<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number 0-24532
FLAG FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-2094179
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(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 3007
LaGrange, Georgia 30241
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(Address of principal executive offices) (Zip Code)
(706) 845-5000
--------------------------------------------------------------------------------
(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Common stock, par value $1 per share: 8,168,718 shares
Outstanding as of November 10, 2000
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FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999............................................. 3
Consolidated Statements of Operations for the Nine Months and
Quarter Ended September 30, 2000 and 1999...................... 4
Consolidated Statements of Comprehensive Income for the
Nine Months and Quarter Ended September 30, 2000 and 1999..... 5
Consolidated Statements of Cash Flows for the Nine Months
and Quarter Ended September 30, 2000 and 1999.................. 6
Notes to Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 9
PART II Other Information
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities............................................. 15
Item 3. Defaults Upon Senior Securities................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 5. Other Information................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................. 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-----------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash and due from banks................................... $ 9,633,135 $ 26,633,628
Federal funds sold........................................ 450,000
---------------------------------
Total cash and cash equivalents....................... 9,633,135 27,083,628
---------------------------------
Interest-bearing deposits................................. 2,083,516 2,791,688
Investment securities held-to-maturity.................... - 16,243,837
Investment securities available-for-sale.................. 90,153,442 73,311,398
Other investments......................................... 4,788,795 6,091,761
Mortgage loans held for sale.............................. 3,931,003 3,483,833
Loans, net................................................ 338,259,223 419,079,161
Premises and equipment, net............................... 14,081,105 18,391,527
Other assets.............................................. 19,317,641 21,392,436
---------------------------------
Total assets............................... $482,247,860 $587,869,269
=================================
LIABILITIES
Non interest-bearing deposits............................. $ 34,457,199 $ 58,512,630
Interest-bearing deposits................................. 349,189,881 425,474,502
Federal funds purchased................................... 581,581 15,320,000
Other borrowed funds...................................... 2,689,202 -
Advances from Federal Home Loan Bank...................... 32,240,301 27,172,889
Other liabilities......................................... 8,434,951 8,192,353
---------------------------------
Total liabilities......................... 427,593,115 534,672,374
---------------------------------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized, none
issued and outstanding).............................. - -
Common stock ($1 par value, 20,000,000 shares authorized
8,275,405 and 8,272,815 shares issued in 2000
and 1999, respectively............................... 8,275,405 8,272,815
Additional paid-in capital................................ 11,348,106 11,341,701
Retained earnings......................................... 36,689,118 34,754,397
Accumulated other comprehensive income (loss)............. (1,225,871) (1,119,987)
Less: Treasury stock at cost; 62,200 shares in 2000 and 7,500
shares in 1999....................................... (432,013) (52,031)
---------------------------------
Total stockholders' equity.............. 54,654,745 53,196,895
---------------------------------
Total liabilities and stockholders'
equity.............................. $482,247,860 $587,869,269
==================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
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<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
INTEREST INCOME
Interest and fees on loans............................... $10,145,625 $10,668,146 30,955,212 32,141,840
Interest on securities................................... 1,499,817 1,315,947 4,409,543 4,216,270
Interest on federal funds sold and interest-bearing
deposits............................................. 233,686 228,556 423,238 543,036
------------------------------------------------------------
Total interest income.............................. 11,879,128 12,212,649 35,787,993 36,901,146
------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits..................................... 4,978,858 4,829,008 14,471,296 14,957,677
Interest on borrowings................................... 709,527 828,380 1,882,057 2,233,065
-----------------------------------------------------------
Total interest expense............................. 5,688,385 5,657,388 16,353,353 17,190,742
-----------------------------------------------------------
Net interest income before provision for loan
