
Interest rate spread. 3.19% 3.74% 3.97%
Net interest margin.. 3.73% 4.30% 4.46%
Interest-earning assets/
interest-bearing liabilities 117.68% 117.39% 115.42%
</TABLE>
Consolidated Average Balances, Interest, and Rates
Net interest income is determined by the amount of interest-earning assets
compared to interest-bearing liabilities and their related yields and costs. The
difference between the weighted average interest rates earned on
interest-earning assets (i.e., loans and investment securities) and the weighted
average interest rates paid on interest-bearing liabilities (i.e., deposits and
borrowings) is called the net interest spread. Another measure of the difference
in interest income earned versus interest expense paid is net interest margin.
Net interest margin is calculated by dividing net interest income by average
earning assets.
Table 1 presents for the three years ended December 31, 1998, average
balances of interest-earning assets and interest-bearing liabilities and the
weighted average interest rates earned and paid on those balances. In addition,
Table 1 presents interest rate spreads, net interest margins and the ratio of
interest-earning assets versus interest-bearing liabilities for those years.
Average interest-earning assets were $51 million in 1998 versus $45 million in
1997, and $41 million in 1996. Average interest-bearing liabilities were $44
million in 1998 versus $38 million in 1997 and $35 million in 1996. The interest
rate spread was 3.19% in 1998 versus 3.74% in 1997 and 3.97% in 1996, while the
net interest margin was 3.73% in 1998, 4.30% in 1997 and 4.46% in 1996.
Table 2 shows the change in net interest income from 1998 to 1997 and from
1997 to 1996 due to changes in volumes and rates.
53
<PAGE>
Table 2 - Rate/Volume Variance Analysis - Taxable Equivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 Compared to 1997 1997 Compared to 1996
--------------------- ----------------------
Rate/ Net Rate/ Net
Volume Yield Change Volume Yield Change
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans ........................................ 31 (7) 24 271 (65) 206
Taxable investment securities ................ 68 (64) 4 113 -- 113
Tax-free investment securities ............... 88 26 114 27 0 27
Federal funds sold ........................... 212 (17) 195 (32) 15 (17)
--- --- --- --- -- ---
Total interest income .......................... 399 (62) 337 379 (50) 329
--- --- --- --- --- ---
Interest expense:
Interest bearing demand deposits ............. 26 (20) 6 9 5 14
Savings deposits ............................. 11 (1) 10 -- 1 1
Other time deposits .......................... 132 5 137 97 (20) 77
Other borrowings ............................. 84 27 111 42 48 90
-- -- --- -- -- --
Total interest expense .................... 253 11 264 148 34 182
--- -- --- --- -- ---
Net interest income ............................ 146 (73) 73 231 (84) 147
=== === == === === ===
</TABLE>
Noninterest Income
Noninterest income totaled $352,00 in 1998, $300,000 in 1997 and $285,000
in 1996. These increases were due to increases in service charges on deposit
accounts.
Noninterest Expenses
Salary and employee benefits increased to $674,000 in 1998 from $622,000 in
1997 and $549,000 in 1996. These increases were primarily due to normal
increases in compensation. Occupancy expenses increased to $204,000 in 1998 from
$174,000 in 1997 and $169,000 in 1996. Other expenses were $470,000 in 1998
versus $447,000 in 1997 and $422,000 in 1996. The increase in other operating
expenses from 1997 to 1998 was due to an increase in various expenses such as
advertising and data processing.
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 The Bank of
Abbeville 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 $6.3 million to $19.3 million at December
31, 1998 from $13 million at December 31, 1997. At December 31, 1998, $14.3
million or 74% of investment securities outstanding, were classified as
available-for-sale. The overall increase in the amount of investments was due to
the bank leveraging their capital by increasing their FHLB advances. At December
31, 1998, gross unrealized gains in the total portfolio amounted to $156,000 and
gross unrealized losses amounted to $264,000.
54
<PAGE>
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,
1998 1997 1996
---- ---- ----
Securities Available-for-sale:
U.S. Treasuries and agencies... 7,485 4,585 5,316
Mortgage-backed securities..... 6,815 5,675 5,930
----- ----- -----
Total.........................$14,300 10,260 11,246
Securities Held to Maturity:
State, county and municipals.. 5,003 2,800 2,123
----- ----- -----
Total....................$19,303 13,060 13,369
Carrying Value of Investments
The December 31, 1998 market value of securities held to maturity, as a
percentage of amortized cost, was 102.2%, up from 101.5% at December 31, 1997.
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 decreased by approximately $1 million in 1998 to
$28.4 million from $29.4 million at December 31, 1997. This decrease was the
result of a decline in commercial, financial and agricultural loans and real
estate loans, partially offset by an increase in installment loans. As shown in
Table 4, commercial, financial, and agricultural loans decreased approximately
$26,000, installment loans increased approximately $586,000, and real estate
mortgages decreased approximately $1.5 million.
Table 4 - Loan Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
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 $ 318 1.1 344 1.2 681 2.5 1,508 6.0 1,808 7.9
Real estate construction....... - - - - - - 6 0.0 4 0.0
Real estate mortgage........... 17,176 60.4 18,687 63.5 15,786 58.1 14,976 59.6 12,921 56.5
Installment loans to individuals 10,949 38.5 10,363 35.3 10,681 39.4 8,602 34.3 8,111 35.6
------ ---- ------ ---- ------ ---- ----- ---- ----- ----
Total loans.................... 28,443 100 29,394 100 27,148 100 25,092 100 22,844 100
Less:
Allowance for loan losses...... (315) (331) (310) (296) (255)
---- ---- ---- ---- ----
Total net loans........... 28,128 29,063 26,838 24,796 22,589
</TABLE>
55
<PAGE>
Table 5 represents the expected maturities for commercial, financial, and
agricultural loans and real estate construction loans at December 31, 1998. The
table also presents the rate structure for these loans that mature after one
year.
Table 5 - Loan Portfolio Maturity
(dollars in thousands)
<TABLE>
<CAPTION>
Rate Structure for Loans
Maturity Maturity Over One Year
-------- ----------------------
Over One Year
One Year Through Over Five Floating or Adjustable Predetermined
or Less Five Years Years Total Interest Rate Rate
------- ---------- ----- ----- ------------- ----
Commercial, financial, and
<S> <C> <C> <C> <C> <C> <C>
agricultural................ $ 152 151 15 318 134 184
Real estate construction....... - - - - - -
</TABLE>
Provision and Allowance for Loan Losses
Table 6 presents an analysis of activities in the allowance for loan losses
for the past five years. An allowance for possible losses is provided through
charges to the Bank's earnings in the form of a provision for loan losses. The
provision for loan losses was $41,000 in 1998, $65,000 in 1997 and $57,000 in
1996. 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.
As shown in Table 6, the year-end allowance for loan losses decreased to
$315,000 at December 31, 1998, from $331,000 at December 31, 1997. The allowance
for loan losses was $310,000 at December 31, 1996. Total charge-offs in 1998
were $88,000 in 1998, $56,000 in 1997, and $51,000 in 1996. The allowance for
loan losses was 1.12% of net outstanding loans at December 31, 1998, versus
1.14% of net outstanding loans at December 31, 1997, and 1.15% of net
outstanding loans at December 31, 1996.
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 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average net loans........................... $ 28,657 28,328 25,574 23,968 21,215
Allowance for loan losses, beginning
of the period............................. 331 310 296 255 284
Charge-offs for the period:
Commercial/financial/agricultural......... 79 28 28 24 72
Real estate construction loans ........... - - - - -
Real estate mortgage loans................ - - 12 - -
Installment loans to individuals.......... 9 28 11 12 12
- -- -- -- --
Total charge-offs........................... 88 56 51 36 84
Recoveries for the period:
Commercial/financial/agricultural......... 21 3 3 - -
Real estate construction loans............ - - - - -
Real estate mortgage loans................ - - 2 - -
Installment loans to individuals.......... 10 9 3 1 5
-- - - - -
Total recoveries............................ 31 12 8 1 5
-- -- - - -
Net charge-offs/(recoveries) for the period 57 44 43 35 80
Provision for loan losses................... 41 65 57 76 50
-- -- -- -- --
Allowance for loan losses, end of period.... $ 315 331 310 296 255
Ratio of allowance for loan losses to total
net loans outstanding ..................... 1.12% 1.14% 1.16% 1.15% 1.13%
Ratio of net charge-offs/(recoveries) during the period
to average net loans outstanding during the period .20% .16% .17% .14% .38%
</TABLE>
Asset Quality
At December 31, 1998, non-performing assets totaled $262,000 compared to
$137,000 at year-end 1997. There were no commitments to lend additional funds on
nonaccrual loans at December 31, 1998. Table 7 summarizes the non-performing
assets for each of the last five years.
Table 7 - Risk Elements
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual...................... $ 251 118 67 2 46
Loans past due 90 days and still accruing 10 19 47 4 146
Other real estate owned.................. - - - 6 12
- --
Total non-performing assets.............. 261 137 114 12 204
Total non-performing loans as a
percentage of net loans............. .92% .47% .42% .05% .90%
</TABLE>
Risk Elements
There may be additional loans within the Bank'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, 1998. At December
31, 1998, management was unaware of any known trends, events, or uncertainties
that will have, or that are reasonably likely to have, a material effect on the
Bank's liquidity, capital resources, or operations.
Deposits
Total deposits increased approximately $6.4 million during 1998, totaling
$44.4 million at December 31, 1998 versus $38 million at December 31, 1997. The
maturities of time deposits of $100,000 or more issued by the Bank at December
31, 1998, are summarized in Table 8.
57
<PAGE>
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less.................. $ 9,313
Over three months through six months.. 1,278
Over six months through twelve months. 1,479
Over twelve months.................... 828
-------
Total.............................. $ 12,898
======
At December 31, 1998, the Bank was a shareholder in the Federal Home Loan
Bank of Atlanta ("FHLBA"), and had advances outstanding at December 31, 1998 of
$3,000,000 at a fixed rate of 4.99% and a maturity of August 2008. Management
anticipates continued utilization of this short- and long-term source of funds
to minimize interest rate risk and to fund competitive fixed rate loans to
customers.
Asset-Liability Management
A primary objective of the Bank'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, 1998, 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, 1998, the liabilities subject to rate changes within one year exceeded its
assets subject to rate changes within one year. This mismatched condition
subjects the Bank to interest rate risk within the one year period because the
assets, due to their generally shorter term to maturity or repricing, are more
sensitive to short-term interest rate changes than the liabilities. It is
management's belief that the result of this position would be a decrease in net
interest income if market interest rates rise and an increase in net interest
income if market interest rates decline.
Management carefully measures and monitors interest rate sensitivity and
believes that its operating strategies offer protection against interest rate
risk.
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 118% in 1998,
117% in 1997 and 115% in 1996.
Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Maturing or Repricing in
------------------------
Over 1 Year Over 3 Years
One Year Through Through Over
or Less 3 Years 5 Years 5 Years Total
---------- --------- ---------- ------- -----
Interest-earning assets:
<S> <C> <C> <C> <C> <C>
Adjustable rate mortgages............ $ 197 20 - 406 623
Fixed rate mortgages................. 3,923 6,572 5,827 231 16,553
Other loans.......................... 2,596 4,348 4,170 154 11,268
Investment securities................ 639 1,773 2,336 14,555 19,303
Interest-bearing deposits
in other banks and Federal Funds sold 7,300 - - - 7,300
----- -----
Total interest-earning assets.... 14,655 12,713 12,333 15,346 55,047
Interest-bearing liabilities:
Fixed maturity deposits.............. 23,390 3,550 - - 26,940
DDA accounts......................... 10,967 - - - 10,967
Passbook accounts.................... 3,044 - - - 3,044
Other borrowed funds.................. 5,771 - - - 5,771
FHLB advances......................... - - - 3,000 3,000
----- -----
Total interest-bearing liabilities.... $ 43,172 3,550 - 3,000 49,722
Interest rate sensitivity gap......... (28,517) 9,163 12,333 12,346 5,325
Cumulative interest rate sensitivity gap (28,517) (19,354) (7,021) 5,325 -
Cumulative interest rate sensitivity gap
to total assets................. (48.7%) (33.1%) (11.9%) 9.1% -
</TABLE>
Table 10 represents the expected maturity of the total investment
securities by maturity date and average yields based on amortized cost at
December 31, 1998. 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.
Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)
<TABLE>
<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 available-for-sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and agencies.. $ 304 6.60 2,664 5.96 4,017 6.44 - - 6,985
Mortgage-backed securities.. 160 6.15 500 5.53 1,387 4.33 5,268 6.48 7,315
Total $ 464 3,164 5,404 5,268 14,300
Securities held-to-maturity:
State, county and municipals 174 5.49 946 4.45 1,370 4.59 2,513 4.84 5,003
Total $ 174 946 1,370 2,513 5,003
Total securities $ 638 4,110 6,774 7,781 19,303
</TABLE>
Liquidity
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 Banks. There were $3 million
in advances from the FHLBA at December 31, 1998, and advances of $1 million at
December 31, 1997.
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. In addition to creditworthiness,
the Bank must own a minimum amount of FHLBA capital stock. This minimum is 5.0%
of outstanding FHLBA advances. The Bank uses FHLBA advances for both long-term
and short-term liquidity needs. Other than normal banking operations, the Bank
has no long-term liquidity needs. The Bank has never been involved with highly
leveraged transactions that may cause unusual potential long-term liquidity
needs.
The consolidated statements of cash flows for the three years ended
December 31, 1998 detail the Bank's sources and uses of funds for those periods.
Capital Resources and Dividends
Stockholders' equity at December 31, 1998, increased 2.9% from December 31,
1997. This growth resulted from 1998 earnings, offset by the acquisition of
certain treasury shares. Dividends of $190,000 or $.80 per share were declared
and paid in 1998, compared to $.52 per share in 1997.
50
<PAGE>
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 9.31% for 1998 and 9.82% for 1997. Table 11
summarizes these and other key ratios for the Bank for each of the last three
years.
The Federal Deposit Insurance Corporation Improvement Act required federal
banking agencies to take "prompt corrective action" with regard to institutions
that do not meet minimum capital requirements. As a result of the Act, 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 T to the consolidated financial statements
presents a summary of the Act's capital tiers compared to the Bank's actual
capital levels. The Bank exceeded all requirements of a "well-capitalized"
institution at December 31, 1998.
Table 11 - Equity Ratios
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Return on average assets........... 1.15% 1.30% 1.42%
Return on average equity........... 12.40% 13.29% 14.44%
Dividend payout ratio.............. 30.65% 20.84% 21.29%
Average equity to average assets... 9.31% 9.82% 9.80%
Provision for Income Taxes
The provision for income taxes was $259,000 in 1998, versus $310,000 in
1997, and $299,000 in 1996. The effective actual tax rates were 29.5% for 1998,
33.4% for 1997 and 33.0% for 1996 (tax provision as a percentage of income
before taxes), respectively. See Abbeville's consolidated financial statements
for an analysis of income taxes.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. The liquidity and
maturity structures of the Bank's assets and liabilities are critical to the
maintenance of acceptable performance levels.
Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("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 of
all 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. Abbeville
believes the adoption of SFAS No. 133 will not have a material impact on its
financial position, results of operations or liquidity.
60
<PAGE>
BUSINESS OF FLAG
General
FLAG is a multi-bank holding company headquartered in LaGrange, Georgia.
FLAG is the sole shareholder of Citizens Bank and First Flag. Citizens Bank is a
state bank organized under the laws of the State of Georgia, with 10 banking
offices located in 10 communities throughout Southern Georgia. First Flag Bank
is a state bank organized under the laws of the State of Georgia with five
offices in LaGrange, Georgia, which serve markets located in western Georgia.
Through its subsidiaries, FLAG offers a full array of deposit accounts and
retail and commercial banking services, engages in small business lending,
residential and commercial real estate lending, mortgage banking services,
brokerage services and performs real estate appraisal services. As of June 30,
1999, FLAG had total consolidated assets of $545, total consolidated deposits of
$419, and total consolidated stockholders' equity of $48.
As a routine part of its business, FLAG evaluates opportunities to acquire
bank holding companies, banks and other financial institutions. Thus, at any
particular point in time, including the date of this proxy statement/prospectus,
discussions and, in some cases, negotiations and due diligence activities
looking toward or culminating in the execution of preliminary or definitive
documents respecting potential acquisitions may occur or be in progress. These
transactions may involve FLAG acquiring such financial institutions in exchange
for cash or capital stock, and depending upon the terms of these transactions,
they may have a dilutive effect upon the FLAG common stock to be issued to
holders of Abbeville common stock in the merger.
Directors and Executive Officers
The directors of FLAG as the surviving corporation of the merger will be:
Dennis D. Allen James W. Johnson
Dr. A. Glenn Bailey Kelly R. Linch
Leonard H. Bateman J. Preston Martin
H. Speer Burdette, III Joseph L. Savitz, Jr.
Patti S. Davis Thomas D. Sherard, Jr.
Fred A. Durand, III J. Daniel Speight, Jr.
John S. Holle John W. Stewart, Jr.
Robert W. Walters
The executive officers of FLAG as the surviving corporation of the merger
will be:
John S. Holle Chairman of the Board
J. Daniel Speight, Jr. President and Chief Executive Officer
Charles O. Hinely Chief Operating Officer and Executive Vice President
Patti S. Davis Chief Financial Officer, Senior Vice President
and Assistant Secretary
J. Preston Martin Senior Vice President
Upon completion of the merger of Abbeville with and into FLAG, Thomas D.
Sherard, Jr., President and Chief Executive Officer of Abbeville and Joseph L.
Savitz, Jr., a director of Abbeville, will be elected as members of FLAG's Board
of Directors. Upon completion of the merger of Hogansville with FLAG, John R.
Hines, Jr., President and Chief Executive Officer of Hogansville, will be
elected as a member of FLAG's Board of Directors. Upon the completion of the
merger of Thomaston with a wholly-owned subsidiary of FLAG, Robert G. Cochran
will be elected as a member of FLAG's Board of Directors. Additional persons may
be elected as directors or executive officers following the merger. See "SUMMARY
- - Recent Developments in FLAG's Business."
61
<PAGE>
The following section sets forth certain information regarding each of the
persons who, after the consummation of the merger, will be a director or
executive officer of FLAG. Except as otherwise indicated, each of the named
persons has been engaged in his or her present principal occupation for more
than five years.
Dennis D. Allen. Mr. Allen served as a director of The Brown Bank from 1981
until December 1998 and has served as the President and Chief Executive Officer
of The Brown Bank since 1991. Following the merger of The Brown Bank with
Citizens Bank, Mr. Allen has served as a member of the Board of Directors of
FLAG and is President of The Brown Bank division of Citizens Bank. Mr. Allen is
42 years old.
Dr. A. Glenn Bailey. Dr. Bailey is a physician and surgeon in LaGrange. He
also serves as President of Chattahoochee Land & Investment and from 1980 to
1989 was President, of Clark-Holder Clinic, a LaGrange medical clinic. He has
been a director of First Flag Bank since 1982 and a director of FLAG since 1994.
Following the merger, Dr. Bailey will continue to serve as a member of the
Boards of Directors of both FLAG and First Flag Bank. Dr. Bailey is 64 years
old.
Leonard H. Bateman. Mr. Bateman has served as President and Chief Executive
Officer of Empire Bancorp, Inc. and Empire Banking Corp. from 1986 until
December 1998. Following consummation of the merger of Empire and FLAG, Mr.
Bateman has served as a member of the Board of Directors of FLAG and as
President of the Empire Banking Company division of Citizens Bank. Mr. Bateman
is 51 years old.
H. Speer Burdette, III. Mr. Burdette is an owner, director and Vice
President/Treasurer of J. K. Boatwright & Co., P.C., an accounting firm located
in LaGrange. He has been a director of First Flag Bank since 1993 and a director
of FLAG since 1994. Following the merger, Mr. Burdette will continue to serve as
a member of the Boards of Directors of both FLAG and First Flag Bank. Mr.
Burdette is 46 years old.
Patti S. Davis. Ms. Davis served as Executive Vice President and Chief
Financial Officer of Middle Georgia since 1994 until Middle Georgia merged with
FLAG in March 1998. Ms. Davis has been Senior Vice President and Chief Financial
Officer of Citizens Bank since 1990. Following the consummation of the merger of
Middle Georgia and FLAG, Ms. Davis has served as a Senior Vice President and as
a member of the Board of Directors of FLAG and, since July 1998, has served as
Chief Financial Officer of FLAG. In addition, Ms. Davis continues to act as
Senior Vice President and Chief Financial Officer of Citizens Bank. Following
the merger, Ms. Davis will continue to act in these capacities. Ms. Davis and J.
Daniel Speight, Jr. are cousins. Ms. Davis is 42 years old.
Fred A. Durand, III. Mr. Durand is President, Chief Executive Officer and a
director of Durand-Wayland, Inc., a manufacturer of produce sorting and spray
equipment. He has been a director of First Flag Bank since 1990 and director of
FLAG since 1994. Following the merger, Mr. Durand will continue to serve as a
member of the Boards of Directors of both FLAG and First Flag Bank. Mr. Durand
is 57 years old.
Charles O. Hinely. Mr. Hinely has served as Executive Vice President and
Chief Operating Officer of FLAG since December 1997. Mr. Hinely has 30 years of
banking and financial industry related experience. He has worked for Citizens
and Southern National Bank and was a principal of Bank Management Resources,
Inc. (BMR Financial Group) and LSI Partners, Inc. Following the merger, Mr.
Hinely will continue to serve as Executive Vice President and Chief Operating
Officer of FLAG. Mr. Hinely is 52 years old.
John S. Holle. Mr. Holle served as Chairman of the Board, President, Chief
Executive Officer and as a director of FLAG since 1993, and he has been
President, Chief Executive Officer and a director of First Flag Bank since 1985
and Chairman of the Board of First Flag Bank since 1990. Following the merger of
FLAG and Middle Georgia, Mr. Holle has served as Chairman of the Board of FLAG
and President, Chief Executive Officer and a member of the Board of Directors of
First Flag Bank and as a director of Citizens Bank. Mr. Holle also has been
Chairman of the Board and President of First Flag Bank's wholly-owned
subsidiary, Piedmont, since 1986. Following the merger, Mr. Holle will continue
62
<PAGE>
to be the Chairman of the Board of FLAG and will continue to serve as a member
of the Board of Directors of FLAG. In addition, Mr. Holle will continue to act
as President, Chief Executive Officer and a member of the Board of Directors of
First Flag Bank and as a director of Citizens Bank following the merger. Mr.
Holle is 49 years old.
James W. Johnson. Mr. Johnson is the President of McCannie Motor and
Tractor Company, Inc., a retail seller of tractors and implement equipment and
President of McCannie Indement Company. He served as a director of Middle
Georgia and Citizens Bank since 1982 until the merger of FLAG and Middle
Georgia. Following the merger of FLAG and Middle Georgia, Mr. Johnson has served
as a member of the Board of Directors of FLAG and continues to serve as a
director of Citizens Bank. Following the merger, Mr. Johnson will continue in
these capacities. Mr. Johnson is 58 years old.
Kelly R. Linch. Mr. Linch is owner of Linch's, Inc., a retail appliance and
electronics store in LaGrange. He has been a director of First Flag Bank since
1986 and a director of FLAG since 1994. Following the merger, Mr. Linch will
continue to serve as a member of the Boards of Directors of both FLAG and First
Flag Bank. Mr. Linch also is a director of Key Distributors of Georgia, Inc. Mr.
Linch is 56 years old.
J. Preston Martin. Mr. Martin served as the President and Chief Executive
Officer of Three Rivers and as President of Bank of Milan from 1986 until May
1998 when Three Rivers merged with and into FLAG. Mr. Martin currently serves as
Senior Vice President, on the Boards of Directors of FLAG, Citizens Bank and
Milan and as President of the Bank of Milan division of Citizens Bank. Mr.
Martin is 46 years old.
Joseph L. Savitz, Jr. Mr. Savitz has served as a director of Abbeville from
1987 until 1991 and from 1993 until present. Following the merger Mr. Savitz
will serve as a member of the Board of Directors of FLAG. Mr. Savitz has served
as the mayor of Abbeville since 1986 and is the owner of and pharmacist of
Savitz Drug Store. Mr. Savitz is 68 years old.
Thomas D. Sherard, Jr. Mr. Sherard has served as President and Chief
Executive Officer of Abbeville since it was formed in 1997. Following the
merger, Mr. Sherard will serve as a member of the Board of Directors of FLAG.
Mr. Sherard has served as President of The Bank of Abbeville since 1987 and will
continue to be President after the merger. Mr. Sherard is 44 years old.
J. Daniel Speight, Jr. Mr. Speight served as Chief Executive Officer and as
a director of Middle Georgia since 1989 and has been President and Chief
Executive Officer of Citizens Bank since 1984. Following the merger of FLAG and
Middle Georgia, Mr. Speight has served as the President and Chief Executive
Officer of FLAG, and as a member of the Board of Directors of FLAG. In addition,
Mr. Speight serves as President and Chief Executive Officer and a director of
Citizens Bank and as a director of First Flag Bank. Following the merger, Mr.
Speight will continue to act in these capacities. Mr. Speight is 42 years old.
John W. Stewart, Jr. Mr. Stewart is an owner, Chairman of the Board and
President of Stewart Wholesale Hardware Company, a wholesale grocery and
hardware business in LaGrange. He has been a director of First Flag Bank since
1982 and a director of FLAG since 1994. Following the merger, Mr. Stewart will
continue to serve as a member of the Boards of Directors of both FLAG and First
Flag Bank. Mr. Stewart is 65 years old.
Robert W. Walters. Mr. Walters retired in March 1996 as owner and director
of The Mill Store, Inc., a retail and contract floor covering business in
LaGrange. He has been a director of First Flag Bank since 1982 and a director of
FLAG since 1994. Following the merger, Mr. Walters will continue to serve as a
member of the Boards of Directors of both FLAG and First Flag Bank. Mr. Walters
is 66 years old.
63
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet as
of March 31, 1999 (the "Pro Forma Balance Sheet"), and the unaudited pro forma
consolidated statements of earnings for the three months ended March 31, 1999,
and for each of the three years in the period ended December 31, 1998
(collectively, the "Pro Forma Earnings Statements"), combine the historical
financial statements of FLAG with Abbeville after giving effect to the merger
using the pooling of interests method of accounting. Pro forma adjustments to
the Pro Forma Balance Sheet are computed as if the merger occurred at March 31,
1999, while the pro forma adjustments to the Pro Forma Earnings Statements are
computed as if the merger were consummated on January 1, 1996, the earliest
beginning of the period presented. The following financial statements do not
reflect any anticipated cost savings which may be realized by FLAG after
consummation of the merger.
The pro forma information does not purport to represent what FLAG's and
Abbeville's combined results of operations actually would have been if the
merger had occurred on January 1, 1996.
64
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet
March 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Other
Pro Forma Forma Pending Pro Forma Pro Forma
FLAG Abbeville Adjustments Combined Acquisitions Adjustments Combined
---- --------- ----------- -------- ------------ ----------- --------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 17,138 1,951 - 19,089 1,950 - 21,039
Federal funds sold 2,000 3,975 - 5,975 2,700 - 8,675
----- ----- ----- ----- -----
Cash and cash equivalents 19,138 5,926 - 25,064 4,650 - 29,714
Interest-bearing deposits 1,039 - - 1,039 4,318 - 5,357
Securities held to maturity 4,107 6,307 - 10,414 10,027 - 20,441
Securities available for sale 67,528 16,464 - 83,992 10,427 - 94,419
Trading securities 324 - - 324 - - 324
Other investments 7,267 - - 7,267 - - 7,267
Mortgage loans held for sale 2,836 - - 2,836 4,071 - 6,907
Loans 395,074 28,499 - 425,573 46,003 - 469,576
Premises and equipment 14,340 1,182 - 15,522 2,821 - 18,343
Other assets 19,861 1,098 - 20,959 3,755 - 24,714
------ ----- ------ ----- ------
Total assets $ 531,514 59,476 - 590,990 86,072 - 677,062
========= ====== ======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 44,955 3,600 - 48,555 6,417 - 54,972
Interest bearing 376,664 41,771 - 418,435 69,657 - 488,092
------- ------ ------- ------ -------
Total deposits 421,619 45,371 - 466,990 76,074 - 543,064
Accrued expenses and other liabilities 9,868 355 - 10,223 904 - 11,127
Federal Home Loan Bank Advances 47,352 3,000 - 50,352 - - 50,352
Federal funds purchased 3,000 - - 3,000 - - 3,000
Other borrowed funds 1,080 5,729 - 6,809 - - 6,809
----- ----- ----- -----
Total liabilities 482,919 54,455 - 537,374 76,978 - 614,352
------- ------ ------- ------ -------
Stockholders' equity:
Preferred stock - - - - - - -
Common stock 6,562 1,244 (419) 7,387 780 921 9,088
Capital surplus 10,500 2,121 169 12,790 2,174 (1,357) 13,607
Retained earnings 29,542 2,058 - 31,600 6,570 - 38,170
Accumulated other comprehensive
income 1,991 (152) - 1,839 6 - 1,845
Treasury stock - (250) 250 - (436) 436 -
---- --- ---- ---
Total stockholders' equity 48,595 5,021 - 53,616 9,094 - 62,710
------ ----- ------ ----- ------
Total liabilities and equity $ 531,514 59,476 - 590,990 86,072 - 677,062
========== ====== ======= ====== =======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
65
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Three Months Ended March 31, 1999
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pending
FLAG Abbeville Pro Forma Transactions Pro Forma
---- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Interest income $ 10,977 1,034 12,011 1,502 13,513
Interest expense 5,119 547 5,666 756 6,422
----- --- ----- --- -----
Net interest income 5,858 487 6,345 746 7,091
Provision for loan losses 345 18 363 17 380
--- -- --- -- ---
Net interest income after provision
for loan losses 5,513 469 5,982 729 6,711
Noninterest income:
Service charges and fees 1,205 77 1,282 94 1,376
Net realized gains on the sale of assets 581 - 581 340 921
Other 320 24 344 95 439
--- -- --- -- ---
Total noninterest income 2,106 101 2,207 529 2,736
Noninterest expense:
Salaries and benefits 3,096 170 3,266 588 3,854
Occupancy 711 54 765 192 957
Other 2,284 123 2,407 262 2,669
----- --- ----- --- -----
Total noninterest expense 6,091 347 6,438 1,042 7,480
Earnings before taxes 1,528 223 1,751 216 1,967
Income tax expense 477 71 548 75 623
--- -- --- -- ---
Net earnings $ 1,051 152 1,203 141 1,344
======= === ===== === =====
Basic earnings per share $ 0.16 0.64 0.18 0.20
Weighted average shares outstanding 6,561 237 7,387 9,050
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
66
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Year Ended December 31, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pending
FLAG Abbeville Pro Forma Acquisitions Pro Forma
---- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Interest income $ 44,732 3,976 48,708 6,441 55,149
Interest expense 21,909 2,059 23,968 3,310 27,278
------ ----- ------ ----- ------
Net interest income 22,823 1,917 24,740 3,129 27,869
Provision for loan losses 3,382 41 3,423 93 3,516
----- -- ----- -- -----
Net interest income after provision
for loan losses 19,441 1,876 21,317 3,036 24,353
Noninterest income:
Service charges and fees 4,619 265 4,884 2,349 7,233
Net realized gains on the sale of assets 1,202 30 1,232 29 1,261
Other 1,618 57 1,675 135 1,810
----- -- ----- --- -----
Total noninterest income 7,439 352 7,791 2,513 10,304
Noninterest expense
Salaries and benefits 10,949 674 11,623 2,342 13,965
Occupancy 3,931 204 4,135 428 4,563
Other 9,737 470 10,207 1,494 11,701
----- --- ------ ----- ------
Total noninterest expense 24,617 1,348 25,965 4,264 30,229
Earnings before income taxes 2,263 880 3,143 1,287 4,430
Income tax expense 303 259 562 405 967
--- --- --- --- ---
Net earnings $ 1,960 621 2,581 882 3,463
=========== === ===== === =====
Basic earnings per share $ .30 2.61 0.35 0.38
Weighted average shares outstanding 6,555 238 7,383 9,047
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
67
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Year Ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pending
FLAG Abbeville Pro Forma Acquisitions Pro Forma
---- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Interest income $ 38,730 3,726 42,456 6,405 48,861
Interest expense 18,623 1,790 20,413 3,239 23,652
------ ----- ------ ----- ------
Net interest income 20,107 1,936 22,043 3,165 25,208
Provision for loan losses 1,596 65 1,661 106 1,767
----- -- ----- --- -----
Net interest income after provision
for loan losses 18,511 1,871 20,382 3,059 23,441
Noninterest income:
Fees and service charges 4,232 234 4,466 2,246 6,712
Net realized gains on the sale of assets 909 20 929 - 998
Other operating income 1,002 46 1,048 120 1,168
----- -- ----- --- -----
Total noninterest income 6,143 300 6,443 2,435 8,878
Noninterest expense:
Salaries and employee benefits 8,913 622 9,535 2,310 11,845
Occupancy 3,351 174 3,525 408 3,933
Other operating expenses 6,260 447 6,707 1,326 8,033
----- --- ----- ----- -----
Total noninterest expense 18,524 1,243 19,767 4,044 23,811
Earnings before income taxes 6,130 929 7,059 1,450 8,509
Income tax expense 1,820 310 2,130 485 2,615
----- --- ----- --- -----
Net earnings $ 4,310 619 4,929 965 5,894
========= === ===== === =====
Basic earnings per share $ 0.66 2.49 0.67 0.65
Weighted average shares outstanding 6,519 249 7,385 9,048
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
68
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Earnings
For the Year Ended December 31, 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pending
FLAG Abbeville Pro Forma Acquisitions Pro Forma
---- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Interest income $ 34,608 3,415 38,023 6,164 44,187
Interest expense 16,374 1,598 17,972 3,210 21,182
------ ----- ------ ----- ------
Net interest income 18,234 1,817 20,051 2,954 23,005
Provision for loan losses 4,475 57 4,532 92 4,624
----- -- ----- -- -----
Net interest income after provision
for loan losses 13,759 1,760 15,519 2,862 18,381
Noninterest income:
Service charges and fees 3,802 219 4,021 2,261 6,282
Net realized gains on the sale of assets 752 34 786 51 837
Other 662 31 693 108 801
--- -- --- --- ---
Total noninterest income 5,216 284 5,500 2,420 7,920
Noninterest expense:
Salaries and benefits 7,553 549 8,102 2,280 10,382
Occupancy 2,660 169 2,829 408 3,237
Other 6,613 422 7,035 1,540 8,575
----- --- ----- ----- -----
Total noninterest expense 16,826 1,140 17,966 4,228 22,194
Earnings before taxes 2,149 904 3,053 1,054 4,107
Income tax expense 451 299 750 347 1,097
--- --- --- --- -----
Net earnings $ 1,698 605 2,303 707 3,010
========= === ===== === =====
Basic earnings per share $ 0.26 2.43 0.31 0.33
Weighted average shares outstanding 6,481 249 7,348 9,013
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
69
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Pro Forma Financial Statements
(1) The unaudited pro forma consolidated balance sheet as of March 31, 1999 and
consolidated statements of earnings for the three months ended March 31,
1999 and for the years ended December 31, 1998, 1997 and 1996 have been
prepared based on the historical consolidated balance sheets and statements
of earnings, which give effect to the Merger of Abbeville with and into
FLAG accounted for as a pooling of interests, based on the exchange of 3.48
shares of FLAG Common Stock for each outstanding share of Abbeville Common
Stock.
(2) In the opinion of management of the respective companies included above,
all adjustments considered necessary for a fair presentation of the
financial position and results for the period presented have been included.
Adjustments, if any, are normal and recurring nature.
70
<PAGE>
SHAREHOLDER PROPOSALS
Proposals of stockholders of FLAG intended to be presented at the 2000
annual meeting of stockholders must be received by FLAG at its principal
executive offices on or before the date that is 120 calendar days in advance of
the date of FLAG's 1999 proxy statement released to security holders in order to
be included in FLAG's proxy statement and proxy relating to the 2000 annual
meeting of stockholders. Based on the date of the mailing of this proxy
statement/prospectus, the specific date by which proposals of stockholders of
FLAG intended to be represented at the 2000 annual meeting of stockholders must
be received by FLAG in order to be included in FLAG's 2000 proxy statement is
December 15, 1999.
EXPERTS
The restated consolidated financial statements of FLAG and subsidiaries as
of December 31, 1998 and 1997, and for each of the years in the three year
period ended December 31, 1998, incorporated by reference herein and in the
registration statement, have been audited by Porter Keadle Moore, LLP,
independent certified public accountants, which are included in the FLAG Annual
Report to Shareholders which is incorporated by reference in FLAG's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998. The financial
statements audited by Porter Keadle Moore, LLP have been incorporated herein by
reference in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
The consolidated financial statements of FLAG and subsidiary for the year
ended December 31, 1996, included in the restated consolidated financial
statements of FLAG, incorporated herein and in the registration statement by
reference, have been audited by Robinson, Grimes and Company, P.C. independent
certified public accountants. The financial statements audited by Robinson,
Grimes and Company P.C., have been incorporated herein by reference in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The consolidated financial statements of Three Rivers Bancshares, Inc. as
of December 31, 1997 and 1996 and for each of the years in the two year period
ended December 31, 1997, included in the restated consolidated financial
statements of FLAG, incorporated herein and in the registration statement by
reference, have been audited by Thigpen, Jones, Seaton & Co., P.C., independent
certified public accountants. The financial statements audited by Thigpen,
Jones, Seaton & Co., P.C. have been incorporated herein by reference in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The consolidated financial statements of Abbeville as of December 31, 1998
and 1997, and for each of the years in the three year period ended December 31,
1998, are contained herein and in the Registration Statement in reliance upon
the report of Tourville, Simpson & Henderson, independent certified public
accountants, upon the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the shares of FLAG common stock to be issued in the merger
and certain tax consequences of the merger will be passed upon by Powell,
Goldstein, Frazer & Murphy LLP, Atlanta, Georgia.
71
<PAGE>
OTHER MATTERS
Management of Abbeville does not know of any matters to be brought before
the Special Meeting other than those described above. If any other matters
properly come before the Special Meeting, the persons designated as Proxies will
vote on such matters in accordance with their best judgment.
72
<PAGE>
INDEX TO ABBEVILLE FINANCIAL DATA
Page
----
Consolidated Balance Sheets as of March 31, 1999 and 1998 (Unaudited)........F-2
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1999 and 1998 (Unaudited)...............................F-3
Consolidated Statements of Comprehensive Income for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).....................................F-4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (Unaudited).....................................F-5
Notes to Consolidated Financial Statements (Unaudited).......................F-6
Report of Independent Certified Public Accountants...........................F-7
Consolidated Balance Sheets as of December 31, 1998
and 1997................................................................F-8
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996........................................F-9
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...................F-11
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................................F-12
Notes to Consolidated Financial Statements..................................F-13
F-1
<PAGE>
Abbeville Capital Corporation
Consolidated Balance Sheets
March 31, 1999 and 1998
Assets
1999 1998
----------- -----------
Cash and due from banks ......................... $ 1,951,226 1,584,880
Federal funds sold .............................. 3,975,407 4,060,981
----------- -----------
Cash and cash equivalents ........... 5,926,633 5,645,861
Securities available for sale ................... 16,463,510 10,397,601
Securities held to maturity ..................... 6,306,594 3,638,303
Securities sold under resell agreements ......... -- 1,200,000
Loans ........................................... 28,499,414 29,614,718
Premises and equipment .......................... 1,182,043 973,335
Accrued interest receivable and other assets .... 1,098,117 930,189
----------- -----------
Total assets ........................ $59,476,311 52,400,007
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Demand ...................................... $ 3,599,575 3,684,776
Interest bearing demand ..................... 11,102,055 10,354,943
Savings ..................................... 3,287,949 2,447,584
Time ........................................ 27,381,463 23,825,616
--==-------- ------------
Total deposits ...................... 45,371,042 40,312,919
Federal Home Loan Bank Advances ................. 3,000,000 1,000,000
Securities sold under repurchase agreements ..... 5,728,656 5,703,319
Accrued interest payable and other liabilities .. 355,178 567,326
------------ ------------
Total liabilities ................... 54,454,876 47,583,564
Shareholders' equity:
Common stock ................................ 1,243,805 1,243,805
Capital surplus ............................. 2,121,007 2,121,007
Retained earnings ........................... 2,058,408 1,810,302
Treasury stock .............................. (249,612) (249,612)
Accumulated other comprehensive income ...... (152,173) (109,059)
------------ ------------
Total shareholders' equity .......... 5,021,435 4,816,443
------------ ------------
Total liabilities and
shareholders' equity.............. $ 59,476,311 52,400,007
============ ============
F-2
<PAGE>
Abbeville Capital Corporation
Consolidated Statements of Earnings
For the Three Months Ended March 31, 1999 and 1998
1999 1998
---- ----
Interest income:
Loans $ ......................................... 666,045 691,073
Federal funds sold .............................. 92,884 68,337
Investments-Taxable ............................. 212,599 164,785
Investments-Nontaxable .......................... 62,665 39,396
Securities purchased under resell agreements .... -- 21,443
--------- ----------
Total Interest Income .................... 1,034,193 985,034
--------- ----------
Interest expense:
Deposits ........................................ 432,339 403,664
Securities sold under repurchase agreements ..... 73,398 81,187
Federal Home Loan Bank advances ................. 40,907 16,027
--------- ----------
Total interest expense ................... 546,644 500,878
--------- ----------
Net interest income ...................... 487,549 484,156
Provision for loan losses .......................... 17,500 10,000
--------- ----------
Net interest income after
provision for loan loss 470,049 474,156
--------- ----------
Non interest income:
Service charges and fees ........................ 76,566 58,442
Other ........................................... 24,208 10,824
--------- ----------
Total non interest income ................. 100,774 69,266
--------- ----------
Non interest expense:
Salaries and benefits ........................... 170,323 166,459
Occupancy ....................................... 54,025 49,385
Other ........................................... 123,017 109,876
--------- ----------
Total noninterest expense ................. 347,365 325,720
--------- ----------
Income before taxes ...................... 223,458 217,702
Income tax expense ................................. 70,552 72,912
--------- ----------
Net earnings ............................. $ 152,906 144,790
========= ==========
Basic earnings per share ............................ $ 0.64 0.60
========== ==========
Average shares outstanding .......................... 237,415 241,197
========== ==========
F-3
<PAGE>
Abbeville Capital Corporation
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1999 and 1998
1999 1998
--------- ---------
Net income .............................................. $ 152,906 144,790
Other comprehensive income, net of tax
Unrealized losses on securities during the period .. (14,204) (9,738)
Less: reclassification adjustment for gains
included in net income......................... -- --
--------- ---------
Other comprehensive income (loss) ....................... (14,204) (9,738)
--------- ---------
Comprehensive income .................................... $ 138,702 135,052
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
Abbeville Capital Corporation
Consolidated Statements of Cash Flows
March 31, 1999 and 1998
1999 1998
---- ----
Cash flows from operating activities:
Net earnings ...................................... $ 152,906 144,790
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation, amortization and accretion ............. 22,708 28,141
Provision for loan losses ...................... 17,500 10,000
Change in other ................................ (163,803) 281,133
----------- ----------
Net cash provided by operating activities .. 29,311 464,064
----------- ----------
Cash flows from investing activities: ................
securities sold under resell agreements .............. -- 400,000
Proceeds from maturities of securities
available for sale.............................. 300,000 --
Purchases of securities available for sale ........ (2,470,958) (147,589)
Purchases of securities held to maturity .......... (1,303,350) (838,706)
Change in loans ................................... (388,098) (562,067)
Purchases of premises and equipment ............... (334) (3,830)
----------- ----------
Net cash used in investing activities ...... (3,862,740) (1,152,192)
----------- ----------
Cash flows from financing activities:
Net change in deposits ............................ 908,011 2,254,687
Change in securities sold under
repurchase agreements ........................... 150,412 894,297
Purchase of treasury stock ........................ -- (249,612)
Dividends paid .................................... (189,932) --
----------- ----------
Net cash provided by investing activities .. 868,491 2,899,372
----------- ----------
Net change in cash and cash equivalents .... (2,964,938) 2,211,244
Cash and cash equivalents at beginning of year ....... 8,891,571 3,434,617
----------- ----------
Cash and cash equivalents at end of year ............. $ 5,926,633 5,645,861
=========== ==========
F-5
<PAGE>
Abbeville Capital Corporation
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization and Basis of Presentation
--------------------------------------
Abbeville Capital Corporation (the "Company"), a bank holding company, owns
100% of the outstanding common stock of The Bank of Abbeville (the "Bank"),
which operates in the Abbeville, South Carolina area.
The consolidated financial statements includes the accounts of the Company
and the Bank. All intercompany accounts and transactions have been
eliminated in consolidation.
The interim financial statements included herein are unaudited but reflect
all adjustments which, in the opinion of management, are necessary for a
fair presentation of the financial position and results of operations for
the interim period presented. All such adjustments are of a normal
recurring nature. The results of operations for the period ended March 31,
1999 are not necessarily indicative of the results of a full year's
operations.
The accounting principles followed by the Company 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 determinations of the allowance for loan
losses, the valuation of real estate acquired in connection with or in lieu
of foreclosure on loans, and valuation allowances associated with deferred
tax assets, the recognition of which are based on future taxable income.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Abbeville Capital Corporation
Abbeville, South Carolina
We have audited the accompanying consolidated balance sheets of Abbeville
Capital Corporation and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Abbeville Capital
Corporation and subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Tourville, Simpson & Henderson
February 4, 1999
Columbia, South Carolina
F-7
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Consolidated Balance Sheets
December 31,
1998 1997
---- ----
Assets
Cash and cash equivalents:
Cash and due from banks ......................... $ 1,591,795 $ 2,056,841
Federal funds sold .............................. 7,299,776 1,377,776
------------ ------------
8,891,571 3,434,617
Securities purchased under agreements to resell .... -- 1,600,000
Investment securities:
Securities available-for-sale ................... 14,299,657 10,259,793
Securities held-to-maturity (estimated market
value: 1998 - $5,114,103; 1997 - $2,841,369) .. 5,003,244 2,799,597
------------ ------------
19,302,901 13,059,390
Loans receivable ................................... 28,453,613 29,410,097
Less unearned income ............................ (9,589) (16,498)
Less allowance for loan losses .................. (315,208) (330,948)
------------ ------------
Loans, net ................................... 28,128,816 29,062,651
Premises and equipment, net ........................ 1,206,118 993,505
Accrued interest receivable ........................ 390,552 434,827
Other assets ....................................... 621,157 467,245
------------ ------------
Total assets ........................... $ 58,541,115 $ 49,052,235
============ ============
Liabilities
Deposits:
Non-interest bearing transaction accounts ....... $ 3,512,376 $ 3,699,057
Interest bearing transaction accounts ........... 10,966,393 9,264,736
Savings ......................................... 3,044,433 2,313,442
Time deposits $100,000 and over ................. 6,653,348 4,150,983
Other time deposits ............................. 20,286,481 18,630,014
------------ ------------
44,463,031 38,058,232
Securities sold under agreements to repurchase ..... 5,578,244 4,809,022
Advance from Federal Home Loan Bank ................ 3,000,000 1,000,000
Short-term borrowings .............................. 193,000 --
Accrued interest payable ........................... 212,931 193,048
Other liabilities .................................. 21,244 61,571
------------ ------------
Total liabilities ...................... 53,468,450 44,121,873
------------ ------------
Stockholders' equity
Common stock, $5.00 par value; 1,000,000 shares
authorized; 248,761 shares issued
and outstanding.................................. 1,243,805 1,243,805
Capital surplus .................................... 2,121,007 2,121,007
Accumulated other comprehensive income ............. (137,969) (99,321)
Retained earnings .................................. 2,095,434 1,664,871
Treasury stock (11,346 shares in 1998) ............. (249,612) --
------------ ------------
Total stockholders' equity ............. 5,072,665 4,930,362
------------ ------------
Total liabilities and
stockholders' equity ................ $ 58,541,115 $ 49,052,235
============ ============
The accompanying notes are an integral part of the consolidated financial
statements
F-8
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Consolidated Statements of Income
Year ended December 31,
-----------------------
1998 1997
---------- ----------
Interest income
Loans, including fees ............................. $2,735,533 $2,712,456
Investment securities, taxable .................... 727,354 728,824
Investment securities, tax-exempt ................. 167,537 113,790
Federal funds sold ................................ 284,207 98,352
Securities purchased under agreements to resell ... 61,495 72,609
---------- ----------
3,976,126 3,726,031
---------- ----------
Interest expense
Time deposits $100,000 and over ................... 270,929 259,518
Other deposits .................................... 1,394,960 1,255,618
Securities sold under agreements to repurchase .... 293,468 209,512
Advance from Federal Home Loan Bank ............... 100,144 64,998
---------- ----------
2,059,501 1,789,646
---------- ----------
Net interest income .................................. 1,916,625 1,936,385
Provision for loan losses ............................ 41,000 65,000
---------- ----------
Net interest income after provision for loan losses .. 1,875,625 1,871,385
---------- ----------
Other income
Service charges on deposit accounts ............... 264,659 233,889
Gain on sales of investment securities ............ -- 783
Credit life insurance commissions ................. 30,534 19,011
Other income ...................................... 56,725 46,196
---------- ----------
351,918 299,879
---------- ----------
Other expense
Salaries and employee benefits .................... 673,715 621,670
Premises and equipment ............................ 203,966 174,262
Other operating expense ........................... 470,342 446,725
---------- ----------
1,348,023 1,242,657
---------- ----------
Income before income taxes ........................... 879,520 928,607
Income tax provision ................................. 259,025 309,967
---------- ----------
Net income ........................................... $ 620,495 $ 618,640
========== ==========
Basic earnings per share .......................... $ 2.61 $ 2.49
Diluted earnings per share ........................ $ 2.61 $ 2.49
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Consolidated Statements of Comprehensive Income
Year ended December 31,
-----------------------
1998 1997
--------- ----------
Net income ........................................... $ 620,495 $ 618,640
--------- ---------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
during the period ............................... (38,648) 56,563
Less: reclassification adjustment for gains
included in net income........................... -- (493)
--------- ---------
Other comprehensive income ........................... (38,648) 56,070
--------- ---------
Comprehensive income ................................. $ 581,847 $ 674,710
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Capital Comprehensiv Retained Treasury
Shares Amount Surplus Income Earnings Stock Total
------ ------ ------- ------ -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 ...... 248,761 $ 1,243,805 $ 1,721,007 $ (155,391) $ 1,575,586 $ $ 4,385,007
Net income .............. 618,640 618,640
Cash dividends -
$.52 per share ........ (129,355) (129,355)
Transfer from retained
earnings to surplus ... 400,000 (400,000)
Other comprehensive
Income ................ 56,070 56,070
--------- ---------- ---------- ---------- ----------- ------------ ------------
Balance,
December 31, 1997 ....... 248,761 1,243,805 2,121,007 (99,321) 1,664,871 4,930,362
Net income ............... 620,495 620,495
Cash dividends -
$.80 per share ......... (189,932) (189,932)
Purchase of
treasury stock ......... (249,612) (249,612)
Other comprehensive
income ................. (38,648) (38,648)
--------- ---------- ---------- ---------- ----------- ------------ ------------
Balance,
December 31, 1998 ....... 248,761 $ 1,243,805 $ 2,121,007 $ (137,969) $ 2,095,434 $ (249,612) $ 5,072,665
=========== =========== =========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31,
------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income ...................................... $ 620,495 $ 618,640
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ................. 41,000 65,000
Depreciation .............................. 87,722 73,276
Accretion and premium amortization ........ 21,812 14,800
Amortization of deferred loan fees
and costs, net .......................... 39,865 41,892
Gain on sale of securities
available for sale....................... -- (783)
(Increase) decrease in deferred
income taxes ............................ 3,412 (9,187)
Decrease in interest receivable ........... 44,275 (1,600)
(Decrease) increase in interest payable ... 19,883 (1,358)
Increase in other assets .................. (38,626) (79,174)
(Decrease) increase in other liabilities .. (40,327) (61,379)
------------ ------------
Net cash provided by operating
activities .......................... 799,511 660,127
------------ ------------
Cash flows from investing activities:
Decrease in securities purchased under
agreements to resell .......................... 1,600,000 400,000
Purchases of securities available-for-sale ....... (10,184,285) (2,676,900)
Maturities of securities available-for-sale ...... 6,065,859 3,491,164
Proceeds from sales of securities
available-for-sale ............................ -- 250,937
Purchases of securities held-to-maturity ......... (2,373,244) (779,992)
Maturities of securities held-to-maturity ........ 165,000 100,000
Net decrease (increase) in loans made
to customers .................................. 852,971 (2,331,509)
Proceeds from sale of asset ...................... 22,644 340
Purchases of premises and equipment .............. (322,979) (117,531)
Purchase of Federal Home Loan Bank stock ......... (96,000) --
------------ ------------
Net cash used by investing activities .. (4,270,034) (1,663,491)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, interest
bearing transaction accounts and
savings accounts ......................... 2,245,967 1,460,212
Net increase in certificates of
deposit and other time deposits............... 4,158,832 1,319,999
Proceeds of advance from short-term borrowings .. 193,000
Net increase in securities sold under agreements
to repurchase ................................ 769,222 146,237
Proceeds of advance from Federal Home Loan Bank . 3,000,000 --
Repayment of Federal Home Loan Bank advances .... (1,000,000) --
Cash dividends paid ............................. (189,932) (129,355)
Purchase of treasury stock ...................... (249,612) --
------------ ------------
Net cash provided by
financing activities ................ 8,927,477 2,797,093
------------ ------------
Net increase in cash and cash equivalents .......... 5,456,954 1,793,729
Cash and cash equivalents, beginning of year ....... 3,434,617 1,640,888
------------ ------------
Cash and cash equivalents, end of year ............. $ 8,891,571 $ 3,434,617
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE A - Organization and Summary of Significant Accounting Policies
Consolidation - Abbeville Capital Corporation, a bank holding company organized
in 1997 (the Company), and its subsidiary, The Bank of Abbeville (the Bank),
provide commercial banking services to domestic markets, principally in
Abbeville County, South Carolina. The Bank is a state chartered bank, and its
deposits are insured by the Federal Deposit Insurance Corporation. The
consolidated financial statements include the accounts of the parent company and
its wholly-owned subsidiary after elimination of all significant intercompany
balances and transactions.
Management's Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans, including
valuation allowances for impaired loans, and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties. Management must also make estimates in determining the
estimated useful lives and methods for depreciating premises and equipment.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
Investment Securities - Investment securities available-for-sale by the Company
include all obligations of the United States government agencies and
corporations. These securities are carried at amortized cost and adjusted to
their estimated market value. The unrealized gain or loss is recorded in
stockholders' equity net of the deferred tax effects. Management does not
actively trade securities classified as available-for-sale but intends to hold
these securities for an indefinite period of time and may sell them prior to
maturity to achieve certain objectives. Reductions in market value considered by
management to be other than temporary are reported as a realized loss and a
reduction in the cost basis in the security. The adjusted cost basis of
securities available-for-sale is determined by specific identification and is
used in computing the realized gain or loss from a sales transaction.
Investment securities held-to-maturity are those securities which management has
the intent and the Company has the ability to hold until maturity. The Company's
policy is to hold to maturity all obligations of counties and municipalities
within the state of South Carolina. Securities held-to-maturity are carried at
cost and adjusted for amortization of premiums and accretion of discounts, both
computed by the straight-line method. Reductions in market value considered by
management to be other than temporary are reported as a realized loss and a
reduction in the cost basis of the security. The adjusted cost basis of
securities held-to-maturity is determined by specific identification and is used
in computing the realized gain or loss from a sales transaction.
F-13
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE A - Organization and Summary of Significant Accounting Policies - Continued
Loans - Loans are stated at their unpaid principal balance. Interest income on
certain installment loans is computed using the sum-of-the-months digits method.
Interest income on all other loans is computed using the simple interest method
and is recorded in the period earned. When serious doubt exists as to the
collectibility of a loan or a loan is 90 days past due, the accrual of interest
income is generally discontinued unless the estimated net realizable value of
the collateral is sufficient to assure collection of the principal balance and
accrued interest. When interest accruals are discontinued, income in the current
year is reversed and interest income accrued in prior years is charged to the
allowance for loan losses.
Impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or fair value of the
collateral if the loan is collateral dependent. When management determines that
a loan is impaired, the difference between the Company's recorded investment in
the related loan and the present value of the expected future cash flows, or the
fair value of the collateral, is charged to bad debt expense with a
corresponding entry to a valuation account. The accrual of interest is
discounted on an impaired loan when management determines that the borrower may
be unable to meet payments as they become due.
Loan Fees and Costs - Loan origination and commitment fees and certain direct
loan origination costs (principally salaries and employee benefits) are deferred
and amortized to income over the contractual lives of the related loans or
commitments using the straight line method.
Allowance for Loan Losses - An allowance for possible loan losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. The allowance is based upon a continuing
review of past loan loss experience, current and future economic conditions
which may affect the borrowers' ability to pay and the underlying collateral
value of the loans. Loans which are deemed to be uncollectible are charged off
and deducted from the allowance. The provision for possible loan losses and
recoveries of loans previously charged off are added to the allowance.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method, based on the following estimated useful lives: buildings -
40 years; furniture and equipment - 5 to 10 years. The cost of assets sold or
otherwise disposed of, and the related allowance for depreciation are eliminated
from the accounts and the resulting gains or losses are reflected in the income
statement when incurred. Maintenance and repairs are charged to current expense.
The costs of major renewals and improvements are capitalized.
Investment in Equity Securities - Other assets include the cost of the Company's
investments in the stock of the Federal Home Loan Bank. The stock has no quoted
market value and no ready market exists. Investment in Federal Home Loan Bank
stock is a condition of borrowing from the Federal Home Loan Bank, and the stock
is pledged to secure the borrowings. At December 31, 1998 and 1997, the
investment in Federal Home Loan Bank stock was $241,200 and $145,200,
respectively. Dividends received on Federal Home Loan Bank stock are included in
other income.
The Company's investment in the stock of an unrelated financial institution is
also included in other assets at cost. The Company owns less than five percent
of the outstanding shares of this institution, and the stock has no quoted
market value and is not readily marketable. At December 31, 1998 and 1997, the
investment in the stock of the unrelated financial institution was $81,864.
Dividends received are included in other income.
F-14
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE A - Organization and Summary of Significant Accounting Policies - Continued
Income Taxes - Income taxes are the sum of amounts currently payable to taxing
authorities and the net changes in income taxes payable or refundable in future
years. Income taxes deferred to future years are determined utilizing a
liability approach. This method gives consideration to the future tax
consequences associated with differences between financial accounting and tax
bases of certain assets and liabilities, principally the allowance for loan
losses and depreciable premises and equipment.
Per-share Amounts - Basic earnings per share is computed by dividing net income
by the weighted-average number of shares outstanding for the period excluding
the affects of any dilutive potential common shares. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Company's stock
option plan are reflected in diluted earnings per share by the application of
the treasury stock method.
See Note O.
Statements of Cash Flows - For purposes of reporting cash flows in the financial
statements, the Company considers certain highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents include amounts due from banks and federal funds sold. Generally,
federal funds are sold for one day periods.
During 1998 and 1997, interest paid on deposits and short-term borrowings
totaled $2,039,617 and $1,791,004, respectively. Income tax payments of $322,038
and $310,576 were made during 1998 and 1997, respectively.
Supplemental noncash financing and investing activities are as follows:
Changes in the valuation account of securities available for sale, including the
deferred tax effects, are considered noncash transactions for purposes of the
statement of cash flows and are presented in detail in the notes to the
financial statements.
Intangibles - Intangibles consist of organizational costs associated with the
formation of the holding company in 1997. Organizational costs are amortized
using the straight line method over 60 months.
Off-Balance-Sheet Financial Instruments - In the ordinary course of business,
the Company has entered into off-balance-sheet financial instruments consisting
of commitments to extend credit and letters of credit. These financial
instruments are recorded in the financial statements when they become payable by
the customer.
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of loans
receivable, investment securities, federal funds sold and amounts due from
banks. Management is not aware of any concentrations of loans to classes of
borrowers or industries that would be similarly affected by economic conditions.
Although the Company's loan portfolio is diversified, a substantial portion of
its borrowers' ability to honor the terms of their loans is dependent on
business and economic conditions in Abbeville County and surrounding areas.
Management does not believe credit risk is associated with obligations of the
United States, its agencies or corporations. The Company has invested in
obligations of state and political subdivisions, substantially all within the
state of South Carolina. Management believes that the credit risk associated
with these securities is limited due to the diversity of the portfolio. The
Company places its deposits and correspondent accounts with and sells federal
funds to high credit quality financial institutions. By policy, time deposits
are limited to amounts insured by the FDIC. Management believes credit risk
associated with correspondent accounts is not significant.
F-15
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE A - Organization and Summary of Significant Accounting Policies - Continued
Reclassifications - Certain captions and amounts in the 1997 financial
statements were reclassified to conform with the 1998 presentation.
NOTE B - Adoption of Accounting Principle
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income. Comprehensive income
includes net income and other comprehensive income which is defined as non-owner
related transactions in equity. The prior period has been reclassified to
reflect the application of the provisions of SFAS 130. The following tables set
forth the amounts of other comprehensive income included in equity along with
the related tax effects for the years ended December 31, 1998 and 1997.
