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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, 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: 8,392,445 shares
Outstanding as of August 6, 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 June 30, 2002 and
December 31, 2001 and June 30, 2001........................................ 3
Consolidated Statements of Operations for the Six Months and
Quarters Ended June 30, 2002 and 2001....................................... 4
Consolidated Statements of Comprehensive Income for the
Six Months and Quarters Ended June 30, 2002 and 2001....................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 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
PART II Other Information
Item 1. Legal Proceedings..............................................................15
Item 2. Changes in Securities..........................................................15
Item 3. Defaults Upon Senior Securities................................................15
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...............................................17
2
Part I. Financial Information
Item 1. Financial Statements
FLAG Financial Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, December 31, June 30,
2002 2001 2001
------------------------------------------------------------
ASSETS (UNAUDITED) (AUDITED) (UNAUDITED)
- ------
Cash and due from banks ....................................... $ 13,991,856 20,077,641 13,840,090
Federal funds sold ............................................ 479,000 -- 2,461,000
------------------------------------------------------------
Total cash and cash equivalents ........................... 14,470,856 20,077,641 16,301,090
------------------------------------------------------------
Interest-bearing deposits ..................................... -- 160,093 59,475
Investment securities available-for-sale ...................... 124,513,166 131,526,473 131,017,736
Other investments
6,148,798 5,835,093 5,785,093
Mortgage loans held-for-sale .................................. 5,491,417 6,454,127 7,274,111
Loans, net .................................................... 348,863,329 368,967,089 367,518,689
Premises and equipment, net ................................... 13,760,004 13,943,542 14,169,497
Interest receivable ........................................... 3,934,318 4,778,443 5,339,457
Other assets .................................................. 20,318,293 18,459,400 18,992,032
------------------------------------------------------------
Total assets ................................... $ 537,500,181 570,201,901 566,457,180
============================================================
LIABILITIES
Non interest-bearing deposits ................................. $ 37,785,842 48,553,710 44,975,023
Interest-bearing demand deposits .............................. 126,466,847 119,985,564 107,712,068
Savings ....................................................... 25,576,785 24,248,553 26,202,122
Time .......................................................... 223,469,329 247,793,498 273,960,166
------------------------------------------------------------
Total deposits ............................................. 413,298,803 440,581,325 452,849,379
------------------------------------------------------------
Federal funds purchased and repurchase agreements ............. 8,558,670 18,001,000 6,138,000
Other borrowings .............................................. -- 5,000,000 1,958,424
Advances from Federal Home Loan Bank .......................... 47,000,000 39,448,435 40,675,744
Accrued interest payable and other liabilities ................ 9,474,746 13,147,654 7,514,503
------------------------------------------------------------
Total liabilities ............................. 478,332,219 516,178,414 509,136,050
------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized, none
issued and outstanding) .................................. -- -- --
Common stock ($1 par value, 20,000,000 shares authorized
9,629,406 and 8,277,995 shares issued in 2002
and 2001, respectively ................................... 9,629,406 8,277,995 8,277,995
Additional paid-in capital .................................... 23,417,860 11,354,511 11,354,511
Retained earnings ............................................. 33,334,947 39,223,132 38,352,820
Accumulated other comprehensive income ........................ 2,253,259 1,612,488 1,791,414
Less: Treasury stock at cost; 1,236,961 shares at June 30,2002,
908,001 shares at December 31, 2001 and 383,556
shares
at June 30, 2001, respectively ............................ (9,467,510) (6,444,639) (2,455,610)
------------------------------------------------------------
Total stockholders' equity .................. 59,167,962 54,023,487 57,321,130
------------------------------------------------------------
Total liabilities and stockholders' equity .. $ 537,500,181 570,201,901 566,457,180
============================================================
See Accompanying Notes to Consolidated Financial Statements.
