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, 2002
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 [X] NO
Common stock, par value $1 per share: 8,386,365 shares
Outstanding as of November 8, 2002
FLAG Financial Corporation and Subsidiaries
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Table of Contents
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 and
December 31, 2001 and September 30, 2001............................ 3
Consolidated Statements of Operations for the Nine months and
Quarters Ended September 30, 2002 and 2001........................... 4
Consolidated Statements of Comprehensive Income for the
Nine months and Quarters Ended September 30, 2002 and 2001.......... 5
Consolidated Statements of Cash Flows for the Nine months
Ended September 30, 2002 and 2001.................................... 6
Notes to Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations........................................... 8
Item 3. Market Risk Information................................................. 15
Item 4. Controls and Procedures................................................ 15
PART II Other Information
Item 1. Legal Proceedings....................................................... 16
Item 2. Changes in Securities................................................... 16
Item 3. Defaults Upon Senior Securities......................................... 16
Item 4. Submission of Matters to a Vote of Security Holders..................... 16
Item 5. Other Information....................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................ 16
2
Part I. Financial Information
Item 1. Financial Statements
FLAG Financial Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, December 31, September 30,
2002 2001 2001
-------------------------------------------------
(UNAUDITED) (AUDITED) (UNAUDITED)
ASSETS
------
Cash and due from banks ........................................ $ 12,401,953 20,077,641 16,418,896
Federal funds sold ............................................. -- -- 6,038,000
-------------------------------------------------
Total cash and cash equivalents ............................ 12,401,953 20,077,641 22,456,896
-------------------------------------------------
Interest-bearing deposits ...................................... -- 160,093 59,756
Investment securities available-for-sale ....................... 118,096,869 131,526,473 126,552,151
Other investments .............................................. 7,142,682 5,835,093 5,835,093
Mortgage loans held-for-sale ................................... 7,561,919 6,454,127 4,414,300
Loans, net ..................................................... 376,582,848 368,967,089 368,044,332
Premises and equipment, net .................................... 13,171,474 13,943,542 13,910,499
Accrued interest receivable .................................... 4,451,006 4,778,443 6,038,216
Other assets ................................................... 19,383,763 18,459,400 19,433,223
-------------------------------------------------
Total assets .................................... $ 558,792,514 570,201,901 566,744,466
=================================================
LIABILITIES
Non interest-bearing deposits .................................. $ 39,347,937 48,553,710 45,882,443
Interest-bearing demand deposits ............................... 126,039,129 119,985,564 114,302,408
Savings ........................................................ 25,401,806 24,248,553 25,127,983
Time ........................................................... 232,300,619 247,793,498 270,650,410
-------------------------------------------------
Total deposits .............................................. 423,089,491 440,581,325 455,963,244
-------------------------------------------------
Federal funds purchased and repurchase agreements .............. 5,703,000 18,001,000 865,071
Other borrowings ............................................... -- 5,000,000 3,250,000
Advances from Federal Home Loan Bank ........................... 62,000,000 39,448,435 40,558,518
Accrued expenses and other liabilities ......................... 7,752,575 13,147,654 9,955,632
-------------------------------------------------
Total liabilities .............................. 498,545,066 516,178,414 510,592,465
-------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized, none
issued and outstanding) ................................... -- -- --
Common stock ($1 par value, 20,000,000 shares authorized,
9,631,451, 8,277,995 and 8,277,995 shares issued at
September 30, 2002, December 31, 2001 and
September 30, 2001, respectively .......................... 9,631,451 8,277,995 8,277,995
Additional paid-in capital ..................................... 23,426,500 11,354,511 11,354,511
Retained earnings .............................................. 34,185,472 39,223,132 39,062,697
Accumulated other comprehensive income ......................... 2,471,535 1,612,488 2,167,244
Less: Treasury stock at cost; 1,236,961 shares at September 30,
2002, 908,001 shares at December 31, 2001 and 692,607 shares
at September 30, 2001, respectively ........................ (9,467,510) (6,444,639) (4,710,446)