Pre-tax (Expense) Net of tax
Amount Benefit Amount
------ ------- ------
For the Year Ended December 31, 1998:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period ............... $(61,348) $ 22,700 $(38,648)
Less: reclassification adjustment
for gains realized in net income ........ -- -- --
-------- -------- --------
Net unrealized gains (losses) on securities . (61,348) 22,700 (38,648)
-------- -------- --------
Other comprehensive income .................. $(61,348) $ 22,700 $(38,648)
======== ======== ========
Pre-tax (Expense) Net of tax
Amount Benefit Amoun
------ ------- -----
For the Year Ended December 31, 1997: .......
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period ............... $ 89,783 $(33,220) $ 56,563
Less: reclassification adjustment
for gains realized in net income ........ (783) 290 (493)
-------- -------- --------
Net unrealized gains (losses) on securities . 89,000 (32,930) (56,070)
-------- -------- --------
Other comprehensive income .................. $ 89,000 $(32,930) $ 56,070
======== ======== ========
NOTE C - Change in Accounting Principle
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share,"
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 simplifies the standards for computing earnings per share (EPS)
and makes them comparable to international EPS standards. It also requires the
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. A further discussion of the
reconciliation of basic and diluted EPS is included in Note Q.
F-16
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE D - Corporate Reorganization
On April 15, 1997, the stockholders of The Bank of Abbeville approved a plan of
corporate reorganization under which The Bank of Abbeville became a wholly-owned
subsidiary of Abbeville Capital Corporation, a bank holding company, which was
organized at the direction of the Board of Directors of the Bank. The authorized
common stock of Abbeville Capital Corporation is 1,000,000 shares with a par
value of $5.00 per share. Pursuant to the registration, all 1,000,000 shares of
common stock of The Bank of Abbeville were converted into equal shares of common
stock of the holding company.
The following is a summary of The Bank of Abbeville's operations and
stockholders' equity for the period January 1, 1997 through June 30, 1997.
Interest income ................................... $ 1,871,130
Interest expense .................................. 891,939
-----------
Net interest income ............................... 979,191
Provision for loan losses ......................... 30,000
-----------
Net interest income after provision for loan losses 949,191
Other income ...................................... 140,804
Other expense ..................................... 766,576
-----------
Net income ........................................ $ 323,419
===========
Stockholders' equity, January 1, 1997 ............. $ 4,385,007
Net income for the period ......................... 323,419
Change in fair value during the period ............ (12,295)
-----------
Stockholders' equity, June 30, 1997 ............... $ 4,696,131
===========
NOTE E - Cash and Due From Banks
The banking subsidiary is required by regulation to maintain average cash
reserve balances computed as a percentage of deposits. At December 31, 1998 and
1997, the required cash reserve balances were approximately $164,000 and
$141,000, respectively. These requirements were satisfied by vault cash.
NOTE F - Securities Purchased under Agreements to Resell
The Company purchases securities under agreements to resell substantially
identical securities. Securities purchased under agreements to resell at
December 31, 1998 and 1997, consist of various municipal and agency securities
with a cost of $0 and $1,600,000, respectively. The amounts advanced under these
agreements represent short-term loans and are reflected as a receivable on the
balance sheet. During the period, the securities were delivered by appropriate
entry into the Company's third-party custodian's account under a written
custodial agreement that explicitly recognizes the Company's interest in the
securities. Securities purchased under agreements to resell had a daily average
of $1,175,559 during 1998, and the maximum amount outstanding at any month-end
during 1998 was $2,750,000.
F-17
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE G - Investment Securities
The amortized costs and estimated market values of securities available-for-sale
at December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1998
Securities of other U.S. Government
agencies and corporations ....... $ 7,464,247 $ 36,149 $ 15,304 $ 7,485,092
Mortgage-backed securities ........ 7,054,409 2,539 242,383 6,814,565
----------- ----------- ----------- -----------
$14,518,656 $ 38,688 $ 257,687 $14,299,657
=========== =========== =========== ===========
December 31, 1997
Securities of other U.S. Government
agencies and corporations ....... $ 4,576,156 $ 19,406 $ 10,891 $ 4,584,671
Mortgage-backed securities ........ 5,841,288 4,103 170,269 5,675,122
----------- ----------- ----------- -----------
$10,417,444 $ 23,509 $ 181,160 $10,259,793
=========== =========== ===========
</TABLE>
The amortized costs and estimated market values of securities held-to-maturity
at December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1998
<S> <C> <C> <C> <C>
Obligations of state and
local governments ............. $5,003,244 $ 117,093 $ 6,234 $5,114,103
========== ========= ========== ==========
December 31, 1997
Obligations of state and
local governments $2,799,597 $ 51,425 $ 9,653 $2,841,369
============= =========== ========== ==========
</TABLE>
At December 31, 1998 and 1997, investment securities with a book value of
$13,704,307 and $8,516,143 and a market value of $13,581,343 and $8,365,592,
respectively, were pledged as collateral to secure public deposits and
securities sold under agreements to repurchase and for other purposes as
required and permitted by law.
There were no sales of securities available-for-sale in 1998. Proceeds from
sales of securities available-for-sale were $250,937 in 1997, resulting in gross
realized gains of $783. There were no sales of securities held-to-maturity in
1998 or 1997.
F-18
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE G - Investment Securities - Continued
The following is a summary of maturities of securities available-for-sale and
held-to-maturity as of December 31, 1998. The amortized cost and estimated fair
values are based on the contractual maturity dates. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalty.
<TABLE>
<CAPTION>
Securities Securities
Available-for-Sale Held-to-Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less .......... $ 302,195 $ 304,125 $ 175,000 $ 175,762
Due after one year but within
five years ..................... 3,147,799 3,163,556 945,685 974,276
Due after five years but within
ten years ...................... 4,014,253 4,017,411 1,369,521 1,406,029
Due after ten years 2,513,038 2,558,036
-------------- -------------- -------------- --------------
7,464,247 7,485,092 5,003,244 5,114,103
Mortgage-backed securities ....... 7,054,409 6,814,565 - -
-------------- -------------- -------------- --------------
$ 14,518,656 $ 14,299,657 $ 5,003,244 $ 5,114,103
============== ============== ============== ==============
</TABLE>
NOTE H - Loans
Major classifications of loans receivable are summarized as follows:
December 31,
------------
1998 1997
---- ----
Commercial and industrial ................. $ 317,767 $ 343,872
Real estate .............................. 17,176,434 18,687,150
Installment and consumer credit lines ..... 10,717,987 9,934,560
All other loans ........................... 241,425 444,515
----------- -----------
Total gross loans ................... $28,453,613 $29,410,097
=========== ===========
Transactions in the allowance for loan losses for the years ended December 31,
1998 and 1997 are summarized below:
1998 1997
----------- ----------
Balance, beginning of year ............... $ 330,948 $ 309,656
Provision charged to operations .......... 41,000 65,000
Recoveries on loans previously charged off 31,264 12,357
Loans charged off ........................ (88,004) (56,065)
----------- -----------
Balance, end of year ..................... $ 315,208 $ 330,948
=========== ===========
F-19
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE H - Loans - Continued
The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding principal and interest are expected to be collected. Loans are not
considered impaired if a minimal delay occurs and all amounts due including
accrued interest at the contractual interest rate for the period of delay are
expected to be collected. At December 31, 1998 and 1997, management has
determined that no impairment on loans existed that would have a material effect
on the Company's financial statements.
At December 31, 1998 and 1997, the Company had nonaccrual loans of approximately
$251,000 and $118,000, respectively, for which impairment had not been
recognized. The additional interest income which would have been recognized into
earnings if the Company's nonaccrual loans had been current in accordance with
their original terms is immaterial for all years presented. Loans 90 days or
more past due and still accruing interest were $10,000 and $19,000 at December
31, 1998 and 1997, respectively.
Certain parties (principally certain directors and executive officers of the
Company, their immediate families and business interests) were loan customers of
and had other transactions in the normal course of business with the Company.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. Total loans and commitments outstanding to these parties at
December 31, 1998 and 1997 were $361,757 and $336,642, respectively.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. A commitment involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company's exposure to credit
loss in the event of non-performance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Letters of credit are conditional
commitments issued to guarantee a customer's performance to a third party and
have essentially the same credit risk as other lending facilities.
Collateral held for commitments to extend credit and standby letters of credit
varies but may include accounts receivable, inventory, property, plant,
equipment and income-producing commercial properties.
The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 1998
and 1997:
1998 1997
---------- ----------
Commitments to extend credit ...... $2,689,019 $1,967,247
Standby letters of credit ........ 85,345 80,245
F-20
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE H - Loans - Continued
Management is not aware of any significant concentrations of loans to classes of
borrowers or industries that would be affected similarly by economic conditions.
Although the Company's loan portfolio is diversified, a substantial portion of
its borrowers' ability to honor the terms of their loans is dependent on the
economic conditions in Abbeville County and surrounding areas.
Note I - Premises and Equipment
Premises and equipment consisted of the following at December 31, 1998 and 1997:
1998 1997
---------- ----------
Land ......................... $ 315,814 $ 122,484
Building and land improvements 892,932 840,751
Furniture and equipment ...... 753,035 705,612
---------- ----------
1,961,781 1,668,847
Less, accumulated depreciation 755,663 675,342
---------- ----------
Premises and equipment, net .. $1,206,118 $ 993,505
========== ==========
NOTE J - Deposits
At December 31, 1998, the scheduled maturities of certificates of deposit are as
follows:
1999 ............... $23,390,261
2000 ............... 2,822,749
2001 ............... 726,819
-----------
$26,939,829
NOTE K - Securities sold under Agreements to Repurchase
The Company sold securities under agreements to repurchase which mature within
one day. The amounts outstanding at December 1998 and 1997 were $5,578,244 and
$4,809,022, respectively. During 1998, the average of securities sold under
agreements to repurchase was $6,235,591 and the maximum amount outstanding at
any month-end during 1998 was $7,938,852. As of December 31, 1998, the par value
and market values of the securities pledged to collaterize the repurchase
agreements were $10,718,690 and $10,688,789, respectively.The securities
underlying the agreements are held by a third-party custodian.
At December 31, 1998, the Company had an arrangement to purchase federal funds
up to $1,000,000 with an unrelated financial institution. Under the terms of the
agreement, the Company may borrow at mutually agreed-upon rates for one to
fourteen day periods. The Company did not purchase federal funds at any time
during 1998 or 1997.
NOTE L - Advance from the Federal Home Loan Bank
As of December 31, 1998, advances from the Federal Home Loan Bank consisted of
$3,000,000, at a fixed rate of 4.99%, maturing on August 4, 2008.
F-21
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE L - Advance from the Federal Home Loan Bank - Continued
As collateral, the Company has pledged first mortgage loans on one to four
family residential loans aggregating $10,627,000 at December 31, 1998. In
addition, the Bank's Federal Home Loan Bank stock, which is included in other
assets, is pledged to secure the borrowings.
NOTE M - Short-term Borrowings
On December 15, 1998, the Company entered into a loan agreement with an
unrelated financial institution to borrow $193,000 for the purpose of purchasing
land for a possible future branch location. The promissory note is an
uncollateralized obligation of the Company which bears interest at the lender's
prime rate less .5%. The promissory note provides for one principal payment of
$193,000 plus interest on February 15, 1999.
NOTE N - Stockholders' Equity
Treasury Stock - Treasury stock is shown at cost. At December 31, 1998, treasury
stock consisted of 11,346 shares.
Restriction of Payment of Dividends - The ability of Abbeville Capital
Corporation to pay cash dividends is dependent upon receiving cash in the form
of dividends from The Bank of Abbeville. However, certain restrictions exist
regarding the ability of the Bank to transfer funds to Abbeville Capital
Corporation in the form of cash dividends. All of the Bank's dividends to the
Company are subject to the prior approval of the Commissioner of Banking and are
payable only from the undivided profits of the Bank. At December 31, 1998, the
Bank's undivided profits were $1,777,844.
NOTE O - Stock Option Plan
During 1997 the Company approved the terms of the Company's Incentive Stock
Option Plan of 1997 and Director Non-Qualified Stock Option Plan of 1997 which
received stockholders approval on August 25, 1997. These plans provide for the
granting of statutory incentive stock options within the meaning of Section 422
of the Internal Revenue Code, as well as nonstatutory stock options. Stock
options are issuable only to employees and directors of the Company and its
subsidiaries. The per-share exercise price of options granted may not be less
than the fair market value of a share on the date of grant. Options are
exercisable on the date of grant and can be exercised within ten years from date
of grant. Any options that expire unexercised or are canceled become available
for issuance. No options shall be granted under this plan after September 1,
2007.
The Incentive Stock Option Plan of 1997 and Director Non-Qualified Stock Option
Plan of 1997 provide for the granting of 17,000 and 8,000 options of the
Company's common stock, respectively. These amounts shall be proportionately and
appropriately adjusted in the event of any merger, consolidation, stock
dividend, or split-up.
NOTE P - Retirement Plan
The Company sponsors a tax deferred retirement savings plan (the Plan) under
Section 401(k) of the Internal Revenue Code covering substantially all
employees. Regular employees of the Company who are 21 years or older, work at
least 1,000 hours per year, and who have completed one or more years of service
are eligible to participate in the retirement savings plan. The Company may make
discretionary non-elective contributions to the Plan based on earnings of the
Company.
F-22
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE P - Retirement Plan - Continued
Employees who participate make elective contributions to the Plan with the
Company matching 100% of the participant's contributions up to 4% of eligible
employee compensation. Participants are fully vested in both their contributions
and the Company's contributions upon participation.
Retirement plan expense was $17,784 and $16,335 in 1998 and 1997, respectively.
The Company's policy is to fund retirement plan contributions as accrued.
NOTE Q - Earnings Per Share
As discussed in Note C, the FASB issued SFAS 128, "Earnings Per Share," in
February 1997. SFAS 128 replaces the presentation of primary earnings per share
(EPS) with a presentation of basic EPS. It requires the presentation of basic
and diluted EPS on the face of the income statement for all entities with a
complex capital structure. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
No options had been granted as of December 31, 1998; therefore, basic and
diluted earnings per share are the same for both 1998 and 1997. A reconciliation
of the numerators and denominators used to calculate basic and diluted earnings
per share follows:
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net income ............................ $620,495 238,130 $ 2.61
Effect of Dilutive Securities ......... -- --
-------- -------- ---------
Diluted EPS
Income available to common shareholders $620,495 238,130 $ 2.61
======== ======== =========
For the Year Ended December 31, 1997
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------- ------
Basic EPS
Net income ........................... $618,640 248,761 $ 2.49
Effect of Dilutive Securities
Stock options ........................ -- --
-------- -------
Diluted EPS
Income available to common shareholders $618,640 248,761 $ 2.49
======== ======== =========
F-23
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE R - Income Taxes
Income tax expense (benefit) is summarized as follows:
Year ended December 31,
-----------------------
1998 1997
---- ----
Currently payable
Federal ........................................... $ 227,641 $ 289,833
State ............................................. 27,971 29,321
--------- ---------
Total current ................................. 255,612 319,154
--------- ---------
Deferred
Federal ........................................... (18,308) 22,622
State ............................................. (978) 1,121
--------- ---------
Total deferred ................................ (19,286) 23,743
--------- ---------
Total income tax expense ............................ $ 236,326 $ 342,897
========= =========
Income tax expense (benefit) is allocated as follows:
To continuing operations .......................... $ 259,025 $ 309,967
To stockholders' equity ........................... (22,699) 32,930
--------- ---------
$ 236,326 $ 342,897
========= =========
The significant components of the deferred tax expense (benefit) for the years
ended December 31, 1998 and 1997 are summarized as follows:
Year ended December 31,
-----------------------
1998 1997
---- ----
Allowance for loan losses ........................... $ 3,850 $ (8,607)
Amortization of organizational costs ................ 194 (194)
Accelerated depreciation ............................ 2,189 (285)
Net capitalized loan costs .......................... (3,315) 394
Net operating loss .................................. (1,127) (495)
Valuation allowance ................................. 1,622
-------- --------
Deferred tax expense (benefit) attributable
to continuing operations ...................... 3,413 (9,187)
Deferred tax expense (benefit) attributable
to stockholders' equity ....................... (22,699) 32,930
-------- --------
Total deferred tax expense (benefit) .......... $(19,286) $ 23,743
======== ========
F-24
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE R - Income Taxes - Continued
The components of the net deferred tax asset as of December 31, 1998 and 1997
were as follows:
December 31,
------------
1998 1997
---- ----
Deferred tax assets:
Allowance for loan losses .......................... $ 102,528 $ 106,378
Other real estate .................................. 8,805 8,804
Amortization of organizational costs ............... -- 194
Unrealized loss on securities available-for-sale ... 81,030 58,331
Net operating loss ................................. 1,622 495
--------- ---------
Total gross deferred tax assets ................ 193,985 174,202
Less, valuation allowance .......................... (1,622) --
--------- ---------
Total net deferred tax assets .................. 192,363 174,202
--------- ---------
Deferred tax liabilities:
Accelerated depreciation ........................... (44,723) (42,534)
Net capitalized loan costs ......................... (6,457) (9,773)
--------- ---------
Total deferred tax liabilities ................. (51,180) (52,307)
--------- ---------
Total .......................................... $ 141,183 $ 121,895
========= =========
Deferred tax assets represent the future tax benefit of future deductible
differences, and, if it is more likely than not that a tax asset will not be
realized, a valuation allowance is required to reduce the recorded deferred tax
assets to net realizable value. At December 31, 1998 and 1997, respectively,
management established the valuation allowance at $1,622 and $0.
A reconciliation between the income tax expense and the amount computed by
applying the federal statutory rate of 34% to income before income taxes for the
years ended December 31, 1998 and 1997 follows:
1998 1997
---- ----
Tax expense at statutory rate .......... $ 299,037 $ 315,726
State income tax, net of federal
income tax benefit ................... 19,020 17,839
Tax-exempt interest income ............. (61,349) (46,832)
Disallowed interest expense ............ 12,447 12,631
Other, net ............................. (10,130) 10,603
--------- ---------
$ 259,025 $ 309,967
========= =========
NOTE S - Commitments and Contingencies
In the ordinary course of business, the Company may, from time to time, become a
party to legal claims and disputes. At December 31, 1998, management and legal
counsel are not aware of any pending or threatened litigation or unasserted
claims or assessments that could result in losses, if any, that would be
material to the financial statements.
F-25
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE T - Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier 1 and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
stockholders' equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Bank's Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total
capital for purposes of computing the capital ratios consists of the sum of Tier
1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and
8% for total risk-based capital.
The Bank is also required to maintain capital at a minimum level based on total
assets, which is known as the leverage ratio. Only the strongest banks are
allowed to maintain capital at the minimum requirement of 3%. All others are
subject to maintaining ratios 1% to 2% above the minimum.
As of December 31, 1998, the most recent notification from the Bank's primary
regulator categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events that
management believes have changed the Bank's category.
The following table summarizes the capital ratios of the Bank and the regulatory
minimum requirements at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ------- ----------- ------- ---------- -------
December 31, 1998
The Bank
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets)$ 5,424 17.05% $2,466 8.0% $3,082 10.0%
Tier 1 capital (to risk weighted assets) 5,109 16.05 1,233 4.0 1,849 6.0
Tier 1 capital (to average assets) 5,109 8.85 2,308 4.0 2,885 5.0
December 31, 1997
The Bank
Total capital (to risk weighted assets) 5,298 17.62% 2,406 8.0% 3,007 10.0%
Tier 1 capital (to risk weighted assets) 4,967 16.52 1,203 4.0 1,804 6.0
Tier 1 capital (to average assets) 4,967 10.43 1,905 4.0 2,381 5.0
</TABLE>
The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies with less
than $150,000,000 in consolidated assets.
F-26
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE U - Abbeville Capital Corporation (Parent Company Only)
Presented below are the condensed financial statements for Abbeville Capital
Corporation (Parent Company Only).
Balance Sheets
December 31, 1998 and 1997
1998 1997
---- ----
Assets
Cash ........................................... $ 14,504 $ 2,693
Investment in banking subsidiary ............... 5,004,686 4,866,576
Premises and equipment ......................... 193,329 --
Organizational costs ........................... 44,769 57,560
Other assets ................................... 8,377 3,533
---------- ----------
Total assets ............................. $5,265,665 $4,930,362
========== ==========
Liabilities and Stockholders' Equity
Short-term borrowings .......................... 193,000 --
Stockholders' equity ........................... 5,072,665 4,930,362
---------- ----------
Total liabilities and stockholders' equity $5,265,665 $4,930,362
========== ==========
Statements of Income
For the year ended December 31, 1998 and
for the period July 1, 1997 through December 31, 1997
1998 1997
---- ----
Income - Dividends from banking subsidiary ........ $460,000 $200,000
Expenses .......................................... 24,639 10,391
-------- --------
Income before income taxes and equity in
undistributed earnings of banking subsidiary.... 435,361 189,609
Income tax benefit ............................... 8,375 3,532
Equity in undistributed earnings
of banking subsidiary .......................... 176,759 102,080
-------- --------
Net income ....................................... $620,495 $295,221
======== ========
F-27
<PAGE>
ABBEVILLE CAPITAL CORPORATION
Notes to Consolidated Financial Statements
NOTE U - Abbeville Capital Corporation (Parent Company Only) - Continued
Statement of Cash Flows
For the year ended December 31, 1998 and 1997
for the period July 1, 1997 through December 31, 1997
1998 1997
---- ----
Cash flows from operating activities
Net income ........................................ $ 620,495 $ 295,221
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of organizational costs ........... 12,791 6,395
Equity in undistributed earnings of
banking subsidiary ........................... (176,759) (102,080)
Increase in other assets ....................... (4,843) (67,488)
--------- ---------
Net cash provided by operating activities 451,684 132,048
--------- ---------
Cash flows from investing activities
Purchases of premises and equipment ............... 193,329
Net cash used by investing activity ............... (193,329
Cash flows from financing activities
Net increase in short-term borrowings ............. 193,000
Cash dividends paid ............................... (189,932) (129,355)
Purchase of treasury stock ........................ (249,612)
--------- ---------
Net cash used by financing activities ... (246,544) (129,355)
--------- ---------
Increase in cash .................................... 11,811 2,693
Cash, beginning ..................................... 2,693 --
--------- ---------
Cash, ending ........................................ $ 14,504 $ 2,693
========= =========
NOTE V - The Year 2000
The Company has conducted a comprehensive review of its computer hardware and
software systems to identify those systems that could be affected by the Year
2000 issue. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to represent the applicable year. Any
of the Company's software systems that have date-sensitive routines or hardware
that has imbedded chips with date-sensitive algorithms may recognize a date of
"00" as the year 1900 rather than 2000. This could result in a major system
failure or errors and miscalculations in processing information. The Company
presently believes that, with modifications to existing hardware and software
and replacing non-compliant systems with Year 2000 compliant systems, the Year
2000 problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, management cannot
guarantee with any certainty the effect that the Year 2000 will ultimately have
on the Company or its operations.
F-28
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN FLAG FINANCIAL CORPORATION,
AND ABBEVILLE CAPITAL CORPORATION
DATED AS OF MARCH 31, 1999
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 22, 1999
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FLAG FINANCIAL CORPORATION
AND
ABBEVILLE CAPITAL CORPORATION
Dated as of
March 31, 1999
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS.............................................................iv
AGREEMENT AND PLAN OF MERGER..................................................1
ARTICLE 1. TRANSACTIONS AND TERMS OF THE MERGER........................2
1.1 MERGER...............................................................2
1.2 TIME AND PLACE OF CLOSING............................................2
1.3 EFFECTIVE TIME.......................................................2
ARTICLE 2. TERMS OF MERGER.............................................2
2.1 ARTICLES OF INCORPORATION............................................2
2.2 BYLAWS...............................................................3
2.3 DIRECTORS AND OFFICERS...............................................4
ARTICLE 3. MANNER OF CONVERTING SHARES.................................4
3.1 CONVERSION OF SHARES.................................................4
3.2 ANTI-DILUTION PROVISIONS.............................................4
3.3 SHARES HELD BY ABBEVILLE OR FLAG.....................................4
3.4 DISSENTING SHAREHOLDERS..............................................5
3.5 FRACTIONAL SHARES....................................................5
ARTICLE 4. EXCHANGE OF SHARES..........................................5
4.1 EXCHANGE PROCEDURES..................................................5
4.2 RIGHTS OF FORMER SHAREHOLDERS OF ABBEVILLE...........................6
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF ABBEVILLE.................7
5.1 ORGANIZATION, STANDING, AND POWER....................................7
5.2 AUTHORITY OF ABBEVILLE; NO BREACH BY AGREEMENT.......................7
5.3 CAPITAL STOCK........................................................8
5.4 ABBEVILLE SUBSIDIARIES...............................................9
5.5 FINANCIAL STATEMENTS................................................10
5.6 ABSENCE OF UNDISCLOSED LIABILITIES..................................10
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS................................10
5.8 TAX MATTERS.........................................................10
5.9 ALLOWANCE FOR POSSIBLE LOAN LOSSES..................................12
5.10 ASSETS...........................................................12
5.11 INTELLECTUAL PROPERTY............................................13
5.12 ENVIRONMENTAL MATTERS............................................13
5.13 COMPLIANCE WITH LAWS.............................................14
5.14 IMMIGRATION MATTERS..............................................15
5.15 LABOR RELATIONS..................................................15
5.16 EMPLOYEE BENEFIT PLANS...........................................15
5.17 MATERIAL CONTRACTS...............................................17
5.18 LEGAL PROCEEDINGS................................................18
5.19 REPORTS..........................................................19
5.20 STATEMENTS TRUE AND CORRECT......................................19
5.21 ACCOUNTING, TAX AND REGULATORY MATTERS...........................19
5.22 CHARTER PROVISIONS...............................................20
5.23 BOARD RECOMMENDATION.............................................20
5.24 Y-2K.............................................................20
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF FLAG.....................20
6.1 ORGANIZATION, STANDING, AND POWER...................................20
6.2 AUTHORITY OF FLAG; NO BREACH BY AGREEMENT...........................21
6.3 CAPITAL STOCK.......................................................22
6.4 FLAG SUBSIDIARIES...................................................22
6.5 SEC FILINGS, FINANCIAL STATEMENTS...................................23
6.6 ABSENCE OF UNDISCLOSED LIABILITIES..................................24
6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS................................24
6.8 TAX MATTERS.........................................................24
6.9 ALLOWANCE FOR POSSIBLE LOAN LOSSES..................................25
6.10 ASSETS...........................................................26
6.11 INTELLECTUAL PROPERTY............................................26
6.12 ENVIRONMENTAL MATTERS............................................27
6.13 COMPLIANCE WITH LAWS.............................................27
6.14 LABOR RELATIONS..................................................28
6.15 EMPLOYEE BENEFIT PLANS...........................................29
6.16 MATERIAL CONTRACTS...............................................30
6.17 LEGAL PROCEEDINGS................................................31
6.18 REPORTS..........................................................31
6.19 STATEMENTS TRUE AND CORRECT......................................32
6.20 ACCOUNTING TAX AND REGULATORY MATTERS............................32
6.21 CHARTER PROVISIONS...............................................32
6.22 BOARD RECOMMENDATION.............................................33
6.23 Y2K..............................................................33
i
<PAGE>
ARTICLE 7. CONDUCT OF BUSINESS PENDING CONSUMMATION...................33
7.1 AFFIRMATIVE COVENANTS OF ABBEVILLE..................................33
7.2 NEGATIVE COVENANTS OF ABBEVILLE.....................................33
7.3 AFFIRMATIVE COVENANTS OF FLAG.......................................35
7.4 NEGATIVE COVENANTS OF FLAG..........................................36
7.5 ADVERSE CHANGES IN CONDITION........................................36
7.6 REPORTS.............................................................36
ARTICLE 8. ADDITIONAL AGREEMENTS......................................37
8.1 REGISTRATION STATEMENT..............................................37
8.2 NASDAQ LISTING......................................................37
8.3 SHAREHOLDER APPROVAL................................................37
8.4 APPLICATIONS........................................................37
8.5 FILINGS WITH STATE OFFICES..........................................38
8.6 AGREEMENT AS TO EFFORTS TO CONSUMMATE...............................38
8.7 INVESTIGATION AND CONFIDENTIALITY...................................38
8.8 PRESS RELEASES......................................................39
8.9 CERTAIN ACTIONS.....................................................39
8.10 ACCOUNTING AND TAX TREATMENT.....................................39
8.11 CHARTER PROVISIONS...............................................39
8.12 AGREEMENTS OF AFFILIATES.........................................40
8.13 EMPLOYEE BENEFITS AND CONTRACTS..................................40
8.14 INDEMNIFICATION..................................................41
ARTICLE 9. CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE..........42
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY.............................42
9.2 CONDITIONS TO OBLIGATIONS OF FLAG...................................43
9.3 CONDITIONS TO OBLIGATIONS OF ABBEVILLE..............................44
ii
<PAGE>
ARTICLE 10. TERMINATION................................................45
10.1 TERMINATION......................................................45
10.2 EFFECT OF TERMINATION............................................46
10.3 NON-SURVIVAL OF REPRESENTATIONS AND COVENANTS....................46
ARTICLE 11. MISCELLANEOUS..............................................47
11.1 DEFINITIONS......................................................47
11.2 EXPENSES.........................................................54
11.3 BROKERS AND FINDERS..............................................55
11.4 ENTIRE AGREEMENT.................................................55
11.5 AMENDMENTS.......................................................55
11.6 WAIVERS..........................................................55
11.7 ASSIGNMENT.......................................................56
11.8 NOTICES..........................................................56
11.9 GOVERNING LAW....................................................57
11.10 COUNTERPARTS.....................................................57
11.11 CAPTIONS, ARTICLES AND SECTIONS..................................57
11.12 INTERPRETATIONS..................................................57
11.13 ENFORCEMENT OF AGREEMENT.........................................57
11.14 SEVERABILITY.....................................................58
SIGNATURES TO AGREEMENT AND PLAN OF MERGER
iii
<PAGE>
LIST OF EXHIBITS
Exhibit
Number Description
- ------ -----------
1. Form of Agreement of Affiliates of ABBEVILLE CAPITAL CORPORATION (ss.
8.12, ss. 9.2(f)).
2. Matters as to which Gerrish & McCreary, P.C. will opine. (ss. 9.2(d)).
3. Form of Claims Letter (ss. 9.2(g)).
4. Matters as to which Powell, Goldstein, Frazer & Murphy LLP will opine.
(ss. 9.3(d)).
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of March 31, 1999 by and between FLAG FINANCIAL CORPORATION ("FLAG"), a
Georgia corporation located in LaGrange, Georgia, and ABBEVILLE CAPITAL
CORPORATION ("ABBEVILLE"), a South Carolina corporation located in Abbeville,
South Carolina.
Preamble
--------
The respective Boards of Directors of ABBEVILLE and FLAG are of the
opinion that the transactions described herein are in the best interests of the
Parties to this Agreement and their respective shareholders. This Agreement
provides for the acquisition of ABBEVILLE by FLAG, pursuant to the merger of
ABBEVILLE with and into FLAG. At the effective time of such merger, the
outstanding shares of the capital stock of ABBEVILLE shall be converted into the
right to receive shares of the common stock of FLAG (except as provided herein).
As a result, shareholders of ABBEVILLE shall become shareholders of FLAG, and
FLAG shall conduct the business and operations of ABBEVILLE. The transactions
described in this Agreement are subject to (a) approval of the shareholders of
ABBEVILLE, (b) approval of the Georgia Department of Banking and Finance and the
South Carolina Board of Financial Institutions, (c) approval of the Board of
Governors of the Federal Reserve, and (d) satisfaction of certain other
conditions described in this Agreement. It is the intention of the Parties to
this Agreement that the merger, for federal income tax purposes, shall qualify
as a "reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code, and, for accounting purposes, shall qualify for treatment as a
pooling of interests.
Certain terms used in this Agreement are defined in Section 11.1
hereof.
NOW, THEREFORE, in consideration of the above and the mutual
warranties, representations, covenants, and agreements set forth herein, the
Parties agree as follows:
1
<PAGE>
ARTICLE 1.
TRANSACTIONS AND TERMS OF THE MERGER
------------------------------------
1.1 Merger.
---------
Subject to the terms and conditions of this Agreement, at the Effective
Time, ABBEVILLE will merge with and into FLAG in accordance with the provisions
of Section 14-2-1101 of the GBCC and Section 33-11-107 of the SCBCA and with the
effect provided in Section 14-2-1106 of the GBCC and Section 33-11-106 of the
SCBCA (the "Merger"). FLAG shall be the Surviving Corporation resulting from the
Merger and shall continue to be governed by the Laws of the State of Georgia.
The Merger shall be consummated pursuant to the terms of this Agreement, which
has been approved and adopted by the respective Boards of Directors of ABBEVILLE
and FLAG, as set forth herein.
1.2 Time and Place of Closing.
-----------------------------
The closing of the transactions contemplated hereby (the "Closing") will
take place at 9:00 A.M. on the date that the Effective Time occurs (or the
immediately preceding day if the Effective Time is earlier than 9:00 A.M.), or
at such other time as the Parties, acting through their authorized officers, may
mutually agree. The Closing shall be held at such location as may be mutually
agreed upon by the Parties.
1.3 Effective Time.
--------------------
The Merger and other transactions contemplated by this Agreement shall
become effective on the date and at the time the Certificate of Merger
reflecting the Merger shall become effective with the Secretary of State of the
State of Georgia, and the Articles of Merger shall become effective with the
Secretary of State of the State of South Carolina (the "Effective Time").
Subject to the terms and conditions hereof, unless otherwise mutually agreed
upon in writing by the authorized officers of each Party, the Parties shall use
their reasonable efforts to cause the Effective Time to occur on the fifth
business day following the last to occur of (i) the effective date (including
expiration of any applicable waiting period) of the last required Consent of any
Regulatory Authority having authority over and approving or exempting the
Merger, and (ii) the earliest date on which the shareholders of ABBEVILLE have
approved this Agreement to the extent such approval is required by applicable
Law; provided, however, that the date of the Effective Time shall not extend
past the termination date set forth in ss. 10.1(e) hereof.
ARTICLE 2.
TERMS OF MERGER
---------------
2.1 Articles of Incorporation.
-----------------------------
The Articles of Incorporation of FLAG in effect immediately prior to the
Effective Time shall be the Articles of Incorporation of the Surviving
Corporation until duly amended or repealed.
2.2 Bylaws.
----------
The Bylaws of FLAG in effect immediately prior to the Effective Time shall
be the Bylaws of the Surviving Corporation until duly amended or repealed.
2
<PAGE>
2.3 Directors and Officers.
---------------------------
(a) The directors of the Surviving Corporation shall be (i) the directors
of FLAG immediately prior to the Effective Time and (ii) Thomas D. Sherard, Jr.
and ______________, together with such additional persons as may thereafter be
elected. Such persons shall serve as the directors of the Surviving Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.
(b) The executive officers of the Surviving Corporation shall be (i) the
executive officers of the Surviving Corporation immediately prior to the
Effective Time and (ii) such additional persons as may thereafter be elected.
Such persons shall serve as the executive officers of the Surviving Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.
ARTICLE 3.
MANNER OF CONVERTING SHARES
---------------------------
3.1 Conversion of Shares.
-------------------------
Subject to the provisions of this Article 3, at the Effective Time, by virtue of
the Merger and without any action on the part of ABBEVILLE, or the shareholders
of the foregoing, the shares of ABBEVILLE shall be converted as follows:
(a) Each share of capital stock of FLAG issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from and after
the Effective Time.
(b) Each share of ABBEVILLE Common Stock (excluding shares held by any
ABBEVILLE Entity or any FLAG Entity, in each case other than in a fiduciary
capacity or as a result of debts previously contracted, and excluding shares
held by shareholders who perfect their statutory dissenters' rights as provided
in Section 3.4) issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted into and exchanged for the
right to receive 3.48 shares of FLAG Common Stock (the "Exchange Ratio").
3.2 Anti-Dilution Provisions.
----------------------------
In the event FLAG changes the number of shares of FLAG Common Stock issued
and outstanding prior to the Effective Time as a result of a stock split, stock
dividend, or similar recapitalization with respect to such stock and the record
date therefor (in the case of a stock dividend) or the effective date thereof
(in the case of a stock split or similar recapitalization for which a record
date is not established) and prior to the Effective Time, the Exchange Ratio
shall be proportionately adjusted.
3.3 Shares Held by ABBEVILLE or FLAG.
-------------------------------------
Each of the shares of ABBEVILLE Common Stock held by any ABBEVILLE Entity
or by any FLAG Entity, in each case other than in a fiduciary capacity or as a
result of debts previously contracted, shall be canceled and retired at the
Effective Time and no consideration shall be issued in exchange therefor.
3
<PAGE>
3.4 Dissenting Shareholders.
---------------------------
Any holder of shares of ABBEVILLE Common Stock who perfects his dissenters'
rights in accordance with and as contemplated by Chapter 13, Article 2, of Title
33 of the SCBCA, shall be entitled to receive the value of such shares in cash
as determined pursuant to such provision of law; provided, that no such payment
shall be made to any dissenting shareholder unless and until such dissenting
shareholder has complied with the applicable provisions of the SCBCA and
surrendered to FLAG the certificates or certificates representing the shares for
which payment is being made. In the event that after the Effective Time, a
dissenting shareholder of ABBEVILLE fails to perfect, or effectively withdraws
or loses, his right to appraisal of and payment for his shares, FLAG shall issue
and deliver the consideration to which such holder of shares of ABBEVILLE Common
Stock is entitled under this Article 3 (without interest) upon surrender by such
holder of the certificate or certificates representing shares of ABBEVILLE
Common Stock held by him. If and to the extent required by applicable Law,
ABBEVILLE will establish (or cause to be established) an escrow account with an
amount sufficient to satisfy the maximum aggregate payment that may be required
to be paid to dissenting shareholders. Upon satisfaction of all claims of
dissenting shareholders, the remaining escrowed amount, reduced by payment of
the fees and expenses of the escrow agent, will be returned to FLAG.
3.5 Fractional Shares.
----------------------
Notwithstanding any other provision of this Agreement, each holder of
shares of ABBEVILLE Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of FLAG Common
Stock (after taking into account all certificates delivered by such holder)
shall receive, in lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of FLAG Common Stock multiplied by the market
value of one share of FLAG Common Stock at the Effective Time. The market value
of one share of FLAG Common Stock at the Effective Time shall be the last sale
price of such common stock on the Nasdaq National Market (as reported by The
Wall Street Journal or, if not reported thereby, any other authoritative source
selected by FLAG) on the last trading day preceding the Effective Time. No such
holder will be entitled to dividends, voting rights, or any other rights as a
shareholder in respect of any fractional shares.
ARTICLE 4.
EXCHANGE OF SHARES
------------------
4.1 Exchange Procedures.
-----------------------
Promptly after the Effective Time, FLAG shall cause the exchange agent
selected by FLAG (the "Exchange Agent") to mail to each holder of record of a
certificate or certificates which represented shares of ABBEVILLE Common Stock
immediately prior to the Effective Time (the "Certificates") appropriate
transmittal materials and instructions (which shall specify that delivery shall
be effected, and risk of loss and title to such Certificates shall pass, only
upon proper delivery of such Certificates to the Exchange Agent). The
Certificate or Certificates of ABBEVILLE Common Stock so delivered shall be duly
endorsed as the Exchange Agent may require. In the event of a transfer of
ownership of shares of ABBEVILLE Common Stock represented by Certificates that
are not registered in the transfer records of ABBEVILLE, the consideration
provided in Section 3.1 may be issued to a transferee if the Certificates
representing such shares are delivered to the Exchange Agent, accompanied by all
4
<PAGE>
documents required to evidence such transfer and by evidence satisfactory to the
Exchange Agent that any applicable stock transfer taxes have been paid. If any
Certificate shall have been lost, stolen, mislaid or destroyed, upon receipt of
(i) an affidavit of that fact from the holder claiming such Certificate to be
lost, mislaid, stolen or destroyed, (ii) such bond, security or indemnity as
FLAG and the Exchange Agent may reasonably require, and (iii) any other
documents necessary to evidence and effect the bona fide exchange thereof, the
Exchange Agent shall issue to such holder the consideration into which the
shares represented by such lost, stolen, mislaid or destroyed Certificate shall
have been converted. The Exchange Agent may establish such other reasonable and
customary rules and procedures in connection with its duties as it may deem
appropriate. After the Effective Time, each holder of shares of ABBEVILLE Common
Stock (other than shares to be canceled pursuant to Section 3.3 or as to which
statutory dissenters' rights have been perfected as provided in Section 3.4)
issued and outstanding at the Effective Time shall surrender the Certificate or
Certificates representing such shares to the Exchange Agent and shall promptly
upon surrender thereof receive in exchange therefor the consideration provided
in Section 3.1, together with all undelivered dividends or distributions in
respect of such shares (without interest thereon) pursuant to Section 4.2. FLAG
shall not be obligated to deliver the consideration to which any former holder
of ABBEVILLE Common Stock is entitled as a result of the Merger until such
holder surrenders such holder's Certificate or Certificates for exchange as
provided in this Section 4.1. Any other provision of this Agreement
notwithstanding, neither FLAG nor the Exchange Agent shall be liable to a holder
of ABBEVILLE Common Stock for any amounts paid or property delivered in good
faith to a public official pursuant to any applicable abandoned property,
escheat or similar Law. Approval of this Agreement by the shareholders of
ABBEVILLE shall constitute ratification of the appointment of the Exchange
Agent.
4.2 Rights of Former Shareholders of ABBEVILLE.
----------------------------------------------
At the Effective Time, the stock transfer books of ABBEVILLE shall be
closed as to holders of ABBEVILLE Common Stock immediately prior to the
Effective Time and no transfer of ABBEVILLE Common Stock by any such holder
shall thereafter be made or recognized. Until surrendered for exchange in
accordance with the provisions of Section 4.1, each Certificate theretofore
representing shares of ABBEVILLE Common Stock (other than shares to be canceled
pursuant to Sections 3.3 and 3.4) shall from and after the Effective Time
represent for all purposes only the right to receive the consideration provided
in Section 3.1 in exchange therefor, subject, however, to FLAG's obligation to
pay any dividends or make any other distributions with a record date prior to
the Effective Time which have been declared or made by ABBEVILLE in respect of
such shares of ABBEVILLE Common Stock in accordance with the terms of this
Agreement and which remain unpaid at the Effective Time. To the extent permitted
by Law, former shareholders of record of ABBEVILLE shall be entitled to vote
after the Effective Time at any meeting of FLAG shareholders the number of whole
shares of FLAG Common Stock into which their respective shares of ABBEVILLE
Common Stock are converted, regardless of whether such holders have exchanged
their Certificates for certificates representing FLAG Common Stock in accordance
with the provisions of this Agreement. Whenever a dividend or other distribution
is declared by FLAG on the FLAG Common Stock, the record date for which is at or
after the Effective Time, the declaration shall include dividends or other
distributions on all shares of FLAG Common Stock issuable pursuant to this
Agreement, but no dividend or other distribution payable to the holders of
record of FLAG Common Stock as of any time subsequent to the Effective Time
shall be delivered to the holder of any Certificate until such holder surrenders
such Certificate for exchange as provided in Section 4.1. However, upon
5
<PAGE>
surrender of such Certificate, both the FLAG Common Stock certificate (together
with all such undelivered dividends or other distributions without interest) and
any undelivered dividends and cash payments payable hereunder (without interest)
shall be delivered and paid with respect to each share represented by such
Certificate. No interest shall be payable with respect to any cash to be paid
under Section 3.1 of this Agreement except to the extent required in connection
with the exercise of dissenters' rights.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF ABBEVILLE
-------------------------------------------
ABBEVILLE hereby represents and warrants to FLAG as follows:
5.1 Organization, Standing,and Power.
-------------------------------------
ABBEVILLE is a corporation duly organized, validly existing, and in good
standing under the Laws of the State of South Carolina, and has the corporate
power and authority to carry on its business as now conducted and to own, lease
and operate its material Assets. ABBEVILLE is duly qualified or licensed to
transact business as a foreign corporation in good standing in the United States
and foreign jurisdictions where the character of its Assets or the nature or
conduct of its business requires it to be so qualified or licensed, except for
such jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect. The minute book and other organizational documents for
ABBEVILLE have been made available to FLAG for its review and, except as
disclosed in Section 5.1 of the ABBEVILLE Disclosure Memorandum, are true and
complete in all material respects as in effect as of the date of this Agreement
and accurately reflect in all material respects all amendments thereto and all
proceedings of the Board of Directors and shareholders thereof.
5.2 Authority of ABBEVILLE; No Breach By Agreement.
---------------------------------------------------
(a) ABBEVILLE has the corporate power and authority necessary to execute,
deliver, and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of ABBEVILLE, subject to the
approval of this Agreement by the holders of a majority of the outstanding
voting stock of ABBEVILLE, which is the only shareholder vote required for
approval of this Agreement, and consummation of the Merger by ABBEVILLE. Subject
to such requisite shareholder approval, this Agreement represents a legal,
valid, and binding obligation of ABBEVILLE, enforceable against ABBEVILLE in
accordance with its terms (except in all cases as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by ABBEVILLE, nor
the consummation by ABBEVILLE of the transactions contemplated hereby, nor
compliance by ABBEVILLE with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of ABBEVILLE's Articles of
Incorporation or Bylaws, or the Charter, Articles of Incorporation, or Bylaws of
any ABBEVILLE Subsidiary or any resolution adopted by the board of directors or
the shareholders of any ABBEVILLE Entity, or (ii) except as disclosed in Section
5.2 of the ABBEVILLE Disclosure Memorandum, constitute or result in a Default
under, or require any Consent pursuant to, or result in the creation of any Lien
on any Asset of any ABBEVILLE Entity under, any Contract or Permit of any
ABBEVILLE Entity, where such Default or Lien, or any failure to obtain such
Consent, is reasonably likely to have, individually or in the aggregate, an
ABBEVILLE Material Adverse Effect, (iii) create any right in any third party to
exercise any rights adverse to any FLAG entity or acquire any asset of any FLAG
entity, or (iv) subject to receipt of the requisite Consents referred to in
Section 9.1(b), constitute or result in a Default under or require any Consent
pursuant to, any Law or Order applicable to any ABBEVILLE Entity or any of their
respective material Assets (including any FLAG Entity or any ABBEVILLE Entity
becoming subject to or liable for the payment of any Tax on any of the Assets
owned by any FLAG Entity or any ABBEVILLE Entity being reassessed or revalued by
any Taxing authority).
(c) Other than in connection or compliance with the provisions of
applicable federal banking laws, and other than Consents required from
Regulatory Authorities, and other than notices to or filings with the Internal
Revenue Service or the Pension Benefit Guaranty Corporation with respect to any
employee benefit plans, or under the HSR Act, and other than Consents, filings,
or notifications which, if not obtained or made, are not reasonably likely to
have, individually or in the aggregate, an ABBEVILLE Material Adverse Effect, no
notice to, filing with, or Consent of, any public body or authority is necessary
for the consummation by ABBEVILLE of the Merger and the other transactions
contemplated in this Agreement.
5.3 Capital Stock.
-----------------
(a) As of the date of this Agreement, the authorized capital stock of
ABBEVILLE consists of 1,000,000 shares of ABBEVILLE Common Stock, of which
237,415 shares are issued and outstanding at the date of this Agreement, and of
which 237,615 shares will be issued and outstanding at Closing. All of the
issued and outstanding shares of capital stock of ABBEVILLE are duly and validly
issued and outstanding and are fully paid and nonassessable under the SCBCA.
None of the outstanding shares of capital stock of ABBEVILLE has been issued in
violation of any preemptive rights of the current or past shareholders of
ABBEVILLE.
(b) Except as set forth in Section 5.3(a), or as disclosed in Section
5.3(b) of the ABBEVILLE Disclosure Memorandum, there are no shares of capital
stock or other equity securities of ABBEVILLE outstanding and no outstanding
Equity Rights relating to the capital stock of ABBEVILLE.
7
<PAGE>
5.4 ABBEVILLE Subsidiaries.
----------------------------
ABBEVILLE has disclosed in Section 5.4 of the ABBEVILLE Disclosure
Memorandum all of the ABBEVILLE Subsidiaries that are corporations (identifying
its jurisdiction of incorporation, each jurisdiction in which the character of
its Assets or the nature or conduct of its business requires it to be qualified
and/or licensed to transact business, and the number of shares owned and
percentage ownership interest represented by such share ownership) and all of
the ABBEVILLE Subsidiaries that are general or limited partnerships, limited
liability companies, or other non-corporate entities (identifying the Law under
which such entity is organized, each jurisdiction in which the character of its
Assets or the nature or conduct of its business requires it to be qualified
and/or licensed to transact business, and the amount and nature of the ownership
interest therein). Except as disclosed in Section 5.4 of the ABBEVILLE
Disclosure Memorandum, ABBEVILLE or one of its wholly-owned Subsidiaries owns
all of the issued and outstanding shares of capital stock (or other equity
interests) of each ABBEVILLE Subsidiary. No capital stock (or other equity
interest) of any ABBEVILLE Subsidiary is or may become required to be issued
(other than to another ABBEVILLE Entity) by reason of any Equity Rights, and
there are no Contracts by which any ABBEVILLE Subsidiary is bound to issue
(other than to another ABBEVILLE Entity) additional shares of its capital stock
(or other equity interests) or Equity Rights or by which any ABBEVILLE Entity is
or may be bound to transfer any shares of the capital stock (or other equity
interests) of any ABBEVILLE Subsidiary (other than to another ABBEVILLE Entity).
There are no Contracts relating to the rights of any ABBEVILLE Entity to vote or
to dispose of any shares of the capital stock (or other equity interests) of any
ABBEVILLE Subsidiary. All of the shares of capital stock (or other equity
interests) of each ABBEVILLE Subsidiary held by an ABBEVILLE Entity are fully
paid and (except pursuant to 12 U.S.C. Section 55 in the case of national banks
and comparable, applicable State Law, if any, in the case of State depository
institutions) nonassessable and are owned by the ABBEVILLE Entity free and clear
of any Lien. Except as disclosed in Section 5.4 of the ABBEVILLE Disclosure
Memorandum, each ABBEVILLE Subsidiary is either a bank, savings association or a
corporation, and is duly organized, validly existing, and in good standing under
the Laws of the jurisdiction in which it is incorporated or organized, and has
the corporate power and authority necessary for it to own, lease, and operate
its Assets and to carry on its business as now conducted. Each ABBEVILLE
Subsidiary is duly qualified or licensed to transact business as a foreign
corporation in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect. Each ABBEVILLE Subsidiary that is a depository
institution is an "insured institution" as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder. The minute book and other
organizational documents for each ABBEVILLE Subsidiary have been made available
to FLAG for its review, and, except as disclosed in Section 5.4 of the ABBEVILLE
Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the Board of Directors
and shareholders thereof.
5.5 Financial Statements.
------------------------
Each of the ABBEVILLE Financial Statements (including, in each case, any
related notes) was prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
to such financial statements), and fairly presented in all material respects the
8
<PAGE>
consolidated financial position of ABBEVILLE and its Subsidiaries as at the
respective dates and the consolidated results of operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were not
or are not expected to be material in amount or effect.
5.6 Absence of Undisclosed Liabilities.
--------------------------------------
No ABBEVILLE Entity has any Liabilities that are reasonably likely to have,
individually or in the aggregate, an ABBEVILLE Material Adverse Effect, except
Liabilities which are accrued or reserved against in the consolidated balance
sheets of ABBEVILLE as of December 31, 1998, included in the ABBEVILLE Financial
Statements or reflected in the notes thereto. No ABBEVILLE Entity has incurred
or paid any Liability since December 31, 1998, except for such Liabilities
incurred or paid (i) in the ordinary course of business consistent with past
business practice and which are not reasonably likely to have, individually or
in the aggregate, an ABBEVILLE Material Adverse Effect or (ii) in connection
with the transactions contemplated by this Agreement.
5.7 Absence of Certain Changes or Events.
----------------------------------------
Since December 31, 1998, except as disclosed in the ABBEVILLE Financial
Statements delivered prior to the date of this Agreement or as disclosed in
Section 5.7 of the ABBEVILLE Disclosure Memorandum, (i) there have been no
events, changes, or occurrences which have had, or are reasonably likely to
have, individually or in the aggregate, an ABBEVILLE Material Adverse Effect,
and (ii) ABBEVILLE Entities have not taken any action, or failed to take any
action, prior to the date of this Agreement, which action or failure, if taken
after the date of this Agreement, would represent or result in a material breach
or violation of any of the covenants and agreements of ABBEVILLE provided in
Article 7.
5.8 Tax Matters.
---------------
(a) All Tax Returns required to be filed by or on behalf of any ABBEVILLE
Entities have been timely filed or requests for extensions have been timely
filed, granted, and, to the Knowledge of ABBEVILLE, have not expired for such
periods, except to the extent that all such failures to file, taken together,
are not reasonably likely to have an ABBEVILLE Material Adverse Effect, and all
Tax Returns filed are complete and accurate in all material respects. All Taxes
shown on filed Tax Returns have been paid. There is no audit examination,
deficiency, or refund Litigation with respect to any Taxes that is reasonably
likely to result in a determination that would have, individually or in the
aggregate, an ABBEVILLE Material Adverse Effect, except as reserved against in
the ABBEVILLE Financial Statements delivered prior to the date of this Agreement
or as disclosed in Section 5.8 of the ABBEVILLE Disclosure Memorandum. All Taxes
and other Liabilities due with respect to completed and settled examinations or
concluded Litigation have been paid. There are no Liens with respect to Taxes
upon any of the Assets of ABBEVILLE Entities, except for any such Liens which
are not reasonably likely to have an ABBEVILLE Material Adverse Effect or with
respect to which the Taxes are not yet due and payable.
9
<PAGE>
(b) None of the ABBEVILLE Entities has executed an extension or waiver of
any statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by the
Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
(c) The provision for any Taxes due or to become due for any of the
ABBEVILLE Entities for the period or periods through and including the date of
the respective ABBEVILLE Financial Statements that has been made and is
reflected on such ABBEVILLE Financial Statements is sufficient to cover all such
Taxes.
(d) Deferred Taxes of ABBEVILLE Entities have been provided for in
accordance with GAAP.
(e) Except as disclosed in Section 5.8 of the ABBEVILLE Disclosure
Memorandum, none of the ABBEVILLE Entities is a party to any Tax allocation or
sharing agreement and none of ABBEVILLE Entities has been a member of an
affiliated group filing a consolidated federal income Tax Return (other than a
group the common parent of which was ABBEVILLE) or has any Liability for Taxes
of any Person (other than ABBEVILLE and its Subsidiaries) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local or foreign
Law) as a transferee or successor or by Contract or otherwise.
(f) Each of the ABBEVILLE Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances of
noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, an ABBEVILLE Material Adverse Effect.
(g) Except as disclosed in Section 5.8 of the ABBEVILLE Disclosure
Memorandum, none of the ABBEVILLE Entities has made any payments, is obligated
to make any payments, or is a party to any Contract that could obligate it to
make any payments that would be disallowed as a deduction under Sections 28OG or
162(m) of the Internal Revenue Code.
(h) Exclusive of the Merger, there has not been an ownership change, as
defined in Internal Revenue Code Section 382(g), of ABBEVILLE Entities that
occurred during or after any Taxable Period in which ABBEVILLE Entities incurred
a net operating loss that carries over to any Taxable Period ending after
December 31, 1998.
(i) No ABBEVILLE Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.
(j) All material elections with respect to Taxes affecting ABBEVILLE
Entities have been or will be timely made.
10
<PAGE>
5.9 Allowance for Possible Loan Losses.
---------------------------------------
The allowance for possible loan or credit losses (the "Allowance") shown on
the consolidated balance sheets of ABBEVILLE included in the most recent
ABBEVILLE Financial Statements dated prior to the date of this Agreement was,
and the Allowance shown on the consolidated balance sheets of ABBEVILLE included
in the ABBEVILLE Financial Statements as of dates subsequent to the execution of
this Agreement will be, as of the dates thereof, adequate (within the meaning of
GAAP and applicable regulatory requirements or guidelines) to provide for all
known or reasonably anticipated losses relating to or inherent in the loan and
lease portfolios (including accrued interest receivables) of ABBEVILLE Entities
and other extensions of credit (including letters of credit and commitments to
make loans or extend credit) by ABBEVILLE Entities as of the dates thereof,
except where the failure of such Allowance to be so adequate is not reasonably
likely to have an ABBEVILLE Material Adverse Effect.
5.10 Assets.
------------
(a) Except as disclosed in Section 5.10 of the ABBEVILLE Disclosure
Memorandum or as disclosed or reserved against in the ABBEVILLE Financial
Statements delivered prior to the date of this Agreement, ABBEVILLE Entities
have good and marketable title, free and clear of all Liens, to all of their
respective Assets, except for any such Liens or other defects of title which are
not reasonably likely to have an ABBEVILLE Material Adverse Effect. All tangible
properties used in the businesses of the ABBEVILLE Entities are usable in the
ordinary course of business consistent with ABBEVILLE's past practices.
(b) All Assets which are material to ABBEVILLE's business on a consolidated
basis, held under leases or subleases by any of the ABBEVILLE Entities, are held
under valid Contracts enforceable against ABBEVILLE in accordance with their
respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, or other Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be brought), and,
assuming the enforceability of such Contract against the third party thereto,
each such Contract is in full force and effect.
(c) ABBEVILLE Entities currently maintain the insurance policies described
in Section 5.10(c) of the ABBEVILLE Disclosure Memorandum. None of the ABBEVILLE
Entities has received written notice from any insurance carrier that (i) any
policy of insurance will be canceled or that coverage thereunder will be reduced
or eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no claims for amounts
exceeding in any individual case $25,000 pending under such policies of
insurance and no written notices of claims in excess of such amounts have been
given by any ABBEVILLE Entity under such policies.
(d) The Assets of the ABBEVILLE Entities include all material Assets
required to operate the business of the ABBEVILLE Entities as presently
conducted.
11
<PAGE>
5.11 Intellectual Property.
--------------------------
Each ABBEVILLE Entity owns or has a license to use all of the Intellectual
Property used by such ABBEVILLE Entity in the ordinary course of its business.
Each ABBEVILLE Entity is the owner of or has a license to any Intellectual
Property sold or licensed to a third party by such ABBEVILLE Entity in
connection with such ABBEVILLE Entity's business operations, and such ABBEVILLE
Entity has the right to convey by sale or license any Intellectual Property so
conveyed. No ABBEVILLE Entity is in material Default under any of its
Intellectual Property licenses. No proceedings have been instituted, or are
pending or, to the Knowledge of ABBEVILLE, threatened, which challenge the
rights of any ABBEVILLE Entity with respect to Intellectual Property used, sold
or licensed by such ABBEVILLE Entity in the course of its business, nor has any
person claimed or alleged any rights to such Intellectual Property. To the
Knowledge of ABBEVILLE, the conduct of the business of the ABBEVILLE Entities
does not infringe any Intellectual Property of any other person. Except as
disclosed in Section 5.11 of the ABBEVILLE Disclosure Memorandum, no ABBEVILLE
Entity is obligated to pay any recurring royalties to any Person with respect to
any such Intellectual Property.
5.12 Environmental Matters.
--------------------------
(a) Except as disclosed in Section 5.12 of the ABBEVILLE Disclosure
Memorandum, to the Knowledge of ABBEVILLE, each ABBEVILLE Entity, its
Participation Facilities, and its Operating Properties are, and have been, in
compliance with all Environmental Laws, except for violations which are not
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of ABBEVILLE,
threatened, before any court, governmental agency, or authority or other forum
in which any ABBEVILLE Entity or any of its Operating Properties or
Participation Facilities (or ABBEVILLE in respect of such Operating Property or
Participation Facility) has been or, with respect to threatened Litigation, may
be named as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the emission,
migration, release, discharge, spillage, or disposal into the environment of any
Hazardous Material, whether or not occurring at, on, under, adjacent to, or
affecting (or potentially affecting) a site owned, leased, or operated by any
ABBEVILLE Entity or any of its Operating Properties or Participation Facilities
or any neighboring property, except for such Litigation pending or threatened
that is not reasonably likely to have, individually or in the aggregate, an
ABBEVILLE Material Adverse Effect, nor, to the Knowledge of ABBEVILLE, is there
any reasonable basis for any Litigation of a type described in this sentence,
except such as is not reasonably likely to have, individually or in the
aggregate, an ABBEVILLE Material Adverse Effect.
(c) Except as disclosed in Section 5.12 of the ABBEVILLE Disclosure
Memorandum, during the period of (i) any ABBEVILLE Entity's ownership or
operation of any of their respective current Assets, or (ii) any ABBEVILLE
Entity's participation in the management of any Participation Facility or any
Operating Property, to the Knowledge of ABBEVILLE, there have been no emissions,
migrations, releases, discharges, spillages, or disposals of Hazardous Material
in, on, at, under, adjacent to, or affecting (or potentially affecting) such
12
<PAGE>
properties or any neighboring properties, except such as are not reasonably
likely to have, individually or in the aggregate, an ABBEVILLE Material Adverse
Effect. Except as disclosed in Section 5.12 of the ABBEVILLE Disclosure
Memorandum, prior to the period of (i) any ABBEVILLE Entity's ownership or
operation of any of their respective current properties, (ii) any ABBEVILLE
Entity's participation in the management of any Participation Facility or any
Operating Property, to the Knowledge of ABBEVILLE, there were no releases,
discharges, spillages, or disposals of Hazardous Material in, on, under, or
affecting any such property, Participation Facility or Operating Property,
except such as are not reasonably likely to have, individually or in the
aggregate, an ABBEVILLE Material Adverse Effect.