losses........................................... 6,190,743 6,555,261 19,434,640 19,710,404
PROVISION FOR LOAN LOSSES....................................... 2,182,890 1,589,000 3,509,030 3,021,639
-----------------------------------------------------------
Net interest income after
provision for loan losses........................ 4,007,853 4,966,261 15,925,610 16,688,765
-----------------------------------------------------------
OTHER INCOME
Fees and service charges.................................. 1,152,286 1,365,045 3,644,881 3,538,398
Gain (loss) on sale of available for sale securities...... (248,671) 27,054 (206,674) 1,132,496
Gain (loss) on trading securities......................... - (314,029) - 486,483
Gain on sale of loans..................................... 182,463 203,383 671,645 1,527,861
Gain on sale of branch offices............................ 5,079,636 - 5,079,636 -
Other income.............................................. 471,704 267,379 1,250,742 1,414,147
-----------------------------------------------------------
Total other income................................. 6,637,418 1,548,832 10,440,230 8,099,385
-----------------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits........................... 3,892,086 4,046,869 11,309,950 11,658,458
Occupancy................................................ 1,112,242 1,261,724 3,258,011 3,527,364
Other operating.......................................... 2,639,024 3,517,370 7,191,896 8,174,186
-----------------------------------------------------------
Total other expenses............................... 7,643,352 8,825,963 21,759,857 23,360,008
-----------------------------------------------------------
Earnings (loss) before provision for
income taxes.................................... 3,001,919 (2,310,870) 4,605,983 1,428,142
Provision for income taxes............................... 924,015 (870,370) 1,192,038 364,752
-----------------------------------------------------------
Net earnings (loss)............................... 2,077,904 (1,440,500) 3,413,945 1,063,390
===========================================================
Basic earnings (loss) per share.......................... $ 0.25 $(0.17) $ 0.42 $ 0.13
Diluted earnings (loss) per share....................... $ 0.25 $(0.17) $ 0.42 $ 0.13
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
================================================================================
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss)............................................. $ 2,077,904 (1,440,500) 3,413,945 1,063,390
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available-for-sale:
Unrealized gains (losses) arising during the period,
net of tax of $329,948, $567,306, $143,433 and
$991,923, respectively................................ 538,337 (925,605) (234,022) (1,618,400)
Less: Reclassification adjustment for gains (losses)
included in net earnings, net of tax of $94,495,
$10,281, $78,536 and $430,348 respectively.............. 154,176 (16,773) 128,138 (702,148)
(Gain) loss on trading securities included in net
earnings in 1999, net of tax of $119,331 and $184,864
respectively.......................................... 194,698 (301,619)
-----------------------------------------------------------
Other comprehensive income (loss)............................... 692,513 (747,680) (105,884) (2,622,167)
-----------------------------------------------------------
Comprehensive income (loss)..................................... $ 2,770,417 (2,188,180) 3,308,061 (1,588,777)
===========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
(UNAUDITED)
September 30,
------------------------------------
2000 1999
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................... $3,413,945 $1,063,390
Adjustment to reconcile net earnings to net
cash provided by operating activities:
Depreciation, amortization and accretion........... 2,359,947 2,079,278
Provision for loan losses.......................... 3,509,030 3,021,639
Gain on sale of branch offices..................... (5,079,636) -
(Gain) loss on sale of investment securities
available for sale............................... 206,674 (1,132,496)
Proceeds from sale of trading securities........... - 292,487
Gain on sale of trading securities................. - (286,019)
Unrealized gain on sale of trading securities...... - (200,464)
Gain on sales of loans............................. (671,645) (1,527,861)
Loss on sale of other real estate.................. 16,597 344,624
Change in:
Mortgage loans held for sale................ 224,475 7,675,986
Other....................................... 13,748 1,355,637
------------------------------------
Net cash provided by operating activities. 3,993,135 12,686,201
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in sale of branch offices (6,675,621) -
Net change in interest-bearing deposits.................... 708,172 (549,749)
Proceeds from sales and maturities of investment
securities available-for-sale............................ 12,596,624 30,576,912
Proceeds from maturities of investment securities held-to-
maturity................................................. 108,520 4,689,608
Proceeds from sale of other investments.................... 4,992,200
Purchases of other investments............................. (27,700) (5,163,000)
Purchases of investment securities available-for-sale...... (12,225,306) (28,331,029)