-------------------------------------------------
Total stockholders' equity ................... 60,247,448 54,023,487 56,152,001
-------------------------------------------------
Total liabilities and stockholders' equity ... $ 558,792,514 570,201,901 566,744,466
=================================================
See Accompanying Notes to Consolidated Financial Statements
3
Consolidated Statements of Operations
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(UNAUDITED)
Three Months Ended Nine months Ended
September 30, September 30,
---------------------------------------------------------
2002 2001 2002 2001
Interest Income
Interest and fees on loans ................................ $ 7,869,733 9,017,780 22,173,738 28,555,680
Interest on securities .................................... 1,726,540 1,994,886 5,294,916 5,428,029
Interest on time deposits and federal funds sold .......... 14,705 105,678 88,575 539,407
---------------------------------------------------------
Total interest income ............................... 9,610,978 11,118,344 27,557,229 34,523,116
---------------------------------------------------------
Interest Expense
Interest on deposits:
Interest Bearing Demand Deposits ....................... 487,950 586,978 1,489,478 1,914,476
Savings Deposits ....................................... 56,102 75,172 165,768 309,699
Time Deposits .......................................... 2,026,869 3,778,473 6,857,305 11,888,945
Other ..................................................... 295,143 660,486 880,906 1,657,400
---------------------------------------------------------
Total interest expense .............................. 2,866,064 5,101,109 9,393,457 15,770,520
---------------------------------------------------------
Net interest income before provision for loan losses 6,744,914 6,017,235 18,163,772 18,752,596
Provision for Loan Losses ............................................. 195,000 84,000 4,399,000 588,000
---------------------------------------------------------
Net interest income after provision for loan losses . 6,549,914 5,933,235 13,764,772 18,164,596
---------------------------------------------------------
Other Income
Service charges on deposit accounts ........................ 848,151 977,356 2,529,494 2,947,925
Mortgage loan and related fees ............................ 808,334 588,816 1,862,331 1,676,920
Insurance commissions and brokerage fees .................. 182,685 175,860 429,418 486,179
Other income .............................................. 145,203 188,879 531,994 330,714
---------------------------------------------------------
Total other income .................................. 1,984,373 1,930,911 5,353,237 5,441,738
---------------------------------------------------------
Other Expenses
Salaries and employee benefits ............................ 3,989,371 3,389,703 14,767,480 10,312,159
Occupancy ................................................. 876,378 863,082 2,767,502 2,663,404
Professional fees ......................................... 165,790 254,501 1,574,797 814,743
Postage, printing and supplies ............................ 220,347 121,987 762,613 642,057
Amortization of intangibles ............................... 126,367 124,322 385,911 372,966
Communications and data ................................... 484,814 561,703 1,611,714 1,541,296
Other operating ........................................... 706,050 944,919 3,160,412 2,609,248
---------------------------------------------------------
Total other expenses ................................ 6,569,117 6,260,217 25,030,429 18,955,873
---------------------------------------------------------
Earnings (loss) before provision for
Income taxes and extraordinary item .............. 1,965,170 1,603,929 (5,912,420) 4,650,461
Provision for income taxes ................................ 607,414 437,957 (2,541,295) 1,243,233
---------------------------------------------------------
Earnings (loss) before extraordinary item ........... 1,357,756 1,165,972 (3,371,125) 3,407,228
Extraordinary item - loss on redemption of debt, net of
income tax benefit of $101,377 in 2002 ............. -- -- 165,404 --
---------------------------------------------------------
Net earnings (loss) ................................ $ 1,357,756 1,165,972 (3,536,529) 3,407,228
=========================================================
Basic earnings (loss) per share before extraordinary item . $ 0.16 0.15 (0.41) 0.43
Extraordinary item ........................................ -- -- (0.02) --
---------------------------------------------------------
Basic earnings (loss) per share ........................... $ 0.16 0.15 (0.43) 0.43
=========================================================
Diluted earnings (loss) per share before extraordinary item $ 0.16 0.15 (0.41) 0.43
Extraordinary item ........................................ -- -- (0.02) --
---------------------------------------------------------
Diluted earnings (loss) per share ......................... $ 0.16 0.15 (0.43) 0.43
=========================================================
See Accompanying Notes to Consolidated Financial Statements.
