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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number 0-24532
FLAG FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-2094179
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(State of incorporation) (I.R.S. Employer Identification No.)
P.O. Box 3007
LaGrange, Georgia 30241
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(Address of principal executive offices) (Zip Code)
(706) 845-5000
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(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Common stock, par value $1 per share: 7,547,672 shares
Outstanding as of November 5, 2001
FLAG FINANCIAL CORPORATION AND SUBSIDIARY
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TABLE OF CONTENTS
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 and
December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Earnings for the Nine Months and
Quarters Ended September 30, 2001 and 2000. . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Income for the
Nine Months and Quarters Ended September 30, 2001 and 2000. . . . 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations . . . . . . . . . . . . . . . . . . . . 8
PART II Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLAG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
==================================================================================================
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------------------
ASSETS (UNAUDITED)
------
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $ 16,418,896 $ 19,143,110
Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . 6,038,000 2,730,000
-------------------------------
Total cash and cash equivalents . . . . . . . . . . . . . . . 22,456,896 21,873,110
-------------------------------
Interest-bearing deposits . . . . . . . . . . . . 59,756 3,451,440
Investment securities available-for-sale. . . . . . . . . . . . . 126,552,151 100,721,942
Other investments . . . . . . . . . . . . . . . . . . . . . . . . 5,835,093 5,360,609
Mortgage loans held for sale. . . . . . . . . . . . . . . . . . . 4,414,300 4,120,659
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 368,044,332 384,661,335
Premises and equipment, net . . . . . . . . . . . . . . . . . . . 13,910,499 14,933,761
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 25,471,439 23,914,244
-------------------------------
Total assets . . . . . . . . . . . . . . . . . . . $ 566,744,466 $ 559,037,100
===============================
LIABILITIES
-----------
Non interest-bearing deposits . . . . . . . . . . . . . . . . . . $ 45,872,245 $ 55,110,513
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . 410,090,998 406,326,454
Federal funds purchased and repurchase agreements . . . . . . . . 865,071 661,482
Other borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 3,250,000 1,500,000
Advances from Federal Home Loan Bank. . . . . . . . . . . . . . . 40,558,518 31,973,304
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9,955,633 7,966,736
-------------------------------
Total liabilities. . . . . . . . . . . . . . . . . 510,592,465 503,538,489
-------------------------------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock (10,000,000 shares authorized, none
issued and outstanding). . . . . . . . . . . . . . . . . . . - -
Common stock ($1 par value, 20,000,000 shares authorized
8,277,995 and 8,275,405 shares issued in 2001
and 2000, respectively). . . . . . . . . . . . . . . . . . . 8,277,995 8,275,405
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 11,354,511 11,348,106
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 39,062,697 37,068,696
Accumulated other comprehensive income (loss) . . . . . . . . . . 2,167,244 (265,517)
Less: Treasury stock at cost; 692,607 shares in 2001 and 152,744
shares in 2000 . . . . . . . . . . . . . . . . . . . . . . . (4,710,446) (928,079)
-------------------------------
Total stockholders' equity . . . . . . . . . . . . 56,152,001 55,498,611
-------------------------------
Total liabilities and stockholders' equity . . . . $ 566,744,466 $ 559,037,100
===============================
See Accompanying Notes To Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF EARNINGS
====================================================================================================================
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
----------------------------------------------------
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . $ 9,017,780 10,145,625 28,555,680 30,955,212
Interest on securities . . . . . . . . . . . . . . . . . . . 1,994,886 1,499,817 5,428,029 4,409,543
Interest on federal funds sold and interest-bearing deposits 105,678 233,686 539,407 423,238
----------------------------------------------------
Total interest income. . . . . . . . . . . . . . . . . 11,118,344 11,879,128 34,523,116 35,787,993
----------------------------------------------------
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . . . . 4,440,623 4,978,858 14,113,120 14,471,296
Interest on borrowings . . . . . . . . . . . . . . . . . . . 660,486 709,527 1,657,400 1,882,057
----------------------------------------------------
Total interest expense . . . . . . . . . . . . . . . . 5,101,109 5,688,385 15,770,520 16,353,353
----------------------------------------------------
Net interest income before provision for loan losses . 6,017,235 6,190,743 18,752,596 19,434,640
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . . 84,000 2,182,890 588,000 3,509,030
----------------------------------------------------
Net interest income after
provision for loan losses. . . . . . . . . . . . . . 5,933,235 4,007,853 18,164,596 15,925,610
----------------------------------------------------
OTHER INCOME
Fees and service charges . . . . . . . . . . . . . . . . . . 1,013,277 1,040,070 2,983,846 3,222,680
Loss on sale of securities available for sale. . . . . . . . - (248,671) - (206,674)
