POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET, N.E.
SIXTEENTH FLOOR
ATLANTA, GEORGIA 30303
(404 572-6600)
July 30, 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 575,000 shares of its
common stock for issuance in connection with the proposed merger of First
Hogansville Bankshares, Inc. with and into FLAG.
Neither FLAG nor Hogansville 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 and
the Georgia Department of Banking and Finance. We will advise you promptly if a
favorable approval is not obtained from either of these entities, although FLAG
and Hogansville do not expect any difficulty in obtaining such approvals.
If you have any questions or comments concerning the Registration
Statement, please call me at 404/572-6641 or Walter G. Moeling at 404/572-6629.
Our fax number is 404/572-6999.
Sincerely,
/s/ Maureen A. FitzGerald
For POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
Enclosures
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 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 of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
101 NORTH GREENWOOD STREET
LAGRANGE, GEORGIA 30240
(706) 845-5000
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
J. Daniel Speight, Jr.
President and Chief Executive Officer
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5000
(Name, address, including zip code, and telephone number, including area
code, of agent for service) with copies to:
Walter G. Moeling, IV Richard R. Cheatham, Esq.
Powell, Goldstein, Frazer & Murphy LLP Kilpatrick Stockton LLP
Suite 1600 1100 Peachtree St., N.E.
191 Peachtree Street, N.E. Suite 2800
Atlanta, Georgia 30303 Atlanta, GA 30309
(404) 572-6600 (404) 815-6500
--------------------
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 Amount of
of Securities Amount to be Offering Price Aggregate Registration
to be Registered Registered (1) Per Unit Offering Price (2) Fee
- ------------------------------------------ ---------------- --------------------- -------------------- ---------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 575,000 N/A $20,579,250 $5,722
======================================================================================================================
</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 First Hogansville
Bankshares, Inc. 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>
FIRST HOGANSVILLE BANKSHARES, INC.
111 High Street
Hogansville, Georgia 30230
To the Stockholders of __________ __, 1999
First Hogansville Bankshares, Inc.
I am pleased to invite you to attend a Special Meeting of the stockholders
of First Hogansville Bankshares, Inc. ("Hogansville") to be held at the main
office of The Citizens Bank, located at 111 High Street, Hogansville, Georgia,
on [Wednesday, September 15,]1999, at 2:00 p.m.
At the Special Meeting, you will be asked to approve the Agreement and Plan
of Merger between Hogansville and FLAG Financial Corporation (the "Merger
Agreement"), pursuant to which Hogansville will merge with and into FLAG. Upon
consummation of the merger, each outstanding share of common stock of
Hogansville (except for shares held by Hogansville, FLAG or their subsidiaries,
and shares held by stockholders of Hogansville who exercise their dissenters'
rights) will be exchanged for 6.08466 shares of FLAG common stock. FLAG will pay
stockholders of Hogansville cash instead of issuing any fractional shares in the
merger.
Your Board believes that the merger will have many benefits. We believe
that the combined company will have greater financial strength and greater
opportunity and flexibility to expand and diversify. Your Board of Directors
unanimously approved the Merger Agreement and recommends that you approve the
Merger Agreement. Consummation of the merger is subject to certain conditions,
including approval of the Merger Agreement by the affirmative vote of holders of
a majority of the outstanding common stock of Hogansville and approval of the
merger by various regulatory agencies.
This Proxy Statement/Prospectus provides detailed information about the
proposed merger. You should read this entire document carefully. You can also
get information about FLAG from the SEC.
Whether or not you plan to attend the Special Meeting, you are urged to
complete, sign, and promptly return the enclosed proxy card. If you attend the
Special Meeting, you may vote in person if you wish, even if you previously have
returned your proxy card. The proposed merger is a significant step for
Hogansville and your vote on this matter is of great importance.
On behalf of the Board of Directors, I strongly urge you to vote FOR
approval of the Merger Agreement and the transactions contemplated therein by
marking the enclosed proxy card "FOR" item one.
We look forward to seeing you at the Special Meeting.
Sincerely,
John R. Hines, Jr.
Chairman of the Board and President
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
Proxy Statement/Prospectus or determined if this Proxy Statement/Prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The securities offered hereby are not savings accounts or deposit accounts or
other obligations of any bank or savings association and they are not insured by
the Federal Deposit Insurance Corporation, the Bank Insurance Fund, the Savings
Association Insurance Fund, or any other government agency.
- --------------------------------------------------------------------------------
This Proxy Statement/Prospectus is dated ____________ __, 1999 and was first
mailed to stockholders on __________________ __, 1999.
<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 may read and copy any materials FLAG files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the Public Reference Room. 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 Hogansville 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 may inspect the Registration Statement at the SEC's Public
Reference Room or on the SEC's Web site.
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 to stockholders
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>
Neither FLAG nor Hogansville has authorized anyone to give any information
or make any representation about the merger or our company or savings
association that differs from, or adds to, the information in the Proxy
Statement/Prospectus or in documents that are publicly filed with the SEC.
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, and information about Hogansville has
been supplied by Hogansville.
A Warning About Forward-Looking Statements
FLAG and Hogansville make forward-looking statements in this document that
are subject to risks and uncertainties. FLAG'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 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 the parties. This could cause
results or performances to differ materially from those expressed in our
forward-looking statements.
You should consider the following possible events or factors when you vote
on the merger:
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 13.
<PAGE>
PROPOSED MERGER OF FIRST HOGANSVILLE BANKSHARES, INC.
WITH FLAG FINANCIAL CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD [September 15,] 1999
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders (the
"Special Meeting") of First Hogansville Bankshares, Inc. ("Hogansville") will be
held at the main office of The Citizens Bank, located at 111 High Street,
Hogansville, Georgia, on [Wednesday, September 15,] 1999, at 2:00 p.m., to vote
on:
1. Merger. The Agreement and Plan of Merger (the "Merger Agreement"), dated
as of June 1, 1999, between Hogansville and FLAG Financial Corporation ("FLAG"),
pursuant to which, among other matters, Hogansville will merge with and into
FLAG (the "Merger").
Each share of Hogansville common stock outstanding at the effective time of
the merger will be exchanged for 6.08466 shares of FLAG common stock, as more
fully described in the accompanying Proxy Statement/Prospectus. A copy of the
Merger Agreement is attached to the Proxy Statement/Prospectus as Appendix A.
2. Other Business. Any other business as may come properly before the
Special Meeting, or any adjournments or postponements. The Board of Directors of
Hogansville is not aware of any other business to be presented to a vote of the
stockholders at the Special Meeting.
Only stockholders who hold their stock at the close of business on [Friday,
August 13,] 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 a majority of the issued and outstanding shares of Hogansville common
stock.
The Board of Directors of Hogansville unanimously recommends that
stockholders vote FOR approval of the Merger Agreement and the transactions
contemplated thereby.
BY ORDER OF THE BOARD OF DIRECTORS
Hogansville, Georgia
_____________ __, 1999
John R. Hines, Jr.
Chairman of the Board and President
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.
--------------------
Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code
(the "GBCC") provides that each Hogansville stockholder may dissent from the
Merger Agreement and demand payment of the fair value of his or her shares in
cash if the merger is consummated. The right of any stockholder to receive such
payment is contingent upon his or her strict compliance with the provisions of
Title 14, Chapter 2, Article 13 of the GBCC. We have included for your review
the full text of Title 14, Chapter 2, Article 13 of the GBCC in Appendix B to
the accompanying Proxy Statement/Prospectus. See "DESCRIPTION OF
MERGER--Dissenters' Rights" in the accompanying Proxy Statement/Prospectus, page
24.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.......................................................................1
THE PARTIES................................................................1
APPROVAL OF THE MERGER AGREEMENT...........................................1
THE MERGER..............................................................1
OUR REASONS FOR THE MERGER..............................................2
RECOMMENDATION TO HOGANSVILLE STOCKHOLDERS.................................3
HOGANSVILLE SPECIAL STOCKHOLDER MEETING....................................3
RECORD DATE FOR STOCKHOLDER MEETING........................................3
VOTE REQUIRED..............................................................3
WHAT HOGANSVILLE STOCKHOLDERS WILL RECEIVE.................................3
REGULATORY APPROVALS.......................................................4
CONDITIONS TO THE MERGER...................................................4
TERMINATION OF THE MERGER AGREEMENT........................................4
DISSENTERS' RIGHTS.........................................................4
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
THAT ARE DIFFERENT FROM YOURS...........................................5
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER....................5
ACCOUNTING TREATMENT OF THE MERGER.........................................5
CERTAIN DIFFERENCES IN STOCKHOLDERS' RIGHTS................................6
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.................................................8
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 MERGERS..................................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 ISSUES..........................................................14
MEETING OF HOGANSVILLE STOCKHOLDERS..........................................14
DATE, PLACE, TIME, AND PURPOSE............................................14
RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES....14
DESCRIPTION OF THE MERGER....................................................16
GENERAL...................................................................16
BACKGROUND OF AND REASONS FOR THE MERGER..................................17
i
<PAGE>
EFFECTIVE DATE OF THE MERGER..............................................19
DISTRIBUTION OF FLAG CERTIFICATES.........................................20
CONDITIONS TO CONSUMMATION OF THE MERGER..................................21
REGULATORY APPROVALS......................................................22
WAIVER, AMENDMENT, AND TERMINATION........................................22
DISSENTERS' RIGHTS........................................................24
CONDUCT OF BUSINESS PENDING THE MERGER....................................27
MANAGEMENT AND OPERATIONS AFTER THE MERGER; INTERESTS OF
CERTAIN PERSONS IN THE MERGER..........................................29
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................30
ACCOUNTING TREATMENT......................................................32
EXPENSES AND FEES.........................................................33
RESALES OF FLAG COMMON STOCK..............................................33
DESCRIPTION OF FLAG COMMON STOCK.............................................34
EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS...............................34
AUTHORIZED CAPITAL STOCK..................................................35
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS.........................35
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING............36
REMOVAL OF DIRECTORS......................................................37
INDEMNIFICATION...........................................................37
SPECIAL MEETINGS OF STOCKHOLDERS..........................................38
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING.................................38
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS..............................39
STOCKHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS.........................39
DIVIDENDS.................................................................40
COMPARATIVE MARKET PRICES AND DIVIDENDS......................................41
BUSINESS OF HOGANSVILLE......................................................42
GENERAL...................................................................42
MANAGEMENT STOCK OWNERSHIP................................................43
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF HOGANSVILLE...............44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................45
BUSINESS OF FLAG.............................................................58
GENERAL...................................................................58
DIRECTORS AND EXECUTIVE OFFICERS..........................................58
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................................61
STOCKHOLDERS PROPOSALS.......................................................68
EXPERTS......................................................................68
LEGAL MATTERS................................................................68
OTHER MATTERS................................................................69
ii
<PAGE>
INDEX TO HOGANSVILLE FINANCIAL DATA.........................................F-1
Appendix A -- AGREEMENT AND PLAN OF MERGER BY AND BETWEEN FLAG
FINANCIAL CORPORATION AND FIRST HOGANSVILLE BANKSHAREES, INC.
AND AMENDMENT TO AGREEMENT AND PLAN OF MERGER DATED
AS OF JULY 28, 1999............................................A-1
Appendix B -- DISSENTERS' RIGHTS.............................................B-1
iii
<PAGE>
SUMMARY
This summary highlights selected information from this Proxy
Statement/Prospectus. Because this is a summary, it does not contain all of the
information that may be important to you. You should read the entire Proxy
Statement/Prospectus and its appendices carefully before you decide to vote.
The Parties (Page 42 for Hogansville, Page 58 for FLAG)
First Hogansville Bankshares, Inc.
111 High Street
Hogansville, Georgia 30230
706-637-6621
Hogansville is a Georgia banking holding company headquartered in
Hogansville, Georgia. Hogansville is the sole stockholder of The Citizens Bank,
which has two banking offices in Hogansville, Georgia. The Citizens Bank is a
community based financial institution that offers a broad range of banking and
banking-related products and services. The Citizens Bank offers deposit
accounts, retail and commercial banking services, small business lending and
residential and commercial real estate lending. As of March 31, 1999,
Hogansville had total consolidated assets of approximately $31 million, total
consolidated deposits of approximately $27 million, and total consolidated
stockholders' equity of approximately $3 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 stockholder of Citizens Bank, Vienna, Georgia, and First Flag Bank,
LaGrange, 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's total assets were about $545 million, deposits were about
$419 million and stockholders' equity was about $48 million.
Approval of the Merger Agreement
The Merger (Page 16)
The Merger Agreement, as amended, provides for FLAG's acquisition of
Hogansville by the merger of Hogansville with and into FLAG.
A copy of the Merger Agreement, and the Amendment to the Merger Agreement
dated July 28, 1999, is included as Appendix A to this Proxy
Statement/Prospectus. We encourage you to read the Merger Agreement because it
is the legal document that governs the merger.
1
<PAGE>
Our Reasons for the Merger (Page 17)
The Hogansville Board of Directors unanimously approved the Merger
Agreement. In deciding to approve the Merger Agreement, the Hogansville Board of
Directors considered a number of factors, including:
o The financial and other terms of the Merger Agreement;
o The alternatives to the merger, including Hogansville remaining as an
independent bank holding company;
o The liquidity of the FLAG common stock;
o The business, operations, earnings, financial condition and future
prospects of FLAG;
o The demographic, economic and financial characteristics of the markets
in which FLAG operates;
o The results of Hogansville's due diligence review of FLAG;
o The additional support and resources provided by FLAG in the areas of
technology, compliance and new product development;
o The vision shared by Hogansville and FLAG relating to future
expansion;
o The likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay; and
o The fact that the merger qualifies as a tax-free reorganization to the
stockholders of Hogansville.
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 Hogansville stockholders in the
merger, the FLAG Board of Directors considered a number of factors, including:
o The financial condition of Hogansville;
o The likelihood of regulators approving the merger without undue
conditions or delay;
o The financial and nonfinancial terms of the merger; and
o The compatibility and the community bank orientation of FLAG and its
subsidiaries, and Hogansville and its subsidiary.
The Boards of Directors of Hogansville 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 Hogansville and FLAG will provide
greater ability for the company to compete in the changing and competitive
financial services industry.
2
<PAGE>
Recommendation to Hogansville Stockholders
The Hogansville Board believes that the merger of Hogansville with and into
FLAG is in the best interests of Hogansville and Hogansville's stockholders. The
Hogansville Board unanimously recommends that you vote FOR the merger.
Hogansville Special Stockholder Meeting (Page 14)
The Special Meeting will be held at The Citizens Bank's main office,
located at 111 High Street, Hogansville, Georgia, on [Wednesday, September 15,]
1999, at 2:00 p.m. The Hogansville Board of Directors is soliciting proxies for
use at the Special Meeting of Hogansville stockholders. At the Special Meeting,
the Hogansville Board of Directors will ask the Hogansville stockholders to vote
on a proposal to approve the Merger Agreement and the transactions contemplated
therein.
Record Date for Special Stockholder Meeting (Page 14)
You may vote at the Special Meeting if you own shares of Hogansville common
stock as of the close of business on [Friday, August 13,] 1999. You will have
one vote for each share of Hogansville common stock you own as of this date. You
may revoke your proxy at any time prior to the vote at the Special Meeting.
Vote Required (Page 14)
In order to approve the merger, stockholders holding a majority of the
outstanding shares of Hogansville common stock must approve the Merger
Agreement. As of the Hogansville Record Date, all directors and executive
officers of Hogansville as a group (8 persons) could vote approximately 64,550
shares of Hogansville common stock, constituting approximately 68% of the total
number of shares of Hogansville common stock outstanding at that date. The
Hogansville directors and executive officers have committed to vote their shares
of Hogansville common stock in favor of the merger. Because the Hogansville
directors and officers hold a majority of the outstanding shares of Hogansville
common stock, approval of the merger is assured. As of the Record Date, FLAG
held no shares of Hogansville common stock.
What Hogansville Stockholders will Receive (Page 20)
Under the terms of the Merger Agreement, FLAG will pay Hogansville
stockholders 6.08466 shares of FLAG common stock for each share of Hogansville
common stock that they own. Hogansville stockholders will not receive fractional
shares of FLAG common stock. 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 you
materials and instructions for the exchange of your Hogansville stock
certificates for FLAG stock certificates.
Hogansville stockholders should not send in their stock certificates
until they receive the transmittal materials and instructions from FLAG's
transfer agent.
3
<PAGE>
Regulatory Approvals (Page 22)
We cannot complete the merger until we receive the approval of the
Federal Reserve Bank of Atlanta (the "Federal Reserve") and the Georgia
Department of Banking and Finance (the "GDBF"). FLAG and Hogansville have filed
applications with the Federal Reserve and the GDBF seeking approval of the
merger. The approvals of the bank regulators may impose conditions or
restrictions that, in the opinion of FLAG and/or Hogansville, would have a
material adverse effect on the economic or business benefits of the merger.
In such event, FLAG and Hogansville may terminate the Merger Agreement by mutual
consent.
Conditions to the Merger (Page 21)
The completion of the merger depends upon FLAG and Hogansville satisfying a
number of conditions, including:
o The holders of a majority of Hogansville common stock must approve the
Merger Agreement;
o FLAG and Hogansville must receive a legal opinion confirming the
tax-free nature of the merger;
o FLAG 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 Hogansville must receive all required regulatory approvals
and any waiting periods required by law must have passed.
Termination of the Merger Agreement (Page 22)
Either FLAG or Hogansville may terminate the Merger Agreement without
completing the merger if, among other things, any of the following occurs:
o The merger is not completed by October 31, 1999;
o The holders of a majority of Hogansville common stock do not approve
the Merger Agreement; or
o The other party breaches or materially fails to comply with any of its
representations or warranties or obligations under the Merger
Agreement.
Dissenters' Rights (Page 24 and Appendix B)
Dissenters' Rights. Each holder of Hogansville Common Stock who perfects
his rights is entitled to the rights and remedies of a dissenting stockholder
under Title 14, Chapter 2, Article 13 of the GBCC, subject to compliance with
the procedures set forth therein. Among other things, a dissenting stockholder
who has perfected his dissenter's rights is entitled to receive an amount in
cash equal to the "fair value" of such holder's shares. A copy of Title 14,
Chapter 2, Article 13 of the GBCC is set forth in Appendix B of this Proxy
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Statement/Prospectus and a summary thereof is included under "DESCRIPTION OF
MERGER--Dissenters' Rights." To perfect dissenters' rights, a stockholder must
comply with the provisions of Title 14, Chapter 2, Article 13 of the GBCC which
require, among other things, that the stockholder deliver to Hogansville, prior
to the vote of the stockholders of Hogansville at the Special Meeting, written
notice of such holder's intention to demand payment for his shares if the merger
is effectuated and that such stockholder not vote such holder's shares in favor
of the Merger Agreement. Any Hogansville stockholder who returns a signed proxy
but fails (i)to provide instructions as to the manner in which such holder's
shares are to be voted, or (ii) to revoke such proxy, will be deemed to have
voted in favor of the Merger Agreement and thus will not be entitled to assert
dissenters' rights.
Interests of Officers and Directors in the Merger that are Different from Yours
(Page 29)
Certain members of Hogansville's management and Board of Directors have
interests in the merger that are in addition to their interests as stockholders
of Hogansville. The Merger Agreement states that, as a condition to completing
the merger, John R. Hines, Jr., President and Chairman of the Board of
Hogansville, will have negotiated a mutually satisfactory employment
relationship with FLAG. FLAG has proposed that Mr. Hines enter into a separation
agreement with FLAG whereby FLAG agrees to make severance payments to Mr. Hines
if he is involuntarily terminated, and Mr. Hines agrees not to compete with FLAG
during the term of the separation agreement and for one year after the
termination of the separation agreement or the termination of Mr. Hines' status
as an employee of FLAG. The Merger Agreement also provides for Mr. Hines'
appointment to the Board of Directors of FLAG when the merger is complete. Mr.
Hines will continue to serve as President of The Citizens Bank.
The Merger Agreement contains provisions for the indemnification of
Hogansville directors and officers by FLAG, and provisions for the officers and
employees of Hogansville to receive certain employee benefits that FLAG already
provides to its officers and employees. As of the Hogansville Record Date, one
of the directors of Hogansville beneficially owned 7,125 shares, or .1%, of the
outstanding shares of FLAG Common Stock.
The FLAG and Hogansville 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 30)
We expect that FLAG, Hogansville and their stockholders will not recognize
any gain or loss for U.S. federal income tax purposes from the merger, except
where Hogansville stockholders receive cash instead of fractional shares. Both
parties 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. However, the opinion does not bind the Internal
Revenue Service, which could take a different view. In addition, this tax
treatment will not apply to any Hogansville stockholder 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. Accordingly, you should
consult your own tax advisor for a full understanding of the tax consequences of
the merger.
Accounting Treatment of the Merger (Page 32)
FLAG and Hogansville 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 Hogansville and FLAG as if Hogansville had always been a
wholly-owned subsidiary of FLAG. FLAG has 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."
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Certain Differences in Stockholders' Rights (Page 34)
When the merger is consummated, Hogansville stockholders, whose rights are
governed by Hogansville's Articles of Incorporation and Bylaws and by the GBCC,
will automatically become FLAG stockholders, and their rights as FLAG
stockholders will be determined by FLAG's Articles of Incorporation and Bylaws
and by the GBCC. The rights of FLAG stockholders differ from the rights of
Hogansville stockholders in certain important respects. For example, FLAG's
governing documents contain certain anti-takeover provisions.
Comparative Market Prices of Common Stock (Page 411)
FLAG common stock is traded on the Nasdaq National Market under the symbol
"FLAG." Hogansville common stock is not traded in any established market. On
February 22, 1999, the last day prior to public announcement of the merger, the
last reported sale price per share of FLAG common stock on the Nasdaq National
Market was $11.37. The resulting equivalent pro forma price per share of
Hogansville common stock (based on the 6.08466 exchange ratio) was $69.21.
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 $________. The resulting
equivalent pro forma price per share of Hogansville common stock was $______.
The equivalent pro forma per share price of a share of Hogansville 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 6.08466.
To the knowledge of Hogansville, the most recent trade of Hogansville
common stock prior to February 23, 1999, the last day prior to public
announcement of the merger between FLAG and Hogansville, was on March 22, 1996
of 1,650 shares for a purchase price of $25.00 per share. To the knowledge of
Hogansville, there have been no trades since the announcement of the merger.
There can be no assurance as to what the market price of the FLAG common stock
will be if and when the merger is consummated.
Dividends after the Merger (Page 40)
Since its formation in 1982, Hogansville has declared and paid dividends to
its stockholders on a quarterly basis each year. Since its formation in 1993,
FLAG has paid cash dividends to its stockholders on a quarterly basis each year.
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 34)
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. These
risks include the following:
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;
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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;
o Before the merger, FLAG's management controls about 21% of FLAG common
stock;
o FLAG's Articles of Incorporation and Bylaws contain provisions 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.
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Recent Developments in FLAG's Business
On May 7, 1999, FLAG and Thomaston Federal Savings Bank ("Thomaston
Federal"), a federally-chartered savings institution with assets of
approximately $55.3 million, entered into an Agreement and Plan of Merger. The
Agreement provides for FLAG's acquisition of Thomaston Federal by the merger of
a newly formed, wholly-owned subsidiary of FLAG with and into Thomaston Federal.
Thomaston Federal will be the surviving savings association in the merger and
will continue to operate as a federally-chartered savings association under the
name "Thomaston Federal Savings Bank." In the merger, FLAG will exchange l.7275
shares of FLAG common stock for each share of Thomaston Federal common stock
outstanding. FLAG expects to issue approximately 1,175,000 shares of FLAG common
stock to Thomaston Federal 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 Thomaston Federal with a
wholly-owned subsidiary of FLAG is subject to approval of Thomaston Federal
stockholders, approval of various regulatory authorities, and other customary
conditions of closing.
Thomaston Federal is a federally-chartered savings institution with its
main, full-service office located in Thomaston, Georgia. Thomaston Federal
operates loan production offices in Columbus and Macon, Georgia and in Phenix
City and Opelika, Alabama.
On March 31, 1999, FLAG and Abbeville Capital Corporation ("Abbeville"), a
South Carolina bank holding company with assets of $59 million, entered into an
Agreement and Plan of Merger to merge Abbeville with and into FLAG. In the
merger, FLAG will exchange a minimum of 3.48 shares of FLAG common stock for
each share of Abbeville common stock outstanding. 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 stockholders in the aggregate
receive shares of FLAG common stock having a market value of $9,110,250. 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 Abbeville with FLAG is subject to approval of Abbeville stockholders,
approval of various regulatory authorities, and other customary conditions of
closing.
Abbeville is a bank holding company located in Abbeville, South Carolina
and is the sole stockholder of The Bank of Abbeville, which has one office in
Abbeville, South Carolina.
You can find additional information about the Thomaston Federal and
Abbeville transactions in FLAG's Current Reports on Form 8-K dated March 18,
1999, April 7, 1999, and May 10, 1999 (the "FLAG 8-Ks"). The FLAG 8-Ks include
or incorporate by reference certain forward-looking statements, estimates, and
projections concerning the transactions with Thomaston Federal and Abbeville.
The parties made certain assumptions in making estimates and projections
concerning the future financial performance of FLAG following the transactions
with Thomaston Federal and Abbeville. 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.
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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 in 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
the merger 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 may 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, Citizens Bank, and any 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
Mergers
The ability of FLAG, as the parent corporation, to perform with financial
success is dependent upon the integration of Abbeville, Thomaston Federal,
Hogansville, 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 and its subsidiaries are subject to extensive governmental regulation.
FLAG, as a bank holding company, is regulated primarily by the Federal Reserve.
Citizens Bank and First Flag Bank are commercial banks chartered by the State of
Georgia and regulated by the FDIC and the Georgia Department of Banking and
Finance, (the "GDBF"). 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 such
restrictions imposed by federal and state bank regulators 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.
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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 stockholder 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 make 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 Issues
FLAG's and Hogansville's current computer systems, software products or
other business systems, or those of FLAG's or Hogansville's suppliers or
customers, or of FLAG's pending acquisitions, may not process date information
in the years 1999, 2000 or thereafter without error or interruption. FLAG and
Hogansville have reviewed their business systems, including their computer
systems, to identify how any problems in processing date information could
affect their systems. In addition, FLAG and Hogansville are asking all software
vendors from whom they have purchased or may purchase software for assurance
that the software will process all date information without error or
interruption. FLAG and Hogansville also are asking their customers and suppliers
to identify and address any problems that their data processing systems could
have as the year 2000 approaches and is reached. However, FLAG and Hogansville
cannot assure that they will identify all potential problems in their processing
of date information, or that they will be able to remedy identified problems
before they occur. The expenses of FLAG's and Hogansville's efforts to identify
and address Year 2000 problems, and the expenses of any Year 2000 problems that
occur, could have a material adverse effect on FLAG's results of operations and
financial condition.
MEETING OF HOGANSVILLE STOCKHOLDERS
Date, Place, Time, and Purpose
The Hogansville Board of Directors is sending you this Proxy
Statement/Prospectus in connection with the solicitation by the Hogansville
Board of Directors of proxies for use at a Special Meeting of the Hogansville
stockholders. At the Special Meeting, the Hogansville Board of Directors will
ask you to vote on a proposal to approve the Merger Agreement and the
transactions contemplated in the Merger Agreement. Hogansville 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 Citizens Bank, located at
111 High Street, Hogansville, Georgia, on [Wednesday, September 15,] 1999, at
2:00 p.m.