4
Consolidated Statements of Comprehensive Income
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(UNAUDITED)
Three Months Ended Nine months Ended
September 30, September 30,
-------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------
Net earnings (loss) ...................................................... $ 1,357,756 1,165,972 (3,536,529) 3,407,228
Other comprehensive income, net of tax:
Unrealized gains on investment
securities available-for-sale:
Unrealized gains arising during the period,
net of tax of $179,619, $500,936, $659,785 and
$1,463,021, respectively ........................................ 293,063 817,317 1,076,491 2,387,035
Plus: Reclassification adjustment for losses included in net
earnings (loss), net of tax of $4,240............................. -- -- 6,917 --
Unrealized (losses) gains on cash flow hedges, net of tax of $45,837,
$270,589, $137,512 and $28,026 respectively ..................... (74,787) (441,487) (224,361) 45,726
----------- --------- ---------- ---------
Other comprehensive income ............................................... 218,276 375,830 859,047 2,432,761
----------- --------- ---------- ---------
Comprehensive income (loss) .............................................. $ 1,576,032 1,541,802 (2,677,482) 5,839,989
=========== ========= ========== =========
See Accompanying Notes to Consolidated Financial Statements
5
Consolidated Statements of Cash Flows
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Nine months Ended
September 30,
---------------------------------
2002 2001
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings ....................................................... $ (3,536,529) $ 3,407,228
Adjustment to reconcile net (loss) earnings to net
cash provided by (used in) operating activities:
Depreciation, amortization and accretion .......................... 1,911,350 2,099,121
Provision for loan losses ......................................... 4,399,000 588,000
Loss on sale of available-for-sale securities ..................... 11,157
Gain on sales of loans ............................................ (1,016,539) (759,096)
Gain on sale of other real estate ................................. (56,639) (64,658)
Change in:
Mortgage loans-held-for sale ............................... (91,253) 465,455
Other ...................................................... (7,829,338) (1,930,467)
---------------------------------
Net cash provided by (used in) operating activities ..... (6,208,791) 3,805,583
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits ................................... 160,093 3,391,684
Proceeds from sales and maturities of investment
securities available-for-sale ......................................... 53,921,872 23,381,350
Purchases of investment securities available-for-sale ..................... (39,355,680) (45,066,491)
Purchases of other investments ............................................ (1,113,700) (733,350)
Net change in loans ....................................................... (12,014,759) 16,029,003
Proceeds from sale of other real estate ................................... 1,271,452 735,029
Proceeds from sale of premises and equipment .............................. 430,763 34,066
Purchases of premises and equipment ....................................... (1,297,089) (750,775)
Purchases of cash surrender value life insurance .......................... (133,023) (120,793)
---------------------------------
Net cash provided by (used in) investing activities........ 1,869,929 (3,100,277)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits .................................................... (17,491,834) (5,473,724)
Change in federal funds purchased and repurchase agreements ............... (12,298,000) 203,589
Change in other borrowed funds ............................................ (5,000,000) 1,750,000
Proceeds from FHLB advances ............................................... 46,000,000 10,000,000
Payments of FHLB advances ................................................. (23,448,435) (1,414,786)
Purchase of treasury stock ................................................ (3,022,872) (3,782,367)
Proceeds from issuance of stock ........................................... 11,707,740 --
Proceeds from exercise of stock options ................................... 481,705 8,995
Proceeds from issuance of warrants ........................................ 1,236,000
Cash dividends paid ....................................................... (1,501,130) (1,413,227)
---------------------------------
Net cash used in financing activities ...................... (3,336,826) (121,520)
---------------------------------
Net change in cash and cash equivalents .................. (7,765,688) 583,786
Cash and cash equivalents at beginning of period .......................... 20,077,641 21,873,110
---------------------------------
Cash and cash equivalents at end of period ................................. $ 12,401,953 $ 22,456,896
================================
See Accompanying Notes to Consolidated Financial Statements
6
Notes to Consolidated Financial Statements
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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
accounting principles generally accepted in the United States of America 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, 2001.