5.13 Compliance with Laws.
---------------------------
Each ABBEVILLE Entity has in effect all Permits necessary for it to own,
lease, or operate its material Assets and to carry on its business as now
conducted, except for those Permits the absence of which are not reasonably
likely to have, individually or in the aggregate, an ABBEVILLE Material Adverse
Effect, and, to the Knowledge of ABBEVILLE, there has occurred no Default under
any such Permit, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, an ABBEVILLE Material Adverse Effect. Except
as disclosed in Section 5.13 of the ABBEVILLE Disclosure Memorandum, none of the
ABBEVILLE Entities:
(a) is in Default under any of the provisions of its Articles of
Incorporation or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect; or
(c) since January 1, 1995, has received any written notification or written
communication from any agency or department of federal, state, or local
government or any Regulatory Authority or the staff thereof (i) asserting that
any ABBEVILLE Entity is not in compliance with any of the Laws or Orders which
such governmental authority or Regulatory Authority enforces, where such
noncompliance is reasonably likely to have, individually or in the aggregate, an
ABBEVILLE Material Adverse Effect, (ii) threatening to revoke any Permits, the
revocation of which is reasonably likely to have, individually or in the
aggregate, an ABBEVILLE Material Adverse Effect, or (iii) requiring any
ABBEVILLE Entity to enter into or consent to the issuance of a cease and desist
order, formal agreement, directive, commitment, or memorandum of understanding,
or to adopt any Board resolution or similar undertaking, which restricts
materially the conduct of its business or in any material manner relates to its
capital adequacy, its credit or reserve policies, its management, or the payment
of dividends. Copies of all material reports, correspondence, notices and other
documents relating to any inspection, audit, monitoring or other form of review
or enforcement action by a Regulatory Authority have been made available to
FLAG.
5.14 Immigration Matters.
------------------------
(a) With respect to all current employees (as defined in Section 27a.1(g)
of Title 8, Code of Federal Regulations) of each ABBEVILLE Entity, true and
complete copies of all Forms I-9 (Employment Eligibility Verification Forms)
13
<PAGE>
completed pursuant to the Immigration Reform and Control Act of 1986 and all
Regulations promulgated thereunder (the "IRCA") and any and all copies of
documentation, records or other papers retained with Forms I-9, have been
delivered to FLAG. Each ABBEVILLE Entity has complied with the IRCA with respect
to the completion of Forms I-9 for all employees and the reverification of the
employment status of any and all employees whose employment authorization
documents indicated a limited period of employment authorization.
(b) With respect to a former employee who has left an ABBEVILLE Entity's
employment within three (3) years prior to Closing, the ABBEVILLE Entity has
complied with the IRCA with respect to the maintenance of Forms I-9 for at least
three years or for one year beyond the date of termination, whichever is later.
True and complete copies of all Forms I-9 maintained for former employees
pursuant to the IRCA, and any and all copies of documentation, records or other
papers retained with Forms I-9, have been delivered to FLAG.
5.15 Labor Relations.
--------------------
No ABBEVILLE Entity is the subject of any Litigation asserting that it or
any other ABBEVILLE Entity has committed an unfair labor practice (within the
meaning of the National Labor Relations Act or comparable state law) or seeking
to compel it or any other ABBEVILLE Entity to bargain with any labor
organization as to wages or conditions of employment, nor is any ABBEVILLE
Entity party to any collective bargaining agreement, nor is there any strike or
other labor dispute involving any ABBEVILLE Entity, pending or threatened, or to
the Knowledge of ABBEVILLE, is there any activity involving any ABBEVILLE
Entity's employees seeking to certify a collective bargaining unit or engaging
in any other organization activity.
5.16 Employee Benefit Plans.
---------------------------
(a) ABBEVILLE has disclosed in Section 5.16 of the ABBEVILLE Disclosure
Memorandum, and has delivered or made available to FLAG prior to the execution
of this Agreement copies in each case of, all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee benefit
plans or fringe benefit plans, including "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any ABBEVILLE Entity or ERISA
Affiliate (as defined in subparagraph (c) below) thereof for the benefit of
employees, retirees, dependents, spouses, directors, independent contractors, or
other beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, "ABBEVILLE Benefit Plans"). Each ABBEVILLE Benefit
Plan which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, is referred to herein as an "ABBEVILLE ERISA Plan." Each
ABBEVILLE ERISA Plan which is also a "defined benefit plan" (as defined in
Section 4140 of the Internal Revenue Code) is referred to herein as an
"ABBEVILLE Pension Plan." No ABBEVILLE Pension Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.
14
<PAGE>
(b) All ABBEVILLE Benefit Plans are in compliance with the applicable terms
of ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, an ABBEVILLE Material Adverse Effect. Each ABBEVILLE ERISA Plan which
is intended to be qualified under Section 401(a) of the Internal Revenue Code
has received a favorable determination letter from the Internal Revenue Service,
and ABBEVILLE has no Knowledge of any circumstances likely to result in
revocation of any such favorable determination letter. To the Knowledge of
ABBEVILLE, no ABBEVILLE Entity has engaged in a transaction with respect to any
ABBEVILLE Benefit Plan that, assuming the taxable period of such transaction
expired as of the date hereof, would subject any ABBEVILLE Entity to a Tax
imposed by either Section 4975 of the Internal Revenue Code or Section 502(i) of
ERISA in amounts which are reasonably likely to have, individually or in the
aggregate, an ABBEVILLE Material Adverse Effect.
(c) No ABBEVILLE Pension Plan has any "unfunded current liability," as that
term is defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions
set forth for such plan's most recent actuarial valuation. Since the date of the
most recent actuarial valuation, there has been (i) no material change in the
financial position of any ABBEVILLE Pension Plan, (ii) no change in the
actuarial assumptions with respect to any ABBEVILLE Pension Plan, and (iii) no
increase in benefits under any ABBEVILLE Pension Plan as a result of plan
amendments or changes in applicable Law which is reasonably likely to have,
individually or in the aggregate, an ABBEVILLE Material Adverse Effect or
materially adversely affect the funding status of any such plan. Neither any
ABBEVILLE Pension Plan nor any "single employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any ABBEVILLE
Entity, or the single-employer plan of any entity which is considered one
employer with ABBEVILLE under Section 4001 of ERISA or Section 414 of the
Internal Revenue Code or Section 302 of ERISA (whether or not waived) (an "ERISA
Affiliate") has an "accumulated funding deficiency" within the meaning of
Section 412 of the Internal Revenue Code or Section 302 of ERISA, which is
reasonably likely to have an ABBEVILLE Material Adverse Effect. No ABBEVILLE
Entity has provided, or is required to provide, security to an ABBEVILLE Pension
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any ABBEVILLE Entity with respect to any ongoing, frozen, or
terminated single-employer plan or the single-employer plan of any ERISA
Affiliate, which Liability is reasonably likely to have an ABBEVILLE Material
Adverse Effect. No ABBEVILLE Entity has incurred any withdrawal Liability with
respect to a multiemployer plan under Subtitle B of Title IV of ERISA
(regardless of whether based on contributions of an ERISA Affiliate), which
Liability is reasonably likely to have an ABBEVILLE Material Adverse Effect. No
notice of a "reportable event," within the meaning of Section 4043 of ERISA for
which the 30-day reporting requirement has not been waived, has been required to
be filed for any ABBEVILLE Pension Plan or by any ERISA Affiliate within the
12-month period ending on the date hereof.
15
<PAGE>
(e) Except as disclosed in Section 5.16 of the ABBEVILLE Disclosure
Memorandum, no ABBEVILLE Entity has any Liability for retiree health and life
benefits under any of the ABBEVILLE Benefit Plans and there are no restrictions
on the rights of such ABBEVILLE Entity to amend or terminate any such retiree
health or benefit Plan without incurring any Liability thereunder, which
Liability is reasonably likely to have an ABBEVILLE Material Adverse Effect.
(f) Except as disclosed in Section 5.16 of the ABBEVILLE Disclosure
Memorandum, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any ABBEVILLE Entity
from any ABBEVILLE Entity under any ABBEVILLE Benefit Plan or otherwise, (ii)
increase any benefits otherwise payable under any ABBEVILLE Benefit Plan, or
(iii) result in any acceleration of the time of payment or vesting of any such
benefit, where such payment, increase, or acceleration is reasonably likely to
have, individually or in the aggregate, an ABBEVILLE Material Adverse Effect.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any ABBEVILLE Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the ABBEVILLE Financial Statements to the extent
required by and in accordance with GAAP.
5.17 Material Contracts.
-------------------------
Except as disclosed in Section 5.17 of the ABBEVILLE Disclosure Memorandum
or otherwise reflected in the ABBEVILLE Financial Statements, none of the
ABBEVILLE Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting, or retirement
Contract providing for aggregate payments to any Person in any calendar year in
excess of $50,000, (ii) any Contract relating to the borrowing of money by any
ABBEVILLE Entity or the guarantee by any ABBEVILLE Entity of any such obligation
(other than Contracts evidencing deposit liabilities, purchases of federal
funds, fully-secured repurchase agreements, Federal Home Loan Bank advances and
trade payables and Contracts relating to borrowings or guarantees made in the
ordinary course of business), (iii) any Contract which prohibits or restricts
any ABBEVILLE Entity from engaging in any business activities in any geographic
area, line of business or otherwise in competition with any other Person, (iv)
any Contract between or among the ABBEVILLE Entities, (v) any Contract relating
to the provision of data processing, network communication, or other technical
services to or by any ABBEVILLE Entity, (vi) any exchange traded or
over-the-counter swap, forward, future, option, cap, floor, or collar financial
Contract, or any other interest rate or foreign currency protection Contract not
included on its balance sheet which is a financial derivative Contract, and
(vii) any other Contract or amendment thereto that would be required to be filed
as an exhibit to a Form 10-K filed by ABBEVILLE with the SEC (assuming ABBEVILLE
were subject to the reporting requirements of the 1934 Act) as of the date of
this Agreement (together with all Contracts referred to in Sections 5.10 and
5.16(a), the "ABBEVILLE Contracts"). With respect to each ABBEVILLE Contract and
16
<PAGE>
except as disclosed in Section 5.16 of the ABBEVILLE Disclosure Memorandum: (i)
assuming the enforceability of such Contract against the third party thereto,
each such Contract is in full force and effect; (ii) no ABBEVILLE Entity is in
Default thereunder, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, an ABBEVILLE Material Adverse Effect; (iii) no
ABBEVILLE Entity has repudiated or waived any material provision of any such
Contract; and (iv) no other party to any such Contract is, to the Knowledge of
ABBEVILLE, in Default in any respect, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect, or has repudiated or waived any material provision
thereunder. Except as disclosed in Section 5.17 of the ABBEVILLE Disclosure
Memorandum, no officer, director or employee of any ABBEVILLE Entity is party to
any Contract which restricts or prohibits such officer, director or employee
from engaging in activities competitive with any Person, including any ABBEVILLE
Entity. All of the indebtedness of any ABBEVILLE Entity for money borrowed
(excluding deposits obtained in the ordinary course of business) is prepayable
at any time by such ABBEVILLE Entity without penalty or premium.
5.18 Legal Proceedings.
----------------------
There is no Litigation instituted or pending or, to the Knowledge of
ABBEVILLE, threatened (or unasserted but considered probable of assertion and
which if asserted would have at least a reasonable probability of an unfavorable
outcome) against any ABBEVILLE Entity, or against any director, employee or
employee benefit plan (acting in such capacity) of any ABBEVILLE Entity, or
against any Asset, interest, or right of any of them, that is reasonably likely
to have, individually or in the aggregate, an ABBEVILLE Material Adverse Effect,
nor are there any Orders of any Regulatory Authorities, other governmental
authorities, or arbitrators outstanding against any ABBEVILLE Entity, that are
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect. Section 5.18 of the ABBEVILLE Disclosure Memorandum
contains a summary of all Litigation as of the date of this Agreement to which
any ABBEVILLE Entity is a party and which names an ABBEVILLE Entity as a
defendant or cross-defendant or for which, to the Knowledge of ABBEVILLE, any
ABBEVILLE Entity has any potential Liability.
5.19 Reports.
------------
(a) Since January 1, 1995, or the date of organization if later, each
ABBEVILLE Entity has timely filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities, except for such filings which the failure to
so file is not reasonably likely to have, individually or in the aggregate, an
ABBEVILLE Material Adverse Effect. As of their respective dates, each of such
reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all material respects with all applicable Laws.
As of its respective date, each such report and document did not, in all
material respects, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.
17
<PAGE>
(b) Since January 1, 1995, no ABBEVILLE Entity has filed any Suspicious
Activity Report or any claim under any fidelity blanket bond, general liability,
errors and omissions, directors and officers or other insurance policies that
pertain to the operations of its business or the ownership of its assets.
5.20 Statements True and Correct.
---------------------------------
No statement, certificate, instrument, or other writing furnished or to be
furnished by any ABBEVILLE Entity to FLAG pursuant to this Agreement or any
other document, agreement, or instrument referred to herein contains or will
contain any untrue statement of material fact or will omit to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. None of the information supplied or
to be supplied by any ABBEVILLE Entity for inclusion in the registration
statement to be filed by FLAG with the SEC in accordance with Section 8.1 will,
when such registration statement becomes effective, be false or misleading with
respect to any material fact, or omit to state any material fact necessary to
make the statements therein not misleading. All documents that any ABBEVILLE
Entity is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all material
respects with the provisions of applicable Law. No documents to be filed by an
ABBEVILLE Entity with any Regulatory Authority in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, be false or misleading with respect to any material fact, or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
5.21 Accounting, Tax and Regulatory Matters.
-------------------------------------------
No ABBEVILLE Entity has taken or agreed to take any action or has any
Knowledge of any fact or circumstance that is reasonably likely to (i) prevent
the Merger from qualifying for pooling of interest accounting treatment and as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, or (ii) materially impede or delay receipt of any Consents of Regulatory
Authorities referred to in Section 9.1(b) or result in the imposition of a
condition or restriction of the type referred to in the last sentence of such
Section.
5.22 Charter Provisions.
-----------------------
Each ABBEVILLE Entity has taken all action so that the entering into of
this Agreement and the consummation of the Merger and the other transactions
contemplated by this Agreement do not and will not result in the grant of any
rights to any Person under the Charter, Articles of Incorporation, Bylaws or
other governing instruments of any ABBEVILLE Entity or restrict or impair the
ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise the
rights of a shareholder with respect to, shares of any ABBEVILLE Entity that may
be directly or indirectly acquired or controlled by them.
5.23 Board Recommendation.
-------------------------
The Board of Directors of ABBEVILLE, at a meeting duly called and held, has
by unanimous vote of those directors present (who constituted all of the
directors then in office) (i) determined that this Agreement and the
transactions contemplated hereby are fair to and in the best interests of the
shareholders and (ii) resolved to recommend that the holders of the shares of
ABBEVILLE Common Stock approve this Agreement.
18
<PAGE>
5.24 Y-2K.
---------
Except as disclosed in Section 5.24 of the ABBEVILLE Disclosure Memorandum,
no ABBEVILLE Entity has received, nor to ABBEVILLE's Knowledge are there facts
that would form the basis for the issuance of, a "Year 2000 Deficiency
Notification Letter" (as such term is employed in the Federal Reserve's
Supervision and Regulatory Letter No. SR 98-3 (SUP), dated March 4, 1998).
ABBEVILLE has disclosed to FLAG a complete and accurate copy of its plan,
including its good faith estimate of the anticipated associated costs, for
addressing the issues set forth in the Year 2000 guidance papers issued by the
Federal Financial Institutions Examination Council, including the statement
dated May 5, 1997, entitled "Year 2000 Project Management Awareness," December
17, 1997, entitled "Safety and Soundness Guidelines Concerning the Year 2000
Business Risk," and October 15, 1998, entitled "Interagency Guidelines
Establishing Year 2000 Standards for Safety and Soundness," as such issues
affect any ABBEVILLE Entity. Between the date of this Agreement and the
Effective Time, ABBEVILLE shall use its reasonable best efforts to implement
such plan.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF FLAG
--------------------------------------
FLAG hereby represents and warrants to ABBEVILLE as follows:
6.1 Organization, Standing, and Power.
--------------------------------------
FLAG is a corporation duly organized, validly existing, and in good
standing under the Laws of the State of Georgia, and has the corporate power and
authority to carry on its business as now conducted and to own, lease and
operate its material Assets. FLAG is duly qualified or licensed to transact
business as a foreign corporation in good standing in the States of the United
States and foreign jurisdictions where the character of its Assets or the nature
or conduct of its business requires it to be so qualified or licensed, except
for such jurisdictions in which the failure to be so qualified or licensed is
not reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect. The minute book and other organizational documents for FLAG have
been made available to ABBEVILLE for its review and, except as disclosed in
Section 6.1 of the FLAG Disclosure Memorandum, are true and complete in all
material respects as in effect as of the date of this Agreement and accurately
reflect in all material respects all amendments thereto and all proceedings of
the Board of Directors and shareholders thereof.
6.2 Authority of FLAG; No Breach By Agreement.
---------------------------------------------
(a) FLAG has the corporate power and authority necessary to execute,
deliver and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of FLAG. This Agreement
represents a legal, valid, and binding obligation of FLAG, enforceable against
FLAG in accordance with its terms (except in all cases as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
receivership, conservatorship, moratorium, or similar Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).
19
<PAGE>
(b) Neither the execution and delivery of this Agreement by FLAG, nor the
consummation by FLAG of the transactions contemplated hereby, nor compliance by
FLAG with any of the provisions hereof, will (i) conflict with or result in a
breach of any provision of FLAG's Articles of Incorporation or Bylaws, or the
Charter, or Articles of Incorporation or Bylaws of any FLAG Entity, or any
resolution adopted by the Board of Directors or the shareholders of any FLAG
Entity, or (ii) constitute or result in a Default under, or require any Consent
pursuant to, or result in the creation of any Lien on any Asset of any FLAG
Entity under, any Contract or Permit of any FLAG Entity, where such Default or
Lien, or any failure to obtain such Consent, is reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, (iii) create
any right in any third party to exercise any rights adverse to any FLAG Entity
or acquire any asset of any FLAG entity, or (iv) subject to receipt of the
requisite Consents referred to in Section 9. 1 (b), constitute or result in a
Default under, or require any Consent pursuant to, any Law or Order applicable
to any FLAG Entity or any of their respective material Assets (including any
FLAG Entity becoming subject to or liable for the payment of any Tax on any of
the Assets owned by any FLAG Entity being reassessed or revalued by any Taxing
authority).
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
or under the HSR Act, and other than Consents, filings, or notifications which,
if not obtained or made, are not reasonably likely to have, individually or in
the aggregate, a FLAG Material Adverse Effect, no notice to, filing with, or
Consent of, any public body or authority is necessary for the consummation by
FLAG of the Merger and the other transactions contemplated in this Agreement.
6.3 Capital Stock.
-------------------
(a) The authorized capital stock of FLAG consists of (i) 20,000,000 shares
of FLAG Common Stock, of which 6,561,879 shares are issued and outstanding as of
the date of this Agreement, and (ii) 10,000,000 shares of FLAG Preferred Stock,
of which no shares are issued and outstanding. All of the issued and outstanding
shares of FLAG Capital Stock are, and all of the shares of FLAG Common Stock to
be issued in exchange for shares of ABBEVILLE Common Stock upon consummation of
the Merger, when issued in accordance with the terms of this Agreement, will be,
duly and validly issued and outstanding and fully paid and nonassessable under
the GBCC. None of the outstanding shares of FLAG Capital Stock has been, and
none of the shares of FLAG Common Stock to be issued in exchange for shares of
ABBEVILLE Common Stock upon consummation of the Merger will be, issued in
violation of any preemptive rights of the current or past shareholders of FLAG.
20
<PAGE>
(b) Except as set forth in Section 6.3(a), or as disclosed in Section 6.3
of the FLAG Disclosure Memorandum, there are no shares of capital stock or other
equity securities of FLAG outstanding and no outstanding Equity Rights relating
to the capital stock of FLAG.
6.4 FLAG Subsidiaries.
----------------------
FLAG has disclosed in Section 6.4 of the FLAG Disclosure Memorandum all of
the FLAG Subsidiaries that are corporations (identifying its jurisdiction of
incorporation, each jurisdiction in which the character of its Assets or the
nature or conduct of its business requires it to be qualified and/or licensed to
transact business, and the number of shares owned and percentage ownership
interest represented by such share ownership) and all of the FLAG Subsidiaries
that are general or limited partnerships, limited liability companies, or other
non-corporate entities (identifying the Law under which such entity is
organized, each jurisdiction in which the character of its Assets or the nature
or conduct of its business requires it to be qualified and/or licensed to
transact business, and the amount and nature of the ownership interest therein).
Except as disclosed in Section 6.4 of the FLAG Disclosure Memorandum, FLAG or
one of its wholly-owned Subsidiaries owns all of the issued and outstanding
shares of capital stock (or other equity interests) of each FLAG Subsidiary. No
capital stock (or other equity interest) of any FLAG Subsidiary are or may
become required to be issued (other than to another FLAG Entity) by reason of
any Equity Rights, and there are no Contracts by which any FLAG Subsidiary is
bound to issue (other than to another FLAG Entity) additional shares of its
capital stock (or other equity interests) or Equity Rights or by which any FLAG
Entity is or may be bound to transfer any shares of the capital stock (or other
equity interests) of any FLAG Subsidiary (other than to another FLAG Entity).
There are no Contracts relating to the rights of any FLAG Entity to vote or to
dispose of any shares of the capital stock (or other equity interests) of any
FLAG Subsidiary. All of the shares of capital stock (or other equity interests)
of each FLAG Subsidiary held by a FLAG Entity are fully paid and nonassessable
under the applicable corporation Law of the jurisdiction in which such
Subsidiary is incorporated or organized and are owned by the FLAG Entity free
and clear of any Lien. Each FLAG Subsidiary is either a bank, savings
association or a corporation, and is duly organized, validly existing, and (as
to corporations) in good standing under the Laws of the jurisdiction in which it
is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease and operate its Assets and to carry on its
business as now conducted. Each FLAG Subsidiary is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of the
United States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect. Each FLAG Subsidiary that is a depository
institution is an "insured institution" as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder. The minute book and other
organizational documents for each FLAG Subsidiary have been made available to
ABBEVILLE for its review, and, except as disclosed in Section 6.4 of the FLAG
Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the Board of Directors
and shareholders thereof.
21
<PAGE>
6.5 SEC Filings, Financial Statements.
--------------------------------------
(a) FLAG has timely filed and made available to ABBEVILLE all SEC Documents
required to be filed by FLAG since December 31, 1993 (the "FLAG SEC Reports").
The FLAG SEC Reports (i) at the time filed, complied in all material respects
with the applicable requirements of the Securities Laws and other applicable
Laws and (ii) did not, at the time they were filed (or, if amended or superseded
by a filing prior to the date of this Agreement, then on the date of such
filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such FLAG SEC Reports or necessary in
order to make the statements in such FLAG SEC Reports, in light of the
circumstances under which they were made, not misleading. No FLAG Subsidiary is
required to file any SEC Documents.
(b) Each of the FLAG Financial Statements (including, in each case, any
related notes) contained in the FLAG SEC Reports, including any FLAG SEC Reports
filed after the date of this Agreement until the Effective Time, complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited interim statements, as permitted by Form 10-Q of the SEC), and fairly
presented in all material respects the consolidated financial position of FLAG
and its Subsidiaries as at the respective dates and the consolidated results of
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in amount
or effect.
6.6 Absence of Undisclosed Liabilities.
---------------------------------------
No FLAG Entity has any Liabilities that are reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, except
Liabilities which are accrued or reserved against in the consolidated balance
sheets of FLAG as of December 31, 1998, included in the FLAG Financial
Statements delivered prior to the date of this Agreement or reflected in the
notes thereto. No FLAG Entity has incurred or paid any Liability since December
31, 1998, except for such Liabilities incurred or paid (i) in the ordinary
course of business consistent with past business practice and which are not
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect or (ii) in connection with the transactions contemplated by this
Agreement.
6.7 Absence of Certain Changes or Events.
------------------------------------------
Since December 31, 1998, except as disclosed in the FLAG Financial
Statements delivered prior to the date of this Agreement or as disclosed in
Section 6.7 of the FLAG Disclosure Memorandum, (i) there have been no events,
changes or occurrences which have had, or are reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, and (ii) the
FLAG Entities have not taken any action, or failed to take any action, prior to
the date of this Agreement, which action or failure, if taken after the date of
this Agreement, would represent or result in a material breach or violation of
any of the covenants and agreements of FLAG provided in Article 7.
22
<PAGE>
6.8 Tax Matters.
----------------
(a) All Tax Returns required to be filed by or on behalf of any of the FLAG
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before December 31,
1998, and on or before the date of the most recent fiscal year end immediately
preceding the Effective Time, except to the extent that all such failures to
file, taken together, are not reasonably likely to have a FLAG Material Adverse
Effect, and all Tax Returns filed are complete and accurate in all material
respects. All Taxes shown on filed Tax Returns have been paid. There is no audit
examination, deficiency, or refund Litigation with respect to any Taxes that is
reasonably likely to result in a determination that would have, individually or
in the aggregate, a FLAG Material Adverse Effect, except as reserved against in
the FLAG Financial Statements delivered prior to the date of this Agreement or
as disclosed in Section 6.8 of the FLAG Disclosure Memorandum. All Taxes and
other Liabilities due with respect to completed and settled examinations or
concluded Litigation have been paid. There are no Liens with respect to Taxes
upon any of the Assets of the FLAG Entities, except for any such Liens which are
not reasonably likely to have a FLAG Material Adverse Effect or with respect to
which the Taxes are not yet due and payable.
(b) None of the FLAG Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due (excluding
such statutes that relate to years currently under examination by the Internal
Revenue Service or other applicable taxing authorities) that is currently in
effect.
(c) The provision for any Taxes due or to become due for any of the FLAG
Entities for the period or periods through and including the date of the
respective FLAG Financial Statements that has been made and is reflected on such
FLAG Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the FLAG Entities have been provided for in
accordance with GAAP.
(e) None of the FLAG Entities is a party to any Tax allocation or sharing
agreement and none of the FLAG Entities has been a member of an affiliated group
filing a consolidated federal income Tax Return (other than a group the common
parent of which was FLAG) or has any Liability for Taxes of any Person (other
than FLAG and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign, Law) as a transferee or
successor or by Contract or otherwise.
(f) Each of the FLAG Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances of
noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect.
23
<PAGE>
(g) Except as disclosed in Section 6.8 of the FLAG Disclosure Memorandum,
none of the FLAG Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Sections 28OG or 162(m)
of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue
Code Section 382(g), of the FLAG Entities that occurred during or after any
Taxable Period in which the FLAG Entities incurred a net operating loss that
carries over to any Taxable Period ending after December 31, 1997.
(i) No FLAG Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.
(j) All material elections with respect to Taxes affecting the FLAG
Entities have been or will be timely made.
6.9 Allowance for Possible Loan Losses.
--------------------------------------
The Allowance shown on the consolidated balance sheets of FLAG included in
the most recent FLAG Financial Statements dated prior to the date of this
Agreement was, and the Allowance shown on the consolidated balance sheets of
FLAG included in the FLAG Financial Statements as of dates subsequent to the
execution of this Agreement will be, as of the dates thereof, adequate (within
the meaning of GAAP and applicable regulatory requirements or guidelines) to
provide for all known or reasonably anticipated losses relating to or inherent
in the loan and lease portfolios (including accrued interest receivables) of the
FLAG Entities and other extensions of credit (including letters of credit and
commitments to make loans or extend credit) by the FLAG Entities as of the dates
thereof, except where the failure of such Allowance to be so adequate is not
reasonably likely to have a FLAG Material Adverse Effect.
6.10 Assets.
-----------
(a) Except as disclosed in Section 6.10 of the FLAG Disclosure Memorandum
or as disclosed or reserved against in the FLAG Financial Statements delivered
prior to the date of this Agreement, the FLAG Entities have good and marketable
title, free and clear of all Liens, to all of their respective Assets, except
for any such Liens or other defects of title which are not reasonably likely to
have a FLAG Material Adverse Effect. All tangible properties used in the
businesses of the FLAG Entities are in good condition, reasonable wear and tear
excepted, and are usable in the ordinary course of business consistent with
FLAG's past practices.
(b) All Assets which are material to FLAG's business on a consolidated
basis, held under leases or subleases by any of the FLAG Entities, are held
under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceedings may be brought), and each such
Contract is in full force and effect.
24
<PAGE>
(c) The FLAG Entities currently maintain insurance similar in amounts,
scope and coverage to that maintained by other peer banking organizations. None
of the FLAG Entities has received notice from any insurance carrier that (i) any
policy of insurance will be cancelled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such policies of
insurance will be substantially increased. There are presently no claims for
amounts exceeding in any individual case $25,000 pending under such policies of
insurance and no notices of claims in excess of such amounts have been given by
any FLAG Entity under such policies.
(d) The Assets of the FLAG Entities include all Assets required to operate
the business of the FLAG Entities as presently conducted.
6.11 Intellectual Property.
--------------------------
Each FLAG Entity owns or has a license to use all of the Intellectual
Property used by such FLAG Entity in the course of its business. Each FLAG
Entity is the owner of or has a license to any Intellectual Property sold or
licensed to a third party by such FLAG Entity in connection with such FLAG
Entity's business operations, and such FLAG Entity has the right to convey by
sale or license any Intellectual Property so conveyed. No FLAG Entity is in
Default under any of its Intellectual Property licenses. No proceedings have
been instituted, or are pending or to the Knowledge of FLAG threatened, which
challenge the rights of any FLAG Entity with respect to Intellectual Property
used, sold or licensed by such FLAG Entity in the course of its business, nor
has any person claimed or alleged any rights to such Intellectual Property. The
conduct of the business of the FLAG Entities does not infringe any Intellectual
Property of any other person. Except as disclosed in Section 6.11 of the FLAG
Disclosure Memorandum, no FLAG Entity is obligated to pay any recurring
royalties to any Person with respect to any such Intellectual Property. Except
as disclosed in Section 6.11 of the FLAG Disclosure Memorandum, no officer,
director or employee of any FLAG Entity is party to any Contract which restricts
or prohibits such officer, director or employee from engaging in activities
competitive with any Person, including any FLAG Entity.
6.12 Environmental Matters.
--------------------------
(a) To the Knowledge of FLAG, each FLAG Entity, its Participation
Facilities, and its Operating Properties are, and have been, in compliance with
all Environmental Laws, except for violations which are not reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect.
(b) There is no Litigation pending or threatened before any court,
governmental agency, or authority or other forum in which any FLAG Entity or any
of its Operating Properties or Participation Facilities (or FLAG in respect of
such Operating Property or Participation Facility) has been or, with respect to
threatened Litigation, may be named as a defendant (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law or (ii) relating to
the emission, migration, release, discharge, spillage, or disposal into the
environment of any Hazardous Material, whether or not occurring at, on, under,
adjacent to, or affecting (or potentially affecting) a site owned, leased, or
operated by any FLAG Entity or any of its Operating Properties or Participation
Facilities or any neighboring property, except for such Litigation pending or
25
<PAGE>
threatened that is not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect, nor is there any reasonable basis for
any Litigation of a type described in this sentence, except such as is not
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect.
(c) During the period of (i) any FLAG Entity's ownership or operation of
any of their respective current properties, (ii) any FLAG Entity's participation
in the management of any Participation Facility or any Operating Property, there
have been no emissions, migrations, releases, discharges, spillages, or
disposals of Hazardous Material in, on, at, under, adjacent to, or affecting (or
potentially affecting) such properties or any neighboring properties, except
such as are not reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect. Prior to the period of (i) any FLAG Entity's
ownership or operation of any of their respective current properties, (ii) any
FLAG Entity's participation in the management of any Participation Facility or
any Operating Property, to the Knowledge of FLAG, there were no releases,
discharges, spillages, or disposals of Hazardous Material in, on, under, or
affecting any such property, Participation Facility or Operating Property,
except such as are not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect.
6.13 Compliance with Laws.
-------------------------
Each FLAG Entity has in effect all Permits necessary for it to own, lease
or operate its material Assets and to carry on its business as now conducted,
except for those Permits the absence of which are not reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, and there has
occurred no Default under any such Permit, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect. Except as disclosed in Section 6.13 of the FLAG Disclosure
Memorandum, none of the FLAG Entities:
(a) is in Default under any of the provisions of its Articles of
Incorporation or Bylaws (or other governing instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to, have, individually or in the aggregate, a FLAG Material
Adverse Effect; or
(c) since January 1, 1995, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i) asserting that any FLAG Entity is
not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance is
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, (ii) threatening to revoke any Permits, the revocation of which
is reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, or (iii) requiring any FLAG Entity to enter into or consent to
the issuance of a cease and desist order, formal agreement, directive,
commitment or memorandum of understanding, or to adopt any Board resolution or
similar undertaking, which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy, its credit or reserve policies,
its management, or the payment of dividends. Copies of all material reports,
correspondence, notices and other documents relating to any inspection, audit,
monitoring or other form of review or enforcement action by a Regulatory
Authority have been made available to ABBEVILLE.
26
<PAGE>
6.14 Labor Relations.
--------------------
No FLAG Entity is the subject of any Litigation asserting that it or any
other FLAG Entity has committed an unfair labor practice (within the meaning of
the National Labor Relations Act or comparable state law) or seeking to compel
it or any other FLAG Entity to bargain with any labor organization as to wages
or conditions of employment, nor is any FLAG Entity party to any collective
bargaining agreement, nor is there any strike or other labor dispute involving
any FLAG Entity, pending or threatened, or to the Knowledge of FLAG, is there
any activity involving any FLAG Entity's employees seeking to certify a
collective bargaining unit or engaging in any other organization activity.
6.15 Employee Benefit Plans.
---------------------------
(a) FLAG has disclosed in Section 6.15 of the FLAG Disclosure Memorandum
and has delivered or made available to ABBEVILLE prior to the execution of this
Agreement copies in each case of all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance pay,
vacation, bonus, or other incentive plan, all other written employee programs,
arrangements, or agreements, all medical, vision, dental, or other health plans,
all life insurance plans, and all other employee benefit plans or fringe benefit
plans, including "employee benefit plans" as that term is defined in Section
3(3) of ERISA, currently adopted, maintained by, sponsored in whole or in part
by, or contributed to by any FLAG Entity or ERISA Affiliate thereof for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other beneficiaries
are eligible to participate (collectively, the "FLAG Benefit Plans"). Each FLAG
Benefit Plan which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as a "FLAG ERISA Plan."
Each FLAG ERISA Plan which is also a "defined benefit plan" (as defined in
Section 4140) of the Internal Revenue Code) is referred to herein as a "FLAG
Pension Plan." No FLAG Pension Plan is or has been a multiemployer plan within
the meaning of Section 3(37) of ERISA.
(b) All FLAG Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect. Each FLAG ERISA Plan which is
intended to be qualified under Section 401(a) of the Internal Revenue Code has
received a favorable determination letter from the Internal Revenue Service, and
FLAG is not aware of any circumstances likely to result in revocation of any
such favorable determination letter. To the Knowledge of Flag, no FLAG Entity
has engaged in a transaction with respect to any FLAG Benefit Plan that,
assuming the taxable period of such transaction expired as of the date hereof,
would subject any FLAG Entity to a Tax imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA in amounts which are reasonably
likely to have, individually or in the aggregate, a FLAG Material Adverse
Effect.
27
<PAGE>
(c) No FLAG Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions set
forth for such plan's most recent actuarial valuation. Since the date of the
most recent actuarial valuation, there has been (i) no material change in the
financial position of a FLAG Pension Plan, (ii) no change in the actuarial
assumptions with respect to any FLAG Pension Plan, and (iii) no increase in
benefits under any FLAG Pension Plan as a result of plan amendments or changes
in applicable Law which is reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect or materially adversely affect the
funding status of any such plan. Neither any FLAG Pension Plan nor any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any FLAG Entity, or the single-employer plan
of any ERISA Affiliate has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
which is reasonably likely to have a FLAG Material Adverse Effect. No FLAG
Entity has provided, or is required to provide, security to a FLAG Pension Plan
or to any single-employer plan of an ERISA Affiliate pursuant to Section 40 1
(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any FLAG Entity with respect to any ongoing, frozen or terminated
single-employer plan or the single-employer plan of any ERISA Affiliate, which
Liability is reasonably likely to have a FLAG Material Adverse Effect. No FLAG
Entity has incurred any withdrawal Liability with respect to a multiemployer
plan under Subtitle B of Title IV of ERISA (regardless of whether based on
contributions of an ERISA Affiliate), which Liability is reasonably likely to
have a FLAG Material Adverse Effect. No notice of a "reportable event," within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any FLAG Pension Plan or
by any ERISA Affiliate within the 12-month period ending on the date hereof.
(e) Except as disclosed in Section 6.15 of the FLAG Disclosure Memorandum,
no FLAG Entity has any Liability for retiree health and life benefits under any
of the FLAG Benefit Plans and there are no restrictions on the rights of such
FLAG Entity to amend or terminate any such retiree health or benefit Plan
without incurring any Liability thereunder, which Liability is reasonably likely
to have a FLAG Material Adverse Effect.
(f) Except as disclosed in Section 6.15 of the FLAG Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, or otherwise) becoming
due to any director or any employee of any FLAG Entity from any FLAG Entity
under any FLAG Benefit Plan or otherwise, (ii) increase any benefits otherwise
payable under any FLAG Benefit Plan, or (iii) result in any acceleration of the
time of payment or vesting of any such benefit, where such payment, increase, or
acceleration is reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect.
28
<PAGE>
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any FLAG Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the FLAG Financial Statements to the extent
required by and in accordance with GAAP.
6.16 Material Contracts.
-----------------------
Except as disclosed in Section 6.16 of the FLAG Disclosure Memorandum or
otherwise reflected in the FLAG Financial Statements, none of the FLAG Entities,
nor any of their respective Assets, businesses, or operations, is a party to, or
is bound or affected by, or receives benefits under, (i) any employment,
severance, termination, consulting or retirement Contract providing for
aggregate payments to any Person in any calendar year in excess of $50,000, (ii)
any Contract relating to the borrowing of money by any FLAG Entity or the
guarantee by any FLAG Entity of any such obligation (other than Contracts
evidencing deposit liabilities, purchases of federal funds, fully-secured
repurchase agreements, and Federal Home Loan Bank advances of depository
institution Subsidiaries, trade payables and Contracts relating to borrowings or
guarantees made in the ordinary course of business), (iii) any Contract which
prohibits or restricts any FLAG Entity from engaging in any business activities
in any geographic area, line of business or otherwise in competition with any
other Person, (iv) any Contract between or among FLAG Entities, (v) any Contract
relating to the provision of data processing, network communication, or other
technical services to or by any FLAG Entity, (vi) any exchange-traded or
over-the-counter swap, forward, future, option, cap, floor, or collar financial
Contract, or any other interest rate or foreign currency protection Contract not
included on its balance sheet which is a financial derivative Contract, or (vii)
any other Contract or amendment thereto that would be required to be filed as an
exhibit to a Form 10-K filed by FLAG with the SEC as of the date of this
Agreement that has not been filed as an exhibit to FLAG's Form 10-K filed for
the fiscal year ended December 31, 1997, or in an SEC Document and identified to
ABBEVILLE (together with all Contracts referred to in Sections 6.10 and 6.15(a),
the "FLAG Contracts"). With respect to each FLAG Contract and except as
disclosed in Section 6.16 of the FLAG Disclosure Memorandum: (i) the Contract is
in full force and effect; (ii) no FLAG Entity is in Default thereunder, other
than Defaults which are not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect; (iii) no FLAG Entity has repudiated
or waived any material provision of any such Contract; and (iv) no other party
to any such Contract is, to the Knowledge of FLAG, in Default in any respect,
other than Defaults which are not reasonably likely to have, individually or in
the aggregate, a FLAG Material Adverse Effect, or has repudiated or waived any
material provision thereunder. All of the indebtedness of any FLAG Entity for
money borrowed is prepayable at any time by such FLAG Entity without penalty or
premium.
6.17 Legal Proceedings.
----------------------
There is no Litigation instituted or pending or, to the Knowledge of FLAG,
threatened (or unasserted but considered probable of assertion and which if
asserted would have at least a reasonable probability of an unfavorable outcome)
against any FLAG Entity, or against any director, employee or employee benefit
plan of any FLAG Entity, or against any Asset, interest, or right of any of
them, that is reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect, nor are there any Orders of any Regulatory
29
<PAGE>
Authorities, other governmental authorities, or arbitrators outstanding against
any FLAG Entity, that are reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect. Section 6.17 of the FLAG Disclosure
Memorandum contains a summary of all Litigation as of the date of this Agreement
to which any FLAG Entity is a party and which names a FLAG Entity as a defendant
or cross-defendant or for which any FLAG Entity has any potential Liability.
6.18 Reports.
------------
Since January 1, 1993, each FLAG Entity has timely filed all reports and
statements, together with any amendments required to be made with respect
thereto, that it was required to file with Regulatory Authorities (except, in
the case of state securities authorities, failures to file which are not
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect). As of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all applicable Laws. As of its respective
date, each such report and document did not, in all material respects, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
6.19 Statements True and Correct.
--------------------------------
No statement, certificate, instrument or other writing furnished or to be
furnished by any FLAG Entity to ABBEVILLE pursuant to this Agreement or any
other document, agreement or instrument referred to herein contains or will
contain any untrue statement of material fact or will omit to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. None of the information supplied or
to be supplied by any FLAG Entity for inclusion in the Registration Statement to
be filed by FLAG with the SEC, will, when such Registration Statement becomes
effective, be false or misleading with respect to any material fact, or omit to
state any material fact necessary to make the statements therein not misleading.
None of the documents to be filed by any FLAG Entity with the SEC or any other
Regulatory Authority in connection with the transactions contemplated hereby,
will, at the respective time such documents are filed, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. All documents that any FLAG Entity thereof is
responsible for filing with any Regulatory Authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable Law.
6.20 Accounting Tax and Regulatory Matters.
------------------------------------------
No FLAG Entity has taken or agreed to take any action or has any knowledge
of any fact or circumstance that is reasonably likely to (i) prevent the Merger
from qualifying for pooling of interests accounting treatment and as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, or (ii) materially impede or delay receipt of any Consents of Regulatory
Authorities referred to in Section 9.l(b) or result in the imposition of a
condition or restriction of the type referred to in the last sentence of such
Section.
30
<PAGE>
6.21 Charter Provisions.
-----------------------
Each FLAG Entity has taken all action so that the entering into of this
Agreement and the consummation of the Merger and the other transactions
contemplated by this Agreement do not and will not result in the grant of any
rights to any Person under the Charter, Articles of Incorporation, Bylaws or
other governing instruments of any FLAG Entity or restrict or impair the ability
of FLAG or any of its Subsidiaries to vote, or otherwise to exercise the rights
of a shareholder with respect to, shares of any FLAG Entity that may be directly
or indirectly acquired or controlled by them.
6.22 Board Recommendation.
-------------------------
The Board of Directors of FLAG, at a meeting duly called and held, has by
unanimous vote of those directors present (who constituted all of the directors
then in office) determined that this Agreement and the transactions contemplated
hereby, including the Merger, taken together, are fair to and in the best
interests of the FLAG shareholders.
6.23 Y2K.
---------
No FLAG Entity has received, nor to FLAG 's Knowledge are there facts that
would form the basis for the issuance of, a "Year 2000 Deficiency Notification
Letter" (as such term is employed in the Federal Reserve's Supervision and
Regulatory Letter No. SR 98-3 (SUP), dated March 4, 1998). FLAG has disclosed to
ABBEVILLE a complete and accurate copy of its plan, including its good faith
estimate of the anticipated associated costs, for addressing the issues set
forth in the Year 2000 guidance papers issued by the Federal Financial
Institutions Examination Council, including the statement dated May 5, 1997,
entitled "Year 2000 Project Management Awareness," December 17, 1997, entitled
"Safety and Soundness Guidelines Concerning the Year 2000 Business Risk," and
October 15, 1998, entitled "Interagency Guidelines Establishing Year 2000
Standards for Safety and Soundness," as such issues affect any FLAG Entity.
Between the date of this Agreement and the Effective Time, FLAG shall use its
reasonable best efforts to implement such plan.
ARTICLE 7.
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
7.1 Affirmative Covenants of ABBEVILLE.
---------------------------------------
From the date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement, unless the prior written consent of FLAG
shall have been obtained, and except as otherwise expressly contemplated herein,
ABBEVILLE shall, and shall cause each of its Subsidiaries to (a) operate its
business only in the usual, regular, and ordinary course, (b) preserve intact
its business organization and Assets and maintain its rights and franchises, and
(c) take no action which would (i) materially adversely affect the ability of
any Party to obtain any Consents required for the transactions contemplated
hereby without imposition of a condition or restriction of the type referred to
in the last sentences of Section 9.1(b) or 9.1(c), or (ii) materially adversely
affect the ability of any Party to perform its covenants and agreements under
this Agreement.
7.2 Negative Covenants of ABBEVILLE.
-----------------------------------
From the date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement, unless the prior written consent of FLAG
shall have been obtained, and except as otherwise expressly contemplated herein,
ABBEVILLE covenants and agrees that it will not do or agree or commit to do, or
permit any of its Subsidiaries to do or agree or commit to do, any of the
following:
31
<PAGE>
(a) amend the Articles of Incorporation, Bylaws or other governing
instruments of any ABBEVILLE entity, or
(b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of an ABBEVILLE Entity to another ABBEVILLE
Entity) in excess of an aggregate of $100,000 (for ABBEVILLE Entities on a
consolidated basis) except in the ordinary course of the business of the
ABBEVILLE Subsidiaries consistent with past practices (which shall include, for
the ABBEVILLE Subsidiaries that are depository institutions, creation of deposit
liabilities, purchases of federal funds, advances from the Federal Reserve Bank
or Federal Home Loan Bank, and entry into repurchase agreements fully secured by
U.S. government or agency securities), or impose, or suffer the imposition, on
any Asset of any ABBEVILLE Entity of any Lien or permit any such Lien to exist
(other than in connection with deposits, repurchase agreements, bankers
acceptances, "treasury tax and loan" accounts established in the ordinary course
of business, the satisfaction of legal requirements in the exercise of trust
powers, and Liens in effect as of the date hereof that are disclosed in Section
7.2(b) of the ABBEVILLE Disclosure Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of the
capital stock of any ABBEVILLE Entity, or, with the exception of the March 31,
1999 dividend payment of $0.80 per share of ABBEVILLE Common Stock, declare or
pay any dividend or make any other distribution in respect of ABBEVILLE's
capital stock; or
(d) except for this Agreement, or pursuant to the exercise of stock options
outstanding as of the date hereof and pursuant to the terms thereof in existence
on the date hereof, or as disclosed in Section 7.2(d) of the ABBEVILLE
Disclosure Memorandum, issue, sell, pledge, encumber, authorize the issuance of,
enter into any Contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional shares of
ABBEVILLE Common Stock or any other capital stock of any ABBEVILLE Entity, or
any stock appreciation rights, or any option, warrant, or other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any ABBEVILLE
Entity or issue or authorize the issuance of any other securities in respect of
or in substitution for shares of ABBEVILLE Common Stock, or sell, lease,
mortgage or otherwise dispose of or otherwise encumber any Asset having a book
value in excess of $100,000 other than in the ordinary course of business for
reasonable and adequate consideration or any shares of capital stock of any
ABBEVILLE Subsidiary (unless any such shares of stock are sold or otherwise
transferred to another ABBEVILLE Entity); or
32
<PAGE>
(f) except for loans made in the ordinary course of its business, make any
material investment, either by purchase of stock or securities, contributions to
capital, Asset transfers, or purchase of any Assets, in any Person other than a
wholly owned ABBEVILLE Subsidiary, or otherwise acquire direct or indirect
control over any Person, other than in connection with (i) foreclosures in the
ordinary course of business, (ii) acquisitions of control by a depository
institution Subsidiary in its fiduciary capacity, or (iii) the creation of new
wholly owned Subsidiaries organized to conduct or continue activities otherwise
permitted by this Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any ABBEVILLE Entity, except in accordance with past practice
specifically disclosed in Section 7.2(g) of the ABBEVILLE Disclosure Memorandum
or as required by Law; pay any severance or termination pay or any bonus other
than pursuant to written policies or written Contracts in effect on the date of
this Agreement and disclosed in Section 7.2(g) of the ABBEVILLE Disclosure
Memorandum; and enter into or amend any severance agreements with officers of
any ABBEVILLE Entity; grant any material increase in fees or other increases in
compensation or other benefits to directors of any ABBEVILLE Entity except in
accordance with past practice disclosed in Section 7.2(g) of the ABBEVILLE
Disclosure Memorandum; or voluntarily accelerate the vesting of any stock
options or other stock-based compensation or employee benefits or other Equity
Rights; or
(h) enter into or amend any employment Contract between any ABBEVILLE
Entity and any Person having a salary thereunder in excess of $50,000 per year
(unless such amendment is required by Law) that the ABBEVILLE Entity does not
have the unconditional right to terminate without Liability (other than
Liability for services already rendered), at any time on or after the Effective
Time; or
(i) adopt any new employee benefit plan of any ABBEVILLE Entity or
terminate or withdraw from, or make any material change in or to, any existing
employee benefit plans of any ABBEVILLE Entity other than any such change that
is required by Law or that, in the opinion of counsel, is necessary or advisable
to maintain the tax qualified status of any such plan, or make any distributions
from such employee benefit plans, except as required by Law, the terms of such
plans or consistent with past practice; or
(j) make any significant change in any Tax or accounting methods or systems
of internal accounting controls, except as may be appropriate to conform to
changes in Tax Laws or regulatory accounting requirements or GAAP; or
(k) commence any Litigation other than in accordance with past practice or
except as set forth in Section 7.2(k) of the ABBEVILLE Disclosure Memorandum,
settle any Litigation involving any Liability of any ABBEVILLE Entity for
material money damages or restrictions upon the operations of any ABBEVILLE
Entity; or
(l) except in the ordinary course of business, enter into, modify, amend or
terminate any material Contract (including any loan Contract with an unpaid
balance exceeding $50,000) or waive, release, compromise or assign any material
rights or claims.
33
<PAGE>
7.3 Affirmative Covenants of FLAG.
----------------------------------
From the date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement, unless the prior written consent of ABBEVILLE
shall have been obtained, and except as otherwise expressly contemplated herein,
FLAG shall and shall cause each of its Subsidiaries to (a) operate its business
only in the usual, regular, and ordinary course, (b) preserve intact its
business organization and Assets and maintain its rights and franchises, and (c)
take no action which would (i) materially adversely affect the ability of any
Party to obtain any Consents required for the transactions contemplated hereby
without imposition of a condition or restriction of the type referred to in the
last sentences of Section 9.1(b) or 9.1(c), or (ii) materially adversely affect
the ability of any Party to perform its covenants and agreements under this
Agreement.
7.4 Negative Covenants of FLAG.
-------------------------------
From the date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement, unless the prior written consent of ABBEVILLE
shall have been obtained, and except as otherwise expressly contemplated herein,
FLAG covenants and agrees that it will not amend the Articles of Incorporation
or Bylaws of FLAG in any manner adverse to the holders of ABBEVILLE Common
Stock, or take any action which will materially adversely impact the ability of
FLAG Entities to consummate the transactions contemplated by this Agreement.
7.5 Adverse Changes in Condition.
---------------------------------
Each of FLAG and ABBEVILLE agrees to give written notice promptly to the
other upon becoming aware of the occurrence or impending occurrence of any event
or circumstance relating to it or any of its Subsidiaries which (i) is
reasonably likely to have, individually or in the aggregate, an ABBEVILLE
Material Adverse Effect or a FLAG Material Adverse Effect, as applicable, or
(ii) would cause or constitute a material breach of any of its representations,
warranties, or covenants contained herein, and to use its reasonable efforts to
prevent or promptly to remedy the same.
7.6 Reports.
------------
Each of FLAG and ABBEVILLE and their Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other copies of all
such periodic reports promptly after the same are filed. If financial statements
are contained in any such reports filed with the SEC, such financial statements
will fairly present the consolidated financial position of the entity filing
such statements as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity, and cash flows for the periods then
ended in accordance with GAAP (subject in the case of interim financial
statements to normal recurring year-end adjustments that are not material). As
of their respective dates, such reports filed with the SEC will comply in all
material respects with the Securities Laws and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with Laws applicable to such reports.
34
<PAGE>
ARTICLE 8.
ADDITIONAL AGREEMENTS
---------------------
8.1 Registration Statement.
---------------------------
As soon as practicable after execution of this Agreement, FLAG shall
prepare and file the Registration Statement with the SEC, and shall use its
reasonable efforts to cause the Registration Statement to become effective under
the 1933 Act and take any action required to be taken under the applicable state
Blue Sky or Securities Laws in connection with the issuance of the shares of
FLAG Common Stock upon consummation of the Merger. ABBEVILLE shall cooperate in
the preparation and filing of the Registration Statement and shall furnish all
information concerning it and the holders of its capital stock as FLAG may
reasonably request in connection with such action. FLAG and ABBEVILLE shall make
all necessary filings with respect to the Merger under the Securities Laws.
8.2 Nasdaq Listing.
-------------------
FLAG shall use its reasonable efforts to list, prior to the Effective Time,
on the Nasdaq National Market the shares of FLAG Common Stock to be issued to
the holders of ABBEVILLE Common Stock pursuant to the Merger, and FLAG shall
give all notices and make all filings with the NASD required in connection with
the transactions contemplated herein.
8.3 Shareholder Approval.
-------------------------
ABBEVILLE shall call a Shareholders' Meeting, to be held as soon as
reasonably practicable after the Registration Statement is declared effective by
the SEC, for the purpose of voting upon approval of this Agreement and such
other related matters as it deems appropriate. In connection with the
Shareholders' Meeting, the Board of Directors of ABBEVILLE shall recommend to
its shareholders, subject to the conditions in such authorization and
recommendation by the Board of Directors, the approval of the matters submitted
for approval (subject to the Board of Directors of ABBEVILLE, after having
consulted with and considered the advice of outside counsel, reasonably
determining in good faith that the making of such recommendation, or the failure
to withdraw or modify its recommendation, would constitute a breach of fiduciary
duties of the members of such Board of Directors to ABBEVILLE's shareholders,
under applicable law), and the Board of Directors and officers of ABBEVILLE
shall use their reasonable efforts to obtain such shareholders' approval
(subject to the Board of Directors of ABBEVILLE, after having consulted with and
considered the advice of outside counsel, reasonably determining in good faith
that the taking of such actions would constitute a breach of fiduciary duties of
the members of such Board of Directors to the ABBEVILLE shareholders, under
applicable law).
8.4 Applications.
-----------------
FLAG shall promptly prepare and file, and ABBEVILLE shall cooperate in the
preparation and, where appropriate, filing of, applications with all Regulatory
Authorities having jurisdiction over the transactions contemplated by this
Agreement, including without limitation, the Board of Governors of the Federal
Reserve System, the Georgia Department of Banking and Finance and the South
Carolina Board of Financial Institutions Examining Division, seeking the
requisite Consents necessary to consummate the transactions contemplated by this
Agreement. The Parties shall deliver to each other copies of all filings,
correspondence and orders to and from all Regulatory Authorities in connection
with the transactions contemplated hereby.
35
<PAGE>
8.5 Filings with State Offices.
-------------------------------
Upon the terms and subject to the conditions of this Agreement, FLAG shall
cause to be filed the Certificate of Merger with the Secretary of State of the
State of Georgia and Articles of Merger with the Secretary of State of the State
of South Carolina.
8.6 Agreement as to Efforts to Consummate.
-----------------------------------------
Subject to the terms and conditions of this Agreement, each Party agrees to
use, and to cause its Subsidiaries to use, its reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper, or advisable under applicable Laws to consummate and make
effective, as soon as reasonably practicable after the date of this Agreement,
the transactions contemplated by this Agreement, including using its reasonable
efforts to lift or rescind any Order adversely affecting its ability to
consummate the transactions contemplated herein and to cause to be satisfied the
conditions referred to in Article 9; provided, that nothing herein shall
preclude either Party from exercising its rights under this Agreement. Each
Party shall use, and shall cause each of its Subsidiaries to use, its reasonable
efforts to obtain all Consents necessary or desirable for the consummation of
the transactions contemplated by this Agreement.
8.7 Investigation and Confidentiality.
--------------------------------------
(a) Prior to the Effective Time, each Party shall keep the other Party
advised of all material developments relevant to its business and to
consummation of the Merger and shall permit the other Party to make or cause to
be made such investigation of the business and properties of it and its
Subsidiaries and of their respective financial and legal conditions as the Party
reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby, and shall not interfere
unnecessarily with normal operations. No investigation by a Party shall affect
the representations and warranties of any other Party.
(b) Each Party shall, and shall cause its advisers and agents to, maintain
the confidentiality of all confidential information furnished to it by the other
Party concerning its and its Subsidiaries' businesses, operations, and financial
positions and shall not use such information for any purpose except in
furtherance of the transactions contemplated by this Agreement. If this
Agreement is terminated prior to the Effective Time, each Party shall promptly
return or certify the destruction of all documents and copies thereof, and all
work papers containing confidential information received from the other Party.
(c) Each Party shall use its reasonable efforts to exercise its rights
under confidentiality agreements entered into with Persons which were
considering an Acquisition Proposal with respect to such Party to preserve the
confidentiality of the information relating to such Party and its Subsidiaries
provided to such Persons and their Affiliates and Representatives.
(d) Each Party agrees to give the other Party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the other
Party which it has discovered through the course of its investigation and which
represents, or is reasonably likely to represent, either a material breach of
any representation, warranty, covenant or agreement of the other Party or which
has had or is reasonably likely to have an ABBEVILLE Material Adverse Effect or
a FLAG Material Adverse Effect, as applicable.
36
<PAGE>
8.8 Press Releases.
------------------
Prior to the Effective Time, ABBEVILLE and FLAG shall consult with each
other as to the form and substance of any press release or other public
disclosure materially related to this Agreement or any other transaction
contemplated hereby; provided, that nothing in this Section 8.8 shall be deemed
to prohibit any Party from making any disclosure which its counsel deems
necessary or advisable in order to satisfy such Party's disclosure obligations
imposed by Law.
8.9 Certain Actions.
--------------------
Except with respect to this Agreement and the transactions contemplated
hereby, no ABBEVILLE Entity nor any Representatives thereof retained by any
ABBEVILLE Entity shall directly or indirectly solicit any Acquisition Proposal
by any Person. Except to the extent the Board of Directors of ABBEVILLE, after
having consulted with and considered the advice of outside counsel, reasonably
determines in good faith that the failure to take such actions would constitute
a breach of fiduciary duties of the members of such Board of Directors to
ABBEVILLE's shareholders, under applicable Law, no ABBEVILLE Entity or
Representative thereof shall furnish any non-public information that it is not
legally obligated to furnish, negotiate with respect to, or enter into any
Contract with respect to, any Acquisition Proposal, but ABBEVILLE may
communicate information about such an Acquisition Proposal to its shareholders
if and to the extent that it is required to do so in order to comply with its
legal obligations. ABBEVILLE shall promptly advise FLAG following the receipt of
any Acquisition Proposal and the details thereof, and advise FLAG of any
developments with respect to such Acquisition Proposal promptly upon the
occurrence thereof. ABBEVILLE shall (i) immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Persons
conducted heretofore with respect to any of the foregoing, and (ii) direct and
use its reasonable efforts to cause its Representatives not to engage in any of
the foregoing.
8.10 Accounting and Tax Treatment.
----------------------------------
Each of the Parties undertakes and agrees to use its reasonable efforts to
cause the Merger to, and to take no action which would cause the Merger not to,
qualify for pooling of interests accounting treatment and as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code for federal
income tax purposes.
8.11 Charter Provisions.
------------------------
Each Party shall take, and shall cause its Subsidiaries to take, all
necessary action to ensure that the entering into of this Agreement and the
consummation of the Merger and the other transactions contemplated hereby do not
and will not result in the grant of any rights to any Person under the charter,
articles of incorporation, bylaws or other governing instruments of such Party
or any of its Subsidiaries or restrict or impair the ability of FLAG or any of
its Subsidiaries to vote, or otherwise to exercise the rights of a shareholder
with respect to, shares of any ABBEVILLE Entity that may be directly or
indirectly acquired by them.