Record Date, Voting Rights, Required Vote, and Revocability of Proxies
Hogansville has set the close of business on [Friday, August 13,] 1999, as
the Record Date for determining holders of outstanding shares of Hogansville
common stock entitled to notice of and to vote at the Special Meeting. Only
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holders of Hogansville common stock of record on the books of Hogansville at the
close of business on the Record Date are entitled to notice of and to vote at
the Special Meeting. As of the Record Date, there were 94,500 shares of
Hogansville common stock issued and outstanding and entitled to vote at the
Special Meeting, which shares were held by 50 holders of record. The executive
officers and directors of Hogansville have committed to vote their shares in
favor of the merger. Because the executive officers and directors of Hogansville
hold a majority of the outstanding shares of Hogansville common stock, approval
of the merger is assured. FLAG holds no shares of Hogansville common stock.
You are entitled to one vote for each share of Hogansville common stock you
own on the Record Date. The vote required for the approval of the Merger
Agreement is a majority of the issued and outstanding shares of Hogansville
common stock entitled to vote at the Special Meeting. Consequently, abstentions
and broker non-votes, as well as instructions to withhold authority to vote,
will have the same effect as a vote "against" the Merger Agreement and the
election of directors.
The designated proxy holder will vote shares of Hogansville common stock in
accordance with the instructions on the proxies if such proxies are properly
executed, received in time, and not revoked. If the proxy does not contain
instructions on how to vote, the proxy holders will vote for approval of the
Merger Agreement. Further, if your proxy does not include instructions on how to
vote at the Special Meeting, you will not be entitled to assert dissenters'
rights. If any other matters properly come before the Special Meeting, the
persons named as proxies will vote upon such matters according to their
judgment. 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 proposals 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 and
the transactions contemplated therein.
- --------------------------------------------------------------------------------
A Hogansville 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 Hogansville;
o Properly submitting to Hogansville 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: First Hogansville
Bankshares, Inc., 111 High Street, Hogansville, Georgia, 30230; Attention: John
R. Hines, Jr., President.
As of the Record Date, all directors and executive officers of Hogansville
as a group (8 persons) were entitled to vote approximately 64,550 shares of
Hogansville common stock, constituting approximately 68% of the total number of
shares of Hogansville common stock outstanding at that date. The Hogansville
directors and executive officers have committed to vote their shares of
Hogansville common stock in favor of the Merger Agreement. See "BUSINESS OF
HOGANSVILLE -- Management."
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DESCRIPTION OF THE MERGER
The following information describes certain 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
Upon consummation of the Merger, Hogansville will merge with and into FLAG.
FLAG will survive the merger and the separate existence of Hogansville will
cease. The Citizens Bank will become a wholly-owned subsidiary of FLAG following
the consummation of the Merger. On the effective date of the merger, each share
of Hogansville common stock then issued and outstanding will be converted into
and exchanged for the right to receive 6.08466 shares of FLAG common stock.
Shares held by Hogansville, 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 Hogansville stockholders
who perfect their dissenters' rights will not be converted to FLAG common stock.
FLAG will not adjust the exchange ratio based on changes in the market
value of FLAG common stock before the effective date of the merger. The market
value of the FLAG common stock that stockholders of Hogansville will receive may
vary significantly between the date of this Proxy Statement/Prospectus and the
effective date of the merger. Because FLAG and Hogansville must satisfy certain
conditions, including receipt of necessary regulatory approvals, the merger may
not be consummated until a substantial period of time following the Special
Meeting. During the time between the date of the Special Meeting and the
effective date of the merger, stockholders of Hogansville who do not properly
perfect their dissenters' rights, or who do not sell their shares of Hogansville
common stock before the effective date of the merger, will be subject to the
risk of a decline in the market value of FLAG common stock.
FLAG will not issue fractional shares. FLAG will pay cash without interest
instead of issuing any fractional share to which any Hogansville stockholder
would otherwise be entitled upon consummation of the merger. FLAG will calculate
the cash value of any fractional shares as the amount equal to the fractional
part of a share of FLAG common stock multiplied by the last sale price of FLAG
common stock on the Nasdaq National Market (as reported by The Wall Street
Journal or, if not reported thereby, any other authoritative source selected by
FLAG) on the last trading day preceding the effective date of the merger.
As of the Record Date, Hogansville had 94,500 shares of Hogansville common
stock issued and outstanding. Based on the number of shares of Hogansville
common stock outstanding on the Record Date and the exchange ratio of 6.08466,
FLAG anticipates that it will issue approximately 575,000 shares of FLAG common
stock to holders of Hogansville common stock once the merger is complete.
Accordingly, FLAG would then have issued and outstanding approximately 7,136,879
shares of FLAG common stock based on the number of shares of FLAG common stock
issued and outstanding on the Record Date. Following the merger, and assuming no
exercise of dissenters' rights, the current stockholders of Hogansville will
beneficially own approximately 8% of the FLAG common stock.
In FLAG's merger with Abbeville, the actual exchange ratio for the
transaction may not be determined until the merger closes. However, as of ______
__, 1999, Abbeville had 237,615 shares of common stock outstanding. Based on
this number and on an Exchange Ratio of __________ (calculated using the last
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reported sale price of FLAG common stock on ______ __, 1999, of $__________),
FLAG estimates that it will issue __________ shares of FLAG common stock to
Abbeville stockholders. FLAG plans to issue approximately 1,175,000 shares of
FLAG common stock to Thomaston Federal stockholders. Therefore, if FLAG
completes the mergers with Abbeville and Thomaston Federal, FLAG estimates that
the current stockholders of Hogansville will beneficially own __% of the
outstanding FLAG common stock. See "SUMMARY - Recent Developments in FLAG's
Business."
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 Hogansville 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 Hogansville stockholders receive in the merger may be reduced and
the consummation of the merger may be delayed.
Background of And Reasons for the Merger
Background of the Merger. In August, 1998, Hogansville began to assess its
strategic alternatives and to contact a number of potential merger partners,
including FLAG. As part of this assessment process, the Board of Directors of
Hogansville met with FLAG representatives on January 6, 1999, to discuss a
possible combination of Hogansville and FLAG.
In negotiating the terms of the merger and the final exchange ratio,
Hogansville 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.
Hogansville 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 Hogansville with its deliberations on
whether to approve and recommend the merger, the Board of Directors retained
financial advisors to help in negotiating the terms of the merger agreement.
The Board of Directors of Hogansville met on February 16, 1999, to discuss
the Merger Agreement and the merger. After review of the matters before the
Board of Directors, the Board of Directors of Hogansville unanimously approved
the Merger Agreement and authorized the President and Chief Executive Officer of
Hogansville to take the appropriate actions necessary to execute the Merger
Agreement.
The Board of Directors of FLAG met on April 21, 1999, to discuss the Merger
Agreement. After review of the matters considered by the Executive Committee of
FLAG, the Board of Directors of FLAG unanimously approved the Merger Agreement
and authorized the President and Chief Executive Officer of FLAG to take the
appropriate actions necessary to execute the Merger Agreement in substantially
the form approved by the Board.
On June 1, 1999, FLAG and Hogansville executed the Merger Agreement. FLAG
and Hogansville each conducted a due diligence review of the material financial,
operating and legal information relating to the other party.
Hogansville's Reasons for the Merger and Recommendation of Directors. The
Hogansville Board of Directors, with the assistance of outside advisors,
evaluated the financial and market considerations bearing on the decision to
recommend the merger to the stockholders of Hogansville. In reaching its
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conclusion that the Merger Agreement is in the best interests of Hogansville and
its stockholders, the Hogansville Board of Directors carefully considered the
following material factors:
o The financial and other terms of the Merger Agreement;
o The alternatives to the merger, including Hogansville remaining as an
independent bank holding company in light of current economic
conditions in its market area;
o The liquidity of the FLAG common stock as compared to the Hogansville
common stock;
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 Hogansville 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 results of Hogansville's due diligence review of FLAG;
o The additional support and resources provided by FLAG in the areas of
technology, compliance and new product development;
o The vision shared by Hogansville and FLAG relating to future
expansion;
o The likelihood of the merger being approved by applicable regulatory
authorities without undue conditions or delay;
o The fact that the merger qualifies as a tax-free reorganization to the
stockholders of Hogansville.
While each member of the Hogansville Board of Directors individually
considered the foregoing and other factors, the Hogansville 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 Hogansville 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 Hogansville stockholders.
The terms of the merger, including the exchange ratio, were the result of
arms-length negotiations between representatives of Hogansville and
representatives of FLAG. Based upon its consideration of the foregoing factors,
the Board of Directors of Hogansville approved the Merger Agreement and the
merger as being in the best interests of Hogansville and its stockholders.
The Hogansville Board of Directors unanimously recommends that Hogansville
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. In reaching its conclusion that the Merger Agreement with
Hogansville is in the best interests of FLAG and its stockholders, the FLAG
Board of Directors carefully considered the following material factors:
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o The information presented to the directors by the management of FLAG
concerning the business, operations, earnings, asset quality, and
financial condition of Hogansville, including the composition of the
earning assets portfolio of Hogansville;
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 Hogansville common
stock;
o The nonfinancial terms of the merger, including the treatment of the
merger as a tax-free exchange of Hogansville 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 Hogansville and the ability of the operations of Hogansville after
the effective date of the merger to contribute to the earnings of
FLAG;
o The attractiveness of the Hogansville franchise, the market position
of Hogansville in Hogansville, Georgia, the compatibility of the
franchise of Hogansville with the operations of FLAG and the ability
of Hogansville to contribute to the business strategy of FLAG;
o The compatibility of the community bank orientation of the operations
of Hogansville 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 considers 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
Hogansville. 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.
Effective Date of the Merger
The effective date of the merger will occur on the date and at the time
that the Certificate of Merger is approved by the Georgia Secretary of State.
Unless Hogansville and FLAG otherwise agree in writing, and subject to the
conditions to the obligations of FLAG and Hogansville to effect the merger, the
parties will use their reasonable efforts to cause the effective date of the
merger to occur on or before the fifth business day following the last to occur
of:
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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 Hogansville approve the Merger
Agreement.
FLAG and Hogansville cannot assure that they can obtain the necessary
stockholder and regulatory approvals or that they can or will satisfy other
conditions precedent to the merger. FLAG and Hogansville 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 Hogansville may terminate the
Merger Agreement if the merger is not consummated by October 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's exchange agent will
mail to each holder of record of Hogansville common stock appropriate
transmittal materials and instructions for the exchange of Hogansville stock
certificates for FLAG stock certificates. FLAG stock certificates will be
exchanged for Hogansville stock certificates, which, immediately prior to the
effective date of the merger, represented outstanding shares of Hogansville
common stock.
Holders of Hogansville common stock should NOT send in their Hogansville
stock certificates until they receive the transmittal materials and
instructions.
After FLAG's exchange agent receives your Hogansville stock certificates
and properly completed transmittal materials, the Exchange Agent will issue and
mail to you a FLAG stock certificate representing the number of shares of FLAG
common stock to which you are entitled. The Exchange Agent will also send
Hogansville stockholders a check for the amount to be paid, without interest,
for any fractional shares and for all undelivered dividends or distributions in
respect of such shares.
After the effective date of the merger, to the extent permitted by law,
holders of Hogansville 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 Hogansville 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 Hogansville
stock certificate until the holder duly surrenders such Hogansville stock
certificate. In no event will the holder of any surrendered Hogansville stock
certificate(s) be entitled to receive interest on any cash to be issued to such
holder, except to the extent required in connection with dissenters' rights. In
no event will FLAG or the Exchange Agent be liable to any holder of Hogansville
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
Hogansville common stock on Hogansville's stock transfer books will be
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recognized. If Hogansville 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 Hogansville stock
certificates will have no rights with respect to the shares of Hogansville
common stock other than the right to surrender such Hogansville stock
certificates and receive in exchange the shares of FLAG common stock to which
such holders are entitled. After the effective date of the merger, holders of
Hogansville stock certificates who have complied with the provisions of Title
14, Chapter 2, Article 13 of the GBCC, which sets forth the right to dissent,
may be entitled to receive in cash the fair value of such stockholder's shares
of Hogansville 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. See "Appendix B" of this Proxy
Statement/Prospectus.
If a Hogansville stockholder wishes to have a FLAG certificate issued in a
name other than that in which the Hogansville stock certificate surrendered for
exchange is issued, the surrendered Hogansville 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 Hogansville 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 holders of a majority of
the outstanding Hogansville common stock;
o Receipt of certain regulatory approvals required for consummation
of the merger (see "-- Regulatory Approvals");
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 of which this Proxy
Statement/Prospectus forms a part being declared effective by the
SEC 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 Negotiation by John R. Hines, Jr., President and Chairman of the
Board of Hogansville, of a mutually satisfactory employment
relationship with FLAG;
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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, in all material respects, as of the date of the
Merger Agreement and as of the effective date of the merger, of
the representations and warranties of Hogansville and FLAG as set
forth in the Merger Agreement;
o The performance of all agreements and the compliance with all
covenants of Hogansville and FLAG as set forth in the Merger
Agreement;
o Receipt by FLAG of a letter from Porter Keadle Moore, LLP,
independent accountants, to the effect that the merger will
qualify for pooling of interests accounting treatment; and
o Satisfaction of certain other conditions, including the execution
of certain claims letters by the directors and officers of
Hogansville, the receipt of certain opinion letters from counsel
for FLAG and counsel for Hogansville, and receipt of various
certificates from the officers of Hogansville and FLAG.
FLAG and Hogansville 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 October 31, 1999, the Merger Agreement may be
terminated and the merger abandoned by either Hogansville 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 Hogansville cannot complete the merger until they receive
regulatory approvals from the Federal Reserve and the GDBF. These regulators
will evaluate financial, managerial and competitive criteria, as well as the
supervisory history of the parties and the public benefits of the merger. FLAG
has filed all required regulatory applications. FLAG and Hogansville cannot
assure when or whether they will receive the regulatory approvals. Additionally,
the parties cannot assure that the regulatory approvals will impose no
conditions or restrictions that in the judgment of their Boards of Directors
would so adversely impact the economic or business benefits of the merger that,
had such conditions or restrictions been known, the parties would not have
entered into the Merger Agreement.
FLAG and Hogansville are not aware of any other material governmental
approvals or actions that are required for consummation of the merger.
Waiver, Amendment, and Termination
To the extent permitted by applicable law, Hogansville and FLAG may amend
the Merger Agreement by written agreement at any time before approval of the
Merger Agreement by the Hogansville stockholders. After the Hogansville
stockholders approve the Merger Agreement, no amendment shall be made to the
Merger Agreement that, pursuant to Sections 14-2-1101 and 14-2-1103 of the GBCC,
requires further stockholder approval, without receiving such stockholder
approval. In addition, prior to or at the effective date of the merger, either
Hogansville or FLAG, or both, acting through their respective Boards of
Directors, chief executive officers or other authorized officers may waive any
default in the performance of any term of the Merger Agreement by the other
party, may waive or extend the time for the compliance or fulfillment by the
other party of any and all of its obligations under the Merger Agreement, and
may waive any of the conditions precedent to the obligations of such party under
the Merger Agreement, except any condition that, if not satisfied, would result
in the violation of any applicable law or governmental regulation. No such
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waiver will be effective unless written and unless signed by a duly authorized
officer of Hogansville or FLAG, as the case may be.
FLAG and Hogansville 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 Hogansville and FLAG; or
o By FLAG or Hogansville:
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 Hogansville
or FLAG Material Adverse Effect (as defined in the Merger
Agreement), as applicable, on the breaching party (provided that
the terminating party is not then in material breach of any
representation, warranty, covenant, or other agreement contained
in the Merger Agreement),
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 October 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 Hogansville fail to vote their approval
of the matters submitted for the approval by such
stockholders at the Special Meeting.
In addition, Hogansville may terminate the Merger Agreement prior to the
effective date of the merger if it enters into a definitive agreement with
respect to the sale of Hogansville to any person or entity who or which has made
a proposal to acquire Hogansville. If Hogansville terminates the Merger
Agreement pursuant to this provision, Hogansville must pay FLAG $100,000 as
reimbursement for the expenses FLAG incurred in connection with the merger.
If FLAG and/or Hogansville 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.
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Dissenters' Rights
If the Merger Agreement and the transactions contemplated thereby are
consummated, any stockholder of Hogansville 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 Hogansville Common Stock
determined immediately prior to the merger, excluding any appreciation of
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 Hogansville entitled to vote on the Merger Agreement has
the right to receive payment of the fair value of his or her shares of
Hogansville common stock upon compliance with the applicable provisions of the
GBCC. A record stockholder may assert dissenters' rights as to fewer than all of
the shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial stockholder 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 Section
14-2-1303 of the GBCC are determined as if the shares as to which he dissents
and his other shares were registered in the names of different stockholders. Any
Hogansville stockholder intending to enforce the right to dissent:
o may not vote in favor of the Merger Agreement, and
o must file a written notice of intent to demand payment for his or her
shares if the merger becomes effective (the "Objection Notice").
A Hogansville stockholder should send the notice of intent to demand
payment to: First Hogansville Bankshares, Inc., 111 High Street, P. O. Box 669,
Hogansville, Georgia 30230-0669 (telephone: (706) 637-6621), Attention: John R.
Hines, Jr., before the vote on the proposal to approve the Merger Agreement is
taken at the meeting. The Objection Notice must state that the stockholder
intends to demand payment for his or her shares of Hogansville Common Stock if
the merger is effected. A vote against approval of the Merger Agreement, in and
of itself, will not constitute an Objection Notice satisfying the requirements
of the GBCC.
If the Merger Agreement is approved by Hogansville's stockholders at the
Special Meeting, each stockholder who has properly filed an Objection Notice and
who has not voted in favor of the Merger Agreement will be notified by
Hogansville of such approval within ten days of the Special Meeting
("Dissenters' Notice"). Such Dissenters' Notice shall contain the following
information:
o where the payment demand must be sent and where and when the
Certificates representing the Hogansville Common Stock must be
deposited;
o the extent to which the transfer of uncertificated shares will be
restricted after the payment demand is received;
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o the date by which the corporation must receive the payment demand
(which date may not be fewer than 30 nor more than 60 days after the
Dissenters' Notice is delivered); and
o a copy of Title 14, Chapter 2, Article 13 of the GBCC (relating to
dissenters' rights).
Following the receipt of such Dissenters' Notice, any stockholder electing
to dissent must demand payment of the fair value of such shares and deposit the
certificates representing the Hogansville common sock in accordance with the
terms of, and by the date set out in, the Dissenters' Notice. Such stockholder
will retain all other rights of a stockholder until those rights are canceled or
modified by the consummation of the merger. A record stockholder who does not
demand payment or deposit such holder's share certificates where required, each
by the date set out in the Dissenters' Notice, is not entitled to payment for
such holder's shares under Title 14, Chapter 2, Article 13 of the GBCC.
Except as described below, within ten days of the later of the Effective
Time, or the date of receipt of a payment demand, Hogansville must, by written
notice, offer to each stockholder who has properly filed a payment demand, and
who has deposited his or her Hogansville certificates representing the
Hogansville Common Stock, to pay an amount Hogansville estimates to be a fair
value for the stockholder's shares, plus accrued interest from the Effective
Time. Such offer of payment must be accompanied by:
o certain of Hogansville's recent financial statements;
o a statement of Hogansville's estimate of the fair value of the shares
involved;
o an explanation of how the interest was calculated;
o a statement of the dissenter's right to demand payment under Section
14-2-1327 of the GBCC; and
o a copy of Title 14, Chapter 2, Article 13 of the GBCC.
Any stockholder who accepts such offer by written notice to Hogansville
within 30 days of the offer, or who is deemed to have accepted such offer due to
his or her failure to respond to such offer within 30 days, shall receive
payment for the dissenting stockholder's shares within 60 days of such offer to
pay or consummation of the merger, whichever is later. If the merger is not
consummated within 60 days following the date set for demanding payment and
depositing share certificates, Hogansville must return the deposited
certificates and release the transfer restrictions imposed on uncertified
shares. If Hogansville then consummates the merger, it must send a new
Dissenters' Notice and repeat the payment demand procedure.
In the event that Hogansville fails to make any payment offer within ten
days of the later of the date the proposed corporate action is taken or the date
of receipt of a payment demand, Hogansville must provide certain information to
the stockholder (the financial statements and other information required to
accompany Hogansville's payment offer) within ten days after receipt of a
written demand from such dissenting stockholder for such information.
Additionally, such dissenting stockholder may, at any time within the three
years following the consummation of the merger, notify Hogansville of his own
estimate of the fair value of his shares and the interest due thereon, and
demand payment of such amounts. If :
o a dissenting stockholder is dissatisfied with an offer for payment
made by Hogansville within the time period set forth above, or
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o Hogansville, having failed to effect the merger, does not return the
deposited Hogansville Certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the
date set for demanding payment, such dissenting stockholder may notify
Hogansville in writing of his own estimate of the fair value of his
shares and the interest due thereon, and demand payment of such
amounts.
A dissenting stockholder waives such holder's right to demand payment under
section 14-2-1327 of the GBCC unless such holder notifies Hogansville of such
holder's demand in writing within 30 days after Hogansville makes or offers
payment for such holder's shares.
If such a demand for payment from any dissenting stockholder remains
unsettled, within 60 days following the receipt by Hogansville of such demand
for payment, Hogansville must institute proceedings in the superior court of the
county where Hogansville's registered office is located (the "Court") requesting
a nonjury equitable determination of the fair value of such dissenting
stockholder's shares and the accrued interest owed to such dissenting
stockholder. If Hogansville fails to file such action within the 60-day period,
Hogansville must pay each dissenting stockholder whose demand remains unsettled
the amount demanded by such dissenting stockholder. Hogansville is required to
make all dissenting stockholders whose demands remain unsettled parties to the
proceeding and to serve a copy of the petition upon each such dissenting
stockholder. The Court may, in its discretion, appoint an appraiser to receive
evidence and recommend a decision on the question of fair value. Each dissenting
stockholder made a party to the proceeding will be entitled to judgment for the
amount which the court finds to be the fair value of his or her shares, plus
interest to the date of judgment.
The Court will determine and assess the costs and expenses of such
proceeding (including reasonable compensation for and the expenses of the
appraiser, but excluding fees and expenses of counsel and experts) against
Hogansville, except that the Court may assess such costs and expenses as it
deems appropriate against any or all of the dissenting stockholders if it finds
that their demand for additional payment was arbitrary, vexatious or otherwise
not in good faith. The Court may award fees and expenses of counsel and experts
in amounts the Court finds equitable:
o against Hogansville, if Hogansville did not substantially comply with
the requirements of the corporation as set out in Title 14, Chapter 2,
Article 13, Part 2 of the GBCC;
o against either Hogansville or the dissenting stockholder(s), if the
Court finds that either party's actions were arbitrary, vexatious or
otherwise not in good faith; or
o if the Court finds that the services of attorneys 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 Hogansville, the court may award those
attorneys reasonable fees out of the amounts awarded the dissenting
stockholders who were benefited.
No action by any dissenting stockholder to enforce dissenters' rights may
be brought more than three years after the corporate action was taken,
regardless of whether notice of the corporate action and of the right to dissent
was given by Hogansville in compliance with the Dissenters' Notice and payment
offer requirements of Sections 14-2-1320 and 14-2-1322 of the GBCC.
The foregoing summary of the applicable provisions of Title 14, Chapter 2,
Article 13 of the GBCC is not intended to be a complete statement of such
provisions, and is qualified in its entirety by reference to such sections,
which are included as Appendix B to this Proxy Statement/Prospectus. The
provisions of the statutes are technical in nature and complex. It is suggested
that any stockholder who desires to exercise the right to object to the Merger
Agreement consult counsel. Failure to comply with the provisions of the statute
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may defeat a stockholder's right to dissent. No further notice of the events
giving rise to dissenters' rights or any steps associated therewith will be
furnished to Hogansville stockholders, except as indicated above or otherwise
required by law.
Any dissenting Hogansville stockholder who perfects such holder's right to
be paid the value of such holder's shares will recognize taxable gain or loss
upon receipt of cash for such shares for federal income tax purposes. See "--
Certain Federal Income Tax Consequences."
Conduct of Business Pending the Merger
FLAG and Hogansville 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 Hogansville 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 certain conditions or
restrictions referred to in 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, Hogansville 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,
Hogansville 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 its Charter or Bylaws;
o Incur any additional debt obligation or other obligation for borrowed
money in excess of an aggregate of $100,000 except in the ordinary
course of the business of Hogansville consistent with past practices
(which shall include 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 Hogansville 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 Hogansville);
o Repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans) any
shares, or any securities convertible into any shares, of the capital
stock of Hogansville, or declare or pay any dividend or make any other
distribution in respect of Hogansville's capital stock other than as
consistent with past practice and as previously disclosed to FLAG by
Hogansville;
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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
of such stock options in existence on the date thereof, or as
previously disclosed to FLAG by Hogansville, 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 Hogansville
common stock, or any stock appreciation rights, or any option,
warrant, or other equity right;
o Adjust, split, combine or reclassify any capital stock of Hogansville
or issue or authorize the issuance of any other securities in respect
of or in substitution for shares of Hogansville 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 Hogansville;
o Enter into or amend any employment contract between Hogansville and
any person having a salary thereunder in excess of $50,000 per year
(unless such amendment is required by law) that Hogansville 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 and investments 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, 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 Hogansville, other than in the ordinary course of
business, pay any severance or termination pay or any bonus other than
pursuant to written policies or written contracts in effect on the
date of the Merger Agreement and previously disclosed to FLAG by
Hogansville; enter into or amend any severance agreements with
officers of Hogansville; grant any material increase in fees or other
increases in compensation or other benefits to directors of
Hogansville except in accordance with past practice previously
disclosed to FLAG by Hogansville; 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 Hogansville or terminate or
withdraw from, or make any material change in or to, any existing
employee benefit plans of Hogansville 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;
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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 Hogansville, or settle any
litigation involving any liability of Hogansville for material money
damages or restrictions upon the operations of Hogansville; 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 Hogansville 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 Hogansville 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
Following the merger, The Citizens Bank will be a wholly-owned subsidiary
of FLAG. Certain members of Hogansville's management and the Hogansville Board
of Directors have interests in the merger in addition to their interests as
stockholders of Hogansville 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, John R. Hines, Jr., President and Chairman of the
Board of Hogansville, will become a member of FLAG's Board of Directors.
Additionally, the Merger Agreement provides that Mr. Hines will have negotiated
a mutually satisfactory employment relationship with FLAG. As of the Record
Date, one of the directors of Hogansville beneficially owned 7,125 shares, or
.1 %, of the outstanding shares, of FLAG common stock.