Gain on sale of loans . . . . . . . . . . . . 321,440 182,463 759,096 671,645
Gain on sale of branch offices . . . . . . . . . . . . . . . - 5,079,636 - 5,079,636
Other income . . . . . . . . . . . . . . . . . . . . . . . . 596,194 583,920 1,698,796 1,672,943
----------------------------------------------------
Total other income . . . . . . . . . . . . . . . . . . 1,930,911 6,637,418 5,441,738 10,440,230
----------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . . . . . 3,389,703 3,892,086 10,312,159 11,309,950
Occupancy . . . . . . . . . . . . . . . . 865,111 1,112,242 2,745,433 3,258,011
Other operating. . . . . . . . . . . . . . . . . . . . . . . 2,005,403 2,639,024 5,898,281 7,191,896
----------------------------------------------------
Total other expenses . . . . . . . . . . . . . . . . . 6,260,217 7,643,352 18,955,873 21,759,857
----------------------------------------------------
Earnings before provision for
income taxes. . . . . . . . . . . . . . . . . . . . 1,603,929 3,001,919 4,650,461 4,605,983
Provision for income taxes . . . . . . . . . . . . . . . . . 437,957 924,015 1,243,233 1,192,038
----------------------------------------------------
Net earnings. . . . . . . . . . . . . . . . . . . . . $ 1,165,972 2,077,904 3,407,228 3,413,945
====================================================
Basic earnings per share. . . . . . . . . . . . . . . . . . $ 0.15 $ 0.25 $ 0.43 $ 0.42
Diluted earnings per share. . . . . . . . . . . . . . . . . $ 0.15 $ 0.25 $ 0.43 $ 0.41
See Accompanying Notes To Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
===========================================================================================================================
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,165,972 2,077,904 3,407,228 3,413,945
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 $1,352,243, $329,948, $1,463,021, and
$143,433, respectively. . . . . . . . . . . . . . . . . . . . . . . 817,317 538,337 2,387,035 (234,022)
Reclassification adjustment for losses included in net
earnings, net of tax of $94,495 and $78,536 respectively . . . . . - 154,176 - 128,138
Unrealized gain (loss) on cash flow hedges, net of tax of $270,589 and
$28,026 respectively. . . . . . . . . . . . . . . . . . . . . . . . (441,487) 45,726
---------------------------------------------
Other comprehensive income (loss). . . . . . . . . . . . . . . . . . . . . . 375,830 692,513 2,432,761 (105,884)
---------------------------------------------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,541,802 2,770,417 5,839,989 3,308,061
=============================================
See Accompanying Notes To Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
=============================================================================================================
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,407,228 3,413,945
Adjustment to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation, amortization and accretion. . . . . . . . . . . . . . 2,099,121 2,359,947
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 588,000 3,509,030
Gain on sale of branch offices (5,079,636)
Loss on sale of investment securities available-for-sale. . . . . . - 206,674
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . (759,096) (671,645)
Loss on sale of other real estate . . . . . . . . . . . . . . . . . (64,658) 16,597
Change in:
Mortgage loans held for sale . . . . . . . . . . . . . . . . 465,455 224,475
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,930,467) 13,748
---------------------------
Net cash provided by operating activities . . . . . . . . 3,805,583 3,993,135
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in sale of branch offices (6,675,621)
Net change in interest-bearing deposits . . . . . . . . . . . . . . . . . . 3,391,684 708,172
Proceeds from sales and maturities of investment
securities available-for-sale . . . . . . . . . . . . . . . . . . . . . 23,381,350 12,596,624
Proceeds from maturities of investment securities held-to-maturity. . . . . - 108,520
Purchases of other investments. . . . . . . . . . . . . . . . . . . . . . . (733,350) (27,700)
Purchases of investment securities available-for-sale . . . . . . . . . . . (45,066,491) (12,225,306)
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,029,003 20,295,017
Proceeds from sale of other real estate . . . . . . . . . . . . . . . . . . 735,029 225,226
Proceeds from sale of premises and equipment. . . . . . . . . . . . . . . . 34,066 -
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . (750,775) (654,824)
Purchases of cash surrender value life insurance. . . . . . . . . . . . . . (120,793) (185,749)
---------------------------
Net cash (used in) provided by investing activities. . . (3,100,277) 14,164,359
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,473,724) (26,775,973)
Change in federal funds purchased and repurchase agreements . . . . . . . . 203,589 (14,738,419)
Change in other borrowed funds. . . . . . . . . . . . . . . . . . . . . . . 1,750,000 2,689,202
Proceeds from FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 27,000,000
Payments of FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . (1,414,786) (21,932,588)
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . (3,782,367) (379,981)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 8,995 8,995
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,413,227) (1,479,223)
---------------------------
Net cash (used in) financing activities. . . . . . . . . (121,520) (35,607,987)
---------------------------
Net change in cash and cash equivalents. . . . . . . . . 583,786 (17,450,493)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . . . . . . . . . . . . 21,873,110 27,083,628
---------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . $ 22,456,896 9,633,135
===========================
See Accompanying Notes to Consolidated Financial Statements
6
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 subsidiary 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, 2000.