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, 2001.
Note 2. Earnings Per Share
Net earnings (loss) per common share are based on the weighted average number of
common shares outstanding during each period. The calculation of basic and
diluted earnings (loss) per share is as follows:
Three Months Ended Nine months Ended
September 30, September 30,
---------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) after extraordinary item $1,357,756 $1,165,972 $(3,536,529) $3,407,228
Weighted average common shares
outstanding ............................ 8,393,364 7,768,959 8,136,955 7,923,701
Per share amount ........................... $ 0.16 $ 0.15 $ (0.43) $ 0.43
Diluted earnings (loss) per share:
Net earnings (loss) ........................ $1,357,756 $1,165,972 $(3,536,529) $3,407,228
Effect of dilutive securities -
stock options .......................... 252,268 48,852 -- 28,213
Per share amount ........................... $ 0.16 $ 0.15 $ (0.43) $ 0.43
7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
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Forward-Looking Statements
The following is a discussion of our financial condition as of September 30,
2002 compared to December 31, 2001 and the results of our operations for the
quarter and nine months ended September 30, 2002 compared to the quarter and
nine months ended September 30, 2001. These comments should be read in
conjunction with our consolidated financial statements and accompanying
footnotes appearing in this report. This report contains "forward-looking
statements" relating to, without limitation, future economic performance, plans
and objectives of management for future operations, and projections of revenues
and other financial items that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. The words "expect", "estimate", "anticipate", and "believe", as well
as similar expressions, are intended to identify forward-looking statements. Our
actual results may differ materially from the results discussed in the
forward-looking statements, and our operating performance each quarter is
subject to various risks and uncertainties. Factors that could cause actual
results to differ from those discussed in the forward-looking statements
include, but are not limited to:
(1) the strength of the U.S. economy in general and the strength of the local
economies in which operations are conducted;
(2) the effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System;
(3) inflation, interest rate, market and monetary fluctuations;
(4) the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits;
(6) technological changes;
(7) acquisitions;
(8) the ability to increase market share and control expenses;
(9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with
which the Company and its subsidiary must comply;
(10) the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as the Financial Accounting
Standards Board;
(11) changes in the Company's organization, compensation and benefit plans;
(12) the costs and effects of litigation and of unexpected or adverse outcomes
in such litigation; and
(13) the Company's success at managing the risks involved in the foregoing.
Forward-looking statements speak only as of the date on which they are made. We
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made to reflect
the occurrence of unanticipated events.
8
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Financial Condition
Assets and Funding
Total assets were $558.8 million at September 30, 2002, a decrease of $11.4
million or 2.0% from December 31, 2001. The Company has worked during 2002 to
reduce the level of lower yielding assets (loans and investment securities) as
well as similar amounts of funding identified as relatively expensive (CDs and
fixed FHLB advances). Resulting from these efforts are lower levels of earning
assets and deposits that are producing slightly higher net interest income.
While total assets reflected a decrease of $11.4 million, earning assets during
the same period decreased only $3.6 million.
Gross loans outstanding at September 30, 2002 were $383.9 million compared to
$376.3 million at December 31, 2001. Loans outstanding, while up 2.0% over prior
year amounts, have just recently begun to grow. The Company's efforts at
reducing lower earning and higher risk assets during 2002 trimmed loans
outstanding to as low as $344.9 million during the second quarter. Loans
outstanding at September 30, 2002 represent growth of approximately $46.5
million or 13.4% from the lower balances experienced during the second quarter
of 2002.