Indemnification and Advancement of Expenses. The Merger Agreement provides
that FLAG will indemnify, defend and hold harmless each person entitled to
indemnification from a Hogansville 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 Hogansville's Articles and Bylaws as
in effect on the date of the Merger Agreement, including provisions relating to
advances of expenses incurred in the defense of any litigation. Without limiting
the foregoing, in any case in which approval by FLAG is required to effectuate
any indemnification, FLAG will direct, at the election of the indemnified party,
that the determination of any such approval shall be made by independent counsel
mutually agreed upon between FLAG and the indemnified party.
Separation Agreement. The Merger Agreement provides, as a condition to
consummation of the merger, that John R. Hines, Jr., President and Chairman of
the Board of Hogansville, will have negotiated a mutually satisfactory
employment relationship with FLAG. FLAG has proposed that Mr. Hines enter into a
separation agreement with FLAG that contains the following terms:
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g o Mr. Hines will receive severance payments equal to his annual base
salary and bonus paid over the previous three fiscal years in the
event that he is involuntarily terminated pursuant to certain Payment
Events, as that term is defined in the separation agreement;
o Mr. Hines will make certain covenants to maintain the confidentiality
of FLAG Confidential Information, as that term is defined in the
separation agreement; and
o Mr. Hines will not 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 his 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 Hogansville employee
benefits under Hogansville's existing employee benefit and welfare
plans or,
o if FLAG determines to provide to officers and employees of Hogansville
employee benefits under other employee benefit plans and welfare
plans, provide generally to officers and employees of Hogansville
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, service under any qualified defined
contribution plans of Hogansville will be treated as service under FLAG's
qualified defined contribution plans, and service under any other employee
benefit plans of Hogansville will be treated as service under any similar
employee benefit plans maintained by FLAG. For officers and employees of
Hogansville 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
Hogansville, FLAG will cause each comparable employee welfare benefit plan which
is substituted for a Hogansville welfare benefit plan to waive any evidence of
insurability or similar provision, to provide credit for such participation
prior to such substitution with regard to the application of any pre-existing
condition limitation, and to provide credit towards satisfaction of any
deductible or out-of-pocket provisions for expenses incurred by such
participants during the period prior to such substitution, if any, that overlaps
with the then current plan year for each such substituted employee welfare
benefit plan. FLAG also will cause the surviving corporation and its
subsidiaries to honor in accordance with their terms all employment, severance,
consulting and other compensation contracts previously disclosed to FLAG by
Hogansville between Hogansville 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 Hogansville
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,
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dealers in securities, and insurance companies, among others, or employees who
may acquire their shares upon the exercise of employment-based stock options).
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.
The parties to the merger have not, and will not, request a federal income
tax ruling from the Internal Revenue Service ("IRS") as to the tax consequences
of this transaction. Instead, Powell, Goldstein, Frazer & Murphy LLP, counsel to
FLAG, will render an opinion to FLAG and Hogansville concerning the material
federal income tax consequences of the proposed merger under federal income tax
law. It is such firm's opinion, based upon the assumption that the merger is
consummated in accordance with the Merger Agreement and the representations made
by the management of FLAG and Hogansville, that 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 Hogansville will have the following
federal income tax consequences:
o The stockholders of Hogansville will recognize no gain or loss upon
the exchange of all of their Hogansville common stock solely for
shares of FLAG common stock;
o The aggregate tax basis of the FLAG common stock received by the
Hogansville stockholders in the merger will, in each instance, be the
same as the aggregate tax basis of the Hogansville 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
Hogansville stockholders will, in each instance, include the period
during which the Hogansville common stock surrendered in exchange
therefor was held, provided that the Hogansville common stock was held
as a capital asset on the date of the exchange;
o The payment of cash to Hogansville 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; and
o Where, pursuant to the exercise of dissenters' rights, a stockholder
receives cash in exchange for Hogansville common stock, the former
Hogansville 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 Hogansville
common stock.
Each Hogansville 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 Hogansville common stock exchanged, and
the number of shares of FLAG common stock received in exchange for Hogansville
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.
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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 Hogansville 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 stock received in the merger, plus any cash in lieu of
fractional shares, and your basis in the Hogansville common stock
surrendered in the merger;
o The tax basis of the FLAG common stock to be received by the holders
of Hogansville 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 Hogansville stockholders pursuant to the merger would begin the day
after the effective date of the merger; and
o Hogansville will be deemed to have sold all of its assets to FLAG in a
taxable exchange as a result of the merger. As a result, Hogansville
would recognize gain or loss equal to the difference between the sum
of the fair market value of the FLAG common stock issued to the
Hogansville stockholders in the merger plus the liabilities of
Hogansville assumed by FLAG (or to which Hogansville's assets are
taken subject) at the time of the merger and Hogansville's basis in
its assets. Hogansville would be liable for (and FLAG would assume as
a result of the merger) any tax due with respect to any net gain
recognized as a result of the deemed sale of assets by Hogansville.
If the condition of receiving this tax opinion is waived by Hogansville,
Hogansville 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 Hogansville 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 Hogansville 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 Hogansville common
stock must be exchanged for FLAG common stock with substantially similar terms.
There are certain other criteria that must be satisfied in order for the merger
to qualify as a pooling of interests, some of which criteria cannot be satisfied
until after the effective date of the merger.
There are certain conditions on the exchange of Hogansville common stock
for FLAG common stock by affiliates of Hogansville, and there are certain
restrictions on the transferability of the FLAG common stock received by those
affiliates in order, among other things, to ensure the availability of pooling
of interests accounting treatment for the merger. See "-- Resales of FLAG Common
Stock."
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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 that Hogansville terminates the Merger Agreement by entering
into a definitive agreement with respect to the sale of Hogansville to any
person or entity who or which has made a proposal to acquire Hogansville,
Hogansville will pay FLAG $100,000 as reimbursement for the expenses of FLAG
incurred in connection with the merger.
Resales of FLAG Common Stock
The FLAG common stock issued to stockholders of Hogansville in connection
with the merger will be registered under the Securities Act. The shares of FLAG
common stock that the holders of Hogansville common stock receive will be freely
transferable by those stockholders of Hogansville and FLAG not considered to be
"Affiliates" of Hogansville or FLAG. "Affiliates" generally are defined as
persons or entities who control, are controlled by, or are under common control
with Hogansville 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 Hogansville 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
Hogansville 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 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 Hogansville or FLAG.
Hogansville has agreed to use its reasonable efforts to cause each person
who Hogansville considers to be an Affiliate of Hogansville to sign and deliver
to FLAG 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:
o except in compliance with the Securities Act and the rules and
regulations of the SEC and
o in any case, until financial results covering at least 30 days of
post-merger combined operations of FLAG have been published.
The receipt of the Hogansville Affiliate Agreements by FLAG is also a
condition to FLAG's obligations to consummate the merger. 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."
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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:
o at least two-thirds of the directors of FLAG approve a memorandum of
understanding with the interested stockholder regarding the business
combination prior to the date on which such stockholder became an
interested stockholder, or
o the business combination is unanimously approved by certain
"continuing directors" of FLAG. In addition, in order to amend certain
provisions of FLAG's Articles of Incorporation and Bylaws relating to
the number, election, term and removal of FLAG Directors, a two-thirds
vote of the issued and outstanding shares of FLAG is required, unless
two-thirds of the directors then serving approve the amendment.
EFFECT OF THE MERGER ON RIGHTS OF STOCKHOLDERS
As a result of the merger, holders of Hogansville common stock will be
exchanging their shares of a Georgia corporation governed by the GBCC and
Hogansville's Articles of Incorporation (the "Hogansville Articles"), and
Bylaws, for shares of common stock of FLAG, a Georgia corporation, which is
governed by the GBCC, FLAG's Articles of Incorporation (the "FLAG Articles") and
FLAG's Bylaws. Certain significant differences exist between the rights of
Hogansville stockholders and those of FLAG stockholders. The differences that
Hogansville 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, as well as to FLAG's Articles and Bylaws and
Hogansville's Articles and Bylaws.
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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 March 31, 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. No shares of
preferred stock are issued and outstanding.
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 stockholder 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, mergers, 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.
Hogansville. Hogansville's authorized capital stock consists of 100,000
shares of Hogansville common stock, $10.00 par value, of which 94,500 shares of
common stock were issued and outstanding as of the Hogansville Record Date.
Hogansville's Bylaws provide that each share of Hogansville common stock is
entitled to one vote per share for all purposes. Hogansville's Articles provide
that stockholders do not have the preemptive right to purchase or subscribe to
any unissued authorized shares of Hogansville common stock or any option or
warrant for the purchase thereof.
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 stockholder action (such as changing the corporate name), and
other amendments which the Georgia Business Corporation Code specifically allows
without stockholder 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
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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 a corporation's articles of incorporation. The FLAG
Articles provide that the provisions regarding the approval required for certain
business combinations may only be changed by the affirmative vote of at least
two-thirds of the issued and outstanding shares of the corporation entitled to
vote thereon at any regular or Special Meeting of the 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.
Hogansville. The Hogansville Articles and Bylaws are silent with respect to
the issue of amending the Hogansville Articles, and thus, the Georgia Business
Corporation Code dictates the requirements for making such an amendment..
The Hogansville Bylaws provide that the Bylaws may be amended by the board
of directors, but any bylaws adopted by the board of directors may be altered,
amended or repealed and new bylaws adopted, by the stockholders by majority vote
of all of the shares having voting power.
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. FLAG currently has
thirteen directors.
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
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Board of Directors, or, if the directors remaining in office constitute fewer
than a quorum of the Board of Directors, by affirmative vote of a majority of
the remaining directors. FLAG 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.
Hogansville. The Hogansville Articles only address the number of initial
directors. The Hogansville Bylaws generally provide that the Board of Directors
may consist of between two and ten members. The Hogansville Bylaws state that in
the event of a vacancy on the Hogansville Board of Directors, including a
vacancy created by an increase in the number of directors, such vacancy may be
filled by the affirmative vote of the majority of the remaining directors,
although less than a quorum of the Board of Directors. A director elected to
fill a vacancy serves until the next election of directors by the stockholders.
The Hogansville Articles do not address the voting rights of stockholders. The
Hogansville Bylaws provide that each holder of shares of Hogansville common
stock shall be entitled to one vote for each share held by such holder,
including votes for the election of directors. Hogansville stockholders are not
entitled to cumulate votes.
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.
Hogansville. The Hogansville Bylaws provide that any director may be
removed with or without case cause at a meeting of stockholders called expressly
for that purpose by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors, and his successor may be elected
at the same or any subsequent meeting of stockholders; provided, that to the
extent any vacancy created by such removal is not filled by such an election
within 60 days after such removal, the remaining directors, shall, by majority
vote, fill any such vacancy.
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
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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.
Hogansville. The Hogansville Articles are silent with respect to the issue
of indemnification of directors and officers. The Hogansville Bylaws provide for
indemnification of directors and officers.
Special Meetings of Stockholders
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.
Hogansville. The Hogansville Bylaws provide that special meetings of the
stockholders may be called for any purpose, by the President or the Chairman of
the Board of Directors, or a majority of the Board of Directors. Hogansville is
required to call a special meeting when requested in writing by not less than
50% of all shares of Hogansville entitled to vote at the meeting. Such request
must state the purposes for which the meeting is being called.
Actions by Stockholders 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 or FLAG's 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:
o two-thirds of the directors of FLAG approve a memorandum of
understanding with the interested stockholder prior to the date when
such interested stockholder first became an interested stockholder, or
o the business combination is unanimously approved by the continuing
directors of FLAG.
Hogansville. 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 Hogansville Bylaws also specifically provide that any
action required or permitted to be taken at a meeting of the stockholders may be
taken without a meeting if all of the stockholders consent thereto in writing,
setting forth the action so taken.
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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 stockholder") of FLAG common stock entitled
to vote to approve a "business combination" with an interested stockholder
(basically, a 10% or more stockholder of FLAG), unless:
o two-thirds of the directors of FLAG approve a memorandum of
understanding with the interested stockholder regarding the business
combination prior to the date such stockholder became an interested
stockholder, or
o 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:
o 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
o 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 stockholder who is a party to the
business combination).
These voting requirements are required in addition to any vote otherwise
required by law or the FLAG Articles. 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 would continue to apply to any such business combinations.
The provisions of the FLAG Articles and FLAG's 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.
Hogansville. The Hogansville Articles and Bylaws are silent with respect to
mergers, consolidations and sales of assets.
Stockholders' 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 stockholder 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 stockholder 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:
39
<PAGE>
o such inspection must occur during regular business hours at a
reasonable location determined by FLAG, and
o 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 stockholder);
o the stockholder 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 stockholder are
directly connected with his or her stated purpose; and,
o the records are to be used solely for the stockholder'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.
Hogansville. The Hogansville Articles and Bylaws are silent with regard to
the inspection of books and records.
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.
Hogansville. The Hogansville Articles provide that Hogansville may
distribute to stockholders out of capital surplus of the Corporation a portion
of its assets. The Hogansville Bylaws provide that dividends upon the stock of
Hogansville may be declared by the Hogansville Board of Directors at any regular
or special meetings pursuant to law.
40
<PAGE>
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.......................... 14.62 10.25 0.060
1999
First Quarter........................... 11.81 9.12 0.060
Second Quarter.......................... 11.00 9.00 0.060
Third Quarter (through_______ __,1999)..
On February 22, 1999, the last day prior to the public announcement of
FLAG's proposed acquisition of Hogansville, the last reported sale price per
share of FLAG common stock on the Nasdaq National Market was $11.37 as adjusted
for 3-for-2 stock split effective June 3, 1998, and the resulting equivalent pro
forma price per share of Hogansville common stock (based on the 6.08466 Exchange
Ratio) was $69.21. 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 Hogansville common stock was
$_____. The equivalent per share price of a share of Hogansville common stock at
each specified date represents the last reported sale price of a share of FLAG
common stock on such date multiplied by the Exchange Ratio.
The market price of FLAG common stock on the effective date of the merger
may be higher or lower than the market price at the time the merger proposal was
announced, at the time the Merger Agreement was executed, at the time of mailing
of this Proxy Statement/Prospectus, or at the time of the Special Meeting.
Holders of Hogansville common stock are not assured of receiving any specific
market value of FLAG common stock on the effective date of the merger, and such
value may be substantially more or less than the current value of FLAG common
stock.
41
<PAGE>
There is no established public trading market for the Hogansville common
stock. To the knowledge of Hogansville, the most recent trade of Hogansville
common stock prior to February 22, 1999, the last day prior to the public
announcement of the proposed merger between FLAG and Hogansville, was the sale
of 1,650 shares on March 22, 1996, at $25.00 per share. To the knowledge of
Hogansville, there have been no trades of Hogansville common stock since the
announcement of the merger.
Hogansville's practice is to declare and pay dividends to its stockholders
on a quarterly basis each year. Since its formation in 1982, Hogansville has
declared a dividend of $0.10 per share per quarter, or $0.40 per share per year.
The information regarding Hogansville common stock is provided for
informational purposes only and, due to the absence of an active market for
Hogansville's shares you should not view it as indicative of the actual or
market value of Hogansville 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 Hogansville'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 HOGANSVILLE
General
Hogansville is a bank holding company headquartered in Hogansville,
Georgia. Hogansville's wholly-owned subsidiary, The Citizens Bank, operates two
banking offices in Hogansville. The Citizens Bank is a community based financial
institution that offers a broad range of banking and banking-related products
and services. As of March 31, 1999, Hogansville had total consolidated assets of
approximately $31 million, total consolidated deposits of approximately $27
million, and total consolidated stockholders' equity of approximately $3
million.
42
<PAGE>
Management Stock Ownership
The following table presents information about each of the directors and
executive officers of Hogansville and all executive officers and directors as a
group. Unless otherwise indicated, each person has sole voting and investment
power over the indicated shares. Information relating to beneficial ownership of
the Hogansville 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
Beneficial Owner Shares Percentage
- ---------------- ------ ----------
John R. Hines, Jr. (1) (2) (3) (4)..................... 48,150 51.0 %
John C. McKibben (1) (2) .............................. 4,900 5.2
R.B. Crawford (2)(5)................................... 3,500 3.7
Phil L. Waldrop (2) (6)................................ 2,500 2.6
Mack Reynolds (2) (7).................................. 2,000 2.1
Yvonne S. McKibben (2) (3)............................. 1,250 1.3
Billy Tucker (2)....................................... 1,250 1.3
Jim Lasater (2) (8).................................... 1,000 1.1
All directors and executive officers as a group (9).... 64,550 68.3
- --------------------------------------------------------------------------------
(1) Beneficial owner of 5% or more of the outstanding shares of Hogansville
common stock.
(2) Director.
(3) Executive officer.
(4) Includes (a) 9,430 shares in an employee profit sharing plan which Mr.
Hines has the power to vote as trustee and (b) 500 shares owned by his
wife, Charlene Morse Hines, of which Mr. Hines disclaims beneficial
ownership.
(5) Consists of shares owned by Mr. Crawford's mother, which he has the power
to vote.
(6) Held jointly with Mr. Waldrop's wife.
(7) Includes 1,000 shares owned by a pension plan which Mr. Reynolds has the
power to vote.
(8) Consists of shares owned by Mr. Lasater's wife of which he disclaims
beneficial ownership.
(9) Consists of 8 persons. Includes shares with respect to which beneficial
ownership is disclaimed. See notes 4 and 8.
43
<PAGE>
Voting Securities and Principal Stockholders of Hogansville
The following lists each stockholder of record that directly or indirectly
owned, controlled, or held with power to vote 5% or more of the 94,500
outstanding shares of Hogansville common stock as of the Record Date. Unless
otherwise indicated, each person has sole voting and investment powers over the
indicated shares. Information relating to beneficial ownership of the
Hogansville 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 of
Name and Address at Record Date Class (%)
- ---------------- -------------- ---------
John R. Hines, Jr. 48,150 (1) 51.0%
105 Maple Drive
Hogansville, Georgia 30230
John C. McKibben 4,900 5.2%
227 College Street
Hogansville, Georgia 30230
--------------------
(1) Includes (a) 9,430 shares in an employee profit sharing plan which Mr.
Hines has the power to vote as trustee and (b) 500 shares owned by his
wife, Charlene Morse Hines, of which Mr. Hines disclaims beneficial
ownership.
44
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
- -------
First Hogansville Bankshares, Inc. (the "Company") is a one bank holding
company organized in 1930. The Company has one subsidiary, The Citizens Bank,
Hogansville, Georgia (the "Bank") at December 31, 1998 and 1997.
Year 2000 Considerations
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" (Y2K) 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.
The Company has tested equipment and all appear to be compliant. Management
does not expect Y2K to have a material affect on earnings for 1999.
Financial Condition 1998 Compared to 1997
During 1998, average total assets increased $574,000 or 1.84% over 1997.
Average deposits increased $509,000 or 1.94% in 1998 over 1997. Average loans
increased $97,000 or .57% in 1998 over 1997.
Total assets at December 31, 1998, were $30.8 million, representing a
$425,000 or 1.36% decrease from December 31, 1997. Total deposits increased
$830,000 or 3.18% from 1997 to 1998 while total gross loans decreased $189,000
or 1.08% during 1998. Time deposits increased $46,000 from 1997 to 1998 while
all other deposit accounts increased $784,000 in 1998. All major categories of
the Company's assets and liabilities remained fairly stable during 1998.
Nonperforming assets at December 31, 1998 were $129,000 compared to $141,000 at
December 31, 1997. The majority of the decrease is attributable to a decrease in
loans past due 90 days. There were no related party loans which were considered
nonperforming at December 31, 1998.
Results of Operations 1998 Compared to 1997
The Company's operational results primarily depend on the earnings of the
Bank. The Bank's earnings depend to a large degree on net interest income, which
is the difference between the interest income received from its interest bearing
assets (such as loans, investment securities, federal funds sold, etc.) and the
interest expense which is paid on its interest bearing liabilities.
For year ended December 31, 1998, the Company reported net earnings of
$268,139 or $2.84 per share compared to $348,520 or $3.69 per share, for the
same period in 1997. Net earnings for December 31, 1998 decreased $80,381 or 23%
compared to the same period in 1997. The decrease is primarily a result of
miscellaneous expense increasing by $98,164 for period of December 31, 1997 to
December 31, 1998.
Net interest income (on tax equivalent basis) decreased by $12,000 and net
interest margin (on tax equivalent basis) decreased by 20 basis points from
5.43% in 1997 to 5.23% in 1998. Interest income decreased by $9,000; this was
caused by a $53,000 decrease in interest income which resulted from a decrease
in the interest rate on interest earning assets which was partially offset by an
increase in interest income of $44,000 related to the volume of interest earning
assets. Interest expense increased by $3,000; this was caused by an increase in
45
<PAGE>
interest expense of $14,000 as a result of an increase in the interest rate on
interest bearing liabilities which was partially offset by a decrease in
interest expense of $11,000 as a result of a decrease in the volume of interest
bearing liabilities.
The provision for loan losses in 1998 was $92,000 compared to $105,000 in
1997. The decrease in the provision for loan losses was primarily attributable
to the decrease in the loan portfolio and a decrease in total non-performing
assets in 1998 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 1.39% and 1.35% of total
loans outstanding at December 31, 1998 and 1997, respectively. Net chargeoffs
were $89,000 and $62,000 during 1998 and 1997, respectively.
Other operating income totaled $268,000 in 1998 and $305,000 in 1997. This
decrease of $37,000 or 12% was mainly due to a gain on sale of investment
securities during 1997 and a loss on sale of investment securities during 1998.
Other operating expenses increased $113,000 or 9.49% in 1998 over 1997
principally due to the increase in miscellaneous expense. No one individual
expense category accounted for a significant portion of the increase.
Income taxes expressed as a percentage of earnings before income taxes
decreased from 32.4% in 1997 to 27.4% in 1998. The decrease relates to an
increase in tax exempt income relative to earnings before income taxes.
Financial Condition 1997 Compared to 1996
During 1997, average total assets increased $610,000 or 1.99% over 1996.
Average deposits increased $290,000 or 1.12% in 1997 over 1996. Average loans
increased $3,034,000 or 21.52% in 1997 over 1996.
Total assets at December 31, 1997, were $31.2 million representing a
$801,000 or 2.63% increase from December 31, 1996. Total deposits increased
$338,000 or 1.31% from 1996 to 1997 while total gross loans increased $878,000
or 5.29% during 1997. Time deposits increased $487,000 from 1996 to 1997 while
all other deposit accounts decreased $149,000 in 1997. The loan increase was
funded partially by the proceeds of sales, calls, and paydowns of investment
securities along with the increase in deposits. Nonperforming assets at December
31, 1997 were $141,000 compared to $100,000 at December 31, 1996. 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, 1997.
Results of Operations 1997 Compared to 1996
For year ended December 31, 1997, the Company reported net earnings of
$348,520 or $3.69 per share compared to $304,127 or $3.24 per share for the same
period in 1996 an increase of $44,393 or 15%.
Net interest income (on a tax-equivalent basis) increased by $94,000; and
net interest margin (on a tax equivalent basis) increased by 39 basis points
from 5.04% in 1996 to 5.43% in 1997, this was caused by a $181,000 increase in
interest income as a result of an increase in the volume of interest earning
assets which was partially offset by a decrease in interest income of $87,000 as
a result of a decreased in the interest rate on interest earning assets.
Interest expense decreased by $45,000; this was primarily caused by a decrease
in the interest rate on interest bearing liabilities.
The provision for loan losses in 1997 was $105,000 compared to $54,000 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 allowance for loan losses represented
46
<PAGE>
approximately 1.35% and 1.16% of total loans outstanding at December 31, 1997
and 1996, respectively. Net chargeoffs were $62,000 and $96,000 during 1997 and
1996, respectively.
Other operating income was $305,000 in 1997 and $252,000 in 1996. This
increase of $53,000 or 21% was due to an increase in service charges and
insurance commissions. Service charges increased due to the Bank raising NSF
fees from $20 to $24 from 1996 to 1997. Insurance commissions increased due to
the fact that the Bank had an increase in the penetration of insurance sales
efforts. Other operating expenses increased $55,000 or 4.8% in 1997 over 1996.
No individual category made a significant contribution to this increase.
Income taxes expressed as a percentage of earnings before income taxes
increased from 27.7% in 1996 to 32.4% in 1997. The increase relates to a
decrease in tax exempt income relative to earnings before income taxes.
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.............. $ 17,229 1,866 10.83% 17,132 1,866 10.89% 14,098 1,625 11.53%
Taxable investment
securities........ 7,761 481 6.20% 8,334 553 6.64% 10,119 664 6.56%
Tax-free investment
securities........ 1,519 106 6.98% 1,676 120 7.16% 2,462 162 6.58%
Interest-bearing deposits
in other banks... - - 0.00% - - 0.00% 212 11 5.19%
Federal funds sold. 2,862 154 5.38% 1,402 77 5.49% 1,096 60 5.47%
----- --- ---- ----- -- ---- ----- -- ----
Total interest-
earning assets.. 29,371 2,607 8.88% 28,544 2,616 9.16% 27,987 2,522 9.01%
Other assets......... 2,453 2,706 2,653
----- ----- -----
Total assets..... $ 31,824 31,250 30,640
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits........ $ 5,008 130 2.60% 5,574 144 2.58% 5,399 151 2.80%
Savings deposits .. 2,718 77 2.83% 2,733 77 2.82% 2,635 76 2.88%
Other time deposits 13,918 781 5.61% 13,558 747 5.51% 13,837 787 5.69%
Federal funds purchased - - 0.00% - - 0.00% 33 1 3.03%
FHLB advances and
other borrowings 1,335 82 6.14% 1,585 99 6.25% 1,585 97 6.12%
----- -- ---- ----- -- ---- ----- -- ----
Total interest-
bearing liabilities 22,979 1,070 4.66% 23,450 1,067 4.55% 23,489 1,112 4.73%
Noninterest bearing
demand deposits. 5,147 4,417 4,088
Other liabilities.... 384 374 338
Stockholders' equity. 3,314 3,009 2,725
------- ------- -------
Total liabilities and
stockholders' equity$31,824 31,250 30,640
====== ====== ======
Net interest income.. 1,537 1,549 1,410
===== ===== =====
Interest rate spread. 4.22% 4.61% 4.28%
Net interest margin.. 5.23% 5.43% 5.04%
Interest-earning assets/
interest-bearing liabilities 127.82% 121.72% 119.15%
Taxable equivalent adjustments:
Investment securities 36 41 55
-- -- --
Net interest income.. 1,501 1,508 1,355
===== ===== ========
</TABLE>
47
<PAGE>
CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES
- --------------------------------------------------
Net interest income is determined by the amount of interest-earning assets
compared to interest-bearing liabilities and their related yields and costs. The
difference between the weighted average interest rates earned on
interest-earning assets (i.e., loans and investment securities) and the weighted
average interest rates paid on interest-bearing liabilities (i.e., deposits and
borrowings) is called the net interest spread. Another measure of the difference
in interest income earned versus interest expense paid is net interest margin.
Net interest margin (on a tax-equivalent basis) 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 (on a tax-equivalent basis) and the
ratio of interest-earning assets versus interest-bearing liabilities for those
years are presented. Average interest-earning assets were $29,371in 1998 versus
$28,544 in 1997, and $27,987 in 1996. Average interest-bearing liabilities were
$22,979 in 1998 versus $23,450 in 1997 and $23,489 in 1996. The interest rate
spread was 4.22% in 1998 versus 4.61% in 1997 and 4.28% in 1996, while the net
interest margin (on a tax equivalent basis) was 5.23% in 1998, 5.43% in 1997 and
5.04% 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.
