SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-24532
FLAG FINANCIAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Georgia 58-2094179
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 North Greenwood Street, LaGrange, Georgia 30240
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(Address of principal executive offices)
(706) 845-5000
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(Registrant's telephone number)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act: Common Stock, $1.00 par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on March 17, 1999 was approximately
$57,003,551. There were 6,561,879 shares of Common Stock outstanding as of March
17, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 Annual Report are incorporated by reference in
Part II hereof.
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held on April 21, 1999, are incorporated by reference in Part
III hereof.
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FLAG FINANCIAL CORPORATION
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1998
Table of Contents
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Item Page
Number Number
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Part I
1. Business........................................................ 3
2. Properties....................................................... 15
3. Legal Proceedings................................................ 17
4. Submission of Matters to a Vote of Security Holders.............. 17
Part II
5. Market for Registrant's Common Stock and Related Shareholder
Matters......................................................... 18
6. Selected Financial Data......................................... 18
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 18
7A. Quantitative and Qualitative Disclosures about Market Risk...... 18
8. Financial Statements and Supplementary Data .................... 18
9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 19
Part III
10. Directors and Executive Officers of the Registrant ............. 19
11. Executive Compensation.......................................... 19
12. Security Ownership of Certain Beneficial Owners and Management.. 19
13. Certain Relationships and Related Transactions.................. 20
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PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 20
Signatures................................................... 24
Index of Exhibits ........................................... 26
ii
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PART I
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ITEM 1. BUSINESS
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. These forward-looking statements may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements. The Company's actual results may differ materially
from the results anticipated in these forward-looking statements due to a
variety of factors, including, without limitation:
(1) The effects of future economic conditions;
(2) Governmental monetary and fiscal policies, as well as legislativ
and regulatory changes;
(3) The risks of changes in interest rates on the level and composition of
deposits, loan demand, and the values of loan collateral, securitie
and interest rate protection agreements, as well as interest rate
risks;
(4) The effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the
Company's market area and elsewhere, including institutions operating
locally, regionally, nationally and internationally, together with
such competitors offering banking products and services by mail,
telephone, and computer and the Internet; and
(5) The failure of assumptions underlying the establishment of reserves
for possible loan losses and estimations of values of collateral and
various financial assets and liabilities.
All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these cautionary
statements.
The Company
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FLAG Financial Corporation (the "Company") is a multi-bank holding
company headquartered in LaGrange, Georgia and is registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The Company is the sole
shareholder of First Flag Bank, formerly known as First Federal Savings Bank of
LaGrange, and Citizens Bank (collectively, the "Banks").
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The Company was incorporated under the laws of the State of Georgia on
February 9, 1993 at the direction of First Flag Bank for the purpose of becoming
the holding company for First Flag Bank (the "Reorganization"). On March 1,
1994, FLAG Interim Corporation, a wholly-owned subsidiary of the Company
organized for the purpose of effecting the Reorganization, merged with and into
First Flag Bank, and the Company issued shares of its common stock to
shareholders of First Flag Bank in exchange for all of the outstanding common
stock of First Flag Bank. As a result, shareholders of First Flag Bank became
shareholders of the Company, with the same proportional interests in the Company
as they previously held in First Flag Bank (excluding the nominal effect on
their ownership interest of the exercise of dissenters' rights by certain
shareholders of First Flag Bank). Following the Reorganization, First Flag Bank
continued its business operations as a federally-chartered stock savings bank
under the same name, charter and bylaws. First Flag Bank is in the process of
converting from a federal stock savings bank to a Georgia state-chartered bank.
As a bank holding company, the Company facilitates the Banks' abilities
to serve their customers' requirements for financial services. The holding
company structure permits diversification by the Company into a broader range of
financial services and other business activities than currently are permitted to
the Banks under applicable law. The holding company structure also provides
greater financial and operating flexibility than is available to the Banks.
Additionally, the Articles of Incorporation and Bylaws of the Company contain
terms that provide a degree of anti-takeover protection to the Company that is
currently unavailable to the Banks and their shareholders under regulations of
the Federal Deposit Insurance Corporation (the "FDIC") and the Office of Thrift
Supervision (the "OTS"), but is permissible for the Company under Georgia law.
A substantial portion of the Company's growth has been through
acquisitions of other financial institutions. As part of its ongoing strategic
plan, the Company continually evaluates business combination opportunities and
frequently conducts due diligence activities in connection with possible
business combinations. As a result, business combination discussions, and in
some cases negotiations, frequently take place, and future business combinations
involving cash, debt or equity securities can be expected. Any future business
combination that the Company might undertake may be material, in terms of assets
acquired or liabilities assumed, to the Company's financial condition. Recent
business combinations in the banking industry have typically involved the
payment of a premium over book and market values. This practice could result in
dilution of book value and net income per share for the acquirer. It is the
Company's practice to avoid possible dilution except where projections indicate
a relatively short payback period.
2
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The Company completed a merger with Middle Georgia Bankshares, Inc. in
March 1998. Through the merger with Middle Georgia, the Company acquired
Citizens Bank, Middle Georgia's wholly-owned bank subsidiary. The Company
completed a merger with Three Rivers Bancshares, Inc. in May 1998. Three Rivers'
wholly-owned subsidiary, Bank of Milan, merged into Citizens Bank effective
January 1, 1999. The Company completed a merger with Empire Bank Corp. in
December 1998. Empire Bank Corp.'s wholly-owned subsidiary, Empire Banking
Company, merged into Citizens Bank effective January 1, 1999. The Company
acquired The Brown Bank through the merger of The Brown Bank with Citizens Bank
effective December 31, 1998.
The Company also acquired E.B.C. Financial Services, Inc. through its
merger with Empire Bank Corp. E.B.C. Financial Services, Inc. provides various
insurance products.
FLAG also provides investment and appraisal services through divisions
known as FLAG Investment Services and FLAG Appraisal Services. These services
were previously provided through First Flag Bank. In anticipation of the
conversion of First Flag Bank to a state chartered bank, these activities are
now provided by FLAG.
Citizens Bank provides technical services through a division known as
FlagTech and insurance services through a division known as Citizens Bank Agency
d/b/a Flag Insurance Services.