8.12 Agreements of Affiliates.
-----------------------------
ABBEVILLE has disclosed in Section 8.12 of the ABBEVILLE Disclosure
Memorandum each Person whom it reasonably believes is an "affiliate" of
ABBEVILLE for purposes of Rule 145 under the 1933 Act. ABBEVILLE shall use its
reasonable efforts to cause each such Person to deliver to FLAG not later than
30 days after the date of this Agreement a written agreement, substantially in
the form of Exhibit 1, providing that such Person will not sell, pledge,
37
<PAGE>
transfer, or otherwise dispose of the shares of the ABBEVILLE Common Stock held
by such Person except as contemplated by such agreement or by this Agreement and
will not sell, pledge, transfer, or otherwise dispose of the shares of FLAG
Common Stock to be received by such Person upon consummation of the Merger
except in compliance with applicable provisions of the 1933 Act and the rules
and regulations thereunder and until such time as financial results covering at
least 30 days of combined operations of FLAG and ABBEVILLE have been published
within the meaning of Section 201.01 of the SEC's Codification of Financial
Reporting Policies, except that transfers may be made in compliance with Staff
Accounting Bulletin No. 76 issued by the SEC. Except for transfers made in
compliance with Staff Accounting Bulletin No. 76, shares of FLAG Common Stock
issued to such affiliates of ABBEVILLE shall not be transferable until such time
as financial results covering at least 30 days of combined operations of FLAG
and ABBEVILLE have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies, regardless of whether each
such affiliate has provided the written agreement referred to in this Section
8.12. FLAG shall be entitled to place restrictive legends upon certificates for
shares of FLAG Common Stock issued to affiliates of ABBEVILLE pursuant to this
Agreement to enforce the provisions of this Section 8.12. FLAG shall not be
required to maintain the effectiveness of the Registration Statement under the
1933 Act for the purposes of resale of FLAG Common Stock by such affiliates.
8.13 Employee Benefits and Contracts.
------------------------------------
Following the Effective Time, FLAG shall either (i) continue to provide to
officers and employees of the ABBEVILLE Entities employee benefits under
ABBEVILLE's existing employee benefit and welfare plans or, (ii) if FLAG shall
determine to provide to officers and employees of the ABBEVILLE Entities
employee benefits under other employee benefit plans and welfare plans, provide
generally to officers and employees of the ABBEVILLE Entities employee benefits
under employee benefit and welfare plans, on terms and conditions which when
taken as a whole are substantially similar to those currently provided by the
FLAG Entities to their similarly situated officers and employees. For purposes
of participation and vesting (but not accrual of benefits) under FLAG's employee
benefit plans, (i) service under any qualified defined benefit plan of ABBEVILLE
shall be treated as service under FLAG's defined benefit plan, if any, (ii)
service under any qualified defined contribution plans of ABBEVILLE shall be
treated as service under FLAG's qualified defined contribution plans, and (iii)
service under any other employee benefit plans of ABBEVILLE shall be treated as
service under any similar employee benefit plans maintained by FLAG. With
respect to officers and employees of the ABBEVILLE Entities who, at or after the
Effective Time, become employees of a FLAG Entity and who, immediately prior to
the Effective Time, are participants in one or more employee welfare benefit
plans maintained by the ABBEVILLE Entities, FLAG shall cause each comparable
employee welfare benefit plan which is substituted for an ABBEVILLE welfare
benefit plan to waive any evidence of insurability or similar provision, to
provide credit for such participation prior to such substitution with regard to
the application of any pre-existing condition limitation, and to provide credit
towards satisfaction of any deductible or out-of-pocket provisions for expenses
incurred by such participants during the period prior to such substitution, if
any, that overlaps with the then current plan year for each such substituted
employee welfare benefit plans. FLAG also shall cause the Surviving Bank and its
Subsidiaries to honor in accordance with their terms all employment, severance,
consulting and other compensation Contracts disclosed in Section 8.13 of the
ABBEVILLE Disclosure Memorandum to FLAG between any ABBEVILLE Entity and any
39
<PAGE>
current or former director, officer, or employee thereof, and all provisions for
vested benefits or other vested amounts earned or accrued through the Effective
Time under the ABBEVILLE Benefit Plans.
8.14 Indemnification.
---------------------
(a) Subject to the conditions set forth in paragraph (b) below, for a
period of six years after the Effective Time, FLAG shall indemnify, defend and
hold harmless each person entitled to indemnification from an ABBEVILLE Entity
(each, an "Indemnified Party") against all Liabilities arising out of actions or
omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under South Carolina Law and by ABBEVILLE's Articles of Incorporation and Bylaws
as in effect on the date hereof, including provisions relating to advances of
expenses incurred in the defense of any Litigation. Without limiting the
foregoing, in any case in which approval by FLAG is required to effectuate any
indemnification, FLAG shall direct, at the election of the Indemnified Party,
that the determination of any such approval shall be made by independent counsel
mutually agreed upon between FLAG and the Indemnified Party.
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 8.14, upon learning of any such Liability or Litigation,
shall promptly notify FLAG thereof. In the event of any such Liability or
Litigation (whether arising before or after the Effective Time), (i) FLAG shall
have the right to assume the defense thereof (provided FLAG acknowledges
responsibility for such indemnification) and FLAG shall not be liable to such
Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if FLAG elects not to assume such defense or
counsel for the Indemnified Parties advises that there are substantive issues
which raise conflicts of interest between FLAG and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and FLAG shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, that FLAG shall be
obligated pursuant to this paragraph (b) to pay for only one firm of counsel for
all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties will
cooperate in the defense of any such Litigation, and (iii) FLAG shall not be
liable for any settlement effected without its prior written consent; and
provided further that FLAG shall not have any obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall determine,
and such determination shall have become final, that the indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by applicable
Law.
ARTICLE 9.
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
-------------------------------------------------
9.1 Conditions to Obligations of Each Party.
--------------------------------------------
The respective obligations of each Party to perform this Agreement and
consummate the Merger and the other transactions contemplated hereby are subject
to the satisfaction of the following conditions, unless waived by both Parties
pursuant to Section 11.6:
39
<PAGE>
(a) Shareholder Approval. The shareholders of ABBEVILLE shall have approved
this Agreement, and the consummation of the transactions contemplated hereby,
including the Merger, as and to the extent required by Law or by the provisions
of any governing instruments. The shareholders of FLAG shall have approved the
issuance of shares of FLAG Common Stock pursuant to the Merger, as and to the
extent required by Law, by the provisions of any governing instruments, or by
the rules of the NASD.
(b) Regulatory Approvals. All Consents of, filings and registrations with,
and notifications to, all Regulatory Authorities required for consummation of
the Merger shall have been obtained or made and shall be in full force and
effect and all waiting periods required by Law shall have expired. No Consent
obtained from any Regulatory Authority which is necessary to consummate the
transactions contemplated hereby shall be conditioned or restricted in a manner
(including requirements relating to the raising of additional capital or the
disposition of Assets) which in the reasonable judgment of the Board of
Directors of any Party would so materially adversely impact the economic or
business benefits of the transactions contemplated by this Agreement that, had
such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(c) Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those referred to
in Section 9.1 (b)) or for the preventing of any Default under any Contract or
Permit of such Party which, if not obtained or made, is reasonably likely to
have, individually or in the aggregate, an ABBEVILLE Material Adverse Effect or
a FLAG Material Adverse Effect, as applicable. No Consent so obtained which is
necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner which in the reasonable judgment of the
Board of Directors of any Party would so materially adversely impact the
economic or business benefits of the transactions contemplated by this Agreement
that, had such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(d) Legal Proceedings. No court or governmental or regulatory authority of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any Law or Order (whether temporary, preliminary or permanent) or taken
any other action which prohibits, restricts, makes illegal consummation of the
transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall be effective
under the 1933 Act, and no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and all necessary approvals under state securities
laws or the 1933 Act or 1934 Act relating to the issuance or trading of the
shares of FLAG Common Stock issuable pursuant to the Merger shall have been
received.
40
<PAGE>
(f) Nasdaq Listing. The shares of FLAG Common Stock issuable pursuant to
the Merger shall have been approved for listing on the Nasdaq National Market.
(g) Tax Matters. Each Party shall have received a written opinion of
counsel from Powell, Goldstein, Frazer & Murphy LLP, in form reasonably
satisfactory to such Parties (the "Tax Opinion"), to the effect that (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code, (ii) the exchange in the Merger of ABBEVILLE Common
Stock for FLAG Common Stock will not give rise to gain or loss to the
shareholders of ABBEVILLE with respect to such exchange (except to the extent of
any cash received), and (iii) neither ABBEVILLE nor FLAG will recognize gain or
loss as a consequence of the Merger (except for amounts resulting from any
required change in accounting methods and any income and deferred gain
recognized pursuant to Treasury regulations issued under Section 1502 of the
Internal Revenue Code). In rendering such Tax Opinion, such counsel shall be
entitled to rely upon representations of officers of ABBEVILLE and FLAG
reasonably satisfactory in form and substance to such counsel.
(h) Employment Matters. Thomas D. Sherard, Jr., Patricia P. Howie, and C.
William Knapp, Jr. shall have negotiated a mutually satisfactory employment
relationship with FLAG, and the agreements between each of Mr. Sherard, Ms.
Howie, and Mr. Knapp and ABBEVILLE concerning post termination payments
subsequent to a change in ownership shall have been terminated.
9.2 Conditions to Obligations of FLAG
-------------------------------------
The obligations of FLAG to perform this Agreement and consummate the Merger
and the other transactions contemplated hereby are subject to the satisfaction
of the following conditions, unless waived by FLAG pursuant to Section 11.6(a):
(a) Representations and Warranties. For purposes of this Section 9.2(a),
the accuracy of the representations and warranties of ABBEVILLE set forth in
this Agreement shall be assessed as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth in
Section 5.3 shall be true and correct (except for inaccuracies which are de
minimus in amount). The representations and warranties set forth in Sections
5.20 and 5.21 shall be true and correct in all material respects. There shall
not exist inaccuracies in the representations and warranties of ABBEVILLE set
forth in this Agreement (including the representations and warranties set forth
in Sections 5.3, 5.20 and 5.21) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, an ABBEVILLE Material Adverse
Effect; provided that, for purposes of this sentence only, those representations
and warranties which are qualified by references to "material" or "Material
Adverse Effect" or to the "Knowledge" of any Person shall be deemed not to
include such qualifications.
41
<PAGE>
(b) Performance of Agreements and Covenants. Each and all of the agreements
and covenants of ABBEVILLE to be performed and complied with pursuant to this
Agreement and the other agreements contemplated hereby prior to the Effective
Time shall have been duly performed and complied with in all material respects.
(c) Certificates. ABBEVILLE shall have delivered to FLAG (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief executive
officer and its secretary, to the effect that to the best of their Knowledge the
conditions set forth in Section 9.1 as relates to ABBEVILLE and in Section
9.2(a) and 9.2(b) have been satisfied; provided, however, that the
representations, warranties and covenants to which such certificate relates
shall not been deemed to have survived the Closing, and (ii) certified copies of
resolutions duly adopted by ABBEVILLE's Board of Directors and shareholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the consummation of
the transactions contemplated hereby, all in such reasonable detail as FLAG and
its counsel shall request.
(d) Opinion of Counsel. FLAG shall have received an opinion of Gerrish &
McCreary, P.C., counsel to ABBEVILLE, dated as of the Closing Date, in form
reasonably satisfactory to FLAG, as to the matters set forth in Exhibit 2.
(e) Pooling Letters. FLAG shall have received an opinion of Porter Keadle
Moore, LLP, as of the Closing Date, addressed to FLAG and in form and substance
reasonably acceptable to FLAG, to the effect that the Merger, for accounting
purposes, shall qualify for treatment as a pooling of interests.
(f) Affiliates Agreements. FLAG shall have received from each affiliate of
ABBEVILLE the affiliates letter referred to in Section 8.12 and Exhibit 1.
(g) Claims Letters. Each of the directors and officers of ABBEVILLE shall
have executed and delivered to FLAG letters in substantially the form of Exhibit
3.
(h) NonCompetition Agreements. Each member of Abbeville Bank Senior
Management and each Director of ABBEVILLE shall enter into a non-competition
agreement with FLAG.
9.3 Conditions to Obligations of ABBEVILLE.
-------------------------------------------
The obligations of ABBEVILLE to perform this Agreement and consummate the
Merger and the other transactions contemplated hereby are subject to the
satisfaction of the following conditions, unless waived by ABBEVILLE pursuant to
Section 11.6(b):
(a) Representations and Warranties. For purposes of this Section 9.3(a),
the accuracy of the representations and warranties of FLAG set forth in this
Agreement shall be assessed as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth in
Section 6.3 shall be true and correct (except for inaccuracies which are de
minimus in amount). The representations and warranties of FLAG set forth in
42
<PAGE>
Section 6.16 and 6.17 shall be true and correct in all material respects. There
shall not exist inaccuracies in the representations and warranties of FLAG set
forth in this Agreement (including the representations and warranties set forth
in Sections 6.3, 6.16 and 6.17) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a FLAG Material Adverse
Effect; provided that, for purposes of this sentence only, those representations
and warranties which are qualified by references to "material" or "Material
Adverse Effect" or to the "Knowledge" of any Person shall be deemed not to
include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the agreements
and covenants of FLAG to be performed and complied with pursuant to this
Agreement and the other agreements contemplated hereby prior to the Effective
Time shall have been duly performed and complied with in all material respects.
(c) Certificates. FLAG shall have delivered to ABBEVILLE (i) a certificate,
dated as of the Closing Date and signed on its behalf by its chief executive
officer and its chief financial officer, to the effect that to the best of their
knowledge the conditions set forth in Section 9.1 as relates to FLAG and in
Section 9.3(a) and 9.3(b) have been satisfied, provided, however, that the
representations, warranties and covenants to which such certificate relates
shall not been deemed to have survived the Closing, and (ii) certified copies of
resolutions duty adopted by FLAG's Board of Directors evidencing the taking of
all corporate action necessary to authorize the execution, delivery and
performance of this Agreement, and the consummation of the transactions
contemplated hereby, all in such reasonable detail as ABBEVILLE and its counsel
shall request.
(d) Opinion of Counsel. ABBEVILLE shall have received an opinion of Powell,
Goldstein, Frazer & Murphy LLP, counsel to FLAG, dated as of the Closing Date,
in form reasonably acceptable to ABBEVILLE, as to the matters set forth in
Exhibit 4.
ARTICLE 10.
TERMINATION
-----------
10.1 Termination.
-----------------
Notwithstanding any other provision of this Agreement, and notwithstanding
the approval of this Agreement by the shareholders of ABBEVILLE, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) By mutual consent of FLAG and ABBEVILLE; or
(b) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event of a material breach by the other
Party of any representation or warranty contained in this Agreement which cannot
be or has not been cured within 30 days after the giving of written notice to
the breaching Party of such breach and which breach is reasonably likely, in the
opinion of the non-breaching Party, to have, individually or in the aggregate,
an ABBEVILLE Material Adverse Effect or a FLAG Material Adverse Effect, as
applicable, on the breaching Party; or
43
<PAGE>
(c) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event of a material breach by the other
Party of any covenant or agreement contained in this Agreement which cannot be
or has not been cured within 30 days after the giving of written notice to the
breaching Party of such breach; or
(d) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event (i) any Consent of any Regulatory
Authority required for consummation of the Merger and the other transactions
contemplated hereby shall have been denied by final non-appealable action of
such authority or if any action taken by such authority is not appealed within
the time limit for appeal, or (ii) the shareholders of ABBEVILLE fail to vote
their approval of the matters relating to this Agreement and the transactions
contemplated hereby at the Shareholders' Meeting where such matters were
presented to such shareholders for approval and voted upon; or
(e) By either Party in the event that the Merger shall not have been
consummated by October 31, 1999, if the failure to consummate the transactions
contemplated hereby on or before such date is not caused by any breach of this
Agreement by the Party electing to terminate pursuant to this Section 10.1(e).
10.2 Effect of Termination.
---------------------------
In the event of the termination and abandonment of this Agreement pursuant
to Section 10.1, this Agreement shall become void and have no effect, except
that (i) the provisions of this Section 10.2 and Article 11 and Section 8.7(b)
shall survive any such termination and abandonment, and (ii) a termination
pursuant to Sections 10.1(b), 10.1(c) or 10.1(e) shall not relieve the breaching
Party from Liability for an uncured willful breach of a representation,
warranty, covenant, or agreement giving rise to such termination.
10.3 Non-Survival of Representations and Covenants.
---------------------------------------------------
The respective representations, warranties, obligations, covenants, and
agreements of the Parties shall not survive the Effective Time except this
Section 10.3 and Articles 1, 2, 3, 4 and 11 and Section 8.10.
ARTICLE 11.
MISCELLANEOUS
-------------
11.1 Definitions.
-----------------
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
44
<PAGE>
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"ABBEVILLE Common Stock" shall mean the $5.00 par value common stock of
ABBEVILLE.
"ABBEVILLE Disclosure Memorandum" shall mean the written information
entitled "ABBEVILLE Disclosure Memorandum" delivered prior to execution of this
Agreement to FLAG describing in reasonable detail the matters contained therein
and, with respect to each disclosure made therein, specifically referencing each
Section of this Agreement under which such disclosure is being made. Information
disclosed with respect to one Section shall not be deemed to be disclosed for
purposes of any other Section not specifically referenced with respect thereto,
unless it is clear from the disclosure of such information that it applies to
other Sections.
"ABBEVILLE Entities" shall mean, collectively, ABBEVILLE and all ABBEVILLE
Subsidiaries.
"ABBEVILLE Financial Statements" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of ABBEVILLE as of
December 31, 1998 and the related statements of income, changes in shareholders'
equity, and cash flows (including related notes and schedules, if any) for the
Fiscal year ended December 31, 1998.
"ABBEVILLE Material Adverse Effect" shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on (i) the financial position,
business, or results of operations of ABBEVILLE and its Subsidiaries, taken as a
whole, or (ii) the ability of ABBEVILLE to perform its obligations under this
Agreement or to consummate the Merger or the other transactions contemplated by
this Agreement, provided that an "ABBEVILLE Material Adverse Effect" shall not
be deemed to include the impact of (a) changes in banking and similar Laws of
general applicability or interpretations thereof by courts or governmental
authorities, (b) changes in generally accepted accounting principles or
regulatory accounting principles generally applicable to banks and their holding
companies, and (c) actions and omissions of ABBEVILLE (or any of its
Subsidiaries) taken with the prior informed written Consent of FLAG in
contemplation of the transactions contemplated hereby.
"ABBEVILLE Subsidiaries" shall mean the Subsidiaries of ABBEVILLE, which
shall include the ABBEVILLE Subsidiaries described in Section 5.4 and any
corporation, bank, savings association, or other organization acquired as a
Subsidiary of ABBEVILLE in the future and held as a Subsidiary by ABBEVILLE at
the Effective Time.
"Acquisition Proposal" with respect to a Party shall mean any tender offer
or exchange offer or any proposal for a merger, acquisition of all of the stock
or assets of, or other business combination involving the acquisition of such
Party or any of its Subsidiaries or the acquisition of a substantial equity
interest in, or a substantial portion of the assets of, such Party or any of its
Subsidiaries.
45
<PAGE>
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting interest of such Person; or (iii) any other Person for which a Person
described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits, the FLAG Disclosure Memorandum and the ABBEVILLE Disclosure Memorandum
delivered pursuant hereto and incorporated herein by reference.
"Articles of Merger" shall mean the Articles of Merger to be filed with the
Secretary of State of the State of South Carolina relating to the Merger as
contemplated by Section 1.1.
"Assets" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or contingent,
or otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, or any Affiliate of such Person and wherever located.
"Certificate of Merger" shall mean the Certificate of Merger
to be filed with the Secretary of State of the State of Georgia relating to the
Merger as contemplated by Section 1.1.
"Closing Date" shall mean the date on which the Closing occurs.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement (provided such oral
agreement is, in any one year period, in excess of $5,000 individually, or
$25,000 in the aggregate), arrangement, authorization, commitment, contract,
indenture, instrument, lease, obligation, plan, practice, restriction,
understanding, or undertaking of any kind or character, or other document to
which any Person is a party or that is binding on any Person or its capital
stock, Assets or business.
"Default" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, after
failing to cure any such breach, violation, default, contravention or conflict
within any applicable grace or cure period (ii) any occurrence of any event that
with the passage of time or the giving of notice or both would constitute a
breach or violation of, default under, contravention of, or conflict with, any
Contract, Law, Order, or Permit, or (iii) any occurrence of any event that with
or without the passage of time or the giving of notice would give rise to a
right of any Person to exercise any remedy or obtain any relief under, terminate
or revoke, suspend, cancel, or modify or change the current terms of, or
renegotiate, or to accelerate the maturity or performance of, or to increase or
impose any Liability under, any Contract, Law, Order, or Permit.
46
<PAGE>
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface, or subsurface strata) and which are
administered, interpreted, or enforced by the United States Environmental
Protection Agency and other federal, state and local agencies with jurisdiction
over, and including common law in respect of, pollution or protection of the
environment, including the Comprehensive Environmental Response Compensation and
Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and
other Laws relating to emissions, migrations, discharges, releases, or
threatened releases of any Hazardous Material, or otherwise relating to the
manufacture, processing, distribution use, treatment, storage, disposal,
generation, recycling, transport, or handling of any Hazardous Material.
"Equity Rights" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, understandings, warrants, or other
binding obligations of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of a
Person or by which a Person is or may be bound to issue additional shares of its
capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exhibits 1 through 4," inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"FLAG Capital Stock" shall mean, collectively, the FLAG Common Stock, the
FLAG Preferred Stock and any other class or series of capital stock of FLAG.
"FLAG Common Stock" shall mean the $1.00 par value common stock of FLAG.
"FLAG Disclosure Memorandum" shall mean the written information entitled
"FLAG Financial Corporation Disclosure Memorandum" delivered prior to execution
of this Agreement to ABBEVILLE describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto, unless it is clear from the
disclosure of such information that it applies to other Sections.
"FLAG Entities" shall mean, collectively, FLAG and all FLAG Subsidiaries.
47
<PAGE>
"FLAG Financial Statements" shall mean the consolidated balance sheets
(including related notes and schedules, if any) of FLAG as of December 31, 1998
and as of December 31, 1997 and 1996, and the related statements of income,
changes in shareholders' equity, and cash flows (including related notes and
schedules, if any), and for each of the three fiscal years ended December 31,
1997, 1996 and 1995, as filed by FLAG in SEC Documents.
"FLAG Material Adverse Effect" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results of
operations of FLAG and its Subsidiaries, taken as a whole, or (ii) the ability
of FLAG Entities to perform their obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this Agreement,
provided that "Material Adverse Effect" shall not be deemed to include the
impact of (a) changes in banking and similar Laws of general applicability or
interpretations thereof by courts or governmental authorities, (b) changes in
generally accepted accounting principles or regulatory accounting principles
generally applicable to savings associations, banks, and their holding
companies, and (c) actions and omissions of FLAG (or any of its Subsidiaries)
taken with the prior informed written Consent of ABBEVILLE in contemplation of
the transactions contemplated hereby.
"FLAG Preferred Stock" shall mean the shares of preferred stock of FLAG.
"FLAG Subsidiaries" shall mean the Subsidiaries of FLAG, which shall
include the FLAG Subsidiaries described in Section 6.4 and any corporation,
bank, savings association, or other organization acquired as a Subsidiary of
FLAG in the future and held as a Subsidiary by FLAG at the Effective Time.
"GAAP" shall mean generally accepted accounting principles, consistently
applied during the periods involved.
"GBCC" shall mean the Georgia Business Corporation Code.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
constituent, hazardous waste, solid waste, special waste, regulated substance,
or toxic substance (as those terms are listed, defined or regulated by any
applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants,
petroleum, petroleum products, or oil (and specifically shall include asbestos
requiring abatement. removal, or encapsulation pursuant to the requirements of
governmental authorities and any polychlorinated biphenyls).
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, and licenses, computer
software (including any source or object codes therefor or documentation
relating thereto), trade secrets, franchises, inventions, and other intellectual
property rights.
48
<PAGE>
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Knowledge" as used with respect to a FLAG Entity (including references to
being aware of a particular matter) shall mean those facts that are known or
should reasonably have been known after due inquiry by the chairman, president,
chief financial officer, chief accounting officer, chief operating officer,
chief credit officer, general counsel, any assistant or deputy general counsel,
or any senior, executive or other vice president of such FLAG Entity.
"Knowledge" as used with respect to an ABBEVILLE Entity (including references to
being aware of a particular matter) shall mean those facts that are actually
known (with no obligation of inquiry) by the president and chief executive
officer of such ABBEVILLE Entity.
"Law" shall mean any code, law (including common law), ordinance,
regulation, decision, judicial interpretation, reporting or licensing
requirement, rule, or statute applicable to a Person or its Assets, Liabilities,
or business, including those promulgated, interpreted or enforced by any
Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course of
business) of any type, whether accrued, absolute or contingent, liquidated or
unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable, (ii) for depository institution Subsidiaries of a Party, pledges to
secure deposits and other Liens incurred in the ordinary course of the banking
business, and (iii) Liens which do not materially impair the use of or title to
the Assets subject to such Lien.
"Litigation" shall mean any action, arbitration, cause of action. claim,
complaint investigation hearing, criminal prosecution, governmental or other
examination or other administrative or other proceeding relating to or affecting
a Party, its business. its Assets (including Contracts related to it), or the
transactions contemplated by this Agreement. but shall not include regular.
periodic examinations of depository institutions and their Affiliates by
Regulatory Authorities.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq National Market" shall mean the National Market System of the
National Association of Securities Dealers Automated Quotations System.
49
<PAGE>
"Operating Property" shall mean any property owned, leased, or operated by
the Party in question or by any of its Subsidiaries and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
"Participation Facility" shall mean any facility or property in which the
Party in question or any of its Subsidiaries participates in the management and,
where required by the context, said term means the owner or operator of such
facility or property, but only with respect to such facility or property.
"Party" shall mean either ABBEVILLE or FLAG, and "Parties" shall mean
ABBEVILLE and FLAG.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets, or
business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Registration Statement" shall mean the Registration Statement on Form S-4,
or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by FLAG under the 1933 Act
with respect to the shares of FLAG Common Stock to be issued to the shareholders
of ABBEVILLE in connection with the transactions contemplated by this Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the NASD, the
Federal Trade Commission, the United States Department of Justice, the Board of
the Governors of the Federal Reserve System, the Office of Thrift Supervision
(including its predecessor, the Federal Home Loan Bank Board), the Federal
Deposit Insurance Corporation, the Georgia Department of Banking and Finance,
the South Carolina Board of Financial Institutions Examining Division, and all
other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
"SCBCA" shall mean the South Carolina Business Corporation Act.
50
<PAGE>
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"Shareholders Meeting" shall mean the meeting of the shareholders of
ABBEVILLE to be held pursuant to Section 8. 3, including any adjournment or
adjournments thereof.
"Subsidiaries" shall mean all those corporations, associations, or other
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided, there
shall not be included any such entity the equity securities of which are owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves
as a general partner, (iii) in the case of a limited liability company, serves
as a managing member, or (iv) otherwise has the ability to elect a majority of
the directors, trustees or managing members thereof.
"Surviving Corporation" shall mean FLAG as the surviving corporation
resulting from the Merger.
"Tax Return" shall mean any report, return, information return, or other
information required to be supplied to a taxing authority in connection with
Taxes, including any return of an affiliated or combined or unitary group that
includes a Party or its Subsidiaries.
"Tax" or Taxes" shall mean any federal, state, county, local, or foreign
taxes, charges, fees, levies, imposts, duties, or other assessments, including
income, gross receipts, excise, employment, sales, use, transfer, license,
payroll, franchise, severance, stamp, occupation, windfall profits,
environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business
and unemployment, disability, real property, personal property, registration, ad
valorem, value added, alternative or add-on minimum, estimated, or other tax or
governmental fee of any kind whatsoever, imposed or required to be withheld by
the United States or any state, county, local or foreign government or
subdivision or agency thereof, including any interest, penalties, and additions
imposed thereon or with respect thereto.
51
<PAGE>
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
ABBEVILLE Benefit Plans Section 5.16
ABBEVILLE Contracts Section 5.17
ABBEVILLE ERISA Plan Section 5.16(a)
ABBEVILLE Pension Plan Section 5.16(a)
Allowance Section 5.9
Certificates Section 4.1
Closing Section 1.2
Effective Time Section 1.3
ERISA Affiliate Section 5.16(c)
Exchange Agent Section 4.1
Exchange Ratio Section 3.1(b)
FLAG Benefit Plans Section 6.15(a)
FLAG ERISA Plan Section 6.15(a)
FLAG Pension Plan Section 6.15(a)
FLAG SEC Reports Section 6.5(a)
Indemnified Party Section 8.14(a)
Merger Section 1.1
Tax Opinion Section 9.1(g)
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
--------------
(a) Except as otherwise provided in this Section 11.2, each Party shall
bear and pay all direct costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel.
(b) If this Agreement is terminated by FLAG pursuant to Sections 10.1(b),
(c) or [(d)(ii)], ABBEVILLE shall pay to FLAG an amount equal to FLAG's actual
out of pocket expenses incurred in connection with the transactions contemplated
by this Agreement, plus $100,000.
(c) If this Agreement is terminated by ABBEVILLE pursuant to Sections
10.1(b) or (c), FLAG shall pay to ABBEVILLE an amount equal to ABBEVILLE's
actual out of pocket expenses incurred in connection with the transactions
contemplated by this Agreement, plus $100,000.
52
<PAGE>
(d) Nothing contained in this Section 11.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a Party of the
terms of this Agreement or otherwise limit the rights of the nonbreaching Party.
11.3 Brokers and Finders.
------------------------
Except as disclosed in Section 11.3 of the FLAG Disclosure Memorandum and
the ABBEVILLE Disclosure Memorandum, each of the Parties represents and warrants
that neither it nor any of its officers, directors, employees, or Affiliates has
employed any broker or finder or incurred any Liability for any financial
advisory fees, investment bankers' fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the transactions contemplated
hereby. In the event of a claim by any broker or finder based upon his or its
representing or being retained by or allegedly representing or being retained by
ABBEVILLE or by FLAG, each of ABBEVILLE and FLAG, as the case may be, agrees to
indemnify and hold the other Party harmless of and from any Liability in respect
of any such claim.
11.4 Entire Agreement.
----------------------
Except as otherwise expressly provided herein, this Agreement (including
the documents and instruments referred to herein) constitutes the entire
agreement between the Parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with respect
thereto, written or oral. Nothing in this Agreement, expressed or implied, is
intended to confer upon any Person, other than the Parties or their respective
successors, any rights, remedies, obligations, or liabilities under or by reason
of this Agreement.
11.5 Amendments.
---------------
To the extent permitted by Law, this Agreement may be amended by a
subsequent writing signed by each of the Parties upon the approval of each of
the Parties, whether before or after shareholder approval of this Agreement has
been obtained; provided, that after any such approval by the holders of
ABBEVILLE Common Stock, there shall be made no amendment that, pursuant to the
SCBCA, requires further approval by such shareholders without the further
approval of such shareholders.
11.6 Waivers.
-------------
(a) Prior to or at the Effective Time, FLAG, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
ABBEVILLE, to waive or extend the time for the compliance or fulfillment by
ABBEVILLE of any and all of its obligations under this Agreement, and to waive
any or all of the conditions precedent to the obligations of FLAG under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of FLAG.
(b) Prior to or at the Effective Time, ABBEVILLE, acting through its Board
of Directors, chief executive officer or other authorized officer, shall have
the right to waive any Default in the performance of any term of this Agreement
by FLAG, to waive or extend the time for the compliance or fulfillment by FLAG,
of any and all of its obligations under this Agreement, and to waive any or all
of the conditions precedent to the obligations of ABBEVILLE under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of ABBEVILLE.
53
<PAGE>
(c) The failure of any Party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more instances shall be deemed to be or construed as a further or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.
11.7 Assignment.
----------------
Except as expressly contemplated hereby, neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any Party
hereto (whether by operation of Law or otherwise) without the prior written
consent of the other Party. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the Parties
and their respective successors and assigns.
11.8 Notices.
------------
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered by hand, by facsimile
transmission, by registered or certified mail, postage pre-paid, or by courier
or overnight carrier, to the persons at the addresses set forth below (or at
such other address as may be provided hereunder), and shall be deemed to have
been delivered as of the date so delivered:
ABBEVILLE: ABBEVILLE Capital Corporation
203 S. Main Street
Abbeville, SC 29620
Telecopy Number: (864) 459-9679
Attention: Thomas D. Sherard, Jr.
Copy to Counsel: Gerrish & McCreary, P.C.
700 Colonial Road, Suite 200
Memphis, TN 38124-2120
Telecopy Number: (901) 684-2339
Attention: P. Thomas Parrish, Esq.
FLAG: CITIZENS Bank
100 Union Street
P. O. Box 156
Vienna, GA 31092
Telecopy Number: (912) 268-1370
Attention: J. Daniel Speight, Jr., President
54
<PAGE>
Copy to Counsel: Powell Goldstein Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy Number: (404) 572-5958
Attention: Walter G. Moeling IV, Esq.
11.9 Governing Law.
-------------------
This Agreement shall be governed by and construed in accordance with the
Laws of the State of Georgia, without regard to any applicable conflicts of
Laws.
11.10 Counterparts.
-------------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
1.11 Captions, Articles and Sections.
-------------------------------------
The captions contained in this Agreement are for reference purposes only
and are not part of this Agreement. Unless otherwise indicated, all references
to particular Articles or Sections shall mean and refer to the referenced
Articles and Sections of this Agreement.
11.12 Interpretations.
----------------------
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against any party, whether under any rule of construction
or otherwise. No party to this Agreement shall be considered the draftsman. The
parties acknowledge and agree that this Agreement has been reviewed, negotiated,
and accepted by all parties and their attorneys and shall be construed and
interpreted according to the ordinary meaning of the words used so as fairly to
accomplish the purposes and intentions of all parties hereto.
11.13 Enforcement of Agreement.
-------------------------------
The Parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement was not performed in accordance
with its specific terms or was otherwise breached. It is accordingly agreed that
the Parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
11.14 Severability.
-------------------
Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
[SIGNATURES APPEAR ON NEXT PAGE]
55
<PAGE>
[SIGNATURES TO AGREEMENT AND PLAN OF MERGER]
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
FLAG FINANCIAL CORPORATION
By: /S/J. Daniel Speight, Jr.
---------------------------------------
J. Daniel Speight, Jr.
President & Chief Executive Officer
ABBEVILLE CAPITAL CORPORATION
By: /s/ Thomas D. Sherard, Jr.
---------------------------------------
Thomas D. Sherard, Jr.
President
<PAGE>
<PAGE>
EXHIBIT 1
AFFILIATE AGREEMENT
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
Attention: J. Daniel Speight, Jr., President and Chief Executive Officer
Gentlemen:
The undersigned is a shareholder of Abbeville Capital Corporation
("ABBEVILLE"), a South Carolina Corporation, and will become a shareholder of
FLAG Financial Corporation ("FLAG"), a Georgia corporation, pursuant to the
transactions described in the Agreement and Plan of Merger, dated as of
________________ ___, 1999 (the "Agreement"), by and between FLAG, and
ABBEVILLE. Under the terms of the Agreement, ABBEVILLE will be merged with and
into FLAG (the "Merger"), and the shares of the $5.00 par value common stock of
ABBEVILLE ("ABBEVILLE Common Stock") will be converted into and exchanged for
shares of the $1.00 par value common stock of FLAG ("FLAG Common Stock"). This
Affiliate Agreement represents an agreement between the undersigned and FLAG
regarding certain rights and obligations of the undersigned in connection with
the shares of FLAG to be received by the undersigned as a result of the Merger.
In consideration of the Merger and the mutual covenants contained herein,
the undersigned and FLAG hereby agree as follows:
1. Affiliate Status. The undersigned understands and agrees that as to
ABBEVILLE he is an "affiliate" under Rule 145(c) as defined in Rule 405 of the
Rules and Regulations of the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933, as amended ("1933 Act"), and the undersigned
anticipates that he will be such an "affiliate" at the time of the Merger.
2. Initial Restrictions on Disposition. The undersigned agrees that he will
not sell, transfer or otherwise dispose of his interests in, or reduce his risk
relative to, any of the shares of FLAG Common Stock into which his shares of
ABBEVILLE Common Stock are converted upon consummation of the Merger until such
time as FLAG notifies the undersigned that the requirements of SEC Accounting
Series Release Nos. 130 and 135 ("ASR 130 and 135") have been met except that
transfers may be made in compliance with Staff Accounting Bulletin No. 76 issued
by the SEC. The undersigned understands that ASR 130 and 135 relate to
publication of financial results of post-Merger combined operations of FLAG and
ABBEVILLE. FLAG agrees that it will publish such results within 45 days after
the end of the first fiscal quarter of FLAG containing the required period of
post-Merger combined operations and that it will notify the undersigned promptly
following such publication. 3. Covenants and Warranties of Undersigned. The
undersigned represents, warrants and agrees that:
<PAGE>
(a) At any meeting of shareholders of ABBEVILLE called to vote upon
the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with
respect to the Merger and the Merger Agreement is sought (the
"Shareholders' Meeting"), the undersigned shall, to the extent that the
Shareholder has the power, vote (or cause to be voted) the Shareholder's
Shares in favor of the Merger, the execution and delivery by ABBEVILLE of
the Merger Agreement, and the approval of the terms thereof and each of the
other transactions contemplated by the Merger Agreement, provided that the
terms of the Merger Agreement shall not have been amended to reduce the
consideration payable in the Merger to a lesser amount of FLAG Common Stock
or otherwise to materially and adversely impair the Shareholder's rights or
increase the Shareholder's obligations thereunder. The undersigned hereby
waives any rights of appraisal, or rights to dissent from the Merger, that
the undersigned may have.
(b) The FLAG Common Stock received by the undersigned as a result of
the Merger will be taken for his own account and not for others, directly
or indirectly, in whole or in part.
(c) FLAG has informed the undersigned that any distribution by the
undersigned of FLAG Common Stock has not been registered under the 1933 Act
and that shares of FLAG Common Stock received pursuant to the Merger can
only be sold by the undersigned (1) following registration under the 1933
Act, or (2) in conformity with the volume and other requirements of Rule
145(d) promulgated by the SEC as the same now exist or may hereafter be
amended, or (3) to the extent some other exemption from registration under
the 1933 Act might be available. The undersigned understands that FLAG is
under no obligation to file a registration statement with the SEC covering
the disposition of the undersigned's shares of FLAG Common Stock or to take
any other action necessary to make compliance with an exemption from such
registration available.
(d) The undersigned will, and will cause each of the other parties
whose shares are deemed to be beneficially owned by the undersigned
pursuant to Section 9 hereof, have all shares of ABBEVILLE Common Stock
beneficially owned by the undersigned registered in the name of the
undersigned or such parties, as applicable, prior to the effective date of
the Merger and not in the name of any bank, broker-dealer, nominee or
clearinghouse.
(e) During the thirty (30) days immediately preceding the Effective
Time of the Merger, the undersigned has not sold, transferred, or otherwise
disposed of his interests in, or reduced his risk relative to, any of the
shares of ABBEVILLE Common Stock beneficially owned by the undersigned as
of the record date for determination of shareholders entitled to vote at
the Shareholders' Meeting of ABBEVILLE held to approve the Merger.
(f) The undersigned is aware that FLAG intends to treat the Merger as
a tax-free reorganization under Section 368 of the Code for federal income
tax purposes. The undersigned agrees to treat the transaction in the same
manner as FLAG for federal income tax purposes.
Exhibit 1 - Affiliate Agreement - Page 2
<PAGE>
4. Restrictions on Transfer. The undersigned understands and agrees that
stop-transfer instructions with respect to the shares of FLAG Common Stock
received by the undersigned pursuant to the Merger will be given to FLAG's
Transfer Agent and that there will be placed on the certificates for such
shares, or shares issued in substitution thereof, a legend stating in substance:
The shares represented by this certificate were issued
pursuant to a business combination which is accounted for as a "pooling
of interests" and may not be sold, nor may the owner thereof reduce his
risks relative thereto in any way, until such time as FLAG Financial
Corporation ("FLAG") has published the financial results covering at
least 30 days of combined operations after the effective date of the
merger through which the business combination was effected. In
addition, the shares represented by this certificate may not be sold,
transferred or otherwise disposed of except or unless (1) covered by an
effective registration statement under the Securities Act of 1933, as
amended, (2) in accordance with (i) Rule 145(d) (in the case of shares
issued to an individual who is an affiliate of FLAG) of the Rules and
Regulations of such Act, or (3) in accordance with a legal opinion
satisfactory to counsel for FLAG that such sale or transfer is
otherwise exempt from the registration requirements of such Act.
Such legend will also be placed on any certificate representing FLAG
securities issued subsequent to the original issuance of FLAG Common Stock
pursuant to the Merger as a result of any transfer of such shares or any stock
dividend, stock split, or other recapitalization as long as the FLAG Common
Stock issued to the undersigned pursuant to the Merger has not been transferred
in such manner as to justify the removal of the legend therefrom. Upon the
request of the undersigned, FLAG shall cause the certificates representing the
shares of FLAG Common Stock issued to the undersigned in connection with the
Merger to be reissued free of any legend relating to restrictions on transfer by
virtue of ASR 130 and 135 as soon as practicable after the requirements of ASR
130 and 135 have been met. In addition, if the provisions of Rules 144 and 145
are amended to eliminate restrictions applicable to the FLAG Common Stock
received by the undersigned pursuant to the Merger, or at the expiration of the
restrictive period set forth in Rule 145(d), FLAG, upon the request of the
undersigned, will cause the certificates representing the shares of FLAG Common
Stock issued to the undersigned in connection with the Merger to be reissued
free of any legend relating to the restrictions set forth in Rules 144 and
145(d) upon receipt by FLAG of an opinion of its counsel to the effect that such
legend may be removed.
5. Understanding of Restrictions on Disposition. The undersigned has
carefully read the Agreement and this Affiliate Agreement and has discussed
their requirements and impact upon his ability to sell, transfer or otherwise
dispose of the shares of FLAG Common Stock received by the undersigned, to the
extent he believes necessary, with his counsel or counsel for ABBEVILLE.
6. Filing of Reports by FLAG. FLAG agrees, for a period of three years
after the effective date of the Merger, to file on a timely basis all reports
required to be filed by it pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended, so that the public information provisions of Rule 145(d)
promulgated by the SEC as the same are presently in effect will be available to
the undersigned in the event the undersigned desires to transfer any shares of
FLAG Common Stock issued to the undersigned pursuant to the Merger.
Exhibit 1 - Affiliate Agreement - Page 3
<PAGE>
7. Transfer Under Rule 145(d). If the undersigned desires to sell or
otherwise transfer the shares of FLAG Common Stock received by him in connection
with the Merger at any time during the restrictive period set forth in Rule
145(d), the undersigned will provide the necessary representation letter to the
transfer agent for FLAG Common Stock, together with such additional information
as the transfer agent may reasonably request. If FLAG's counsel concludes that
such proposed sale or transfer complies with the requirements of Rule 145(d),
FLAG shall cause such counsel to provide such opinions as may be necessary to
FLAG's transfer agent so that the undersigned may complete the proposed sale or
transfer.
8. Certain Actions. The undersigned covenants and agrees with FLAG that,
for a period of two (2) years after the effective time of the Merger, the
undersigned shall not, without the prior written consent of FLAG, directly or
indirectly serve as a consultant to, serve as a management official of, or be or
become a major shareholder of any financial institution having an office in
Abbeville County. It is expressly understood that the covenants contained in
this paragraph 8 do not apply to (i) "management official" positions which the
undersigned holds with financial institutions (other than FLAG, ABBEVILLE, and
their subsidiaries) as of the date of this Agreement, (ii) securities holdings
which cause the undersigned to be deemed a major shareholder of a financial
institution (other than FLAG, ABBEVILLE, and their subsidiaries) as of the date
of this Agreement, or (iii) advisory relationships with a financial institution
which the undersigned has as of the date of this Agreement or may have after the
date hereof solely in the capacity as legal counsel. For the purposes of the
covenants contained in this paragraph 8, the following terms shall have the
following respective meanings:
(a) The term "management official" shall refer to service of any type
which gives the undersigned the authority to participate, directly or
indirectly, in policy-making functions of the financial institution. This
includes, but is not limited to, service as an organizer, officer,
director, or advisory director of the financial institution. It is
expressly understood that the undersigned may be deemed a management
official of the financial institution whether or not he holds any official,
elected, or appointed position with such financial institution.
(b) The term "financial institution" shall refer to any bank, bank
holding company, savings and loan association, savings and loan holding
company, banking-related company, or any other similar financial
institution which engages in the business of accepting deposits or making
loans or which owns or controls a company which engages in the business of
accepting deposits or making loans. It is expressly understood that the
term "financial institution" shall include any financial institution as
defined herein that, after the date of this Agreement, makes application
for an appropriate federal or state regulatory authority for approval to
organize.
Exhibit 1 - Affiliate Agreement - Page 4
<PAGE>
(c) The term "major shareholder" shall refer to the beneficial
ownership of five percent (5%) or more of any class of voting securities or
the ownership of five percent (5%) of the total equity interest in such
company, however denominated.
The provisions of this paragraph 8 shall be of no further force and effect
if the undersigned is not offered employment as a director of FLAG or any of its
subsidiaries (to include the subsidiaries of ABBEVILLE acquired at the Effective
Time of the Merger) at the Effective Time of the Merger or, if the undersigned
is so employed, the undersigned's employment is terminated by FLAG after the
Effective Time of the Merger.
9. Acknowledgments. The undersigned recognizes and agrees that the
foregoing provisions also apply to all shares of the capital stock of ABBEVILLE
and FLAG that are deemed to be beneficially owned by the undersigned pursuant to
applicable federal securities laws, which the undersigned agrees may include,
without limitation, shares owned or held in the name of (i) the undersigned's
spouse, (ii) any relative of the undersigned or of the undersigned's spouse who
has the same home as the undersigned, (iii) any trust or estate in which the
undersigned, the undersigned's spouse and any such relative collectively own at
least a ten percent (10%) beneficial interest or of which any of the foregoing
serves as trustee, executor, or in any similar capacity, and (iv) any
corporation or other organization in which the undersigned, the undersigned's
spouse and any such relative collectively own at least ten percent (10%) of any
class of equity securities or of the equity interest. The undersigned further
recognizes that, in the event that the undersigned is a director or officer of
FLAG or becomes a director or officer of FLAG upon consummation of the Merger,
among other things, any sale of FLAG Common Stock by the undersigned within a
period of less than six (6) months following the Effective Time of the Merger
may subject the undersigned to liability pursuant to Section 16(b) of the
Securities Exchange Act of 1934, as amended.
10. Miscellaneous. This Affiliate Agreement is the complete agreement
between FLAG and the undersigned concerning the subject matter hereof. Any
notice required to be sent to any party hereunder shall be sent by registered or
certified mail, return receipt requested, using the addresses set forth herein
or such other address as shall be furnished in writing by the parties. This
Affiliate Agreement shall be governed by the laws of the State of Georgia.
SIGNATURES CONTAINED ON NEXT PAGE
Exhibit 1 - Affiliate Agreement - Page5
<PAGE>
This Affiliate Agreement is executed as of the _________ day of
________________, 1999.
Very truly yours,
---------------------------------
Signature
---------------------------------
Print Name
Address:-------------------------
---------------------------------
---------------------------------
[add below the signatures of all registered
owners of shares deemed beneficially owned
by the affiliate]
--------------------------------
Name
--------------------------------
Name
--------------------------------
Name
AGREED TO AND ACCEPTED as of
the _______ day of _____________________, 1999.
FLAG FINANCIAL CORPORATION
By:--------------------------------
Exhibit 1 - Affiliate Agreement - Page 6
<PAGE>
Exhibit 2
MATTERS AS TO WHICH GERRISH & McCREARY, P.C. WILL OPINE
1. Abbeville Capital Corporation. ("ABBEVILLE") is a corporation duly
organized, validly existing and in good standing under the laws of the
State of South Carolina with full corporate power and authority to carry on
the business in which it is engaged, and to own and use its Assets.
2. The execution and delivery of the Agreement and compliance with its terms
do not and will not violate or contravene any provision of the Articles of
Incorporation or Bylaws of ABBEVILLE or, to our knowledge but without any
independent investigation, result in any conflict with, breach of, or
default or acceleration under any Contract disclosed in the Agreement, Law,
Order or Permit (subject to the approval of Regulatory Authorities) to
which ABBEVILLE is a party or by which ABBEVILLE is bound.
3. The Agreement has been duly and validly executed and delivered by ABBEVILLE
and, assuming valid authorization, execution and delivery by FLAG,
constitutes a valid and binding agreement of ABBEVILLE enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; provided, however, that we express no opinion as to the
availability of the equitable remedy of specific performance.
4. The authorized capital stock of ABBEVILLE consists of 1,000,000 shares of
the ABBEVILLE Common Stock, of which 237,415 shares were issued and
outstanding as of _______________________, 1999. The shares of the
ABBEVILLE Common Stock that are issued and outstanding were not issued in
violation of any statutory preemptive rights of shareholders, were duly
issued, and are fully paid and nonassessable under the SCBCA. To our
knowledge, except as set forth above, or as disclosed in Section 5.3 of the
ABBEVILLE Disclosure Memorandum, as of ______________, 1999, there were no
shares of capital stock or other equity securities of ABBEVILLE outstanding
and no outstanding Equity Rights relating to the capital stock of
ABBEVILLE.
<PAGE>
EXHIBIT 3
____________________, 1999
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
RE: Abbeville Capital Corporation ("ABBEVILLE")
Abbeville, South Carolina
Ladies and Gentlemen:
This letter is delivered pursuant to Section 9.2(g) of the Agreement and
Plan of Merger, dated as of ____________ __, 1999, by and between FLAG Financial
Corporation and ABBEVILLE.
In my capacity as an officer or a director of ABBEVILLE, and as of the date
of this letter, I do not, to the best of my knowledge, have any claims, and I am
not aware of any facts or circumstances that I believe are likely to give rise
to any claim, for indemnification under ABBEVILLE's Articles of Incorporation or
Bylaws as existing on the date hereof or as may be afforded by the laws of the
State of South Carolina or the United States.
Very truly yours,
--------------------------------------------
Signature of Officer or Director
--------------------------------------------
Name of Officer or Director
--------------------------------------------
Position at ABBEVILLE
<PAGE>
Exhibit 4
MATTERS AS TO WHICH POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
WILL OPINE
1. FLAG Financial Corporation ("FLAG") is a corporation duly organized,
validly existing and in good standing under the laws of the State of Georgia
with full corporate power and authority to carry on the business in which it is
engaged, and to own and use its Assets.
2. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the Articles of
Incorporation or Bylaws of FLAG or, to our knowledge but without any independent
investigation, result in any conflict with, breach of, or default under any
Contract disclosed in the Agreement, Law, Order or Permit (subject to the
approval of Regulatory Authorities) to which FLAG is a party or by which FLAG is
bound.
3. The Agreement has been duly and validly executed and delivered by FLAG,
and assuming valid authorization, execution and delivery by Abbeville Capital
Corporation., constitutes a valid and binding agreement of FLAG enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or similar laws affecting creditors'
rights generally, provided, however, that we express no opinion as to the
availability of the equitable remedy of specific performance.
4. The authorized capital stock of FLAG consists of 20,000,000 shares of
FLAG Common Stock, of which 6,561,879 shares are issued and outstanding as of
____________ 1999, and (ii) 10,000,000 shares of FLAG Preferred Stock, of which
no shares are issued and outstanding as of _____________________ 1999. The
shares of FLAG Common Stock that are issued and outstanding were not issued in
violation of any statutory preemptive rights of shareholders, were duly issued
and are fully paid and nonassessable under the Georgia Business Corporation
Code. To our knowledge, except as set forth above, or as disclosed in Section
6.3 of the FLAG Disclosure Memorandum, as of _________________________, 1999,
there were no shares of capital stock or other equity securities of FLAG
outstanding and no outstanding Equity Rights relating to the capital stock of
FLAG. The shares of FLAG Common Stock to be issued to the shareholders of
Abbeville Capital Corporation as contemplated by the Agreement have been
registered under the Securities Act of 1933, as amended, and when properly
issued and delivered following consummation of the Merger will be fully paid and
non-assessable under the Georgia Business Corporation Code.
<PAGE>
EXHIBIT 5
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of July 22, 1999 (the "Agreement"), by and
between Abbeville Capital Corporation, a South Carolina corporation ("Issuer"),
and FLAG Financial Corporation, a Georgia corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into that certain Agreement and
Plan of Merger, dated as of March 31, 1999 (the "Merger Agreement"), providing
for, among other things, the merger of Issuer with and into Grantee with Grantee
as the surviving entity; and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has required that Issuer agree, and Issuer has agreed, to
grant Grantee the option (as defined below); and
WHEREAS, as a condition and inducement to Grantee's execution,
contemporaneously with Grantee's execution of this Agreement, of the July 22,
1999 Amendment to the Merger Agreement (the "Amendment");
NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants, and agreements set forth herein and in the Merger
Agreement and the Amendment thereto, and intending to be legally bound hereby,
Issuer and Grantee agree as follows:
1. Defined Terms. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.
2. Grant of Option. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 47,285 shares (as adjusted as set forth herein) (the "Option Shares,"
which shall include the Option Shares before and after any transfer of such
Option Shares) of Common Stock, par value $1.00 per share ("Issuer Common
Stock"), of Issuer at a purchase price per Option Share (the "Purchase Price")
equal to $24.00.
3. Exercise of Option.
(a) Provided that (i) Grantee shall not be in material breach of the
agreements or covenants contained in this Agreement or the Merger
Agreement, and (ii) no preliminary or permanent injunction or other order
against the delivery of shares covered by the Option issued by any court of
competent jurisdiction in the United States shall be in effect, Grantee may
exercise the Option, in whole or in part, at any time and from time to time
following the occurrence of a Purchase Event, provided that the Option
shall terminate and be of no further force and effect upon the earliest to
occur of (A) the Effective Time, (B) termination of the Merger Agreement in
accordance with the terms thereof prior to the occurrence of a Purchase
Event or a Preliminary Purchase Event (other than a termination of the
Merger Agreement by Grantee pursuant to Section 10.1(b) (but only if such
termination was a result of a willful breach by Issuer) or by Grantee
pursuant to Section 10.1(c) thereof or by Grantee and Issuer pursuant to
Section 10.1(a) thereof if Grantee shall at that time have been entitled to
terminate the Merger Agreement pursuant to Section 10.1(b) (but only if
such termination was a result of a willful breach by Issuer) or Section
<PAGE>
10.1(c) thereof (each a "Default Termination")), (C) 6 months after the
termination of the Merger Agreement by Grantee pursuant to a Default
Termination, and (D) 6 months after termination of the Merger Agreement
(other than pursuant to a Default Termination) following the occurrence of
a Purchase Event or a Preliminary Purchase Event; provided, further, that
any purchase of shares upon exercise of the Option shall be subject to
compliance with applicable law, including, without limitation, the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The rights set
forth in Section 8 shall terminate when the right to exercise the Option
terminates (other than as a result of a complete exercise of the Option) as
set forth herein.
(b) As used herein, a "Purchase Event" means any of the following
events subsequent to the date of this Agreement:
(i) without Grantee's prior written consent, Issuer shall have
authorized, recommended, publicly proposed, or publicly announced an
intention to authorize, recommend, or propose, or entered into an
agreement with any person (other than Grantee) to effect an
Acquisition Transaction (as defined below). As used herein, the term
Acquisition Transaction shall mean (A) a merger, consolidation, or
similar transaction involving Issuer or any of its Subsidiaries (other
than transactions solely between Issuer's Subsidiaries), (B) except as
permitted pursuant to Section 7.2 of the Merger Agreement, the
disposition, by sale, lease, exchange, or otherwise, of Assets of
Issuer or any of its Subsidiaries representing in either case 20% or
more of the consolidated Assets of Issuer and its Subsidiaries, or (C)
the issuance, sale, or other disposition of (including by way of
merger, consolidation, share exchange, or any similar transaction)
securities representing 20% or more of the voting power of Issuer or
any of its Subsidiaries (any of the foregoing an "Acquisition
Transaction"); or
(ii) any person (other than Grantee) shall have acquired
beneficial ownership (as such term is defined in Rule 13d-3
promulgated under the Exchange Act) of or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under
the Exchange Act) shall have been formed which beneficially owns or
has the right to acquire beneficial ownership of, 20% or more of the
then-outstanding shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee) shall have commenced (as such
term is defined in Rule 14d-2 under the Exchange Act), or shall have
filed a registration statement under the Securities Act with respect
to, a tender offer or exchange offer to purchase any shares of Issuer
Common Stock such that, upon consummation of such offer, such person
would own or control 15% or more of the then outstanding shares of
Issuer Common Stock (such an offer being referred to herein as a
"Tender Offer" or an "Exchange Offer," respectively); or
2
<PAGE>
(ii) the holders of Issuer Common Stock shall not have approved
the Merger Agreement at the meeting of such stockholders held for the
purpose of voting on the Merger Agreement, such meeting shall not have
been held or shall have been canceled prior to termination of the
Merger Agreement, or Issuer's Board of Directors shall have withdrawn
or modified in a manner adverse to Grantee the recommendation of
Issuer's Board of Directors with respect to the Merger Agreement, in
each case after it shall have been publicly announced, on or after
July 22, 1999, that any person (other than Grantee) shall have (A)
made, or disclosed an intention to make, a proposal to engage in an
Acquisition Transaction, (B) commenced a Tender Offer or filed a
registration statement under the Securities Act with respect to an
Exchange Offer, or (C) filed an application (or given a notice),
whether in draft or final form, under the BHC Act, the Bank Merger
Act, or the Change in Bank Control Act of 1978, for approval to engage
in an Acquisition Transaction.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(d) In the event Grantee wishes to exercise the Option, it shall send
to Issuer a written notice (the date of which being herein referred to as
the "Notice Date') specifying (i) the total number of Option Shares it
intends to purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 15 business days from the
Notice Date for the closing (the "Closing") of such purchase (the "Closing
Date"). If prior notification to or approval of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") or any other
regulatory authority is required in connection with such purchase, Issuer
shall cooperate with Grantee in the filing of the required notice or
application for approval and the obtaining of such approval and the Closing
shall occur immediately following such regulatory approvals (and any
mandatory waiting periods).
4. Payment and Delivery of Certificates.
(a) On each Closing Date, Grantee shall (i) pay to Issuer, in
immediately available funds by wire transfer to a bank account designated
by Issuer, an amount equal to the Purchase Price multiplied by the number
of Option Shares to be purchased on such Closing Date, and (ii) present and
surrender this Agreement to the Issuer at the address of the Issuer
specified in Section 13(f).
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section
4(a), (i) Issuer shall deliver to Grantee (A) a certificate or certificates
representing the Option Shares to be purchased at such Closing, which
Option Shares shall be free and clear of all liens, claims, charges, and
encumbrances of any kind whatsoever and subject to no pre-emptive rights,
and (B) if the Option is exercised in part only, an executed new agreement
with the same terms as this Agreement evidencing the right to purchase the
3
<PAGE>
balance of the shares of Issuer Common Stock purchasable hereunder, and
Grantee shall deliver to Issuer a letter agreeing that Grantee shall not
offer to sell or otherwise dispose of such Option Shares in violation of
applicable federal and state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable
law, certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as
follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT
TO RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF JULY
22, 1999. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE HOLDER
HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST
THEREFOR.
It is understood and agreed that the above legend shall be removed by
delivery of substitute certificate(s) without such legend if Grantee shall
have delivered to Issuer a copy of a letter from the staff of the SEC, or
an opinion of counsel in form and substance reasonably satisfactory to
Issuer and its counsel, to the effect that such legend is not required for
purposes of the Securities Act.
5. Representations and Warranties of Issuer. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals referred to herein, to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the
part of Issuer. This Agreement has been duly executed and delivered by
Issuer.
(b) Issuer has taken all necessary corporate and other action to
authorize and reserve and to permit it to issue, and, at all times from the
date hereof until the obligation to deliver Issuer Common Stock upon the
exercise of the Option terminates, will have reserved for issuance, upon
exercise of the Option, the number of shares of Issuer Common Stock
necessary for Grantee to exercise the Option, and Issuer will take all
necessary corporate action to authorize and reserve for issuance all
additional shares of Issuer Common Stock or other securities which may be
issued pursuant to Section 7 upon exercise of the Option. The shares of
Issuer Common Stock to be issued upon due exercise of the Option, including
all additional shares of Issuer Common Stock or other securities which may
be issuable pursuant to Section 7, upon issuance pursuant hereto, shall be
duly and validly issued, fully paid, and nonassessable, and shall be
delivered free and clear of all liens, claims, charges, and encumbrances of
any kind or nature whatsoever, including any preemptive rights of any
stockholder of Issuer.
4
<PAGE>
6. Representations and Warrants of Grantee. Grantee hereby represents and
warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by an necessary corporate
action on the part of Grantee. This Agreement has been duly executed and
delivered by Grantee.
(b) This Option is not being, and any Option Shares or other
securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the Securities Laws.
7. Adjustment upon Changes in Capitalization, etc.
(a) In the event of any change in Issuer Common Stock by reason of a
stock dividend, stock split, split-up, recapitalization, combination,
exchange of shares, or similar transaction, the type and number of shares
or securities subject to the Option, and the Purchase Price therefor, shall
be adjusted appropriately, and proper provision shall be made in the
agreements governing such transaction so that Grantee shall receive, upon
exercise of the Option, the number and class of shares or other securities
or property that Grantee would have received in respect of Issuer Common
Stock if the Option had been exercised immediately prior to such event, or
the record date therefor, as applicable. If any additional shares of Issuer
Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in the first sentence of this Section 7(a)),
the number of shares of Issuer Common Stock subject to the Option shall be
adjusted so that, after such issuance, it, together with any shares of
Issuer Common Stock previously issued pursuant hereto, equals 19.9% of the
number of shares of Issuer Common Stock then issued and outstanding,
without giving effect to any shares subject to or issued pursuant to the
Option.