Purchases of investment securities held-to-maturity........ - (4,154,716)
Net change in loans........................................ 20,295,017 (24,453,720)
Proceeds from sale of ORE.................................. 225,226 1,497,687
Purchases of premises and equipment........................ (654,824) (1,773,024)
Purchases of cash surrender value life insurance........... (185,749) (197,626)
------------------------------------
Net cash provided by (used in) investing
activities.............................. 14,164,359 (22,866,457)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits..................................... (26,775,973) (38,219,039)
Change in federal funds purchased.......................... (14,738,419) 14,095,000
Change in other borrowed funds............................. 2,689,202 (148,000)
Proceeds from FHLB advances................................ 27,000,000 6,500,000
Payments of FHLB advances.................................. (21,932,588) (4,921,525)
Purchase of treasury stock................................. (379,981) -
Proceeds from exercise of stock options.................... 8,995 53,070
Cash dividends paid........................................ (1,479,223) (1,355,253)
------------------------------------
Net cash used in financing activities....... (35,607,987) (23,995,747)
------------------------------------
Net change in cash and cash equivalents... (17,450,493) (34,176,003)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 27,083,628 53,316,956
------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. 9,633,135 19,140,953
====================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The accompanying consolidated financial statements have not been audited. The
results of operations are not necessarily indicative of the results of
operations for the full year or any other interim periods.
The accounting principles followed by FLAG Financial Corporation ("FLAG") and
its bank subsidiaries and the methods of applying these principles conform with
generally accepted accounting principles and with general practices within the
banking industry. Certain principles, which significantly affect the
determination of financial position, results of operations, and cash flows are
summarized below and in FLAG's annual report on Form 10-K for the year ended
December 31, 1999.
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of FLAG and its
wholly owned subsidiaries, First Flag Bank (LaGrange, Georgia), Citizens Bank
(Vienna, Georgia), and Thomaston Federal Savings Bank (Thomaston, Georgia). All
significant inter-company accounts and transactions have been eliminated in
consolidation.
The consolidated financial information furnished herein represents all
adjustments that are, in the opinion of management, necessary to present a fair
statement of the results of operations, and financial position for the periods
covered herein and are normal and recurring in nature. For further information,
refer to the consolidated financial statements and footnotes included in FLAG's
annual report on Form 10-K for the year ended December 31, 1999.
Note 2. Earnings Per Share
Net earnings per common share are based on the weighted average number of common
shares outstanding during each period. The calculation of basic and diluted
earnings per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ----------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic earnings per share:
Net earnings............................... $ 2,077,904 (1,440,500) 3,413,945 1,063,390
Weighted average common shares
outstanding............................ 8,217,223 8,263,281 8,224,980 8,255,012
Per share amount $ 0.25 (0.17) 0.42 0.13
Diluted earnings per share:
Net earnings................................ $ 2,077,904 (1,440,500) 3,413,945 1,063,390
Effect of dilutive securities -
stock options *....................... - - - -
Diluted earnings per share $ 0.25 (0.17) 0.42 0.13
</TABLE>
* Stock options were anti-dilutive as of 9/30/00 and 09/30/99
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Note 3. Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting and reporting
standards for hedging activities and for derivative instruments including
derivative instruments embedded in other contracts. It requires the fair value
recognition of derivatives as assets or liabilities in the financial statements.
The accounting for the changes in the fair value of a derivative depends on the
intended use of the derivative instrument at inception. SFAS No. 133 is
effective for all fiscal quarters in fiscal years beginning after June 15, 2000,
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 adopted SFAS No. 133 as of April 1, 2000, and transferred all
held-to-maturity securities to available-for-sale which decreased stockholders'
equity by $273,000 for the net of tax effect for the unrealized losses.
8
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
FINANCIAL CONDITION
OVERVIEW
Total assets were $482.2 million at September 30, 2000, a decrease of $105.6
million or 18.0 percent from December 31, 1999. This decrease in total assets
was primarily due to the sale of certain branch locations of Citizens Bank
during the third quarter of 2000. During the third quarter, six branch locations
were sold to other financial institutions. These branch locations represented
total assets of $63.4 million, deposits of $73.6 million and loans of $57.0
million. The sale of these branches resulted in a gain of $5.1 million.