Investment securities at September 30, 2002 totaled $125.2 million versus $137.4
million at December 31, 2001. While the Company has reinvested some of the funds
that have resulted from maturities and sales during 2002, a portion of those
proceeds have been used to offset decreases in certain funding sources as well
as to fund loan growth.
Non-interest-bearing deposits have decreased by $9.2 million compared to
December 31, 2001 levels. This decrease is attributable to the divestiture of
two branches in December 2001 as well as the closure of five branches during
2002. Interest bearing transaction accounts have increased over the same period
by $11.7 million and largely results from the Company's focus on this type of
funding as opposed to time deposits. Time deposits have decreased substantially
over the same period, from $247.8 million at December 31, 2001 to $232.3 million
at September 30, 2002.
Liquidity and Capital Resources
The Company maintains borrowing lines with various other financial institutions
including the Federal Home Loan Bank. At September 30, 2002, the Company had
total borrowing agreements of approximately $101 million of which approximately
$62.0 million was advanced.
The Company's Board of Directors approved a private placement of 1.3 million
shares of common stock and 1.3 million warrants to purchase common stock during
the first quarter of 2002. At September 30, 2002, 1,272,000 shares and 1,272,000
warrants to purchase common stock had been sold for an aggregate of $12.9
million. All shares and warrants issued in the private placement were issued to
members of the Company's management team and other employees under Rule 506
under the Securities Act of 1933, as amended.
The funds provided from the private placement contributed to an increase of
11.5% in stockholders' equity to $60.2 million over December 31, 2001 levels.
The increase provided by the private placement funds was partially offset by the
net loss of $3.5 million and an increase in treasury stock of $3.0 million.
Stockholders' equity as a percentage of total assets was 10.8% at September 30,
2002 versus 9.5% at December 31, 2001.
9
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Results of Operations
Overview of nine month period ending September 30, 2002
Net loss for the nine month period ending September 30, 2002 was $3.5 million or
$0.43 per share compared to net income of $3.4 million or $0.43 per share for
the first nine months of 2001. The net loss in 2002 includes an after tax
restructuring charge of $3,380,000, a one-time after tax provision for loan
losses of $2,483,000, and an after tax extraordinary charge of $165,000 related
to the prepayment of a portion of the Company's Federal Home Loan Bank
borrowings.
Net interest income for the nine months ending September 30, 2002 was $18.2
million, a decrease of $600,000 or 3.1% from the same period in 2001. This
decrease is primarily attributed to the significant decrease in interest rates
as well as a slight contraction in earning assets during 2002.
Non-interest income for the nine month period ending September 30, 2002
decreased 1.6% to $5.4 million when compared to the nine months ending September
30, 2001. While income from mortgage banking activities increased $185,000 or
11.1% for the period, FLAG experienced a decrease in fees and service charges on
deposit accounts of $418,000 or 14.2%. This decrease was mainly attributed to
FLAG's decision to sell two branches in December 2001 with approximately $37
million in deposits.
Excluding the one-time charges mentioned above, the Company would have earned
approximately $2.5 million with non-interest expenses of approximately $19.6
million for the nine month period ending September 30, 2002. This level of
non-interest expenses represents an increase of approximately $600,000 and is
largely comprised of higher salaries and benefits.
Results of operations for quarter ending September 30, 2002
Net income for the quarter ended September 30, 2002 was $1,358,000 or $0.16 per
diluted share. This level of net income represents an increase of 16.5% compared
to net income of $1,166,000 for the comparable period in 2001. Diluted earnings
per share also increased from 2001 levels of $0.15 per share.