(b) In the event that Issuer shall enter in an agreement: (i) to
consolidate with or merge into any person, other than Grantee, and shall
not be the continuing or surviving corporation of such consolidation or
merger; (ii) to permit any person, other than Grantee, to merge into Issuer
and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Issuer Common
Stock shall be changed into or exchanged for stock or other securities of
Issuer or any other person or cash or any other property or the outstanding
shares of Issuer Common Stock immediately prior to such merger shall after
such merger represent less than 50% of the outstanding shares and share
equivalents of the merged company; or (iiii) to sell or otherwise transfer
all or substantially all of its Assets to any person, other than Grantee or
one of its Subsidiaries, then, and in each such case, the agreement
governing such transaction shall make proper provisions so that the Option
shall, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option
5
<PAGE>
(the "Substitute Option"), at the election of Grantee, of either (x) the
Acquiring Corporation (as defined below), (y) any person that controls the
Acquiring Corporation, or (z) in the case of a merger described in clause
(ii), the Issuer (in each case, such person being referred to as the
"Substitute Option Issuer").
(c) The Substitute Option shall have the same terms as the Option,
provided that, if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as
possible and in no event less advantageous to Grantee. The Substitute
Option Issuer shall also enter into an agreement with the then-holder or
holders of the Substitute Option in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of the Substitute Common Stock (as hereinafter defined) as is equal
to the Assigned Value (as hereinafter defined) multiplied by the number of
shares of the Issuer Common Stock for which the Option was theretofore
exercisable, divided by the Average Price (as hereinafter defined). The
exercise price of the Substitute Option per share of the Substitute Common
Stock (the "Substitute Purchase Price") shall then be equal to the Purchase
Price multiplied by a fraction in which the numerator is the number of
shares of the Issuer Common Stock for which the Option was theretofore
exercisable and the denominator is the number of shares for which the
Substitute Option is exercisable.
(e) The following terms have the meaning indicated:
(i) "Acquiring Corporation" shall mean (x) the continuing or
surviving corporation of a consolidation or merger with Issuer (if
other than Issuer), (y) Issuer in a merger in which Issuer is the
continuing or surviving person, and (z) the transferee of all or any
substantial part of the Issuer's Assets (or the Assets of its
Subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock issued
by the Substitute Option Issuer upon exercise of the Substitute
Option.
(iii) "Assigned Value" shall mean the highest of (x) the price
per share of the Issuer Common Stock at which a Tender Offer or
Exchange Offer therefor has been made by any person (other than
Grantee), (y) the price per share of the Issuer Common Stock to be
paid by any person (other than the Grantee) pursuant to an agreement
with Issuer, and (z) the highest closing sales price per share of
Issuer Common Stock quoted on the Nasdaq National Market (or if Issuer
Common Stock is not quoted on the Nasdaq National Market, the highest
bid price per share on any day as quoted on the principal trading
market or securities exchange on which such shares are traded as
reported by a recognized source chosen by Grantee) within the
six-month period immediately preceding the agreement, provided, that
in the event of a sale of less than all of Issuer's assets, the
Assigned Value shall be the sum of the price paid in such sale for
such Assets and the current market value of the remaining assets of
6
<PAGE>
Issuer as determined by a nationally recognized investment banking
firm selected by Grantee (or by a majority in interest of the Grantees
if there shall be more than one Grantee (a "Grantee Majority")),
divided by the number of shares of the Issuer Common Stock outstanding
at the time of such sale. In the event that an exchange offer is made
for the Issuer Common Stock or an agreement is entered into for a
merger or consolidation involving consideration other than cash, the
value of the securities or other property issuable or deliverable in
exchange for the Issuer Common Stock shall be determined by a
nationally recognized investment banking firm mutually selected by
Grantee and Issuer (or if applicable, Acquiring Corporation), provided
that if a mutual selection cannot be made as to such investment
banking firm it shall be selected by Grantee. (If there shall be more
than one Grantee, any such selection shall be made by a Grantee
Majority.)
(iv) "Average Price" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately
preceding the consolidation, merger, or sale in question, but in no
event higher than the closing price of the shares of the Substitute
Common Stock on the day preceding such consolidation, merger, or sale;
provided that if Issuer is the Issuer of the Substitute Option, the
Average Price shall be computed with respect to a share of common
stock issued by Issuer, the person merging into Issuer or by any
company which controls or is controlled by such merger person, as
Grantee may elect.
(f) In no event pursuant to any of the foregoing paragraphs shall the
Substitute Option be exercisable for more than 19.9% of the aggregate of
the shares of the Substitute Common Stock outstanding prior to exercise of
the Substitute Option. In the event that the Substitute Option would be
exercisable for more than 19.9% of the aggregate of the shares of
Substitute Common Stock but for this clause (f), the Substitute Option
Issuer shall make a cash payment to Grantee equal to the excess of (i) the
value of the Substitute Option without giving effect to the limitation in
this clause (f) over (ii) the value of the Substitute Option after giving
effect to the limitation in this clause (f). This difference in value shall
be determined by a nationally recognized investment banking firm selected
by Grantee (or a Grantee Majority).
(g) Issuer shall not enter into any transaction described in
subsection (b) of this Section 7 unless the Acquiring Corporation and any
person that controls the Acquiring Corporation assume in writing all the
obligations of Issuer hereunder and take all other actions that may be
necessary so that the provisions of this Section 7 are given full force and
effect (including, without limitation, any action that may be necessary so
that the shares of Substitute Common Stock are in no way distinguishable
from or have lesser economic value than other shares of common stock issued
by the Substitute Option Issuer).
(h) The provisions of Sections 8, 9, 10 and 11 shall apply, with
appropriate adjustments, to any securities for which the Option becomes
exercisable pursuant to this Section 7 and, as applicable, references in
such sections to "Issuer," "Option," "Purchase Price," and "Issuer Common
Stock" shall be deemed to be references to "Substitute Option Issuer,"
"Substitute Option," "Substitute Purchase Price," and "Substitute Common
Stock," respectively.
7
<PAGE>
8. Repurchase at the Option of Grantee.
(a) Subject to the last sentence of Section 3(a), at the request of
Grantee at any time commencing upon the first occurrence of a Repurchase
Event (as defined in Section 8(d)) and ending 12 months immediately
thereafter, Issuer shall repurchase from Grantee the Option and all shares
of Issuer Common Stock purchased by Grantee pursuant hereto with respect to
which Grantee then has beneficial ownership. The date on which Grantee
exercises its rights under this Section 8 is referred to as the "Request
Date." Such repurchase shall be at an aggregate price (the "Section 8
Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Grantee for any shares
of Issuer Common Stock acquired pursuant to the Option with respect to
which Grantee then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined
below) for each share of Issuer Common Stock over (y) the Purchase
Price (subject to adjustment pursuant to Section 7), multiplied by the
number of shares of Issuer Common Stock with respect to which the
Option has not been exercised; and
(iii) the excess, if any, of the Applicable Price over the
Purchase Price (subject to adjustment pursuant to Section 7) paid (or,
in the case of Option Shares with respect to which the Option has been
exercised but the Closing Date has not occurred, payable) by Grantee
for each share of Issuer Common Stock with respect to which the Option
has been exercised and with respect to which Grantee then has
beneficial ownership, multiplied by the number of such shares.
(b) If Grantee exercises its rights under this Section 8, Issuer
shall, within ten business days after the Request Date, pay the Section 8
Repurchase Consideration to Grantee in immediately available funds, and
contemporaneously with such payment Grantee shall surrender to Issuer the
Option and the certificates evidencing the shares of Issuer Common Stock
purchased thereunder with respect to which Grantee then has beneficial
ownership, and Grantee shall warrant that it has sole record and beneficial
ownership of such shares and that the same are then free and clear of all
liens, claims, charges, and encumbrances of any kind whatsoever.
Notwithstanding the foregoing, to the extent that prior notification to or
approval of the Federal Reserve Board or other regulatory authority is
required in connection with the payment of all or any portion of the
Section 8 Repurchase Consideration, Grantee shall have the ongoing option
to revoke its request for repurchase pursuant to Section 8, in whole or in
part, or to require that Issuer deliver from time to time that portion of
the Section 8 Repurchase Consideration that it is not then so prohibited
from paying and promptly file the required notice or application for
approval and expeditiously process the same (and each party shall cooperate
with the other in the filing of any such notice or application and the
obtaining of any such approval). If the Federal Reserve Board or any other
regulatory authority disapproves of any part of Issuer's proposed
repurchase pursuant to this Section. 8, Issuer shall promptly give notice
of such fact to Grantee. If the Federal Reserve Board or other agency
8
<PAGE>
prohibits the repurchase in part but not in whole, then Grantee shall have
the right (i) to revoke the repurchase request or (ii) to the extent
permitted by the Federal Reserve Board or other agency, determine whether
the repurchase should apply to the Option and/or Option Shares and to what
extent to each, and Grantee shall thereupon have the right to exercise the
Option as to the number of Option Shares for which the Option was
exercisable at the Request Date less the sum of the number of shares
covered by the Option in respect of which payment has been made pursuant to
Section 8(a)(ii) and the number of shares covered by the portion of the
Option (if any) that has been repurchased. Grantee shall notify Issuer of
its determination under the preceding sentence within five business days of
receipt of notice of disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of Grantee's
rights under this Section 8 shall terminate on the date of termination of
this Option pursuant to Section 3(a).
(c) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Issuer Common Stock paid for
any such share by the person or groups described in Section 8(d)(i), (ii)
the price per share of Issuer Common Stock received by holders of Issuer
Common Stock in connection with any merger or other business combination
transaction described in Section 7(b)(i), 7(b)(ii), or 7(b)(iii), or (iii)
the highest closing sales price per share of Issuer Common Stock quoted on
the Nasdaq National Market (or if Issuer Common Stock is not quoted on the
Nasdaq National Market, the highest bid price per share as quoted on the
principal trading market or securities exchange on which such shares are
traded as reported by a recognized source chosen by Grantee) during the 60
business days preceding the Request Date; provided however, that in the
event of a sale of less than all of Issuer's Assets, the Applicable Price
shall be the sum of the price paid in such sale for such Assets and the
current market value of the remaining Assets of Issuer as determined by an
independent nationally recognized investment banking firm selected by
Grantee and reasonably acceptable to Issuer (which determination shall be
conclusive for all purposes of this Agreement), divided by the number of
shares of the Issuer Common Stock outstanding at the time of such sale. If
the consideration to be offered, paid, or received pursuant to either of
the foregoing clauses (i) or (ii) shall be other than in cash, the value of
such consideration shall be determined in good faith by an independent
nationally recognized investment banking firm selected by Grantee and
reasonably acceptable to Issuer, which determination shall be conclusive
for all purposes of this Agreement.
(d) As used herein, "Repurchase Event" shall occur if (i) any person
(other than Grantee or any Subsidiary of Grantee) shall have acquired
beneficial ownership (as such term is defined in Rule 13d-3 promulgated
under the Exchange Act), or the right to acquire beneficial ownership, or
any "group" (as such term is defined under the Exchange Act) shall have
been formed which beneficially owns or has the right to acquire beneficial
ownership of 50% or more of the then-outstanding shares of Issuer Common
Stock, or (ii) any of the transactions described in Section 7(b)(i),
7(b)(ii), or 7(b)(iii) shall be consummated.
9
<PAGE>
10. Registration Rights.
(a) Issuer shall, subject to the conditions of subparagraph (c) below,
if requested by Grantee (or if applicable, a Grantee Majority), as
expeditiously as possible prepare and file a registration statement under
the Securities Laws if necessary in order to permit the sale or other
disposition of any or all shares of Issuer Common Stock or other securities
that have been acquired by or are issuable to Grantee upon exercise of the
Option in accordance with the intended method of sale or other disposition
stated by Grantee in such request, including, without limitation, a "shelf'
registration statement under Rule 415 under the Securities Act or any
successor provision, and Issuer shall use its best efforts to qualify such
shares or other securities for sale under any applicable state securities
laws.
(b) If Issuer at any time after the exercise of the Option proposes to
register any shares of Issuer Common Stock under the Securities Laws in
connection with an underwritten public offering of such Issuer Common
Stock, Issuer will promptly give written notice to Grantee (and any
permitted transferee) of its intention to do so and, upon the written
request of Grantee (or any such permitted transferee of Grantee) given
within 30 days after receipt of any such notice (which request shall
specify the number of shares of Issuer Common Stock intended to be included
in such underwritten public offering by Grantee (or such permitted
transferee)), Issuer will cause all such shares, the holders of which shall
have requested participation in such registration, to be so registered and
included in such underwritten public offering; provided that Issuer may
elect to not cause any such shares to be so registered (i) if the
underwriters in good faith object for valid business reasons, or (ii) in
the case of a registration solely to implement a dividend reinvestment or
similar plan, an employee benefit plan or a registration filed on Form S-4
provided, further, that such election pursuant to clause (i) may only be
made one time. If some but not all the shares of Issuer Common Stock, with
respect to which Issuer shall have received requests for registration
pursuant to this subparagraph (b), shall be excluded from such
registration, Issuer shall make appropriate allocation of shares to be
registered among Grantee (and any such permitted transferee desiring to
register their shares) and any other person (other than Issuer) who or
which is permitted to register their shares of Issuer Common Stock in
connection with such registration pro rata in the proportion that the
number of shares requested to be registered by each such holder bears to
the total number of shares requested to be registered by all such holders
then desiring to have Issuer Common Stock registered for sale.
(c) Issuer shall use all reasonable efforts to cause each registration
statement referred to in subparagraph (a) above to become effective and to
obtain all consents or waivers of other parties which are required therefor
and to keep such registration statement effective, provided, that Issuer
may delay any registration of Option Shares required pursuant to
subparagraph (a) above for a period not exceeding 90 days provided Issuer
shall in good faith determine that any such registration would adversely
affect an offering or contemplated offering of other securities by Issuer,
and Issuer shall not be required to register Option Shares under the
Securities Laws pursuant to subparagraph (a) above:
10
<PAGE>
(i) prior to the earliest of (a) termination of the Merger
Agreement pursuant to Section 10.1 thereof, (b) failure to obtain the
requisite stockholder approval pursuant to Section 9. 1(a) of the
Merger Agreement, and (c) a Purchase Event or a Preliminary Purchase
Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
(iv) within 90 days after the effective date of a registration
referred to in subparagraph (b) above pursuant to which the holder or
holders of the Option Shares concerned were afforded the opportunity
to register such shares under the Securities Laws and such shares were
registered as requested; and
(v) unless a request therefor is made to Issuer by the holder or
holders of at least 25% or more of the aggregate number of Option
Shares then outstanding.
In addition to the foregoing, Issuer shall not be required to maintain
the effectiveness of any registration statement after the expiration of
nine months from the effective date of such registration statement. Issuer
shall use all reasonable efforts to make any filings, and take all steps,
under all applicable state securities laws to the extent necessary to
permit the sale or other disposition of the Option Shares so registered in
accordance with the intended method of distribution for such shares,
provided, that Issuer shall not be required to consent to general
jurisdiction or qualify to do business in any state where it is not
otherwise required to so consent to such jurisdiction or to so qualify to
do business.
(d) Except where applicable state law prohibits such payments, Issuer
will pay all expenses (including without limitation registration fees,
qualification fees, blue sky fees and expenses (including the fees and
expenses of counsel), accounting expenses, legal expenses, including the
reasonable fees and expenses of one counsel to the holders whose Option
Shares are being registered, printing expenses, expenses of underwriters,
excluding discounts and commissions but including liability insurance if
Issuer so desires or the underwriters so require, and the reasonable fees
and expenses of any necessary special experts) in connection with each
registration pursuant to subparagraph (a) or (b) above (including the
related offerings and sales by holders of Option Shares) and all other
qualifications, notifications or exemptions pursuant to subparagraph (a) or
(b) above. Underwriting discounts and commissions relating to Option
Shares, fees and disbursements of counsel to the holders of Option Shares
being registered, and any other expenses incurred by such holders in
connection with any such registration shall be borne by such holders.
(e) In connection with any registration under subparagraph (a) or (b)
above Issuer hereby indemnifies the holder of the Option Shares, and each
underwriter thereof, including each person, if any, who controls such
holder or underwriter within the meaning of Section 15 of the Securities
Act, against all expenses, losses, claims, damages, and liabilities caused
by any untrue statement of a material fact contained in any registration
statement or prospectus or notification or offering circular (including any
11
<PAGE>
amendments or supplements thereto) or any preliminary prospectus, or caused
by any omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such expenses, losses, claims, damages, or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue
statement that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments
or supplements thereto) in reliance upon and in conformity with,
information furnished in writing to Issuer by such indemnified party
expressly for use therein, and Issuer and each officer, director, and
controlling person of Issuer shall be indemnified by such holder of the
Option Shares, or by such underwriter, as the case may be, for all such
expenses, losses, claims, damages, and liabilities caused by any untrue, or
alleged untrue, statement, that was included by Issuer in any such
registration statement or notification or offering circular (including any
amendments or supplements thereto) in reliance upon, and in conformity
with, information furnished in writing to Issuer by such holder or such
underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this subparagraph
(e) of notice of the commencement of any action against such indemnified
party in respect of which indemnity or reimbursement may be sought against
any indemnifying party under this subparagraph (e), such indemnified party
shall notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not
relieve it of any liability which it may otherwise have to any indemnified
party under this subparagraph (e). In case notice of commencement of any
such action shall be given to the indemnifying party as above provided, the
indemnifying party shall be entitled to participate in and, to the extent
it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such indemnified party. The indemnified
party shall have the right to employ separate counsel in any such action
and participate in the defense thereof, but the fees and expenses of such
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless (i) the indemnifying party either agrees to pay
the same, (ii) the indemnifying party falls to assume the defense of such
action with counsel' satisfactory to the indemnified party, or (iii) the
indemnified party has been advised by counsel that one or more legal
defenses may be available to the indemnifying party that may be contrary to
the interest of the indemnified party, in which case the indemnifying party
shall be entitled to assume the defense of such action notwithstanding its
obligation to bear fees and expenses of such counsel. No indemnifying party
shall be liable for any settlement entered into without its consent, which
consent may not be unreasonably withheld.
If the indemnification provided for in this subparagraph (e) is
unavailable to a party otherwise entitled to be indemnified in respect of
any expenses, losses, claims, damages, or liabilities referred to herein,
then the indemnifying party, in lieu of indemnifying such party otherwise
entitled to be indemnified, shall contribute to the amount paid or payable
by such party to be indemnified as a result of such expenses, losses,
claims, damages, or liabilities in such proportion as is appropriate to
reflect the relative benefits received by Issuer, the selling stockholders,
and the underwriters from the offering of the securities and also the
relative fault of Issuer, the selling stockholders, and the underwriters in
12
<PAGE>
connection with the statements or omissions which resulted in such
expenses, losses, claims, damages, or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as
a result of the expenses, losses, claims, damages, and liabilities referred
to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim; provided that in no case shall the holders
of the Option Shares be responsible, in the aggregate, for any amount in
excess of the net offering proceeds attributable to its Option Shares
included in the offering. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Any obligation by any holder to indemnify
shall be several and not joint with other holders.
In connection with any registration pursuant to subparagraph (a) or
(b) above, Issuer and each holder of any Option Shares (other than Grantee)
shall enter into an agreement containing the indemnification provisions of
this subparagraph (e).
(f) Issuer shall comply with all reporting requirements and will do
all such other things as may be necessary to permit the expeditious sale at
any time of any Option Shares by the holder thereof in accordance with and
to the extent permitted by any rule or regulation promulgated by the SEC
from time to time, including, without limitation, Rules 144 and 144A.
Issuer shall at its expense provide the holder of any Option Shares with
any information necessary in connection with the completion and filing of
any reports or forms required to be filed by them under the Securities
Laws, or required pursuant to any state securities laws or the rules of any
stock exchange.
(g) Issuer will pay all stamp taxes in connection with the issuance
and the sale of the Option Shares and in connection with the exercise of
the Option, and will save Grantee harmless, without limitation as to time,
against any and all liabilities, with respect to, all such taxes.
11. Quotation; Listing. If Issuer Common Stock or any other securities to
be acquired upon exercise of the Option are then authorized for quotation or
trading or listing on the Nasdaq National Market or any other securities
exchange or any automated quotations system maintained by a self-regulatory
organization, Issuer, upon the request of Grantee, will promptly file an
application, if required, to authorize for quotation or trading or listing the
shares of Issuer Common Stock or other securities to be acquired upon exercise
of the Option on the Nasdaq National Market or any other securities exchange or
any automated quotations system maintained by a self-regulatory organization and
will use its best efforts to obtain approval, if required, of such quotation or
listing as soon as practicable.
12. Division of Option. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Grantee, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement' and "Option" as used herein
13
<PAGE>
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction, or mutilation of
this Agreement, and (in the case of loss, theft, or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed, or mutilated shall at any time be
enforceable by anyone.
13. Miscellaneous.
(a) Expenses. Except as otherwise provided in Section 11, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants, and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be
waived at any time by the party that is entitled to the benefits of such
provision. This Agreement may not be modified, amended, altered, or
supplemented except upon the execution and delivery of a written agreement
executed by the parties hereto.
(c) Entire Agreement, No Third-Party Beneficiary; Severability. This
Agreement, together with the Merger Agreement and the other documents and
instruments referred to herein and therein, between Grantee and Issuer (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, between the parties with respect to
the subject matter hereof and (b) is not intended to confer upon any person
other than the parties hereto (other than any transferees of the Option
Shares or any permitted transferee of this Agreement pursuant to Section
13(h)) any rights or remedies hereunder. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent
jurisdiction or a federal or state regulatory agency to be invalid, void,
or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired, or invalidated. If for any reason
such court or regulatory agency determines that the Option does not permit
Grantee to acquire, or does not require Issuer to repurchase, the full
number of shares of Issuer Common Stock as provided in Sections 3 and 8 (as
adjusted pursuant to Section 7), it is the express intention of Issuer to
allow Grantee to acquire or to require Issuer to repurchase such lesser
number of shares as may be permissible without any amendment or
modification hereof
(d) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Georgia without regard to any
applicable conflicts of law rules.
14
<PAGE>
(e) Descriptive Headings. The descriptive headings contained herein
are for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.
(f) Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, telecopied
(with confirmation), or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
If to Issuer to: Abbeville Capital Corporation
203 South Main Street
Abbeville, S.C. 29620
Telecopy Number: (864) 459-9679
Attention: Thomas D. Sherard, Jr.
President
with a copy to: Gerrish & McCreary, P.C.
700 Colonial Road, Suite 200
Memphis, TN 38124-2120
Telecopy Number: (901) 684-2339
Attention: Jeffrey C. Gerrish
If to Grantee to: FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
Telecopy Number: (706) 845-5156
Attention: J. Daniel Speight, Jr.
President
and a copy to: Powell, Goldstein, Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street, NE
Atlanta, Georgia 30303
Telecopy Number: (404) 572-5958
Attention: Walter G. Moeling IV
(g) Counterparts. This Agreement and any amendments hereto may be
executed in two counterparts, each of which shall be considered one and the
same agreement and shall become effective when both counterparts have been
signed, it being understood that both parties need not sign the same
counterpart.
15
<PAGE>
(h) Assignment. Neither this Agreement nor any of the rights,
interests, or obligations hereunder or under the Option shall be assigned
by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other party, except that Grantee
may assign this Agreement to a wholly owned Subsidiary of Grantee and
Grantee may assign its rights hereunder in whole or in part after the
occurrence of a Purchase Event. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the parties and their respective successors and assigns.
(i) Further Assurances. In the event of any exercise of the Option by
Grantee, Issuer and Grantee shall execute and deliver all other documents
and instruments and take all other action that may be reasonably necessary
in order to consummate the transactions provided for by such exercise.
(j) Specific Performance. The parties hereto agree that this Agreement
may be enforced by either party through specific performance, injunctive
relief, and other equitable relief Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
[SIGNATURES APPEAR ON NEXT PAGE]
16
<PAGE>
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
ABBEVILLE CAPITAL CORPORATION
By: /s/Thomas D. Sherard,Jr.
-------------------------
Thomas D. Sherard, Jr.
President
FLAG FINANCIAL CORPORATION
By: /s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President
17
<PAGE>
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FLAG FINANCIAL CORPORATION
AND
ABBEVILLE CAPITAL CORPORATION
Dated as of March 31, 1999
THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Merger by
and between FLAG Financial Corporation ("FLAG") and Abbeville Capital
Corporation ("ABBEVILLE") that is dated as of March 31, 1999 (the "Agreement"),
is made and entered into this 22nd day of July, 1999. Capitalized terms used
herein and not otherwise defined shall have the meaning ascribed to them in the
Agreement.
WHEREAS, the parties hereto desire to amend the Agreement for the
purpose of changing the calculation of the purchase price and extending the
termination date of the Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, FLAG and ABBEVILLE agree to amend the Agreement:
(1) To add the Stock Option Agreement attached to this Amendment as
Exhibit 5 to the Agreement and to incorporate the Stock Option
Agreement by reference into the Agreement and to make it a part of the
Agreement;
(2) To add the following Section 1.4:
1.4 Execution of Stock Option Agreement.On or before the 22nd day of
July, 1999, and as a condition to the Agreement, ABBEVILLE will
execute and deliver to FLAG the Stock Option Agreement at Exhibit
5 to the Agreement.
(3) To delete Subparagraph (b) of Section 3.1 of the Agreement in its
entirety and to replace it with the following Subparagraph (b):
(b) Each share of ABBEVILLE Common Stock (excluding shares held
by any ABBEVILLE Entity or any FLAG Entity, in each case other than in
a fiduciary capacity or as a result of debts previously contracted,
and excluding shares held by shareholders who perfect their statutory
dissenters' rights as provided in Section 3.4) issued and outstanding
immediately prior to the Effective Time shall cease to be outstanding
and shall be converted into and exchanged for the right to receive
3.48 shares of FLAG Common Stock (the "Exchange Ratio") subject to
possible adjustment as provided in Section 3.1(d).
<PAGE>
(4) To add the following Subsection (d) to Section 3.1 of the Agreement:
(d) If the daily weighted average price for all trades of FLAG
common stock on the Nasdaq National Market (as reported by The Wall
Street Journal or, if not reported thereby, any other authoritative
source) for the 5 consecutive full trading days preceding the Closing
Date ("FLAG stock value") is less than $11.00 per share, then the
Exchange Ratio will be increased so that each share of ABBEVILLE
common stock will be converted into a number of shares of FLAG common
stock equivalent to $38.34(the "Floor Value"), based on the FLAG Stock
Value.
For Example, if the FLAG Stock Value were $9.00, the 3.48 Exchange
Ratio would yield a value to ABBEVILLE shareholders of $31.32, which
is $7.02 less than the Floor Value of $38.34. Accordingly, the
Exchange Ratio would be increased by 0.78 ($7.02 divided by $9.00),
making the new Exchange Ratio 4.26.
(5) To delete the date of October 31, 1999 from Section 10.1(e) of the
Agreement, and to replace the date of October 31, 1999 with the date
of December 31, 1999.
(6) To revise Section 11.2(b) of the Agreement to read as follows:
(b) If this Agreement is terminated by FLAG pursuant to Sections
10.1(b) or (c), ABBEVILLE shall pay to FLAG an amount equal to FLAG's
actual out of pocket expenses incurred in connection with the
transactions contemplated by this Agreement, plus $100,000. If this
Agreement is terminated by FLAG pursuant to Section 10.1(d)(ii) or
because the Shareholders' Meeting shall not have been held or shall
have been canceled prior to termination of this Agreement or because
ABBEVILLE's Board of Directors shall have withdrawn or modified in a
manner adverse to FLAG ABBEVILLE'S Board of Directors' recommendation
that the holders of the shares of ABBEVILLE Common Stock approve this
Agreement, in each case after ABBEVILLE shall have authorized,
recommended, publicly proposed or publicly announced, on or after July
22, 1999, that any person other than FLAG shall have (i) made, or
disclosed an intention to make, a proposal to engage in an Acquisition
Transaction (as defined in the Stock Option Agreement at Exhibit 5 to
this Agreement), (ii) commenced a Tender Offer (as defined in the
Stock Option Agreement at Exhibit 5 to this Agreement) or filed a
registration statement under the 1933 Act with respect to an Exchange
Offer (as defined in the Stock Option Agreement at Exhibit 5 to this
Agreement), or (iii) filed an application (or given a notice), whether
in draft or final form, with any Regulatory Authorities for approval
to engage in an Acquisition Transaction (as defined in the Stock
Option Agreement at Exhibit 5 to this Agreement), then ABBEVILLE shall
pay to FLAG an amount equal to FLAG's actual out of pocket expenses
incurred in connection with the transactions contemplated by this
Agreement, plus $500,000.
<PAGE>
(7) Except as hereinabove amended, and except to the extent that any
representations, warranties, and covenants of ABBEVILLE are amended or
waived by virtue of the provisions of the Stock Option Agreement
between FLAG and ABBEVILLE dated July 22, 1999, the Agreement shall
remain otherwise in full force and effect.
(8) This Amendment may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together
shall constitute one and the same instrument.
[Signatures on Next Page]
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers hereunto duly authorized all as of the day and year first
above written.
FLAG FINANCIAL CORPORATION
By: /s/J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President and Chief Executive Office
ABBEVILLE CAPITAL CORPORATION
By: /s/ Thomas D. Sherard, Jr.
--------------------------
Thomas D. Sherard, Jr.
President
<PAGE>
APPENDIX B
DISSENTER'S RIGHTS
B-1
<PAGE>
CODE OF LAWS OF SOUTH CAROLINA 1976 ANNOTATED
TITLE 33. CORPORATIONS, PARTNERSHIPS AND ASSOCIATIONS
CHAPTER 13. DISSENTERS' RIGHTS
ARTICLE 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SEC. 33-13-101. DEFINITIONS.
In this chapter:
(1)"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2)"Dissenter" means a shareholder that is entitled to dissent from
corporate action under Section 33-13-102 and who exercises that right when and
in the manner required by Sections 33-13-200 through 33-13-280.
(3)"Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action to which the dissenter objects, excluding
any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. The value of the shares is to be determined by
techniques that are accepted generally in the financial community.
(4)"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5)"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6)"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
(7)"Shareholder" means the record shareholder or the beneficial
shareholder.
SEC. 33-13-102. RIGHT TO DISSENT.
(A)A shareholder is entitled to dissent from, and obtain payment of the
fair value of, his shares in the event of any of the following corporate
actions:
(1) consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by Section
33-11-103 or the articles of incorporation and the shareholder is entitled
to vote on the merger or (ii) if the corporation is a subsidiary that is
merged with its parent under Section 33-11-104 or 33-11-108 or if the
corporation is a parent that is merged with its subsidiary under Section
33-11-108;
(2) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares are to be acquired, if the
shareholder is entitled to vote on the plan;
B-2
<PAGE>
(3) consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale must be distributed to
the shareholders within one year after the date of sale;
(4) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares;
(iii)alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(iv) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights; or
(v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under Section 33-6-104; or
(5) in the case of corporations which are not public corporations, the
approval of a control share acquisition under Article 1 of Chapter 2 of
Title 35;
(6) any corporate action to the extent the articles of incorporation,
bylaws, or a resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain payment for their
shares.
(B)Notwithstanding subsection (A), no dissenters' rights under this section
are available for shares of any class or series of shares which, at the record
date fixed to determine shareholders entitled to receive notice of a vote at the
meeting of shareholders to act upon the agreement of merger or exchange, were
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.
SEC. 33-13-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(a)A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares to which he dissents and his other shares were registered in
the names of different shareholders.
(b)A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if he dissents with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote. A
beneficial shareholder asserting dissenters' rights to shares held on his behalf
shall notify the corporation in writing of the name and address of the record
shareholder of the shares, if known to him.
B-3
<PAGE>
SEC. 33-13-200. NOTICE OF DISSENTERS' RIGHTS.
(a)If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a stockholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(b)If corporate action creating dissenters' rights under Section 33-13-102
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in Section 33-13-220.
SEC. 33-13-210. NOTICE OF INTENT TO DEMAND PAYMENT.
(a)If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (1) must give to the corporation before the
vote is taken written notice of his intent to demand payment for his shares if
the proposed action is effectuated and (2) must not vote his shares in favor of
the proposed action. A vote in favor of the proposed action cast by the holder
of a proxy solicited by the corporation shall not disqualify a shareholder from
demanding payment for his shares under this chapter.
(b)A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this chapter.
SEC. 33-13-220. DISSENTERS' NOTICE.
(a)If proposed corporate action creating dissenters' rights under Section
33-13-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Section 33-13-210(a).
(b)The dissenters' notice must be delivered no later than ten days after
the corporate action was taken and must:
(1)state where the payment demand must be sent and where certificates
for certificated shares must be deposited;
(2)inform holders of uncertificated shares to what extent transfer of
the shares is to be restricted after the payment demand is received;
(3)supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he or, if he is a nominee
asserting dissenters' rights on behalf of a beneficial shareholder, the
beneficial shareholder acquired beneficial ownership of the shares before
that date;
(4)set a date by which the corporation must receive the payment
demand, which may not be fewer than thirty nor more than sixty days after
the date the subsection (a) notice is delivered and set a date by which
certificates for certificated shares must be deposited, which may not be
earlier than twenty days after the demand date; and
(5)be accompanied by a copy of this chapter.
SEC. 33-13-230. SHAREHOLDERS' PAYMENT DEMAND.
B-4
<PAGE>
(a)A shareholder sent a dissenters' notice described in Section 33-13-220
must demand payment, certify whether he (or the beneficial shareholder on whose
behalf he is asserting dissenters' rights) acquired beneficial ownership of the
shares before the date set forth in the dissenters' notice pursuant to Section
33-13-220(b)(3), and deposit his certificates in accordance with the terms of
the notice.
(b)The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(c)A shareholder who does not comply substantially with the requirements
that he demand payment and deposit his share certificates where required, each
by the date set in the dissenters' notice, is not entitled to payment for his
shares under this chapter.
SEC. 33-13-240. SHARE RESTRICTIONS.
(a)The corporation may restrict the transfer of uncertificated shares from
the date the demand for payment for them is received until the proposed
corporate action is taken or the restrictions are released under Section
33-13-260.
(b)The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
SEC. 33-13-250. PAYMENT.
(a)Except as provided in Section 33-13-270, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the corporation
shall pay each dissenter who substantially complied with Section 33-13-230 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(b)The payment must be accompanied by:
(1)the corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(2)a statement of the corporation's estimate of the fair value of the
shares and an explanation of how the fair value was calculated;
(3)an explanation of how the interest was calculated;
(4)a statement of the dissenter's right to demand additional payment
under Section 33-13-280; and
(5)a copy of this chapter.
SEC. 33-13-260. FAILURE TO TAKE ACTION.
B-5
<PAGE>
(a)If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation, within the same sixty-day period, shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(b)If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Section 33-13-220 and repeat the payment demand
procedure.
SEC. 33-13-270. AFTER-ACQUIRED SHARES.
(a)A corporation may elect to withhold payment required by section
33-13-250 from a dissenter as to any shares of which he (or the beneficial owner
on whose behalf he is asserting dissenters' rights) was not the beneficial owner
on the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action, unless the beneficial ownership of the shares devolved upon
him by operation of law from a person who was the beneficial owner on the date
of the first announcement.
(b)To the extent the corporation elects to withhold payment under
subsection (a), after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall pay this amount
to each dissenter who agrees to accept it in full satisfaction of his demand.
The corporation shall send with its offer a statement of its estimate of the
fair value of the shares, an explanation of how the fair value and interest were
calculated, and a statement of the dissenter's right to demand additional
payment under Section 33-13-280.
SEC. 33-13-280. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(a)A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due and demand payment of
his estimate (less any payment under Section 33-13-250) or reject the
corporation's offer under Section 33-13-270 and demand payment of the fair value
of his shares and interest due, if the:
(1)dissenter believes that the amount paid under Section 33-13-250 or
offered under Section 33-13-270 is less than the fair value of his shares
or that the interest due is calculated incorrectly;
(2)corporation fails to make payment under Section 33-13-250 or to
offer payment under Section 33-13-270 within sixty days after the date set
for demanding payment; or
(3)corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(b)A dissenter waives his right to demand additional payment under this
section unless he notifies the corporation of his demand in writing under
subsection (a) within thirty days after the corporation made or offered payment
for his shares.
SEC. 33-13-300. COURT ACTION.
(a)If a demand for additional payment under Section 33-13-280 remains
unsettled, the corporation shall commence a proceeding within sixty days after
receiving the demand for additional payment and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
B-6
<PAGE>
commence the proceeding within the sixty-day period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b)The corporation shall commence the proceeding in the circuit court of
the county where the corporation's principal office (or, if none in this State,
its registered office) is located. If the corporation is a foreign corporation
without a registered office in this State, it shall commence the proceeding in
the county in this State where the principal office (or, if none in this State,
the registered office) of the domestic corporation merged with or whose shares
were acquired by the foreign corporation was located.
(c)The corporation shall make all dissenters (whether or not residents of
this State) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication, as provided by law.
(d)The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint persons as
appraisers to receive evidence and recommend decisions on the question of fair
value. The appraisers have the powers described in the order appointing them or
in any amendment to it. The dissenters are entitled to the same discovery rights
as parties in other civil proceedings.
(e)Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
SEC. 33-13-310. COURT COSTS AND COUNSEL FEES.
(a)The court in an appraisal proceeding commenced under Section 33-13-300
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under Section 33-13-280.
(b)The court also may assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1)against the corporation and in favor of any or all dissenters if
the court finds the corporation did not comply substantially with the
requirements of Sections 33-13-200 through 33-13-280; or
(2)against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
(c)If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
B-7
<PAGE>
(d)In a proceeding commenced by dissenters to enforce the liability under
Section 33-13-300(a) of a corporation that has failed to commence an appraisal
proceeding within the sixty-day period, the court shall assess the costs of the
proceeding and the fees and expenses of dissenters' counsel against the
corporation and in favor of the dissenters.
B-8
<PAGE>
APPENDIX C
FAIRNESS OPINION
<PAGE>
FAIRNESS OPINION
MERGER BY AND BETWEEN
FLAG FINANCIAL CORPORATION
AND
ABBEVILLE CAPITAL CORPORATION
Report Dated
March 22, 1999
<PAGE>
March 22, 1999
Board of Directors
Abbeville Capital Corporation
Abbeville, South Carolina
RE: Fairness Opinion Relative to Proposed Agreement of Abbeville Capital
Corporation, Abbeville, South Carolina, to Merge with and into FLAG
Financial Corporation, LaGrange, Georgia
Directors:
The Board of Directors of Abbeville Capital Corporation ("ABBEVILLE") retained
Southard Financial, in its capacity as a financial valuation and consulting
firm, to render its opinion of the fairness, from a financial viewpoint, of the
acquisition of ABBEVILLE by FLAG Financial Corporation ("FLAG"). Southard
Financial and its principals have no past, present, or future contemplated
financial, equity, or other interest in either ABBEVILLE or FLAG. This opinion
is issued based upon financial data as of December 31, 1998.
Approach to Assignment
The approach to this assignment was to consider the following factors:
o A review of the financial performance and position of ABBEVILLE and the
value of its common stock;
o A review of the financial performance and position of FLAG and the value
of its common stock; o A review of recent Bank merger transactions in the United
States, South Carolina and Georgia, and nearby states;
o A review of the current and historical market prices of bank holding
companies in the United States, South Carolina and Georgia, and nearby states;
o A review of the investment characteristics of the common stock of
ABBEVILLE and FLAG;
o A review of a draft of the Agreement and Plan of Merger by and between
ABBEVILLE and FLAG;
o An evaluation of the impact of the merger on the expected return to the
current shareholders of ABBEVILLE; and,
o An evaluation of other factors as was considered necessary to render this
opinion.
It is Southard Financial's understanding that the merger and resulting exchange
of the stock of FLAG for the outstanding common stock of ABBEVILLE constitute a
non-taxable exchange for federal income tax purposes. The exchange of cash for
fractional shares may have tax consequences.
<PAGE>
Board of Directors
Abbeville Capital Corporation
Page 2
DUE DILIGENCE REVIEW PROCESS
In performing this assignment, Southard Financial reviewed the documents
specifically outlined in Exhibit 1 pertaining to ABBEVILLE and in Exhibit 2
pertaining to FLAG.
Review of Abbeville Capital Corporation
Southard Financial visited with the management of ABBEVILLE in Abbeville, South
Carolina. Discussions included questions regarding the current and historical
financial position and performance of ABBEVILLE, its outlook for the future, and
other pertinent factors. Details pertaining to ABBEVILLE are contained in
Southard Financial's file.
Review of FLAG Financial Corporation
Southard Financial visited with the management of FLAG in LaGrange, Georgia.
Discussions included questions regarding the current and historical financial
position and performance of FLAG and its operating subsidiaries, its outlook for
the future, and other pertinent factors. Details pertaining to FLAG are
contained in Southard Financial's file.
Merger Documentation
Southard Financial reviewed the proposed merger terms with the management of
ABBEVILLE and with legal counsel for ABBEVILLE. Southard Financial reviewed a
draft of the Agreement and Plan of Merger (the "Agreement") that was in the
process of being finalized by the parties. The analysis in this opinion reflects
the proposed merger terms as outlined in Exhibit 3, Terms of the Agreement and
Plan of Merger.
Southard Financial did not independently verify the information reviewed, but
relied on such information as being complete and accurate in all material
respects. Southard Financial did not make any independent evaluation of the
assets of FLAG or ABBEVILLE, but reviewed data supplied by the management of
both institutions.
<PAGE>
Board of Directors
Abbeville Capital Corporation
Page 3
MAJOR CONSIDERATIONS
Numerous factors were considered in the overall review of the proposed merger.
The review process included considerations regarding ABBEVILLE, FLAG, and the
proposed merger. The major considerations are:
Abbeville Capital Corporation
o Historical earnings;
o Historical dividend payments;
o Outlook for future performance, earnings, and dividends;
o Economic conditions and outlook in ABBEVILLE's market;
o The competitive environment in ABBEVILLE's market;
o Comparisons with peer banks;
o Potential risks in the loan and securities portfolios;
o Recent minority stock transactions in ABBEVILLE's common stock; and,
o Other such factors as were deemed appropriate in rendering this opinion.
FLAG Financial Corporation
o Historical earnings;
o Historical dividend payments;
o Outlook for future performance, earnings, and dividends;
o Economic conditions and outlook in FLAG's market;
o The competitive environment in FLAG's market;
o Comparisons with peer banks;
o Potential risks in the loan and securities portfolios;
o Recent minority stock transactions in FLAG's common stock; and,
o Other such factors as were deemed appropriate in rendering this opinion.
Common Factors
o Historical and current bank merger pricing; and,
o Current market prices for minority blocks of common stocks of regional
bank holding companies in the United States, South Carolina and Georgia,
and nearby states.
<PAGE>
Board of Directors
Abbeville Capital Corporation
Page 4
The Proposed Merger
o The terms of the Agreement as described herein;
o The specific pricing of the merger;
o Adequacy of the consideration paid to the shareholders of ABBEVILLE;
o The assumption that the merger will be treated as a tax-free exchange;
o The amount of debt and goodwill on the balance sheet of FLAG and the
impact of the merger of ABBEVILLE on FLAG's capital and liquidity
positions;
o The historical dividend payments of FLAG and the likely impact on the
dividend income of the current shareholders of ABBEVILLE (equivalency of
cash dividends);
o Pro-forma combined income statements for FLAG post merger and the
expected returns to ABBEVILLE shareholders (equivalency of earnings
yield);
o The market for minority blocks of FLAG common stock; and,
o Other such factors as deemed appropriate.
OVERVIEW OF FAIRNESS ANALYSIS
In connection with rendering its opinion, Southard Financial performed a variety
of financial analyses, which are summarized below. Southard Financial believes
that its analyses must be considered as a whole and that considering only
selected factors could create an incomplete view of the analyses and the process
underlying the opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not susceptible to partial
analyses.
In its analyses, Southard Financial made numerous assumptions, many of which are
beyond the control of ABBEVILLE and FLAG. Any estimates contained in the
analyses prepared by Southard Financial are not necessarily indicative of future
results or values, which may vary significantly from such estimates. Estimates
of value of companies do not purport to be appraisals or necessarily reflect the
prices at which companies or their securities may actually be sold. None of the
analyses performed by Southard Financial was assigned a greater significance
than was any other. More details on the analyses prepared by Southard Financial
are contained in Exhibits 3-5.
Of particular note in the fairness analysis was the structuring of the merger as
a "partnership" more than as an acquisition. As part of the merger, ABBEVILLE
will be allowed to retain its charter, its Board of Directors, its management,
and its name. Both institutions view the merger as a partnership of community
banks, consistent with other recent mergers effected by FLAG. Further, despite
the change in ownership, it is intended by both parties that ABBEVILLE will
retain its profile as independent community bank in the market it serves, but
will benefit from services provided by FLAG and from the diversification impact
of being part of a larger organization.
<PAGE>
Board of Directors
Abbeville Capital Corporation
Page 5
Fairness of the Merger Price
Analysis of Market Transactions
Based upon the merger terms and the recent market price of FLAG common stock,
ABBEVILLE shareholders will receive 180.4% of ABBEVILLE book value at December
31, 1998, 14.8 times 1998 ABBEVILLE earnings, and 14.85% of ABBEVILLE's assets
at December 31, 1998. Based upon the review conducted by Southard Financial, the
pricing for ABBEVILLE in the merger is below the average, but within the range
of multiples seen in recent bank acquisitions (see Exhibit 5). However, the
merger price represents a significant premium to the most recent transaction
prices for ABBEVILLE stock.
Analysis of Liquidity
Unlike ABBEVILLE stock, FLAG shares are traded on the NASDAQ national market
system under the ticker symbol "FLAG". The stock is actively traded, has several
institutional holders, and is followed by at least four investment analysts.
Further, except in the case of certain officers, directors, and significant
shareholders of ABBEVILLE, FLAG shares received will be freely tradable with no
restrictions. Finally, FLAG is currently trading at or near its 52-week low, and
at a price well below that suggested by recent market multiples.
Analysis of Alternatives
Recent transactions in ABBEVILLE common stock have been in the range of $22.00
to $24.00 per share, or well below the merger price of $36.54 per share. In
January 1998 ABBEVILLE completed a tender offer to repurchase its stock from
shareholders at $22.00 per share. A total of over 11,000 shares were repurchased
from 37 shareholders. Nevertheless, ABBEVILLE stock is not traded on a stock
exchange and no party makes a market for the stock on an ongoing basis. Further,
unlike FLAG, ABBEVILLE does not have a dividend reinvestment plan.
Discounted Cash Flow Analysis
Southard Financial prepared a pro-forma discounted cash flow analysis to
determine a range of present values of ABBEVILLE assuming ABBEVILLE continued to
operate as a stand-alone entity. This range was determined by adding (i) the
present value of the estimated future dividend stream that ABBEVILLE could
generate over the ten year period from 1999 through 2008 and (ii) the present
value of the "terminal value" of ABBEVILLE Common Stock at the end of 2008. To
determine a projected dividend stream, Southard Financial assumed an equity to
assets ratio of about 8.5%. Southard Financial used management's estimates for
ABBEVILLE for 1999 and assumed annual growth in earnings and assets of between
3% and 8%. The "terminal value" of ABBEVILLE Common Stock at the end of the
ten-year period was determined by applying price-to-earnings multiples (15x to
20x) to projected net income for ABBEVILLE in 2008. The dividend stream and
terminal value were discounted to the present using discount rates of 12% to
15%, which Southard Financial viewed as the appropriate discount rate range for
a company with ABBEVILLE's risk characteristics. Using this analysis, the
implied value of ABBEVILLE was at or below the proposed price in the merger.
<PAGE>
Board of Directors
Abbeville Capital Corporation
Page 6
Impact of Acquisition on FLAG's Performance and Financial Position
Southard Financial reviewed the impact of the proposed acquisition on the per
share earnings, dividends, and book value of FLAG (see Exhibit 4). The analysis
indicated that the acquisition will have a slightly dilutive impact on earnings
per share and dividends per share in the first year after the merger. However,
our analysis indicated that the adverse impact on earnings is expected to be
short-lived, given the expected faster rate of earnings growth at FLAG than at
ABBEVILLE and the synergies of the merger and other mergers currently underway
by FLAG. Further, the merger will have a highly positive impact on book value
per share for ABBEVILLE shareholders.
Other Factors Pertinent to the Merger
Other factors that impact the shareholders of ABBEVILLE in the merger are as
follows:
o ABBEVILLE's loan portfolio, which is currently concentrated in consumer
loans in Abbeville County, should benefit from the geographic and
product diversification offered by FLAG.
o By "purchasing" administrative services from FLAG, senior management of
ABBEVILLE will be freed up to focus on customer service, business
development, and community relations.
o Further, the synergies provided by FLAG in the merger should allow
ABBEVILLE to operate more profitably and to increase earnings growth.
Summary of Analyses
The summary set forth does not purport to be a complete description of the
analyses performed by Southard Financial. The analyses performed by Southard
Financial are not necessarily indicative of actual values, which may differ
significantly from those suggested by such analyses. Southard Financial did not
appraise any individual assets or liabilities of ABBEVILLE or FLAG.
Throughout the due diligence process, all information provided by ABBEVILLE,
FLAG, and third party sources was relied upon by Southard Financial without
independent verification.
Based upon the analyses discussed above and other analyses performed by Southard
Financial, the impact of the merger on the shareholders of ABBEVILLE is expected
to be favorable.
<PAGE>
Board of Directors
Abbeville Capital Corporation
Page 7
FAIRNESS OPINION
Based upon the analyses of the foregoing and such matters as were considered
relevant, it is the opinion of Southard Financial that the terms of the offer
for the acquisition of Abbeville Capital Corporation by FLAG Financial
Corporation pursuant to the Agreement and Plan of Merger are fair, from a
financial viewpoint, to the shareholders of Abbeville Capital Corporation.
Thank you for this opportunity to be of service to the shareholders of Abbeville
Capital Corporation.
Sincerely yours,
SOUTHARD FINANCIAL
Attachments:
Exhibit 1: Abbeville Capital Corporation, Document Review List
Exhibit 2: FLAG Financial Corporation, Document Review List
Exhibit 3: Terms of the Agreement and Plan of Merger
Exhibit 4: Overview of the Expected Impact on ABBEVILLE Shareholders
Exhibit 5: Comparison of the Merger Pricing to Public Market Transactions
Exhibit 6: Qualifications of Southard Financial
<PAGE>
EXHIBIT 1
ABBEVILLE CAPITAL CORPORATION
DOCUMENT REVIEW LIST
1. Consolidated Reports of Condition and Income for a Bank with Domestic
Offices Only and Total Assets of Less than $100 Million ("Call
Report") of The Bank of Abbeville for the period ended December 31,
1998.
2. Uniform Bank Performance Report ("UBPR") of The Bank of Abbeville for
the periods ended September 30, 1998 and December 31, 1997.
3. Parent Company Only Financial Statements for Small Bank Holding
Companies (FR Y-9SP) of Abbeville Capital Corporation for the periods
ended December 31, 1997-98 and June 30, 1998.
4. Annual Report (with audited financial statements) of Abbeville Capital
Corporation for 1997 and of The Bank of Abbeville for 1993-96.
5. Annual Report of Bank Holding Companies (FR Y-6) of Abbeville Capital
Corporation for 1997.
6. Shareholder list of Abbeville Capital Corporation as of March 11, 1999
and list of transactions in the common stock of Abbeville Capital
Corporation between January 1, 1998 and March 11, 1999. List of stock
options to purchase the common stock of Abbeville Capital Corporation.
7. Additional pertinent information deemed necessary to render this
opinion.
<PAGE>
EXHIBIT 2
FLAG FINANCIAL CORPORATION
DOCUMENT REVIEW LIST
1. SEC Form 10-K of FLAG Financial Corporation for the year ended
December 31, 1997-98.
2. Annual Reports of FLAG Financial Corporation for the years ended
December 31, 1996-98, including audited consolidated financial
statements.
3. Summary budget and pro forma key financial ratios for FLAG Financial
Corporation.
4. Recent press releases of FLAG Financial Corporation.
5. Additional pertinent information deemed necessary to render this
opinion.
<PAGE>
EXHIBIT 3
TERMS OF THE
AGREEMENT AND PLAN OF MERGER
The discussion below is based upon our understanding of the key financial terms
that are contained in the definitive agreement by and between FLAG Financial
Corporation and Abbeville Capital Corporation (the "Agreement").
In exchange for each share of ABBEVILLE common stock outstanding, ABBEVILLE
shareholders will receive 3.48 shares (the "Exchange Ratio") of FLAG common
stock. Certificates previously representing shares of ABBEVILLE common stock
shall be exchanged for certificates representing whole shares of FLAG common
stock and cash in lieu of fractional shares.
The parties intend for the merger to qualify as a "reorganization" under the
Internal Revenue Code. Thus, the exchange of ABBEVILLE stock for FLAG stock is
expected to qualify as a tax-free exchange for Federal income tax purposes. The
exchange of cash for fractional shares may have tax consequences. No fractional
shares will be issued by FLAG. Instead, each former shareholder of ABBEVILLE
will receive an amount in cash determined by multiplying the fraction of a share
of FLAG that such holder would otherwise be entitled to receive by the price per
share of the last trade of FLAG common stock on the last day preceding the
Effective Date of the merger.
The Agreement may be terminated by either party:
- upon the mutual consent of each institution;
- upon a breach by the other party of any representation, warranty,
obligation, or covenant that is not cured within 30 days after written
notice of the breach;
- in the event that any Consent of any Regulatory Authority required for
the merger is denied or withheld;
- if the merger is not approved by the shareholders of ABBEVILLE;
- if the merger is not consummated on or before October 31, 1999; and,
- if other conditions and obligations as set forth in the Agreement are not
met.
If, before the Effective Date, FLAG changes the number of its shares issued and
outstanding as a result of a stock split, stock dividend, recapitalization or
similar transaction, the Exchange Ratio shall be adjusted proportionally.
<PAGE>
EXHIBIT 4
OVERVIEW OF THE EXPECTED IMPACT
ON ABBEVILLE SHAREHOLDERS
The following is a summary of the various analyses undertaken in conjunction
with this fairness opinion. This summary is not intended to represent all
analyses performed by Southard Financial, but is presented here for the
convenience of ABBEVILLE and its shareholders.
According to the Agreement, the Exchange Ratio is 3.48 shares of FLAG common
stock for each share of ABBEVILLE common stock outstanding, or a total of
826,204.2 shares of FLAG stock (237,415 ABBEVILLE common shares times the
Exchange Ratio of 3.48). Based upon the current market price of FLAG common
stock ($10.50 per share from March 15-18, 1999), the total value of ABBEVILLE in
the merger is $8,675,144, or $36.54 per share (3.48 FLAG shares at $10.50 each).
The following analysis focuses on the total consideration to be paid in the
merger.
Earnings: ABBEVILLE reported earnings of $2.47 per share in 1998. FLAG reported
earnings of $0.30 per share (basic and diluted) in 1998. Based upon the Exchange
Ratio as derived above, had the merger been consummated prior to January 1,
1998, each former ABBEVILLE share would have earned $1.044 in 1998 (FLAG 1998
earnings of $0.30 times 3.48 equivalent shares). This represents a 57.7%
decrease from ABBEVILLE'S reported earnings for 1998.
However, FLAG incurred substantial non-recurring expenses in 1988, including
one-time write-offs of $2.0 million (pretax) due to two loans and merger related
expenses of $1.0 million (pretax). After taxes at 34%, these items were
equivalent to about $0.30 per share. Therefore, adjusted for these one-time
expenses, FLAG would have earned about $0.60 per share in 1998. Based upon the
Exchange Ratio and adjusted FLAG earnings as derived above, had the merger been
consummated prior to January 1, 1998, each former ABBEVILLE share would have
earned $2.09 in 1998 (FLAG 1998 adjusted earnings of $0.60 times 3.48 equivalent
shares). This represents a 15.4% decrease from ABBEVILLE'S reported earnings for
1998.
Absent the merger, ABBEVILLE management expects earnings of about $2.95 per
share in 1999, while FLAG is expected to earn $0.75 per share in 1999 ("core"
earnings before merger related expenses). Based upon the Exchange Ratio, had the
merger been consummated prior to January 1, 1999, each former ABBEVILLE share
would be expected to earn $2.61 in 1999 (FLAG expected earnings of $0.75 times
3.48 equivalent shares). This would represent a dilution in earnings for
ABBEVILLE shareholders in 1999. However, it is expected that the merger will be
accretive to earnings after the first year.
Dividends: The shareholders of ABBEVILLE received cash dividends of $0.76 per
share in 1998, while FLAG shareholders received cash dividends of $0.20 per
share in 1998. Based upon the Exchange Ratio, had the merger been consummated
prior to January 1, 1998, each former ABBEVILLE share would have received
dividends of $0.70 in 1998 (FLAG 1998 dividends of $0.20 times 3.48 equivalent
shares). This is slightly less than ABBEVILLE'S dividends for 1998.
<PAGE>
EXHIBIT 4
OVERVIEW OF THE EXPECTED IMPACT
ON ABBEVILLE SHAREHOLDERS
(continued)
Book Value: Reported book value of ABBEVILLE was $20.25 per share at December
31, 1998. Reported book value of FLAG at December 31, 1998 was $7.30 per share.
Had the merger been consummated on December 31, 1998, each former ABBEVILLE
share would have had book value of $25.40 (FLAG book value of $7.30 per share
times 3.48 equivalent shares). This represents an increase of 25.4% over
ABBEVILLE'S book value at December 31, 1998.
Liquidity: Unlike ABBEVILLE stock, FLAG shares are traded on the NASDAQ National
Market System. Further, except in the case of officers, directors, and certain
significant shareholders (Affiliates) of ABBEVILLE, FLAG shares received will be
freely tradable with no restrictions. FLAG stock trades on a regular basis and
the daily volume ranges from 100 shares to over 25,000 shares. Further, the
stock is followed by a few analysts. The current market price of FLAG common
stock is near its 52-week low, having peaked at over $19.00 in July 1998.
Fundamental Analysis: Southard Financial reviewed the financial characteristics
of ABBEVILLE and FLAG with respect to profitability, capital ratios, liquidity,
asset quality, and other factors. Southard Financial compared ABBEVILLE and FLAG
to a universe of publicly traded banks and bank holding companies and to peer
groups prepared by the Federal Financial Institutions Examination Council
(FFIEC). Southard Financial found that the post-merger combined entity will have
capital ratios and profitability ratios not materially different from those of
the public peer group and the FFIEC peer group (predominantly non-publicly
traded banks).
Further, the merger will result in the shareholders of ABBEVILLE owning stock in
a company with more geographically diverse operations and with a more
diversified loan portfolio. Typically, diversification results in a lower risk
investment. Finally, in our opinion, the growth outlook for FLAG is
significantly better than the growth outlook for ABBEVILLE.
<PAGE>
EXHIBIT 5
COMPARISON OF THE MERGER PRICING
TO PUBLIC MARKET TRANSACTIONS
Southard Financial compared the pricing terms of the Agreement to the pricing of
recent acquisitions of banks and bank holding companies across the United
States, and to the minority interest prices of publicly traded banks and bank
holding companies in the Southeast. Pricing data for recent acquisitions of
banks and bank holding companies (nationwide and in South Carolina and
contiguous states) is summarized as follows:
<TABLE>
<CAPTION>
# of Price/ Price/ Price/ Ret on
Transactions Announced in 1998 (1) Banks Earnings Book Assets Equity
- ---------------------------------- ------ ------- ---- ------ ------
<S> <C> <C> <C> <C> <C>
All Transactions 203 24.2x 2.733x 26.48% 12.89%
Assets $0-$100 Million 90 23.3 2.508 25.70 12.47
Equity/Assets 6%-8% 46 27.2 3.176 23.35 13.76
Equity/Assets 8%-10% 69 22.3 2.818 24.62 14.15
ROA 0.75%-1.00% 28 28.1 2.500 23.58 9.70
ROA 1.00%-1.50% 91 23.2 2.863 27.01 13.15
South Carolina Banks 6 35.9 3.507 32.19 9.51
Georgia Banks 20 23.3 2.960 28.47 14.82
Third Quarter Announcements 49 4.9 2.849 27.32 12.75
Fourth Quarter Announcements 36 19.9 2.447 24.83 14.28
Fourth Quarter Under $100 Million Assets 18 17.7 2.145 24.07 13.76
Fourth Quarter Over $100 Million Assets 18 22.0 2.750 25.60 14.80
Transactions Announced in 1999 (2)
----------------------------------
All Transactions 11 23.2x 2.319x 24.10% 12.35%
Georgia Banks 1 23.4 2.979 28.68 18.77
ABBEVILLE (3) 14.8x 180.4x 14.85% 12.20%
</TABLE>
(1) Through December; only includes transactions for Banks with assets under $1
billion for which sufficient data was available
(2) Through February; only includes transactions for Banks with assets under $1
billion for which sufficient data was available
(3) Based upon the merger price of $36.54 per share (based on the recent price
of $10.50 per share for FLAG), ABBEVILLE shares outstanding of 237,415,
ABBEVILLE 1998 earnings of $2.47 per share, ABBEVILLE book value of $20.25 per
share at December 31, 1998, and ABBEVILLE assets of $246 per share at December
31, 1998.