The Banks
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First Flag Bank. First Flag Bank, formerly known as First Federal
Savings Bank of LaGrange, is a federally chartered savings bank headquartered in
LaGrange, Troup County, Georgia with five offices in LaGrange, Georgia. First
Flag Bank was originally chartered by the State of Georgia in January 1927 under
the name "Home Building and Loan Association." First Flag Bank received its
federal charter and changed its name to "First Federal Savings and Loan
Association of LaGrange" in 1955, and at that time its deposits became insured
by the Federal Savings and Loan Insurance Corporation (the "FSLIC"). In December
1986, First Flag Bank converted from a federal mutual savings and loan
association to a federal stock savings and loan association by selling 805,000
shares of Common Stock to the public pursuant to a plan of conversion approved
by the members of the institution. In June 1989, First Flag Bank converted from
a federal stock savings and loan association to a federal stock savings bank and
changed its name to "First Federal Savings Bank of LaGrange." In December 1998,
First Flag Bank changed its name to "First Flag Bank." First Flag Bank filed an
application with the Georgia Department of Banking and Finance ("GDBF") and the
OTS to convert its charter from a federal stock savings bank to a
state-chartered bank. First Flag Bank had total assets of approximately
$260,832,699 at December 31, 1998. As of September 30, 1998, First Flag Bank was
the 5th largest of 29 thrift institutions headquartered in Georgia and the
largest financial institution headquartered in Troup County. First Flag Bank's
wholly-owned subsidiary, Piedmont Mortgage Service, Inc. is currently inactive.
Citizens Bank. Citizens Bank is a state bank organized under the laws
of the State of Georgia with banking offices in the cities of Unadilla, Vienna,
Byromville, Montezuma, Cordele, Oglethorpe, Pinehurst, Homerville, Waycross,
Milan, McRae, Cobbtown, Reidsville and Metter, Georgia. Citizens Bank was
originally chartered in 1931 and became a wholly-owned subsidiary of Middle
Georgia in 1989. On March 31, 1998, Middle Georgia merged into the Company, and
Citizens Bank became a wholly-owned subsidiary of the Company. At December 31,
1998, Citizens Bank had total assets of approximately $177,077,920.
3
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Effective December 31, 1998, The Brown Bank, with offices in Cobbtown,
Metter and Reidsville, Georgia, merged into Citizens Bank. Effective January 1,
1999, Empire Banking Company, with offices in Homerville and Waycross, Georgia,
merged into Citizens Bank. At December 31, 1998, Empire Banking Company had
approximately $69,112,755 in total assets. Effective January 1, 1999, Bank of
Milan, with offices in Milan and McRae, Georgia, merged into Citizens Bank. At
December 31, 1998, Bank of Milan had approximately $41,417,992 in total assets.
The Brown Bank, Empire Banking Company, and Bank of Milan operate as
divisions of Citizens Bank. Citizens Bank registered the names "The Brown Bank,"
"Empire Banking Company," and "Bank of Milan" as tradenames of Citizens Bank.
Citizens Bank is the sole shareholder of CB Financial Group, Inc., which is
currently inactive.
The Banks' businesses consist primarily of attracting deposits from the
general public and, with these and other funds, making residential mortgage
loans, consumer loans, commercial loans, commercial real estate loans,
residential construction loans and securities investments. In addition to
deposits, sources of funds for the Banks' loans and other investments include
amortization and prepayment of loans, loan origination and commitment fees,
sales of loans or participations in loans, fees received for servicing loans
sold to others and advances from the Federal Home Loan Bank of Atlanta
("FHLBA"). The Bank's principal sources of income are interest and fees
collected on loans, including fees received for originating and selling loans
and for servicing loans sold to others, and, to a lesser extent, interest and
dividends collected on other investments and service charges on deposit
accounts. The Bank's principal expenses are interest paid on deposits, interest
paid on FHLBA advances, employee compensation, federal deposit insurance
premiums, office expenses and other overhead expenses.
While the Banks attempt to avoid concentrations of loans to a single
industry or based on a single type of collateral, the various types of loans the
Banks make have certain risks associated with them. Consumer and commercial
loans present risks which, among other things, include fraud, bankruptcy,
economic downturn, deteriorated or non-existing collateral, changes in interest
rates and customer financial problems. Real estate loans present risks related
to, among other things, whether the builder is able to sell the property,
whether the buyer is able to obtain permanent financing and the nature of
changing economic conditions.
The Company's primary asset is its stock in the Banks. Accordingly, its
financial performance is determined primarily by the results of operations of
the Banks. For information regarding the consolidated financial condition and
results of operations of the Company as of December 31, 1998 and 1997 and for
the three years in the period ended December 31, 1998, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of the Company, and the related notes
which are incorporated by reference from the Company's 1998 Annual Report to
Shareholders. All average balances presented in this report were derived based
on monthly averages.
4
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Recent Developments
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On February 23, 1999 the Company and First Hogansville Bankshares, Inc.
executed a Letter of Intent that provides that First Hogansville will merge into
the Company. The Letter of Intent states that the Company will exchange 6.08466
shares of Company common stock for each share of First Hogansville common stock
outstanding. The Company expects to issue approximately 575,000 shares to the
First Hogansville shareholders. The parties expect the merger to be accounted
for as a pooling of interest and expect to consummate the merger in the third
quarter of 1999, subject to approval of the First Hogansville shareholders,
approval of various regulatory authorities and other customary conditions of
closing.
First Hogansville is a bank holding company located in Hogansville,
Georgia. First Hogansville is the sole shareholder of The Citizens Bank also
located in Hogansville, Georgia.
On March 12, 1999 the Company and Thomaston Federal Savings Bank
executed a Letter of Intent that provides that Thomaston will merge into a
wholly-owned subsidiary of the Company. The Company will form the subsidiary for
the purpose of effecting the merger, and Thomaston will be the survivor of the
merger. The Letter of Intent states that the Company will exchange 1.7275 shares
of Company common stock for each share of Thomaston common stock outstanding.
The Company expects to issue approximately 1,125,447 shares to the Thomaston
shareholders and 49, 233 shares to the Thomaston optionholders on exercise of
their options. The parties expect the merger to be accounted for as a pooling of
interest and expect to consummate the Merger in the third quarter of 1999,
subject to approval of the Thomaston shareholders, approval of various
regulatory authorities and other customary conditions of closing.
Thomaston is a federal savings bank located in Thomaston, Georgia with
mortgage production offices in Columbus and Macon, Georgia and Phenix City and
Auburn, Alabama.
Citizens Bank entered into a Purchase and Assumption Agreement with
First Georgia Bank that provides that Citizens Bank will acquire First Georgia
Bank's branch office located in Blackshear, Georgia. The branch purchase is
subject to regulatory approval.
The parties expect the purchase to be completed during the second quarter of
1999.
Citizens Bank plans to file an application with the GDBF and the FDIC
for approval to open a branch office in Statesboro, Georgia. Upon receiving
regulatory approval, Citizens Bank expects to open its Statesboro office during
the second quarter of 1999. The office will be known as First Flag Bank -
Statesboro. Citizens Bank will register "First Flag Bank - Statesboro" as a
tradename.