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of FLAG and its
wholly owned subsidiary, FLAG Bank (Vienna, 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, 2000.
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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER30,
-----------------------------------------------
2001 2000 2001 2000
-----------------------------------------------
Basic earnings per share:
Net earnings . . . . . . . . . . . . $ 1,165,972 2,077,904 3,407,228 3,413,945
Weighted average common shares
Outstanding. . . . . . . . . . . 7,768,959 8,217,223 7,923,701 8,225,041
Per share amount $ 0.15 0.25 0.43 0.42
Diluted earnings per share:
Net earnings . . . . . . . . . . . . $ 1,165,972 2,077,904 3,407,228 3,413,945
Effect of dilutive securities
stock options. . . . . . . . . . 48,852 11,738 28,213 17,107
Diluted earnings per share $ 0.15 0.25 0.43 0.41
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
FINANCIAL CONDITION
OVERVIEW
Total assets were $566.7 million at September 30, 2001, an increase of $7.7
million or 1.3 percent from December 31, 2000. The increase in total assets was
primarily due to increases in investment securities available-for-sale as well
as an increase in other assets and other investments during the nine months
ended September 30, 2001. These increases were partially offset by decreases in
net loans outstanding as well as interest-bearing deposits.
ASSETS AND FUNDING
At September 30, 2001, earning assets totaled $511.0 million, an increase of
$10.0 million from December 31, 2000. Loans comprised 72 percent of earning
assets and investment securities available-for-sale were 25 percent of earning
assets at September 30, 2001. Net loans decreased $16.6 million or 4 percent
for the nine months ended September 30, 2001 primarily due to the sale of $24
million in mortgage loans during 2001.
At September 30, 2001, interest-bearing deposits increased $3.8 million compared
to December 31, 2000. Non-interest bearing deposits decreased $9.2 million in
the first nine months of 2001 and totaled $46.0 million at September 30, 2001.
The decrease in non-interest bearing deposits for the first nine months of 2001
was mainly attributed to a seasonal reduction of approximately $5 million in one
commercial demand deposit account. Federal Home Loan Bank advances increased
$8.6 million in the first nine months of 2001 and totaled $40.5 million at
September 30, 2001. At September 30, 2001 deposits represented 90 percent of
FLAG's interest-bearing liabilities and Federal Home Loan Bank advances
represented 9 percent.
The increase in Federal Home Loan Bank advances was the result of additional
borrowings in the amount of $10 million maturing in 5 years. The advances, in
addition to $10 million in brokered certificates of deposits and $5 million of
overnight funds were used to fund the acquisition of $20 million in investment
securities available-for-sale as well as $5 million in loan participations as
part of a specifically matched leverage transaction.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $3.8 million for the nine
months ended September 30, 2001. Net cash used in investing activities totaling
$3.1 million consisted largely of purchases of investment securities
available-for-sale of $45.0 million partially offset by $23.3 million in
proceeds from sales and maturities of investment securities available-for-sale
and a net decrease in loans of $16.0 million. Net cash provided by financing
activities consisted largely of a $10.0 million increase in Federal Home Loan
Bank, partially offset by a $5.5 million decrease in deposits as well as
purchases of treasury stock of $3.8 million.
