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 June 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: 7,806,564 shares
Outstanding as of August 10, 2001
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 June 30, 2001 and
December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Earnings for the Six Months and
Quarter Ended June 30, 2001 and 2000. . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Income for the
Six Months and Quarter Ended June 30, 2001 and 2000. . . . . 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2001 2000
-----------------------------
ASSETS (UNAUDITED)
------
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . $ 13,840,090 $ 19,143,110
Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . 2,461,000 2,730,000
-----------------------------
Total cash and cash equivalents . . . . . . . . . . . . . . . 16,301,090 21,873,110
-----------------------------
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . 59,475 3,451,440
Investment securities available-for-sale. . . . . . . . . . . . . 131,017,736 100,721,942
Other investments . . . . . . . . . . . . . . . . . . . . . . . . 5,785,093 5,360,609
Mortgage loans held for sale. . . . . . . . . . . . . . . . . . . 7,274,111 4,120,659
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,518,689 384,661,335
Premises and equipment, net . . . . . . . . . . . . . . . . . . . 14,169,497 14,933,761
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 24,331,489 23,914,244
-----------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . $566,457,180 $ 559,037,100
=============================
LIABILITIES
-----------
Non interest-bearing deposits . . . . . . . . . . . . . . . . . . $ 44,975,023 $ 55,110,513
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . 407,874,356 406,326,454
Federal funds purchased and repurchase agreements . . . . . . . . 6,138,000 661,482
Other borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 1,958,424 1,500,000
Advances from Federal Home Loan Bank. . . . . . . . . . . . . . . 40,675,744 31,973,304
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7,514,503 7,966,736
-----------------------------
Total liabilities . . . . . . . . . . . . . . . . 509,136,050 503,538,489
-----------------------------
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 . . . . . . . . . . . . . . . . . . . . . . . . 38,352,820 37,068,696
Accumulated other comprehensive income (loss) . . . . . . . . . . 1,791,414 (265,517)
Less: Treasury stock at cost; 383,556 shares in 2001 and 152,744
shares in 2000 . . . . . . . . . . . . . . . . . . . . . . . (2,455,610) (928,079)
-----------------------------
Total stockholders' equity. . . . . . . . . . . 57,321,130 55,498,611
-----------------------------
Total liabilities and stockholders' equity. . . $566,457,180 $ 559,037,100
=============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSOLIDATED STATEMENTS OF EARNINGS
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(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------
2001 2000 2001 2000
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . $ 9,574,793 $10,488,721 19,537,900 20,809,587
Interest on securities . . . . . . . . . . . . . . . . . . . 1,702,953 1,464,443 3,433,143 2,909,726
Interest on federal funds sold and interest-bearing deposits 272,596 77,030 433,729 189,552
--------------------------------------------------
Total interest income. . . . . . . . . . . . . . . . . 11,550,342 12,030,194 23,404,772 23,908,865
--------------------------------------------------
INTEREST EXPENSE
Interest on deposits . . . . . . . . . . . . . . . . . . . . 4,712,175 4,824,338 9,672,497 9,492,438
Interest on borrowings . . . . . . . . . . . . . . . . . . . 503,187 644,607 996,914 1,172,530
--------------------------------------------------
Total interest expense . . . . . . . . . . . . . . . . 5,215,362 5,468,945 10,669,411 10,664,968
--------------------------------------------------
Net interest income before provision for loan losses . 6,334,980 6,561,249 12,735,361 13,243,897
PROVISION FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . . . . 252,000 733,070 504,000 1,326,140
--------------------------------------------------
Net interest income after
Provision for loan losses. . . . . . . . . . . . . . 6,082,980 5,828,179 12,231,361 11,917,757
--------------------------------------------------
OTHER INCOME
Fees and service charges . . . . . . . . . . . . . . . . . . 781,235 1,048,513 1,970,569 2,182,610
Gain on sale of available for sale securities. . . . . . . . - - - 41,997
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . 164,507 294,369 437,656 489,182
Other income . . . . . . . . . . . . . . . . . . . . . . . . 732,350 544,630 1,102,602 1,089,023