5
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Employees
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As of December 31, 1998, the Company (including the Banks) had 244
full-time and 41 part-time employees. The employees are not represented by any
collective bargaining unit, and the Company considers its relationship with its
employees to be good.
Competition
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The banking business in Georgia is highly competitive. The Banks
compete not only with other banks and thrifts that are located in the same
counties as the Banks and in surrounding counties, but with other financial
service organizations including, credit unions, finance companies, and certain
governmental agencies. To the extent that the Banks must maintain non-interest
earning reserves against deposits, it may be at a competitive disadvantage when
compared with other financial service organizations that are not required to
maintain reserves against substantially equivalent sources of funds. Also, other
financial institutions with which the Banks compete may have substantially
greater resources and lending capabilities due to the size of the organization.
Supervision and Regulation
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The following discussion sets forth the material elements of the
regulatory framework applicable to bank holding companies and their bank and
thrift subsidiaries and provides certain specific information related to the
Company.
General
In connection with its acquisition of Middle Georgia, the Company
became a bank holding company registered with the Board of Governors of the
Federal Reserve System (the "Federal Reserve") under the BHC Act. As such, the
Company and its non-bank subsidiaries are subject to the supervision,
examination, and reporting requirements of the BHC Act and the regulations of
the Federal Reserve. In addition, as a savings and loan holding company, the
Company is also registered with the OTS and is subject to the regulation,
supervision, examination, and reporting requirements of the OTS.
The BHC Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before: (1) it may acquire direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the voting shares of the bank; (2) it or any of its
subsidiaries, other than a bank, may acquire all or substantially all of the
assets of any bank; or (3) it may merge or consolidate with any other bank
holding company.
The BHC Act further provides that the Federal Reserve may not approve
any transaction that would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any section of the United States, or the effect of which
may be substantially to lessen competition or to tend to create a monopoly in
any section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy and consideration of convenience and needs issues including the
parties' performance under the Community Reinvestment Act of 1977 (the "CRA"),
both of which are discussed below.
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The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding companies, such that the Company, and any other bank holding
company located in Georgia may now acquire a bank located in any other state,
and any bank holding company located outside Georgia may lawfully acquire any
Georgia-based bank, regardless of state law to the contrary, in either case
subject to certain deposit-percentage, aging requirements, and other
restrictions. The Interstate Banking Act also generally provides that, as of
June 1, 1997, national and state-chartered banks may branch interstate through
acquisitions of banks in other states. By adopting legislation prior to that
date, a state had the ability either to "opt in" and accelerate the date after
which interstate branching is permissible or "opt out" and prohibit interstate
branching altogether.
In response to the Interstate Banking Act, the Georgia General Assembly
adopted the Georgia Interstate Banking Act, which was effective on July 1, 1995.
The Georgia Interstate Banking Act provides that (1) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (2) interstate acquisitions of institutions
located in Georgia will be permitted by institutions in states that allow
national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted
the Georgia Interstate Branching Act, which permits Georgia-based banks and bank
holding companies owning or acquiring banks outside of Georgia and all
non-Georgia banks and bank holding companies owning or acquiring banks in
Georgia to merge any lawfully acquired bank into an interstate branch network.
The Georgia Interstate Branching Act also allows banks to establish de novo
branches on a limited basis. As of July 1, 1998, the number of de novo branches
that may be established is no longer limited.
The BHC Act generally prohibits the Company from engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and from acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In determining whether a particular
activity is permissible, the Federal Reserve must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public, such as greater convenience, increased competition, or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking practices. For example, factoring accounts receivable, acquiring or
servicing loans, leasing personal property, conducting discount securities
brokerage activities, performing certain data processing services, acting as
agent or broker in selling credit life insurance and certain other types of
insurance in connection with credit transactions, and performing certain
insurance underwriting activities all have been determined by the Federal
Reserve to be permissible activities of bank holding companies. The BHC Act does
not place territorial limitations on permissible non-banking activities of bank
holding companies. Despite prior approval, the Federal Reserve has the power to
order a holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
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The bank and thrift subsidiaries of the Company are members of the
FDIC, and as such, their deposits are insured by the FDIC to the maximum extent
provided by law. Such subsidiaries are also subject to numerous state and
federal statutes and regulations that affect their businesses, activities, and
operations, and they are supervised and examined by one or more state or federal
bank regulatory agencies.
All of the Company's depository institution subsidiaries that are
state-chartered banks and are not members of the Federal Reserve System are
subject to supervision and examination by the FDIC and the Georgia Department of
Banking and Finance. The Company's subsidiary that is a federal savings bank is
subject to regulation, supervision, and examination by the OTS and the FDIC. The
federal banking regulator for each of the Company's subsidiaries, as well as the
Georgia Department of Banking and Finance for each of the subsidiary banks that
is a state chartered bank, regularly examines the operations of the subsidiary
banks and is given authority to approve or disapprove mergers, consolidations,
the establishment of branches, and similar corporate actions. The federal and
state banking regulators also have the power to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law.
Payment of Dividends
The Company is a legal entity separate and distinct from its
subsidiaries. The principal sources of cash flow of the Company, including cash
flow to pay dividends to its shareholders, are dividends by its bank and thrift
subsidiaries. There are statutory and regulatory limitations on the payment of
dividends by such subsidiaries to the Company as well as by the Company to its
shareholders.
As to the payment of dividends, all of the Company's depository
institution subsidiaries that are state nonmember banks are subject to the laws
and regulations of the state of Georgia and to the regulations of the FDIC. The
Company's depository institution subsidiary that is a federal savings bank is
subject to the OTS' capital distributions regulation.
If, in the opinion of the applicable federal banking regulator, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution, could include the payment of
dividends), such authority may require, after notice and hearing, that such
institution cease and desist from such practice. The federal banking agencies
have indicated that paying dividends that deplete a depository institution's
capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), a depository institution may not pay any dividend if payment
would cause it to become undercapitalized or if it already is undercapitalized.
See "-- Prompt Corrective Action." Moreover, the federal agencies have issued
policy statements that provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
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At December 31, 1998, under dividend restrictions imposed under federal
and state laws, the bank and thrift subsidiaries of the Company, without
obtaining governmental approvals, could declare aggregate dividends to the
Company of up to approximately $2,000,000.
The payment of dividends by the Company and its subsidiaries may also
be affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
Capital Adequacy
The Company and its depository institution subsidiaries are required
to comply with the capital adequacy standards established by the Federal Reserve
and the appropriate federal banking regulator in the case of its depository
institution subsidiaries. There are two basic measures of capital adequacy for
bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital
Ratio") of total capital ("Total Capital") to risk-weighted assets (including
certain off-balance-sheet items, such as standby letters of credit) is 8%. At
least half of Total Capital must comprise common stock, minority interests in
the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier 1 Capital"). The
remainder may consist of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves ("Tier 2 Capital"). At December 31, 1998, the
Company's consolidated Total Risk-Based Capital Ratio and its Tier 1 Risk-Based
Capital Ratio (i.e., the ratio of Tier 1 Capital to risk-weighted assets) were
14.0% and 12.3%, respectively.