Based upon the assumptions noted in the table above, the merger of ABBEVILLE
into FLAG will take place at 14.8 times ABBEVILLE 1998 earnings, 180.4% of
ABBEVILLE book value at December 31, 1998, and 14.85% of ABBEVILLE assets at
December 31, 1998. The ratios are all below the average but within the range of
recent market multiples. It should be noted that the average market multiples
declined from the third quarter to the fourth quarter of 1998. Further, the
average multiples for banks with assets under $100 million were lower than those
for banks with assets over $100 million. Nevertheless, the below average
multiples reflect several factors:
- the lack of growth in ABBEVILLE's earnings;
- the higher risk associated with the concentration of consumer (primarily
used auto) loans at ABBEVILLE;
- the size of ABBEVILLE and its market and the lack of geographic
diversification; and,
- the fact that FLAG does not intend to force overhead reductions on
ABBEVILLE and will allow ABBEVILLE to retain its own board, management,
and basic cost structure.
<PAGE>
EXHIBIT 5
COMPARISON OF THE MERGER PRICING
TO PUBLIC MARKET TRANSACTIONS
(continued)
In determining the attractiveness of owning FLAG stock, it is important to
examine FLAG's recent pricing in comparison with recent pricing multiples for
publicly traded banks and bank holding companies. This pricing data is presented
below as of December 31, 1998, the most recent quarter-end for the banking
industry.
Price/ Price/ Current Current
Publicly Traded Banks (1) Earnings Book Val ROAE Yield
-------------------------------- --------- ---------- --------- -------
All Banks (206) 16.55x 214.7% 12.04% 2.05%
Banks Under $500MM Mkt Cap (171) 16.23 209.6 11.90 2.00
Banks Under $100MM Mkt Cap (72) 15.58 182.0 11.00 1.71
South Central Banks (37) 17.18 212.5 11.53 2.07
South Carolina Banks (3) 19.30 228.5 10.41 1.87
Georgia Banks (5) 19.41 216.3 10.39 1.94
FLAG - Recent Price ($10.50) 14.00x2 143.83 10.274 1.905
(1) As of December 31, 1998; subject to certain screens performed by Southard
Financial
(2) Based upon estimated 1999 earnings of $0.75 per share
(3) Based upon December 31, 1998 book value of $7.30 per share
(4) Based upon estimated 1999 earnings of $0.75 per share and December 31, 1998
book value of $7.30 per share
(5) Based upon 1998 FLAG dividends of $0.20 per share
Based upon an analysis of the data provided above, FLAG's price/earnings
multiple and price/book value multiples are below the range of other publicly
traded banks, while its return on equity and dividend yield are within the
range. The below average price/earnings and price/book value ratios reflect the
low reported earnings of FLAG. Earnings of FLAG have been significantly impacted
by non-recurring expenses related to one-time loan losses and by recent mergers.
<PAGE>
EXHIBIT 6
QUALIFICATIONS OF SOUTHARD FINANCIAL
BACKGROUND o Founded in 1987.
o Principals have combined business valuation experience of
nearly thirty years.
o Clients served throughout the United States, with
concentration in the Southeast.
o Broad industry experience.
o Services provided for public and closely-held companies.
o Annual valuation services provided for over 100 ESOPs,
making Southard Financial one of the largest ESOP appraisers
in the United States.
PROFESSIONAL
REDENTIALS o David A. Harris is a senior member of the c American
Society of Appraisers (ASA).
o Both principals of Southard Financial are Chartered
Financial Analysts (CFA).
o Both principals are former officers of the West Tennessee
Chapter of the ASA.
EDUCATIONAL
CREDENTIALS o Douglas K.Southard holds Doctor of Business Administration
and Master of Business Administration degrees from Indiana
University, with concentrations in finance, economics, and
quantitative analysis.
o David A. Harris holds the Master of Business
Administration degree from Memphis State University, with a
concentration in finance and business investments.
BUSINESS
ETHICS o Southard Financial andits principals adhere to the ethical
standards of the Institute of Chartered Financial Analysts
and the American Society of Appraisers.
o All reports conform to the Uniform Standards of
Professional Appraisal Practice.
o Southard Financial is committed to providing unbiased
opinions to be used for decision making.
o Fees for valuation services are not contingent upon the
conclusion of value or the completion of a transaction.
<PAGE>
SOUTHARD
FINANCIAL
{SOUTHARD LOGO}
SERVICES FOR COMMUNITY BANKS
Valuation Services
Minority Stock Appraisals
o ESOPs
o Dissenting Shareholders
o Insider Transactions
o Gift & Estate Taxes
o Charitable Gifts
o Private Placements/Offerings
o Share Repurchase Plans
o Dividend Reinvestment Plans
o Stock Option Plans
o Other Purposes
Control Valuations
o Pricing Merger/Acquisition Candidates
o Negotiating Pricing/Terms
o Fairness Opinions for Buyers and Sellers
o Evaluation of Offers Received
Consulting Services
Economic & Financial Analysis
o Branch Feasibility Studies
o Holding Company Formations
o Expert Witness Testimony
Strategic Planning
o Long-range Financial Plans
o Evaluation of Financing Alternatives
o Board of Director Seminars
<PAGE>
SOUTHARD FINANCIAL
665 Oakleaf Office Lane
Memphis, TN 38117
July 6, 1999
Mr. Thomas D. Sherard, Jr.
Abbeville Capital Corporation
203 South Main Street
Abbeville, SC 29620
Dear Mr. Sherard:
Southard Financial previously issued an opinion that the offer by Flag Financial
Corporation ("FLAG") to purchase the common stock of Abbeville Capital
Corporation in Abbeville, South Carolina ("ACC") was fair, from a financial
viewpoint, to the shareholders of ACC. Subsequently, Southard Financial was
retained to provide consulting services regarding two unsolicited offers to
acquire ACC received from The County Bank ("TCB") and Community Capital
Corporation ("CCC"), both based in Greenwood, South Carolina, and to compare
them with the offer by FLAG. The comparisons consisted of financial calculations
and investment quality considerations, but did not constitute fairness opinions.
Southard Financial and its principals have no past, present, or contemplated
future interest in ACC, FLAG, CCC, TCB, or the conclusions of our analyses.
Further, Southard Financial and its principals have no bias or conflict that
could cause a question as to our independence or objectivity. Compensation paid
to Southard Financial for the analyses is in no way contingent upon the
conclusions of the analyses.
From a purely financial perspective, the price set forth by CCC was the highest
of the three offers. However, it is Southard Financial's understanding that the
ACC Board renegotiated with FLAG, and that the FLAG offer now contains a floor
value of $9,110,250. Given the relative financial performance and condition of
FLAG and CCC, the revised offer by FLAG is comparable to the CCC offer, despite
the fact that its value is slightly lower. Therefore, we are able to reaffirm
our fairness opinion with respect to the FLAG offer.
Thank you for the opportunity to provide services. Please call if you have
questions about this letter.
Sincerely,
/s/David A. Harris
David A. Harris, CFA, ASA
Enclosure
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The FLAG Articles and Bylaws generally provide that any director who is
deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding in which the director was made a party by reason of the
fact he is or was a director, to the fullest extent authorized by the Georgia
Business Corporation Code; provided, however, that FLAG will not indemnify any
director for any liability or expenses incurred by such director (i) for any
appropriation, in violation of his duties, of any business opportunity of FLAG;
(ii) for any acts or omissions which involve intentional misconduct or a knowing
violation of law; (iii) for the types of liability set forth in Section 14-2-832
of the Georgia Business Corporation Code or successor provisions; or (iv) for
any transaction from which the director derives an improper personal benefit.
FLAG's Articles and Bylaws provide for the advancement of expenses to its
directors at the outset of a proceeding, upon the receipt from such director of
the written affirmation and repayment promise required by Section 14-2-856 of
the Georgia Business Corporation Code, the purchase of insurance by FLAG against
any liability of the director arising from his duties and actions as a director,
the survival of such indemnification to the director's heirs, executors and
administrators, and the limitation of the directors' liability to the
corporation (except under the four situations described above). The
indemnification provisions are non-exclusive, and shall not impair any other
rights to which those seeking indemnification or advancement of expenses may be
entitled. The FLAG Bylaws also provide for a similar amount of indemnification
for the officers of FLAG. In the Bylaws of FLAG, shareholders are entitled to
notification of any indemnification paid to the directors. The Georgia Business
Corporation Code's provisions for indemnification are summarized below.
Section 14-2-851 of the Georgia Business Corporation Code empowers a
corporation to indemnify any person who was or is a party to any proceeding by
reason of the fact that he is or was a director of the corporation or is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another domestic or foreign corporation,
partnership, joint venture, trust, employee benefit plan, or other entity
against liability incurred in connection with such proceeding, if he: (i)
conducted himself in good faith; and (ii) reasonably believed (a) in the case of
conduct in his official capacity, that such conduct was in the best interests of
the corporation, (b) in all other cases, that such conduct was at least not
opposed to the best interests of the corporation (for example, this Section
states that a director's conduct with respect to an employee benefit plan for a
purpose he believed in good faith to be in the interests of the participants in
and beneficiaries of the plan is conduct that satisfies this requirement), and
(c) in the case of any criminal proceeding, that he had no reasonable cause to
believe his conduct was unlawful. This Section further provides that the
termination of proceeding by judgment, order, settlement, or conviction or upon
a plea of nolo contendere or its equivalent is not, of itself, determinative
that the director did not meet the standards of conduct described above. This
Section also provides that a corporation is not permitted to indemnify any
director of the corporation under this Section in connection with a proceeding
by or in the right of the corporation (except for reasonable expenses incurred
in connection with the proceeding if it is determined that the director has met
the standards of conduct as outlined in this Section), nor may a corporation
indemnify a director under this Section in connection with any proceeding with
respect to conduct for which he or she was adjudged liable on the basis that
improper personal benefit was received by him (whether or not the conduct
involved action in his official capacity).
Section 14-2-852 requires a corporation to indemnify a director against
reasonable expenses incurred by the director in connection with any proceeding
to which he was a party because he was a director of the corporation where the
director is wholly successful, on the merits or otherwise, in the defense of
such proceeding.
II-1
<PAGE>
Section 14-2-853 empowers a corporation to advance funds to a director,
before the final disposition of a proceeding to which he was a party because he
was a director of the corporation, in order to pay for or reimburse the
reasonable expenses incurred by the director if the director delivers to the
corporation a written affirmation to the corporation of his belief that he has
satisfied the relevant standard of conduct described in Section 14-2-851 (or
that the proceeding involves conduct for which a director's liability has been
eliminated under the corporation's articles of incorporation), and a written
undertaking by the director to repay any funds so advanced (which must be an
unlimited general obligation of the director, but which need not be secured, and
which may be accepted by the corporation without reference to the financial
ability of the director to repay the advancement) if it is ultimately determined
that the director is not entitled to indemnification under the provisions of the
Georgia Business Corporation Code. This Section further provides that any
advancement of expenses to be made pursuant to this Section must be authorized
(i) by the Board of Directors: (a) when there are two or more disinterested
directors, by a majority vote of all the disinterested directors (a majority of
whom will constitute a quorum for such purposes) or by a majority of the members
of a committee consisting of two or more disinterested directors who are
appointed by such a vote; or (b) if there are fewer than two disinterested
directors, by majority vote of a quorum of the Board of Directors, in which
authorization the directors who do not qualify as disinterested directors may
take part; or (ii) by the shareholders of the corporation, but no shares owned
by a director who does not qualify as a disinterested director may be voted on
the authorization.
Section 14-2-854 provides that a director who is a party to a
proceeding by virtue of the fact that he is a director may apply to the court
conducting the proceeding or another court of competent jurisdiction for
indemnification or the advancement of expenses. Once a court receives such an
application, and after the court gives any notice which it deems necessary, the
court considering the application must order indemnification or advance for
expenses (i) if the court determines that the director is entitled to such
indemnification, or (ii) if the court determines that, taking into account all
of the relevant circumstances, it is fair and reasonable to indemnify the
director or to advance expenses to the director, even if the director failed to
satisfy the standards of conduct set forth in Section 14-2-851, failed to comply
with the requirements of Section 14-2-853, or was adjudged liable in any
proceeding by or in right of the corporation or any proceeding initiated on the
basis that improper personal benefit was received by the director (provided
that, if the director is adjudged so liable, the indemnification must be limited
to the reasonable expenses incurred by the director in connection with such
proceeding). In addition, Section 14-2-851 states that, if the court determines
that the director is entitled to indemnification or advance for expenses, the
court may also direct the corporation to pay the director's reasonable expenses
incurred in connection with obtaining such court-ordered indemnification or
advance for expenses.
Section 14-2-855 states that a corporation may not indemnify a director
under Section 14-2-851 unless such indemnification is authorized thereunder and
a determination is made that the indemnification of the director in a particular
proceeding is permissible due to the fact that the director has satisfied the
relevant standard of conduct set forth in Section 14-2-851. Such a determination
must be made: (i) if there are two or more disinterested directors, by the board
of directors by a majority vote of all such disinterested directors (a majority
of whom constitutes a quorum for such purposes) or by a majority of the members
of a committee of two or more disinterested directors appointed by such a vote;
(ii) by special legal counsel selected in the manner described in (i) above, or,
if there are fewer than two disinterested directors, selected by the board of
directors (including the directors who are not considered disinterested
directors); or (iii) by the shareholders of the corporation, but no shares owned
by a director who does not qualify as a disinterested director may be voted on
the determination. The authorization of indemnification and evaluation as to the
II-2
<PAGE>
reasonableness of the expenses involved with such indemnification must be
obtained in the same manner as the determination that indemnification is
permissible (as described above), except that, if there are fewer than two
disinterested directors, or the determination as to the permissibility of the
indemnification is made by special legal counsel, then the authorization of such
indemnification and the evaluation as to the reasonableness of the expenses
involved must be made by the board of directors (in which authorization and
evaluation directors who do not qualify as disinterested directors may
participate).
Section 14-2-856 states that, if authorized by the corporation's
articles of incorporation or a bylaw, contract, or resolution approved or
ratified by the shareholders by a majority of the votes entitled to be cast, a
corporation will be permitted to indemnify a director made a party to a
proceeding (including a proceeding brought by or in right of the corporation),
without regard to the other limitations on indemnification contained within
Title 14, Chapter 2, Article 8, Part 5 of the Georgia Business Corporation Code,
but any director, who at the time does not qualify as a disinterested director
with respect to an existing or threatened proceeding that would be covered by
such authorization, will not be permitted to vote the shares owned or voted
under the control of such director with respect to such authorization. However,
Section 14-2-856 further states that no corporation may indemnify a director
under Section 14-2-856 for any liability incurred in a proceeding in which the
director is adjudged liable to the corporation (or is subjected to injunctive
relief in favor of the corporation): (i) for any appropriation, in violation of
his duties, of any business opportunity of the corporation; (ii) for any acts or
omissions involving intentional misconduct or a knowing violation of law; (iii)
for the types of liability set forth in Section 14-2-832 of the Georgia Business
Corporation Code (relating to unlawful distributions); or (iv) for any
transaction from which he received an improper personal benefit. Where approved
or authorized in the manner described above, a corporation may advance or
reimburse expenses incurred by the director in advance of final disposition of
the proceeding only if the director delivers a written affirmation to the
corporation which indicates his good faith belief that his conduct does not fall
within any of the four categories of conduct listed above, and a written
undertaking by the director (executed personally or on his behalf) to repay any
advances made to him by the corporation if it is ultimately determined that the
director is not entitled to indemnification under this Section.
Section 14-2-857 provides that a corporation may indemnify and advance
expenses to an officer of the corporation who is made a party to a proceeding by
virtue of his status as an officer of the corporation. A corporation's officers
may be indemnified to the same extent as the corporation's directors (as
discussed above), and any officer who is not also a director (or who was made a
party to a proceeding solely due to an act or omission committed in his role as
an officer) may be indemnified to any further extent as provided in the articles
of incorporation, the bylaws, a resolution of the board of directors, or
contract except for liability arising out of conduct which constitutes: (i) an
appropriation, in violation of his duties as an officer, of any business
opportunity of the corporation; (ii) any acts or omissions which involve
intentional misconduct or a knowing violation of law; (iii) the types of
liability set forth in Section 14-2-832; or (iv) the receipt of an improper
personal benefit. In addition, this Section provides that a corporation may
indemnify and advance expenses to its employees or agents (who are not also
directors) to the extent provided in the corporation's articles of
incorporation, bylaws, general or specific action of its board of directors, or
contract (so long as such indemnification or advancement of expenses is
consistent with public policy).
Section 14-2-858 provides that the corporation is empowered to purchase
and maintain insurance on behalf of any person who is a director, officer,
employee, or agent of the corporation or who, while a director, officer,
employee or agent of the corporation serves at the request of the corporation as
a director, officer, partner, trustee, employee, or agent of another domestic or
foreign corporation, partnership, joint venture, trust, employee benefit plan,
or other entity against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him or advance expenses against
such liability under the provisions of Title 14, Chapter 2, Article 8, Part 5 of
the Georgia Business Corporation Code.
II-3
<PAGE>
The Registrant maintains an insurance policy insuring the Registrant
and directors and officers of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933.
Item 21. Exhibits And Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - Agreement and Plan of Merger, dated as of March 31, 1999,
by and between FLAG and Abbeville (included in Appendix A
to the proxy statement/prospectus and incorporated by
reference herein).
2.2 - Amendment to Agreement and Plan of Merger dated as of July
22, 1999, by and between FLAG and Abbeville (included in
Appendix A to the proxy statement/prospectus and
incorporated by reference herein)
2.3 - Agreement and Plan of Merger dated as of June 1, 1999, by
and between FLAG and First Hogansville Bankshares, Inc.
(Incorporated by reference herein from FLAG's Current
Report on Form 8-K filed June 4, 1999)
2.4 - Agreement and Plan of Merger dated as of May 7, 1999, by
and between FLAG and Thomaston Federal Savings Bank
(Incorporated by reference herein from FLAG's Current
Report on Form 8-K filed May 10, 1999)
4.1 - Articles of Incorporation of FLAG, as amended (Incorporated
herein by reference from Exhibit 3.1(i) of FLAG's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
4.2 - Bylaws of FLAG, as amended (Incorporated herein by
reference from Exhibit 3.1(ii) of FLAG's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997 and
Exhibit 3.3 to FLAG's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998)
5 - Opinion of Powell, Goldstein, Frazer & Murphy LLP(including
consent)
8 - Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
federal income tax matters (including consent)
10.1 - Employment Agreement between J. Daniel Speight, Jr.and FLAG
dated as of April 1, 1998*+
10.2 - Employment Agreement between John S. Holle and FLAG dated
as of April 1, 1998*+
II-4
<PAGE>
10.3 - Employment Agreement between Ellison C. Rudd and FLAG dated
as of April 1, 1998*+
10.4 - Employment Agreement between Patti S. Davis and FLAG dated
as of April 1, 1998*+
10.5 - Separation Agreement between Charles O. Hinely and FLAG
dated April 1, 1998*+
10.6 - Separation Agreement between J. Preston Martin and FLAG
dated May 13, 1998*+
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight,
Jr. and Citizens Bank dated November 2, 1992*+
10.8 - Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank)for individuals listed
on exhibit cover page*+
10.10 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals
listed on exhibit cover page*+
10.11 - Director Indexed Fee Continuation Program for First Flag
Bank effective February 3, 1995 (Incorporated by reference
from Exhibit 10.12 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.12 - Form of Director Agreement(pursuant to Director Indexed Fee
Construction Program for First Flag Bank) for individuals
listed on exhibit cover page (Incorporated by reference
from Exhibit 10.13 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.13 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Fee Continuation Program of First Flag Bank) for
individuals listed on exhibit cover page (Incorporated by
reference from Exhibit 10.14 from FLAG's Amendment No. 1 to
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997)*
10.14 - Form of Indexed Executive Salary Continuation Plan
Agreement by and between First Flag Bank and individuals
listed on exhibit coverage page (Incorporated by reference
from Exhibit 10.15 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.15 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Flag Bank) for individuals
listed on exhibit cover page (Incorporated by reference
from Exhibit 10.16 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
II-5
<PAGE>
10.16 - Indexed Executive Salary Continuation Plan Agreement by and
between First Flag Bank and William F. Holle, Jr. dated
February 3, 1995 (Incorporated by reference from Exhibit
10.17 from FLAG's Amendment No. 1 to Annual Report on Form
10-K for the fiscal year ended December 31, 1997)*
10.17 - FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.6 to
FLAG's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)*
10.18 - FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.7 to
FLAG's Annual Report on Form 10-K for the year ended
December 31, 1993)*
10.19 - Separation Agreement between Leonard H. Bateman and FLAG
dated December 11, 1998 (Incorporated by reference from
Exhibit 10.1 to FLAG's Current Report on Form 8-K dated
June 4, 1999)*
10.20 - Separation Agreement between Dennis D. Allen and FLAG
dated December 31, 1998 (Incorporated by reference from
Exhibit 10.2 to FLAG's Current Report on Form 8-K dated
June 4, 1999)*
11 - Statement regarding Computation of Per Share Earnings+
13 - FLAG's Annual Report for the fiscal year ended December 31,
1997 (Incorporated herein by reference from Exhibit 13 to
FLAG's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997)
21 - Subsidiaries of FLAG+
23.1 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of FLAG Financial Corporation)
23.2 - Consent of Robinson, Grimes and Company, P.C. (with respect
to financial statements of FLAG Financial Corporation)
23.3 - Consent of Thigpen, Jones, Seaton & Co., P.C. (with respect
to financial statements of Three Rivers Bancshares, Inc.)
23.4 - Consent of Tourville Simpson & Henderson (with respect to
financial statements of Abbeville Capital Corporation)
23.5 - Consent of Southard Financial
23.6 - Consents of Powell, Goldstein, Frazer & Murphy LLP(included
in Exhibits 5 and 8)
24 - Powers of Attorney (appears on the signature page to this
Registration Statement)
99.1 - Form of Proxy of Abbeville
99.2 - Consent to be Named in Registration Statement
II-6
<PAGE>
99.3 FLAG Annual Report to Shareholders for the fiscal year
ended December 31, 1998
99.4 FLAG Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999
*The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Registration Statement on Form S-4.
+Incorporated by reference from exhibit of the same number from the
FLAG's Amendment No. 1 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
II-7
<PAGE>
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's Articles of Incorporation or Bylaws,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of LaGrange, State of Georgia, on July ___, 1999.
FLAG FINANCIAL CORPORATION
By: /s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Daniel Speight, Jr. and John S. Holle,
and each of them, as true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith,
including any Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
which said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities indicated on July ___, 1999.
Signature Title
--------- -----
/s/ Dennis D. Allen Director
----------------------------
Dennis D. Allen
/s/ Dr. A. Glenn Bailey Director
--------------------------
Dr. A. Glenn Bailey
/s/ Leonard H. Bateman Director
--------------------------
Leonard H. Bateman
II-9
<PAGE>
Signature Title
--------- -----
/s/ H. Speer Burdette, III Director
--------------------------
H. Speer Burdette, III
/s/ Patti S. Davis Director, Senior Vice President and
-------------------------- Chief Financial Officer (principal financial
Patti S. Davis and accounting officer)
/s/ Fred A. Durand, III Director
---------------------------
Fred A. Durand, III
/s/ John S. Holle Chairman of the Board and Director
---------------------------
John S. Holle
/s/ James W. Johnson Director
---------------------------
James W. Johnson
/s/ Kelly R. Linch Director
---------------------------
Kelly R. Linch
/s/ J. Preston Martin Director
---------------------------
J. Preston Martin
/s/ J. Daniel Speight, Jr. President, Chief Executive Officer and
--------------------------- Director (principal executive officer)
J. Daniel Speight, Jr.
/s/ John W. Stewart, Jr. Director
---------------------------
John W. Stewart, Jr.
/s/ Robert W. Walters Director
---------------------------
Robert W. Walters
II-10
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - Agreement and Plan of Merger, dated as of March 31, 1999,
by and between FLAG and Abbeville (included in Appendix A
to the proxy statement/prospectus and incorporated by
reference herein)
2.2 - Amendment to Agreement and Plan of Merger dated as of July
22, 1999, by and between FLAG and Abbeville (Included in
Appendix A to the proxy statement/ prospectus and
incorporated by reference herein)
2.3 - Agreement and Plan of Merger dated as of June 1, 1999, by
and between FLAG and First Hogansville Bankshares, Inc.
(Incorporated by reference herein from FLAG's CurrentReport
on Form 8-K filed June 4, 1999)
2.4 - Agreement and Plan of Merger dated as of May 7, 1999, b
and between FLAG and Thomaston Federal Savings Bank
(Incorporated by reference herein from FLAG's CurrentReport
on Form 8-K filed May 10, 1999)
4.1 - Articles of Incorporation of FLAG, as amended (Incorporated
herein by reference from Exhibit 3.1(i) of FLAG's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993)
4.2 - Bylaws of FLAG,as amended (incorporated herein by reference
from Exhibit 3.1(ii) of FLAG's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1997 and Exhibit 3.3
to FLAG's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998)
5 - Opinion of Powell, Goldstein, Frazer & Murphy LLP(including
consent)
8 - Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
federal income tax matters (including consent)
10.1 - Employment Agreement between J. Daniel Speight, Jr.and FLAG
dated as of April 1, 1998*+
10.2 - Employment Agreement between John S. Holle and FLAG dated
as of April 1, 1998*+
10.3 - Employment Agreement between Ellison C. Rudd and FLAG dated
as of April 1, 1998*+
10.4 - Employment Agreement between Patti S. Davis and FLAG dated
as of April 1, 1998*+
10.5 - Separation Agreement between Charles O. Hinely and FLAG
dated April 1, 1998*+
10.6 - Separation Agreement between J. Preston Martin and FLAG
dated May 13, 1998*+
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight,
Jr. and Citizens Bank dated November 2, 1992*+
<PAGE>
10.8 - Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank)for individuals listed
on exhibit cover page*+
10.10 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank)for individuals listed
on exhibit cover page*+
10.11 - Director Indexed Fee Continuation Program for First Flag
Bank effective February 3, 1995 (Incorporated by reference
from Exhibit 10.12 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.12 - Form of Director Agreement(pursuant to Director Indexed Fee
Construction Program for First Flag Bank) for individuals
listed on exhibit cover page (Incorporated by reference
from Exhibit 10.13 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.13 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement(pursuant to Director Indexed
Fee Continuation Program of First Flag Bank)for individuals
listed on exhibit cover page (Incorporated by reference
from Exhibit 10.14 from FLAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.14 - Form of Indexed Executive Salary Continuation Plan
Agreement by and between First Flag Bank and individuals
listed on exhibit coverage page (Incorporated by reference
from Exhibit 10.15 from LAG's Amendment No. 1 to Annual
Report on Form 10-K for the fiscal year ended December 31,
1997)*
10.15 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Flag Bank) for individuals
listed on exhibit cover page(Incorporated by reference from
Exhibit 10.16 from FLAG's Amendment No. 1 to Annual Report
\ on Form 10-K for the fiscal year ended December 31, 1997)*
10.16 - Indexed Executive Salary Continuation Plan Agreement by and
between First Flag Bank and William F. Holle, Jr. dated
February 3, 1995 (Incorporated by reference from Exhibit
10.17rom FLAG's Amendment No. 1 to Annual Report on Form
10-K for the fiscal year ended December 31, 1997)*
10.17 - FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.6 to
FLAG's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)*
10.18 - FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.7 to
FLAG's Annual Report on Form 10-K for the year ended
December 31, 1993)*
<PAGE>
10.19 - Separation Agreement between Leonard H. Bateman and FLAG
dated December 11, 1998 (Incorporated by reference from
Exhibit 10.1 to FLAG's Current Report on Form 8-K dated
June 4, 1999)*
10.20 - Separation Agreement between Dennis D. Allen and FLAG dated
December 31, 1998 (Incorporated by reference from Exhibit
10.2 to FLAG's Current Report on Form 8-K dated June 4,
1999)*
11 - Statement regarding Computation of Per Share Earnings+
13 - FLAG's Annual Report for the fiscal year ended December 31,
1997 (Incorporated herein by reference from Exhibit 13
to FLAG's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997)
21 - Subsidiaries of FLAG+
23.1 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of FLAG Financial Corporation)
23.2 - Consent of Robinson, Grimes and Company, P.C. (with respect
to financial statements of FLAG Financial Corporation)
23.3 - Consent of Thigpen, Jones, Seaton & Co., P.C. (with respect
to financial statements of Three Rivers Bancshares, Inc.)
23.4 - Consent of Tourville Simpson & Henderson (with respect to
financial statements of Abbeville Capital Corporation)
23.5 - Consent of Southard Financial
23.6 - Consents of Powell,Goldstein, Frazer & Murphy LLP (included
in Exhibits 5 and 8)
24 - Powers of Attorney (appears on the signature page to this
Registration Statement)
99.1 - Form of Proxy of Abbeville
99.2 - Consent to be Named in Registration Statement
99.3 FLAG Annual Report to Shareholders for the fiscal year
ended December 31, 1998
99.4 - FLAG Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999
*The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Registration Statement on Form S-4.
+Incorporated by reference from exhibit of the same number from the
FLAG's Amendment No. 1 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
EXHIBIT 5
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
July 26, 1999
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30204
Ladies and Gentlemen:
This opinion is given in connection with the filing of a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission, by FLAG Financial Corporation, a corporation organized and
existing under the laws of the State of Georgia ("FLAG"), with respect to the
registration under the Securities Act of 1933, as amended, of 826,900 shares of
the $1.00 par value common stock of FLAG (the "FLAG common stock") to be issued
in connection with the proposed merger of Abbeville Capital Corporation
("Abbeville") with FLAG (the "Merger").
The Merger is intended to be effected pursuant to an Agreement and Plan of
Merger dated as of March 31, 1999 between FLAG and Abbeville, pursuant to which
each outstanding share of $1.00 par value common stock of Abbeville (other than
shares held by FLAG, Abbeville or their subsidiaries or by stockholders who
perfect dissenters' rights) will be converted into and exchanged for the right
to receive 3.48 shares of FLAG common stock.
In rendering this opinion, we have examined such corporate records and
documents as we have deemed relevant and necessary as the basis for the opinion
set forth herein.
Based upon the foregoing, it is our opinion that the shares of FLAG common
stock when issued to holders of Abbeville common stock on the terms and upon
fulfillment of the conditions set forth in the Agreement, will be validly
issued, fully paid and nonassessable under the Georgia Business Corporation
Code.
We consent to the use of this opinion and to the reference made to the firm
in the proxy statement/prospectus of FLAG and Abbeville constituting part of the
Registration Statement.
/s/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
EXHIBIT 8
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
July 26, 1999
FLAG Financial Corporation
100 Union Street
P.O. Box 156
Vienna, Georgia 31092
Attention: J. Daniel Speight, Jr.
Abbeville Capital Corporation.
203 South Main Street
Abbeville, South Carolina 29620
Attention: Thomas D. Sherard, Jr.
Re: Merger of Abbeville Capital Corporation into FLAG Financial
Corporation
Ladies and Gentlemen:
You have requested our opinion as to the tax consequences under the
Internal Revenue Code of 1986, as amended (the "Code") of the proposed merger
(the "Merger") of Abbeville Capital Corporation ("Abbeville"), a corporation
organized and existing under the laws of the State of South Carolina, with and
into FLAG Financial Corporation ("FLAG"), a corporation organized and existing
under the laws of the State of Georgia, with FLAG as the surviving entity, in
accordance with that certain Agreement and Plan of Merger (the "Merger
Agreement") dated March 31, 1999, as amended, and incorporated herein by
reference. Specifically, you have requested us to opine that the Merger will
constitute a "tax-free" reorganization within the meaning of Section 368 of the
Code.
In rendering the opinions expressed below, we have examined the following
documents (the "Documents"):
(a) The Merger Agreement and amendments thereto;
(b) The Statements of Facts and Representations of Abbeville and FLAG
that have been delivered to the undersigned and incorporated
herein by reference; and
(c) Such other documents and records as we have deemed necessary in
order to enable us to render the opinions expressed below.
Terms not otherwise defined in this opinion letter have the meaning given
those terms in the Documents.
<PAGE>
In rendering the opinions expressed below, we have assumed, without any
independent investigation or verification of any kind, that all of the
information as to factual matters contained in the Documents is true, correct
and complete. Any inaccuracy with respect to factual matters contained in the
Documents or incompleteness in our understanding of the facts could alter the
conclusion reached in this opinion.
In addition, for purposes of rendering the opinions expressed below, we
have assumed with your permission, that (i) all signatures on all Documents
reviewed by us are genuine, (ii) all Documents submitted to us as originals are
true and correct, (iii) all Documents submitted to us as copies are true and
correct copies of the originals thereof, (iv) each natural person signing any
Document reviewed by us had the legal capacity to do so, and (v) the Merger and
the transactions contemplated in the Merger Agreement will be effected in
accordance with the terms thereof.
Finally, with your permission we have assumed that the sum of: (i) the
amount of cash and the value of any property other than FLAG stock paid to
Abbeville stockholders who exercise their statutory right to dissent to the
Merger, (ii) the amount of cash and the value of any property other than FLAG
stock given as consideration by FLAG (or a person related to FLAG within the
meaning of Treasury Regulation Section 1.368-1(e)(2)) in exchange for Abbeville
stock prior to, but in contemplation of, the Merger or in redemption of FLAG
stock after the Merger, and (iii) the amount of cash paid to Abbeville
stockholders in lieu of the issuance of fractional shares of FLAG stock will not
exceed fifty percent (50%) of the value of all of the formerly outstanding
shares of Abbeville stock as of the time of the Merger.
OPINION
Based upon the foregoing, it is our opinion that, provided the Merger
qualifies as a statutory merger under the Georgia Business Corporation Code, the
Merger will constitute a reorganization within the meaning of Code Section
368(a)(1)(A). Accordingly, it is our opinion that:
a. No gain or loss will be recognized for federal income tax purposes by
Abbeville stockholders upon the exchange of shares of Abbeville stock
for shares of FLAG stock. Code Section 354(a).
b. Cash received in lieu of fractional shares will be treated for federal
income tax purposes as if the fractional shares were distributed and
then redeemed by FLAG. The cash payments will be treated as having
been received as a distribution in exchange for the fractional shares
redeemed. Code Section 302(a); Rev. Rul. 66-365, 1966-2 C.B. 116.
c. Abbeville stockholders that receive FLAG stock, including fractional
shares, will have a basis in that FLAG stock equal to their basis in
the Abbeville stock surrendered therefore. Code Section 358(a)(1).
d. The holding period of the FLAG stock received by Abbeville
stockholders will include the period during which the Abbeville
stockholders held the Abbeville stock surrendered therefore, provided
the Abbeville stock was held as a capital asset. Code Section 1223(1).
e. Abbeville stockholders who receive solely cash pursuant to their
statutory right to dissent will be treated as having received such
payment in redemption of their stock, as provided in Code Section
302(a). Generally, any gain or loss recognized by any such Abbeville
shareholder will be capital gain or loss, provided (i) the Abbeville
common stock constitutes a capital asset in the hands of such
<PAGE>
shareholder, and (ii) the requirements of Section 302(b)(1), (2) or
(3) of the Code are met. Each affected Abbeville shareholder should
consult such shareholder's own tax advisor for the tax effect of such
redemption (i.e., exchange treatment or dividend).
f. No gain or loss will be recognized by Abbeville as a consequence of
the Merger, except for gain or loss recognized pursuant to Treasury
Regulations issued under Code Section 1502. Code Section 361(a).
g. FLAG's basis in the assets received from Abbeville as part of the
Merger will equal Abbeville's basis in the assets immediately prior to
the Merger. Code Section 362(b).
h. The holding period of the Abbeville assets transferred to FLAG as part
of the Merger shall include the period during which such assets were
held by Abbeville, provided the assets were held as capital assets.
Code Section 1223(2).
* * * * *
Our opinions are based upon the facts as they exist today, the existing
provisions of the Code, Treasury Regulations issued or proposed thereunder,
published Revenue Rulings and releases of the Internal Revenue Service, and
existing federal case law, any of which could be changed at any time. Any such
change may be retroactive in application and could modify the legal conclusion
upon which our opinions are based.
In addition, this opinion does not address any tax considerations under
foreign, state, or local laws, or the tax considerations to certain Abbeville
stockholders in light of their particular circumstances, including persons who
are not United States persons, dealers in securities, tax-exempt entities,
stockholders who do not hold Abbeville common stock as "capital assets" within
the meaning of Code Section 1221, and stockholders who acquired their shares of
Abbeville common stock pursuant to the exercise of Abbeville options or
otherwise as compensation.
This opinion letter is being furnished only to the parties to which it is
addressed and is solely for their benefit. No other person shall be entitled to
rely on the opinions without our prior express written consent. This opinion
letter may not be used, circulated, quoted, published, or otherwise referred to
for any purpose without our prior express written consent, except that we
consent to the inclusion of this opinion as an exhibit to the registration
statements required under the Securities Act of 1933 (the "Securities Act") in
connection with the Distribution and the Merger. In giving such consent, we do
not thereby admit that we are acting within the category of persons whose
consent is required under Section 7 of the Securities Act and the rules and
regulations of the Securities and Exchange Commission thereunder. Our opinions
are limited to the matters stated herein, and no opinion is implied or may be
inferred beyond the opinions expressly stated herein.
Very truly yours,
/s/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<PAGE>
July 26, 1999
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Ladies and Gentlemen:
This STATEMENT OF FACTS AND REPRESENTATIONS made by the management of FLAG
Financial Corporation is intended to provide Powell, Goldstein, Frazer & Murphy
LLP with certain facts and representations that may be relied upon in connection
with the issuance of an opinion as to certain Federal income tax consequences
that will arise upon consummation of the statutory merger (the "Merger") of
Abbeville Capital Corporation, a corporation organized and existing under the
laws of the State of Georgia ("Abbeville"), with and into FLAG Financial
Corporation, a corporation organized and existing under the laws of the State of
Georgia ("FLAG"), with FLAG as the survivor.
The undersigned hereby certifies, to the best of his or her knowledge and
belief, after due inquiry and investigation, as follows:
(a) Except for the receipt of cash by dissenters or in lieu of the
issuance of fractional shares of FLAG stock in the Merger, all of the
Abbeville stock outstanding immediately prior to the Merger will be
exchanged solely for FLAG common stock. Thus, other than the receipt
of cash by dissenters or in lieu of fractional shares, no
consideration will be paid or received (directly or indirectly,
actually or constructively) for Abbeville stock other than FLAG common
stock.
(b) The fair market value of the FLAG stock and other consideration, if
any, received by each Abbeville shareholder will be approximately
equal to the fair market value of the Abbeville stock surrendered in
the exchange.
(c) Neither FLAG nor any "related person" of FLAG (as such term is defined
by Treasury Regulation 1.368-1(e)(3)) has acquired any of the
Abbeville stock in contemplation of the Merger, nor will acquire,
purchase or redeem any of the FLAG common stock to be issued to the
Abbeville stockholders in connection with the Merger.
(d) FLAG has no plan or intention to sell or otherwise dispose of any of
the assets of Abbeville or its subsidiaries to be acquired in the
Merger, except for dispositions to be made in the ordinary course of
business.
(e) Following the Merger, FLAG will continue a historic business of
Abbeville and its subsidiaries, or use a significant portion of the
historic business assets of Abbeville and its subsidiaries in a
business.
(f) FLAG will pay the expenses, if any, it incurs in connection with the
Merger.
(g) There is no indebtedness, other than indebtedness that arose in the
ordinary course of the parties' trades or businesses, existing between
FLAG (or its subsidiaries) and Abbeville (or its subsidiaries) that
was issued, acquired, or will be settled at a discount.
<PAGE>
(h) FLAG is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as
amended (the "Code").
(i) The payment of cash in lieu of the issuance of fractional shares of
FLAG stock is solely for the purposes of avoiding the expense and
inconvenience to FLAG of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash
consideration that will be paid in the transaction to Abbeville
stockholders instead of issuing fractional shares of FLAG will not
exceed one percent of the total consideration that will be issued in
the transaction to Abbeville stockholders. The fractional share
interest of each Abbeville shareholder will be aggregated and no
shareholder will receive cash in an amount equal to or greater than
the value of one full share of FLAG stock.
(j) None of the compensation received by any shareholder-employees of
Abbeville will be separate consideration for, or allocable to, any of
their shares of Abbeville stock; none of the shares of FLAG stock
received by any shareholder-employees of Abbeville will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees of Abbeville will be
for services actually rendered and will be determined by bargaining at
arm's length.
(k) The Agreement and Plan of Merger between FLAG and Abbeville dated as
of July 22, 1999 and the attachments thereto represent the entire
understanding of Abbeville and FLAG with respect to the Merger.
(l) Unless required by a "determination" (as defined in Section 1313 of
the Code) or as otherwise required by applicable law, FLAG will not
take any position on any tax returns or any other action or reporting
position which is inconsistent with the qualification of the Merger as
a reorganization under Section 368(a)(1)(A) of the Code or which is
inconsistent with any of the representations in this letter.
(m) The aggregate amount of cash to be paid to Abbeville stockholders in
connection with the Merger, including cash paid to Abbeville
stockholders who will exercise their dissenters' rights by electing to
accept cash for their Abbeville stock in lieu of FLAG stock and cash
issued to Abbeville stockholders in lieu of the issuance of fractional
shares, will not exceed 50 percent of the value of the Abbeville stock
outstanding at the time of the Merger.
(n) The Merger is being entered into for valid business reasons as set
forth in the Registration Statement on Form S-4 and not solely for tax
purposes.
FLAG FINANCIAL CORPORATION
By: /s/ J. Daniel Speight, Jr.
--------------------------
Title: President and Chief Executive Officer
-------------------------------------
Date: July 26, 1999
-------------
<PAGE>
July 26, 1999
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Ladies and Gentlemen:
This STATEMENT OF FACTS AND REPRESENTATIONS made by the management of Abbeville
Capital Corporation is intended to provide Powell, Goldstein, Frazer & Murphy
LLP with certain facts and representations that may be relied upon in connection
with the issuance of an opinion as to certain Federal income tax consequences
that will arise upon consummation of the statutory merger (the "Merger") of
Abbeville Capital Corporation, a corporation organized and existing under the
laws of the State of South Carolina ("Abbeville"), with and into FLAG Financial
Corporation, a corporation organized and existing under the laws of the State of
Georgia ("FLAG"), with FLAG as the survivor.
The undersigned hereby certifies, to the best of his or her knowledge and
belief, after due inquiry and investigation, as follows:
(a) Except for the receipt of cash by dissenters or in lieu of the
issuance of fractional shares of FLAG in the Merger, all of the
Abbeville stock outstanding immediately prior to the Merger will be
exchanged solely for FLAG common stock. Thus, other than the receipt
of cash by dissenters or in lieu of fractional shares, no
consideration will be paid or received (directly or indirectly,
actually or constructively) for the Abbeville stock exchanged in the
Merger, other than FLAG common stock.
(b) The fair market value of the FLAG stock and other consideration, if
any, received by each Abbeville shareholder in the Merger will be
approximately equal to the fair market value of the Abbeville stock
surrendered in the exchange.
(c) To the best knowledge of Abbeville, FLAG has no present plan or
intention to redeem any of its stock issued in the Merger, there is no
present plan or intention on the part of the Abbeville stockholders to
sell any of the FLAG stock received in the Merger to a person related
(as defined in Treasury Regulation Section 1.368-1(e)(3)) to FLAG, and
no Abbeville shareholder has sold Abbeville stock to FLAG or any
person related to FLAG or Abbeville in contemplation of the Merger.
(d) The liabilities, if any, of Abbeville to be assumed by FLAG and the
liabilities, if any, to which the transferred assets of Abbeville are
subject were incurred by Abbeville in the ordinary course of its
business.
<PAGE>
(e) Abbeville and its stockholders will pay their respective expenses, if
any, incurred in connection with the Merger.
(f) There is no indebtedness, other than indebtedness that arose in the
ordinary course of the parties' trades or businesses, existing between
FLAG (or its subsidiaries prior to the Merger) and Abbeville (or its
subsidiaries prior to the Merger) that was issued, acquired or will be
settled at a discount.
(g) Abbeville is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as
amended (the "Code").
(h) The aggregate amount of cash to be issued to Abbeville stockholders in
connection with the Merger, including cash issued to Abbeville
stockholders who will exercise their dissenters' rights by electing to
accept cash for their Abbeville stock in lieu of FLAG stock and cash
issued to Abbeville stockholders in lieu of the issuance of fractional
shares, will not exceed 50 percent of the value of the Abbeville stock
outstanding at the time of the Merger.
(i) None of the compensation received by any shareholder-employees of
Abbeville will be separate consideration for, or allocable to, any of
their shares of Abbeville stock; none of the shares of FLAG stock
received by any shareholder-employees of Abbeville will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees of Abbeville will be
for services actually rendered and will be determined by bargaining at
arm's length.
(j) Abbeville is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(k) The fair market value and total adjusted basis of the assets of
Abbeville transferred to FLAG will equal or exceed the sum of the
liabilities, if any, assumed by FLAG, plus the amount of liabilities,
if any, to which the transferred assets are subject.
(l) The Merger will be effected in accordance with the Agreement and Plan
of Merger by and between Abbeville and FLAG, as amended.
(m) Unless required by a "determination" (as defined in Section 1313 of
the Code) or as otherwise required by applicable law, Abbeville will
not take, and the management of Abbeville is not aware of any plan or
intention of Abbeville stockholders to take any position on any
Federal, state or local tax return, or take any other action or
reporting position, which is inconsistent with the merger of Abbeville
into FLAG as a tax-free reorganization under Section 368(a)(1)(A) of
the Code, or which is inconsistent with the representations made in
this letter.
<PAGE>
(n) The Merger is being entered into for valid business reasons as set
forth in the Registration Statement on Form S-4 and not solely for tax
purposes.
ABBEVILLE CAPITAL CORPORATION
By: /s/ Thomas D. Sherard, Jr.
--------------------------
Title President and Chief Executive Officer
-------------------------------------
Date: July 26, 1999
-------------
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 29, 1999, except for note 18 as
to which the date is March 12, 1999, accompanying the consolidated financial
statements of FLAG Financial Corporation and subsidiaries incorporated by
reference in the Form S-4 Registration Statement and Prospectus. We consent to
the use of the aforementioned report in this Form S-4 Registration Statement and
Prospectus and to the use of our name as it appears under the caption "Experts."
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
July 27, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 31, 1997, accompanying the
consolidated financial statements of FLAG Financial Corporation and subsidiaries
incorporated by reference in the Form S-4 Registration Statement and Prospectus.
We consent to the use of the aforementioned report in this Form S-4 Registration
Statement and Prospectus and to the use of our name as it appears under the
caption "Experts."
/s/ ROBINSON, GRIMES AND COMPANY, P.C.
Columbus, Georgia
July 27, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 28, 1998, except for note S as
to which the date is February 18, 1998, accompanying the consolidated financial
statements of Three Rivers Bancshares, Inc. and subsidiaries incorporated by
reference in the Form S-4 Registration Statement and Prospectus. We consent to
the use of the aforementioned report in this Form S-4 Registration Statement and
Prospectus and to the use of our name as it appears under the caption "Experts."
/s/ THIGPEN, JONES, SEATON & CO., P.C.
Dublin, Georgia
July 27, 1999
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 4, 1999, accompanying the
consolidated financial statements of Abbeville Capital Corporation and
subsidiary contained in the Form S-4 Registration Statement and Prospectus. We
consent to the use of the aforementioned report in this Form S-4 Registration
Statement and Prospectus and to the use of our name as it appears under the
caption "Experts."
/s/ TOURVILLE, SIMPSON & HENDERSON
Columbia, South Carolina
July 23, 1999
EXHIBIT 23.5
CONSENT OF SOUTHARD FINANCIAL
We hereby consent to the inclusion in this Registration Statement on
Form S-4 of our opinion dated March 22, 1999 and to all references to our firm
in the Registration Statement.
/s/ SOUTHARD FINANCIAL
Memphis, Tennessee
July 26, 1999
EXHIBIT 99.1
PROXY
ABBEVILLE CAPITAL CORPORATION
SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby constitutes and appoints Thomas D. Sherard, Jr. and
_______________, or either of them, as proxies, each with full power of
substitution, to vote the number of shares of common stock of Abbeville Capital
Corporation, a South Carolina corporation, which the undersigned would be
entitled to vote if personally present at the special meeting of Abbeville
stockholders to be held at the main office of The Bank of Abbeville located at
203 S. Main Street, Abbeville, South Carolina 29620, on ____________,
________________, 1999, at _____ p.m., local time, and at any adjournment or
postponement thereof upon the proposals described in the proxy
statement/prospectus and the notice of the special meeting of stockholders,
dated _____________, 1999, the receipt of which is acknowledged in the manner
specified below.
1. Merger. To approve, ratify, confirm and adopt the Agreement and Plan of
Merger, dated as of March 31, 1999, by and between FLAG Financial
Corporation and Abbeville pursuant to which (i) Abbeville will merge with
and into FLAG, and (ii) each share of the $5.00 par value common stock of
Abbeville issued and outstanding at the effective time of the Merger will
be exchanged fora minimum of 3.48 shares of $1.00 par value common stock of
FLAG.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In the discretion of the proxies to vote on such other matters as may
properly come before the special meeting or any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 ABOVE.
Please sign this proxy exactly as your name appears below. When shares are
held jointly, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
DATED: __________________________ , 1999
__________________________
Signature
__________________________
Signature if held jointly
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF ABBEVILLE CAPITAL
CORPORATION, AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
I _____will _____will not attend the special meeting.
EXHIBIT 99.2
CONSENT TO BE NAMED IN
REGISTRATION STATEMENT OF
FLAG FINANCIAL CORPORATION
The undersigned hereby consents to be named as a director nominee of FLAG
in the prospectus contained in the Registration Statement on Form S-4 of FLAG
Financial Corporation.
/s/ Thomas D. Sherard, Jr.
-------------------------------
Thomas D. Sherard, Jr.
July 27, 1999
-------------
Date
/s/ Joseph L. Savitz, Jr.
-------------------------------
Joseph L. Savits, Jr.
July 27, 1999
-------------
Date
EXHIBIT 99.3
FLAG FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998 (without exhibits)
<PAGE>
A Partnership of Community Banks
1998 Annual Report
Table of Contents
Corporate Profile ......................................................... 1
Letter to Shareholders .................................................... 2
Financial Highlights ...................................................... 5
A Community of Partner Banks .............................................. 6
Partnership: Progress and Preservation .................................... 7
Comprehensive Support, Impressive Benefits ................................ 8
Into the Twenty-First Century ............................................. 11
Board of Directors ........................................................ 12
FLAG Partner Banks ........................................................ 14
Management's Discussion
and Analysis of Financial Condition and Results of Operations ............. 16
Table of Contents to Consolidated Financial Statements .................... 25
Corporate Information ...................................... Inside Back Cover
<PAGE>
Corporate Profile
- -----------------
FLAG Financial Corporation, headquartered in LaGrange, Georgia, is a multi-bank
holding company whose wholly-owned subsidiaries are First Flag Bank, in
LaGrange, Georgia, and Citizens Bank, in Vienna, Georgia. Citizens Bank also
includes the operations of Bank of Milan, Empire Banking Company and The Brown
Bank, all three of which operate as divisions of Citizens Bank. Through these
subsidiaries, the Company provides a broad range of financial products and
services to markets located throughout West Central, Middle and Southeast
Georgia.
The Company currently serves these markets through 23 banking offices in 10
communities, and offers retail and commercial banking, mortgage banking,
appraisal, insurance, investment and trust services. As of December 31, 1998,
FLAG had assets of approximately $551 million and its common stock is traded on
The Nasdaq Stock Market under the symbol "FLAG"
Mission Statement
- -----------------
Our mission is to be a diversified provider of financial services, creating
partnerships that maximize value for our customers, our shareholders, our
employees and our communitites.
[CHART]
Stock Trade Activity
(number of trades)
1994 344
1995 536
1996 449
1997 829
1998 1,349
[END CHART]
[CHART]
Stock Prices at Year End
94 $5.75
95 $9.17
96 $7.17
97 $14.33
98 $11.50
[END CHART]
[CHART]
Book Value at Year End
94 $5.49
95 $6.24
96 $6.24
97 $6.91
98 $7.30
Stock prices and Book value reflect adjustment for 3-for-2 stock split paid June
3, 1998.
[END CHART]
A Partnership of Community Banks
--------------------------------
1
<PAGE>
A Partnership of Community Banks
2
To Our Shareholders
Dear Shareholders:
It is a pleasure to report to you the operating success of your company, FLAG
Financial Corporation, for the year 1998. The community bank vision initiated in
late 1997 became a reality with the merger of Middle Georgia Bankshares, Inc.
and FLAG Financial Corporation on March 31, 1998. From this merger of equals, a
foundation was created to build a new and strategically different FLAG Financial
Corporation. This initial combination positioned the organization for enhanced
long-term growth and expansion of our franchise. During the year we made
significant progress in both of those areas. Initially, we more than doubled our
asset base, as well as our number of branches. We also increased our market
presence, which was formerly limited to West Central Georgia, to include Middle
and Southeast Georgia. The expansion of our franchise adds to the diversity of
our markets, provides us with opportunities to leverage investments in
technology and people and allows us to demonstrate that our philosophy of
community bank partnerships can be successfully implemented in many distinct
markets. Nineteen ninety-eight was also a year in which we built upon the
foundation established in 1997. We completed a major conversion of our data
processing system, invested heavily in other technologies and strengthened and
expanded our management team. In sum, we finished the year well positioned to
maintain the momentum that we built in the last twelve months.
[PHOTO]
J. Daniel Speight, Jr. and Johns S. Holle
[END PHOTO]
A YEAR OF EXTERNAL EXPANSION...
If there is one thing that 1998 will be remembered for, it will likely be that
this was the year in which we proved that the term "community bank partnership"
was more than a concept. During the year, we successfully completed four
community bank partnership mergers. Early in the year, as mentioned previously,
we completed the merger with Middle Georgia Bankshares, Inc., giving FLAG
Financial Corpor-ation a new presence in Central and South Central Georgia. In
addition to broadening FLAG Financial Corporation's market presence, this merger
strengthened our management capabilities, as well as provided depth to our
management team. Later in the year, we completed mergers with Three Rivers
Bancshares, Inc., based in Milan, Georgia; The Brown Bank, based in Metter,
Georgia; and Empire Bank Corp., based in Homerville, Georgia.
As a result of these mergers, all of which closed by year-end 1998, we increased
our asset base to more than $550 million, versus total assets at year-end 1997
(before the mergers) of $248 million. (The pooling of interests accounting
A Partnership of Community Banks
--------------------------------
2
<PAGE>
treatment that was used for each of these mergers requires that the financial
results of those operations be included in the years prior to the merger. For
that reason, our current financial statements will reflect total assets of $512
million at year-end 1997.) We also announced in late 1998 our intention to
acquire the Blackshear branch of First Georgia Bank and, in early 1999,
announced our intention to merge with First Hogansville Bankshares, Inc., based
in Hogansville, Georgia and Thomaston Federal Savings Bank, based in Thomaston,
Georgia. We are excited about the addition of these two fine organizations as
external expansion will continue to be an important component of our growth
plan. As always, we welcome new community bank partners and pledge our support
and commitment to the principles of community banking that have made them so
successful.
...COMPLEMENTED BY INTERNAL GROWTH
During 1998, we also opened a Crisp county office in Cordele, Georgia and, after
year end, announced that we will be establishing an office in Statesboro,
Georgia, as First Flag Bank - Statesboro. This office will be a branch of
Citizens Bank and will be the first branch opened under the First Flag Bank de
novo strategy. By identifying merger partners that are located in strategic
markets and complementing those efforts by selective de novo branches, we can
enhance the value and growth potential of our entire franchise.
OUR INVESTMENT IN IN TECHNOLOGY AND PEOPLE
Many of the benefits that will accrue from these expansion-related activities
will ultimately result from linking our partners to our technological and other
resources. Realizing the importance of technology in our future success, we
devoted significant resources to upgrading our capabilities in 1998. One of the
major enhancements was the conversion of our data processing system in
preparation for Year 2000 ("Y2K"). This state-of-the art banking system, through
its relational database capabilities, allows our employees to have immediate
access to customer account information, thereby improving responsiveness,
overall service levels and cross-selling opportunities. Additionally, this
system has fully integrated teller, telephone, ATM and internet banking modules
and is Y2K compliant.
[QUOTE]
We welcome new community bank partners and pledge our support and commitment to
the principles of community banking that have made them so successful.
We also invested in our staff through personnel additions and training programs.
We added several key individuals with expertise in insurance, investment, and
trust services, which should enhance noninterest income. We also added a sales
manager who is responsible for the implementation of a sales culture throughout
our organization. All employees were exposed to improved sales training
techniques during the year, and we supplemented those efforts by implementing
incentive programs that reward successful sales efforts.
A Partnership of Community Banks
--------------------------------
3
<PAGE>
FINANCIAL RESULTS
Our geographic expansion and enhancements to our technological capabilities have
required large investments, not only in terms of time and effort, but also in
terms of financial resources. In fact, we estimate that pre-tax expenses of
approximately $1 million were incurred in 1998 that related to the transactions
that were closed during the year and to technological improvements, including
our conversion to the new data processing system. Additionally, we increased our
loan loss reserves by approximately $2 million to more conservatively position
the Company. Clearly, 1998's earnings were affected by these investments. Net
income in 1998 was $2.0 million, or $0.30 per share, versus $4.3 million, or
$0.66 per share in 1997.
While our expansion and investments affected our short-term earnings, our
resulting larger size and enhanced technological capabilities provide us with
much greater opportunities to leverage our fixed costs (therefore enhancing
long-term efficiency) and provide superior products and services to our
customers. It is these factors, in our opinion, that will ultimately increase
our shareholder and franchise value. Reflecting the confidence that the Board of
Directors has in the steps we are taking and their commitment to shareholder
value, we increased FLAG Financial Corporation's cash dividend during the year
and declared a 3-for-2 stock split. Looking ahead, we will continue to manage
the Company with the primary objective of maximizing long-term earnings. We
believe this approach is most compatible with shareholder objectives to maximize
long-term value.
[CHART]
Assets*
(in thousands)
94 $381,250
95 $407,361
96 $435,976
97 $512,087
98 $550,782
*Years prior to 1998 restated to reflect acquired companies.
[END CHART]
[CHART]
Stockholders'
Equity
(in thousands)
94 $34,989
95 $39,563
96 $41,198
97 $45,075
98 $47,865
[END CHART]
LOOKING AHEAD AND MAINTAIUNING OUR MOMENTUM
The investments we have made over the past year have positioned us for growth
and will support an organization considerably larger than our current size. We
have the senior management team in place to support such an organization, and
our community bank partnership philosophy provides an excellent vehicle through
which to achieve this growth.
We remain committed to maintaining the momentum that was established in 1998 and
pledge to you, our shareholders, that we will strive to build the long-term
value of your investment. Thank you for your confidence and continued support.
/s/John S. Holle /s/J. Daniel Speight, Jr.
John S. Holle J. Daniel Speight, Jr.