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 ................................ 11 (11) -- 350 (109) 241
Taxable investment securities ........ (36) (36) (72) (119) 8 (111)
Tax-free investment securities ....... (11) (3) (14) (56) 14 (42)
Interest-bearing deposits in
other banks ........................ -- -- -- (11) -- (11)
Federal funds sold ................... 80 (3) 77 17 0 17
-- -- -- -- - --
Total interest income .................. 44 (53) (9) 181 (87) 94
== === == === === ==
Interest expense:
Interest bearing demand deposits (15) 1 (14) 5 (12) (7)
Savings deposits ..................... -- -- -- 3 (2) 1
Other time deposits .................. 20 14 34 (16) (24) (40)
Federal funds purchased .............. -- -- -- (1) -- (1)
FHLB advances and other borrowings (16) (1) (17) 2 -- 2
--- -- --- - -
Total interest expense ............ (11) 14 3 (7) (38) (45)
--- -- - -- --- ---
Net interest income .................... 55 (67) (12) 188 (49) 139
== === === === === ===
</TABLE>
NONINTEREST INCOME
- ------------------
Other income decreased to $268,000 in 1998 from $305,000 in 1997 and
$252,000 in 1996. The decrease in other income in 1998 was due primarily to a
loss on the sale of investment securities in 1998 compared to a gain on the sale
of investment securities in 1997, while in 1997 the increase was due to an
increase in insurance commissions received. Insurance commissions increased due
to the fact that the Bank had an increase in the penetration of insurance sales
efforts.
48
<PAGE>
NONINTEREST EXPENSES
- --------------------
Salary and employee benefits decreased to $592,000 in 1998 from $594,000 in
1997 and $596,000 in 1996. This decrease in 1998 was primarily due to an officer
leaving the Bank in April of 1998 that has not since been replaced, partially
offset by other salary increases.
Occupancy expense increased to $232,000 in 1998 from $215,000 in 1997 and
$208,000 in 1996. The increases in occupancy expense was the result of an
increase in real estate taxes and maintenance expense on equipment.
Miscellaneous expense was $481,000 in 1998 versus $383,000 in 1997 and
$329,000 in 1996. The increase in miscellaneous expense from 1998 to 1997 was
not specifically identifiable to any one or small group of 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 the
Company'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 $1.5 million to $8.4 million at December
31, 1998 from $9.9 million at December 31, 1997. At December 31, 1998, all
investment securities outstanding were classified as available-for-sale. The
decrease in 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 investment portfolio amounted to $98,000 and
gross unrealized losses amounted to $78,000.
Table 3 reflects the carrying amount of the investment securities portfolio for
the past three years.
Table 3 - Carrying Value of Investments
(dollars in thousands)
December 31,
------------
1998 1997 1996
---- ---- ----
Securities Available-for-sale:
U.S. Treasuries and agencies .......... 3,932 5,012 1,890
State, county and municipal ........... 1,741 1,236 1,910
Mortgage-backed securities ............ 2,573 3,424 6,040
Mutual fund investments .................... 186 186 183
--- --- ---
Total ....................... $8,432 9,858 10,023
====== ===== ======
CARRYING VALUE OF INVESTMENTS
- -----------------------------
The December 31, 1998 and 1997, market value of securities
available-for-sale approximated their amortized cost. The market value of the
securities available-for-sale 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 sold or called at
prices which differ from the carrying value at the time of the call.
49
<PAGE>
LOANS
- -----
Gross loans receivable decreased by approximately $189,000 in 1998 to $17.3
million from $17.5 million at December 31, 1997. This decrease was the result of
a decline in commercial, financial and agricultural loans, partially offset by
an increase in real estate mortgages and loans. As shown in Table 4, commercial,
financial and agricultural loans decreased approximately $1.2 million,
installment loans increased approximately $481,000 and real estate mortgages
increased approximately $541,000.
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
------ -------- --------------- ------ -------- ------ --------------- --------
Commercial, financial
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and agricultural............ $ 4,931 28.5% 6,143 35.2% 6,657 40.1% 5,014 38.2% 4,059 35.2%
Real estate construction....... - 0.0% - 0.0% - 0.0% - 0.0% - 0.0%
Real estate mortgage........... 7,751 44.9% 7,210 41.3% 5,800 35.0% 5,062 38.5% 4,536 39.3%
Installment loans to individuals 4,591 26.6% 4,110 23.5% 4,127 24.9% 3,058 23.3% 2,937 25.5%
Total loans.................... 17,273 100.0% 17,463 100.0% 16,584 100.0% 13,134 100.0% 11,532 100.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Less:
Allowance for loan losses...... 239 236 193 235 211
--- --- --- --- ---
Total net loans........... $ 17,034 17,227 16,391 12,899 11,321
========= ====== ====== ====== ======
</TABLE>
Table 5 represents the expected maturities for commercial, financial and
agricultural 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
<S> <C> <C> <C> <C> <C> <C>
and agricultural............. $ 641 2,318 1,972 4,931 4,290 -
</TABLE>
50
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
Table 6 presents an analysis of activity 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 $92,000 in 1998, $105,000 in 1997 and $54,000 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 increased to
$239,000 at December 31, 1998, from $236,000 at December 31, 1997. The allowance
for loan losses was $193,000 at December 31, 1996. Total charge-offs in 1998,
were $95,000 in 1998, $78,000 in 1997, and $99,000 in 1996. The ratio of net
charge-offs to average net loans was .52% in 1998, versus .36% in 1997, and .68%
in 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........................... $ 17,192 17,054 14,645 12,110 11,217
Allowance for loan losses, beginning
of the period............................. 236 193 235 211 206
Charge-offs for the period:
Commercial/financial/agricultural......... - - 83 - -
Real estate construction loans ........... - - - - -
Real estate mortgage loans................ - 14 - - -
Installment loans to individuals.......... 95 64 16 8 26
-- -- -- - --
Total charge-offs........................... 95 78 99 8 26
Recoveries for the period:
Commercial/financial/agricultural......... - 5 - - -
Real estate construction loans............ - - - - -
Real estate mortgage loans................ - 1 - - -
Installment loans to individuals.......... 6 10 3 16 17
- -- - -- --
Total recoveries............................ 6 16 3 16 17
- -- - -- --
Net charge-offs/(recoveries) for the period 89 62 96 (8) 9
Provision for loan losses................... 92 105 54 16 14
== === == == ==
Allowance for loan losses, end of period.... $ 239 236 193 235 211
=========== === === === ===
Ratio of allowance for loan losses to total
net loans outstanding ..................... 1.39% 1.35% 1.16% 1.82% 1.86%
Ratio of net charge-offs/(recoveries)
during the period to average net loans
outstanding during the period.............. .52% .36% .66% (.07)% .08%
</TABLE>
51
<PAGE>
ASSET QUALITY
- -------------
At December 31, 1998, non-performing assets totaled $129,000 compared to
$141,000 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...................... $ 116 95 78 76 49
Loans past due 90 days and still accruing 13 46 22 31 70
Other real estate owned.................. - - - - -
----------- --- --- --- ---
Total non-performing assets.............. $ 129 141 100 107 119
=========== === === === ===
Total non-performing loans as a
percentage of net loans............. .76% .82% .61% .83% 1.05%
</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.
51
<PAGE>
DEPOSITS
- --------
Total deposits increased approximately $830,000 during 1998, totaling $26.9
million at December 31, 1998 versus $26.1 million at December 31, 1997. The
maturities of time deposits of $100,000 or more at December 31, 1998, are
summarized in Table 8.
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Three months or less.................. $ 355
Over three months through six months.. 411
Over six months through twelve months. 986
Over twelve months.................... -
------
Total.............................. $ 1,752
=====
At December 31, 1998, the Bank was a shareholder in the Federal Home Loan
Bank of Atlanta ("FHLBA"). There were no advances outstanding at December 31,
1998. Management anticipates 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.
52
<PAGE>
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. Although
interest bearing DDA accounts and passbook accounts are shown to reprice in a
year or less, historical experience show these deposits to be more stable over
the course of a year.
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 127.82% in 1998,
121.72% in 1997 and 119.15% 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>
Fixed rate mortgages.................. $ 504 1,015 892 5,340 7,751
Other loans.......................... 1,511 3,461 1,431 2,880 9,283
Investment securities................ 681 1,940 1,396 4,415 8,432
Interest-bearing deposits
in other banks and Federal Funds sold 1,700 - - - 1,700
----- -----
Total interest-earning assets.... 4,396 6,416 3,719 12,635 27,166
Interest-bearing liabilities:
Fixed maturity deposits.............. 11,404 1,535 902 - 13,841
DDA accounts......................... 4,953 - - - 4,953
Passbook accounts.................... 2,733 - - - 2,733
Other borrowed funds.................. 19 33 - - 52
-- -- --
Total interest-bearing liabilities.... $ 19,109 1,568 902 - 21,579
======== ===== === ======
Interest rate sensitivity gap......... (14,713) 4,848 2,817 12,635 5,587
Cumulative interest rate sensitivity gap$(14,713) (9,865) (7,048) 5,587
Cumulative interest rate sensitivity gap
to total assets................. (47.8%) (32.0%) (22.9%) 18.1%
</TABLE>
Table 10 represents the expected maturity of the investment portfolio 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.
53
<PAGE>
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>
U.S. Treasury and agencies.. $ 504 2,415 1,013 - 3,932
State, county and municipals 175 899 - 666 1,740
Equity securities........... - - - 186 186
Mortgage-backed securities.. - 24 1,150 1,400 2,574
-- -- ----- ----- -----
Total $ 679 3,338 2,163 2,252 8,432
====== ===== ===== ===== =====
</TABLE>
LIQUIDITY
- ---------
The Bank's primary sources of liquidity (funds) are deposit inflows, loan
repayments, proceeds from sales of securities, advances from the FHLBA, and
earnings from investments. Short-term deposits, particularly noninterest-bearing
checking accounts, are becoming a more significant source of liquidity than they
have been historically to the Bank. There were no advances from the FHLBA at
December 31, 1998. Advances from the FHLBA were $1.5 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. Unused borrowing capacity at December 31, 1998,
was $5,000,000. 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.
53
<PAGE>
CAPITAL RESOURCES AND DIVIDENDS
- -------------------------------
Shareholders' equity at December 31, 1998, increased 7.98% from December
31, 1997. This growth resulted from 1998 earnings and the increase in unrealized
gain on securities available for sale. Dividends of $37,800 or $.40 per share
were declared and paid in 1998 and 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 10.41% for 1998 and 9.63% 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 ("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
54
<PAGE>
core capital to risk adjusted total assets. Note 10 to the consolidated
financial statements presents a summary of FDICIA'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........... .84% 1.12% .99%
Return on average equity........... 8.09% 11.60% 11.16%
Dividend payout ratio.............. 14.08% 10.84% 12.42%
Average equity to average assets... 10.41% 9.63% 8.89%
PROVISION FOR INCOME TAXES
- --------------------------
The provision for income taxes was $101,000 in 1998, versus $167,000 in
1997, and $116,000 in 1996. The effective tax rates for 1998, 1997, and 1996
(tax provision as a percentage of income before taxes) were 27.4%, 32.4%, and
27.7%, respectively. These tax rates are lower than the statutory Federal tax
rate of 34% primarily due to interest income on tax exempt securities. See the
Company'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. The Company
believes the adoption of SFAS No. 133 will not have a material impact on its
financial position, results of operations or liquidity.
55
<PAGE>
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 virtually unchanged at $30.8 million,
compared to December 31, 1998. Deposits increased approximately $32,000, or less
than 1% from December 31, 1998, while net loans decreased approximately $1.8
million, or 10.6%. During the first quarter of 1999 the Bank had approximately
1.2 million in loan payoffs. Principally associated with participation loans
with other banks. These proceeds have been invested in securities, which has
caused securities to increase 23.7% from December 31, 1998. The allowance for
loan losses at March 31, 1999 totaled $258,000, representing 1.7% of total loans
compared to the December 31, 1998 total of $239,000, representing 1.4% of total
loans.
RESULTS OF OPERATIONS
- ---------------------
Net interest income decreased $49,000 for the first three months of 1999
compared to 1998. Interest income for the first three months of 1999 was
$576,000, representing a decrease of $77,000, or 11.8%, over the same period in
1998. Interest expense for the first three months of 1999 decreased
approximately $37,000, or 13.8%, compared to the same period in 1998. This
decrease in interest income and interest expense during the first three months
of 1999 compared to 1998 is primarily attributable to the decrease in interest
bearing assets and liabilities. The Company recognized a provision for loan
losses in the first three months of 1999 and 1998 of $17,000 and $15,000,
respectively. It is management's belief that the allowance for loan losses is
adequate to absorb probable losses in the loan portfolio. Noninterest income
decreased 29.0% to approximately $63,000 for the three month period ended March
31, 1999, as compared to the same period in 1998 due to a decrease in credit
life insurance income. Credit life insurance income has decreased due to the
decrease in loan production for the first quarter in 1999. Noninterest expense
for the first three months of 1999 and 1998 totaled $330,000 and $323,000,
respectively. This increase of 1.9% was due to normal salary increases.
CAPITAL RESOURCES
- -----------------
The Company 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,
The Company must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company'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 the Company 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, the Company met all capital adequacy requirements to which it is
subject. The following tables present The Company's regulatory capital position
at March 31, 1999:
56
<PAGE>
RISK-BASED CAPITAL RATIOS
- -------------------------
Tier 1 Capital .................................... 21.20%
Tier 1 Capital minimum requirement ................ 4.00%
Excess ............................................ 17.20%
Total Capital ..................................... 22.40%
Total Capital minimum requirement ................ 8.00%
Excess ............................................ 14.40%
Leverage Ratio Tier 1 Capital to adjusted
total assets ................................... 11.10%
Minimum leverage requirement ...................... 4.00%
Excess ............................................ 8.10%
57
<PAGE>
BUSINESS OF FLAG
General
FLAG is a bank holding company headquartered in LaGrange, Georgia. FLAG is
the sole stockholder of Citizens Bank, Vienna, Georgia, and First Flag Bank,
LaGrange, Georgia. Citizens Bank is a commercial bank organized under the laws
of the State of Georgia, with 14 branch offices located in 14 communities
throughout Southern Georgia. First Flag Bank is a commercial bank organized
under the laws of the State of Georgia, with five branch offices 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 million, total consolidated
deposits of $419 million, and total consolidated stockholders' equity of $48
million.
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 mergers 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 Hogansville common stock in the merger.
Directors and Executive Officers
The directors of FLAG after the merger will be:
Dennis D. Allen John S. Holle
Dr. A. Glenn Bailey James W. Johnson
Leonard H. Bateman Kelly R. Linch
H. Speer Burdette, III J. Preston Martin
Patti S. Davis J. Daniel Speight, Jr.
Fred A. Durand, III John W. Stewart, Jr.
John R. Hines, Jr. Robert W. Walters
The executive officers of FLAG after 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, Secretary,
Senior Vice President
J. Preston Martin Senior Vice President
Upon the completion of the merger of Hogansville with FLAG, John R. Hines,
Jr., President and Chairman of the Board of Hogansville, 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."
58
<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. Since July 1998, Ms. Davis has
served as Chief Financial Officer of FLAG, and since July 1999, she also has
served as Secretary 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.
59
<PAGE>
John R. Hines, Jr. Mr. Hines is President and Chairman of the Board of
Hogansville. Following the merger, Mr. Hines will serve as a member of the Board
of Directors of FLAG. Mr. Hines has served as President of The Citizens Bank
since 1971 and will continue to serve as President after the merger. Mr. Hines
is 65 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
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.
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.
60
<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 Hogansville 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
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
Hogansville combined results of operations actually would have been if the
Merger had occurred on January 1, 1996.
61
<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 Hogansville Adjustments Combined Acquisitions Adjustments Combined
---- ----------- ----------- -------- ------------ ----------- --------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 17,138 1,434 18,572 2,467 21,039
Federal funds sold 2,000 2,700 4,700 3,975 8,675
Interest bearing deposits in banks 1,039 - 1,039 4,318 5,357
Securities held to maturity 4,107 - 4,107 16,334 20,441
Securities available for sale 67,528 10,427 77,955 16,464 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 15,231 410,305 59,271 469,576
Premises and equipment 14,340 240 14,580 3,762 18,342
Other assets 19,861 768 20,629 4,075 24,704
------ --- ------ ----- ------
Total assets $ 531,514 30,800 562,314 114,737 677,051
=========== ====== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Non-interest bearing $ 44,955 5,377 50,332 4,640 54,972
Interest bearing 376,664 21,585 398,249 89,843 488,092
------- ------ ------- ------ -------
Total deposits 421,619 26,962 448,581 94,483 543,064
Accrued expenses and other liabilities 9,868 407 10,275 877 11,152
Federal Home Loan Bank Advances 47,352 - 47,352 3,000 50,352
Fed funds purchased 3,000 - 3,000 - 3,000
Other borrowed funds 1,080 - 1,080 5,729 6,809
----- ----- ----- -----
Total liabilities 482,919 27,369 510,288 104,089 614,377
----------------- ------- ------ ------- ------- -------
Shareholders' equity:
Preferred stock
Common stock 6,562 120 455 7,137 1,904 47 9,088
Capital surplus 10,500 1,925 (825) 11,600 2,370 (363) 13,607
Retained earnings 29,542 1,786 31,328 6,842 38,170
Accumulated other comprehensive
income 1,991 (30) 1,961 (92) 1,809
----- --- ----- --- -----
48,595 3,801 52,396 10,964 63,360
Less treasury stock - (370) 370 - (316) 316 -
---- --- ---- ---
Total shareholders' equity 48,595 3,431 52,026 10,648 62,990
------ ----- ------ ------ ------
Total liabilities and equity $ 531,514 30,800 562,314 114,737 677,051
========== ====== ======= ======= =======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
62
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Three Months Ended March 31, 1999
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Hogansville Adjustments Combined Acquisitions Adjustments Combined
---- ----------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 10,977 576 11,553 1,960 13,513
Interest Expense 5,119 234 5,353 1,069 6,422
----- --- ----- ----- -----
Net Interest Income 5,858 342 6,200 891 7,091
Provision for loan losses 345 17 362 18 380
--- -- --- -- ---
Net interest income after
provision for loan losses 5,513 325 5,838 874 6,712
Non interest income:
Service charges and fees 1,205 38 1,243 13 1,376
Net realized gains on
the sale of assets 581 - 581 340 921
Other 320 25 345 94 439
--- -- --- -- ---
Total non interest income 2,106 63 2,169 567 2,736
Non interest expense
Salaries and benefits 3,096 143 3,239 615 3,854
Occupancy 711 56 767 190 957
Other 2,284 131 2,415 254 2,669
----- --- ----- --- -----
Total noninterest expense 6,091 330 6,421 1,059 7,480
Income before taxes 1,528 58 1,586 382 1,968
Income tax expense 477 18 495 128 623
--- -- --- --- ---
Net Income $ 1,051 40 1,091 254 1,345
========= == ===== === =====
Net income per common
share outstanding $ .16 .42 .15 .18
========= === === ===
Weighted average outstanding shares 6,561 95 7,136 9,050
===== == ===== =====
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
63
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Year Ended December 31, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Hogansville Adjustments Combined Acquisitions Adjustments Combined
---- ----------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 44,732 2,571 47,303 7,846 55,149
Interest Expense 21,909 1,070 22,979 4,299 27,278
------ ----- ------ ----- ------
Net Interest Income 22,823 1,501 24,324 3,547 27,871
Provision for loan losses 3,382 93 3,475 41 3,516
----- -- ----- -- -----
Net interest income after
provision for loan losses 19,441 1,408 20,849 3,506 24,355
Non interest income:
Service charges and fees 4,619 173 4,792 2,441 7,233
Net realized gain on
the sale of assets 1,202 29 1,231 30 1,261
Other 1,618 66 1,684 126 1,810
----- -- ----- --- -----
Total non interest income 7,439 268 7,707 2,597 10,304
Non interest expense
Salaries and benefits 10,949 592 11,541 2,424 13,965
Occupancy 3,931 232 4,163 400 4,563
Other 9,737 481 10,218 1,483 11,701
----- --- ------ ----- ------
Total noninterest expense 24,617 1,305 25,922 4,307 30,229
Income before taxes 2,263 370 2,633 1,795 4,428
Income tax expense 303 101 404 563 967
--- --- --- --- ---
Net Income $ 1,960 269 2,229 1,232 3,461
========= === ===== ===== =====
Net income per common
share outstanding $ .30 2.84 .31 .38
========= ==== === ===
Weighted average outstanding shares 6,555 95 7,130 9,047
===== == ===== =====
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
64
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Year Ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Hogansville Adjustments Combined Acquisitions Adjustments Combined
---- ----------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 38,730 2,575 41,305 7,556 48,861
Interest Expense 18,623 1,066 19,689 3,963 23,652
------ ----- ------ ----- ------
Net Interest Income 20,107 1,508 21,615 3,593 25,208
Provision for loan losses 1,596 106 1,702 65 1,767
----- --- ----- -- -----
Net interest income after
provision for loan losses 18,511 1,402 19,913 3,528 23,441
Non interest income:
Service charges and fees 4,232 174 4,406 2,306 6,712
Net realized gains on
on the sale of assets 909 69 978 20 998
Other 1,002 63 1,065 103 1,168
----- -- ----- --- -----
Total non interest income 6,143 306 6,449 2,429 8,878
Non interest expense
Salaries and benefits 8,913 594 9,507 2,338 11,845
Occupancy 3,351 215 3,566 367 3,933
Other 6,260 383 6,643 1,390 8,033
----- --- ----- ----- -----
Total noninterest expense 18,524 1,192 19,716 4,095 23,811
Income before taxes 6,130 515 6,645 1,863 8,508
Income tax expense 1,820 167 1,987 628 2,615
----- --- ----- --- -----
Net Income $ 4,310 348 4,658 1,235 5,893
========== === ===== ===== =====
Net income per common
share outstanding $ .66 3.69 .66 .65
========= ==== === ===
Weighted average outstanding shares 6,519 95 7,094 9,048
===== == ===== =====
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
65
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Year Ended December 31, 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Hogansville Adjustments Combined Acquisitions Adjustments Combined
---- ----------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 34,608 2,467 37,075 7,112 44,187
Interest Expense 16,374 1,112 17,486 3,696 21,182
------ ----- ------ ----- ------
Net Interest Income 18,234 1,355 19,589 3,416 23,005
Provision for loan losses 4,475 54 4,529 95 4,624
----- -- ----- -- -----
Net interest income after
provision for loan losses 13,759 1,301 15,060 3,321 18,381
Non interest income:
Service charges and fees 3,802 156 3,958 2,324 6,282
Net realized gains on
the sale of assets 752 51 803 34 837
Other 662 45 707 94 801
--- -- --- -- ---
Total non interest income 5,216 252 5,468 2,453 7,920
Non interest expense
Salaries and benefits 7,553 596 8,149 2,233 10,382
Occupancy 2,660 208 2,868 369 3,237
Other 6,613 329 6,942 1,633 8,575
----- --- ----- ----- -----
Total noninterest expense 16,826 1,133 17,959 4,235 22,194
Income before taxes 2,149 420 2,569 1,539 4,107
Income tax expense 451 116 567 530 1,097
--- --- --- --- -----
Net Income $ 1,698 304 2,002 1,009 3,010
========== === ===== ===== =====
Net income per common
share outstanding $ .26 3.24 .28 .33
========== ==== === ===
Weighted average outstanding shares 6,481 94 7,052 9,013
===== == ===== =====
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
66
<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 Hogansville with and into
FLAG accounted for as a pooling of interests, based on the exchange of
6.08466 shares of FLAG Common Stock for each outstanding share of
Hogansville 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.
67
<PAGE>
STOCKHOLDER 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 release of its 1999 proxy statement to security holders, in
order to be included in FLAG's proxy statement and proxy relating to the 2000
annual meeting of stockholders. As of the date of the mailing of this Proxy
Statement/Prospectus, FLAG's 1999 proxy statement has not been completed. 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 1999 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, are included in the FLAG Annual Report
to Stockholders 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 financial statements of Hogansville 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 Porter Keadle Moore, LLP, independent certified public accountants, upon the
authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the shares of FLAG common stock to be issued in the merger
and certain tax consequences of the merger will be passed upon by Powell,
Goldstein, Frazer & Murphy LLP, Atlanta, Georgia.
68
<PAGE>
OTHER MATTERS
Management of Hogansville 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.
69
<PAGE>
TABLE OF CONTENTS
To Consolidated Financial Statements of First Hogansville Bankshares, Inc.