--------------------------------------------------
Total other income . . . . . . . . . . . . . . . . . . 1,678,092 1,887,512 3,510,827 3,802,812
--------------------------------------------------
OTHER EXPENSES
Salaries and employee benefits . . . . . . . . . . . . . . . 3,446,046 3,607,946 6,922,456 7,417,864
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . 935,340 1,069,866 1,880,322 2,145,769
Other operating. . . . . . . . . . . . . . . . . . . . . . . 2,085,167 2,257,805 3,892,878 4,552,872
--------------------------------------------------
Total other expenses . . . . . . . . . . . . . . . . . 6,466,553 6,935,617 12,695,656 14,116,505
--------------------------------------------------
Earnings before provision for
income taxes. . . . . . . . . . . . . . . . . . . . 1,294,519 780,074 3,046,532 1,604,064
Provision for income taxes . . . . . . . . . . . . . . . . . 322,638 120,439 805,276 268,023
--------------------------------------------------
Net earnings. . . . . . . . . . . . . . . . . . . . . $ 971,881 659,635 2,241,256 1,336,041
==================================================
Basic earnings per share. . . . . . . . . . . . . . . . . . $ 0.12 $ 0.08 $ 0.28 $ 0.16
Diluted earnings per share. . . . . . . . . . . . . . . . . $ 0.12 $ 0.08 $ 0.28 $ 0.16
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---------------------------------------------
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 971,881 659,635 2,241,256 1,336,041
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 $1,944,969, $162,527, $962,085, and
$473,381, respectively . . . . . . . . . . . . . . . . . . . 224,591 (265,175) 1,569,718 (772,359)
Less: Reclassification adjustment for gains included in net
earnings, net of tax of $15,959 . . . . . . . . . . . . . . - - - (26,038)
Unrealized gain on cash flow hedges, net of tax of $222,614 and
$298,614 respectively. . . . . . . . . . . . . . . . . . . . 363,213 487,213
---------------------------------------------
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . 587,804 (265,175) 2,056,931 (798,397)
---------------------------------------------
Comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . $1,559,685 394,460 4,298,187 537,644
=============================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
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SIX MONTHS ENDED
JUNE 30,
2001 2000
---------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,241,256 1,336,041
Adjustment to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation, amortization and accretion. . . . . . . . . . . . . . 1,599,591 1,556,597
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 504,000 1,326,140
Gain on sale of investment securities available-for-sale. . . . . . - (41,997)
Gain on sale of loans . . . . . . . . . . . . . . . . . . . . . . . (437,656) (489,182)
Loss on sale of other real estate . . . . . . . . . . . . . . . . . 13,917 -
Change in:
Mortgage loans held for sale . . . . . . . . . . . . . . . . (2,715,796) (337,301)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,118,277) (2,125,026)
---------------------------
Net cash (used in) provided by operating activities . . . (912,965) 1,225,772
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits . . . . . . . . . . . . . . . . . . 3,391,965 1,433,804
Proceeds from sales and maturities of investment
securities available-for-sale . . . . . . . . . . . . . . . . . . . . . 16,107,627 6,232,613
Proceeds from maturities of investment securities held-to-maturity. . . . . - 108,520
Purchases of other investments. . . . . . . . . . . . . . . . . . . . . . . (683,350) (27,700)
Purchases of investment securities available-for-sale . . . . . . . . . . . (43,575,000) (8,070,165)
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,638,646 6,666,919
Proceeds from sale of other real estate . . . . . . . . . . . . . . . . . . 421,927 225,226
Proceeds from sale of premises and equipment. . . . . . . . . . . . . . . . 20,967 21,520
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . (463,169) (405,811)
Purchases of cash surrender value life insurance. . . . . . . . . . . . . . (92,794) (139,987)
---------------------------
Net cash (used in) provided by investing activities. . . . (8,233,181) 6,044,939
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . (8,587,588) (18,867,835)
Change in federal funds purchased and repurchase agreements . . . . . . . . 5,476,518 (1,280,000)
Change in other borrowed funds. . . . . . . . . . . . . . . . . . . . . . . 458,424 2,468,665
Proceeds from FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 19,000,000
Payments of FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . (1,297,560) (16,797,558)