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In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at December 31, 1998 was 8.4%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve has indicated that it will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The Company's depository institution subsidiaries are subject to
risk-based and leverage capital requirements adopted by their applicable federal
regulators, which are substantially similar to those adopted by the Federal
Reserve for bank holding companies. Such subsidiaries were in compliance with
applicable minimum capital requirements as of December 31, 1998. The Company has
not been advised by any federal banking agency of any specific minimum capital
ratio requirement applicable to it or its subsidiary depository institutions.
Failure to meet capital guidelines could subject an institution to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"-- Prompt Corrective Action."
Community Reinvestment
The Company's subsidiaries are subject to the provisions of the CRA.
Under the terms of the CRA, the subsidiaries have a continuing and affirmative
obligation consistent with their safe and sound operation to help meet the
credit needs of their entire communities, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each appropriate federal bank regulatory agency, in connection with its
examination of a subsidiary depository institution, to assess such institution's
record in assessing and meeting the credit needs of the community served by that
institution, including low- and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to:
(1) charter a national bank; (2) obtain deposit insurance coverage for a newly
chartered institution; (3) establish a new branch office that will accept
deposits; (4) relocate an office; or (5) merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or other bank holding company, the Federal Reserve will assess
the record of each subsidiary depository institution of the applicant bank
holding company, and such records may be the basis for denying the application.
All of the Company's subsidiary depository institutions received at least a
"satisfactory" CRA rating in their most recent examinations.
<PAGE>
10
In April 1995, the federal banking agencies adopted amendments revising
their CRA regulations, with a phase-in schedule applicable to various
provisions. Among other things, the amended CRA regulations, implemented on July
1, 1997, substitute for the prior process-based assessment factors a new
evaluation system that rates an institution based on its actual performance in
meeting community needs. In particular, the system focuses on three tests: (1) a
lending test, to evaluate the institution's record of making loans in its
service areas; (2) an investment test, to evaluate the institution's record of
investing in community development projects; and (3) a service test, to evaluate
the institution's delivery of services through its branches, ATM's and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance will be considered in the application process.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Company is expected to act as a
source of financial strength for, and to commit resources to support, each of
its banking subsidiaries. This support may be required at times when, absent
such Federal Reserve policy, the Company may not be inclined to provide it. In
addition, any capital loans by a bank holding company to any of its depository
institution subsidiaries are subordinate in right of payment to deposits and to
certain other indebtedness of such banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a depository institution
subsidiaries will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (1) the default of a commonly controlled FDIC-insured depository
institution or (2) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors, secured creditors, and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The subsidiary depository institutions of the Company are subject
to these cross-guarantee provisions. As a result, any loss suffered by the FDIC
in respect of these subsidiaries would likely result in assertion of the
cross-guarantee provisions, the assessment of such estimated losses against the
depository institution's banking affiliates, and a potential loss of the
Company's investment in such other subsidiary depository institutions.
11
<PAGE>
Prompt Corrective Action
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires the regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
The capital levels established for each of the categories are as
follows:
<TABLE>
<CAPTION>
========================== ================ =================== ============== ===================
Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
========================== ================ =================== ============== ===================
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
========================== ---------------- ------------------- -------------- ===================
Adequately Capitalized 4% or more 8% or more 4% or more --
========================== ---------------- ------------------- -------------- ===================
Undercapitalized Less than 4% less than 8% less than 4% --
========================== ---------------- ------------------- -------------- ===================
Significantly Less than 3% less than 6% less than 3% --
Undercapitalized
========================== ================ =================== ============== ===================
Critically 2% or less -- -- --
Undercapitalized tangible equity
========================== ================ =================== ============== ===================
</TABLE>
For purposes of the regulation, the term "tangible equity" includes
core capital elements counted as Tier 1 Capital for purposes of the risk-based
capital standards, plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling holding company under FDICIA to fund a capital
restoration plan is limited to the lesser of 5% of an undercapitalized
subsidiary's assets or the amount required to meet regulatory capital
requirements. An undercapitalized institution is also generally prohibited from
increasing its average total assets, making acquisitions, establishing any
branches, or engaging in any new line of business, except in accordance with an
accepted capital restoration plan or with the approval of the FDIC. In addition,
the appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
12
<PAGE>
At December 31, 1998, the Company's depository institution subsidiaries
had the requisite capital levels to qualify as well capitalized.
FDIC Insurance Assessments
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (1) well capitalized;
(2) adequately capitalized; and (3) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Pursuant to the Deposit Insurance Funds Act of 1996, the FDIC
implemented a special one-time assessment of approximately 65.7 basis points
(0.657%) on a depository institution's SAIF-insured deposits held as of March
31, 1995 (or approximately 52.6 basis points on SAIF deposits acquired by banks
in certain qualifying transactions) and adopted revisions to the assessment rate
schedules that would generally eliminate the disparity between assessment rates
applicable to the deposits insured by the Bank Insurance Fund ("BIF") and the
SAIF. The revisions in the assessment rate schedules reduced assessment rates on
SAIF-insured deposits and would generally equalize BIF and SAIF assessment rates
by January, 2000. The Company anticipates that the net effect of the decrease in
the premium assessment rate on SAIF deposits will result in a reduction in its
total deposit insurance premium assessments through 1999 as compared to years
prior to 1997, assuming no further changes in announced premium assessment
rates. The Company recorded a charge against earnings for the special assessment
in the quarter ended September 30, 1996, in the pre-tax amount of approximately
$1,150,000.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
13
<PAGE>
Proposed Legislation and Regulatory Action
New statutes and regulations are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company may be affected by such statute or
regulation.
Selected Statistical Information
Selected statistical information is included in the Company's
Management's Discussion and Analysis of Financial Condition and Results of
Operation set forth on pages 16 through 24 of the Company's 1998 Annual Report.
Such information is incorporated by reference.
ITEM 2. PROPERTIES
----------
The Company and First Flag Bank
The Company and First Flag Bank operate from a main office which
contains approximately 28,400 square feet of usable office space and is located
on approximately two acres of land at 101 North Greenwood Street, LaGrange,
Georgia. First Flag Bank owns both the building and the land.