Page
----
Consolidated Balance Sheets as of March 31, 1999 and 1998.................. F-2
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1999 and 1998................................ F-3
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 1999 and 1998.........................F-4
Consolidated Statements of Cash Flows, March 31, 1999 and 1998...............F-5
Notes to Consolidated Financial Statements (Unaudited).......................F-6
Report of Independent Certified Public Accountants...........................F-7
Consolidated Balance Sheets, December 31, 1998 and 1997......................F-9
Consolidated Statements of Earnings, December 31, 1998, 1997 and 1996.......F-10
Consolidated Statements of Comprehensive Income,
December 31, 1998, 1997 and 1996..........................................F-12
Consolidated Statements of Changes in Shareholders' Equity,
December 31, 1998, 1997 and 1996..........................................F-13
Consolidated Statements of Cash Flows, December 31, 1998, 1997 and 1996.....F-14
Notes to Consolidated Financial Statements..................................F-16
F-1
<PAGE>
First Hogansville Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 1999 and 1998
Assets
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks ........................................... $ 1,433,999 1,564,735
Federal funds sold ................................................ 2,700,000 1,640,000
------------ ------------
Cash and cash equivalents ............................. 4,133,999 3,204,735
Securities available for sale ..................................... 10,427,320 9,670,603
Loans ............................................................. 15,230,714 17,564,738
Premises and equipment ............................................ 240,502 324,791
Other assets ...................................................... 767,938 787,712
------------ ------------
Total assets .......................................... $ 30,800,473 31,552,579
============ ============
Liabilities and Shareholders' Equity
Deposits:
Demand ........................................................ $ 5,376,797 4,610,561
Interest bearing demand ....................................... 4,959,448 5,004,811
Savings ....................................................... 2,751,039 2,871,929
Time .......................................................... 13,875,204 13,924,713
------------ ------------
Total deposits ........................................ 26,962,488 26,412,014
Advances from the FHLB ............................................ -- 1,500,000
Accrued interest payable and other liabilities .................... 407,456 375,249
------------ ------------
Total liabilities ..................................... 27,369,944 28,287,263
Shareholders' equity:
Common stock .................................................. 120,000 120,000
Capital surplus ............................................... 1,924,625 1,924,625
Retained earnings ............................................. 1,785,778 1,618,387
Treasury stock ................................................ (369,625) (369,625)
Accumulated other comprehensive income ........................ (30,249) (28,071)
------------ ------------
Total shareholders' equity ............................ 3,430,529 3,265,316
------------ ------------
Total liabilities and shareholders' equity ............ $ 30,800,473 31,552,579
</TABLE>
F-2
<PAGE>
First Hogansville Bankshares, Inc. and Subsidiary
Consolidated Statements of Earnings
For the Three Months Ended March 31, 1999 and 1998
1999 1998
---- ----
Interest income:
Loans ................................................. $413,987 476,445
Federal funds sold .................................... 33,972 27,670
Investments-taxable ................................... 101,297 127,053
Investments-nontaxable ................................ 18,080 14,184
Other interest income ................................. 8,880 8,284
-------- --------
Total interest income .......................... 576,216 653,636
Interest expense:
Deposits .............................................. 233,920 248,716
Federal Home Loan Bank advances ....................... -- 22,599
--------- --------
Total interest expense ......................... 233,920 271,315
--------- --------
Net interest income ............................ 342,296 382,321
Provision for loan losses ................................ 17,000 15,000
-------- --------
Net interest income after provision for loan loss 325,296 367,321
-------- --------
Non interest income:
Service charges and fees .............................. 38,210 46,074
Other ................................................. 24,513 42,274
-------- --------
Total non interest income ....................... 62,723 88,348
-------- --------
Non interest expense:
Salaries and benefits ................................. 143,407 149,535
Occupancy ............................................. 55,525 58,760
Other 131,374 ......................................... 114,658
-------- --------
Total noninterest expense ....................... 330,306 322,953
-------- --------
Income before taxes ............................ 57,713 132,716
Income tax expense ....................................... 17,679 43,673
-------- --------
Net earnings ................................... $ 40,034 89,043
======== ========
Basic earnings per share .................................. $ .42 .94
======== ========
Average shares outstanding ................................ 94,500 94,500
F-3
<PAGE>
First Hogansville Bankshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1999 and 1998
1999 1998
---- ----
Net earnings ................................... $ 40,034 89,043
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available for sale:
Holding gains (losses) arising during
period, net of tax of $24,438 and $7,155 (36,657) (10,733)
-------- --------
Comprehensive income ...................... $ 3,377 78,310
======== ========
F-4
<PAGE>
First Hogansville Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings ............................................ $ 40,034 89,043
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, amortization and accretion ............. 28,145 29,964
Provision for loan losses ............................ 17,000 15,000
Loss on sale of premises and equipment ............... -- (897)
Change in:
Other assets ..................................... 3,375 (52,212)
Other liabilities ................................ (12,894) (40,837)
----------- -----------
Net cash provided by operating activities ........ 75,660 40,061
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 942,301 666,607
Purchases of securities available for sale .............. (2,999,704) (500,000)
Change in loans ......................................... 1,786,408 (352,901)
----------- -----------
Net cash used in investing activities ............ (270,995) (186,294)
----------- -----------
Cash flows from financing activities:
Net change in deposits .................................. 32,465 312,471
Repayment of note payable ............................... (4,750) (4,750)
Dividends paid .......................................... (9,450) (9,450)
----------- -----------
Net cash provided by financing activities ........ 18,265 298,271
----------- -----------
Net change in cash and cash equivalents .......... (177,070) 152,038
Cash and cash equivalents at beginning of period ........... 4,311,069 3,052,697
----------- -----------
Cash and cash equivalents at end of period ................. $ 4,133,999 3,204,735
=========== ===========
</TABLE>
F-5
<PAGE>
First Hogansville Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization and Basis of Presentation
- -------------------------------------------
FirstHogansville Bankshares, Inc. (the "Company"), a bank holding company,
owns 100% of the outstanding common stock of The Citizens Bank (the
"Bank"), which operates in the Hogansville, Georgia 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>
FIRST HOGANSVILLE BANKSHARES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(with Independent Accountants' Report thereon)
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
First Hogansville Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of First
Hogansville Bankshares, Inc. and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of earnings, comprehensive income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Hogansville
Bankshares, Inc. and subsidiary 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.
Atlanta, Georgia
March 18, 1999
F-8
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks ......................................... $ 2,611,069 1,452,697
Federal funds sold .............................................. 1,700,000 1,600,000
------------ ------------
Cash and cash equivalents .................................. 4,311,069 3,052,697
------------ ------------
Securities available for sale ................................... 8,432,907 9,858,730
Loans, net ...................................................... 17,034,122 17,226,837
Premises and equipment, net ..................................... 265,671 350,404
Accrued interest receivable and other assets .................... 747,956 728,166
------------ ------------
$ 30,791,725 31,216,834
============ ============
Liabilities and Shareholders' Equity
Deposits:
Demand ........................................................ $ 5,403,628 4,120,101
Interest-bearing demand ....................................... 4,953,044 5,511,544
Savings ....................................................... 2,732,755 2,673,426
Time .......................................................... 13,840,596 13,794,472
------------ ------------
Total deposits ............................................. 26,930,023 26,099,543
Other borrowings ................................................ 52,250 1,571,250
Accrued interest payable and other liabilities .................. 372,850 363,524
------------ ------------
Total liabilities .......................................... 27,355,123 28,034,317
------------ ------------
Commitments
Shareholders' equity:
Common stock, par value $1; 1,000,000 shares authorized;
120,000 shares issued ........................................ 120,000 120,000
Capital surplus ............................................... 1,924,625 1,924,625
Retained earnings ............................................. 1,755,194 1,524,855
Accumulated other comprehensive income ........................ 6,408 (17,338)
------------ ------------
3,806,227 3,552,142
Less treasury stock, at cost; 25,500 shares ................... (369,625) (369,625)
------------ ------------
Total shareholders' equity ................................. 3,436,602 3,182,517
------------ ------------
$ 30,791,725 31,216,834
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
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 .................................. $ 1,865,535 1,865,571 1,624,827
Interest on deposits with other banks ....................... -- -- 12,209
Interest on investment securities:
Mortgage-backed securities ................................. 172,251 331,669 451,701
U.S. Treasury and government agencies ...................... 283,739 197,103 189,551
State, county and municipal ................................ 70,082 79,350 106,785
Other securities ........................................... 24,601 24,464 22,736
Interest on federal funds sold .............................. 154,016 76,525 59,522
----------- ----------- -----------
Total interest income .................................... 2,570,224 2,574,682 2,467,331
----------- ----------- -----------
Interest expense:
Interest-bearing demand deposits ............................ 129,945 144,478 150,756
Savings deposits ............................................ 76,823 76,639 76,369
Time deposits ............................................... 780,696 747,215 786,914
----------- ----------- -----------
987,464 968,332 1,014,039
Other borrowings ............................................ 82,358 98,183 97,978
----------- ----------- -----------
Total interest expense ................................... 1,069,822 1,066,515 1,112,017
----------- ----------- -----------
Net interest income ...................................... 1,500,402 1,508,167 1,355,314
Provision for loan losses ..................................... 92,500 105,500 53,660
----------- ----------- -----------
Net interest income after provision for loan losses ...... 1,407,902 1,402,667 1,301,654
----------- ----------- -----------
Other income:
Service charges on deposit accounts ......................... 172,968 173,762 156,393
Insurance commissions ....................................... 46,162 60,734 30,697
Gain (loss) on sales of investment securities ............... (17,456) 8,208 19,884
Miscellaneous ............................................... 65,922 62,640 45,413
----------- ----------- -----------
Total other income ....................................... 267,596 305,344 252,387
----------- ----------- -----------
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
Other expenses:
<S> <C> <C> <C>
Salaries and employee benefits .............................. 592,235 594,469 595,750
Occupancy and equipment ..................................... 232,247 214,960 208,366
Miscellaneous ............................................... 481,430 383,266 329,495
----------- ----------- -----------
Total other expenses ..................................... 1,305,912 1,192,695 1,133,611
----------- ----------- -----------
Earnings before income taxes ............................. 369,586 515,316 420,430
Income tax expense ............................................ 101,447 166,796 116,303
----------- ----------- -----------
Net earnings ............................................. $ 268,139 348,520 304,127
=========== =========== ===========
Net earnings per common share based on average
outstanding shares of 94,500 in 1998 and 1997
and 93,794 in 1996:
Net earnings per share ................................... $ 2.84 3.69 3.24
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
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 ................................................ $268,139 348,520 304,127
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Holding gains (losses) arising during period, net of tax
of $8,845, $24,793 and $6,899 .......................... 13,272 37,190 (10,348)
Reclassification adjustment for (gains) losses included
in net earnings, net of tax of $6,982, $3,283 and $7,954 10,474 (4,925) (11,930)
-------- -------- --------
Total other comprehensive income (loss) .................. 23,746 32,265 (22,278)
-------- -------- --------
Comprehensive income ..................................... $291,885 380,785 281,849
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
----- ------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ..... $ 120,000 1,480,000 1,347,808 (31,325) (431,250) 2,485,233
Net earnings ................... -- -- 304,127 -- -- 304,127
Dividends paid, $.40 per share . -- -- (37,800) -- -- (37,800)
Transfer of retained earnings to
capital surplus ............. -- 400,000 (400,000) -- -- --
Change in accumulated other
comprehensive income ........ -- -- -- (22,278) -- (22,278)
Sale of treasury stock ......... -- 44,625 -- -- 61,625 106,250
-------- --------- --------- ------- ------ -------
Balance, December 31, 1996 ..... 120,000 1,924,625 1,214,135 (53,603) (369,625) 2,835,532
Net earnings ................... -- -- 348,520 -- -- 348,520
Dividends paid, $.40 per share . -- -- (37,800) -- -- (37,800)
Change in accumulated other
comprehensive income ........ -- -- -- 36,265 -- 36,265
-------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ..... 120,000 1,924,625 1,524,855 (17,338) (369,625) 3,182,517
Net earnings ................... -- -- 268,139 -- -- 268,139
Dividends paid, $.40 per share . -- -- (37,800) -- -- (37,800)
Change in accumulated other
comprehensive income ........ -- -- -- 23,746 -- 23,746
-------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 ..... $ 120,000 1,924,625 1,755,194 6,408 (369,625) 3,436,602
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
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 ...................................................... $ 268,139 348,520 304,127
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation, amortization and accretion ....................... 110,945 105,640 110,292
Provision for loan losses ...................................... 92,500 105,500 53,660
Deferred income tax (benefit) .................................. (22,336) (19,820) 25,776
(Gain) loss on sales of securities ............................. 17,456 (8,208) (19,884)
Gain on sale of other real estate .............................. -- -- (4,751)
Loss on sale of premises and equipment ......................... -- -- 3,587
Change in:
Interest receivable .......................................... 29,468 (34,025) 10,059
Interest payable ............................................. 4,763 4,413 (8,155)
Other assets ................................................. (42,753) 29,650 (55,553)
Other liabilities ............................................ 4,563 131,126 (13,753)
----------- ----------- -----------
Net cash provided by operating activities ................ 462,745 662,796 405,405
----------- ----------- -----------
Cash flows from investing activities:
Purchases of securities available for sale ........................ (5,435,160) (4,168,931) (4,302,110)
Proceeds from sales of securities available for sale .............. 1,192,836 1,970,966 4,368,625
Proceeds from maturities and calls of securities available for sale 5,680,195 2,423,632 2,307,006
Proceeds from maturities and calls of securities held to maturity . -- -- 729,700
Net change in loans ............................................... 100,216 (967,563) (3,604,249)
Purchases of equipment ............................................ (16,140) (44,217) (53,470)
Proceeds from sale of other real estate ........................... -- 27,181 61,857
----------- ----------- -----------
Net cash provided (used) in investing activities ......... 1,521,947 (758,932) (492,641)
----------- ----------- -----------
Cash flows from financing activities:
Net change in deposits ............................................ 830,480 337,802 85,900
Repayment of notes payable ........................................ (19,000) (19,000) (129,000)
Proceeds from FHLB note payable ................................... -- -- 1,500,000
Repayment of FHLB note payable .................................... (1,500,000) -- (1,500,000)
Proceeds from sale of treasury stock .............................. -- -- 106,250
Dividends paid .................................................... (37,800) (37,800) (37,800)
----------- ----------- -----------
Net cash provided (used) by financing activities ......... (726,320) 281,002 25,350
----------- ----------- -----------
Net change in cash and cash equivalents ............................. 1,258,372 184,866 (61,886)
Cash and cash equivalents, beginning of year ........................ 3,052,697 2,867,831 2,929,717
----------- ----------- -----------
Cash and cash equivalents, end of year .............................. $ 4,311,069 3,052,697 2,867,831
=========== =========== ===========
</TABLE>
F-14
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
<S> <C> <C> <C>
Interest .................................................................. $1,060,038 1,064,374 1,109,449
Income taxes .............................................................. $ 262,750 98,500 111,000
Noncash investing activities:
Change in unrealized gains (losses) on securities
available for sale, net of tax ........................................... $ 23,746 36,265 (22,278)
Transfer of loans to other real estate owned .............................. $ -- 27,181 57,106
Securities transferred, at amortized cost, to
securities available for sale............................................. $ -- -- 2,026,915
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
FIRST HOGANSVILLE BANKSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Basis of Presentation and Nature of Operations
----------------------------------------------
FirstHogansville Bankshares, Inc. (the "Company"), is a one-bank holding
company whose business is conducted by its wholly-owned bank subsidiary,
The Citizens Bank (the "Bank"). The Company is regulated by the Federal
Reserve Bank and is subject to periodic examinations.
The Bank was established in 1930 and was granted a State of Georgia
commercial banking charter in 1961. It is regulated by the State of Georgia
Department of Banking and Finance and the Federal Deposit Insurance
Corporation and undergoes periodic examinations by these agencies. The Bank
provides a full range of commercial and consumer banking services in Troup,
Meriwether and Heard Counties in West Georgia.
The accounting principles followed by the Company and the Bank, 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 and the valuation of real estate acquired in
connection with or in lieu of foreclosure on loans.
The consolidated financial statements include the accounts of the Company
and the Bank. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Investment Securities
---------------------
The Company classifies its securities in one of three categories: trading,
available for sale, or held to maturity. Trading securities are bought and
held principally for sale in the near term. Held to maturity securities are
those securities for which the Company has the ability and intent to hold
the security until maturity. All other securities not included in trading
or held to maturity are classified as available for sale. At December 31,
1998 and 1997, the Company has no trading or held to maturity securities.
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 shareholders' equity
until realized. Transfers of securities between categories are recorded at
fair value at the date of transfer. Unrealized holding gains or losses
associated with transfers of securities from held to maturity to available
for sale are recorded as a separate component of shareholders' equity. The
unrealized holding gains or losses included in the separate component of
shareholders' equity for securities transferred from available for sale to
held to maturity are maintained and amortized into earnings over the
remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated security.
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.
F-16
<PAGE>
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
for securities classified as available for sale and held to maturity are
included in earnings and are derived using the specific identification
method for determining the cost of securities sold. Loans and Allowance for
Loan Losses Loans are stated at principal amount outstanding, net of the
allowance for loan losses. Interest on loans is calculated primarily by
using the simple interest method on daily balances of the principal amount
outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of the principal is
unlikely. The allowance represents an amount, which, in management's
judgement, will be adequate to absorb probable losses on existing loans
that may become uncollectible.
Management's judgement in determining the adequacy of the allowance is
based on evaluations of the collectibility of loans. These evaluations take
into consideration such factors as changes in the nature and volume of the
loan portfolio, current economic conditions that may affect the borrower's
ability to pay, overall portfolio quality, and review of specific problem
loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to recognize
additions to the allowance based on judgements different than those of
management.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or at the
loan's observable market price, or at the fair value of the collateral of
the loan if the loan is collateral dependent. A loan is 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.
Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using a combination of accelerated and
straight-line methods over the estimated useful lives of the related assets
(25 years for buildings and 3 to 10 years for furniture and equipment).
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is reflected in earnings for the period. The cost of
maintenance and repairs is charged to expense as incurred, whereas
significant renewals and improvements are capitalized.
Income Taxes
------------
The Company accounts for income taxes under the liability method. This
method requires the recognition of deferred tax assets and liabilities for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Additionally, this method requires the
recognition of future tax benefits, such as net operating loss
carryforwards, to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
the assets and liabilities are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date.
F-17
<PAGE>
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities result 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 for the portion of the deferred
tax asset when it is more likely than not that some portion or all of the
deferred tax asset will not be realized. In assessing the realizability of
the deferred tax assets, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax planning
strategies. Net Earnings Per Common Share Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" specifies the computation,
presentation and disclosure requirements for earnings per share and is
designed to simplify previous earnings per share standards and to make
domestic and international practices more compatible. Basic earnings per
common share are based on the weighted average number of common shares
outstanding during the period while the effects of potential common shares
outstanding during the period such as options, convertible securities and
warrants are included in diluted earnings per share. The Company has no
potential common shares and correspondingly, earnings per share amounts for
all years presented are based on the weighted average number of common
shares outstanding.
Comprehensive Income
--------------------
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS 130 established standards for the
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company has elected to
present comprehensive income in a separate consolidated statement of
comprehensive income. Accumulated other comprehensive income is solely
related to the net of tax effect of unrealized gains and losses on
securities available for sale.
Recent Accounting Pronouncements
--------------------------------
In 1998, the Financial Accounting Standards Board issued 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. The accounting for the
changes in the fair value of a derivative depends on the intended use of
the derivative instrument at inception. Instruments used as fair value
hedges account for the change in fair value in the earnings of the period
simultaneous with accounting for the fair value change of the item being
hedged. Cash flow hedges account for the change in fair value of the
effective portion in comprehensive income rather than earnings and foreign
currency hedges are accounted for in comprehensive income as part of the
translation adjustment. Derivative instruments that are not intended as a
hedge account for the change in fair value in the earnings of the period of
the change. 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. The Bank believes the adoption of SFAS No. 133 will not have a
material impact on its financial position, results of operations or
liquidity.
F-18
<PAGE>
(2) Investment Securities
Investment securities available for sale at December 31, 1998 and 1997 are
as follows:
December 31, 1998
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasuries and
government agencies ....... $3,894,761 37,420 -- 3,932,181
Mortgage-backed securities .. 2,609,376 18,618 54,737 2,573,257
Mutual fund investments ..... 200,007 -- 13,513 186,494
State, county and municipal . 1,709,074 41,701 9,800 1,740,975
---------- ---------- ---------- ----------
Total .................. $8,413,218 97,739 78,050 8,432,907
========== ========== ========== ==========
December 31, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasuries and
government agencies ....... $4,997,128 15,494 573 5,012,049
Mortgage-backed securities .. 3,473,122 31,717 80,708 3,424,131
Mutual fund investments ..... 200,007 -- 13,514 186,493
State, county and municipal . 1,208,359 27,849 151 1,236,057
---------- ---------- ---------- ----------
Total ....................... $9,878,616 75,060 94,946 9,858,730
========== ========== ========== ==========
Proceeds from sales of investment securities during 1998, 1997 and 1996
were $1,192,836, $1,970,966 and $4,368,625, respectively. Gross gains of
$897, $24,352 and $45,714, along with gross losses of $18,353, $16,144 and
$25,830, respectively, were realized on these sales.
Securities with a carrying value of $1,723,000 and $2,480,000 at December
31, 1998 and 1997, respectively, were pledged to secure public deposits as
required by law.
The amortized cost and estimated fair value of investment securities
available for sale at December 31, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Estimated
Cost Fair Value
---- ----------
U.S. Treasuries and
U.S. government agencies:
Within 1 year ................................. $ 500,918 504,687
1 to 5 years .................................. 2,397,745 2,414,857
5 to 10 years ................................. 996,098 1,012,637
---------- ----------
$3,894,761 3,932,181
========== ==========
State, county and municipal:
Within 1 year ................................. $ 175,000 176,107
1 to 5 years .................................. 874,035 898,698
5 to 10 years -- --
---------- ----------
More than 10 years ............................ 660,039 666,170
---------- ----------
$1,709,074 1,740,975
========== ==========
F-19
<PAGE>
Total securities other than mortgage-backed
securities and mutual fund investments:
Within 1 year ................................. $ 675,918 680,794
1 to 5 years .................................. 3,271,780 3,313,555
5 to 10 years ................................. 996,098 1,012,637
More than 10 years ............................ 660,039 666,170
Mutual fund investments .......................... 200,007 186,494
Mortgage-backed securities ....................... 2,609,376 2,573,257
---------- ----------
$8,413,218 8,432,907
========== ==========
(3) Loans
Major classifications of loans are summarized as follows:
1998 1997
----------- -----------
Commercial .................... $ 4,931,003 6,142,646
Real estate - mortgage ........ 7,751,001 7,210,585
Consumer ...................... 4,591,535 4,109,779
----------- -----------
17,273,539 17,463,010
Less: Allowance for loan losses 239,417 236,173
----------- -----------
Total net loans ............... $17,034,122 17,226,837
=========== ===========
The Company grants loans and extensions of credit to individuals and a
variety of firms and corporations located in Troup County, Georgia and
portions of surrounding counties. Although the Company has a diversified
loan portfolio, a substantial portion of the loan portfolio is
collateralized by improved and unimproved real estate and is dependent upon
the real estate market.
Changes in the allowance for loan losses were as follows:
1998 1997 1996
--------- --------- ---------
Balance, beginning of year ........... $ 236,173 192,974 235,368
Loans charged off .................... (95,455) (78,293) (99,419)
Recoveries ........................... 6,199 15,992 3,365
Provision charged to operating expense 92,500 105,500 53,660
--------- --------- ---------
Balance, end of year ................. $ 239,417 236,173 192,974
========= ========= =========
F-20
<PAGE>
(4) Premises and Equipment
Major classifications of premises and equipment are summarized as follows:
1998 1997 1996
---------- ---------- ----------
Land .......................... $ 5,000 5,000 5,000
Buildings ..................... 379,512 379,512 379,512
Furniture and equipment ....... 949,329 933,188 912,121
---------- ---------- ----------
1,333,841 1,317,700 1,296,633
Less: Accumulated depreciation 1,068,170 967,296 889,463
---------- ---------- ----------
$ 265,671 350,404 407,170
========== ========== ==========
Depreciation expense amounted to approximately $101,000 in 1998 and $99,800
in 1997 and 1996.
(5) Time Deposits
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $11,403,728
2000 1,269,842
2001 264,966
2002 139,526
2003 and thereafter 762,534
-----------
$13,840,596
At December 31, 1998 and 1997, the Bank had individual time deposits over
$100,000 of approximately $1,750,000 and $2,200,000, respectively.
(6) Other Borrowings
Notes payable at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
Note payable to a bank in monthly principal
installments of $1,583 through September 2001,
plus interest at the prime rate, secured by all
the stock of the Company's subsidiary ................ $ 52,250 71,250
====== ======
The Bank is party to an agreement with the Federal Home Loan Bank ("FHLB")
whereby the FHLB provides the Bank with credit facilities under varying
terms. Any amounts advanced by the FHLB are collateralized under a blanket
security lien covered by all of the Bank's 1-4 family first mortgage loans.
At December 31, 1998, the Bank had no borrowings under this agreement with
the FHLB while borrowings at December 31, 1997, were $1,500,000.
Maturities of other borrowings for future years are as follows:
1999 $19,000
2000 19,000
2001 14,250
-------
$52,250
F-21
<PAGE>
(7) Employee Benefit Plans
The Company has a noncontributory defined benefit pension plan covering
substantially all of its employees who have completed one year of service.
The Company's funding policy is to fund the maximum amount deductible for
income tax purposes. Contributions are intended to provide not only for
benefits attributed to service to date but also for those expected to be
earned in the future.
The following table sets forth the Plan's funded status and amounts
recognized in the balance sheets at December 31, 1998 and 1997. Plan assets
are stated at fair value and consist of cash, certificates of deposit,
equity and government securities. Actuarial present value of benefit
obligations:
TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Vested ................................................................ $ 430,368 334,188
Nonvested ............................................................. 5,394 2,377
--------- ---------
Total accumulated benefit obligations ......................... 435,762 336,565
========= =========
rojected benefit obligations for services rendered to date ........... 528,873 442,695
Plan assets at fair value ............................................. 714,419 619,463
--------- ---------
Assets in excess of projected benefit obligation .............. 185,546 176,768
Unamortized transition gain existing at date of adoption of SFAS No. 87 (39,570) (43,556)
Unamortized net gain from past experience different from that assumed
and effects of changes in assumptions ............................... (177,297) (159,638)
--------- ---------
Accrued pension cost .......................................... $ (31,321) (26,426)
========= =========
</TABLE>
The components of net pension cost for the years ended December 31, 1998,
1997 and 1996 are as follows:
1998 1997 1996
-------- -------- --------
Service cost for benefits earned ...............$ 22,920 21,507 22,793
Interest cost on projected benefit obligations . 33,197 39,966 36,134
Actual return on plan assets ................... (96,437) (134,873) (80,895)
Net amortization and deferral .................. 45,215 79,242 30,473
-------- -------- --------
Net pension cost ...............................$ 4,895 5,842 8,505
======== ======== ========
The following assumptions were used in determining the actuarial present
value of the projected benefit obligations at December 31, 1998, 1997 and
1996:
1998 1997 1996
------- ------- -------
Discount rate .................................. 7.00% 7.00% 7.00%
Rate of increase in future compensation levels.. 5.00% 5.00% 5.00%
Expected long-term rate of return on assets .... 8.25% 8.25% 8.50%
F-22
<PAGE>
The Company also has a profit sharing plan covering substantially all
employees subject to minimum service and age requirements that complies
with Section 401(k) of the Internal Revenue Code. The plan allows each
participant to purchase Company stock with the vested portion of their plan
assets and allows each participant to contribute up to 15% of their annual
salary. The Company can make contributions at the discretion of the board
of directors. The Company made matching contributions of $12,100, $9,000
and $12,100 in 1998, 1997 and 1996, respectively.
The Company also has a deferred compensation plan available to its
directors, whereby participants will forego receipt of director fees in
return for an annuity of payments to begin upon retirement. Benefits
accrued under this plan amounted to approximately $54,000, $49,500 and
$18,000 for 1998, 1997 and 1996, respectively. (8) Income Taxes The
components of income tax expense for the years ended December 31, 1997 and
1996 are as follows:
1998 1997 1996
--------- --------- ---------
Current ............................ $ 123,783 186,616 90,527
Deferred ........................... (22,336) (19,820) 25,776
--------- --------- ---------
Total income tax expense... $ 101,447 166,796 116,303
========= ========= =========
The total income tax expense as shown in the financial statements differs
from the expected income tax at the statutory rate principally because of
tax-exempt interest income and nondeductible interest expense.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1997 are
presented below:
1998 1997
--------- ---------
Deferred tax assets:
Unrealized (gain) loss on investment securities
available for sale .......................... $ (13,281) 2,549
Allowance for loan losses ........................ 65,522 64,291
State tax operating loss carryforwards and credits 22,965 30,340
Deferred compensation ............................ 125,714 98,079
Other ............................................ 981 2,230
--------- ---------
Total gross deferred tax assets ............. 201,901 197,489
Less: Valuation allowance ............................ 51,300 51,300
--------- ---------
Net deferred tax asset ...................... 150,601 146,189
Deferred tax liabilities - premises and equipment .... 26,402 28,496
--------- ---------
Net deferred tax asset ...................... $ 124,199 117,693
========= =========
F-23
<PAGE>
At December 31, 1998, the Company has remaining loss carryforwards of
approximately $150,000 for state income tax purposes, which begin to expire
in 2001 and state tax credits of approximately $26,000. The use of these
carryforwards is limited to future state taxable earnings of the Company.