3
Consolidated Statements of Operations
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(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------------------------
Interest Income
Interest and fees on loans ................................. $ 7,303,073 9,574,793 14,304,005 19,537,900
Interest on securities ..................................... 1,780,966 1,702,953 3,568,376 3,433,144
Interest on federal funds sold and interest-bearing deposits 31,913 272,596 73,870 433,729
--------------------------------------------------------
Total interest income ................................ 9,115,952 11,550,342 17,946,251 23,404,773
--------------------------------------------------------
Interest Expense
Interest on deposits:
Demand .................................................. 461,320 625,866 1,001,528 1,327,498
Savings ................................................. 55,513 91,342 109,666 234,527
Time .................................................... 2,152,776 3,994,967 4,830,436 8,110,472
Interest on other borrowings ............................... 211,941 503,187 585,763 996,914
--------------------------------------------------------
Total interest expense ............................... 2,881,550 5,215,362 6,527,393 10,669,411
--------------------------------------------------------
Net interest income before provision for loan losses . 6,234,402 6,334,980 11,418,858 12,735,362
Provision for Loan Losses .............................................. 150,000 252,000 4,204,000 504,000
--------------------------------------------------------
Net interest income after provision for loan losses .. 6,084,402 6,082,980 7,214,858 12,231,362
--------------------------------------------------------
Other Income
Fees and service charges on deposit accounts ................ 795,260 781,235 1,681,342 1,970,569
Mortgage banking activities ................................ 767,704 456,569 1,054,000 1,088,104
Insurance commissions and brokerage fees ................... 118,675 161,773 246,732 310,319
Other income ............................................... 151,727 278,515 386,790 141,835
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Total other income ................................... 1,833,366 1,678,092 3,368,864 3,510,827
--------------------------------------------------------
Other Expenses
Salaries and employee benefits ............................. 3,740,347 3,446,046 10,778,109 6,922,456
Occupancy .................................................. 817,520 935,340 1,891,124 1,800,322
Professional fees .......................................... 315,069 305,096 1,409,007 560,242
Postage, printing and supplies ............................. 235,962 292,186 542,266 520,070
Amortization of intangibles ................................ 129,204 124,322 259,544 248,644
Communications and data .................................... 512,128 522,229 1,126,900 979,593
Other operating ............................................ 618,326 841,334 2,454,362 1,664,329
--------------------------------------------------------
Total other expenses ................................. 6,368,556 6,466,553 18,461,312 12,695,656
--------------------------------------------------------
Earnings (loss) before provision for
income taxes and extraordinary item ............... 1,549,212 1,294,519 (7,877,590) 3,046,533
Provision for income taxes ................................. 326,957 322,638 (3,148,709) 805,276
--------------------------------------------------------
Earnings (loss) before extraordinary item ............ 1,222,255 971,881 (4,728,881) 2,241,257
Extraordinary item - loss on redemption of debt, net of
income tax benefit of $101,377 in 2002 .............. -- -- 165,404 --
--------------------------------------------------------
Net earnings (loss) ................................. $ 1,222,255 971,881 (4,894,285) 2,241,257
========================================================
Basic earnings (loss) per share before extraordinary item .. $ 0.15 $ 0.12 $ (0.59) $ 0.28
Extraordinary item ......................................... -- -- (0.02) --
Basic earnings (loss) per share ............................ 0.15 0.12 (0.61) 0.28
========================================================
Diluted earnings (loss) per share before extraordinary item $ 0.14 $ 0.12 $ (0.59) $ 0.28
Extraordinary item ......................................... -- -- (0.02) --
Diluted earnings (loss) per share .......................... 0.14 0.12 (0.61) 0.28
========================================================
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,
2002 2001 2002 2001
-------------------------------------------------------
Net earnings (loss) ...................................................... $ 1,222,255 $ 971,881 (4,894,285) 2,241,257
Other comprehensive income, net of tax:
Unrealized gains on investment securities available-for-sale:
Unrealized gains arising during the period,
net of tax of $617,886, $137,653, $484,405 and
$962,085, respectively .......................................... 997,004 224,591 783,428 1,569,718
Plus: Reclassification adjustment for losses included in net
earnings (loss) , net of tax of $6,819 and $4,240, respectively . 11,126 -- 6,917 --
Unrealized gain (loss) on cash flow hedges, net of tax of $45,837,
$222,614, $91,674 and $298,614 respectively ..................... (74,787) 363,213 (149,574) 487,213
-------------------------------------------------------
Other comprehensive income ............................................... 933,343 587,804 640,771 2,056,931
-------------------------------------------------------
Comprehensive income (loss) .............................................. $ 2,041,056 $ 1,559,685 (4,253,514) 4,298,188
=======================================================
See Accompanying Notes to Consolidated Financial Statements
5
Consolidated Statements of Cash Flows
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Six Months Ended
June 30,
2002 2001
----------------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings ............................................................... $ (4,894,285) $ 2,241,257
Adjustment to reconcile net (loss) earnings to net
cash used in operating activities:
Depreciation, amortization and accretion .................................. 1,270,710 1,599,591
Provision for loan losses ................................................. 4,204,000 504,000