Total stockholders' equity at September 30, 2001, was 9.91 percent of total
assets compared to 9.93 percent at December 31, 2000.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
RESULTS OF OPERATIONS
Nine months and quarters ended September 30, 2001 and 2000.
OVERVIEW
Net earnings for the nine months ended September 30, 2001 remained stable
compared to the first nine months of 2000. Net earnings per common share
increased 2 percent for the first nine months of 2001 and are $0.43 compared to
$0.42 for the first nine months of 2000. Net interest income decreased 4 percent
for the nine months ended September 30, 2001 over the same period of 2000 to
$18.8 million.
Net earnings for the quarter ended September 30, 2001 decreased $912,000 or 44
percent compared to the quarter ended September 30, 2000. Net earnings per
common share decreased 40 percent for the quarter ended September 30, 2001 and
are $0.15 compared to $0.25 in the quarter ended September 30, 2000. The
decrease in net income for the quarter ended September 30, 2001 was due largely
to gains on sale of assets during the quarter ended September 30, 2000.
During the quarter ended September 30, 2000, FLAG sold loans in the amount of
$58 million, deposits in the amount of $74 million as well as property of its
bank branches in Cobbtown, Metter, Statesboro, Blackshear, Homerville and
Waycross, Georgia, and recognized a gain of on the sale of approximately $5
million.
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 2001 decreased
$682,000 compared to the first nine months of 2000. This decrease resulted from
a $1,265,000 or 4.0 percent decrease in interest income offset by a $583,000 or
4.0 percent decrease in interest expense. Net interest income for the quarter
ended September 30, 2001 decreased $174,000 compared to the quarter ended
September 30, 2000. This decrease resulted from a $761,000 or 6.4 percent
decrease in interest income offset by a $587,000, or 10.0 percent decrease in
interest expense. Decreases in net interest income are a result of lower
interest rates, resulting in lower interest rate spreads.
NON-INTEREST INCOME AND EXPENSE
Non-interest income for the first nine months ended September 30, 2001 decreased
$4,998,000 or 48 percent compared to the first nine months of 2000. Non-interest
income for the quarter ended September 30, 2001 decreased $4,706,000 or 71
percent compared to the quarter ended September 30, 2000.
The decrease in non-interest income for the nine months and quarter ended
September 30, 2001 was due largely to a decrease of $5,080,000 in gain on sale
of assets representing gains on sales of branches during September 30, 2000.
Gain on sale of loans increased $87,000 or 13% for the nine months ended
September 30, 2001 compared to the same period in 2000. Gain on sale of loans
increased $139,000 or 76% for the quarter ended September 30, 2001 compared to
the same period in 2000. The increases in gain on sale of loans were attributed
to increased service release fees on loan sales, due to increased mortgage loan
activity.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Non-interest expense decreased $2,804,000 or 13 percent for the first nine
months of 2001 compared to the same period of 2000. Non-interest expense
decreased $1,383,000 or 18 percent for the quarter ended September 30, 2001
compared to the same period of 2000. Salaries and employee benefits decreased
$998,000 or 9 percent during the first nine months of 2001 compared to 2000 and
decreased $502,000 or 13 percent during the quarter ended September 30, 2001
compared to the same period of 2000. These decreases in non-interest expense
were primarily attributed to reduced expenses as a result of the sale of
branches during the third quarter of 2000.
INCOME TAXES
Income tax expense for the first nine months of 2001 was $1,243,000 compared to
$1,192,000 for the first nine months of 2000. The effective tax rate for the
nine months ended September 30, 2001 was 27 percent and for the nine months
ended September 30, 2000 was 26 percent. Income tax expense for the quarter
ended September 30, 2001 was $438,000 compared to $924,000 for the same period
in 2000. The effective tax rate for the quarter ended September 30, 2001 was 27
percent and for the quarter ended September 30, 2000 was 31 percent.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
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 was
$6.5 million at September 30, 2001 and at December 31, 2000 was $6.6 million.
The ratio of the allowance for loan losses to net outstanding loans at September
30, 2001 and December 31, 2000 was 1.74 percent and 1.68 percent, respectively.
The provision for loan losses for the first nine months and quarter ended
September 30, 2001 decreased $2,921,000 and $2,099,000, respectively compared to
the same period in 2000. This decrease was a result of additional provisions
that were made in 2000 for certain loans retained as a result of the Homerville,
Georgia branch sale.