Chairman of the Board President and CEO
FLAG Financial Corporation FLAG Financial Corporation
TIMELINE OF 1998 PARTNER BANK MERGERS
October 1997
FLAG announced plans to combine with Middle Georgia Bankshares, Inc., parent
company of Citizens Bank
FLAG is a Unitary Thrift Holding Company
January 1998
FLAG announced plans to combine with Three Rivers Bancshares, Inc., parent
company of Bank of Milan
[Citizens Bank Logo]
March 1998
Completed merger with Middle Georgia Bankshares, Inc., parent company of
Citizens Bank
[Bank of Milan Logo]
May 1998
Completed merger with Three Rivers Bancshares, Inc., parent company of Bank of
Milan
FLAG announced plans to combine with The Brown Bank
June 1998
FLAG announced plans to combine with Empire Bank Corp., parent company of Empire
Banking Company
FLAG 3-for-2 Stock Split payable June 3, 1998
September 1998
FLAG announced Letter of Intent to aquire Blackshear, Georgia branch office of
First Georgia Bank
[Empire Banking Company Logo]
[The Brown Bank Logo]
December 1998
Completed merger with Empire Bank Corp., parent company of Empire Banking
Company
Completed merger with The Brown Bank
[First Flag Bank LaGrange Logo]
January 1999
FLAG subsidiary, First Federal Savings Bank of LaGrange, changed name to First
Flag Bank LaGrange and instituted a charter conversion from a savings
institution to a State of Georgia commercial bank
Bank of Milan, Empire Banking Company and The Brown Bank merged into Citizens
Bank operating under a State of Georgia commercial bank charter
February 1999
February 1999
FLAG announced plans to add to franchise with First Flag Bank - Statesboro as a
loan production office (first de novo office establishment)
March 1999
FLAG announced plans to combine with First Hogansville Bankshares, Inc., parent
company of The Citizens Bank of Hogansville
March 1999
FLAG announced plans to combine with Thomaston Federal Savings Bank
A Partnership of Community Banks
--------------------------------
4
<PAGE>
Financial Highlights
(in thousands except per share data)
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
FOR THE YEAR
Net interest income ..... $22,823 20,106 18,235 16,877 14,400
Provision for loan losses 3,382 1,596 4,475 1,490 634
Noninterest income ...... 7,439 6,144 5,216 4,148 3,320
Noninterest expense ..... 24,617 18,523 16,825 13,867 11,489
Income taxes ............ 303 1,820 451 1,662 1,734
Net earnings ............ 1,960 4,311 1,700 4,007 3,863
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
PER COMMON SHARE
Basic earnings .......... .30 .66 .26 .62 .60
Diluted earnings ........ .30 .66 .26 .62 .60
Cash dividends declared . .20 .13 .13 .13 .12
Book value .............. 7.30 6.91 6.24 6.24 5.49
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
AT YEAR END
Loans ................... 377,359 348,774 298,124 265,563 244,949
Earning assets .......... 491,235 461,095 394,116 365,423 350,555
Assets .................. 550,782 512,087 435,976 407,361 381,250
Deposits ................ 446,798 412,454 367,036 329,799 296,583
Stockholders' equity .... 47,865 45,075 41,198 39,563 34,989
Common shares outstanding 6,560 6,524 6,516 6,341 6,374
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
AVERAGE BALANCES
Loans ................... 383,639 320,737 280,488 261,031 239,456
Earning assets .......... 497,960 418,417 375,995 362,705 342,642
Assets .................. 540,771 464,653 412,784 392,987 363,594
Deposits ................ 431,653 384,374 343,052 314,596 291,459
Stockholders' equity .... 46,730 43,245 40,051 37,993 54,212
Weighted average shares
outstanding............. 6,555 6,519 6,481 6,448 6,406
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
KEY PERFORMING RATIOS
Return on average assets. .36% .93% .41% 1.02% 1.06%
Return on average
stockholder' equity.... 4.19% 9.97% 4.24% 10.55% 7.13%
Net interest margin ..... 4.64% 4.81% 4.85% 4.65% 4.20%
Dividend payout ratio ... 66.55% 19.47% 48.02% 20.39% 19.20%
Average equity to
average assets.......... 8.64% 9.31% 9.70% 9.67% 14.91%
A Partnership of Community Banks
--------------------------------
5
<PAGE>
A Community of Partner Banks
Every community is different. Like people, each has its own special sense of
history, character and destiny. One town could be home to a textile plant.
Another is surrounded by farmland. Still another is a retail center.
[PHOTO of Porch Scene]
Yet despite these differences, every town has something in common. Namely, the
commitment of its founders to build a home that would endure. Family farms and
thriving businesses were built on such commitment. And around them arose
schools, churches and eventually, an entire community to nurture and protect its
own.
At FLAG Financial Corporation, we respect the individuality of every community
we serve. Furthermore, we value its people and the energy and determination they
bring to making it all work, just as generations have done before them.
The commitment of FLAG Financial Corporation is to offer communities something
new, while preserving the things we value most and how our partnerships with
community banks provide the support necessary to give local management more time
to do what they do best: serve their individual communities with undivided
attention.
In a way, FLAG Financial is its own community: a community of partner banks. And
just like communities everywhere, we look forward to a bright future of service
and growth built on a foundation of enduring relationships. With customers. With
shareholders. With employees. And with the communities we call home.
The LaGrange Community
First Flag Bank LaGrange, founded in 1927, now has five branches serving West
Georgia and East Alabama markets. Located in Troup County, First Flag Bank has
strong ties to the communities it serves. As an active participant in the
community, bank employees commit their time and talent in numerous areas of
volunteerism, from Chamber of Commerce projects to support of the United Way,
constantly giving of themselves to improve the community at large. In 1996, the
bank was selected by the Community Bankers Association of Georgia as the Georgia
Community Bank of the Year. This award emphasizes the commitment of community
banks to excellence through superior quality service.
[QUOTE]
"First Flag Bank's long-term commitment to quality customer and community
service has been enhanced and strengthened with the support of the newly
structured FLAG organization.'
[END QUOTE]
[PHOTO of John S. Holle]
[CAPTION]
John S. Holle
President/CEO
First Flag Bank LaGrange
[END CAPTION]
A Partnership of Community Banks
--------------------------------
6
<PAGE>
Partnership: Progress & Preservation
From 1994 through 1997, FLAG Financial Corporation was headquartered and
operated exclusively in LaGrange, Georgia. In the past year, Flag Financial has
experienced extraordinary growth. Successfully completing four mergers within a
year is an impressive accomplishment. All the same, some may wonder why these
thriving community banks chose to unite with FLAG.
At FLAG Financial, we take a dramatically different approach to growth. Our
philosophy is to create a partnership with a community bank that is more a
merger of equals than an "acquisition." Our strategy is not to fix a bank that
is broken, but to join forces with successful banks and build on our combined
strengths.
First and foremost, that means leaving current management and staff in place.
After all, they know the territory and they know the people. It is their
personal dedication and hard work that make a bank more than a building and a
community more than a place to live.
[QUOTE]
Our philosophy is to create a partnership with a community bank that is more a
merger of equals than an "acquisition."
[END QUOTE]
In addition, the President and Board of our partner banks retain the
independence they need to provide the services their neighbors want, keeping the
focus of the community bank where it belongs - on the community.
FLAG Financial functions as a support and service company to its partner banks.
As such, we provide them with the resources and tools necessary to bring new
products and services to the community. The result? Banks that look the same but
have undergone a behind the scenes evolution to provide improved product
delivery.
All of which means a partner bank is more efficient, competitive and flexible,
and better prepared to meet the demands of the twenty-first century.
[PHOTO of Michael Guido]
[CAPTION]
Evangelist, Michael Guido, brings worldwide recognition to the Metter community
through international television and radio spots known as 'Seeds from the
Sower."
[END CAPTION
[PHOTO of Lafayette Statue]
[CAPTION
The Lafayette Statue - Lafayette a member of General George Washington's staff -
was unveiled in 1975 in honor of his country estate, the chateau de LaGrange and
is in the center of the LaGrange town square.
[END CAPTION]
A Partnership of Community Banks
--------------------------------
7
<PAGE>
Comprehensive Support, Impressive Benefits
[PHOTO of Ocmulgee State Park in McRae]
[CAPTION]
The Milan and McRae communities enjoy golf, camping and picnicing at the
beautiful Ocmulgee State Park in McRae.
[END CAPTION]
As regional banks continue to expand, offering increasingly sophisticated
services to more and more markets, mid-sized community banks face a dilemma: How
do they reach the next level and match the strength and capability of their
competition?
Clearly, FLAG Financial offers an attractive solution. That is because partner
banks retain their autonomy, and they also receive substantial support from FLAG
which allows them to effectively compete.
What is born of this "merger of equals" is something we like to call a
SuperCommunity Bank. The SuperCommunity Bank is, above all, efficient and
profitable. It emphasizes its community presence and a sales mentality while
centralizing operations and leveraging economies of scale. In short, the
SuperCommunity Bank enhances stockholder value by reducing costs and increasing
productivity.
FLAG Financial supports partner banks from the bottom up with a comprehensive
array of services. For example, back office functions are consolidated,
including financial management, accounting, purchasing, payroll, training, data
processing, treasury, compliance, asset/liability management and strategic
planning. All of which results in impressive cost savings and purchasing power.
Milan and McRae Communities
The Bank of Milan was founded in 1906 in Milan, Georgia, and has remained in the
same location, though renovated, for over 90 years. A second branch was added in
McRae in 1995. Both branches are located in Telfair County where timber,
peanuts, watermelon and cotton are primary sources of revenue. The Bank of Milan
has played a vital part in the county's continued success by its leadership in
education, the Chamber of Commerce and many other local organizations. Known as
a bank that is a "member of the community," the Bank of Milan will be serving
their customers for another 90 years.
[QUOTE]
"FLAG has consolidated time-consuming paperwork which saves us a tremendous
amount of time, enabling our limited personnel to be more proactive in public
relations and serving our customers"
[END QUOTE]
[PHOTO of J. Preston Martin]
[CAPTION
J. Preston Martin
President/CEO
Bank of Milan
[END CAPTION]
A Partnership of Community Banks
--------------------------------
8
<PAGE>
In addition, FLAG offers partner banks broader capabilities and products through
correspondent services and joint ventures, including insurance, investment and
trust services. We also enhance our partners' ability to offer brokerage and
financial planning. What is more, we deliver the strength of a large ban's
balance sheet and a wealth of in-house expertise.
[CHART of FLAG Support Services]
Bank of Milan
Local Board
Local President
Empire Banking Company
Local Board
Local President
First Flag Bank LaGrange
Local Board
Local President
Separate Charter
Citizens Bank
Local Board
Local President
Separate Charter
The Brown Bank
Local Board
Local President
Flag Financial Support Services
[END CHART]
FLAG Financial also provides essential technology and information services such
as Wide Area Networks for both internal communications and customer service,
including internet banking and e-mail. A centralized data operations center has
been developed to support each partner bank. The data center is a
state-of-the-art, Y2K compliant system utilizing the Phoenix International
Banking System. Each partner bank has either undergone or is scheduled to
convert to this technology. Like most system
Metter, Cobbtown and Reidsville Communities
The Brown Bank was founded in 1946 in Cobbtown, Georgia. In 1994 a branch was
opened in Metter, which now functions as the main office. Since 1994, The Brown
Bank increased assets from $7 million to $32 million. Cobbtown, Metter and
Reidsville are primarily agricultural towns for which tobacco and Vidalia
onions are the main sources of commerce. The Brown Bank is a strong leader in
each community through Civic Clubs, Chambers of Commerce and City Councils. All
three are successful communities, best exemplified by Metter being recognized by
the Department of Community Affairs as one of ten towns across the state as a
Better Hometown Community.
[QUOTE]
"With low unemployment, it's extremely hard to find experienced middle
management. FLAG provides us with the support and expertise we need to provide
better service to our customers."
[END QUOTE]
[PHOTO of Dennis D. Allen]
[CAPTION]
Dennis D. Allen
President/CEO
The Brown Bank
[END CAPTION]
A Partnership of Community Banks
--------------------------------
9
<PAGE>
[PHOTO of Cotton]
[CAPTION]
Acres and acres of cotton can be seen throughout Dooly, Macon and Crisp counties
during the months of July, August and September, with harvest time in late fall.
[END CAPTION]
[PHOTO of Lumber]
[CAPTION]
Located in Homerville, the Little Suwannee Lumber Company is one of a handful of
working, non-computerized sawmills in the nation.
[END CAPTION]
conversions, a brief period of transition and adjustment is to be expected. Once
completed, each partner bank will be positioned to offer the highest standard of
customer service.
For our partner banks, the benefits of uniting with FLAG Financial has proven
immediate and substantial. From human resources to asset diversification to
market expansion, our partners can now stand shoulder-to-shoulder with regional
banks. Moveover, relieved of the burden of time-consuming administrative duties,
local management suddenly has the freedom to enhance personal service and
explore additional sources of revenue. The cumulative result is greater
profitability and efficiency, and a bank which offers more and better financial
services to its customers.
In short, the community bank has evolved into a SuperCommunity Bank with the
decision-making independence it wants and the complementary support it needs.
Homerville and Waycross Communities
Empire Banking Company was founded in 1945 in Homerville, Georgia, and has an
additional branch in Waycross. Located in far South Georgia near the Okefenokee
Swamp, these towns thrive on timber production and industry. Area manufacturers
include Brockway Standard and Lee Container. Historically, Homerville has
experienced a low unemployment rate as it relates to other counties throughout
the state. As a leader in these communities, Empire Banking Company takes an
active role in education, the arts and city government. Every spring, the bank
sponsors the Timberland Jubilee, which honors the contributions of the local
timber industry.
[QUOTE]
"We will be able to provide our customers with quicker statement presentations
through phone banking and the internet. FLAG Tech supplies us with all of the
knowledge and support we need."
[END QUOTE]
[PHOTO of Leonard H. Bateman]
[CAPTION]
Leonard H. bateman
President/CEO
Empire Banking Company
[END CAPTION]
A Partnership of Community Banks
--------------------------------
10
<PAGE>
Into The Twenty-First Century
FLAG Financial's primary objective for 1999 and beyond is to continue to build a
network of thriving community banks. Our main goal is to establish mutually
beneficial banking alliances which maximize value for customers, shareholders,
employees and communities.
Still, we envision our company's overall mission to provide the products,
services and investments which will complement our partner banks and deliver
additional returns to our shareholders.
In addition, we will continue to expand the FLAG Financial community, seeking
out strategic partners in new and diverse markets while remaining flexible to
take advantage of unexpected business opportunities. Furthermore, we will seek
out partnerships with companies that share our philosophy and offer seasoned,
skillful management.
After all, it was the prospect of opportunity which built the communities in
which we live. And it is with a similar sense of optimism and confidence that we
look forward to building FLAG Financial Corporation well into the twenty-first
century.
Dooly, Macon and Crisp County Communities
Citizens Bank was founded in 1931 in Vienna, Georgia. Today, Citizens has six
additional offices in Middle Georgia in Unadilla, Byromville, Pinehurst,
Oglethorpe, Montezuma and Cordele. Providing superior customer service is the
foundation of Citizens' success. The bank plays a vital role in supporting these
agricultural communities which thrive on cotton and peanut farming. In 1995,
Citizens Bank was selected by the Community Bankers Association of Georgia as
the Georgia Community Bank of the Year. As an example of our commitment to these
communities, CB Man, a super "banking" hero and the bank's mascot, appears
throughout the area supporting various functions and promoting goodwill from
Citizens Bank and its employees.
[QUOTE]
"Citizens is poised for the future. With FLAG, we now have the administrative
support, the technology, and the vision to grow and prosper in the twenty-first
century."
[END QUOTE]
[PHOTO of J. Daniel Speight, Jr.]
[CAPTION]
J. Daniel Speight, Jr.
President/CEO
Citizens Bank
A Partnership of Community Banks
--------------------------------
11
<PAGE>
Our Board Of Directors
[PHOTO of Board of Directors]
[LISTING]
Dennis D. Allen
Senior Vice President
FLAG Financial Corporation
President
The Brown Bank
Dr. A. Glenn Bailey
Physician
Clark-Holder Clinic
Leonard H. Bateman
Senior Vice President
FLAG Financial Corporation
President
Empire Banking Company
H. Speer Burdette, III
Vice President, Treasurer and
Managing Officer
J.K. Boatwright & Company, P.C.
Accounting Firm
Patti S. Davis
Senior Vice President
Chief Financial Officer
FLAG Financial Corporation
Senior Vice President
Chief Financial Officer
Citizens Bank
Fred A. Durand, III
President and
Chief Executive Officer
Durand-Wayland, Inc.
Manufacturer of Produce
Sorting and Spray Equipment
John S. Holle
Chairman of the Board
FLAG Financial Corporation
President and Chief
Executive Officer
First Flag Bank LaGrange
James W. Johnson
President
McCranie Motor and
Tractor Company
Kelly R. Linch
Owner
Linch's, Inc.
Retail Appliances and
Electronics
J. Preston Martin
Senior Vice President
FLAG Financial Corporation
President
Bank of Milan
J. Daniel Speight, Jr.
President and Chief
Executive Officer
FLAG Financial Corporation
President and Chief
Executive Officer
Citizens Bank
John W. Stewart, Jr.
President
Stewart Wholesale
Hardware Company
Robert W. Walters
Retired Vice President
The Mill Store, Inc.
Retail and Contract Floor
Coverings
A Partnership of Community Banks
--------------------------------
12
<PAGE>
[PHOTO of Board of Directors]
[CAPTION for Board of Directors' Photo]
Back row pictured left to right:
Dr. Glenn A. Bailey, Robert W. Walters,
H. Speer Burdette, III, John W. Stewart, Jr.,
J. Preston Martin, James W. Johnson
and Leonard H. Bateman
Front row pictured left to right:
Kelly R. Linch, Fred A. Durand, III,
John S. Holle, J. Daniel Speight, Jr.,
Patti S. Davis and Dennis D. Allen
[END CAPTION]
FLAG Financial Corporation
Dennis D. Allen
President
The Brown Bank
Leonard H. Bateman
President
Empire Banking Company
Gregory S. Callaway
Chief Information Officer
Patti S. Davis
Chief Financial Officer
Rhonda T. Hendrix
Insurance and Investments
Charles O. Hinely
Chief Operating Officer
John S. Holle
Chairman of the Board
FLAG Financial Corporation
President and Chief
Executive Officer
First Flag Bank LaGrange
Susan R. Huckabee
Investor Relations
Lisa G. Lane
Correspondent Services
J. Preston Martin
President
Bank of Milan
Michael S. Moyer
Audit and Compliance
Randall O. Nix
Sales Management
Ellison C. Rudd
Secretary/Treasurer
Raymond C. Smith, Jr.
Human Resources
J. Daniel Speight, Jr.
President and Chief
Executive Officer
FLAG Financial Corporation
President and Chief
Executive Officer
Citizens Bank
Ronald M. Warner
Credit Administration
Mary E. Winks
Consulting
A Partnership of Community Banks
--------------------------------
13
<PAGE>
FLAG Partner Banks
[MAP of State of Georgia with Counties Screened and Named]
Since 1997, FLAG Financial, a partnership of community banks, has expanded to
include West Central, Middle and Southeast Georgia. FLAG has grown from eight
offices in two counties to 23 offices in 10 counties. FLAG has nine offices
pending approval which will add six new counties, resulting in 32 offices in 16
counties.
[MATCHING CODES for Counties and Offices]
1-7 Troup
15,16 Macon
9, 11-14 Dooly
17 Crisp
18-19 Telfair
24 Candler
10 Bulloch
23,25 Tattnall
20 Pierce
22 Ware
21 Clinch
8,29 Muscogee
28 Upson
30 Bibb
31 Russell
32 Lee
A Partnership of Community Banks
--------------------------------
14
<PAGE>
First Flag Bank LaGrange
1 Main Office
101 North Greenwood Street
LaGrange, Georgia 30240
2 Marketplace Office
908 Hogansville Road
LaGrange, Georgia 30240
3 Lee's Crossing Office
1795 West Point Road
LaGrange, Georgia 30240
4 Vernon Street Drive-up Office
306 Vernon Street
LaGrange, Georgia 30240
5 LaFayette Parkway Office
1417 LaFayette Parkway
LaGrange, Georgia 30240
FLAG Appraisal Services
6 200 Broad Street
LaGrange, Georgia 30240
FLAG Investment Services
7 101 North Greenwood Street
LaGrange, Georgia 30240
Piedmont Mortgage Service
8 5669 Whitesville Road, Suite A
Columbus, Georgia 31904
FLAG Tech
9 2233 Pine Street
Unadilla, Georgia 31091
First Flag Bank - Statesboro
10 302 South Zetterower Avenue*
Statesboro, Georgia 30458
Citizens Bank
11 Vienna Office
100 Union Street
Vienna, Georgia 31092
12 Unadilla Office
2233 Pine Street
Unadilla, Georgia 31091
13 Byromville Office
448 Main Street
Byromville, Georgia 31007
14 Pinehurst Office
Fullington Avenue
Pinehurst, Georgia 31070
15 Citizens Bank - Macon County
102 West Railroad Street
Montezuma, Georgia 31063
16 Oglethorpe Office
130 North Sumter Street
Oglethorpe, Georgia 31068
17 Citizens Bank - Crisp County
602 East 16th Avenue
Times Square, Suite G
Cordele, Georgia 31015
Bank of Milan
18 Milan Office
Mount Zion Street
Milan, Georgia 31060
19 McRae Office
850 East Oak Street
McRae, Georgia 31055
Empire Banking Company
20 Blackshear Office **
129 Highway 82
Blackshear, Georgia 31516
21 Homerville Office
115 East Dame Avenue
Homerville, Georgia 31634
22 Waycross Office
2110 Memorial Drive
Waycross, Georgia 31501
The Brown Bank
23 Cobbtown Office
1 Railroad Street
Cobbtown, Georgia 30420
24 Metter Office
24-28 North Broad Street
Metter, Georgia 30439
25 Reidsville Office
132-A West Brazell Street
Reidsville, Georgia 30453
The Citizens Bank
26 Main Office **
111 High Street
Hogansville, Georgia 30230
27 Ingles Supermarket Office**
1890 East Main Street
Hogansville, Georgia 30230
Thomaston Federal Savings Bank
28 Thomaston Office**
206 North Church Street
Thomaston, Georgia 30286
29 Columbus Office**
5617 Princeton Avenue
Columbus, Georgia 31904
30 Macon Office**
130 North Crest Blvd., Suite C
Macon, Georgia 31201
31 Phenix City Office**
712 Thirteenth Street, Suite A
Phenix City, Alabama 36867
32 Opelika Office**
2106 Gateway Drive, Suite C
Opelika, Alabama 36801
* First Flag Bank - Statesboro - Pending Regulatory Approval ** Blackshear
Office - Pending, The Citizens Bank - Pending, Thomaston Federal Savings Bank -
Pending
A Partnership of Community Banks
--------------------------------
15
<PAGE>
Management's Discussion and Analysis of Fnancial Cndition and Results of
Ooperations
GENERAL
FLAG Financial Corporation ("FLAG") is a multi-bank holding company that
owns 100 percent of the common stock of First Flag Bank, formerly First Federal
Savings Bank of LaGrange ("First Flag"), Citizens Bank ("Citizens"), Bank of
Milan ("Milan") and Empire Banking Company ("Empire"), (collectively, the
"Banks"). First Flag is a commercial bank doing business in West Central
Georgia. Citizens is a commercial bank that serves Dooly, Macon, Crisp, Candler,
Tattnall and surrounding counties in Middle Georgia. Milan is a commercial bank
that serves Telfair and surrounding counties in Middle Georgia. Empire is a
commercial bank serving Clinch, Ware and surrounding counties in South Georgia.
Effective January 1, 1999, Milan and Empire were merged into Citizens. The Banks
are full-service, retail-oriented community banks primarily engaged in retail
banking, small business, residential and commercial real estate lending,
agricultural lending and mortgage banking.
The following discussion focuses on significant changes in the financial
condition and results of operations of FLAG and the Banks during the three years
ended December 31, 1998. This discussion and the financial information contained
herein are presented to assist the reader in understanding and evaluating the
financial condition, results of operations and future prospects of FLAG and
should be read as a supplement to and in conjunction with the Consolidated
Financial Statements and Related Notes.
FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis contains forward-looking
statements under the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties. Although FLAGbelieves that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate, and therefore, no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that could cause actual results to differ from results discussed in
forward-looking statements include, but are not limited to: economic conditions;
competition from other providers of financial services offered by FLAG;
government regulation; changes in interest rates; material unforeseen changes in
the financial stability and liquidity of FLAG's borrowers; material unforeseen
complications related to the Year 2000 issues for FLAG, its customers and its
suppliers; and other risks detailed in FLAG's filings with the Securities and
Exchange Commission, all of which are difficult to predict and which may be
beyond the control of FLAG. FLAG undertakes no obligation to revise
forward-looking statements to reflect events or changes after the date of this
discussion or to reflect the occurrence of unanticipated events.
CAPTITAL ISSUES
Effective June 3, 1998, FLAG declared a 3-for-2 stock split. All per share
amounts and prices have been restated to reflect this stock split as if it had
occurred at the beginning of the earliest period presented.
RESTATEMENT OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Effective March 31, 1998, FLAG completed the acquisition of Middle Georgia
Bankshares, Inc., the parent company of the $129 million Citizens Bank in
Vienna, Georgia. FLAG issued approximately 1.5 million shares of its common
stock in connection with this acquisition.
Effective May 8, 1998, FLAG completed the acquisition of Three Rivers
Bancshares, Inc., the parent company of the $35 million Bank of Milan in Milan,
Georgia. FLAG issued approximately 597,000 shares of its common stock in
connection with this acquisition.
Effective December 11, 1998, FLAG completed the acquisition of Empire Bank
Corp., the parent company of the $70 million Empire Banking Company in
Homerville, Georgia. FLAG issued approximately 1.1 million shares of its common
stock in connection with this acquisition.
Effective December 31, 1998, FLAG completed the acquisition of The Brown
Bank, a $31 million bank in Metter, Georgia. FLAG issued approximately 255,000
shares of its common stock in connection with this acquisition.
These acquisitions were accounted for as pooling of interests and,
accordingly, the consolidated financial statements and management's discussion
and analysis for all periods have been restated to include the financial
position and results of operations as if the combination had occurred at the
beginning of the earliest period presented.
PENDING ACQUISITIONS
On March 12, 1999, FLAG announced the signing of a letter of intent to
merge with Thomaston Federal Savings Bank ("TFSB"), a $53 million asset thrift
based in Thomaston, Georgia. The letter of intent 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 FLAGcommon
stock. Total outstanding shares of FLAG will increase by approximately 1.1
million additional shares at closing.
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.
16
<PAGE>
On September 30, 1998, FLAG entered into an agreement to assume deposits
totaling approximately $9.5 million and to purchase certain assets totaling
$60,000 of a branch banking facility of First Georgia Bank in Blackshear,
Georgia.
YEAR 2000 ISSUES
FLAG's State of Readiness
The directors and management of FLAGrecognize the risks associated with the
Year 2000 issues and understand the importance of compliance within FLAG's
procedures, as well as the procedures of the various vendors providing services
to the Banks and its large customer borrowing base. 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.
To monitor and direct the Year 2000 compliance efforts, FLAG has appointed
a Year 2000 committee comprised of outside directors and key senior executives
to meet on a monthly basis.The preliminary responsibility of the Year 2000
Committee was to develop a comprehensive project action plan consisting of five
critical phases. These phases are: 1.) Develop an ongoing awareness strategy to
ensure that FLAG's directors, management, employees and customers are educated
and informed of the Year 2000 issues; 2.) Identify, inventory and assess (a)
hardware and software used in each area of responsibility impacted by the Year
2000 issue; (b) vendors upon whom FLAGrelies to provide financial information or
services which may be impacted by the Year 2000 issue; and (c) each area as
either mission critical, mission significant or mission optional; 3.) Renovate
or replace systems and applications which are determined to be non-compliant
with the Year 2000 issue or which are determined to not have adequate plans in
place to become compliant in a timely basis; 4.) Validate the assessed systems
and the comprehensive "Business Resumption Contingency Plan" to ensure full
preparation for any Year 2000 issues and have the progress and results reviewed
by the Year 2000 Committee and an objective third party; and 5.) Implement a
final review and control process to ensure satisfactory management review and
approval before any Year 2000 specific changes are put into production and to
ultimately place the renovated systems into production.
FLAG has conducted a risk assessment for each product and categorized the
risks associated with each product as "catastrophic", "serious", or "minimal".
FLAG's overall risks were considered to be serious to minimal. A separate plan
of action and dates have been established for hardware/software considered to be
either critical or significant to FLAG's ongoing operations. To address these
procedures, FLAGhas developed a testing strategy, methodology and plan of action
to include documentation of the results for the hardware/software and electronic
components affected by the Year 2000 issue.
FLAG's two largest subsidiaries converted their core applications to the
Phoenix International, Ltd., Inc. ("Phoenix") application system in August 1998.
The core applications include the general ledger, loans, deposits and
receivables/payables. Phoenix has represented that their application system is
Year 2000 compliant. FLAGdeveloped its own testing plan for the Phoenix system
and has substantially completed this plan and will continuously validate its
results. In addition, FLAG will test each vendor that interfaces with this core
system. FLAG's other subsidiaries are scheduled to be converted during the first
six months of 1999.
Each of the Banks is monitoring its larger loan customer compliance issues
in becoming Year 2000 compliant. For those customers unable or unwilling to
become Year 2000 compliant, FLAG's credit administration department will
evaluate options to minimize FLAG's risks associated with continuing to do
business with these customers on a case by case basis.
The Costs to Address FLAG's Year 2000 Issues
FLAG has incurred approximately $976,000 in converting to the Phoenix
system through December 31, 1998. FLAGexpects to spend an additional $130,000 in
converting its other subsidiaries. FLAGwould have upgraded its core application
systems if the Year 2000 had not been an issue. FLAGhas also spent an additional
$807,000 as of December 31, 1998 in upgrading most of its personal computers.
FLAG expects to spend an additional $50,000 in upgrading additional personal
computers. It was necessary to upgrade the personal computers in order to be
compatible with the Phoenix system. To date, FLAGhas spent $27,000 of an
estimated $235,000 to address other Year 2000 issues.
Most Likely Consequences of Year 2000 Issues
FLAG expects to identify and resolve all Year 2000 issues that could have a
material impact on its financial condition or business. However, FLAGbelieves
that it is not possible to determine that all Year 2000 issues have been
identified and corrected. The applications and number of devices that could be
affected are simply too numerous. Also, FLAGcannot accurately determine how many
problems related to the Year 2000 issue will occur with its customers, vendors
and other third parties or the severity, duration or financial consequences of
such problems. As a result, FLAGexpects that it could possibly suffer the
following consequences: a number of operational inefficiencies and
inconveniences for FLAG, its customers and its service providers that may
require the time and attention of FLA's employees; or system malfunctions that
might require significant efforts by FLAG, its customers and its service
providers to prevent or alleviate material business disruptions.
17
<PAGE>
TABLE 1
Cnsolidated Average Balances, Interest, and Rates - Taxable Equivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Interest Weighted Interest Weighted Interest Weighted
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans ...................................... $383,639 38,409 10.01% $320,737 32,804 10.23% $280,488 28,908 10.31%
Taxable investment securities .............. 77,389 4,553 5.88% 77,712 4,862 6.26% 76,521 4,701 6.14%
Tax-free investment securities ............. 10,878 838 7.70% 8,525 625 7.33% 7,643 602 7.88%
Interest-bearing depositsin other banks .... 7,303 325 4.45% 2,625 198 7.54% 1,881 101 5.37%
Federal funds sold ......................... 18,751 892 4.45% 8,818 451 5.11% 9,462 500 5.28%
------ --- ---- ----- --- ---- ----- --- ----
Total interest-earning assets ......... 497,960 45,0 9.04% 418,417 38,940 9.31% 375,995 34,812 9.26%
Other assets ............................... 42,811 46,236 36,789
------ ------ ------
Total assets .......................... $540,771 $464,653 $412,784
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits ........... $ 47,455 924 1.95% $ 72,736 1,986 2.73%$ 62,063 1,776 2.86%
Savings deposits ........................... 61,840 1,985 3.21% 24,107 607 2.52% 23,984 603 2.51%
Other time deposits ........................ 273,021 15,820 5.79% 245,513 14,266 5.81% 216,579 12,553 5.80%
Federal funds purchased .................... 1,238 60 4.85% 1,287 86 6.68% 571 32 5.60%
FHLB advances and other borrowings ......... 55,179 3,120 5.65% 28,810 1,678 5.82% 25,370 1,410 5.56%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing liabilities .... 438,733 21,909 4.99% 372,453 18,623 5.00% 328,567 16,374 4.98%
Noninterest-bearing demand deposits ........ 49,337 42,018 40,426
Other liabilities .......................... 5,971 6,937 3,740
Stockholders' equity ....................... 46,730 43,245 40,051
------ ------ ------
Total liabilities and
stockholders' equity ............. $540,771 $464,653 $ 412,784
======== ======== =========
Tax-equivalent adjustment .................. 285 210 204
--- --- ---
Net interest income ........................ 22,823 20,107 18,234
====== ====== ======
Interest rate spread ....................... 4.05% 4.31% 4.28%
Net interest margin ........................ 4.64% 4.86% 4.90%
Interest-earning assets/interest-bearing
liabilities............................ 113% 112% 114%
</TABLE>
FLAG's Contingency Plans
FLAG has developed a separate plan of action associated with the risks to
liquidity directly resulting from the Year 2000 issue. This plan includes
estimating extra cash inventories needed, obtaining additional cash inventories,
analyzing vault capacities, security issues, insurance coverage, cash
replenishment of automated teller machines and evaluating available credit lines
to ensure adequacy.
As is the case with most financial institutions, FLAGis highly automated
and many of its systems are date sensitive. For each mission critical process,
available options have been identified with the most reasonable contingency
strategy being chosen. The Year 2000 Committee and the FLAGContingency Committee
are responsible for the implementation and validation of the contingency plan.
Appropriate staff and resources will be available during key dates within this
project, such as December 30, 1999 through January 3, 2000.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on assets
and the interest paid on deposits and other interest-bearing liabilities) is the
single largest component of FLAG's operating income. The management of net
interest income is of most importance in the banking industry. FLAG manages this
income source while it controls credit, liquidity and interest rate risks.
Net interest income increased 13.5% in 1998, from $20.1 million in 1997 to
$22.8 million in 1998. Net interest income increased 10.3% in 1997 compared to
1996.
Total interest income increased 15.5% in 1998 and 11.9% in 1997. Interest
expense increased approximately 17.6% in 1998 and 13.7% in 1997. The interest
expense variances from year to year have been primarily influenced by the
average balances of interest-bearing liabilities (see Tables 1 & 2).
17
<PAGE>
TABLE 2
Rate/Volume Variance Analysis - Taxable Euivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended Dcember 31,
1998 compared to 1997 1997 compared to 1996
Rate/ Net Rate/ Net
Volume Yield Change Volume Yield Change
------ ----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans .................................. $ 6,298 (693) 5,605 4,117 (221) 3,896
Taxable investment securities .......... (19) (290) (309) 75 86 161
Tax-free investment securities ......... 181 32 213 65 (42) 23
Interest-bearing deposits in other banks 208 (81) 127 56 41 97
Federal funds sold ..................... 473 (32) 441 (33) (16) (49)
--- --- --- --- --- ---
Total interest income ............. 7,141 (1,064) 6,077 4,280 (152) 4,128
----- ------ ----- ----- ---- -----
Interest expense:
Interest-bearing demand deposits ....... (492) (570) (1,062) 291 (81) 210
Savings deposits ....................... 1,211 167 1,378 3 1 4
Other time deposits .................... 1,594 (40) 1,554 1,681 32 1,713
Federal funds purchased ................ (2) (24) (26) 48 6 54
FHLB advances an other borrowings ...... 1,491 (49) 1,442 200 68 268
----- --- ----- --- -- ---
Total interest expense ............ 3,802 (516) 3,286 2,223 26 2,249
----- ---- ----- ----- -- -----
Net interest income ......................... $ 3,339 (548) 2,791 2,057 (178) 1,879
======= ==== ===== ===== ==== =====
</TABLE>
CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES
Net interest income is determined by the amount of interest-earning assets
compared to interest-bearing liabilities and their related yields and costs. The
difference between the weighted average interest rates earned on
interest-earning assets (i.e., loans and investment securities) and the weighted
average interest rates paid on interest-bearing liabilities (i.e., deposits and
borrowings) is called the net interest spread. Another measure of the difference
in interest income earned versus interest expense paid is net interest margin.
Net interest margin is calculated by dividing net interest income by average
earning assets.
Table 1 presents for the three years ended December 31, 1998, 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 $498.0 million in 1998 versus $418.4
million in 1997, and $376.0 million in 1996. Average interest-bearing
liabilities were $438.7 million in 1998 versus $372.5 million in 1997 and $328.6
million in 1996. The interest rate spread was 4.05% in 1998 versus 4.31% in 1997
and 4.28% in 1996, while the net interest margin was 4.64% in 1998, 4.86% in
1997 and 4.90% in 1996.
Table 2 shows the change in net interest income from 1998 to 1997 and from
1997 to 1996 due to changes in volumes and rates. Variances resulting from a
combination of changes in rate and volume are allocated in proportion to the
absolute dollar amounts of the change in each category.
NONINTEREST INCOME
Other income increased to $7.4 million in 1998 from $6.1 million in 1997
and $5.2 million in 1996. The increases in other income in 1998 and 1997
resulted from increased gain on sales of loans and increased fee income related
to transaction deposit accounts.
Gain on sales of loans increased to $885,000 in 1998 versus $821,000 in
1997 and $596,000 in 1996. The increase in gain on sales of loans in 1998 and
1997 primarily resulted from gains on the sale of government guaranteed loans.
Fees and service charges on deposits increased to $4.6 million in 1998 from
$4.2 million in 1997 and $3.8 million in 1996.
NONINTEREST EXPENSES
Salary and employee benefits increased to $10.9 million in 1998 from $8.9
million in 1997 and $7.6 million in 1996. This increase in 1998 was primarily
due to normal increases in compensation levels as well as the hiring of several
key individuals in mid- and late-1997 and in 1998.
Occupancy expenses increased to $3.9 million in 1998 from $3.4 million in
1997 and $2.7 million in 1996. The increase in 1998 occupancy expense was the
result of an increase in the number of branch locations. The increase in
occupancy expense in 1997 was due to higher depreciation expense 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 at First Flag.
Other expenses were $9.7 million in 1998 versus $6.3 million in 1997 and
$6.6 million in 1996. The increase in other operating expenses from 1998 to 1997
was due to the conversion of FLAG's data processing systems and certain
merger-related expenses.
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 decreased $12.6 million to $76.5 million at December
31, 1998 from $89.1 million at December 31, 1997. At December 31, 1998, $72.3
million, or approximately 94% of investment securities outstanding, was
classified as available-for-sale, while the remainder was classified as
held-to-maturity. The overall decrease in the amount of investments was due to
increased loan demand in 1998, which required available funds generated by
investment maturities and paydowns. At December 31, 1998, gross unrealized gains
in the total portfolio amounted to $3,521,000 and gross unrealized losses
amounted to $290,000.
18
<PAGE>
TABLE 3
Carrying Value of Investments
(dollars in thousands)
December 31,
------------
1998 1997 1996
---- ---- ----
Securities held-to-maturity:
U.S. Treasuries and agencies ...... $ -- $ 200 $ --
State, county and municipal ....... 3,111 3,165 515
Mortgage-backed securities ........ 87 103 118
Collateralized mortgage obligations 1,037 2,505 3,092
Securities available-for-sale:
U.S. Treasuries and agencies ...... 18,069 28,162 27,499
Corporate debt securities ......... 999 1,000 990
State, county and municipal ....... 8,026 6,767 6,966
Mortgage-backed securities ........ 29,967 30,088 23,833
Collateralized mortgage obligations 11,520 15,854 16,705
Equity securities ................. 3,710 1,248 2,253
----- ----- -----
Total ........................ $76,526 $89,092 $81,971
======= ======= =======
Table 3 reflects the carrying amount of the investment securities portfolio
for the past three years.
TABLE 4
Loan Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
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 and agricultural $116,133 30.3% 69,916 19.8% 60,778 19.9% 47,844 17.8% 36,667 14.8%
Real estate-construction ............. 29,956 7.8% 12,663 3.6% 10,784 3.5% 18,676 6.9% 18,725 7.5%
Real estate-mortgage ................. 174,852 45.7% 231,460 65.4% 191,478 62.9% 158,291 58.9% 157,948 63.8
Installment loans to individuals ..... 54,312 14.2% 30,375 8.6% 33,744 11.1% 36,603 13.6% 26,017 10.5%
Lease financings ..................... 7,674 2.0% 9,308 2.6% 7,723 2.5% 7,404 2.8% 8,354 3.4%
----- --- ----- --- ----- --- ----- --- ----- ---
Total loans ..................... 382,927 100.0% 353,722 100.0% 304,507 100.0% 268,818 100.00% 247,711 100.0%
Less allowance for loan losses ....... 5,568 4,948 6,384 3,255 2,762
----- ----- ----- ----- -----
Total net loans ................. $377,359 348,774 298,123 265,563 244,949
======== ======= ======= ======= =======
</TABLE>
CARRYING VALUE OF INVESTMENTS
The December 31, 1998 market value of securities held-to- maturity, as a
percentage of amortized cost, was 103%, up from 101% at December 31, 1997. 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 $29.2 million in 1998 to
$382.9 million from $353.7 million at December 31, 1997. This increase was the
result of growth in commercial, financial and agricultural loans, real estate
construction loans and installment loans, partially offset by a decrease in real
estate mortgages and lease financings. As shown in Table 4, commercial,
financial and agricultural loans increased approximately $46.2 million, real
estate construction loans increased approximately $17.3 million, installment
loans increased approximately $23.9 million, real estate mortgages decreased
approximately $56.6 million and lease financings decreased by approximately $1.6
million.
Table 5 represents the expected maturities for commercial, financial and
agricultural loans and real estate construction loans at December 31, 1998. The
table also presents the rate structure for these loans that mature after one
year.
TABLE 5
Loan Portfolio Maturity
(dollars in thousands)
<TABLE>
<CAPTION>
Rate Structure for Loans
Maturity Maturing 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> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ......... $58,650 25,846 31,637 116,133 34,059 23,424
Real estate-construction ...... 28,212 1,180 564 29,956 303 1,441
$86,862 27,026 32,201 146,089 34,262 24,865
</TABLE>
19
<PAGE>
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 $3,382,000 in 1998, $1,596,188 in 1997 and
$4,474,529 in 1996. The increase in the provision in 1998 compared to 1997 was
due to provisions made for certain loans to Gulf Properties Financial, Inc.
("Gulf Properties") in 1998. First Flag had provided a warehouse line to Gulf
Properties with which Gulf Properties would originate loans and sell them to
First Flag. During 1998, it was discovered that certain loans would not be
collectible. Provisions relating to Gulf Properties totaled $2,000,000 in 1998.
The large decrease in the provision for loan losses from 1996 to 1997 is
directly attributable to Bennett Funding. Bennett Funding was an equipment
leasing company based in Syracuse, New York. First Flag had invested in office
equipment leases sold through Bennett Funding. During 1996, Bennett Funding
filed for Chapter 11 bankruptcy protection and, accordingly, First Flag
recognized a provision of approximately $3,000,000. Excluding the provision
associated with Bennett Funding, the 1996 provision for loan losses would have
been $1,496,000. 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.
Reviews of non-performing, past due loans and larger credit relationships,
designed to identify potential problem loans, as well as to determine the
adequacy of the allowance for loan losses, are performed periodically during the
year. These reviews are performed by the responsible lending officers, as well
as the credit administration department, and consider such factors as the
financial strength of borrowers, the value of collateral, past loan loss
experience, growth in the loan portfolio and other economic factors.
As shown in Table 6, the year-end allowance for loan losses increased to
$5.6 million at December 31, 1998, from $4.9 million at December 31, 1997. The
allowance for loan losses was $6.4 million at December 31, 1996. The increase in
the allowance at December 31, 1998 was due to the provision made for Gulf
Properties. The decline in the allowance for losses in 1997 was primarily due to
a $2.5 million charge-off associated with the Bennett Funding assets. Total
charge-offs were $3.1 million in 1998, $3.3 million in 1997 and $1.4 million in
1996. The allowance for loan losses was 1.48% of net outstanding loans at
December 31, 1998, versus 1.42% of net outstanding loans at December 31, 1997
and 2.14% of net outstanding loans at December 31, 1996.
Management believes that the allowance for loan losses is 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 6
Analysis of the Allowance for Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average net loans ................... $383,639 $320,737 $280,488 $261,031 $239,456
Allowance for loan losses, beginning
of the period ................. 4,948 6,385 3,255 2,762 2,372
Charge-offs for the period:
Commercial, financial and
agricultural .............. 1,834 311 745 464 264
Real estate-construction loans . -- -- 22 23 2
Real estate-mortgage loans ..... 264 225 433 432 36
Installment loans to individuals 679 264 232 244 119
Lease financings ............... 314 2,465 -- -- --
--- -----
Total charge-offs ......... 3,091 3,265 1,432 1,163 421
----- ----- ----- ----- ---
Recoveries for the period:
Commercial, financial and
agricultural .............. 75 2 -- 78 52
Real estate-construction loans . -- -- -- -- 10
Real estate-mortgage loans ..... 52 105 -- -- 5
Installment loans to individuals 152 125 88 88 110
Lease financings ............... 50 -- -- -- --
--
Total recoveries .......... 329 232 88 166 177
--- --- -- --- ---
Net charge-offs for
the period .......... 2,762 3,033 1,344 997 244
Provision for loan losses ........... 3,382 1,596 4,474 1,490 634
----- ----- ----- ----- ---
Allowance for loan losses,
end of period .................. $ 5,568 4,948 6,385 3,255 2,762
======== ===== ===== ===== =====
Ratio of allowance for loan losses
to total net loans outstanding 1.48% 1.42% 2.14% 1.23% 1.13%
Ratio of net charge-offs during the
period to average net loans
outstanding during the period . .72% .95% .48% .38% .10%
</TABLE>
20
<PAGE>
ASSET QUALITY
At December 31, 1998, non-performing assets totaled $10.1 million compared
to $7.4 million at year-end 1997. The increase in 1998 is primarily due to the
Gulf Properties loans. There were no commitments to lend additional funds on
nonaccrual loans at December 31, 1998. Table 7 summarizes the non-performing
assets for each of the last five years.
TABLE 7
Risk Elements
(dollars in thousands)
Ddecember 31,
-------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Loans on nonaccrual .............. $ 7,489 5,886 8,519 2,991 3,204
Loans past due 90 days
and still accruing .......... 583 578 1,740 668 13
Other real estate owned .......... 2,028 901 946 892 364
----- --- --- --- ---
Total non-performing assets ...... $10,100 7,365 11,205 4,551 3,581
======= ===== ====== ===== =====
Total non-performing loans
as a percentage of net loans 2.68% 2.11% 3.76% 1.71% 1.46%
==== ==== ==== ==== ====
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, 1998. At December 31,
1998, management was unaware of any known trends, events or uncertainties that
will have, or that are reasonably likely to have, a material effect on the
Banks' or FLAG's liquidity, capital resources or operations.
DEPOSITS
Total deposits increased approximately $34.3 million during 1998, totaling
$446.8 million at December 31, 1998 versus $412.5 million at December 31, 1997.
The maturities of time deposits of $100,000 or more issued by the Banks at
December 31, 1998, are summarized in Table 8.
At December 31, 1998, the Banks were shareholders in the Federal Home Loan
Bank of Atlanta ("FHLBA"). Through this affiliation, advances totaling $48.4
million were outstanding at rates competitive with time deposits of like
maturities. Management anticipates continued utilization of this short- and
long-term source of funds to minimize interest rate risk and to fund competitive
fixed rate loans to customers.
TABLE 8
Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less ................... $27,843
Over three months through six months.... 21,021
Over six months through twelve months... 26,637
Over twelve months ..................... 10,301
------
$85,802
=======
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, 1998, 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, 1998, the liabilities subject to rate changes within one year exceeded its
assets subject to rate changes within one year. This mismatched condition
subjects FLAG to interest rate risk within the one year period because the
assets, due to their generally shorter term to maturity or repricing, are more
sensitive to short-term interest rate changes than the liabilities. It is
management's belief that the result of this position would be a decrease in net
interest income if market interest rates rise and an increase in net interest
income if market interest rates decline.
21
<PAGE>
TABLE 9
Interest Rate Sensitivity Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Maturing or Repricing in
------------------------
Over 1 Year Over 3 Years
One Year Through Through Over
or Less 3 Years 5 Years 5 Years Total
------- ------- ------- ------- -----
Interest-earning assets:
<S> <C> <C> <C> <C>
Adjustable rate mortgages .............. $ 93,132 6,601 275 -- 100,008
Fixed rate mortgages ................... 16,894 17,582 23,318 28,075 85,869
Other loans ............................ 119,898 28,430 25,555 29,109 202,992
Investment securities .................. 61,319 8,748 6,461 6,381 82,909
Interest-bearing deposits
in other banks and
Federal funds sold ................ 25,025 -- -- -- 25,025
------ ------
Total interest-earning assets ..... 316,268 61,361 55,609 63,565 496,803
------- ------ ------ ------ -------
Interest-bearing liabilities:
Fixed maturity deposits ................ 203,035 56,546 15,378 1,621 276,580
NOW and money market demand accounts ... 91,805 -- -- -- 91,805
Passbook accounts ...................... 22,669 -- -- -- 22,669
FHLB advances .......................... 2,616 6,058 10,640 29,084 48,398
----- ----- ------ ------ ------
Total interest-bearing
liabilities ....................... 320,125 62,604 26,018 30,705 439,452
------- ------ ------ ------ -------
Interest rate sensitivity gap ............... (3,857) (1,243) 29,591 32,860 57,351
Cumulative interest rate sensitivity gap .... $ (3,857) (5,100) 24,491 57,351
Cumulative interest rate sensitivity gap
to total assets.................... (.70)% (.93)% 4.45% 10.41%
</TABLE>
Management carefully measures and monitors interest rate sensitivity and
believes that its operating strategies offer protection against interest rate
risk. As required by various regulatory authorities, FLAG's Board of Directors
has established an interest rate risk policy, which sets specific limits on
interest rate risk exposure. Adherence to this policy is reviewed quarterly by
the Board of Directors' Asset Liability Committee.
Management has maintained positive ratios of average interest-earning
assets to average interest-bearing liabilities. As represented in Table 1 this
ratio, based on average balances for the respective years, was 113% in 1998,
112% in 1997 and 114% in 1996.
Table 10 presents the expected maturity of the total investment securities
by maturity date and average yields based on amortized cost at December 31,
1998. 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 Banks are required under federal regulations to maintain in cash and
eligible short-term investment securities a monthly average of 5.0% of net
withdrawable deposits and borrowings payable in one year or less. The Banks'
liquidity was 17.0% at December 31, 1998 and 9.7% at December 31, 1997.
The Banks' primary sources of liquidity (funds) are deposit inflows, loan
repayments, proceeds from sales of loans and securities, advances from the FHLBA
and earnings from investments. Short-term deposits, particularly
noninterest-bearing checking accounts, are becoming a more significant source of
liquidity than they have been historically to the Banks. Advances from the FHLBA
were $48.4 million and $47.8 million, respectively, at December 31, 1998 and
1997.
Subject to certain limitations, the Banks may borrow funds from the FHLBA
in the form of advances. Credit availability from the FHLBA to the Banks are
based on the Banks' financial and operating condition. Credit availability from
the FHLBA to the Banks was approximately $68.0 million at December 31, 1998. In
addition to creditworthiness, the Banks must own a minimum amount of FHLBA
capital stock. This minimum is 5.0% of outstanding FHLBA advances. Unused
borrowing capacity at December 31, 1998, was $19.6 million. The Banks use FHLBA
advances for both long-term and short-term liquidity needs. Other than normal
banking operations, the Banks have no long-term liquidity needs. The Banks have
never been involved with highly leveraged transactions that may cause unusual
potential long-term liquidity needs.
The Consolidated Statements of Cash Flows for the three years ended
December 31, 1998 detail FLAG's sources and uses of funds for those periods.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity at December 31, 1998 increased 6.2% from December 31,
1997. This growth resulted from 1998 earnings and the increase in unrealized
gains on securities available -for-sale. Dividends of $1.3 million or $.20 per
share were declared and paid in 1998 compared to $.13 per share in 1997.
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 8.64% for 1998 and 9.31% for 1997. Table 11
summarizes these and other key ratios for FLAG for each of the last three years.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
required federal banking agencies to take "prompt corrective action" with regard
to institutions that do not meet minimum capital requirements. As a result of
FDICIA, the federal banking agencies introduced an additional capital measure
called the "Tier 1 risk-based capital ratio." The Tier 1 ratio is the ratio of
core capital to risk adjusted total assets. Note 10 to the Consolidated
Financial Statements presents a summary of FDICIA's capital tiers compared to
FLAG's and the Banks' actual capital levels. The Banks exceeded all requirements
of a "well-capitalized" institution at December 31, 1998. The pending mergers
(see "Pending Acquisitions" will not significantly reduce FLAG's capital ratios
and management will continue leveraging capital to increase return on
stockholders' equity.
22
<PAGE>
TABLE 10
Expected Maturity of Investments
(dollars in thousands)
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield Totals
------ ----- ------ ----- ------ ----- ------ ----- ------
Securities held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
State, county and municipals . $ 110 5.38% 826 5.15% 2,014 4.93% 161 5.03% 3,111
Mortgage-backed securities ... -- -- -- -- -- -- 87 6.75% 87
Collateralized mortgage
obligations ............ 4 8.75% -- -- 1,033 7.40% -- -- 1,037
- ---- ----- ---- -----
114 5.50% 826 5.15% 3,047 5.77% 248 5.63% 4,235
--- ---- --- ---- ----- ---- --- ---- -----
Securities available-for-sale:
U.S. Treasury and agencies ... 7,174 5.71% 7,254 5.75% 3,140 6.59% 501 6.00% 18,069
State, county and municipals . 333 5.23% 1,555 4.81% 1,976 4.33% 4,162 5.48% 8,026
Corporate debt securities .... 999 4.70% -- -- -- -- -- -- 999
Equity securities ............ 3,710 6.41% -- -- -- -- -- -- 3,710
Mortgage-backed securities ... 173 5.45% 3,108 6.70% 1,690 7.37% 24,996 6.95% 29,967
Collateralized mortgage
obligations ............ 528 6.80% 136 7.00% 7,762 5.90% 3,094 5.70% 11,520
--- ---- --- ---- ----- ---- ----- ---- ------
12,917 5.86% 12,053 5.89% 14,568 6.01% 32,753 6.63% 72,291
------ ---- ------ ---- ------ ---- ------ ---- ------
Total ........................ $13,031 5.86% 12,879 5.84% 17,615 5.96% 33,001 6.60% 76,526
======= ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
PROVISION OF RINCOME TAXES
The provision for income taxes was $303,000 in 1998, versus $1,820,000 in
1997 and $451,000 in 1996. The effective actual tax rates for 1998, 1997 and
1996 (tax provision as a percentage of income before taxes) were 13%, 30% and
21%, respectively. These tax rates are lower than the statutory Federal tax rate
of 34% primarily due to interest income on tax exempt securities. See FLAG's
consolidated financial statements for an analysis of income taxes.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. The liquidity and
maturity structures of FLAG's assets and liabilities are critical to the
maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("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.
TABLE 11
Equity Ratios
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Return on average assets ......... .36% .93% .41%
Return on average equity ......... 4.19% 9.97% 4.24%
Dividend payout ratio ............ 66.55% 19.47% 48.02%
Average equity to average assets.. 8.64% 9.31% 9.70%
23
<PAGE>
Table of Contents to Consolidated Financial Sstatements
Report of Independent Certified Public Accountants ....... 26
Consolidated Balance Sheets .............................. 27
Consolidated Statements of Earnings ...................... 28
Consolidated Statements of Comprehensive Income 29
Consolidated Statements of Changes in Stockholders' Equity 30
Consolidated Statements of Cash Flows .................... 31
Notes to Consolidated Financial Statements ............... 33
24
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia
We have audited the accompanying consolidated balance sheets of FLAG Financial
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
statements of earnings, comprehensive income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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 did not audit the 1996 consolidated financial statements of
FLAG Financial Corporation and subsidiary and the 1997 and 1996 consolidated
financial statements of Three Rivers Bancshares, Inc. and subsidiary, all of
which were pooled with Middle Georgia Bankshares, Inc. and subsidiary, The Brown
Bank and subsidiary and Empire Banking Corp. and subsidiary in 1998 as explained
in note 2 to the consolidated financial statements. Those statements are
included in the accompanying consolidated financial statements and reflect total
assets of $34,548,811 as of December 31, 1997 and net earnings of $662,466 and
$221,184 for the years ended December 31, 1997 and 1996, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to these amounts, is based solely on
the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of FLAG Financial Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/Porter Keadle Moore, LLP
Atlanta, Georgia
January 29, 1999, except for note 18,
as to which the date is March 12, 1999
26
<PAGE>
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks, including
reserve requirements of $1,970,000 and $1,584,000 $ 25,246,090 18,427,230
Federal funds sold ............................... 23,330,000 10,645,000
---------- ----------
Cash and cash equivalents ........................ 48,576,090 29,072,230
Interest-bearing deposits ........................ 1,695,167 3,168,353
Investment securities
available-for-sale .......................... 72,291,309 83,119,392
Investment securities
held-to-maturity (fair value
o f$4,361,256 in 1998 and
$6,031,158 in 1997) ............................. 4,234,998 5,972,993
Other investments ................................ 6,382,443 5,933,543
Mortgage loans held for sale ..................... 5,941,739 3,481,678
Loans, net ....................................... 377,359,122 348,773,865
Premises and equipment, net ...................... 14,887,215 14,119,031
Other assets ..................................... 19,413,502 18,445,705
---------- ----------
Total assets ................................ $550,781,585 512,086,790
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand ........................................... $ 55,744,640 48,471,856
Interest-bearing demand .......................... 91,804,621 78,272,387
Savings .......................................... 22,668,610 23,183,721
Time ............................................. 190,778,268 188,931,198
Time, over $100,000 .............................. 85,802,186 73,594,976
-------- ---------- ----------
Total deposits .............................. 446,798,325 412,454,138
Federal funds purchased .......................... -- 170,000
Advances from Federal Home Loan Bank ............. 48,398,478 47,798,059
Other liabilities ................................ 7,720,125 6,589,591
--------- ---------
Total liabilities ........................... 502,916,928 467,011,788
----------- -----------
Stockholders' equity:
Preferred stock (10,000,000 shares
authorized; none issued and outstanding) .... -- --
Common stock ($1 par value, 20,000,000
shares authorized, 6,560,004 and
6,524,239 shares issued and outstanding
in 1998 and 1997, respectively) ............. 6,560,004 6,524,239
Additional paid-in capital ....................... 10,487,618 10,320,527
Retained earnings ................................ 28,886,607 28,231,052
Accumulated other comprehensive income ........... 1,930,428 (816}
--------- ----
Total stockholders' equity ............. 47,864,657 45,075,002
---------- ----------
Total liabilities and
stockholders' equity .................. $550,781,585 512,086,790
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Consolidated Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Interest Income:
<S> <C> <C> <C>
Interest and fees on loans ............... $38,409,086 32,803,344 28,907,264
Interest on investment securities ........ 5,105,986 5,276,961 5,098,080
Interest-bearing deposits ................ 325,199 198,064 101,695
Federal funds sold ....................... 891,775 451,580 500,984
------- ------- -------
Total interest income ............... 44,732,046 38,729,949 34,608,023
---------- ---------- ----------
Interest Expense:
Deposits ................................. 18,729,042 16,858,904 14,931,861
Borrowings ............................... 3,180,425 1,764,773 1,441,442
--------- --------- ---------
Total interest expense .............. 21,909,467 18,623,677 16,373,303
---------- ---------- ----------
Net interest income before
provision for loan losses .......... 22,822,579 20,106,272 18,234,720
---------- ---------- ----------
Provision for Loan Losses ..................... 3,382,000 1,596,188 4,474,529
--------- --------- ---------
Net interest income after
provision for loan losses .......... 19,440,579 18,510,084 13,760,191
---------- ---------- ----------
Other Income:
Fees and service charges ................. 4,618,598 4,232,022 3,801,862
Gain on sales of investment
securities .......................... 290,931 171,161 236,120
Gain on sales of loans ................... 884,603 821,175 595,535
Gain (loss) on other real
estate, net ......................... 26,370 (82,719) (79,643)
Other .................................... 1,618,109 1,002,357 662,442
--------- --------- -------
Total other income .................. 7,438,611 6,143,996 5,216,316
--------- --------- ---------
Other Expenses:
Salaries and employee benefits ........... 10,949,030 8,912,563 7,552,501
Occupancy ................................ 3,930,390 3,350,915 2,660,303
Other operating .......................... 9,737,392 6,259,666 6,612,567
--------- --------- ---------
Total other expenses ................ 24,616,812 18,523,144 16,825,371
---------- ---------- ----------
Earnings before provision
for income taxes .................. 2,262,378 6,130,936 2,151,136
Provision for income taxes .................... 302,750 1,820,188 451,333
------- --------- -------
Net earnings ............................. $ 1,959,628 4,310,748 1,699,803
=========== ========= =========
Basic earnings per share ...................... $ .30 .66 .26
=========== === ===
Diluted earnings per share .................... $ .30 .66 .26
=========== === ===
</TABLE>
See accompanying notes to consolidated financial statements
28
<PAGE>
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings ............................... $ 1,959,628 4,310,748 1,699,803
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available-for-sale:
Unrealized gains arising during
the period, net of tax of
$1,294,219, $277,094 and $61,559,
respectively .................... 2,111,621 452,100 100,439
Less reclassification adjustment for
gains included in net earnings, net
of tax of $110,554, $65,041 and
$89,726, respectively .............. (180,377) (106,120) (146,394)
-------- -------- --------
Other comprehensive income ................. 1,931,244 345,980 (45,955)
--------- ------- -------
Comprehensive income ....................... $ 3,890,872 4,656,728 1,653,848
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance, Cecember 31, 1995,
as previously stated .............. $ 2,874,000 6,561,001 11,580,579 (317,364) 20,698,216
Adjustment to reflect
pooling of interests ............. 3,466,822 3,086,589 12,295,308 16,523 18,865,242
--------- --------- ---------- ------ ----------
Balance, Cecember 31, 1995 ............. 6,340,822 9,647,590 23,875,887 (300,841) 39,563,458
Treasury stock activity of
pooled entity .................. (43,083) (19,770) -- -- (62,853)
Exercise of stock options ......... 180,311 450,318 -- -- 630,629
Issuance of common stock .......... 37,543 191,981 -- -- 229,524
Change in unrealized loss
on securities available-for-sale -- -- -- (45,955) (45,955)
Net earnings ...................... -- -- 1,699,803 -- 1,699,803
Dividends declared ................ -- -- (816,185) -- (816,185)
-------- --------
Balance, December 31, 1996 ............. 6,515,593 10,270,119 24,759,505 (346,796) 41,198,421
Treasury stock activity of
pooled entity ................... 8,646 50,408 -- -- 59,054
Change in unrealized loss
on securities available-for-sale -- -- -- 345,980 345,980
Net earnings ...................... -- -- 4,310,748 -- 4,310,748
Dividends declared ................ -- -- (839,201) -- (839,201)
-------- --------
Balance, December 31, 1997 ............. 6,524,239 10,320,527 28,231,052 (816) 45,075,002
Treasury stock activity of
pooled entity ................... 26,265 103,653 -- -- 129,918
Exercise of stock options ........ 9,500 63,438 -- -- 72,938
Change in unrealized gain (loss)on
securities available-for-sale .. -- -- -- 1,931,244 1,931,244
Net earnings ...................... -- -- 1,959,628 -- 1,959,628
Dividends declared ................ -- -- (1,304,073) -- (1,304,073)
---------- ----------
Balance, December 31, 1998 ............. $ 6,560,004 10,487,618 28,886,607 1,930,428 47,864,657
=========== ========== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net earnings $ 1,959,628 4,310,748 1,699,803
Adjustments to reconcile net earnings
to net cashprovided by operating activities:
Depreciation, amortization and accretion 2,391,666 1,825,266 1,573,733
Provision for loan losses ............... 3,382,000 1,596,188 4,474,529
Provision for deferred taxes ............ (335,713) 861,873
Gains on sales of securities ............ (290,931) (172,438) (236,120)
Gain on sales of loans .................. (884,603) (825,065) (595,535)
(Gain) loss on other real estate ........ (26,370) 64,780 83,565
Change in:
Mortgage loans held for sale .......... (1,575,458) (1,317,157) (887,549)
Other ................................. (3,836,730) 1,185,977 1,692,569
---------- --------- ---------
Net cash provided by
operating activities ................ 783,489 7,530,172 6,854,002
------- --------- ---------
Cash Flows From Investing Activities:
Net change in interest-bearing deposits ..... 1,473,186 (1,841,246) 411,725
Proceeds from sales and maturities
of securitiesavailable-for-sale ......... 60,550,406 58,820,823 37,952,887
Proceeds from maturities of
securities held-to-maturity ............ 1,696,422 966,861 1,477,484
Proceeds from sale of other investments ...... 5,764,366 225,400 --
Purchases of other investments ............... (6,078,968) (963,595) (517,810)
Purchases of securities available-for-sale ... (46,602,265) (67,422,382) (34,024,310)
Purchases of securities held-to-maturity ..... -- -- (407,039)
Net change in loans .......................... (29,887,886) (51,149,424) (37,407,101)
Proceeds from sales of other real estate ..... 1,111,560 22,590 599,937
Purchases of premises and equipment .......... (3,283,425) (3,030,277) (2,141,637)
Proceeds from sale of premises and equipment . 475,347 -- --
Purchase of cash surrender value
of life insurance ....................... (376,919) (243,652) (72,962)
Cash acquired in branch acquisition,
net of premium paid ....................... -- 25,416,547 --
Other ........................................ -- 1,441 90,930
----- ------
Net cash used in investing activities ... (15,158,176) (39,196,914) (34,037,896)
----------- ----------- -----------
</TABLE>
31
<PAGE>
Consolidated Statements of Cash Flows (continued)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash Flows From Financing Activities:
<S> <C> <C> <C>
Net change in deposits .......................... 34,344,187 16,333,598 34,782,295
Change in Federal funds purchased ............... (170,000) (2,870,000) 3,040,000
Proceeds from FHLB advances ..................... 25,000,006 42,858,772 16,879,346
Payments of FHLB advances ....................... (24,399,587) (16,033,339) (28,213,334)
Proceeds from exercise of stock options ......... 72,938 -- 630,629
Proceeds from issuance of common stock .......... -- -- 187,604
Treasury stock transactions of
pooled entities ............................ 129,918 59,053 (20,933)
Cash dividends paid ............................. (1,098,915) (839,201) (786,644)
Other ........................................... -- (16,114) (4,360)
------- ------
Net cash provided by financing
activities .............................. 33,878,547 39,492,769 26,494,603
---------- ---------- ----------
Net change in cash and cash equivalents .... 19,503,860 7,826,027 (689,291)
Cash and cash equivalents at
beginning of year .......................... 29,072,230 21,246,203 21,935,494
---------- ---------- ----------
Cash and cash equivalents at end of year ........ $ 48,576,090 29,072,230 21,246,203
============ ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ................................... $ 21,584,257 18,138,346 16,307,618
Income taxes ............................... $ 1,152,848 1,645,210 1,596,745
Supplemental Schedule of Noncash Investing and
Financing Activities:
Real estate acquired through foreclosure ........ $ 2,079,371 704,649 1,260,775
Change in unrealized gain (loss) on
securities available-for-sale, net of tax .. $ 1,931,244 345,980
Increase (decrease) in dividends payable ........ $ 205,158 -- 29,541
Deposit liabilities assumed in
branch acquisition ......................... $ 29,083,191 --
Assets acquired in branch acquisition, other
than cash and cash equivalents ............. $ -- 1,660,756 --
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of FLAG
Financial Corporation "FLAG"), its wholly - owned subsidiaries First Flag Bank,
formerly First Federal Savings Bank of LaGrange ("First Flag") and First Flag's
wholly-owned subsidiary Piedmont Mortgage Service, Inc. ("Piedmont"), Citizens
Bank ("Citizens"), Bank of Milan ("Milan") and Empire Banking Company ("Empire")
("the Banks", collectively). All significant intercompany accounts and
transactions have been eliminated in consolidation.