Net interest income for the quarter ending September 30, 2002 increased
approximately $728,000 or 12.1% over the comparable quarter in 2001. For these
periods, net interest margin increased to 5.30% from 4.63%. The Company
attributes most of the decrease in interest income and interest expense to the
lower rate environment that has persisted during 2002. The decrease in interest
expense has been more significant than the decrease in interest income,
resulting in increased net interest income.
Interest income for the third quarter of 2002 was $9.6 million, a decrease of
$1.5 million or 13.6% over the same quarter in 2001. Interest and fees on loans
decreased from $9.0 million to $7.9 million, a decrease of 12.7%. FLAG's yield
on loans during the quarter ended September 30, 2002 decreased to 8.35% from
9.46% in the third quarter of 2001. Average loans outstanding during the third
quarter of 2002 were $374.0 million, a decrease of $4.1 million or 1.1% compared
to the comparable quarter a year ago. At September 30, 2002, gross loans
accounted for 68.7% of total assets and approximately 74.3% of interest earning
assets. This compares favorably with the September 30, 2001 ratios of 66.1% and
73.2%, respectively.
10
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Interest income on investment securities decreased by $268,000 during the
quarter ending September 30, 2002 to $1.7 million when compared to the same
quarter in 2001. The yield on the investment portfolio decreased from 5.86% to
5.24% over this period. For the quarters ended September 30, 2002 and 2001, FLAG
had average investment securities of $129.6 million and $134.0 million,
respectively.
FLAG aggressively manages earning assets in order to maintain a balanced
combination of credit and market risk, as well as yield. In the current rate
environment, FLAG has attempted to maintain a very low level of federal funds
sold, relying on borrowing lines with other financial institutions, including
but not limited to the FHLB. During the third quarter of 2002, FLAG was
successful in averaging only $1.3 million of federal funds sold and interest
bearing deposits with other banks, compared to $3.3 million during the third
quarter of 2001. Federal funds sold and interest- bearing deposits with other
banks averaged 0.25% and 0.64% of total interest earning assets for the quarters
ending September 30, 2002 and 2001, respectively.
FLAG uses customer deposits and borrowings from other financial institutions as
its two primary sources to fund interest earning assets. Total funding for FLAG
at September 30, 2002 was $490.8 million with an overall cost for the quarter of
2.36%, compared to $500.6 million, costing 4.10% in the comparable quarter of
2001. The decreases in costs and balances resulted in a savings of $2.2 million
or 43.8% for the quarter, and allowed FLAG to improve total net interest income
with lower levels of interest earning assets.
Interest expense on customer deposits for the third quarter of 2002 decreased by
$1.9 million to $2.6 million when compared to the quarter ended September 30,
2001. This 42% decrease was mainly attributable to aggressive repricing efforts
on all elements of FLAG's deposit base. Interest bearing demand deposits
averaged $126.7 million with an average cost of 1.53% for the quarter ending
September 30, 2002 compared to $108.6 million costing an average of 2.15% for
the comparable quarter of 2001. Time deposits averaged $233.3 million and $266.7
million with average costs of 3.45% and 5.62% for the third quarter of 2002 and
2001, respectively.
Interest expense on other borrowings consists of interest on FHLB advances,
other borrowings and federal funds purchased. For the third quarter of 2002,
interest expense on other borrowings was approximately $295,000 compared to
$660,000 for the same quarter in 2001. This decrease of 55.3% is the result of
the early repayment and refinancing of fixed FHLB advances in recent quarters.
This refinancing allowed FLAG to reduce the overall cost on other borrowings to
1.97% for the third quarter of 2002 compared to 5.25% a year ago.
Non-Interest Income and Expense
Non-interest income grew 2.8% during the third quarter of 2002 compared to the
same period in 2001. The decrease in non-interest bearing balances discussed
earlier contributed to a decrease in service charges of 13.2% to $848,000.
Income from mortgage banking activities (origination fees, gain on sale of loans
and service release premiums) grew $220,000 to $808,000 in the third quarter of
2002, mostly the result of very favorable interest rates on home mortgages.