First Flag Bank also operates three full-service branch offices and one
drive-through facility in LaGrange, Georgia. One of the full-service branches
contains approximately 360 square feet of office space in the Winn-Dixie
Marketplace grocery store at 908 Hogansville Road in LaGrange. This office is
leased by First Flag Bank. A second full-service branch office is located at
1795 West Point Road at Lee's Crossing in LaGrange. This office contains
approximately 2,700 square feet of office space on one acre of land, and both
the land and the building are owned by First Flag Bank. The third full-service
branch office is located at 1417 LaFayette Parkway in LaGrange. This office
contains approximately 2,300 square feet of office space on 1.2 acres of land,
and it has three drive through lanes. Both the building and the land are owned
by First Flag Bank. The drive-through facility is located at 306 Vernon Street
in LaGrange. This facility contains approximately 1,800 square feet of space,
and both the building and the land are owned by First Flag Bank.
First Flag Bank leases approximately 2,760 square feet of office space
at 5669 Whitesville Road, Suite A, Columbus, Georgia, where its loan production
office is located.
First Flag Bank leases approximately 600 square feet of office space at
200 Broad Street, Suite D, LaGrange, Georgia.
First Flag Bank leases approximately 2,500 square feet of office space
at 205 North Lewis Street, Suites 2 and 3, LaGrange, Georgia.
14
<PAGE>
Citizens Bank
Citizens Bank operates four full-service offices in Vienna, Unadilla,
Montezuma, and Cordele. It also operates three limited-service offices in
Byromville, Oglethorpe, and Pinehurst.
One of the full-service offices has 10,500 square feet of office space
on .85 acres of land that is owned by Citizens Bank and is located at 100 Union
Street, Vienna, Georgia. The second full-service office has 15,127 square feet
of office space on 1.48 acres of land that is owned by Citizens Bank and is
located at 2233 Pine Street, Unadilla, Georgia. The third full-service office
has 10,718 square feet of office space on 1.3 acres of land that is owned by
Citizens Bank and is located at 102 West Railroad Street, Montezuma, Georgia.
The fourth full-service office has 2,000 square feet of office space that is
leased by Citizens Bank and is located at 602 East 16th Avenue, Suite G.,
Cordele, Georgia.
One of the limited-service offices has 1,750 square feet of office
space on .07 acres and is located on Main Street, Byromville, Georgia. The
second limited-service office has 2,500 square feet of office space on .6 acres
of land and is located at 130 North Sumter Street, Oglethorpe, Georgia. The
third limited-service office has 843 square feet of office space on .55 acres
and is located on Fullington Avenue, Pinehurst, Georgia. Citizens Bank owns each
of these properties.
Citizens Bank owns three warehouse/meeting facilities located in
Vienna, Georgia at the following locations: (1) 2nd Street, Vienna, Georgia with
4,100 square feet of space on .10 acres of land, (2) 3rd Street, Vienna,
Georgia, with 2,940 square feet of office space on .09 acres of land, and (3)
3rd Street, Vienna, Georgia, with 1,755 square feet of office space on .05 acres
of land.
Citizens Bank also owns an office parking lot at the corner of Union
Street and 2nd Street, Vienna Georgia. The lot is on .42 acres of land. Another
lot owned by Citizens Bank is located at Fullington Avenue and Highway 41,
Pinehurst, Georgia. Citizens Bank also owns a lot located at the corner of
Fullington Avenue and Cyprus Avenue, Pinehurst, Georgia with 370 square feet of
a vacant building on .23 acres of land.
Bank of Milan Division of Citizens Bank
Citizens Bank, through its Bank of Milan division, operates two
full-service offices in Milan and McRae, Georgia. Citizens Bank owns the office
located at 1 Mt. Zion Street, Milan, Georgia. It has 5,124 square feet of office
space on .18 acres of land. Citizens Bank leases the office located at 850 East
Oak Street, McRae, Georgia. It has 1,360 square feet of office space.
Empire Banking Company Division of Citizens Bank
Citizens Bank, through its Empire Banking Company division, operates
two full-service offices in Homerville and Waycross, Georgia. Citizens Bank owns
two buildings in Homerville located at 115 East Dame Avenue comprising the main
office building that has approximately 5,000 square feet of office space and an
operations building that has approximately 2,200 square feet of office space.
Citizens Bank also owns about 3/4 acres in paved parking lots near the Dame
Avenue office. Additionally, Citizens Bank owns a building located at 2110
Memorial Drive, Waycross, Georgia that has 3,500 square feet of office space.
15
<PAGE>
The Brown Bank Division of Citizens Bank
Citizens Bank, through its Brown Bank division, operates two
full-service offices in Metter and Cobbtown, Georgia and a full-service office
in Reidsville, Georgia that it leases. The office located at 24-28 North Broad
Street, Metter, Georgia has 12,000 square feet of office space, of which 6,000
is used for banking operations and 6,000 is used for rental offices. This office
sits on .17 acres of land and has a paved parking lot on .34 acres also on North
Broad Street. The office located at 1 Railroad Street in Cobbtown, Georgia has
4,000 square feet of office space and sits on .066 acres of land. The office
located at 132 A West Brazell Street, Reidsville, Georgia has 6,000 square feet
of office space.
All of the Company's offices are in good condition and are adequate for
the Company's current and foreseeable needs.
The Company is unaware of any potential environmental liability that it
may incur in connection with any properties or other assets owned by it.
The net book value of the Company's investment in land, premises,
furniture, fixtures and equipment totaled approximately $14.9 million at
December 31, 1998. The Company owns most of its data processing equipment.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company and the Banks are periodically involved as plaintiff or
defendant in various legal actions in the ordinary course of its business.
First Flag Bank is a named defendant in a suit filed in December 1998
in Superior Court of the State of California for the County of Los Angeles. The
plaintiffs leased ATM machines from First Flag Bank and other defendants.
Another named defendant arranged the leases and agreed to manage the ATMs and
leases on behalf of the plaintiffs. The plaintiffs allege that this defendant
has breached his contract with the plaintiffs. First Flag Bank leased the
plaintiffs ten ATMs having an original value of approximately $20,000 each. The
plaintiffs allege, among other things, that First Flag Bank and the other lessor
defendants are liable for fraud, restitution, recission and negligent
misrepresentation. The parties currently are exploring settlement. If the
parties do not reach a settlement, First Flag Bank intends to vigorously defend
the claims.