ASSETS AND FUNDING
At September 30, 2000 earning assets totaled $439.2 million, a decrease of $81.8
million from December 31, 1999. Loans comprised 77 percent of earning assets and
investment securities were 22 percent of earning assets at September 30, 2000.
At September 30, 2000, interest-bearing deposits decreased $76.3 million
compared to December 31, 1999. Non-interest bearing deposits decreased $24.1
million in the first nine months of 2000 and totaled $34.4 million at September
30, 2000. Federal Home Loan Bank advances increased $5.1 million in the first
nine months of 2000 and totaled $32.2 million at September 30, 2000. At
September 30, 2000, deposits represented 90 percent of FLAG's interest-bearing
liabilities and Federal Home Loan Bank advances represented 8 percent.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $4.0 million for the nine
months ended September 30, 2000. Net cash provided by investing activities
totaling $14.2 million consisted largely of a $20.3 million net change in loans
outstanding, and $12.6 million in proceeds from sales and maturities of
investment securities available-for-sale, partially offset by purchases of $12.2
million of investment securities available-for-sale and cash paid in connection
of branch sales of $6.7 million. Net cash used in financing activities consisted
largely of a $26.8 million decrease in deposits and a $14.7 million decrease in
federal funds purchased, partially offset by a $5.1 million net increase in
Federal Home Loan Bank advances.
Total stockholders' equity at September 30, 2000, was 11.33 percent of total
assets compared to 9.05 percent at December 31, 1999. The increase is attributed
to a $105.6 million decrease in total assets since December 31, 1999 due to the
sale of the branch locations of Citizens Bank.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
Nine months and quarters ended September 30, 2000 and 1999
OVERVIEW
Net earnings for the nine months ended September 30, 2000 increased $2,351,000
or 221 percent compared to the first nine months of 1999. Net earnings per
common share increased 223 percent for the first nine months of 2000 and are
$0.42 compared to $0.13 in the first nine months of 1999. Net earnings for the
quarter ended September 30, 2000 increased $3,518,000 compared to the quarter
ended September 30, 1999. Net earnings per common share increased $.42 for the
quarter ended September 30, 2000 and are $.25 compared to a net loss of $.17 in
the quarter ended September 30, 1999. Net interest income decreased 1 percent
for the nine months ended September 30, 2000 over the same period of 1999 to
$19.4 million. Non-interest income increased 29 percent for the first nine
months of 2000 compared to the same period of 1999 and non-interest expense
decreased 7 percent for the first nine months of 2000 compared to 1999.
Non-interest income increased 328 percent for the quarter ended September 30,
2000 compared to the same period of 1999 and non-interest expense decreased 13
percent for the quarter ended September 30, 2000 compared to 1999.
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 2000 decreased
$276,000 compared to the first nine months of 1999. This decrease resulted from
a $1,113,000 or 3 percent decrease in interest income partially offset by a
$837,000 or 5 percent decrease in interest expense. Net interest income for the
quarter ended September 30, 2000 decreased $365,000 compared to the quarter
ended September 30, 1999. This decrease resulted from a $334,000 or 3 percent
decrease in interest income coupled with a $31,000 or 1 percent increase in
interest expense.
NON-INTEREST INCOME AND EXPENSE
Non-interest income for the nine months ended September 30, 2000 increased
$2,341,000 or 29 percent compared to the first nine months of 1999. Non-interest
income for the quarter ended September 30, 2000 increased $5,088,000 or 328
percent compared to the quarter ended September 30, 1999. These increases were
due largely to an increase in gains on sale of assets, representing gains on
sales of branches totaling $5,080,000. Gain on sale of available-for-sale
securities for the first nine months of 2000 decreased $1,339,000 compared to
the same period of 1999, and decreased $276,000 for the quarter ended September
30, 2000. This decrease was due in part to losses in the amount of $249,000 on
the sale of available-for-sale securities during the quarter ended September 30,
2000 which were incurred as a strategy to restructure the investment portfolio
to take advantage of a higher interest rate environment.