Purchase of treasury stock. . . . . . . . . . . . . . . . . . . . . . . . . (1,527,531) (353,438)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . 8,995 8,995
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (957,132) (986,148)
---------------------------
Net cash provided by (used in) financing activities. . . . . 3,574,126 (16,807,319)
---------------------------
Net change in cash and cash equivalents. . . . . . . . . . (5,572,020) (9,537,108)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . . . . . . . . . . . . 21,873,110 27,083,628
---------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . $ 16,301,090 17,546,520
===========================
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
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------
2001 2000 2001 2000
-------------------------------------------
Basic earnings per share:
Net earnings. . . . . . . . . . $ 971,881 659,635 2,241,256 1,336,041
Weighted average common shares
outstanding . . . . . . . . 7,973,448 8,217,905 8,002,355 8,228,897
Per share amount $ 0.12 0.08 0.28 0.16
Diluted earnings per share:
Net earnings. . . . . . . . . . $ 971,881 659,635 2,241,256 1,336,041
Effect of dilutive securities -
stock options . . . . . . . 21,788 13,579 23,834 17,292
Diluted earnings per share $ 0.12 0.08 0.28 0.16
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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FINANCIAL CONDITION
OVERVIEW
Total assets were $566.5 million at June 30, 2001, an increase of $7.4 million
or 1.0 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 loans held for sale during the six months ended June 30, 2001.
These increases were partially offset by decreases in net loans outstanding as
well as cash and due from banks.
ASSETS AND FUNDING
At June 30, 2001 earning assets totaled $514.1 million, an increase of $13.1
million from December 31, 2000. Loans comprised 71 percent of earning assets and
investment securities available-for-sale were 25 percent of earning assets at
June 30, 2001. Net loans decreased $17.1 million or 4 percent for the first six
months ended June 30, 2001 primarily as a result of the sale of $24 million in
mortgage loans during the quarter ended June 30, 2001.
At June 30, 2001, interest-bearing deposits increased $1.5 million compared to
December 31, 2000. Non-interest bearing deposits decreased $10.1 million in the
first six months of 2001 and totaled $45.0 million at June 30, 2001. The
decrease in non-interest bearing deposits for the first six 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
$8.7 million in the first six months of 2001 and totaled $40.7 million at June
30, 2001. At June 30, 2001 deposits represented 89 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, with an average duration of
3 years.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $913 thousand for the six months
ended June 30, 2001. Net cash used in investing activities totaling $8.2
million consisted largely of purchases of investment securities
available-for-sale of $43.6 million partially offset by $16.1 million in
proceeds from sales and maturities of investment securities available-for-sale
and a net decrease in loans of $16.6 million. Net cash provided by financing
activities consisted largely of a $10.0 million increase in Federal Home Loan
Bank advances and an increase in repurchase agreements, partially offset by a
$8.6 million decrease in deposits.
Total stockholders' equity at June 30, 2001, was 10.12 percent of total assets
compared to 9.93 percent at December 31, 2000. The increase is attributed to a
$2.2 million increase in net earnings since December 31, 2000, less dividends
paid to stockholders.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Six months and quarters ended June 30, 2001 and 2000
OVERVIEW
Net earnings for the six months ended June 30, 2001 increased $905,000 or 68
percent compared to the first six months of 2000. Net earnings per common share
increased 75 percent for the first six months of 2001 and are $0.28 compared to
$0.16 for the first six months of 2000. Net earnings for the quarter ended June
30, 2001 increased $312,000 or 47 percent compared to the quarter ended June 30,
2000. Net earnings per common share increased 50 percent for the quarter ended
June 30, 2001 and are $0.12 compared to $0.08 in the quarter ended June 30,
2000. Net interest income decreased 4 percent for the six months ended June 30,
2001 over the same period of 2000 to $12.7 million. The increase in net income
for the six months and quarter ended June 30, 2001 was due to a reduction in the
provision for loan losses and a decrease in other expenses partially offset by
decreases in net interest income and other income.
Effective 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 on the sale of approximately $5 million.