Loss on sale of available-for-sale securities ............................. 11,157 --
Gain on sales of loans .................................................... (572,349) (437,656)
Loss (gain)on sale of other real estate ................................... (43,535) 13,917
Change in:
Mortgage loans-held-for sale ....................................... 1,535,059 (2,715,796)
Other .............................................................. (6,088,172) (2,118,278)
----------------------------------
Net cash used in operating activities ........................... (4,577,415) (912,965)
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits ........................................... 160,093 3,391,965
Proceeds from sales and maturities of investment
securities available-for-sale ................................................. 45,784,353 16,107,627
Purchases of investment securities available-for-sale ............................. (37,855,680) (43,575,000)
Purchases of other investments .................................................... (363,700) (683,350)
Net change in loans ............................................................... 15,899,760 16,638,646
Proceeds from sale of other real estate ........................................... 1,133,824 421,927
Proceeds from sale of premises and equipment ...................................... 166,090 20,967
Purchases of premises and equipment ............................................... (1,122,814) (463,169)
Purchases of cash surrender value life insurance .................................. (55,998) (92,794)
----------------------------------
Net cash provided by (used in) investing activities ............... 23,745,928 (8,233,181)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits ............................................................ (27,282,522) (8,587,588)
Change in federal funds purchased and repurchase agreements ....................... (9,442,330) 5,476,518
Change in other borrowed funds .................................................... (5,000,000) 458,424
Proceeds from FHLB advances ....................................................... 35,000,000 10,000,000
Payments of FHLB advances ......................................................... (27,448,435) (1,297,560)
Purchase of treasury stock ........................................................ (3,022,871) (1,527,531)
Proceeds from issuance of stock ................................................... 11,707,740 --
Proceeds from exercise of stock options ........................................... 471,020 8,995
Proceeds from issuance of warrants ................................................ 1,236,000 --
Cash dividends paid ............................................................... (993,900) (957,132)
----------------------------------
Net cash (used in) provided by financing activities ................ (24,775,298) 3,574,126
----------------------------------
Net change in cash and cash equivalents .......................... (5,606,785) (5,572,020)
Cash and cash equivalents at beginning of period .................................. 20,077,641 21,873,110
----------------------------------
Cash and cash equivalents at end of period ......................................... $ 14,470,856 $ 16,301,090
==================================
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 Six Months Ended
June 30, June 30,
------------------------------------------------------
2002 2001 2002 2001
------------------------------------------------------
Basic earnings (loss) per share:
Net earnings (loss) ............................... $1,222,255 971,881 (4,894,285) 2,241,257
Weighted average common shares
outstanding ................................... 8,260,185 7,973,448 8,006,625 8,002,355
Per share amount .................................. $ 0.15 0.12 (0.61) 0.28
Diluted earnings (loss) per share:
Net earnings (loss) ............................... $1,222,255 971,881 (4,894,286) 2,241,257
Effect of dilutive securities -
stock options ................................. 283,508 21,788 23,834
Diluted earnings (loss) per share ................. $ 0.14 0.12 (0.61) 0.28
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 June 30, 2002
compared to December 31, 2001 and the results of our operations for the quarter
and six months ended June 30, 2002 compared to the quarter and six months ended
June 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
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Financial Condition
Overview
The Company experienced a reduction in earning assets and funding during the
first six months of 2002. Most of the reductions were the result of decisions
made by management in an effort to improve the net interest margin and/or credit
quality.
Assets and Funding
Total assets were $537.5 million at June 30, 2002, a decrease of $32.7 million
or 5.7% from December 31, 2001. This decrease in total assets was mainly
attributable to a reduction in net loans outstanding of approximately $20.1
million, a reduction in investment securities of approximately $7.0 million and
a reduction in cash and cash equivalents of approximately $5.6 million. A
significant portion of the reduction in loans outstanding was the result of the
Company's decision to return lower yielding loan participations to the
originating bank and refocus the Company's efforts on loan growth in existing
local markets. The reduction in investment securities of $7.0 million was
largely the result of expected calls and contractual maturities, while the
reduction in cash and equivalents was the result of improved management of lower
earning assets.
Interest-bearing deposits decreased $16.5 million compared to December 31, 2001,
while non-interest bearing deposits decreased $10.8 million over the same
period. The decrease in non-interest bearing deposits in the first six months of
2002 was mainly attributed to a seasonal reduction resulting from traditionally
high balances at year end. Funding from non-deposit sources decreased $6.9
million to $55.6 million at June 30, 2002, made possible by the reduction in
loans and investment securities. The decrease in interest bearing funding was
partially the result of FLAG's margin management where the company has begun to
focus efforts on lower cost funding as opposed to traditionally higher costing
time deposits. Time deposits have decreased to $223.5 million at June 30, 2002,
a decrease of 9.8% from December 31, 2001.