The valuation allowance of $51,300 at December 31, 1998 and 1997 is
primarily due to the uncertainty regarding the future utilization of the
Company's state operating loss and tax credits carryforwards.
(9) Miscellaneous Operating Expenses
Components of other operating expense in excess of 1% interest and other
income for the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
------- ------- -------
Professional services ................. $92,056 66,614 62,338
Office supplies ....................... $52,394 47,902 47,609
Service charges ....................... $96,462 56,056 57,551
Directors fees and related compensation $78,197 61,364 28,344
(10) Commitments
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the balance sheet. The contractual amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
In some cases, the Company requires collateral or other security to support
financial instruments with credit risk.
Approximate
Contract Amount
---------------
1998 1997
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit ................$ 2,228,542 2,046,000
Standby letters of credit and
financial guarantees written ...........$ -- 50,000
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of
credit is based on management's credit evaluation. Collateral held varies
but may include unimproved and improved real estate, certificates of
deposit, or personal property.
F-24
<PAGE>
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of the
customer to a third party. Those guarantees are primarily issued to local
businesses. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company holds various types of collateral supporting those
commitments for which collateral is deemed necessary. Substantially all
standby letters of credit at December 31, 1997, were collateralized.
(11) Related Party Transactions
The Bank conducts transactions with directors and officers, including
companies in which they have beneficial interests, in the normal course of
business. Loans to executive officers and directors are made on terms
comparable to those available to other Bank customers. The following
summary reflects approximate activity for related party loans during 1998:
Beginning balance $ 501,000
New loans ....... 603,000
Repayments ...... (656,000)
---------
Ending balance .. $ 448,000
=========
The Bank had related party deposits at December 31, 1998, of approximately
$1,643,000.
(12) Shareholders' Equity and Dividend Restrictions
Dividends paid by the Bank are the primary source of funds available to the
Company for payment of dividends to its shareholders and other needs.
Banking regulations restrict the amount of dividends which the Bank may pay
without obtaining prior approval. In additional to the formal statutes and
regulations, regulatory authorities also consider the adequacy of the
Bank's total capital in relation to its assets, deposits and other such
items. Capital adequacy considerations could further limit the availability
of dividends from the Bank. At December 31, 1998, the Bank could have
declared dividends without prior approval of regulatory authorities of
approximately $136,000.
(13) Regulatory Matters
The Company and the Bank 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, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
certain adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets and of Tier 1 capital to average assets.
Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
F-26
<PAGE>
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table. Consolidated and Bank only amounts and ratios do not materially
differ.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998
Total Capital
<S> <C> <C> <C> <C> <C> <C>
(to Risk Weighted Assets) ..... $3,650,145 21.7% $1,343,482 8.0% $1,679,353 10.0%
Tier 1 Capital
(to Risk Weighted Assets) ..... $3,440,599 20.5% $ 671,741 4.0% $1,007,612 6.0%
Tier 1 Capital
(to Average Assets) ........... $3,440,599 10.8% $1,273,120 4.0% $3,536,639 5.0%
As of December 31, 1997
Total Capital
(to Risk Weighted Assets) ..... $3,477,450 17.6% $1,584,945 8.0% $1,981,180 10.0%
Tier 1 Capital
(to Risk Weighted Assets) ..... $3,241,277 16.4% $ 792,472 4.0% $1,188,708 6.0%
Tier 1 Capital
(to Average Assets) ........... $3,241,277 10.5% $1,232,989 4.0% $1,541,236 5.0%
</TABLE>
F-26
<PAGE>
(14) First Hogansville Bankshares, Inc. (Parent Company Only) Financial
Information
Balance Sheets
December 31, 1998 and 1997
Assets
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash .......................................................... $ 8,608 104,024
Investment in subsidiary ...................................... 3,444,649 3,209,999
Other assets .................................................. 35,595 --
----------- -----------
$ 3,488,852 3,314,023
=========== ===========
Liabilities and Shareholders' Equity
Other liabilities ..............................................$ -- 60,256
Note payable ................................................... 52,250 71,250
Shareholders' equity ........................................... 3,436,602 3,182,517
----------- -----------
$ 3,488,852 3,314,023
=========== ===========
</TABLE>
Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Dividends from bank subsidiary ................................ $ 61,813 63,404 71,090
Other operating expenses ...................................... (6,936) (8,569) (11,688)
----------- ----------- -----------
Earnings before income taxes and equity in
undistributed earnings of bank subsidiary ....... 54,877 54,835 59,402
Income tax benefit ............................................ 2,358 2,913 3,974
----------- ----------- -----------
Earnings before equity in undistributed earnings
of bank subsidiary .............................. 57,235 57,748 63,376
Equity in undistributed earnings of bank subsidiary ........... 210,904 290,772 240,751
----------- ----------- -----------
Net earnings .................... $ 268,139 348,520 304,127
=========== =========== ===========
</TABLE>
F-27
<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 .................................................. $ 268,139 348,520 304,127
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earning in bank subsidiary ........ (210,904) (290,772) (240,751)
Change in:
Other liabilities ...................................... (60,256) 57,023 3,233
Other assets ........................................... (35,595) -- 18,727
--------- --------- ---------
Net cash (used) provided by operating activities ... (38,616) 114,771 85,336
--------- --------- ---------
Cash flows from financing activities:
Sale of treasury stock ........................................ -- -- 106,250
Dividends paid ................................................ (37,800) (37,800) (37,800)
Repayments of note payable .................................... (19,000) (19,000) (129,000)
--------- --------- ---------
Net cash used by financing activities .............. (56,800) (56,800) (60,550)
--------- --------- ---------
Net change in cash .............................................. (95,416) 57,971 24,786
Cash at beginning of year ....................................... 104,024 46,053 21,267
--------- --------- ---------
Cash at end of year ............................................. $ 8,608 104,024 46,053
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the yearfor:
Interest .................................................... $ 4,921 6,554 10,723
Income taxes ................................................ $ 262,750 98,500 111,000
Supplemental disclosure of noncash investing activities:
Change in unrealized gains (losses) on securities available for
for sale of Bank subsidiary, net of tax ..................... $ 23,746 36,265 (22,278)
</TABLE>
(15) Proposed Merger
During February 1999, the Board of directors of the Company approved a
merger agreement between the Company and FLAG Financial Corporation
("FLAG") whereby all of the Company's outstanding common stock would be
acquired by FLAG in a business combination, accounted for as a pooling of
interests. FLAG, a multi-bank holding company, headquartered in LaGrange,
Georgia, is the parent company of First FLAG Bank LaGrange (formerly First
Federal Savings Bank of LaGrange) and Citizens Bank, Vienna, Georgia.
Pursuant to the merger agreement, each share of the Company's common stock
will be converted into approximately 6.08 shares of FLAG common stock. The
merger agreement is subject to approval of regulatory authorities and the
Company's shareholders.
F-28
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN FLAG FINANCIAL CORPORATION
AND FIRST HOGANSVILLE BANKSHARES, INC.
DATED AS OF JUNE 1, 1999
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
DATED AS OF JULY 28, 1999
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FLAG FINANCIAL CORPORATION
AND
FIRST HOGANSVILLE BANKSHARES, INC.
Dated as of June 1, 1999
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS..............................................................IV
AGREEMENT AND PLAN OF MERGER...................................................1
ARTICLE 1. TRANSACTIONS AND TERMS OF THE MERGER.........................1
1.1 MERGER................................................................1
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................................................................2
2.3 DIRECTORS AND OFFICERS................................................2
ARTICLE 3. MANNER OF CONVERTING SHARES..................................3
3.1 CONVERSION OF SHARES..................................................3
3.2 ANTI-DILUTION PROVISIONS..............................................3
3.3 SHARES HELD BY HOGANSVILLE OR FLAG....................................3
3.4 DISSENTING SHAREHOLDERS...............................................3
3.5 FRACTIONAL SHARES.....................................................4
ARTICLE 4. EXCHANGE OF SHARES...........................................4
4.1 EXCHANGE PROCEDURES...................................................4
4.2 RIGHTS OF FORMER SHAREHOLDERS OF HOGANSVILLE..........................5
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF HOGANSVILLE................6
5.1 ORGANIZATION, STANDING, AND POWER.....................................6
5.2 AUTHORITY OF HOGANSVILLE; NO BREACH BY AGREEMENT......................6
5.3 CAPITAL STOCK.........................................................7
5.4 HOGANSVILLE SUBSIDIARIES..............................................7
5.5 FINANCIAL STATEMENTS..................................................8
5.6 ABSENCE OF UNDISCLOSED LIABILITIES....................................8
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS..................................9
5.8 TAX MATTERS...........................................................9
5.9 ALLOWANCE FOR POSSIBLE LOAN LOSSES...................................10
5.10 ASSETS...............................................................11
5.11 INTELLECTUAL PROPERTY................................................11
5.12 ENVIRONMENTAL MATTERS................................................12
5.13 COMPLIANCE WITH LAWS.................................................13
5.14 IMMIGRATION MATTERS..................................................13
5.15 LABOR RELATIONS......................................................14
5.16 EMPLOYEE BENEFIT PLANS...............................................14
5.17 MATERIAL CONTRACTS...................................................16
5.18 LEGAL PROCEEDINGS....................................................17
5.19 REPORTS..............................................................17
5.20 STATEMENTS TRUE AND CORRECT..........................................17
5.21 ACCOUNTING, TAX AND REGULATORY MATTERS...............................18
5.22 CHARTER PROVISIONS...................................................18
5.23 BOARD RECOMMENDATION.................................................18
5.24 Y2K..................................................................18
i
<PAGE>
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF FLAG......................19
6.1 ORGANIZATION, STANDING, AND POWER....................................19
6.2 AUTHORITY OF FLAG; NO BREACH BY AGREEMENT............................19
6.3 CAPITAL STOCK........................................................20
6.4 FLAG SUBSIDIARIES....................................................20
6.5 SEC FILINGS, FINANCIAL STATEMENTS....................................21
6.6 ABSENCE OF UNDISCLOSED LIABILITIES...................................22
6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS.................................22
6.8 TAX MATTERS..........................................................22
6.9 ALLOWANCE FOR POSSIBLE LOAN LOSSES...................................24
6.10 ASSETS...............................................................24
6.11 INTELLECTUAL PROPERTY................................................25
6.12 ENVIRONMENTAL MATTERS................................................25
6.13 COMPLIANCE WITH LAWS.................................................26
6.14 LABOR RELATIONS......................................................26
6.15 EMPLOYEE BENEFIT PLANS...............................................27
6.16 MATERIAL CONTRACTS...................................................28
6.17 LEGAL PROCEEDINGS....................................................29
6.18 REPORTS..............................................................29
6.19 STATEMENTS TRUE AND CORRECT..........................................30
6.20 ACCOUNTING TAX AND REGULATORY MATTERS................................30
6.21 CHARTER PROVISIONS...................................................30
6.22 BOARD RECOMMENDATION.................................................30
6.23 Y2K..................................................................30
ARTICLE 7. CONDUCT OF BUSINESS PENDING CONSUMMATION....................31
7.1 AFFIRMATIVE COVENANTS OF HOGANSVILLE.................................31
7.2 NEGATIVE COVENANTS OF HOGANSVILLE....................................31
7.3 AFFIRMATIVE COVENANTS OF FLAG........................................33
7.4 NEGATIVE COVENANTS OF FLAG...........................................34
7.5 ADVERSE CHANGES IN CONDITION.........................................34
7.6 REPORTS..............................................................34
ARTICLE 8. ADDITIONAL AGREEMENTS.......................................34
8.1 REGISTRATION STATEMENT...............................................34
8.2 NASDAQ LISTING.......................................................35
8.3 SHAREHOLDER APPROVAL.................................................35
8.4 APPLICATIONS.........................................................35
8.5 FILINGS WITH STATE OFFICES...........................................35
8.6 AGREEMENT AS TO EFFORTS TO CONSUMMATE................................35
8.7 INVESTIGATION AND CONFIDENTIALITY....................................36
8.8 PRESS RELEASES.......................................................36
8.9 CERTAIN ACTIONS......................................................36
8.10 ACCOUNTING AND TAX TREATMENT.........................................37
8.11 CHARTER PROVISIONS...................................................37
8.12 AGREEMENTS OF AFFILIATES.............................................37
8.13 EMPLOYEE BENEFITS AND CONTRACTS......................................38
8.14 INDEMNIFICATION......................................................38
ARTICLE 9. CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE...........39
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY..............................39
9.2 CONDITIONS TO OBLIGATIONS OF FLAG....................................41
9.3 CONDITIONS TO OBLIGATIONS OF HOGANSVILLE.............................42
ARTICLE 10. TERMINATION.................................................43
ii
10.1 TERMINATION..........................................................43
10.2 EFFECT OF TERMINATION................................................44
10.3 NON-SURVIVAL OF REPRESENTATIONS AND COVENANTS........................44
ARTICLE 11. MISCELLANEOUS...............................................44
11.1 DEFINITIONS..........................................................44
11.2 EXPENSES.............................................................52
11.3 BROKERS AND FINDERS..................................................52
11.4 ENTIRE AGREEMENT.....................................................52
11.5 AMENDMENTS...........................................................53
11.6 WAIVERS..............................................................53
11.7 ASSIGNMENT...........................................................53
11.8 NOTICES..............................................................53
11.9 GOVERNING LAW........................................................54
11.10 COUNTERPARTS.........................................................54
11.11 CAPTIONS, ARTICLES AND SECTIONS......................................54
11.12 INTERPRETATIONS......................................................54
11.13 ENFORCEMENT OF AGREEMENT.............................................55
11.14 SEVERABILITY.........................................................55
SIGNATURES TO AGREEMENT AND PLAN OF MERGER......................................
iii
<PAGE>
LIST OF EXHIBITS
Exhibit
Number Description
- ------ -----------
1. Form of Agreement of Affiliates of FIRST HOGANSVILLE BANKSHARES,
INC.. (ss. 8.12,ss. 9.2(f)).
2. Matters as to which Kilpatrick Stockton LLP 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 June 1, 1999, by and between FLAG FINANCIAL CORPORATION ("FLAG"), a
Georgia corporation located in LaGrange, Georgia, and FIRST HOGANSVILLE
BANKSHARES, INC.("HOGANSVILLE"), a Georgia corporation located in Hogansville,
Georgia.
Preamble
--------
The respective Boards of Directors of HOGANSVILLE 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 HOGANSVILLE by FLAG, pursuant to the merger of
HOGANSVILLE with and into FLAG. At the effective time of such merger, the
outstanding shares of the capital stock of HOGANSVILLE shall be converted into
the right to receive shares of the common stock of FLAG (except as provided
herein). As a result, shareholders of HOGANSVILLE shall become shareholders of
FLAG, and FLAG shall conduct the business and operations of HOGANSVILLE. The
transactions described in this Agreement are subject to (a) approval of the
shareholders of HOGANSVILLE, (b) approval of the Georgia Department of Banking
and Finance, (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:
ARTICLE 1.
TRANSACTIONS AND TERMS OF THE MERGER
------------------------------------
1.1 Merger.
-----------
Subject to the terms and conditions of this Agreement, at the Effective
Time, HOGANSVILLE will merge with and into FLAG in accordance with the
provisions of Section 14-2-1101 of the GBCC and with the effect provided in
Section 14-2-1106 of the GBCC (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 HOGANSVILLE and FLAG, as set forth herein.
1
<PAGE>
1.2 Time and Place of Closing.
------------------------------
The closing of the transactions contemplated hereby (the "Closing") will
take place at 9:00 A.M. on the date that the Effective Time occurs (or the
immediately preceding day if the Effective Time is earlier than 9:00 A.M.), or
at such other time as the Parties, acting through their authorized officers, may
mutually agree. The Closing shall be held at such location as may be mutually
agreed upon by the Parties.
1.3 Effective Time.
---------------------
The Merger and other transactions contemplated by this Agreement shall
become effective on the date and at the time the Certificate of Merger
reflecting the Merger shall become effective with the Secretary of State of the
State of Georgia (the "Effective Time"). Subject to the terms and conditions
hereof, unless otherwise mutually agreed upon in writing by the authorized
officers of each Party, the Parties shall use their reasonable efforts to cause
the Effective Time to occur on the fifth business day following the last to
occur of (i) the effective date (including expiration of any applicable waiting
period) of the last required Consent of any Regulatory Authority having
authority over and approving or exempting the Merger, and (ii) the earliest date
on which the shareholders of HOGANSVILLE 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.
2.3 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) John R. Hines, Jr.,
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.
2
<PAGE>
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 HOGANSVILLE, or the
shareholders of the foregoing, the shares of HOGANSVILLE 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 HOGANSVILLE Common Stock (excluding shares held by any
HOGANSVILLE 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 6.08466 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 HOGANSVILLE or FLAG.
---------------------------------------
Each of the shares of HOGANSVILLE Common Stock held by any HOGANSVILLE
Entity or by any FLAG Entity, in each case other than in a fiduciary capacity or
as a result of debts previously contracted, shall be canceled and retired at the
Effective Time and no consideration shall be issued in exchange therefor.
3.4 Dissenting Shareholders.
-----------------------------
Any holder of shares of HOGANSVILLE Common Stock who perfects his
dissenters' rights in accordance with and as contemplated by Article 13, Part 2
of Title 14 of the GBCC, 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 GBCC
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 HOGANSVILLE 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 HOGANSVILLE
Common Stock is entitled under this Article 3 (without interest) upon surrender
by such holder of the certificate or certificates representing shares of
HOGANSVILLE Common Stock held by him. 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
<PAGE>
3.5 Fractional Shares.
----------------------
Notwithst anding any other provision of this Agreement, each holder of
shares of HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Common Stock represented by Certificates that
are not registered in the transfer records of HOGANSVILLE, the consideration
provided in Section 3.1 may be issued to a transferee if the Certificates
representing such shares are delivered to the Exchange Agent, accompanied by all
documents required to evidence such transfer and by evidence satisfactory to the
Exchange Agent that any applicable stock transfer taxes have been paid. If any
Certificate shall have been lost, stolen, mislaid or destroyed, upon receipt of
(i) an affidavit of that fact from the holder claiming such Certificate to be
lost, mislaid, stolen or destroyed, (ii) such bond, security or indemnity as
FLAG and the Exchange Agent may reasonably require, and (iii) any other
documents necessary to evidence and effect the bona fide exchange thereof, the
Exchange Agent shall issue to such holder the consideration into which the
shares represented by such lost, stolen, mislaid or destroyed Certificate shall
have been converted. The Exchange Agent may establish such other reasonable and
customary rules and procedures in connection with its duties as it may deem
appropriate. After the Effective Time, each holder of shares of HOGANSVILLE
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 HOGANSVILLE 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
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of this Agreement notwithstanding, neither FLAG nor the Exchange Agent shall be
liable to a holder of HOGANSVILLE 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 HOGANSVILLE shall constitute ratification of the appointment of
the Exchange Agent.
4.2 Rights of Former Shareholders of HOGANSVILLE.
-------------------------------------------------
At the Effective Time, the stock transfer books of HOGANSVILLE shall be
closed as to holders of HOGANSVILLE Common Stock immediately prior to the
Effective Time and no transfer of HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE
in respect of such shares of HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE 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 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.
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ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF HOGANSVILLE
---------------------------------------------
HOGANSVILLE hereby represents and warrants to FLAG as follows:
5.1 Organization, Standing, and Power.
-------------------------------------------
HOGANSVILLE 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. HOGANSVILLE is duly qualified or licensed to
transact business as a foreign corporation in good standing in the United States
and foreign jurisdictions where the character of its Assets or the nature or
conduct of its business requires it to be so qualified or licensed, except for
such jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a HOGANSVILLE
Material Adverse Effect. The minute book and other organizational documents for
HOGANSVILLE have been made available to FLAG for its review and, except as
disclosed in Section 5.1 of the HOGANSVILLE 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 HOGANSVILLE; No Breach By Agreement.
------------------------------------------------------
(a) HOGANSVILLE 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 HOGANSVILLE, subject to the
approval of this Agreement by the holders of a majority of the outstanding
voting stock of HOGANSVILLE, which is the only shareholder vote required for
approval of this Agreement, and consummation of the Merger by HOGANSVILLE.
Subject to such requisite shareholder approval, this Agreement represents a
legal, valid, and binding obligation of HOGANSVILLE, enforceable against
HOGANSVILLE 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 HOGANSVILLE,
nor the consummation by HOGANSVILLE of the transactions contemplated hereby, nor
compliance by HOGANSVILLE with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of HOGANSVILLE's Articles of
Incorporation or Bylaws, or the Charter, Articles of Incorporation, or Bylaws of
any HOGANSVILLE Subsidiary or any resolution adopted by the board of directors
or the shareholders of any HOGANSVILLE Entity, or (ii) except as disclosed in
Section 5.2 of the HOGANSVILLE Disclosure Memorandum, constitute or result in a
Default under, or require any Consent pursuant to, or result in the creation of
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any Lien on any Asset of any HOGANSVILLE Entity under, any Contract or Permit of
any HOGANSVILLE Entity, where such Default or Lien, or any failure to obtain
such Consent, is reasonably likely to have, individually or in the aggregate, a
HOGANSVILLE Material Adverse Effect, or (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 HOGANSVILLE Entity or
any of their respective material Assets (including any FLAG Entity or any
HOGANSVILLE Entity becoming subject to or liable for the payment of any Tax on
any of the Assets owned by any FLAG Entity or any HOGANSVILLE Entity being
reassessed or revalued by any Taxing authority).
(c) Other than in connection or compliance with the provisions of
applicable federal banking laws, and other than Consents required from
Regulatory Authorities, and other than notices to or filings with the Internal
Revenue Service or the Pension Benefit Guaranty Corporation with respect to any
employee benefit plans, or under the HSR Act, and other than Consents, filings,
or notifications which, if not obtained or made, are not reasonably likely to
have, individually or in the aggregate, a HOGANSVILLE Material Adverse Effect,
no notice to, filing with, or Consent of, any public body or authority is
necessary for the consummation by HOGANSVILLE 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
HOGANSVILLE consists of 1,000,000 shares of HOGANSVILLE Common Stock of which
94,500 shares are issued and outstanding. All of the issued and outstanding
shares of capital stock of HOGANSVILLE are duly and validly issued and
outstanding and are fully paid and nonassessable under the GBCC. None of the
outstanding shares of capital stock of HOGANSVILLE has been issued in violation
of any preemptive rights of the current or past shareholders of HOGANSVILLE.
(b) Except as set forth in Section 5.3(a), or as disclosed in Section
5.3(b) of the HOGANSVILLE Disclosure Memorandum, there are no shares of capital
stock or other equity securities of HOGANSVILLE outstanding and no outstanding
Equity Rights relating to the capital stock of HOGANSVILLE.
5.4 HOGANSVILLE Subsidiaries.
------------------------------
HOGANSVILLE has disclosed in Section 5.4 of the HOGANSVILLE Disclosure
Memorandum all of the HOGANSVILLE 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 HOGANSVILLE 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
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HOGANSVILLE Disclosure Memorandum, HOGANSVILLE or one of its wholly-owned
Subsidiaries owns all of the issued and outstanding shares of capital stock (or
other equity interests) of each HOGANSVILLE Subsidiary. No capital stock (or
other equity interest) of any HOGANSVILLE Subsidiary is or may become required
to be issued (other than to another HOGANSVILLE Entity) by reason of any Equity
Rights, and there are no Contracts by which any HOGANSVILLE Subsidiary is bound
to issue (other than to another HOGANSVILLE Entity) additional shares of its
capital stock (or other equity interests) or Equity Rights or by which any
HOGANSVILLE Entity is or may be bound to transfer any shares of the capital
stock (or other equity interests) of any HOGANSVILLE Subsidiary (other than to
another HOGANSVILLE Entity). There are no Contracts relating to the rights of
any HOGANSVILLE Entity to vote or to dispose of any shares of the capital stock
(or other equity interests) of any HOGANSVILLE Subsidiary. All of the shares of
capital stock (or other equity interests) of each HOGANSVILLE Subsidiary held by
a HOGANSVILLE 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
HOGANSVILLE Entity free and clear of any Lien. Except as disclosed in Section
5.4 of the HOGANSVILLE Disclosure Memorandum, each HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect. Each HOGANSVILLE 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 HOGANSVILLE Subsidiary have
been made available to FLAG for its review, and, except as disclosed in Section
5.4 of the HOGANSVILLE 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 HOGANSVILLE Financial Statements (including, in each case, any
related notes) was prepared in accordance with GAAP applied on a consistent
basis throughout the periods involved (except as may be indicated in the notes
to such financial statements), and fairly presented in all material respects the
consolidated financial position of HOGANSVILLE 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 HOGANSVILLE Entity has any Liabilities that are reasonably likely to
have, individually or in the aggregate, a HOGANSVILLE Material Adverse Effect,
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except Liabilities which are accrued or reserved against in the consolidated
balance sheets of HOGANSVILLE as of December 31, 1998, included in the
HOGANSVILLE Financial Statements or reflected in the notes thereto. No
HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Financial
Statements delivered prior to the date of this Agreement or as disclosed in
Section 5.7 of the HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect,
and (ii) HOGANSVILLE 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 HOGANSVILLE provided in
Article 7.
5.8 Tax Matters.
----------------
(a) All Tax Returns required to be filed by or on behalf of any HOGANSVILLE
Entities have been timely filed or requests for extensions have been timely
filed, granted, and, to the Knowledge of HOGANSVILLE, have not expired for such
periods, except to the extent that all such failures to file, taken together,
are not reasonably likely to have a HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect, except as reserved against in
the HOGANSVILLE Financial Statements delivered prior to the date of this
Agreement or as disclosed in Section 5.8 of the HOGANSVILLE 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 HOGANSVILLE Entities, except for
any such Liens which are not reasonably likely to have a HOGANSVILLE Material
Adverse Effect or with respect to which the Taxes are not yet due and payable.
(b) None of the HOGANSVILLE 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
HOGANSVILLE Entities for the period or periods through and including the date of
the respective HOGANSVILLE Financial Statements that has been made and is
reflected on such HOGANSVILLE Financial Statements is sufficient to cover all
such Taxes.
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(d) Deferred Taxes of HOGANSVILLE Entities have been provided for in
accordance with GAAP.
(e) Except as disclosed in Section 5.8 of the HOGANSVILLE Disclosure
Memorandum, none of the HOGANSVILLE Entities is a party to any Tax allocation or
sharing agreement and none of HOGANSVILLE 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 HOGANSVILLE) or has any Liability for Taxes
of any Person (other than HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect.
(g) Except as disclosed in Section 5.8 of the HOGANSVILLE Disclosure
Memorandum, none of the HOGANSVILLE 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 HOGANSVILLE Entities that
occurred during or after any Taxable Period in which HOGANSVILLE Entities
incurred a net operating loss that carries over to any Taxable Period ending
after December 31, 1998.
(i) No HOGANSVILLE 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 HOGANSVILLE
Entities have been or will be timely made.