First Flag Bank purchased certain warehouse loans of Gulf Properties
Financial Services, Inc., a residential mortgage broker. The loans that Gulf
Properties sold to First Flag Bank were fraudulent. Gulf Properties filed
Chapter 11 bankruptcy on December 30, 1998. First Flag Bank is serving on the
creditors' committee, and the bankruptcy is pending. First Flag Bank's exposure
as a result of the fraud is approximately $3 million. Several other banks also
purchased fraudulent loans from Gulf Properties and the total amount of exposure
of all banks is approximately $32 million.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted by the Company to a vote of its shareholders
during the fourth quarter of 1998.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
--------------------------------------------------------------------
Information relating to the market for, holders of and dividends paid
on the Company's Common Stock is set forth under the caption "Corporate
Information-Stock Prices and Dividends" on the inside back cover of the
Company's 1998 Annual Report. Such information is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Selected consolidated financial data for the Company and its
subsidiaries for each year of the five-year period ended December 31, 1998 is
set forth under the caption "Financial Highlights" on page 5 of the 1998 Annual
Report. Such financial data is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations is set forth on pages 16 through 24 of the Company's 1998 Annual
Report. Such information is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's net interest income and the fair value of its financial
instruments (interest earning assets and interest bearing liabilities) are
influenced by changes in market interest rates. The Company actively manages its
exposure to interest rate fluctuations through policies established by its
Asset/Liability Management Committee (the "ALCO"). The ALCO meets regularly and
is responsible for approving asset/liability management policies, developing and
implementing strategies to improve balance sheet positioning and net interest
income and assessing the interest rate sensitivity of the Banks.
The Company utilizes an interest rate simulation model to monitor and
evaluate the impact of changing interest rates on net interest income and the
market value of its investment portfolio. The ALCO policy limits the maximum
percentage changes in net interest income and investment portfolio equity,
assuming a simultaneous, instantaneous change in interest rate. These percentage
changes are as follows:
17
<PAGE>
Changes in Percentage Percent Change in
Interest Rates Change in Net Market Value of
(In Basis Points) Interest Income Portfolio Equity
----------------- --------------- ----------------
400 30% 40%
300 25% 30%
200 20% 20%
100 10% 10%
As of December 31, 1998, the Company was in compliance with its ALCO policy.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The following financial statements are included in the Company's 1998
Annual Report on pages 26 through 52 and are incorporated herein by reference:
Independent Auditor's Report
Financial Statements
Consolidated Balance Sheets dated as of December 31, 1998 and
1997 Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 Consolidated Statements of
Cash Flows for the years ended December 31, 1998, 1997 and
1996 Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders Equity
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
On February 20, 1997, the Company engaged Porter Keadle Moore, LLP as
independent accountants to audit the Company's financial statements for the
fiscal year ended December 31, 1997, and elected not to renew the engagement of
the Company's previous independent accountants, Robinson, Grimes & Company, P.C.
No adverse opinions or disclaimers of opinion were given by Robinson, Grimes &
Company, P.C. during the fiscal years ended December 31, 1995, and 1996, nor
were any of their opinions qualified as to uncertainty, audit scope, or
accounting principle, during the time Robinson, Grimes & Company was engaged.
There were no disagreements or "reportable events" of any nature between the
Company and Robinson, Grimes & Company, P.C. during the fiscal years ended
December 31, 1995, 1996, and the subsequent interim period through February 20,
1997, as described in Items 304(a) (1) (iv) and (v) of Regulation S-K. The
decision was approved by the Company's Audit Committee and Board of Directors.
<PAGE>
18
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information relating to the directors and executive officers of the
Company is set forth under the captions "Proposal 1 Election of
Directors-Nominees" and "Proposal 1 - Election of Directors-Information
Regarding Nominees and Continuing Directors" in the Company's Proxy Statement
for its 1999 Annual Meeting of Shareholders to be held on April 21, 1998. Such
information is incorporated herein by reference. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and the Banks is set
forth under the caption "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Proxy Statement referred to above. Such information
is incorporated herein by reference. To the Company's knowledge, no person was
the beneficial owner of more than 10% of the Company's common stock during 1998.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information relating to executive compensation and the sale of stock to
certain directors is set forth under the captions "Proposal 1 - Election of
Directors - Director Compensation" and "Executive Compensation" in the Proxy
Statement referred to above.
Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information regarding ownership of the Company's common stock as of
December 31, 1998, by certain persons is set forth under the captions "Voting -
Stock Ownership" and "Proposal 1 - Election of Directors - Information Regarding
Nominees and Continuing Directors" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain transactions between the Bank and
affiliates of the Company and the Bank is set forth under the caption "Executive
Compensation - Loans to Management" in the Proxy Statement referred to in Item
10 above. Such information is incorporated herein by reference.
19
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
------------------------------------------------------
(a)(1) The list of all financial statements is included at Item 8.
(a)(2) The financial statement schedules are either included in the financial
statements or are not applicable.
(a)(3) Exhibit List
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation of the Company, as amended through October
15, 1993 (incorporated by reference from Exhibit 3.1(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
3.2 Bylaws of the Company, as amended through March 30, 1998 (incorporated
by reference from Exhibit 3.1(ii) to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997)
3.3 Amendment to Bylaws of the Company (adopted by resolution of Board of
Directors on October 19, 1998)
4.1 Instruments Defining the Rights of Security Holders (See Articles of
Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto)
10.1 Employment Agreement between J. Daniel Speight, Jr. and the Company
dated as of April 1, 1998 (incorporated by reference from Exhibit 10.1
to Amendment No. 1 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1997)*
10.2 Employment Agreement between John S. Holle and the Company dated as of
April 1, 1998 (incorporated by reference from Exhibit 10.2 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.3 Employment Agreement between Ellison C. Rudd and the Company dated as
of April 1, 1998 (incorporated by reference from Exhibit 10.3 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
20
<PAGE>
10.4 Employment Agreement between Patti S. Davis and the Company dated as
of April 1, 1998 (incorporated by reference from Exhibit 10.4 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.5 Separation Agreement between Charles A. Hinely and the Company dated
April 1, 1998 (incorporated by reference from Exhibit 10.5 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.6 Separation Agreement between J. Preston Martin and the Company dated
May 13, 1998 (incorporated by reference from Exhibit 10.6 to Amendment
No. 1 to the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1997)*
10.7 Split Dollar Insurance Agreement between J. Daniel Speight, Jr. and
Citizens Bank dated November 2, 1992 (incorporated by reference from
Exhibit 10.7 to Amendment No. 1 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997)*
10.8 Director Indexed Retirement Program for Citizens Bank dated January
13, 1995 (incorporated by reference from Exhibit 10.8 to Amendment No.