Non-interest income as a percent of total revenue decreased to 22.7% from the
2001 level of 24.3%.
11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Non-interest expenses increased during the quarter ended September 30, 2002 to
$6.6 million from $6.3 million in the same quarter of 2001. This 4.9% increase
includes a $13,000 increase in occupancy expense, a $239,000 decrease in other
operating expense and a $600,000 increase in salaries and benefits. A
significant portion of the increase in salaries and benefits is attributed to
increased commissions related to improved production in the mortgage, insurance
and investment groups.
Income Taxes
Income tax expense for the quarter ending September 30, 2002 was $607,000
compared to $438,000 for the same quarter in 2001. FLAG's effective tax rate for
the quarter ended September 30, 2002 was 30.9% compared to 27.3% for the quarter
ended September 30, 2001.
Loans
FLAG engages in a full complement of lending activities, including real
estate-related, commercial and financial loans and consumer installment loans.
FLAG generally concentrates lending efforts on real estate related loans. As of
September 30, 2002, FLAG's loan portfolio consisted of 84.3% real estate-related
loans, 11.1% commercial and financial loans, and 4.4% consumer installment
loans. While risk of loss is primarily tied to the credit quality of the various
borrowers, risk of loss may also increase due to factors beyond the FLAG's
control, such as local, regional and/or national economic downturns. General
conditions in the real estate market may also impact the relative risk in the
real estate portfolio. Of the target areas of lending activities, commercial and
financial loans are generally considered to have a greater risk of loss than
real estate loans or consumer installment loans.
Loans are stated at unpaid balances, net of unearned income and deferred loan
fees. Balances within the major loans receivable categories are represented in
the following table: (000's omitted)
September 30, December 31, September 30,
2002 2001 2001
-------- ------- -------
Commercial/financial/agricultural..... $ 42,750 79,722 57,913
Real estate construction ............. 76,036 65,052 65,341
Real estate - mortgage ............... 53,858 47,180 43,925
Real estate - other .................. 194,142 166,568 184,574
Installment loans to individuals ..... 17,094 17,793 22,822
-------- ------- -------
Total loans .......................... 383,880 376,315 374,575
less:
Allowance for loan losses ............ 7,297 7,348 6,531
-------- ------- -------
Total net loans ...................... $376,583 368,967 368,044
======== ======= =======
12
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Provision and Allowance for Loan and Lease Losses
FLAG maintains an allowance for loan losses appropriate for the quality of the
loan portfolio and sufficient to meet anticipated future loan losses. FLAG
utilizes a comprehensive loan review and risk identification process and the
analysis of FLAG's financial trends to determine the adequacy of the allowance.
Many factors are considered when evaluating the allowance. The analysis is based
on historical loss trends; trends in criticized and classified loans in the
portfolio; trends in past due and non-accrual loans; trends in portfolio volume,
composition, maturity, and concentrations; changes in local and regional
economic market conditions; the accuracy of the loan review and risk
identification system, and the experience, ability, and depth of lending
personnel and management.
Management evaluates the allowance on a quarterly basis. Through this
evaluation, the appropriate provision for loan losses is determined by
considering the current allowance level, actual loan losses and loan recoveries.
The provision for loan losses for the third quarter of 2002 was $195,000 versus
$84,000 for comparable period in 2001. The allowance for loan and lease losses
at September 30, 2002 was $7.3 million, approximately the same as December 31,
2001. The ratio of the allowance for loan losses to net outstanding loans at
September 30, 2002 and December 31, 2001 was 1.94% and 1.99%, respectively.