5.9 Allowance for Possible Loan Losses.
----------------------------------------
The allowance for possible loan or credit losses (the "Allowance") shown on
the consolidated balance sheets of HOGANSVILLE included in the most recent
HOGANSVILLE Financial Statements dated prior to the date of this Agreement was,
and the Allowance shown on the consolidated balance sheets of HOGANSVILLE
included in the HOGANSVILLE 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
HOGANSVILLE Entities and other extensions of credit (including letters of credit
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<PAGE>
and commitments to make loans or extend credit) by HOGANSVILLE Entities as of
the dates thereof, except where the failure of such Allowance to be so adequate
is not reasonably likely to have a HOGANSVILLE Material Adverse Effect.
5.10 Assets.
------------
(a) Except as disclosed in Section 5.10 of the HOGANSVILLE Disclosure
Memorandum or as disclosed or reserved against in the HOGANSVILLE Financial
Statements delivered prior to the date of this Agreement, HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect. All
tangible properties used in the businesses of the HOGANSVILLE Entities are
usable in the ordinary course of business consistent with HOGANSVILLE's past
practices.
(b) All Assets which are material to HOGANSVILLE's business on a
consolidated basis, held under leases or subleases by any of the HOGANSVILLE
Entities, are held under valid Contracts enforceable against HOGANSVILLE 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) HOGANSVILLE Entities currently maintain the insurance policies
described in Section 5.10(c) of the HOGANSVILLE Disclosure Memorandum. None of
the HOGANSVILLE 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 HOGANSVILLE Entity under such policies.
(d) The Assets of the HOGANSVILLE Entities include all material Assets
required to operate the business of the HOGANSVILLE Entities as presently
conducted.
5.11 Intellectual Property.
---------------------------
Each HOGANSVILLE Entity owns or has a license to use all of the
Intellectual Property used by such HOGANSVILLE Entity in the ordinary course of
its business. Each HOGANSVILLE Entity is the owner of or has a license to any
Intellectual Property sold or licensed to a third party by such HOGANSVILLE
Entity in connection with such HOGANSVILLE Entity's business operations, and
such HOGANSVILLE Entity has the right to convey by sale or license any
Intellectual Property so conveyed. No HOGANSVILLE 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 HOGANSVILLE, threatened,
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which challenge the rights of any HOGANSVILLE Entity with respect to
Intellectual Property used, sold or licensed by such HOGANSVILLE Entity in the
course of its business, nor has any person claimed or alleged any rights to such
Intellectual Property. To the Knowledge of HOGANSVILLE, the conduct of the
business of the HOGANSVILLE Entities does not infringe any Intellectual Property
of any other person. Except as disclosed in Section 5.11 of the HOGANSVILLE
Disclosure Memorandum, no HOGANSVILLE 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 HOGANSVILLE Disclosure
Memorandum, to the Knowledge of HOGANSVILLE, each HOGANSVILLE 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 HOGANSVILLE
Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of HOGANSVILLE,
threatened, before any court, governmental agency, or authority or other forum
in which any HOGANSVILLE Entity or any of its Operating Properties or
Participation Facilities (or HOGANSVILLE 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
HOGANSVILLE Entity or any of its Operating Properties or Participation
Facilities or any neighboring property, except for such Litigation pending or
threatened that is not reasonably likely to have, individually or in the
aggregate, a HOGANSVILLE Material Adverse Effect, nor, to the Knowledge of
HOGANSVILLE, 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 HOGANSVILLE Material Adverse Effect.
(c) Except as disclosed in Section 5.12 of the HOGANSVILLE Disclosure
Memorandum, during the period of (i) any HOGANSVILLE Entity's ownership or
operation of any of their respective current Assets, or (ii) any HOGANSVILLE
Entity's participation in the management of any Participation Facility or any
Operating Property, to the Knowledge of HOGANSVILLE, 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 HOGANSVILLE
Material Adverse Effect. Except as disclosed in Section 5.12 of the HOGANSVILLE
Disclosure Memorandum, prior to the period of (i) any HOGANSVILLE Entity's
ownership or operation of any of their respective current properties, (ii) any
HOGANSVILLE Entity's participation in the management of any Participation
Facility or any Operating Property, to the Knowledge of HOGANSVILLE, there were
no releases, discharges, spillages, or disposals of Hazardous Material in, on,
under, or affecting any such property, Participation Facility or Operating
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Property, except such as are not reasonably likely to have, individually or in
the aggregate, a HOGANSVILLE Material Adverse Effect.
5.13 Compliance with Laws.
---- ---------------------
Each HOGANSVILLE 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 HOGANSVILLE Material Adverse
Effect, and, to the Knowledge of HOGANSVILLE, 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 HOGANSVILLE Material Adverse Effect.
Except as disclosed in Section 5.13 of the HOGANSVILLE Disclosure Memorandum,
none of the HOGANSVILLE 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, a HOGANSVILLE
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 HOGANSVILLE 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
HOGANSVILLE Material Adverse Effect, (ii) threatening to revoke any Permits, the
revocation of which is reasonably likely to have, individually or in the
aggregate, a HOGANSVILLE Material Adverse Effect, or (iii) requiring any
HOGANSVILLE 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 HOGANSVILLE Entity, true and
complete copies of all Form I-9 (Employment Eligibility Verification Forms)
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 HOGANSVILLE 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.
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(b) With respect to a former employee who has left a HOGANSVILLE Entity's
employment within three (3) years prior to Closing, the HOGANSVILLE 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 HOGANSVILLE Entity is the subject of any Litigation asserting that it or
any other HOGANSVILLE 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 HOGANSVILLE Entity to bargain with any labor
organization as to wages or conditions of employment, nor is any HOGANSVILLE
Entity party to any collective bargaining agreement, nor is there any strike or
other labor dispute involving any HOGANSVILLE Entity, pending or threatened, or
to the Knowledge of HOGANSVILLE, is there any activity involving any HOGANSVILLE
Entity's employees seeking to certify a collective bargaining unit or engaging
in any other organization activity.
5.16 Employee Benefit Plans.
-----------------------------
(a) HOGANSVILLE has disclosed in Section 5.16 of the HOGANSVILLE 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 HOGANSVILLE 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, "HOGANSVILLE Benefit Plans"). Each HOGANSVILLE
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 "HOGANSVILLE ERISA
Plan." Each HOGANSVILLE 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 "HOGANSVILLE Pension Plan." No HOGANSVILLE Pension Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect. Each HOGANSVILLE 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 HOGANSVILLE has no Knowledge of any circumstances likely to
result in revocation of any such favorable determination letter. To the
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Knowledge of HOGANSVILLE, no HOGANSVILLE Entity has engaged in a transaction
with respect to any HOGANSVILLE Benefit Plan that, assuming the taxable period
of such transaction expired as of the date hereof, would subject any HOGANSVILLE
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 HOGANSVILLE Material Adverse Effect.
(c) No HOGANSVILLE 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 HOGANSVILLE Pension Plan, (ii) no change
in the actuarial assumptions with respect to any HOGANSVILLE Pension Plan, and
(iii) no increase in benefits under any HOGANSVILLE 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 HOGANSVILLE Material Adverse Effect or
materially adversely affect the funding status of any such plan. Neither any
HOGANSVILLE Pension Plan nor any "single employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any
HOGANSVILLE Entity, or the single-employer plan of any entity which is
considered one employer with HOGANSVILLE under Section 4001 of ERISA or Section
414 of the Internal Revenue Code or Section 302 of ERISA (whether or not waived)
(an "ERISA Affiliate") has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
which is reasonably likely to have a HOGANSVILLE Material Adverse Effect. No
HOGANSVILLE Entity has provided, or is required to provide, security to a
HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Material
Adverse Effect. No HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Pension Plan or by any ERISA Affiliate within the
12-month period ending on the date hereof.
(e) Except as disclosed in Section 5.16 of the HOGANSVILLE Disclosure
Memorandum, no HOGANSVILLE Entity has any Liability for retiree health and life
benefits under any of the HOGANSVILLE Benefit Plans and there are no
restrictions on the rights of such HOGANSVILLE 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 HOGANSVILLE Material Adverse
Effect.
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(f) Except as disclosed in Section 5.16 of the HOGANSVILLE 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 HOGANSVILLE
Entity from any HOGANSVILLE Entity under any HOGANSVILLE Benefit Plan or
otherwise, (ii) increase any benefits otherwise payable under any HOGANSVILLE
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 HOGANSVILLE
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 HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Disclosure
Memorandum or otherwise reflected in the HOGANSVILLE Financial Statements, none
of the HOGANSVILLE 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
HOGANSVILLE Entity or the guarantee by any HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Entities, (v) any
Contract relating to the provision of data processing, network communication, or
other technical services to or by any HOGANSVILLE 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 HOGANSVILLE with the
SEC (assuming HOGANSVILLE 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 "HOGANSVILLE Contracts"). With respect to each
HOGANSVILLE Contract and except as disclosed in Section 5.17 of the HOGANSVILLE
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
HOGANSVILLE Entity is in Default thereunder, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, a HOGANSVILLE
Material Adverse Effect; (iii) no HOGANSVILLE Entity has repudiated or waived
any material provision of any such Contract; and (iv) no other party to any such
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Contract is, to the Knowledge of HOGANSVILLE, in Default in any respect, other
than Defaults which are not reasonably likely to have, individually or in the
aggregate, a HOGANSVILLE Material Adverse Effect, or has repudiated or waived
any material provision thereunder. Except as disclosed in Section 5.17 of the
HOGANSVILLE Disclosure Memorandum, no officer, director or employee of any
HOGANSVILLE 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 HOGANSVILLE Entity. All of the indebtedness of any
HOGANSVILLE Entity for money borrowed (excluding deposits obtained in the
ordinary course of business) is prepayable at any time by such HOGANSVILLE
Entity without penalty or premium.
5.18 Legal Proceedings
----------------------
. There is no Litigation instituted or pending or, to the Knowledge of
HOGANSVILLE, 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 HOGANSVILLE Entity, or against any director, employee or
employee benefit plan (acting in such capacity) of any HOGANSVILLE Entity, or
against any Asset, interest, or right of any of them, that is reasonably likely
to have, individually or in the aggregate, a HOGANSVILLE Material Adverse
Effect, nor are there any Orders of any Regulatory Authorities, other
governmental authorities, or arbitrators outstanding against any HOGANSVILLE
Entity, that are reasonably likely to have, individually or in the aggregate, a
HOGANSVILLE Material Adverse Effect. Section 5.18 of the HOGANSVILLE Disclosure
Memorandum contains a summary of all Litigation as of the date of this Agreement
to which any HOGANSVILLE Entity is a party and which names a HOGANSVILLE Entity
as a defendant or cross-defendant or for which, to the Knowledge of HOGANSVILLE,
any HOGANSVILLE Entity has any potential Liability.
5.19 Reports.
-------------
Since January 1, 1995, or the date of organization if later, each
HOGANSVILLE Entity has timely filed all reports and statements, together with
any amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities, except for such filings which the failure to
so file is not reasonably likely to have, individually or in the aggregate, a
HOGANSVILLE 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.
Since January 1, 1995, no HOGANSVILLE 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 HOGANSVILLE Entity to FLAG pursuant to this Agreement or any
other document, agreement, or instrument referred to herein contains or will
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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 HOGANSVILLE 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 HOGANSVILLE
Entity is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all material
respects with the provisions of applicable Law. No documents to be filed by a
HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Entity that
may be directly or indirectly acquired or controlled by them.
5.23 Board Recommendation.
--------------------------
The Board of Directors of HOGANSVILLE, 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
HOGANSVILLE Common Stock approve this Agreement.
5.24 Y2K.
---------
No HOGANSVILLE Entity has received, nor to HOGANSVILLE'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). HOGANSVILLE 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
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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 HOGANSVILLE Entity. Between the date of this Agreement and the
Effective Time, HOGANSVILLE shall use its reasonable best efforts to implement
such plan. HOGANSVILLE has formed a committee to review policies and directives
issued by Regulatory Authorities with respect to preparedness for year 2000 data
processing and other operations, and intends to implement such committee's
recommendations for ensuring compliance with such policies and directives.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF FLAG
--------------------------------------
FLAG hereby represents and warrants to HOGANSVILLE 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 HOGANSVILLE 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).
(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
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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, or (iii)
subject to receipt of the requisite Consents referred to in Section 9. 1 (b),
constitute or result in a Default under, or require any Consent pursuant to, any
Law or Order applicable to any FLAG Entity or any of their respective material
Assets (including any FLAG Entity becoming subject to or liable for the payment
of any Tax 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 HOGANSVILLE 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 HOGANSVILLE Common Stock upon consummation of the Merger will be, issued in
violation of any preemptive rights of the current or past shareholders of FLAG.
(b) Except as set forth in Section 6.3(a), or as disclosed in Section 6.3
of the FLAG Disclosure Memorandum, there are no shares of capital stock or other
equity securities of FLAG outstanding and no outstanding Equity Rights relating
to the capital stock of FLAG.
6.4 FLAG Subsidiaries.
----------------------
FLAG has disclosed in Section 6.4 of the FLAG Disclosure Memorandum all of
the FLAG Subsidiaries that are corporations (identifying its jurisdiction of
incorporation, each jurisdiction in which the character of its Assets or the
nature or conduct of its business requires it to be qualified and/or licensed to
transact business, and the number of shares owned and percentage ownership
interest represented by such share ownership) and all of the FLAG Subsidiaries
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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
HOGANSVILLE for its review, and, except as disclosed in Section 6.4 of the FLAG
Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the Board of Directors
and shareholders thereof.
6.5 SEC Filings, Financial Statements.
--------------------------------------
(a) FLAG has timely filed and made available to HOGANSVILLE 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.
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(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.
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
22
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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.
(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.
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(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.
(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.
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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
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
26
<PAGE>
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 HOGANSVILLE.
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.
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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 HOGANSVILLE 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.
(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
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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.
(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
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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
HOGANSVILLE (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
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.
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6.19 Statements True and Correct.
---------------------------------
No statement, certificate, instrument or other writing furnished or to be
furnished by any FLAG Entity to HOGANSVILLE 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.
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
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HOGANSVILLE 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. FLAG has formed a committee to
review policies and directives issued by Regulatory Authorities with respect to
preparedness for year 2000 data processing and other operations, and intends to
implement such committee's recommendations for ensuring compliance with such
policies and directives.
ARTICLE 7.
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
7.1 Affirmative Covenants of HOGANSVILLE.
-----------------------------------------
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,
HOGANSVILLE 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 HOGANSVILLE.
--------------------------------------
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,
HOGANSVILLE covenants and agrees that it will not do or agree or commit to do,
or permit any of its Subsidiaries to do or agree or commit to do, any of the
following:
(a) amend the Articles of Incorporation, Bylaws or other governing
instruments of any HOGANSVILLE entity, or
(b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of a HOGANSVILLE Entity to another HOGANSVILLE
Entity) in excess of an aggregate of $100,000 (for HOGANSVILLE Entities on a
consolidated basis) except in the ordinary course of the business of the
HOGANSVILLE Subsidiaries consistent with past practices (which shall include,
for the HOGANSVILLE 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
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imposition, on any Asset of any HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Entity, or declare or pay any dividend or make
any other distribution in respect of HOGANSVILLE's capital stock, other than
regularly scheduled quarterly dividends of $0.10 per share of HOGANSVILLE Common
Stock payable on record dates and in amounts consistent with past practices;
provided that any dividend declared or payable on the shares of HOGANSVILLE
Common Stock for the quarterly period during which the Effective Time occurs
shall, unless otherwise agreed upon in writing by FLAG and HOGANSVILLE, be
declared with a record date prior to the Effective Time only if the normal
record date for payment of the corresponding quarterly dividend to holders of
FLAG Common Stock is before the Effective Time; 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 HOGANSVILLE
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
HOGANSVILLE Common Stock or any other capital stock of any HOGANSVILLE 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
HOGANSVILLE Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of HOGANSVILLE 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
HOGANSVILLE Subsidiary (unless any such shares of stock are sold or otherwise
transferred to another HOGANSVILLE Entity); or
(f) except for loans made in the ordinary course of its business, make any
material investment, either by purchase of stock or securities, contributions to
capital, Asset transfers, or purchase of any Assets, in any Person other than a
wholly owned HOGANSVILLE 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 HOGANSVILLE Entity, except in accordance with past practice
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specifically disclosed in Section 7.2(g) of the HOGANSVILLE 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 HOGANSVILLE
Disclosure Memorandum; and enter into or amend any severance agreements with
officers of any HOGANSVILLE Entity; grant any material increase in fees or other
increases in compensation or other benefits to directors of any HOGANSVILLE
Entity except in accordance with past practice disclosed in Section 7.2(g) of
the HOGANSVILLE 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 HOGANSVILLE
Entity and any Person having a salary thereunder in excess of $50,000 per year
(unless such amendment is required by Law) that the HOGANSVILLE 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 HOGANSVILLE Entity or
terminate or withdraw from, or make any material change in or to, any existing
employee benefit plans of any HOGANSVILLE 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 HOGANSVILLE Disclosure Memorandum,
settle any Litigation involving any Liability of any HOGANSVILLE Entity for
material money damages or restrictions upon the operations of any HOGANSVILLE
Entity; or
(l) except in the ordinary course of business, enter into, modify, amend or
terminate any material Contract (including any loan Contract with an unpaid
balance exceeding $50,000) or waive, release, compromise or assign any material
rights or claims.
7.3 Affirmative Covenants of FLAG.
------------------------------------
From the date of this Agreement until the earlier of the Effective Time or
the termination of this Agreement, unless the prior written consent of
HOGANSVILLE 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.
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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
HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE agrees to give written notice promptly to the
other upon becoming aware of the occurrence or impending occurrence of any event
or circumstance relating to it or any of its Subsidiaries which (i) is
reasonably likely to have, individually or in the aggregate, a HOGANSVILLE
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 HOGANSVILLE 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.
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. HOGANSVILLE 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 HOGANSVILLE shall
make all necessary filings with respect to the Merger under the Securities Laws.
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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 HOGANSVILLE 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.
-------------------------
HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE, 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 HOGANSVILLE's shareholders,
under applicable law), and the Board of Directors and officers of HOGANSVILLE
shall use their reasonable efforts to obtain such shareholders' approval
(subject to the Board of Directors of HOGANSVILLE, 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 HOGANSVILLE
shareholders, under applicable law).
8.4 Applications.
------------------
FLAG shall promptly prepare and file, and HOGANSVILLE 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 and the Georgia Department of Banking and Finance,
seeking the requisite Consents necessary to consummate the transactions
contemplated by this Agreement. The Parties shall deliver to each other copies
of all filings, correspondence and orders to and from all Regulatory Authorities
in connection with the transactions contemplated hereby.
8.5 Filings with State Offices.
-------------------------------
Upon the terms and subject to the conditions of this Agreement, FLAG shall
cause to be filed the Certificate of Merger with the Secretary of State of the
State of Georgia.
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.
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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 a HOGANSVILLE Material Adverse Effect or
a FLAG Material Adverse Effect, as applicable.
8.8 Press Releases.
-------------------
Prior to the Effective Time, HOGANSVILLE 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 HOGANSVILLE Entity nor any Representatives thereof retained by any
HOGANSVILLE Entity shall directly or indirectly solicit any Acquisition Proposal
by any Person. Except to the extent the Board of Directors of HOGANSVILLE, 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
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HOGANSVILLE's shareholders, under applicable Law, no HOGANSVILLE 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 HOGANSVILLE 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. HOGANSVILLE 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. HOGANSVILLE 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 HOGANSVILLE Entity that may be directly or
indirectly acquired by them.
8.12 Agreements of Affiliates.
------------------------------
HOGANSVILLE has disclosed in Section 8.12 of the HOGANSVILLE Disclosure
Memorandum each Person whom it reasonably believes is an "affiliate" of
HOGANSVILLE for purposes of Rule 145 under the 1933 Act. HOGANSVILLE shall use
its reasonable efforts to cause each such Person to deliver to FLAG not later
than 30 days after the date of this Agreement a written agreement, substantially
in the form of Exhibit 1, providing that such Person will not sell, pledge,
transfer, or otherwise dispose of the shares of the HOGANSVILLE 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 HOGANSVILLE have
been published within the meaning of Section 201.01 of the SEC's Codification of
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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 HOGANSVILLE shall not be transferable until
such time as financial results covering at least 30 days of combined operations
of FLAG and HOGANSVILLE 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 HOGANSVILLE
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 HOGANSVILLE Entities employee benefits under
HOGANSVILLE's existing employee benefit and welfare plans or, (ii) if FLAG shall
determine to provide to officers and employees of the HOGANSVILLE Entities
employee benefits under other employee benefit plans and welfare plans, provide
generally to officers and employees of the HOGANSVILLE 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
HOGANSVILLE shall be treated as service under FLAG's defined benefit plan, if
any, (ii) service under any qualified defined contribution plans of HOGANSVILLE
shall be treated as service under FLAG's qualified defined contribution plans,
and (iii) service under any other employee benefit plans of HOGANSVILLE shall be
treated as service under any similar employee benefit plans maintained by FLAG.
With respect to officers and employees of the HOGANSVILLE 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 HOGANSVILLE Entities, FLAG shall cause each
comparable employee welfare benefit plan which is substituted for a HOGANSVILLE
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 HOGANSVILLE Disclosure Memorandum to FLAG between any
HOGANSVILLE Entity and any current or former director, officer, or employee
thereof, and all provisions for vested benefits or other vested amounts earned
or accrued through the Effective Time under the HOGANSVILLE Benefit Plans.
8.14 Indemnification.
---------------------
(a) Subject to the conditions set forth in paragraph (b) below, for a
period of six years after the Effective Time, FLAG shall indemnify, defend and
hold harmless each person entitled to indemnification from a HOGANSVILLE Entity
(each, an "Indemnified Party") against all Liabilities arising out of actions or
omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under Georgia Law and by HOGANSVILLE's Articles of Incorporation and Bylaws as
in effect on the date hereof, including provisions relating to advances of
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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:
(a) Shareholder Approval. The shareholders of HOGANSVILLE 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
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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, a HOGANSVILLE 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 or, in good faith,
inadvisable, the consummation of the transactions contemplated by this
Agreement.
(e) Registration Statement. The Registration Statement shall be effective
under the 1933 Act, and no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and all necessary approvals under state securities
laws or the 1933 Act or 1934 Act relating to the issuance or trading of the
shares of FLAG Common Stock issuable pursuant to the Merger shall have been
received.
(f) Nasdaq Listing. The shares of FLAG Common Stock issuable pursuant to
the Merger shall have been approved for listing on the Nasdaq National Market.
(g) Tax Matters. Each Party shall have received a written opinion of
counsel from Powell, Goldstein, Frazer & Murphy LLP, in form reasonably
satisfactory to such Parties (the "Tax Opinion"), to the effect that (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code, (ii) the exchange in the Merger of HOGANSVILLE Common
Stock for FLAG Common Stock will not give rise to gain or loss to the
shareholders of HOGANSVILLE with respect to such exchange (except to the extent
of any cash received), and (iii) neither HOGANSVILLE 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 HOGANSVILLE and FLAG
reasonably satisfactory in form and substance to such counsel.
40
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(h) Employment Matters. John R. Hines, Jr. shall have negotiated a mutually
satisfactory employment relationship with FLAG, and any agreement between Mr.
Hines and HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE set
forth in this Agreement (including the representations and warranties set forth
in Sections 5.3, 5.20 and 5.21) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a HOGANSVILLE 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 HOGANSVILLE 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. HOGANSVILLE 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
HOGANSVILLE 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 HOGANSVILLE'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 Kilpatrick
Stockton LLP, counsel to HOGANSVILLE, dated as of the Closing Date, in form
reasonably satisfactory to FLAG, as to the matters set forth in Exhibit 2.
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(e) Pooling Letters. FLAG shall have received an opinion of Porter Keadle
Moore, LLP, dated 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
HOGANSVILLE the affiliates letter referred to in Section 8.12 and Exhibit 1.
(g) Claims Letters. Each of the directors and officers of HOGANSVILLE shall
have executed and delivered to FLAG letters in substantially the form of Exhibit
3.
9.3 Conditions to Obligations of HOGANSVILLE.
---------------------------------------------
The obligations of HOGANSVILLE 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 HOGANSVILLE 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
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 HOGANSVILLE (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 HOGANSVILLE and its
counsel shall request.
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(d) Opinion of Counsel. HOGANSVILLE 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 HOGANSVILLE, 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 HOGANSVILLE, this
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) By mutual consent of FLAG and HOGANSVILLE; 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, a
HOGANSVILLE Material Adverse Effect or a FLAG Material Adverse Effect, as
applicable, on the breaching Party; or
(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 HOGANSVILLE 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, (i) 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
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Section 10.1(e), or (ii) if the failure to consummate the transactions
contemplated hereby on or before such date is caused by a breach or breaches of
this Agreement by both Parties to the Agreement.
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:
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Acquisition Proposal" with respect to a Party shall mean any tender offer
or exchange offer or any proposal for a merger, acquisition of all of the stock
or assets of, or other business combination involving the acquisition of such
Party or any of its Subsidiaries or the acquisition of a substantial equity
interest in, or a substantial portion of the assets of, such Party or any of its
Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting interest of such Person; or (iii) any other Person for which a Person
described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits, the FLAG Disclosure Memorandum and the HOGANSVILLE Disclosure
Memorandum delivered pursuant hereto and incorporated herein by reference.
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"Assets" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or contingent,
or otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, or any Affiliate of such Person and wherever located.
"Certificate of Merger" shall mean the Certificate of Merger to be executed
by FLAG and filed with the Secretary of State of the State of Georgia relating
to the Merger as contemplated by Section 1.1.
"Closing Date" shall mean the date on which the Closing occurs.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement (provided such oral
agreement is, in any one year period, in excess of $5,000 individually, or
$25,000 in the aggregate), arrangement, authorization, commitment, contract,
indenture, instrument, lease, obligation, plan, practice, restriction,
understanding, or undertaking of any kind or character, or other document to
which any Person is a party or that is binding on any Person or its capital
stock, Assets or business.
"Default" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, after
failing to cure any such breach, violation, default, contravention or conflict
within any applicable grace or cure period (ii) any occurrence of any event that
with the passage of time or the giving of notice or both would constitute a
breach or violation of, default under, contravention of, or conflict with, any
Contract, Law, Order, or Permit, or (iii) any occurrence of any event that with
or without the passage of time or the giving of notice would give rise to a
right of any Person to exercise any remedy or obtain any relief under, terminate
or revoke, suspend, cancel, or modify or change the current terms of, or
renegotiate, or to accelerate the maturity or performance of, or to increase or
impose any Liability under, any Contract, Law, Order, or Permit.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface, or subsurface strata) and which are
administered, interpreted, or enforced by the United States Environmental
Protection Agency and other federal, state and local agencies with jurisdiction
over, and including common law in respect of, pollution or protection of the
environment, including the Comprehensive Environmental Response Compensation and
Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and
other Laws relating to emissions, migrations, discharges, releases, or
threatened releases of any Hazardous Material, or otherwise relating to the
manufacture, processing, distribution use, treatment, storage, disposal,
generation, recycling, transport, or handling of any Hazardous Material.
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"Equity Rights" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, understandings, warrants, or other
binding obligations of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of a
Person or by which a Person is or may be bound to issue additional shares of its
capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exhibits 1 through 4," inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"FLAG Capital Stock" shall mean, collectively, the FLAG Common Stock, the
FLAG Preferred Stock and any other class or series of capital stock of FLAG.