1 to the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997)*
10.9 Form of Executive Agreement (pursuant to Director Indexed Retirement
Program for Citizens Bank) for individuals listed on exhibit cover
page (incorporated by reference from Exhibit 10.9 to Amendment No. 1
to the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997)*
10.10Form 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
(incorporated by reference from Exhibit 10.10 to Amendment No. 1 to
the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997)*
10.11Director Indexed Fee Continuation Program for First Federal Savings
Bank of LaGrange effective February 3, 1995 (incorporated by reference
from Exhibit 10.12 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)
21
<PAGE>
10.12Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of LaGrange) for
individuals listed on exhibit cover page (incorporated by reference
from Exhibit 10.13 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)*
10.13Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Director Indexed Fee Continuation
Program of First Federal Savings Bank of LaGrange) for individuals
listed on exhibit cover page (incorporated by reference from Exhibit
10.14 to Amendment No. 1 to the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1997)*
10.14Form of Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and individuals listed
on exhibit cover page (incorporated by reference from Exhibit 10.15 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.15Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Executive Salary Continuation Plan
for First Federal Savings Bank of LaGrange) for individuals listed on
exhibit cover page (incorporated by reference from Exhibit 10.16 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.16Indexed Executive Salary Continuation Plan Agreement by and between
First Federal Savings Bank of LaGrange and William F. Holle, Jr. dated
February 3, 1995 (incorporated by reference from Exhibit 10.17 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.17FLAG Financial Corporation 1994 Employees Stock Incentive Plan
(incorporated by reference from Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993)*
10.18FLAG Financial Corporation 1994 Directors Stock Incentive Plan
(incorporated by reference from Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993)*
13 1998 Annual Report to Shareholders+
22
<PAGE>
21 Subsidiaries
27 Financial Data Schedule
99.1 Report of Robinson, Grimes & Company, P.C., dated January 31, 1997
99.2 Report of Thigpen, Jones, Seaton & Co., P.C., dated January 28, 1998
- --------------------
* The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Form 10-K.
+ Portions of the Company's 1998 Annual Report, as indicated in this
report, are incorporated herein by reference. Other than as noted
herein, the Company's 1998 Annual Report is furnished to the
Securities and Exchange Commission solely for its information and is
not deemed to be "filed" with the Securities and Exchange Commission
or subject to the liabilities of Section 18 of the Securities Exchange
Act of 1934, as amended.
(b) Reports on Form 8-K.
Reports on Form 8-K filed during fourth quarter of 1998
o A Current Report on Form 8-K filed October 6, 1998 regarding execution
of Letter of Intent to purchase branch in Blackshear, Georgia from
First Georgia Bank.
o A Current Report on Form 8-K filed November 16, 1998 regarding
execution of Mutual Termination Agreement with Heart of Georgia
Bancshares, Inc. to cancel plans to merge.
Reports on Form 8-K filed since Year End 1998
o A Current Report on Form 8-K filed January 8, 1999 regarding
consummation of merger with Empire Bank Corp. on December 11, 1998.
o 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.
o 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.
o A Current Report on Form 8-K filed March 18, 1999 regarding execution
of Letter of Intent to acquire Thomaston Federal Savings Bank.
(c) The Exhibits not incorporated herein by reference are submitted as
a separate part of this report.
(d) Financial Statements Schedules: The financial statement schedules are
either included in the financial statements or are not applicable.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: March 24, 1999 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 or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, 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 or she might or could do in person, hereby
ratifying and confirming all which said attorneys-in-fact and agents or either
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 1934, this Report
has been signed by the following persons in the capacities indicated on March
24, 1999
Signature Title
--------- -----
/s/ Dennis D. Allen Director
- ---------------------------
Dennis D. Allen
s/ Dr. A. Glenn Bailey Director
- ---------------------------
Dr. A. Glenn Bailey
24
<PAGE>
/s/ Leonard H. Bateman Director
- ---------------------------
Leonard H. Bateman
/s/ H. Speer Burdette, III Director
- ---------------------------
H. Speer Burdette, III
/s/ Patti S. Davis Director, Senior Vice President,
- --------------------------- Chief Financial Officer and Assistant
Patti S. Davis Secretary (principal financial and
accounting officer)
/s/ Fred A. Durand, III Director
- ---------------------------
Fred A. Durand, III
/s/ John S. Holle Chairman of the Board and Director
- ---------------------------
John S. Holle
/s/ James W. Johnson Director
- ---------------------------
James W. Johnson
/s/ Kelly R. Linch Director
- ---------------------------
Kelly R. Linch
/s/ J. Preston Martin Director
- ---------------------------
J. Preston Martin
/s/ J. Daniel Speight, Jr. President, Chief Executive Officer and
- --------------------------- Director (principal executive officer)
J. Daniel Speight, Jr.
/s/ John W. Stewart, Jr. Director
- ---------------------------
John W. Stewart, Jr.
/s/ Robert W. Walters Director
- ---------------------------
Robert W. Walters
26
<PAGE>
FLAG FINANCIAL CORPORATION
Index of Exhibits
-----------------
The following exhibits are filed as part of or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the Company, as amended through October
15, 1993 (incorporated by reference from Exhibit 3.1(i) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
3.2 Bylaws of the Company, as amended through March 30, 1998 (incorporated
by reference from Exhibit 3.1(ii) to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1997)
3.3 Amendment to Bylaws of the Company (adopted by resolution of Board of
Directors on October 19, 1998)
4.1 Instruments Defining the Rights of Security Holders (See Articles of
Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto)
10.1 Employment Agreement between J. Daniel Speight, Jr. and the Company
dated as of April 1, 1998 (incorporated by reference from Exhibit 10.1
to Amendment No. 1 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1997)*
10.2 Employment Agreement between John S. Holle and the Company dated as of
April 1, 1998 (incorporated by reference from Exhibit 10.2 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.3 Employment Agreement between Ellison C. Rudd and the Company dated as
of April 1, 1998 (incorporated by reference from Exhibit 10.3 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.4 Employment Agreement between Patti S. Davis and the Company dated as
of April 1, 1998 (incorporated by reference from Exhibit 10.4 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
26
<PAGE>
10.5 Separation Agreement between Charles A. Hinely and the Company dated
April 1, 1998 (incorporated by reference from Exhibit 10.5 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.6 Separation Agreement between J. Preston Martin and the Company dated
May 13, 1998 (incorporated by reference from Exhibit 10.6 to Amendment
No. 1 to the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1997)*
10.7 Split Dollar Insurance Agreement between J. Daniel Speight, Jr. and
Citizens Bank dated November 2, 1992 (incorporated by reference from
Exhibit 10.7 to Amendment No. 1 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997)*
10.8 Director Indexed Retirement Program for Citizens Bank dated January
13, 1995 (incorporated by reference from Exhibit 10.8 to Amendment No.