Management performs an on-going loan review process. Based on the results of
these reviews, we evaluate the adequacy of the allowance for possible loan
losses. This evaluation considers historical loan losses by risk grade under
each major category of loans, i.e., commercial, real estate and consumer. It
also considers current portfolio risk, industry concentrations and the
uncertainty associated with changing economic conditions. All new loans are
risk rated under loan policy guidelines. On a monthly basis, we evaluate the
composite risk ratings in a model that assesses the adequacy of the current
allowance for loan losses. This evaluation is presented to the board of
directors each month. Management performs loan reviews for compliance with
underwriting policy on new loans and presents the results in the monthly asset
review committee meeting. Past due loans are reviewed weekly. Risk ratings may
be changed if it appears that new loans may not have received the proper initial
grading or, if on existing loans, credit conditions have improved or worsened.
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.
NON-PERFORMING ASSETS AND PAST DUE LOANS
Non-performing assets, comprised of real estate owned, non-accrual loans and
loans for which payments are more than 90 days past due, totaled $9.6 million at
September 30, 2001 compared to $12.8 million at December 31, 2000.
Non-performing assets as a percentage of net loans and other real estate owned
at September 30, 2001 and December 31, 2000 were 2.61 percent and 3.28 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
At September 30, 2001, FLAG and its bank 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, 2001
-------------------------------------------------------------------
ACTUAL REQUIRED EXCESS
AMOUNT % AMOUNT % AMOUNT %
-------------------------------------------------------------------
Tier 1 Capital $47,175 8.52% $21,351 4.00% $25,824 4.52%
Tangible Capital $47,175 8.52% $ 8,307 1.50% $38,868 7.02%
Risk-Based Capital $52,812 11.90% $35,506 8.00% $17,306 3.90%
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PART 2. OTHER INFORMATION
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
================================================================================
PART II. Other Information
Item 1. Legal Proceedings
FLAG and the Bank are periodically involved as plaintiff or defendant in
various legal actions in the ordinary course of its business.
As previously reported, FLAG Bank purchased certain warehouse loans of Gulf
Properties Financial Services, Inc., a residential mortgage broker. The loans
that Gulf Properties sold to FLAG Bank were fraudulent. Gulf Properties filed
Chapter 11 bankruptcy on December 30, 1998. 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. The perpetrators of the
fraud have pled guilty to criminal charges and have been sentenced to prison.
FLAG Bank obtained a restitution order as part of the criminal sentence. 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. FLAG Bank has
recovered all of the amounts lost as a result of the fraud including attorney's
fees spent in the recovery effort.
On June 28, 2000, David and Trenne Baker filed a suit against America's
Homeplace, Southern Homestead Mortgage and 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. FLAG Bank provided the construction financing on the home.
Co-defendant America's Homeplace filed a motion to compel arbitration in
accordance with the plaintiff's contract. The motion was granted and the
plaintiffs are now pursuing their claim against AHP only in an arbitration
proceeding. FLAG Bank intends to vigorously defend the claims, if the
plaintiffs continue to pursue a claim against FLAG at the conclusion of the
arbitration.
In September 2000, Bank of Milan filed suit against one of its Borrowers,
Walter T. Branyan, to collect upon an outstanding loan in the amount of
$1,349,066.66. The Bank of Milan also filed suit against the borrower's father,
Walter C. Branyan, and a business associate, R. Tommy Gilder as Guarantors of
the obligation. Walter C. Branyan has settled his obligation with the Bank of
Milan and the court has entered a default judgment against Walter T. Branyan.
R. Tommy Gilder recently settled favorably with the Bank of Milan.
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OTHER INFORMATION
================================================================================
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 2002 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 November 12, 2001 to be included in the 2002 Proxy
Materials. A shareholder must notify the Company before January 26, 2002 of a
proposal for the 2002 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 26, 2002, 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
Reports on Form 8-K filed during the Third Quarter of 2001:
None.
Reports on Form 8-K filed from Third Quarter End 2001 to Present:
None.
14
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/ J. Daniel Speight, Jr.
-----------------------------
J. Daniel Speight, Jr.
(Chief Executive Officer)
By: /s/ Thomas L. Redding
-----------------------------
Thomas L. Redding
(Chief Financial Officer)
Date: 11/9/01
-----------------------------
15