Gain on sale of available-for-sale securities for the first nine months of 1999
primarily resulted from gains on the sale of FLAG's holdings in Towne Services,
Inc. Gain on sale of loans for the first nine months of 2000 decreased 56
percent or $856,000 compared to the same period of 1999, and decreased $21,000
or 10 percent for the quarter ended September 30, 1999. This decrease was due in
part to a one time gain on the sale of the guaranteed portion of a commercial
loan during 1999 in the amount of $382,000, as well as decreased volume in the
sale of mortgage loans, servicing released.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Other operating income for the first nine months of 2000 decreased $163,000 or
12 percent compared to the first nine months of 1999, in part due to a decrease
in mortgage servicing income as a result of the sale of a significant portion of
the mortgage servicing portfolio during the fourth quarter of 1999. Other
operating income increased $204,000 or 76 percent for the quarter ended
September 30, 2000 compared to the same period in 1999. This increase was due in
large part to increased mortgage origination fees for the first nine months of
2000 compared to 1999.
Non-interest expense decreased $1,600,000 or 7 percent in the first nine months
of 2000 compared to the same period in 1999. Non-interest expense decreased
$1,183,000 or 13 percent for the quarter ended September 30, 2000 compared to
the same period of 1999. Salaries and employee benefits decreased $348,000 or 3
percent during the first nine months of 2000 compared to 1999 and decreased
$155,000 or 4 percent during the quarter ended September 30, 1999. This decrease
reflects management's continued emphasis on consolidation and cost containment
in an effort to increase the efficiency of our operations.
INCOME TAXES
Income tax expense for the first nine months of 2000 was $1,192,000 compared to
$365,000 for the first nine months of 1999. The effective tax rate for the nine
months ended September 30, 2000 and 1999 was 26 percent. Income tax expense for
the quarter ended September 30, 2000 was $924,000 compared to a benefit of
$870,000 for the same period in 1999. The effective tax rate for the quarter
ended September 30, 2000 was 31 percent and for the quarter ended September 30,
1999 was 38 percent.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
The adequacy of the allowance for loan and lease losses is determined through
management's informed judgment concerning the amount of risk inherent in FLAG's
loan and lease portfolios. This judgment is based on such factors as the change
in levels of non-performing and past due loans and leases, historical loan loss
experience, borrowers' financial condition, concentration of loans to specific
borrowers and industries, estimated values of underlying collateral, and current
and prospective economic conditions. The allowance for loan and lease losses at
September 30, 2000 was $8.6 million compared to $7.0 million at December 31,
1999. The ratio of the allowance for loan losses to net outstanding loans at
September 30, 2000 and December 31, 1999 was 2.54 percent and 1.67 percent,
respectively.
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets, comprised of real estate owned, non-accrual loans and
loans for which payments are more than 90 days past due, totaled $13.9 million
at September 30, 2000 compared to $15.8 million at December 31, 1999.
Non-performing assets as a percentage of net loans at September 30, 2000 and
December 31, 1999 were 3.65 percent and 3.78 percent, respectively.
FLAG has a loan review function that continually monitors selected accruing
loans for which general economic conditions or changes within a particular
industry could cause the borrowers financial difficulties. The loan review
function also identifies loans with high degrees of credit or other risks. The
focus of loan review as well as FLAG management is to maintain a low level of
non-performing assets and return current non-performing assets to earning
status.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
At September 30, 2000, FLAG and its banks were in compliance with various
regulatory capital requirements administered by Federal and State banking
agencies. The following is a table representing FLAG's consolidated Tier-1
Capital, Tangible Capital, and Risk-Based Capital:
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
ACTUAL REQUIRED EXCESS
AMOUNT % AMOUNT % AMOUNT %
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital $ 52,153 9.57% $ 21,800 4.00% $ 30,353 5.47%
Tangible Capital $ 52,153 9.57% $ 8,175 1.50% $ 43,978 8.07%
Risk-Based Capital $ 57,712 14.06% $ 32,791 8.00% $ 24,921 6.06%
</TABLE>
13
<PAGE>
PART 2. OTHER INFORMATION
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
================================================================================
PART II. Other Information
Item 1. Legal Proceedings
FLAG and the Banks are periodically involved as plaintiff or defendant
in various legal actions in the ordinary course of its business.