1 to the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997)*Form of Executive Agreement (pursuant to
Director Indexed Retirement Program for Citizens Bank) for individuals
listed on exhibit cover
10.9 page (incorporated by reference from Exhibit 10.9 to Amendment No. 1
to the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1997)*
10.10Form 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
(incorporated by reference from Exhibit 10.10 to Amendment No. 1 to
the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997)*
10.11Director Indexed Fee Continuation Program for First Federal Savings
Bank of LaGrange effective February 3, 1995 (incorporated by reference
from Exhibit 10.12 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)
10.12Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of LaGrange) for
individuals listed on exhibit cover page (incorporated by reference
from Exhibit 10.13 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)*
10.13Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Director Indexed Fee Continuation
Program of First Federal Savings Bank of LaGrange) for individuals
listed on exhibit cover page (incorporated by reference from Exhibit
10.14 to Amendment No. 1 to the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1997)*
27
<PAGE>
10.14Form of Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and individuals listed
on exhibit cover page (incorporated by reference from Exhibit 10.15 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.15Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Executive Salary Continuation Plan
for First Federal Savings Bank of LaGrange) for individuals listed on
exhibit cover page (incorporated by reference from Exhibit 10.16 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.16Indexed Executive Salary Continuation Plan Agreement by and between
First Federal Savings Bank of LaGrange and William F. Holle, Jr. dated
February 3, 1995 (incorporated by reference from Exhibit 10.17 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997)*
10.17FLAG Financial Corporation 1994 Employees Stock Incentive Plan
(incorporated by reference from Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993)*
10.18FLAG Financial Corporation 1994 Directors Stock Incentive Plan
(incorporated by reference from Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993)*
13 1998 Annual Report to Shareholders+
22 Subsidiaries
27 Financial Data Schedule
99.1 Report of Robinson, Grimes & Company, P.C., dated January 31, 19997
99.2 Report of Thigpen, Jones, Seaton & Co., P.C., dated January 28, 1998
- --------------------
* The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Form 10-K.
+ Portions of the Company's 1998 Annual Report, as indicated in this
report, are incorporated herein by reference. Other than as noted
herein, the Company's 1998 Annual Report is furnished to the
Securities and Exchange Commission solely for its information and is
not deemed to be "filed" with the Securities and Exchange Commission
or subject to the liabilities of Section 18 of the Securities Exchange
Act of 1934, as amended.
28
<PAGE>
EXHIBIT 3.3
Amendment of Bylaws
WHEREAS, the Board of Directors believes it is in the best interests of
the Company to amend the provision of its Bylaws relating to the number of
directors;
NOW, THEREFORE, BE IT RESOLVED, that Section 2.2 of Article II of the
Company's Bylaws be deleted in its entirety and a new Section 2.2 of Article II
be inserted in lieu thereof as follows:
Section 2.2. Number and Term. The Board of Directors shall
consist of not fewer than 10 and not more than 25 members and
shall be divided into three classes as nearly equal in number
as possible. The Board of Directors shall set the precise
number of directors from time to time. The members of each
class shall be elected for a term of three years and until
their successors are elected and qualified. One class shall be
elected by ballot annually. Any amendment of this Section 2.2
of the Bylaws which has the effect of changing the minimum or
maximum number of directors as set forth herein shall require
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 the Corporation entitled
to vote at any regular or special meeting of the stockholders
called for that purpose.
RESOLVED FURTHER, that all other provisions of the Bylaws shall remain in
full force and effect.
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 21
SUBSIDIARIES OF FLAG FINANCIAL CORPORATION
First Flag Bank (formerly known as First Federal Savings Bank of
LaGrange), a federal savings bank organized under the laws of the United States.
Citizens Bank, a state bank organized under the laws of the State of
Georgia. Citizens Bank also operates under the following tradenames: Bank of
Milan, Empire Banking Company, The Brown Bank, FlagTech and Citizens Bank Agency
d/b/a Flag Insurance Services.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,246,090
<INT-BEARING-DEPOSITS> 1,695,167
<FED-FUNDS-SOLD> 23,330,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,291,309
<INVESTMENTS-CARRYING> 4,234,998
<INVESTMENTS-MARKET> 6,382,443
<LOANS> 388,868,968
<ALLOWANCE> 5,568,107
<TOTAL-ASSETS> 550,781,585
<DEPOSITS> 446,798,325
<SHORT-TERM> 48,398,478
<LIABILITIES-OTHER> 7,720,125
<LONG-TERM> 0
0
0
<COMMON> 6,560,004
<OTHER-SE> 41,304,653
<TOTAL-LIABILITIES-AND-EQUITY> 550,781,585
<INTEREST-LOAN> 38,409,086
<INTEREST-INVEST> 5,105,986
<INTEREST-OTHER> 1,216,974
<INTEREST-TOTAL> 44,732,046
<INTEREST-DEPOSIT> 18,729,042
<INTEREST-EXPENSE> 21,909,467
<INTEREST-INCOME-NET> 22,822,579
<LOAN-LOSSES> 3,382,000
<SECURITIES-GAINS> 290,931
<EXPENSE-OTHER> 24,616,812
<INCOME-PRETAX> 2,262,378
<INCOME-PRE-EXTRAORDINARY> 1,959,628
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,959,628
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 4.64
<LOANS-NON> 7,489,000
<LOANS-PAST> 583,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,700,000
<ALLOWANCE-OPEN> 4,948,039
<CHARGE-OFFS> 3,090,614
<RECOVERIES> 328,682
<ALLOWANCE-CLOSE> 5,568,107
<ALLOWANCE-DOMESTIC> 5,568,107
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,568,107
</TABLE>
EXHIBIT 99.1
REPORT OF ROBINSON, GRIMES & COMPANY, P.C., DATED JANUARY 31, 1999
[LETTERHEAD LOGO]
ROBINSON, GRIMES & COMPANY, P.C.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia
We have audited the accompanying consolidated statements of operatIOns, changes
in stockholders' equity and cash flows for the year ended December 31, 1996 of
FLAG Financial Corporation and Subsidiary. These financial statements are the
responsibility of FLAG's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statments are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
FLAG Financial Corporation and Subsidiary for the year ended December 31, 1996,
in conformity with generally accepted accounting principles.
/s/Robinson, Grimes & Company, P.C.
Certified Public Accountants
Columbus, Georgia
January 31, 1997
EXHIBIT 99.2
REPORT OF THIGPEN, JONES, SEATON & CO., P.C., DATED JANUARY 28, 1999
[LETTERHEAD LOGO]
THIGPEN, JONES, SEATON & CO., P.C.
INDEPTENDENT AUDITORS' REPORT
Board of Directors
Three Rivers Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Three Rivers
Bancshares, Inc. and Subsidiary, as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes , assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Three Rivers
Bancshares, Inc. and Subsidiary at December 31, 1997, and the consolidated
results of its operations adn its cash flows for each of the two years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Thigpen, Jones, Seaton & Co., P.C.
January 29, 1998
Dublin, Georgia