The following table summarizes the changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off by
loan category, and additions to the allowance that have been charged to
operations in the Company's consolidated statements of operations. (000's
omitted)
Nine months ended
September 30,
2002 2001
---- ----
Balance of allowance for loan losses at beginning of period $7,348 6,583
Provision charged to operating expense 4,399 588
Charge offs:
Commercial 959 218
Construction -- --
Real estate - mortgage 469 359
Real estate - other 3,221 45
Consumer 312 251
------ ------
Total charge-offs 4,961 873
Recoveries:
Commercial 120 83
Construction 1
Real estate - mortgage 23 13
Real estate - other 283 108
Consumer 84 29
------ ------
Total recoveries 511 233
------ ------
Net charge-offs 4,450 640
------ ------
Balance of allowance for loan losses at end of period $7,297 6,531
====== ======
13
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Non-Performing Assets
Non-performing assets (nonaccrual loans, real estate owned and repossessions)
totaled approximately $12.5 million at September 30, 2002 compared to $18.9
million at December 31, 2001 and $9.6 million at September 30, 2001. These
levels as a percentage of net loans outstanding represented 3.33%, 5.14% and
2.62%, 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 is to maintain a low level of non-performing assets and
return current non-performing assets to earning status.
Non-performing assets (000's omitted) September 30, December 31, September 30,
2002 2001 2001
--------- --------- ---------
Loans on nonaccrual.............................. $ 9,464 17,122 6,975
Loans past due 90 days and still accruing........ 2,084 594 1,367
Other real estate owned.......................... 989 1,231 1,303
--------- --------- ---------
Total non-performing assets...................... $ 12,537 18,947 9,645
========= ========= =========
Total non-performing assets as a percentage of
net loans...................................... 3.33% 5.14% 2.62%
Capital
At September 30, 2002, 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 the Company's consolidated
Tier-1 Capital, Tangible Capital, and Risk-Based Capital:
September 30, 2002
---------------------------------------------------------------------------------------------------------------------
Actual Required Excess
Amount % Amount % Amount %
---------------------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) $ 56,897 12.77% $ 35,654 8.00% $ 21,243 4.77%
Tier 1 Capital (to Risk Weighted Assets) $ 51,286 11.51% $ 17,827 4.00% $ 33,459 7.51%
Tier 1 Capital (to Average Assets) $ 51,286 9.49% $ 21,627 4.00% $ 29,659 5.49%
14
Management's Discussion and Analysis of
Financial Condition and Results of Operations
--------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As of September 30, 2002, there were no substantial changes in the composition
of the Company's market-sensitive assets and liabilities or their related market
values from that reported as of December 31, 2001. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company's audited consolidated financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 2001 included in the Company's 2001
Annual Report on Form 10-K.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) that is required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or, to the company's knowledge, in other factors that could
significantly affect those internal controls subsequent to the date the Company
carried out its evaluation, and there have been no corrective actions with
respect to significant deficiencies or material weaknesses.
15
Part 2. Other Information
FLAG Financial Corporation and Subsidiaries
--------------------------------------------------------------------------------
PART II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - 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 2003 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, 2002 to be included in the 2003 Proxy Materials. A
shareholder must notify the Company before January 15, 2003 of a proposal for
the 2003 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, 2003, 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
99.1 Certification by Chief Executive Officer and Chief Financial
Officer.
(b) Reports on Form 8-K
Reports on Form 8-K filed during the Third Quarter of 2002:
None
16
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/ Joseph W Evans
---------------------------
Joseph W. Evans
(Chief Executive Officer)
Date: 11/12/02
-------------------------
By: /s/ J. Daniel Speight, Jr.
----------------------------
J. Daniel Speight, Jr.
(Chief Financial Officer)
Date: 11/12/02
------------------------
17
Certification
I, Joseph W. Evans, Chief Executive Officer of FLAG Financial Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of FLAG Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer(s) and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Joseph W. Evans
------------------------
Joseph W. Evans
Chief Executive Officer
18
Certification
I, J. Daniel Speight, Jr., Chief Financial Officer of FLAG Financial
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FLAG Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer(s) and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
Chief Financial Officer
19