NET INTEREST INCOME
Net interest income for the first six months ended June 30, 2001 decreased
$508,000 compared to the first six months of 2000. This decrease resulted from a
$504,000 or 2.0 percent decrease in interest income coupled with a $4,000 or .04
percent increase in interest expense. Net interest income for the quarter ended
June 30, 2001 decreased $226,000 compared to the quarter ended June 30, 2000.
This decrease resulted from a $480,000 or 4 percent decrease in interest income
offset with a $254,000, or 5 percent decrease in interest expense. Decreases in
net interest income are a result of lower interest rates coupled with lower loan
volume.
NON-INTEREST INCOME AND EXPENSE
Non-interest income for the first six months ended June 30, 2001 decreased
$292,000 or 8 percent compared to the first six months of 2000. This decrease
was due largely to a decrease of $212,000 in fees and service charges, as well
as a decrease of $52,000 in gain on sale of loans. Non-interest income for the
quarter ended June 30, 2001 decreased $209,000 or 11 percent compared to the
quarter ended June 30, 2000. This decrease was due largely to a decrease of
$267,000 in fees and service charges, partially offset by an increase of
$188,000 in other operating income.
Other operating income decreased $14,000 or 1 percent for the first six months
ended June 30, 2001 compared to the same period in 2000. Other operating income
increased $188,000 or 34 percent for the quarter ended June 30, 2001 compared to
the same period in 2000. The increase in other operating income was due largely
to increases in mortgage origination fees during the first six months of 2001
compared to the same period in 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Non-interest expense decreased $1,421,000 or 10 percent for the first six months
of 2001 compared to the same period of 2000. Non-interest expense decreased
$469,000 or 7 percent for the quarter ended June 30, 2001 compared to the same
period of 2000. Salaries and employee benefits decreased $495,000 or 7 percent
during the first six months of 2001 compared to 2000 and decreased $162,000 or 4
percent during the quarter ended June 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 six months of 2001 was $805,000 compared to
$268,000 for the first six months of 2000. The effective tax rate for the first
six months ended June 30, 2001 was 26 percent and for the six months ended June
30, 2000 was 17 percent. Income tax expense for the quarter ended June 30, 2001
was $323,000 compared to $120,000 for the same period in 2000. The effective
tax rate for the quarter ended June 30, 2001 was 25 percent and for the quarter
ended June 30, 2000 was 15 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 at
June 30, 2001 and at December 31, 2000 was $6.6 million. The ratio of the
allowance for loan losses to net outstanding loans at June 30, 2001 and December
31, 2000 was 1.78 percent and 1.68 percent, respectively.
The provision for loan losses for the first six months and quarter ended June
30, 2001 decreased $822,000 and $481,000, 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 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 $9.4 million at
June 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 June 30, 2001
and December 31, 2000 were 2.54 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
At June 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:
JUNE 30, 2001
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ACTUAL REQUIRED EXCESS
AMOUNT % AMOUNT % AMOUNT %
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Tier 1 Capital $48,185 8.86% $ 21,760 4.00% $26,425 4.86%
Tangible Capital $48,185 8.86% $ 8,160 1.50% $40,025 7.36%
Risk-Based Capital $53,782 12.37% $ 34,774 8.00% $19,008 4.37%
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PART 2. OTHER INFORMATION
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
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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. As of June 30, 2001
FLAG Bank has collected approximately $1,538,000 as part of the bankruptcy
proceedings. Additionally, 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. 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.
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 has 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.
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 is defending the suit and has counterclaimed against the Bank
for breach of fiduciary duty based upon an alleged confidential relationship
with the Bank of Milan. Gilder's defenses and counterclaims are without merit
and the Bank of Milan intends to pursue and defend this matter vigorously.
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OTHER INFORMATION
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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 Second Quarter of 2001:
None.
Reports on Form 8-K filed from Second Quarter End 2001 to Present:
None.
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FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLAG Financial Corporation
By: /s/ J. Daniel Speight, Jr.
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J. Daniel Speight, Jr.
(Chief Executive Officer)
By: /s/ Thomas L. Redding
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Thomas L. Redding
(Chief Financial Officer)
Date: 8/10/01
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15