"FLAG Common Stock" shall mean the $1.00 par value common stock of FLAG.
"FLAG Disclosure Memorandum" shall mean the written information entitled
"FLAG Financial Corporation Disclosure Memorandum" delivered prior to execution
of this Agreement to HOGANSVILLE describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto, unless it is clear from the
disclosure of such information that it applies to other Sections.
"FLAG Entities" shall mean, collectively, FLAG and all FLAG Subsidiaries.
"FLAG Financial Statements" shall mean 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) for each of the three fiscal years ended December 31, 1997,
1996 and 1995, as filed by FLAG in SEC Documents, and (ii) the consolidated
balance sheets of FLAG (including related notes and schedules, if any) and
related statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents filed
with respect to periods ended subsequent to December 31, 1998.
"FLAG Material Adverse Effect" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results of
operations of FLAG and its Subsidiaries, taken as a whole, or (ii) the ability
of FLAG Entities to perform their obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this Agreement,
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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 HOGANSVILLE 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).
"HOGANSVILLE Common Stock" shall mean the $1.00 par value common stock of
HOGANSVILLE.
"HOGANSVILLE Disclosure Memorandum" shall mean the written information
entitled "HOGANSVILLE 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.
"HOGANSVILLE Entities" shall mean, collectively, HOGANSVILLE and all
HOGANSVILLE Subsidiaries.
"HOGANSVILLE Financial Statements" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of HOGANSVILLE as of
December 31, 1998, and (ii) the consolidated balance sheets of HOGANSVILLE
(including related notes and schedules, if any) and related statements of
income, changes in shareholders' equity, and cash flows (including related notes
and schedules, if any) with respect to periods ended subsequent to December 31,
1998.
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"HOGANSVILLE 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 HOGANSVILLE and its Subsidiaries, taken as
a whole, or (ii) the ability of HOGANSVILLE to perform its obligations under
this Agreement or to consummate the Merger or the other transactions
contemplated by this Agreement, provided that an "HOGANSVILLE 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 HOGANSVILLE (or any of
its Subsidiaries) taken with the prior informed written Consent of FLAG in
contemplation of the transactions contemplated hereby.
"HOGANSVILLE Subsidiaries" shall mean the Subsidiaries of HOGANSVILLE,
which shall include the HOGANSVILLE Subsidiaries described in Section 5.4 and
any corporation, bank, savings association, or other organization acquired as a
Subsidiary of HOGANSVILLE in the future and held as a Subsidiary by HOGANSVILLE
at the Effective Time.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, and licenses, computer
software (including any source or object codes therefor or documentation
relating thereto), trade secrets, franchises, inventions, and other intellectual
property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Knowledge" as used with respect to a FLAG Entity (including references to
being aware of a particular matter) shall mean those facts that are known or
should reasonably have been known after due inquiry by the chairman, president,
chief financial officer, chief accounting officer, chief operating officer,
chief credit officer, general counsel, any assistant or deputy general counsel,
or any senior, executive or other vice president of such FLAG Entity.
"Knowledge" as used with respect to a HOGANSVILLE 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 HOGANSVILLE 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.
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"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.
"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.
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"Party" shall mean either HOGANSVILLE or FLAG, and "Parties" shall mean
HOGANSVILLE 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 HOGANSVILLE in connection with the transactions contemplated by this
Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the NASD, the
Federal Trade Commission, the United States Department of Justice, the Board of
the Governors of the Federal Reserve System, the Office of Thrift Supervision
(including its predecessor, the Federal Home Loan Bank Board), the Federal
Deposit Insurance Corporation, the Georgia Department of Banking and Finance,
and all other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
"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
HOGANSVILLE 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
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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.
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
Allowance Section 5.
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)
HOGANSVILLE Benefit Plans Section 5.16(a)
HOGANSVILLE Contracts Section 5.17
HOGANSVILLE ERISA Plan Section 5.16(a)
HOGANSVILLE Pension Plan Section 5.16(a)
Indemnified Party Section 8.14(a)
Merger Section 1.1
Tax Opinion Section 9.1(g)
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(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), HOGANSVILLE shall pay to FLAG an amount equal to the lesser of
$100,000 or FLAG's actual out of pocket expenses incurred in connection with the
transactions contemplated by this Agreement.
(c) If this Agreement is terminated by HOGANSVILLE pursuant to Sections
10.1(b) or (c), FLAG shall pay to HOGANSVILLE an amount equal to the lesser of
$100,000 or HOGANSVILLE's actual out of pocket expenses incurred in connection
with the transactions contemplated by this Agreement.
(d) Nothing contained in this Section 11.2 shall constitute or shall be
deemed to constitute liquidated damages for the willful breach by a Party of the
terms of this Agreement or otherwise limit the rights of the nonbreaching Party.
11.3 Brokers and Finders.
----------------------------
Except as disclosed in Section 11.3 of the FLAG Disclosure Memorandum, and
except as disclosed in Section 11.3 of the HOGANSVILLE 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 HOGANSVILLE or by FLAG, each of
HOGANSVILLE 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.
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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
HOGANSVILLE Common Stock, there shall be made no amendment that, pursuant to the
GBCC, 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
HOGANSVILLE, to waive or extend the time for the compliance or fulfillment by
HOGANSVILLE 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, HOGANSVILLE, 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 HOGANSVILLE 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 HOGANSVILLE.
(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:
53
<PAGE>
HOGANSVILLE: First Hogansville Bankshares, Inc.
111 High Street
Hogansville, GA 30230-0669
Telecopy Number: (706) 637-6506
Attention: John R. Hines, Jr., President
Copy to Counsel: Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, GA 30309-4530
Telecopy Number: (404) 815-6555
Attention: Richard R. Cheatham, Esq.
FLAG: Citizens Bank
100 Union Street
P. O. Box 156
Vienna, GA 31092
Telecopy Number: (912) 268-1370
Attention: J. Daniel Speight, Jr.
Copy to Counsel: Powell Goldstein Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy Number: (404) 572-5954
Attention: Walter G. Moeling IV, Esq.
11.9 Governing Law.
---------------------
This Agreement shall be governed by and construed in accordance with the
Laws of the State of Georgia, without regard to any applicable conflicts of
Laws.
11.10 Counterparts.
-------------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed to be an original, but all of which together shall constitute
one and the same instrument.
11.11 Captions, Articles and Sections.
---------------------------------------
The captions contained in this Agreement are for reference purposes only
and are not part of this Agreement. Unless otherwise indicated, all references
to particular Articles or Sections shall mean and refer to the referenced
Articles and Sections of this Agreement.
11.12 Interpretations.
-----------------------
Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against any party, whether under any rule of construction
or otherwise. No party to this Agreement shall be considered the draftsman. The
parties acknowledge and agree that this Agreement has been reviewed, negotiated,
and accepted by all parties and their attorneys and shall be construed and
interpreted according to the ordinary meaning of the words used so as fairly to
accomplish the purposes and intentions of all parties hereto.
54
<PAGE>
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
FIRST HOGANSVILLE BANKSHARES, INC.
By: /s/John R. Hines, Jr.
---------------------
John R. Hines, Jr.
President
<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 First Hogansville Bankshares, Inc.
("HOGANSVILLE"), a Georgia 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 June 1,
1999 (the "Agreement"), by and between FLAG and HOGANSVILLE. Under the terms of
the Agreement, HOGANSVILLE will be merged with and into FLAG (the "Merger"), and
the shares of the $1.00 par value common stock of HOGANSVILLE ("HOGANSVILLE
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
HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE. 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.
Exhibit 1 - Affiliate Agreement - Page 2
<PAGE>
3. Covenants and Warranties of Undersigned. The undersigned represents,
warrants and agrees that:
(a) At any meeting of shareholders of HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE 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 HOGANSVILLE Common Stock beneficially owned by the undersigned as of the
record date for determination of shareholders entitled to vote at the
Shareholders' Meeting of HOGANSVILLE 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 3
<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 HOGANSVILLE.
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
Exhibit 1 - Affiliate Agreement - Page 4
<PAGE>
the undersigned in the event the undersigned desires to transfer any shares of
FLAG Common Stock issued to the undersigned pursuant to the Merger.
7. Transfer Under Rule 145(d). If the undersigned desires to sell or
otherwise transfer the shares of FLAG Common Stock received by him in connection
with the Merger at any time during the restrictive period set forth in Rule
145(d), the undersigned will provide the necessary representation letter to the
transfer agent for FLAG Common Stock, together with such additional information
as the transfer agent may reasonably request. If FLAG's counsel concludes that
such proposed sale or transfer complies with the requirements of Rule 145(d),
FLAG shall cause such counsel to provide such opinions as may be necessary to
FLAG's transfer agent so that the undersigned may complete the proposed sale or
transfer.
8. Certain Actions. The undersigned covenants and agrees with FLAG
that, for a period of two (2) years after the effective time of the Merger, the
undersigned shall not, without the prior written consent of FLAG, directly or
indirectly serve as a consultant to, serve as a management official of, or be or
become a major shareholder of any financial institution having an office in
Troup County, Georgia. It is expressly understood that the covenants contained
in this paragraph 8 do not apply to (i) "management official" positions which
the undersigned holds with financial institutions (other than FLAG, HOGANSVILLE,
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, HOGANSVILLE, 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.
(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.
Exhibit 1 - Affiliate Agreement - Page 5
<PAGE>
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 HOGANSVILLE 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
HOGANSVILLE 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 - Page 5
<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 KILPATRICK STOCKTON LLP WILL OPINE
1. First Hogansville Bankshares, Inc. ("HOGANSVILLE") 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 HOGANSVILLE 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 HOGANSVILLE is a
party or by which HOGANSVILLE is bound.
3. The Agreement has been duly and validly executed and delivered by HOGANSVILLE
and, assuming valid authorization, execution and delivery by FLAG, constitutes a
valid and binding agreement of HOGANSVILLE 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 HOGANSVILLE consists of 1,000,000 shares of
the HOGANSVILLE Common Stock, of which 94,500 shares were issued and outstanding
as of _______________________, 1999. The shares of the HOGANSVILLE 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 GBCC. To our knowledge, except as set forth above, or as
disclosed in Section 5.3 of the HOGANSVILLE Disclosure Memorandum, as of
______________, 1999, there were no shares of capital stock or other equity
securities of HOGANSVILLE outstanding and no outstanding Equity Rights relating
to the capital stock of HOGANSVILLE.
<PAGE>
Exhibit 3
____________________, 1999
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
RE: First Hogansville Bankshares, Inc. ("HOGANSVILLE")
Hogansville, Georgia
Ladies and Gentlemen:
This letter is delivered pursuant to Section 9.2(g) of the Agreement
and Plan of Merger, dated as of June 1, 1999, by and between FLAG Financial
Corporation and HOGANSVILLE.
In my capacity as an officer or a director of HOGANSVILLE, 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 HOGANSVILLE's Articles of
Incorporation or Bylaws as existing on the date hereof or as may be afforded by
the laws of the State of Georgia or the United States.
Very truly yours,
------------------------------------------
Signature of Officer or Director
------------------------------------------
Name of Officer or Director
------------------------------------------
Position at HOGANSVILLE
<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 First Hogansville
Bankshares, Inc., 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 First
Hogansville Bankshares, Inc. 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>
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FLAG FINANCIAL CORPORATION
AND
FIRST HOGANSVILLE BANKSHARES, INC.
(Dated June 1, 1999)
THIS AMENDMENT (the "Amendment") to the Agreement and Plan of Merger by and
between FLAG Financial Corporation ("FLAG") and First Hogansville Bankshares,
Inc. ("HOGANSVILLE"), dated June 1, 1999 (the "Agreement"), is made and entered
into this 28th 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 to accurately
reflect the total number of shares of authorized capital stock of HOGANSVILLE
and the par value per share of the stock.
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 HOGANSVILLE agree to amend the Agreement:
(1) To delete the first sentence of Section 5.3(a) of the Agreement in its
entirety and to replace it with the following sentence:
"As of the date of this Agreement, the authorized capital stock of
HOGANSVILLE consists of 100,000 shares of HOGANSVILLE Common Stock of
which 94,500 shares are issued and outstanding."
(2) To delete the definition of HOGANSVILLE Common Stock found in Section
11.1 of the Agreement in its entirety and to replace it with the
following definition:
"HOGANSVILLE Common Stock" shall mean the $10.00 par value common stock of
HOGANSVILLE.
(3) Except as hereinabove amended, the Agreement shall remain otherwise in
full force and effect.
(4) 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 by its duly authorized officers hereunto as of the day
and year first above written.
FLAG FINANCIAL CORPORATION
By: /s/ J. Daniel Speight, Jr.
---------------------------
J. Daniel Speight, Jr.
President
FIRST HOGANSVILLE BANKSHARES, INC.
By: /s/John R. Hines, Jr.
----------------------------
John R. Hines, Jr.
President
<PAGE>
APPENDIX B
DISSENTERS' RIGHTS
EXCERPTS FROM THE
GEORGIA BUSINESS CORPORATION CODE
RELATING TO DISSENTING STOCKHOLDERS
<PAGE>
GEORGIA BUSINESS CORPORATION CODE
ARTICLE 13
DISSENTERS' RIGHTS
14-2-1301. Definitions.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right
when and in the manner required by Code Sections 14-2-1320 through
14-2-1327.
(5) "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.
(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances.
(7) "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.
(8) "Shareholder" means the record shareholder or the beneficial
shareholder.
14-2-1302. Right to dissent.
(a) A record shareholder of the corporation is entitled to dissent from,
and obtain payment of the fair value of his or her 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:
(A) If approval of the shareholders of the corporation is
required for the merger by Code Section 14-2-1103 or the articles of
incorporation and the shareholder is entitled to vote on the merger;
or
(B) If the corporation is a subsidiary that is merged with its
parent under Code Section 14-2-1104;
B-1
<PAGE>
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all or substantially all of
the property of the corporation if a shareholder vote is required on the
sale or exchange pursuant to Code Section 14-2-1202, 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 will be
distributed to the shareholder 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:
(A) Alters or abolishes a preferential right of the shares;
(B) 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;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the rights 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;
(E) 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 Code Section 14-2-604; or
(F) Cancels, redeems, or repurchases all or part of the shares of
the class; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent that Article 9 of this chapter, 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) A shareholder entitled to dissent and obtain payment for his or her
shares under this article may not challenge the corporate action creating his or
her entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be no
right of dissent in favor of the holder of shares of any class or series which,
at the record date fixed to determine the shareholders entitled to receive
notice of and to vote at a meeting at which a plan of merger or share exchange
or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of
shares of the class or series are required under the plan of merger or
share exchange to accept for their shares anything except shares of the
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surviving corporation or another publicly held corporation which at the
effective date of the merger or share exchange are either listed on a
national securities exchange or held of record by more than 2,000
shareholders, except for scrip or cash payments in lieu of fractional
shares; or
(2) The articles of incorporation or a resolution of the board of
directors approving the transaction provides otherwise.
14-2-1303. Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his or her name only if he dissents with respect to all
shares beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf
asserts dissenters' rights. The rights of a partial dissenter under this Code
section are determined as if the shares as to which dissents and his or her
other shares were registered in the names of different shareholders.
14-2-1320. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Code Section
14-2-1302 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 Code Section
14-2-1322.
14-2-1321. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of his or her intent to demand payment for his or her shares if the
proposed action is effectuated; and
(2) Must not vote his or her shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of
subsection (a) of this Code section is not entitled to payment for his or her
shares under this article.
14-2-1322. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
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(b) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after the
date the notice required in subsection (a) of this Code section is
delivered; and
(4) Be accompanied by a copy of this article.
14-2-1323. Duty to demand payment.
(a) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his or her certificates in
accordance with the terms of the notice.
(b) A record shareholder who demands payment and deposits his or her shares
under subsection (a) of this Code section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(c) A record shareholder who does not demand payment or deposit his or her
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his or her shares under this article.
14-2-1324. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Code Section 14-2-1326.
(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.
14-2-1325. Offer of payment.
(a) Except as provided in Code Section 14-2-1327, within ten days of the
later of the date the proposed corporate action is taken or receipt of a payment
demand, the corporation shall offer to pay each dissenter who complied with Code
Section 14-2-1323 the amount the corporation estimates to be the fair value of
his or her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
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(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 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;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under Code
Section 14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written notice to
the corporation within 30 days after the corporation's offer, payment for his or
her shares shall be made within 60 days after the making of the offer or the
taking of the proposed corporate action, whichever is later.
14-2-1326. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation 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 Code Section 14-2-1422 and repeat the payment demand
procedure.
14-2-1327. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his or her own
estimate of the fair value of his or her shares and amount of interest due, and
demand payment of his or her estimate of the fair value of his or her shares and
interest due, if:
(1) The dissenter believes that the amount offered under Code Section
14-2-1325 is less than the fair value of his or her shares or that the
interest due is incorrectly calculated; or
(2) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the date
set for demanding payment.
(b) A dissenter waives his or her right to demand payment under this Code
section unless he notifies the corporation of his or her demand in writing under
subsection (a) of this Code section within 30 days after the corporation made or
offered payment for his or her shares.
(c) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under
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subsection (b) of Code Section 14-2-1325, and the corporation shall provide
the information to the shareholder within ten days after receipt of a
written demand for the information; and
(2) The shareholder may at any time, subject to the limitations period
of Code Section 14-2-1332, notify the corporation of his or her own
estimate of the fair value of his or her shares and the amount of interest
due and demand payment of his or her estimate of the fair value of his or
her shares and interest due.
14-2-1330. Court action.
(a) If a demand for payment under Code Section 14-2-1327 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the 60 day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving 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 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, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail and publication,
or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter, Chapter 11 of the Title 9, known as the "Georgia Civil
Practice Act," applies to any proceeding with respect to dissenters' rights
under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount which the court finds to be the fair value of his or her shares,
plus interest to the date of judgment.
14-2-1331. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the 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 Code Section
14-2-1327.
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(b) The court may also assess the fees and expenses of attorneys 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 substantially comply with the
requirements of Code Sections 14-2-1320 through 14-2-1327; 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 article.
(c) If the court finds that the services of attorneys 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 attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.
14-2-1332. Limitation of actions.
No action by any dissenter to enforce dissenters' rights shall be brought
more than three years after the corporate action was taken, regardless of
whether notice of the corporate action and of the right to dissent was given by
the corporation in compliance with the provisions of Code Section 14-2-1320 and
Code Section 14-2-1322.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The FLAG Articles and Bylaws generally provide that any director who is
deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding in which the director was made a party by reason of the
fact he is or was a director, to the fullest extent authorized by the 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, stockholders 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
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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.
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 stockholders 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 stockholders of the corporation, but no shares owned
by a director who does not qualify as a disinterested director may be voted on
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the determination. The authorization of indemnification and evaluation as to the
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
stockholders 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
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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.
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 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)
2.2 - Amendment to Agreement and Plan of Merger dated as of July 28, 1999,
by and between FLAG and Hogansville (included in Appendix A to the
Proxy Statement/Prospectus and incorporated by reference herein)
2.3 - Agreement and Plan of Merger, dated as of March 31, 1999, by and
between FLAG and Abbeville, as amended on July 22, 1999, (Incorporated
by reference herein from Appendix A of FLAG's Registration Statement
on Form S-4 (No. 333-____).
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*+
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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)*
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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 Porter Keadle Moore, LLP (with respect to financial
statements of First Hogansville Bankshares, Inc.)
23.5 - 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 Hogansville
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
II-7
<PAGE>
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's Articles of Incorporation or Bylaws,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public 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 29, 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 29, 1999.
By: /s/ Dennis D. Allen
-------------------
Dennis D. Allen
Director
By: /s/ Dr. A. Glenn Bailey
-----------------------
Dr. A. Glenn Bailey
Director
By: /s/ Leonard H. Bateman
----------------------
Leonard H. Bateman
Director
By: /s/ H. Speer Burdette, III
--------------------------
H. Speer Burdette, III
Director
<PAGE>
By: /s/ Patti S. Davis
------------------
Patti S. Davis
Director, Senior Vice President and
Chief Financial Officer (principal
financial and accounting officer)
By: /s/ Fred A. Durand, III
-----------------------
Fred A. Durand, III
Director
By: /s/ John S. Holle
-----------------
John S. Holle
Chairman of the Board and Director
By: /s/ James W. Johnson
--------------------
James W. Johnson
Director
By: /s/ Kelly R. Linch
------------------
Kelly R. Linch
Director
By: /s/ J. Preston Martin
---------------------
J. Preston Martin
Director
By: /s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President, Chief Executive Officer
and Director (principal
executive officer)
By: /s/ John W. Stewart, Jr.
------------------------
John W. Stewart, Jr.
Director
By: /s/ Robert W. Walters
---------------------
Robert W. Walters
Director
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - 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)
2.2 - Amendment to Agreement and Plan of Merger dated as of July 28, 1999,
by and between FLAG and Hogansville (included in Appendix A to the
Proxy Statement/Prospectus and incorporated by reference herein)
2.3 - Agreement and Plan of Merger, dated as of March 31, 1999, by and
between FLAG and Abbeville, as amended on July 22, 1999, (Incorporated
by reference herein from Appendix A of FLAG's Registration Statement
on Form S-4 (No. 333-____).
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*+
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*+
<PAGE>
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight, Jr. and
Citizens Bank dated November 2, 1992*+
10.8 - Director Indexed Retirement Program for Citizens Bank dated January
13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed Retirement
Program for Citizens Bank) for individuals listed on exhibit cover
page*+
10.10- Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Director Indexed Retirement Program
for Citizens Bank) for individuals listed on exhibit cover page*+
10.11- 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 Repot 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 Repot 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 Repot 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 Repot 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 Repot 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 Repot 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)*
<PAGE>
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 Porter Keadle Moore, LLP (with respect to financial
statements of First Hogansville Bankshares, Inc.)
23.5 - 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 Hogansville
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.
<PAGE>
+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 30, 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 575,000 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 First Hogansville Bankshares, Inc.
("Hogansville") with FLAG (the "Merger").
The Merger is intended to be effected pursuant to an Agreement and Plan of
Merger (the "Agreement") dated as of June 1, 1999 between FLAG and Hogansville.
Pursuant to the Agreement, each outstanding share of $10.00 par value common
stock of Hogansville (other than shares held by FLAG, Hogansville or their
subsidiaries or by stockholders who perfect dissenters' rights) will be
converted into and exchanged for the right to receive 6.08466 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 Hogansville 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 Hogansville 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 30, 1999
FLAG Financial Corporation
100 Union Street
P.O. Box 156
Vienna, Georgia 31092
Attention: J. Daniel Speight, Jr.
First Hogansville Bankshares, Inc.
111 High Street
Hogansville, Georgia 30230-0669
Attention: John R. Hines, Jr.
Re: Merger of First Hogansville Bankshares Inc. 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 First Hogansville Bankshares, Inc., a corporation organized
and existing under the laws of the State of Georgia ("Hogansville"), with and
into FLAG Financial Corporation, a corporation organized and existing under the
laws of the State of Georgia ("FLAG"), with FLAG as the surviving entity, in
accordance with that certain Agreement and Plan of Merger (the "Merger
Agreement") dated June 1, 1999, 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 Hogansville and
FLAG that have been delivered to the undersigned and incorporated
herein by reference; and
(c) The Registration Statement on Form S-4 dated July 30, 1999
containing the Proxy Statement/Prospectus for FLAG and the Proxy
Statement/Prospectus for Hogansville.
(d) 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
Hogansville 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
Hogansville 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 Hogansville
stockholders in lieu of the issuance of fractional shares of FLAG stock will not
exceed fifty percent (50%) of the sum of the total value of all of the formerly
outstanding shares of Hogansville stock as of the time of the Merger and the
total value of any Hogansville stock purchased by FLAG (or a person related to
FLAG within the meaning of Treasury Regulation Section 1.368-1(e)(2)) prior to,
but in contemplation 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
Hogansville stockholders upon the exchange of shares of Hogansville
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. Hogansville stockholders that receive FLAG stock, including fractional
shares, will have a basis in that FLAG stock, including basis
allocable to any fractional shares, equal to their basis in the
Hogansville stock surrendered therefore. Code Section 358(a)(1).
d. The holding period of the FLAG stock received by Hogansville
stockholders will include the period during which the Hogansville
stockholders held the Hogansville stock surrendered therefore,
provided the Hogansville stock was held as a capital asset as of the
time of the Merger. Code Section 1223(1).
<PAGE>
e. Hogansville stockholders who receive solely cash pursuant to their
statutory right to dissent will be treated as having received such
payment in redemption of their Hogansville stock, as provided in Code
Section 302(a). Generally, any gain or loss recognized by any such
Hogansville stockholder will be capital gain or loss, provided (i) the
Hogansville common stock constitutes a capital asset in the hands of
such stockholder, and (ii) the requirements of one of Sections
302(b)(1), (2) or (3) of the Code are met. Each affected Hogansville
stockholder should consult such stockholder'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 Hogansville 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. No gain or loss will be recognized by FLAG as a consequence of the
Merger. Code Section 1032(a).
h. FLAG's basis in the assets received from Hogansville as part of the
Merger will equal Hogansville's basis in the assets immediately prior
to the Merger. Code Section 362(b).
i. The holding period of the Hogansville assets transferred to FLAG as
part of the Merger shall include the period during which such assets
were held by Hogansville, 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 Hogansville
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 Hogansville common stock as "capital assets" within
the meaning of Code Section 1221, and stockholders who acquired their shares of
Hogansville common stock pursuant to the exercise of Hogansville 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
<PAGE>
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
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 30, 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 28, 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 28, 1999
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 18, 1999, accompanying the
consolidated financial statements of First Hogansville Bankshares, Inc. and
subsidiary contained in the Registration Statement on Form S and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement on
Form S and Prospectus and to the use of our name as it appears under the caption
"Experts."
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
July 29, 1999
EXHIBIT 99.1
PROXY
FIRST HOGANSVILLE BANKSHARES, INC.
SPECIAL MEETING OF STOCKHOLDERS
The undersigned hereby constitutes and appoints John R. Hines, Jr. and
___________________, or either of them, as proxies, each with full power of
substitution, to vote the number of shares of common stock of First Hogansville
Bankshares, Inc. ("Hogansville"), a Georgia corporation, which the undersigned
would be entitled to vote if personally present at the special meeting of
Hogansville stockholders to be held at the main office of The Citizens Bank
located at 111 High Street, Hogansville, Georgia 30230, on [Wednesday, September
15,] 1999, at 2:00 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 June 1, 1999, by and between FLAG Financial Corporation
and Hogansville pursuant to which (i) Hogansville will merge with and into
FLAG, and (ii) each share of the $10.00 par value common stock of
Hogansville issued and outstanding at the effective time of the Merger will
be exchanged for 6.08466 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 STOCKHOLDER. 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 HOGANSVILLE
BANKSHARES, INC., 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/ John R. Hines, Jr.
----------------------
John R. Hines, Jr.
July 28, 1999
-------------
Date
EXHIBIT 99.3
FLAG FINANCIAL CORPORATION
ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998 (without exhibits)
<PAGE>
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-Q FOR THE QUARTER
ENDED MARCH 31, 1999
<PAGE>
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
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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
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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
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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
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FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
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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)