As previously reported, 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 parties settled the suit in February of this year.
As previously reported, First Flag Bank purchased certain warehouse
loans of Gulf Properties Financial Services, Inc., a residential mortgage
broker. The loans that Gulf Properties sold to First Flag Bank were fraudulent.
Gulf Properties filed Chapter 11 bankruptcy on December 30, 1998. First Flag
Bank is serving on the creditors' committee and is assisting in the liquidation
of assets, which will be distributed on a pro rata basis among the creditors.
First Flag Bank has collected approximately $950,000 as part of the bankruptcy
proceedings. Additionally, First Flag Bank has received $1.6 million from a
claim under its fidelity bond regarding this matter. The perpetrators of the
fraud have pled guilty to criminal charges and have been sentenced to prison.
First Flag Bank obtained a restitution order as part of the criminal sentence.
First Flag Bank's exposure as a result of the fraud was 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.
As previously reported, Tad Moore Golf, Inc. is a borrower of First
Flag Bank. An investor in Tad Moore Golf, Inc., who is also a lender to Tad
Moore Golf, Inc., sued First Flag Bank in Southern District Court in New York
alleging that First Flag Bank fraudulently induced the investor into allegedly
subordinating his loan to the loan of First Flag Bank. The investor was also a
borrower of First Flag Bank. The plaintiff is claming $1.6 million in
consequential damages and $10 million in punitive damages. First Flag Bank has
succeeded in having the venue of this matter transferred from New York to United
States District Court in Newnan, Georgia. Discovery ended on July 31, 2000.
First Flag Bank filed a motion for summary judgement on October 10, 2000. The
defendant's response is due on November 17, 2000. First Flag Bank intends to
continue vigorously defending this claim and pursue counterclaims against the
investor.
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OTHER INFORMATION
================================================================================
On June 28, 2000, David and Trenne Baker filed a suit against America's
Homeplace, Southern Homestead Mortgage and First Flag Bank in Superior Court of
Bartow County, Georgia. The Complaint alleges that the defendants are liable to
the plaintiffs for unspecified damages for fraud, suppression and concealment,
breach of contract, intentional infliction of emotional distress, negligent
infliction of emotional distress, conspiracy and violations of Georgia RICO
arising out of the construction and purchase of a house from a co-defendant by
the plaintiff. First Flag bank provided the construction financing on the home.
Co-defendant America's Homeplace has filed a motion to compel arbitration in
accordance with the plaintiff's contract. The motion is currently pending. First
Flag Bank intends to vigorously defend the claim.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Pursuant to Rule 14a-14(c)(1) promulgated under the Securities Exchange
Act of 1934, as amended, shareholders desiring to present a proposal for
consideration at the Company's 2001 Annual Meeting of Shareholders must notify
the Company in writing to the Secretary of the Company, at Eagle's Landing, 235
Corporate Center Drive, Stockbridge, Georgia 30281 of the contents of such
proposal no later than December 15, 2000 to be included in the 2001 Proxy
Materials. A shareholder must notify the Company before January 15, 2001 of a
proposal for the 2001 Annual Meeting that the shareholder intends to present
other than by inclusion in the Company's proxy material. If the Company does not
receive such notice prior to January 15, 2001, proxies solicited by the
management of the Company will confer discretionary authority upon the
management of the Company to vote upon any such matter.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits: 27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K filed during the Third Quarter 2000:
Current Report on Form 8-K, dated August 3, 2000, regarding completion
of branch sale.
Reports on Form 8-K filed since Quarter End 2000 to Present:
None.
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FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAG Financial Corporation
By: /s/ Thomas L. Redding
----------------------------------
Thomas L. Redding
(Chief Financial Officer)
Date: 11-13-2000
----------------------------------
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