FLAG is a multi-bank holding company formed in 1994 whose business is
conducted primarily by the Banks. FLAG is subject to regulation under the Bank
Holding Company Act of 1956. The Banks are primarily regulated by the Georgia
Department of Banking and Finance ("DBF") and the Federal Deposit Insurance
Corporation ("FDIC"). The Banks provide a full range of commercial, mortgage and
consumer banking services in West-Central, Middle and South Georgia. Piedmont is
an appraisal service company working principally for First Flag and as a
brokerage service to individuals.
The accounting principles followed by FLAG and its subsidiaries, and the
methods of applying these principles, conform with generally accepted accounting
principles ("GAAP") and with general practices within the banking industry. In
preparing financial statements in conformity with GAAP, management is required
to make estimates and assumptions that affect the reported amounts in the
financial statements. Actual results could differ significantly from those
estimates. Material estimates common to the banking industry that are
particularly susceptible to significant change in the near term include, but are
not limited to, the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with or in lieu of foreclosure
on loans, the valuation allowance for mortgage servicing rights and valuation
allowances associated with the realization of deferred tax assets which are
based on future taxable income.
Cash and Cash Equivalents
Cash equivalents include amounts due from banks and Federal funds sold.
Generally, Federal funds are sold for one-day periods.
Investment Securities
FLAG classifies its securities in one of three categories: trading,
available-for-sale, or held-to-maturity. There were no trading securities at
December 31, 1998 and 1997. 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
federally insured savings bank. Additionally, 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.
33
<PAGE>
NOTE 1. SUMMARY OFSIGNIFICANTACCOUNTINGPOLICIES, continued
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. The amount by which cost
exceeds market value is accounted for as a valuation allowance. Changes, if any,
in the valuation allowance are included in the determination of net earnings in
the period in which the change occurs. Gains and losses from the sale of loans
are determined using the specific identification method.
Loans, Loan Fees and Interest Income
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their outstanding unpaid
principal balances, net of the allowance for loan losses, deferred fees or costs
on originated loans and unamortized premiums or discounts on purchased loans.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized in interest income using the level-yield method
over the contractual lives of the loans, adjusted for estimated prepayments
based on the Banks' historical prepayment experience. Commitment fees and costs
relating to commitments whose likelihood of exercise is remote are recognized
over the commitment period on a straight-line basis. If the commitment is
subsequently exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise is recognized over the life of the loan
as an adjustment to the yield. Premiums and discounts on purchased loans are
amortized over the remaining lives of the loans using the level-yield method.
Fees arising from servicing loans for others are recognized as earned.
FLAG considers a loan impaired when, based on current information and
events, it is probable that all amounts due according to the contractual terms
of the loan agreement will not be collected. Impaired loans are measured based
on the present value of expected future cash flows, discounted at the loan's
effective interest rate or at the loa'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
First Flag 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.
FLAG's judgment in determining the adequacy of the allowance for loan
losses is based on evaluations of the collectibility of loans. These evaluations
take into consideration such factors as changes in the nature and volume of the
loan portfolio, current economic conditions, overall portfolio quality, and
review of specific problem loans. In determining the adequacy of the allowance
for loan losses, FLAG uses a loan grading system that rates loans in eight
different categories. Loans are allocated loss ranges based on these categories.
The results of the allocated losses are compared to the recorded allowance on a
periodic basis and material deficiences are adjusted by increasing the provision
for loan losses.
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.
34
<PAGE>
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, 1998 and 1997, no
valuation allowances were required for FLAG's mortgage servicing rights.
FLAG recognized approximately $750,000, $418,000 and $451,000 in servicing
assets during 1998, 1997 and 1996, respectively, and recognized amortization
expense relating to servicing assets of approximately $241,000, $149,000 and
$204,000 during 1998, 1997 and 1996, respectively. The risk characteristics that
FLAG uses to stratify recognized servicing assets for purposes of measuring
impairment include the interest rate and term of the underlying loans serviced.
Core Deposit Intangible
During 1997, Citizens entered into a Purchase and Assumption agreement with
Wachovia Bank of Georgia, N.A. to acquire certain loans, deposits and other
liabilities of a branch in Montezuma, Georgia and a former branch in Oglethorpe,
Georgia ("branch acquisition") for a net purchase price approximating
$2,095,000. The purchased core deposit intangible and the associated expenses
have been capitalized and are being amortized using the straight-line method
over the 15 year estimated average life of the deposit base acquired and is
included as a component of other assets. Amortization expense approximated
$140,000 and $58,000 for the years ended December 31, 1998 and 1997,
respectively.
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
35
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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 8. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Net Earnings Per Common Share
FLAG is required to report earnings per
common share with and without the dilutive effects of potential common stock
issuances from instruments such as options, convertible securities and warrants
on the face of the statements of earnings. 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. Additionally, FLAG must reconcile the
amounts used in the computation of both "basic earnings per share" and "diluted
earnings per share". Earnings per common share for the years ended December 31,
1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Net Common Per
Earnings Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
For the year ended December 31, 1998
Basic earnings per share .................... $1,959,628 6,554,643 .30
Effect of dilutive securities - stock options -- 31,665 --
------
Diluted earnings per share .................. $1,959,628 6,586,308 .30
========== ========= ===
For the year ended December 31, 1997
Basic earnings per share .................... $4,310,748 6,519,292 .66
Effect of dilutive securities - stock options -- 29,364 --
------
Diluted earnings per share .................. $4,310,748 6,548,656 .66
========== ========= ===
For the year ended December 31, 1996
Basic earnings per share .................... $1,699,803 6,481,022 .26
Effect of dilutive securities - stock options -- 12,149 -
------
Diluted earnings per share .................. $1,699,803 6,493,171 .26
========== ========= ===
</TABLE>
Recent Accounting Pronouncements
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.
36
<PAGE>
NOTE 2. BUSINESS COMBINATIONS
Effective March 31, 1998, FLAG acquired, for approximately 1.5 million
shares of its common stock, all of the outstanding stock of Middle Georgia
Bankshares, Inc., the holding company of the $129 million Citizens Bank, located
in Vienna, Georgia. Effective May 8, 1998, FLAG acquired, for approximately
597,000 shares of its common stock all of the outstanding stock of Three Rivers
Bancshares, Inc., the holding company of the $35 million Bank of Milan, located
in Milan, Georgia. Effective December 11, 1998, FLAG acquired, for approximately
1.1 million shares of its common stock, all of the outstanding stock of Empire
Bank Corp., the holding company of the $70 million Empire Banking Company,
located in Homerville, Georgia. Effective December 31, 1998, FLAG acquired, for
approximately 255,000 shares of its common stock, all of the outstanding stock
of The Brown Bank ("Brown"), a $31 million bank located in Metter, Georgia.
These acquisitions were accounted for as pooling of interests and accordingly,
the consolidated financial statements for all periods presented have been
restated to include the financial position and results of operations as if the
combination had occurred on January 1, 1996.
The following is a reconciliation of the amounts of net interest income and
net earnings previously reported with the restated amounts:
1997 1996
---- ----
Net interest income:
FLAG ........... $ 8,542,364 8,721,592
Citizens ....... 5,623,192 4,667,851
Milan .......... 1,831,118 1,367,223
Empire ......... 2,615,732 2,269,478
Brown .......... 1,493,866 1,208,576
--------- ---------
As restated $ 20,106,272 18,234,720
============ ==========
Net earnings (loss):
FLAG ........... $ 2,033,114 (177,626)
Citizens ....... 1,053,118 1,065,064
Milan .......... 662,466 398,810
Empire ......... 693,347 246,172
Brown .......... (131,297) 167,383
-------- -------
As restated .... $ 4,310,748 1,699,803
============ =========
37
<PAGE>
NOTE 3. INVESTMENT SECURITIES
Investment securities at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available-for-sale
<S> <C> <C> <C> <C>
U.S. Treasuries and agencies ...... $17,908,611 180,458 20,399 18,068,670
State, county and municipals ...... 7,794,302 240,154 8,051 8,026,405
Corporate debt securities ......... 997,809 873 -- 998,682
Equity securities ................. 1,028,463 2,730,231 48,991 3,709,703
Mortgage-backed securities ........ 29,862,601 195,155 90,391 29,967,365
Collateralized mortgage obligations 11,594,459 30,792 104,767 11,520,484
---------- ------ ------- ----------
$69,186,245 3,377 272,599 72,291,309
=========== ===== ======= ==========
Securities held-to-maturity
State, county and municipals ...... $ 3,111,584 139,510 -- 3,251,094
Mortgage-backed securities ........ 86,778 2,749 872 88,655
Collateralized mortgage obligations 1,036,636 990 16,119 1,021,507
--------- --- ------ ---------
$ 4,234,998 143,249 16,991 4,361,256
=========== ======= ====== =========
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available-for-sale
U.S. Treasuries and agencies ...... $28,061,226 135,716 34,916 28,162,026
State, county and municipals ...... 6,677,231 126,077 35,859 6,767,449
Corporate debt securities ......... 989,300 10,700 -- 1,000,000
Equity securities ................. 1,124,996 125,370 1,817 1,248,549
Mortgage-backed securities ........ 30,048,443 216,612 177,519 30,087,536
Collateralized mortgage obligations 16,226,434 11,031 383,633 15,853,832
---------- ------ ------- ----------
$83,127,630 625,506 633,744 83,119,392
=========== ======= ======= ==========
Securities held-to-maturity
U.S. Treasuries and agencies ...... $ 199,536 -- 36 199,500
State, county and municipals ...... 3,165,622 97,841 948 3,262,515
Mortgage-backed securities ........ 103,140 1,160 -- 104,300
Collateralized mortgage obligations 2,504,695 2,037 41,889 2,464,843
--------- ----- ------ ---------
$ 5,972,993 101,038 42,873 6,031,158
=========== ======= ====== =========
</TABLE>
38
<PAGE>
The amortized cost and estimated fair value of securities
available-for-sale and securities held-to-maturity at December 31, 1998, 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.
<TABLE>
<CAPTION>
Securities Available- Securities Held-
For-Sale to-Maturity
-------- -----------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
U.S. Treasuries and agencies
and state, county and municipals:
Within 1 year ........... $ 7,481,578 7,506,875 109,966 112,096
1 to 5 years ............ 8,729,766 8,809,323 826,293 849,368
5 to 10 years ........... 4,959,721 5,115,907 2,014,091 2,122,766
More than 10 years ...... 4,531,848 4,662,970 161,234 166,864
--------- --------- ------- -------
25,702,913 26,095,075 3,111,584 3,251,094
========== ========== ========= =========
Equity securities ....... 1,028,463 3,709,703 -- --
Corporate debt securities 997,809 998,682 -- --
Mortgage-backed securities
obligations .......... 11,594,459 11,520,484 1,036,636 1,021,507
---------- ---------- --------- ---------
$69,186,245 72,291,309 4,234,998 4,361,256
=========== ========== ========= =========
</TABLE>
There were no sales of securities held-to-maturity during 1998, 1997 and
1996. Proceeds from sales of securities available-for-sale during 1998, 1997 and
1996 totalled approximately $13,650,000, $8,356,000 and $17,805,000,
respectively. Gross gains of approximately $325,000, $186,000 and $267,000 and
gross losses of approximately $34,000, $15,000 and $31,000 were realized on
those sales for the years ended December 31, 1998, 1997 and 1996, respectively.
Securities and interest-bearing deposits with a carrying value of
approximately $54,683,000 and $49,901,000 at December 31, 1998 and 1997,
respectively, were pledged to secure advances from FHLB, U.S. Government and
other public deposits. note 4. Loans Major classifications of loans at December
31, 1998 and 1997 are summarized as follows:
1998 1997
---- ----
Commercial, financial and agricultural $ 116,133,182 69,915,736
Real estate-construction ............. 29,956,050 12,663,396
Real estate-mortgage ................. 174,852,524 231,460,215
Installment loans to individuals ..... 54,311,596 30,374,344
Lease financings ..................... 7,673,877 9,308,213
--------- ---------
Gross loans .......................... 382,927,229 353,721,904
Less allowance for loan losses ....... (5,568,107) (4,948,039)
---------- ----------
$ 377,359,122 348,773,865
============= ===========
FLAG concentrates its lending activities in the origination of permanent
residential mortgage loans, commercial mortgage loans, agribusiness loans,
timber loans, commercial business loans and consumer installment loans. The
majority of the Banks' real estate loans are secured by real property located in
West Central, Middle and South Georgia.
39
<PAGE>
NOTE 4. LOANS, continued
FLAG has recognized impaired loans of approximately $3,700,000 and $191,000
at December 31, 1998 and 1997, respectively, with a total allowance for loan
losses related to these loans of approximately $2,150,000 and $191,000,
respectively. Interest income on impaired loans of approximately $150,000 and
$17,000 was recognized for cash payments received in 1998 and 1997,
respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31, 1998, 1997and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year .............. $ 4,948,039 6,384,853 3,254,709
Provisions charged to operations ........ 3,382,000 1,596,188 4,474,529
Loans charged off ........................ (3,090,614) (3,265,183) (1,432,546)
Recoveries on loans previously charged off 328,682 232,181 88,161
------- ------- ------
Balance at end of year ..................... $ 5,568,107 4,948,039 6,384,853
=========== ========= =========
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated financial statements. Unpaid principal balances of these loans at
December 31, 1998 and 1997 approximate $213,390,000 and $166,823,000,
respectively. Custodial escrow balances maintained in connection with loan
servicing, and included in demand deposits, were approximately $675,000 and
$618,000 at December 31, 1998 and 1997, respectively.
Mortgage loans secured by 1-4 family residences totalling approximately
$57,393,000 were pledged as collateral for outstanding FHLB advances as of
December 31, 1998.
NOTE 5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 are summarized as
follows:
1998 1997
---- ----
Land and land improvements .. $ 1,655,012 1,555,012
Buildings and improvements .. 10,116,781 9,970,968
Furniture and equipment ..... 13,758,342 12,049,938
---------- ----------
25,530,135 23,575,918
Less accumulated depreciation 10,642,920 9,456,887
---------- ---------
$14,887,215 14,119,031
=========== ==========
Depreciation expense approximated $2,065,000, $1,630,000 and $1,343,000 at
December 31, 1998, 1997 and 1996, respectively.
NOTE 6. TIME DEPOSITS
At December 31, 1998, contractual maturities of time deposits are
summarized as follows:
Year ending December 31,
1999 .................... $203,036,225
2000 .................... 44,656,174
2001 .................... 11,889,973
2002 .................... 7,723,513
2003 .................... 7,653,430
2004 and thereafter.... 1,621,139
---------
$276,580,454
============
40
<PAGE>
NOTE 7. FHLB ADVANCES
Advances FHLB advances are collateralized by FHLB stock, certain investment
securities and first mortgage loans. Advances from the FHLB outstanding at
December 31, 1998 bear fixed and floating interest rates ranging from 4.84% to
8.13% and mature as follows:
Year ending December 31,
1999.................... $ 2,616,254
2000.................... 5,616,254
2001.................... 441,536
2002.................... 7,342,786
2003.................... 3,297,000
Thereafter.............. 29,084,648
----------
$48,398,478
===========
NOTE 8. INCOME TAXES
The following is an analysis of the components of income tax expense
(benefit) for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Current ...................... $ 638,463 958,315 1,402,326
Deferred ..................... (203,543) 918,373 (1,067,993)
Change in valuation allowance (132,170) (56,500) 117,000
-------- ------- -------
$ 302,750 1,820,188 451,333
=========== ========= =======
The differences between income tax expense and the amount computed by
applying the statutory federal income tax rate to earnings before taxes for the
years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pretax income at statutory rate ..... $ 769,209 2,084,517 731,387
Add (deduct):
Tax-exempt interest income ..... (322,540) (290,923) (173,307)
State income taxes, net of
federal effect ............ 30,768 164,353
Increase in cash surrender value
of life insurance ......... (63,837) (75,192) (15,064)
Nondeductible merger expenses .. 109,131 -- --
Change in valuation allowance .. (132,170) (56,500) 117,000
Other .......................... (87,811) (6,067) (174,560)
------- ------ --------
$ 302,750 1,820,188 451,333
=========== ========= =======
</TABLE>
41
<PAGE>
NOTE 8. INCOME TAXES, continued
The following summarizes the net deferred tax asset. The deferred tax asset
is included as a component of other assets at December 31, 1998 and 1997.
1998 1997
Deferred tax assets:
Allowance for loan losses ...................... $1,500,497 1,195,053
Allowance for other real estate owned .......... 27,647 21,208
Net operating loss carryforwards and credits ... 192,230 727,740
Other .......................................... 227,679 73,093
------- ------
Total gross deferred tax assets ........... 1,948,053 2,017,094
Less: valuation allowance ................. -- (132,170)
--------
1,948,053 1,884,924
========= =========
Deferred tax liabilities:
Premises and equipment ......................... 593,886 568,472
Net deferred loan fees ......................... 74,773 151,375
Unrealized gain on securities available-for-sale 1,131,327 --
Other .......................................... 96,298 317,694
------ -------
Total gross deferred tax liabilities ...... 1,896,284 1,037,541
--------- ---------
Net deferred tax asset .................... $ 51,769 847,383
========== =======
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, First Flag now computes its tax bad debt reserve
under the rules of IRC section 585, which apply to commercial banks. In years
prior to 1996, First Flag 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 First Flag ceases to qualify as a bank pursuant to the
provisions of IRC section 585.
NOTE 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 1998, 1997 and 1996, the
Company contributed approximately $105,000, $59,000 and $49,000, 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 and 1996, FLAG recognized
$194,000 and $185,000, respectively, in expense related to its obligations under
the plan. FLAG recognized no such expense in 1998.
The companies acquired in 1998 sponsored certain defined contribution
employee benefit plans that have been terminated or merged into existing plans
of FLAG. Under these plans, the acquired companies recognized expense of
approximately $58,000, $88,000 and $78,000 in 1998, 1997 and 1996, respectively.
These amounts are included in the accompanying statements of earnings.
42
<PAGE>
Directors' Retirement Plan
FLAG sponsors a defined contribution postretirement benefit plan to provide
retirement benefits to certain of FLAG's and the Banks' Board of Directors and
executive officers and to provide death benefits for their designated
beneficiaries. Under this plan, split-dollar whole life insurance contracts were
purchased on the lives of certain Directors and executive officers. The increase
in cash surrender value of the contracts, less the Banks' cost of funds,
constitutes FLAG's contribution to the plan each year. In the event the
insurance contracts fail to produce positive returns, FLAG has no obligation to
contribute to the plan. At December 31, 1998 and 1997, the cash surrender value
of the insurance contracts was approximately $3,971,000 and $3,514,000,
respectively. Expenses incurred for benefits were approximately $7,200, $22,000
and $66,000 during 1998, 1997 and 1996, respectively.
Defined Benefit Plan
Prior to 1998, FLAG sponsored a trusteed defined benefit pension plan which
covered substantially all employees. This pension plan was frozen effective
January 15, 1998 and terminated effective May 1, 1998 at which time all accrued
benefits became fully vested. During 1998, FLAGfully funded the liability under
this plan. As of December 31, 1998, approximately $139,000 of assets remained in
this plan. These assets, which consist of cash and cash equivalents, will be
distributed at the direction of the participants.
The following is a reconciliation of the funded status of the plan as of
December 31, 1997:
Accumulated benefit obligation including vested
benefits of $1,050,965 ................................... $ 1,062,575
===========
Projected benefit obligation for services rendered to date 1,635,798
Plan assets at fair value ................................ 1,379,263
---------
Projected benefit obligation in excess of plan assets .... (256,535)
Unrecognized transition obligation ....................... 15,755
Unrecognized prior service cost .......................... 141,472
Unrecognized net loss .................................... (6,457)
------
Accrued pension liability ................................ $ (105,765)
===========
Net pension expense for the years ended December 31, 1997 and 1996 is
summarized as follows:
1997 1996
---- ----
Service cost - benefits earned .............. $ 93,676 71,238
Interest cost on projected benefit obligation 116,072 95,648
Actual return on plan assets ................ (99,024) (85,327)
Net amortization ............................ 12,191 12,191
------ ------
$ 122,915 93,750
========= ======
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. Prior service costs were generally amortized over a
period of 17 years.
43
<PAGE>
NOTE 9. EMPLOYEE AND DIRECTORS BENEFIT PLANS, continued
Stock Option Plan
FLAG has an employee stock incentive plan and a director stock incentive
plan. The plans were adopted for the benefit of directors and key officers and
employees in order that they may purchase FLAG stock at a price equal to the
fair market value on the date of grant. A total of 525,000 shares were reserved
for possible issuance under the employee plan and 165,938 shares were reserved
under the director plan. The options generally vest over a four-year period and
expire after ten years.
FLAG is encouraged, but not required, 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, and
therefore no compensation expense has been recognized in 1998, 1997 or 1996
related to the stock option plans. Had compensation cost been determined based
upon the fair value of the options at the grant dates, FLAG's net earnings and
net earnings per share would have been reduced to the pro forma amounts
indicated below.
1998 1997 1996
---- ---- ----
Net earnings
As reported ........ $ 1,959,628 4,310,748 1,699,803
Pro forma .......... $ 1,516,077 4,290,038 1,696,464
Basic earnings per share
As reported ......... $ .30 .66 .26
Pro forma ........... $ .23 .66 .26
Diluted earnings per share
As reported ......... $ .30 .66 .26
Pro forma ........... $ .23 .65 .26
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: dividend yield of 2%; volatility ranging from .4266 to .8531; 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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Option Option Option
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 109,125 $ 7.01 69,000 $6.68 240,311 $4.27
Granted during the year ...... 445,404 12.97 42,000 7.58 9,000 9.00
Cancelled during the year .... (6,000) 13.33 (1,875) 7.50 -- --
Exercised during the year .... (9,500) 7.68 -- -- (180,311) 3.59
------ ---- -------- ----
Outstanding, end of year ..... 539,029 $11.85 109,125 $7.01 69,000 $6.68
------- ------ ------- ----- ------ -----
Number of shares exercisable . 312,561 109,125 69,000
======= ======= ======
</TABLE>
The weighted average grant-date fair value of options granted in 1998, 1997
and 1996 was $6.12, $2.79 and $2.39, respectively. For these employee and
director stock options, options outstanding at December 31, 1998 are exercisable
at option prices ranging from $6.33 to $19.375 as presented in the table above.
Such options have a weighted average remaining contractual life of approximately
8.5 years as of December 31, 1998.
44
<PAGE>
NOTE 10. STOCKHOLDERS' EQUTIY
Shares of preferred stock may be issued from time to time in one or more
series as established by resolution of the Board of Directors of FLAG, up to a
maximum of 10,000,000 shares. Each resolution shall include the number of shares
issued, preferences, special rights and limitations as determined by the Board.
On May 18, 1998, FLAG declared a three-for-two stock split, payable on June
3, 1998. All share and per share amounts have been restated to reflect this
stock split as if it had occurred on January 1, 1996.
NOTE 11. REGULATORY MATTERS
FLAG and the Banks are 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, action by regulators that, if undertaken, could have a direct
material effect on the Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of December
31, 1998 that the Banks meet all capital adequacy requirements to which they are
subject.
Minimum ratios required by the Banks to ensure capital adequacy are 8% for
total capital to risk weighted assets and 4% each for Tier 1 capital to average
assets. Minimum ratios required by the Banks to be well capitalized under prompt
corrective action provisions are 10% for total capital to risk-weighted assets,
6% for Tier 1 capital to risk-weighted assets and 5% for Tier 1 capital to
average assets. Minimum amounts required for capital adequacy purposes and to be
well capitalized under prompt corrective action provisions are presented below
for FLAG and the Banks. Prompt corrective action provisions do not apply to bank
holding companies. note 11. regulatory matters, continued
45
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ -----------------------------------
Amount Ratio Amount Ratio Amount Ratio
(000's) (000's) (000's)
------- ------ ------- ----- ------- ------
As of December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets)
FLAG consolidated ................. $51,390 14.0% 29,386 8.0% N/A N/A
First Flag ........................ $18,418 10.5% 13,967 8.0% 17,459 10.0%
Citizens .......................... $13,883 9.9% 11,234 8.0% 14,043 10.0%
Milan ............................. $ 4,393 13.7% 2,560 8.0% 3,200 10.0%
Empire ............................ $ 7,734 14.2% 4,345 8.0% 5,432 10.0%
Tier 1 Capital (to Risk-Weighted Assets)
FLAG consolidated ................. $45,934 12.5% 14,693 4.0% N/A N/A
First Flag ........................ $18,418 10.5% 6,983 4.0% 10,475 6.0%
Citizens .......................... $12,134 8.6% 5,617 4.0% 8,426 6.0%
Milan ............................. $ 3,992 12.5% 1,280 4.0% 1,920 6.0%
Empire ............................ $ 7,134 13.1% 2,173 4.0% 3,259 6.0%
Tier 1 Capital (to Average Assets)
FLAG consolidated ................. $45,934 8.4% 21,919 4.0% N/A N/A
First Flag ........................ $18,418 7.0% 10,476 4.0% 13,095 5.0%
Citizens .......................... $12,134 7.1% 6,858 4.0% 8,573 5.0%
Milan ............................. $ 3,992 10.2% 1,571 4.0% 1,963 5.0%
Empire ............................ $ 7,134 10.3% 2,776 4.0% 3,470 5.0%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
FLAG consolidated ................. $46,605 13.0% 28,645 8.0% N/A N/A
First Flag ........................ $22,408 13.9% 12,871 8.0% 16,089 10.0%
Citizens .......................... $11,171 9.0% 9,905 8.0% 12,381 10.0%
Milan ............................. $ 3,077 13.8% 1,790 8.0% 2,238 10.0%
Empire ............................ $ 7,129 14.6% 3,893 8.0% 4,866 10.0%
Tier 1 Capital (to Risk-Weighted Assets)
FLAG consolidated ................. $42,267 11.8% 14,323 4.0% N/A N/A
First Flag ........................ $20,382 12.7% 6,436 4.0% 9,653 6.0%
Citizens .......................... $ 9,590 7.8% 4,953 4.0% 7,429 6.0%
Milan ............................. $ 2,798 12.5% 895 4.0% 1,343 6.0%
Empire ............................ $ 6,647 13.7% 1,947 4.0% 2,920 6.0%
Tier 1 Capital (to Average Assets)
FLAG consolidated ................. $42,267 8.5% 19,854 4.0% N/A N/A
First Flag ........................ $20,382 8.3% 9,883 4.0% 12,354 5.0%
Citizens .......................... $ 9,590 6.3% 6,110 4.0% 7,638 5.0%
Milan ............................. $ 2,798 8.8% 1,270 4.0% 1,587 5.0%
Empire ............................ $ 6,647 10.4% 2,550 4.0% 3,187 5.0%
</TABLE>
Banking regulations limit the amount of dividends the Banks can pay to FLAG
without prior regulatory approval. These limitations are a function of excess
regulatory capital and net earnings in the year the dividend is declared. In
1999, the Banks can pay dividends totalling approximately $2,000,000 without
prior regulatory approval.
46
<PAGE>
NOTE 12. COMMITMENTS AND CONTINGENCIES
FLAG has a partially self-insured health care plan for the benefit of
eligible employees and their eligible dependents, administered by a third party
administrator. Claims in excess of $15,000 per person annually, but less than
$1,000,000, are covered by an insurance policy with Guarantee Mutual Life
Company. FLAG is responsible for any claims less than $15,000 per person
annually.
FLAG is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
manage its cost of funds. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amounts recognized in
the consolidated statements of financial condition. The contract amounts of
these instruments reflect the extent of involvement the Banks have in particular
classes of financial instruments.
Commitments to originate first mortgage loans and to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks upon extension of credit, is based on management's credit evaluation
of the counterparty. The Banks' loans are primarily collateralized by
residential and other real properties, automobiles, savings deposits, accounts
receivable, inventory and equipment located in Central and South Georgia.
Standby letters of credit are written conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. Most letters of credit extend for less than one year. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
FLAG's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Banks use the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. All standby letters of
credit are secured at December 31, 1998 and 1997.
1998 1997
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit.............. $75,617,000 59,594,000
Standby letters of credit ................ $ 767,000 1,486,000
NOTE 13. RELATED PARTY TRANSACTIONS
At December 31, 1998, deposits from directors, executive officers and their
related interests aggregated approximately $797,000. These deposits were taken
in the normal course of business at market interest rates.
FLAG conducts transactions with its directors and executive officers,
including companies in which they have beneficial interest, in the normal course
of business. It is the policy of FLAG to make loans to directors and executive
officers 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 1998.
Balance at December 31, 1997..... $ 1,311,694
New loans .................. 318,906
Repayments ................. (901,902)
Balance at December 31, 1998..... $ 728,698
47
<PAGE>
NOTE 14. MISCELLANEOUS OPERATING EXPENSES
Components of other operating expenses in excess of 1% of interest and
other income for the years ended December 31, 1998, 1997 and 1996 are as
follows:
1998 1997 1996
---- ---- ----
Advertising ...................... $ 355,458 445,208 349,000
Data processing .................. $1,312,761 729,330 611,645
Federal deposit insurance premiums $ 288,120 246,686 1,678,115
Telephone ........................ $ 588,015 404,280 352,288
NOTE 15. FLAG FINANCIAL CORPORATION
(Parent Company Only) Financial Information
Balance Sheets
December 31, 1998 and 1997
1998 1997
---- ----
Assets
Cash ........................................ $ 392,796 1,081,780
Investment securities ....................... 3,538,348 942,883
Investment in subsidiaries .................. 43,820,514 42,048,143
Equipment, net .............................. 937,892 536,282
Other assets ................................ 271,093 889,276
------- -------
Total assets ............................. $48,960,643 45,498,364
=========== ==========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses ....... $ 1,095,986 423,362
Stockholder' equity ........................ 47,864,657 45,075,002
---------- ----------
Total liabilities and stockholder' equity $48,960,643 45,498,364
=========== ==========
Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Income:
<S> <C> <C> <C>
Dividend income from subsidiaries ... $ 4,132,982 1,537,690 1,364,766
Interest income ..................... 23,438 7,357 --
Other ............................... 1,472,914 147,890 136,757
--------- ------- -------
Total income ................... 5,629,334 1,692,937 1,501,523
--------- --------- ---------
Operating expenses:
Interest expense .................... 32,933 1,333 347
Other ............................... 4,555,443 595,309 430,074
--------- ------- -------
Total operating expenses ....... 4,588,376 596,642 430,421
--------- ------- -------
Earnings before income tax
benefit and equity in
undistributed earnings of
subsidiaries ................. 1,040,958 1,096,295 1,071,102
Income tax benefit ....................... 1,074,699 154,263 97,907
--------- ------- ------
Earnings before equity in
undistributed earnings of
subsidiaries or dividends received
in excess of earnings of subsidiaries 2,115,657 1,250,558 1,169,009
Dividends received in excess of
earnings of subsidiaries ............ (156,029) -- --
Equity in undistributed earnings
of subsidiaries ....................... -- 3,060,189 530,794
--------- -------
Net earnings ........................ $ 1,959,628 4,310,747 1,699,803
=========== ========= =========
</TABLE>
48
<PAGE>
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings ........................................ $ 1,959,628 4,310,748 1,699,803
Adjustments to reconcile net earnings to
netcash provided by operating activities:
Depreciation and amortization ............................ 124,713 26,588 26,588
Gain on sale of investment securities .......... (28,580) -- --
Dividends received in excess of earnings
of subsidiaries .......................... 156,029 -- --
Equity in undistributed earnings of subsidiaries -- (3,060,189) (530,794)
Change in other assets and liabilities ......... 1,085,649 90,214 (149,876)
--------- ------ --------
Net cash provided by operating activities . 3,297,439 1,367,361 1,045,721
--------- --------- ---------
Cash flows from investing activities:
Purchase of investment securities ................... (273,941) (502,665) (214,752)
Purchase of equipment ............................... (526,323) (536,282) --
Investment in subsidiaries .......................... (2,554,157) -- (985,255)
Proceeds from sale of investment securities ......... 264,057 -- 25,000
------- ------
Net cash used in investing activities ..... (3,090,364) (1,038,947) (1,175,007)
---------- ---------- ----------
Cash flows from financing activities:
Treasury stock transactions of pooled entities ...... 129,918 59,054 (62,853)
Repayment of long-term debt ......................... -- -- (80,000)
Exercise of stock options ........................... 72,938 -- 630,629
Proceeds from issuance of common stock .............. -- -- 229,524
Dividends paid ...................................... (1,098,915) (839,201) (786,644)
---------- -------- --------
Net cash used in financing activities .......... (896,059) (780,147) (69,344)
-------- -------- -------
Net change in cash .................................. (688,984) (451,733) (198,630)
Cash at beginning of year ........................... 1,081,780 1,533,513 1,732,143
--------- --------- ---------
Cash at end of year ................................. $ 392,796 1,081,780 1,533,513
=========== ========= =========
</TABLE>
49
<PAGE>
NOTE 16. QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of the unaudited condensed consolidated
quarterly operating results of FLAG for the years ended December 31, 1998 and
1997 (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
Quarter ended Quarter ended
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income ............. $11,109 11,189 11,129 10,844 11,030 9,787 8,998 8,914
Interest expense ............ 5,488 5,600 5,486 5,322 5,183 4,857 4,368 4,216
----- ----- ----- ----- ----- ----- ----- -----
Net interest income ......... 5,621 5,589 5,643 5,522 5,847 4,930 4,630 4,698
Provision for loan losses ... 2,621 252 257 252 684 259 344 309
----- --- --- --- --- --- --- ---
Net interest income after
provision for loan losses . 3,000 5,337 5,386 5,270 5,163 4,671 4,286 4,389
Noninterest income .......... 1,910 1,724 1,728 2,386 1,553 1,708 1,258 1,625
Noninterest expense ......... 6,758 6,754 5,447 5,519 5,808 4,594 4,195 3,926
----- ----- ----- ----- ----- ----- ----- -----
Earnings (loss) before
income taxes .............. (1,848) 307 1,667 2,137 908 1,785 1,349 2,088
Provision (benefit) for
income taxes .............. (758) (46) 453 654 294 497 377 652
---- --- --- --- --- --- --- ---
Net earnings (loss) ......... $(1,090) 353 1,214 1,483 614 1,288 972 1,436
======= === ===== ===== === ===== === =====
Net earnings (loss) per share $ (.17) .05 .19 .23 .09 .20 .15 .22
======= === === === === === === ===
Weighted average
shares outstanding ........ 6,560 6,556 6,552 6,533 6,524 6,525 6,517 6,516
</TABLE>
50
<PAGE>
NOTE 17. 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.
Cash and Cash Equivalents and Interest-Bearing Deposits
For cash, due from banks, Federal funds sold and interest-bearing deposits
with other banks, the carrying amount is a reasonable estimate of fair value.
Securities Held-to-Maturity and Securities Available-for-Sale
Fair values for securities held-to-maturity and securities
available-for-sale are based on quoted market prices.
Other Investments
The carrying value of other investments approximates fair value.
Loans and Mortgage Loans Held for Sale
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For variable rate loans, the carrying
amount is a reasonable estimate of fair value.
Mortgage Servicing Rights
Fair value of mortgage servicing rights is determined by estimating the
present value of the future net servicing income, on a disaggregated basis,
using anticipated prepayment assumptions.
Cash Surrender Value of Life Insurance
The carrying value of cash surrender value of life insurance approximates
fair value.
Deposits
The fair value of demand deposits, savings accounts, NOW accounts, certain
money market deposits, advances from borrowers and advances payable to secondary
market is the amount payable on demand at the reporting date. The fair value of
fixed maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
Federal Funds Purchased
For Federal funds purchased, the carrying amount is a reasonable estimate
of fair value.
Advances from the Federal Home Loan Bank
The fair value of the FHLB fixed rate borrowings are estimated using
discounted cash flows, based on the current incremental borrowing rates for
similar types of borrowing arrangements.
Commitments to Originate First Mortgage Loans, Commitments to Extend Credit
and Standby Letters of Credit
Because commitments to originate first mortgage loans, commitments to
extend credit and standby letters of credit are made using variable rates, the
contract value is a reasonable estimate of fair value.
51
<PAGE>
NOTE 17. FAUR VALUE OF FINANCIAL INSTRUMENTS, continued
Limitation
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, premises and equipment and purchased core deposit
intangible. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
The carrying amount and estimated fair values of FLAG's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents .... $ 48,576,090 48,576,090 29,072,230 29,072,230
Interest-bearing deposits .... 1,695,167 1,695,167 3,168,353 3,168,353
Investment securities ........ 76,526,307 76,652,565 89,092,385 89,150,550
Other investments ............ 6,382,443 6,382,443 5,933,543 5,933,543
Mortgage loans held for sale . 5,941,739 5,941,739 3,841,678 3,841,678
Loans, net ................... 377,359,122 378,406,348 348,773,865 350,283,093
Mortgage servicing rights .... 1,683,291 1,683,291 1,174,292 1,174,292
Cash surrender value of
life insurance .............. 4,241,531 4,241,531 3,864,612 3,864,612
Liabilities:
Deposits ..................... 446,798,325 448,387,104 412,454,138 413,865,828
Federal funds purchased ...... -- -- 170,000 170,000
Advances from the Federal
Home Loan Bank .............. 48,398,478 47,118,704 47,798,059 47,087,598
Unrecognized financial instruments:
Commitments to extend credit . 75,617,000 75,617,000 59,594,000 59,594,000
Standby letters of credit .... 767,000 767,000 1,486,000 1,486,000
</TABLE>
NOTE 18. SUBSEQUENTEVENTS On February 23, 1999, FLAGannounced the signing
of a letter of intent to merge with First Hogansville Bankshares, Inc. ("FHB")
and on March 12, 1999, FLAGannounced the signing of a letter of intent to merge
with Thomaston Federal Savings Bank ("TFSB"). FHB is a one bank holding company
based in Hogansville, Georgia with assets totaling approximately $31 million.
TFSB is a thrift based in Thomaston, Georgia with assets totaling approximately
$53 million. These mergers are subject to the approval of applicable regulatory
authorities and shareholders and are expected to be accounted for as pooling of
interests. FLAG is expected to issue approximately 1.7 million additional shares
of its common stock in connection with these mergers.
52
<PAGE>
Corporate Information
Corporate Headquarters
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5001
Corporate Mailing Address
FLAG Financial Corporation
P.O. Box 3007
LaGrange, Georgia 30241
Notice of 1999 Annual Meeting
The Annual Meeting of Shareholders of FLAG Financial Corporation will be held on
Wednesday, April 21, 1999 at 2:00 p.m. at the Corporate Headquarters, 101 North
Greenwood Street, LaGrange, Georgia.
Independent Auditors
Porter Keadle Moore, LLP
235 Peachtree Street
Suite 1800
Atlanta, Georgia 30303
Legal Counsel
Powell, Goldstein, Frazer
& Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Shareholder Services
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, Suite 900
Atlanta, Georgia 30326
(770) 938-6400
(800) 241-5568
Stock Exchange Listing
FLAG Financial Corporation
Common Stock is traded and
quoted on The Nasdaq Stock Market under the symbol "FLAG."
Shareholders of Record
FLAG Financial Corporation had 6,560,004 shares of Common Stock outstanding and
858 shareholders of record as of December 31, 1998.
Investor Relations
Shareholders, analysts, investors, the news media and others desiring a copy of
the FLAG Financial Corporation 1998 Annual Report or 1998 Annual Report on Form
10-K as filed with the Securities and Exchange Commission, supplemental
quarterly information 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
(706) 845-5140
Market Makers
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Newport Tower
10th Floor
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.
50 Front Street
15th Floor
Memphis, Tennessee 38103
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
Dividend Payment Dates
Subject to approval of the Board of Directors, quarterly dividend payments are
made on the first business day of January, April, July and October.
Dividend Reinvestment and Stock Purchase Plan
FLAG Financial Corporation offers a Dividend Reinvestment Plan for automatic
reinvestment of dividends in the Common Stock of the Company. FLAG Common Stock
may also be purchased with optional cash payments. In order to purchase stock by
making optional cash payments, shareholders must be participants in the FLAG
Dividend Reinvestment Plan.
For more information concerning this convenient and economical way to purchase
additional Common Stock and to receive a brochure describing the plan and an
authorization card, contact:
FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5140
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, 1997 $8.67 $6.83 $0.04
June 30, 1997 $9.75 $7.50 $0.03
September 30, 1997 $11.00 $9.33 $0.03
December 31, 1997 $14.33 $11.00 $0.03
March 31, 1998 $14.33 $11.92 $0.04
June 30, 1998 $19.00 $12.67 $0.05
September 30, 1998 $19.38 $12.75 $0.05
December 31, 1998 $14.63 $10.25 $0.06
High and low closing sales prices and cash dividends per share reflect
adjustment for the 3-for-2 stock split paid June 3, 1998.
Inside Back Cover
<PAGE>
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5001
Fax (706) 845-5156
Back Cover
EXHIBIT 99.4
FLAG FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-K FOR THE QUARTER
ENDED MARCH 31, 1999
<PAGE>
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 March 31, 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
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2094179
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 3007
LaGrange, Georgia 30241
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
\
(706) 845-5000
- --------------------------------------------------------------------------------
(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Common stock, par value $1 per share: 6,561,879 shares
Outstanding as of May 10, 1999
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Table of Contents
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998............................................. 3
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1999 and 1998................................. 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and 1998.................... 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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................................................ 13
Item 6. Exhibits and Reports on Form 8-K................................. 13
2
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1999 1998
------------------------------
ASSETS (UNAUDITED)
Cash and cash equivalents..................... $ 19,137,543 $ 48,576,090
Interest-bearing deposits..................... 1,039,343 1,695,167
Investment securities held-to-maturity........ 4,107,312 4,234,998
Investment securities available-for-sale...... 67,528,055 72,291,309
Investment securities trading................. 323,829 -
Other investments............................. 7,267,442 6,382,443
Mortgage loans held for sale.................. 2,835,752 5,941,739
Loans, net.................................... 395,074,267 377,359,122
Premises and equipment, net................... 14,339,538 14,887,215
Other assets.................................. 19,860,688 19,413,502
----------- -----------
Total assets................... $ 531,513,769 $ 550,781,585
=========== ===========
LIABILITIES
Non interest-bearing deposits................. $ 44,954,870 $ 55,744,640
Interest-bearing deposits..................... 376,663,530 391,053,685
Other borrowed money.......................... 1,080,088 -
Federal funds purchased....................... 3,000,000 -
Advances from Federal Home Loan Bank.......... 47,351,642 48,398,478
Other liabilities............................. 9,868,359 7,720,125
------------ ------------
Total liabilities............. 482,918,489 502,916,928
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares
authorized: none issued and outstanding) $ - $ -
Common stock ($1 parv value, 20,000,000 shares
authorized, 6,561,879 and 6,560,004 shares
issued and outstanding................... 6,561,879 6,560,004
Additional paid-in capital.................... 10,499,506 10,487,618
Retained earnings............................. 29,542,423 28,886,607
Accumulated other comprehensive income........ 1,991,472 1,930,428
------------ ------------
Total stockholders' equity.......... 48,595,280 47,864,657
------------ ------------
Total liabilities and
stockholders' equity.............. $ 531,513,769 $ 550,781,585
============ =============
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------
1999 1998
---- ----
Interest Income (UNAUDITED)
Interest and fees on loans................ $ 9,626,474 9,075,373
Interest on securities.................... 1,116,103 1,610,682
Interest on time deposits and Federal
funds sold........................... 233,996 66,754
---------- ----------
Total interest income.................... 10,976,573 10,752,809
---------- ----------
Interest Expense
Interest on deposits...................... 4,451,960 4,556,507
Other..................................... 667,403 765,143
---------- ----------
Total interest expense.............. 5,119,363 5,321,650
---------- ----------
Net interest income before
provision for loan losses....... 5,857,210 5,431,159
Provision for Loan Losses 345,000 252,000
---------- ----------
Net interest income after
provision for loan losses......... 5,512,210 5,179,159
---------- ----------
Other Income
Fees and service charges.................. 1,204,945 1,253,152
Gain on sale of investment securities..... 109,296 74,367
Unrealized gain on trading securities..... 317,361 -
Gain on sale of loans..................... 141,606 446,186
Gain on sale of real estate-net........... 12,500 17,737
Other income.............................. 320,480 696,809
---------- ----------
Total other income.................. 2,106,188 2,488,251
---------- ----------
Other Expenses
Salaries and employee benefits............ 3,096,037 2,548,713
Occupancy ................................ 710,908 1,044,736
Other operating........................... 2,283,627 1,940,466
---------- ----------
Total other expenses................ 6,090,572 5,533,915
---------- ----------
Earnings before provision for
income taxes........................ 1,527,826 2,133,495
Provision for income taxes................ 477,088 653,833
---------- ----------
Net earnings ...................... $ 1,050,738 1,479,662
========== ==========
Basic earnings per share.................. $0.16 $0.23
Diluted earnings per share................ $0.16 $0.23
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
---------- ----------
<S> <C> <C>
Net earnings .................................................................. $1,050,738 $1,479,662
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 $ 78,947 and $ 108,538, respectively ...................... 128,808 177,089
Less: Reclassification adjustment for gains included
in net earnings, net of tax of $41,532 and
$28,259 respectively 67,764 46,108
---------- ----------
Other comprehensive income .................................................... 61,044 130,981
---------- ----------
Comprehensive income .......................................................... $1,111,782 $1,610,643
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
---------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .............................................. $ 1,050,738 $ 1,479,662
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion .......... 617,816 522,743
Provision for loan losses ......................... 345,000 252,000
Gain on sale of investment securities
available-for-sale ............................ (109,296) (74,367)
Gain on sales of loans ............................ (141,606) (446,186)
Gain on other real estate ......................... (12,500) (17,737)
Change in:
Mortgage loans held for sale ............... 3,247,593 (1,799,695)
Other ...................................... 2,503,601 9,664,739
------------ ------------
Net cash provided by operating activities 7,501,346 9,581,159
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits ................... 655,824 (496,182)
Proceeds from sales and maturities of investment securities
available-for-sale .................................... 11,876,846 21,537,660
Proceeds from maturities of investment securities
held-to-maturity ..................................... 123,967 56,024
Proceeds from sale of other investments ................... 1,801,822 0
Purchases of other investments ............................ (2,686,821) (323,300)
Purchases of investment securities available-for-sale ..... (6,920,465) (22,724,807)
Net change in loans ....................................... (18,060,145) (14,993,086)
Proceeds from sale of premises and equipment .............. 21,520 0
Purchases of premises and equipment ....................... (40,999) (1,438,805)
Purchases of cash surrender value life insurance .......... (88,114) (49,894)
------------ -------------
Net cash provided by (used in) investing activities (13,316,565) (18,432,390)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits .................................... (25,179,925) 7,435,174
Change in federal funds purchased ......................... 3,000,000 (170,000)
Proceeds from FHLB advances ............................... 0 5,000,000
Payments of FHLB advances ................................. (1,046,836) (4,181,392)
Proceeds from exercise of stock options ................... 12,553 -
Cash dividends paid ....................................... (409,120) (292,020)
------------ ------------
Net cash provided by (used in) financing activities (23,623.328) 7,791,762
------------ ------------
Net change in cash and cash equivalents ........... (29,438,547) (1,059,469)
Cash and cash equivalents at beginning of period ........... 48,576,090 29,072,230
------------ ------------
Cash and cash equivalents at end of period ..................$ 19,137,543 28,012,761
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements have not been audited. The
results of operations are not necessarily indicative of the results of
operations for the full year or any other interim periods.
The accounting principles followed by FLAG Financial Corporation ("FLAG") and
its bank subsidiaries and the methods of applying these principles conform with
generally accepted accounting principles and with general practices within the
banking industry. Certain principles, which significantly affect the
determination of financial position, results of operations, and cash flows are
summarized below and in FLAG's annual report on Form 10-K for the year ended
December 31, 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 definitivew 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 thing, for the merger of Abbeville with and into a
wholly-oowned subsidiary of FLAG and the exchange of each share of Abbeville
common stock for 3.48 shares of FLAG common stock. Total outstanding shares of
FLAG will increase by approximately 826,000 additional shares at closing.
On September 30, 1998, FLAG entered into an agreement to assume deposits
totaling approximately $9 million and to purchase certain assets totaling
approximately $60,000 of a branch banking facility of First Georgia Bank in
Blackshear, Georgia. The transaction was completed on April 30, 1999.
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.
7
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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:
March 31,
---------
1999 1998
--------- ---------
Basic earnings per share:
Net earnings .............................. 1,050,736 1,479,662
Weighted Average Common shares
Outstanding ........................... 6,560,754 6,532,739
Per share amount .......................... 0.16 0.23
Diluted earnings per share:
Net earnings .............................. 1,050,736 1,479,662
Effect of dilutive securities -
stock options * ....................... - 34,787
Diluted earnings per share ................ 0.16 0.23
* Stock options were anti-dilutive as of 3/31/99
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
- --------------------------------------------------------------------------------
Results of Operations
Quarters ended March 31, 1999 and 1998
Overview
Net earnings for the quarter ended March 31, 1999 decreased $429,000 or 29
percent compared to first quarter 1998. Net earnings per common share decreased
30 percent for the first quarter of 1999 and are $0.16 compared to $0.23 in the
first quarter of 1998. Net interest income increased 8 percent for the quarter
ended March 31, 1999 over the same period of 1998 to $5.9 million. Non-interest
income decreased 15 percent for the first quarter of 1999 compared to the same
period of 1998 and non-interest expense increased 10 percent for the first
quarter of 1999 compared to 1998.
Net Interest Income
Net interest income for the quarter ended March 31, 1999 increased $426,000
compared to the first quarter of 1998. This increase resulted from a $224,000 or
2 percent increase in interest income and a $202,000 or 4 percent decrease in
interest expense. 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 three months of 1999 decreased $ 382,000 or 15
percent compared to the first quarter of 1998. Other income in the first quarter
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.
Excluding this one time loan fee in the first quarter 1998, non-interest income
increased $153,000 due primarily to securities gains and other fee income.
Non-interest expense increased $ 557,000 or 10 percent in the first quarter of
1999 compared to the same period in 1998. Salaries and employee benefits
increased $ 547,000, a 21 % increase over first quarter 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
- --------------------------------------------------------------------------------
Income Taxes
Income tax expense for the first three months was $ 477,000 in 1999 compared to
$ 654,000 in 1998. The effective tax rate for the first three months ended March
31, 1998 and 1997 was 31 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 at March
31, 1999 was $5.6 million compared to $5.8 million at December 31, 1998. The
ratio of the allowance for loan losses to outstanding loans at March 31, 1999
was 1.44 percent, compared to 1.43 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 $9.3 million at
March 31, 1999 compared to $10.1 million at December 31, 1998. Non-performing
assets as a percentage of total loans and real estate owned at March 31, 1999
and December 31, 1998 were 2.34 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.
Management is unaware of any known trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on FLAG's
liquidity, capital resources or operations.
10
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Financial Condition
Overview
Total assets were $531.5 million at March 31, 1999, a decrease of $19.3 million
or 3.5 percent from December 31, 1998.
Assets and Funding
At March 31, 1999 earning assets totaled $478 million, an increase of more than
$10.2 million from December 31, 1998. The mix of interest earning assets
remained relatively the same in the first three months of 1999. Loans were at 83
percent of earning assets and investment securities were 15 percent of earning
assets at March 31, 1999.
At March 31, 1999, interest-bearing deposits decreased $14.4 million compared to
December 1998. Non-interest bearing deposits decreased $10.8 million in the
first three months of 1999 and totaled $45 million at March 31, 1999. Federal
Home Loan Bank advances decreased $1 million in the first quarter of 1999 and
totaled $47.4 million at March 31, 1999. At March 31, 1999, deposits represented
88 percent of FLAG's interest-bearing liabilities and Federal Home Loan Bank
advances represented 11 percent.
Liquidity and Capital Resources
Net cash provided by operations totaled $7,500,000 for the quarter ended March
31, 1999. Net cash used by investing activities totaling $13,317,000 consisted
of $9,607,000 in investment securities purchases, an $18,060,000 net increase in
loans outstanding, and an $88,000 increase in cash surrender value of life
insurance, offset by cash flows of $13,803,000 of proceeds from sale and
maturities of investment securities plus a $656,000 increase in interest-bearing
deposits. Net cash used in financing activities consisted largely of $25,180,000
decrease in deposits and $1,047,000 decrease in Federal Home Loan Bank advances
offset by a $3,000,000 increase in federal funds purchased.
Total stockholders' equity at March 31, 1999, was 9.14 percent of total assets
compared to 8.69 percent at December 31, 1998. The slight increase is attributed
to a $19 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 March 31, 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, tangible capital,
and risk-based capital
March 31, 1999
--------------
Actual Required Excess
Amount % Amount % Amount %
------ - ------ - ------ -
Tier 1 capital ....... $44,159 8.29% $21,298 4.00% $22,861 4.29%
Tangible capital ..... $44,159 8.29% $ 7,786 1.50% $36,173 6.79%
Risk-based capital ... $50,840 12.50% $32,557 8.00% $18,283 4.50%
Year 2000
FLAG and its subsidiaries have been working on Year 2000 for several years. A
Steering Committee of member bank executives and directors reviews the progress
of various task forces within the operating divisions on a monthly basis.
Testing of the core operating system and of critical dates as defined by the
FFIEC has been completed. Interface testing with critical vendor services
relating to customer sensitive issues like accruals, item processing, ATM file
support, statement processing, telephone and internet banking will be completed
no later than June 30, 1999.
Hardware testing has been completed and necessary changes in equipment have been
addressed. The business resumption contingency planning process includes four
phases: 1) establishing organizational planning guidelines, 2) completing a
business impact analysis, 3) developing the business resumption contingency plan
and 4) validation of viability, will be completed on schedule by June 30, 1999.
FLAG cloaely monitors the Year 2000 readiness of the pending merger partners.
The merger partners expected to meet critical date testing and compliance
according to schedule.
FLAG's customer awareness program will intensify during the second and third
quarters to include suggestions and reminders for customer preparation, as well
as disclosure of the individual banks' actions for preparation and readiness for
the new millennium.
12
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
PART II.
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1999 Annual Meeting of Shareholders was held on April 21, 1999.
(b) Election of directors
The shareholders voted 4,383,764.516 shares in the affirmative and
110,186 shares were withheld from the authority to vote for the
election of Patti S. Davis, Fred A Durand, III, James W. Johnson and J.
Preston Martin as a class of directors, each to serve a three year term
as a director of the Company.
(c) Amending the Company's 1994 Employees Stock Incentive Plan
The shareholders voted 3,062,033.249 shares in the affirmative and
356,522.735 shares in the negative, with 20,683.532 shares abstaining
for the amendment of the 1994 Employee Stock Incentive Plan.
(d) Ratifying the appointment of Porter Dadle Moore, LLP, as independent
accountants of the Company for the fiscal year ending December 31, 1999
The shareholders voted 4,472,454.212 shares in the affirmative, 6,500
in the negative, with 17,996.304 shares abstaining for the ratification
and appointment of Porter Keadle Moore LLP as independent accountants
of the Company for the fiscal year ending December 31, 1999
Item 5. Other Information - None
Pursuant to Rule 14a-4(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
Report on Form 8-K filed during first quarter 1999
A Current Report on Form 8-K filed January 8, 1999 regarding
consummation of merger with Empire Bank Corp. on December 11, 1998.
A Current Report on Form 8-K filed January 11, 1999 regarding
consummation of merger between Citizens Bank and The Brown Bank on
December 31, 1998.
A Current Report on Form 8-K filed March 2, 1999 regarding execution
of Letter of Intent to merge First Hogansville Bankshares, Inc. with
FLAG Financial Corporation.
A Current Report on Form 8-K filed March 18, 1999 regarding execution
of Letter of Intent to acquire Thomaston Federsl Savings Bank.
Report on Form 8-K filed since Quarter End 1999 to Present
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.
13
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAG Financial Corporation
By:/s/ Patti S. Davis
---------------------
Patti S. Davis
(Chief Financial Officer)