Liquidity and Capital Resources
The Company maintains borrowing lines with various other financial institutions
including the Federal Home Loan Bank. At June 30, 2002, the Company had total
borrowing agreements of approximately $ 101 million of which approximately $55.5
million was advanced.
The Company's Board of Directors approved a 1,300,000 share private placement
during the first quarter of 2002. At June 30, 2002, 1,272,000 shares and
1,272,000 warrants had been sold for $12.9 million. All shares and warrants
purchased or subscribed through the private placement were with the Company's
management or employees.
The funds provided from the private placement contributed to an increase of 9.5%
in stockholders' equity to $59.2 million over December 31, 2001 levels. The
increase provided by the private placement funds was partially offset by the net
loss of $4.9 million and an increase in treasury stock of $3.0 million.
Stockholders' equity as a percentage of total assets was 11.0% at June 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 six month period ending June 30,2002.
Net loss for the six month period ending June 30,2002 was $4.9 million or $0.61
per share compared to net income of $2,241,000 or $0.28 per share for the first
six months of 2001. The net loss in 2002 includes an after tax restucting 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 six months ending June 30,2002 was $11.4 million, a
decrease of $1.3 million or 10.3% from the same period in 2001. This decrease is
a combination of a 23% decrease in interest income to $17.9 million and a 39%
decrease in interest expense to $6.5 million. Although FLAG's balance sheet has
contracted over the year in queston, these decreases in interest income and
interest expence are mostly the result of a lower interest rate environment that
started in the second half of 2001.
Non-interest income for six month period ending June 30, 2002 decreased 4.0% to
$3.4 million when compared to the six months ending June 30, 2001. While income
from mortgage activities remained flat for the period, FLAG experienced a
decrease in fees and service charges on deposit accounts of $289,000 or 14.7%.
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, FLAG had $13.0 million in
non-interest expences for the six month period ending June 30, 2002, an increase
of $316,000 or 2.5% over the comparable period in 2001. On a recurring basis
excluding one time charges for these periods, salaries and benefits increased by
$456,000 to $7.5 million, professional fees increased $199,000 to $560,000.
These increases were partially offset by decreases in occupancy of $303,000 to
$1.5 million.
Results of operations for quarter ending June 30, 2002
Net income for the quarter ended June 30, 2002 was $1,222,000 or $0.14 per
diluted share, an increase of 26% compared to net income of $972,000 or $.012
per share for the same period in 2001. Net interest income for the quarter
ending June 30, 2002 decreased approximately $101,000 or 1.6% over the
comparable quarter in 2001. For these periods, net interest margin increased to
5.21% from 5.12%.
Interest income for the second quarter of 2002 was $9.1 million, a decrease of
$2.4 million or 21.1% over the same quarter in 2001. The majority of this
decrease is attributable to the decrease in interest and fees on loans from $9.6
million to $7.3 million, a decrease of 24%. FLAG's yield on loans decreased
during the second quarter of 2002 to 8.41% from 10.32% in the second quarter of
2001. This decrease is attributable to the low rate environment that began
during 2001. Average loans outstanding during the second quarter of 2002 were
$347.3 million, a decrease of $23.9 million or 6.4% compared to the comparable
quarter a year ago. This decrease in average loans outstanding is largely the
result of the Company's decision to return lower yielding loan participations to
the originating bank and refocus the Company's efforts on loan growth in
existing local markets. At June 30, 2002, gross loans accounted for 67.4% of
total assets and approximately 73.4% of interest earning assets. This compares
with June 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 increased by $78,000 during the quarter
ending June 30, 2002 to $1.8 million when compared to the same quarter in 2001.
The yield on the investment portfolio decreased from 7.22% to 5.47% over this
period, due largely to the low interest rate environment. The decrease in yield
on the portfolio was offset by an increase in average investment securities. For
the quarters ended June 30, 2002 and 2001, FLAG had average investment
securities of $130.3 million and $94.4 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 second quarter of 2002, FLAG was
successful in averaging approximately $5.6 million of federal funds sold and
interest bearing deposits with other banks, compared to $18.3 million during the
second quarter of 2001. Federal funds sold and interest bearing deposits with
other banks averaged 1.2% and 3.7% of total interest earning assets for the
quarters ending June 30, 2002 and 2001, respectively.
FLAG uses customer deposits and borrowings from other financial institutions as
its two primary sources to fund increases in interest earning assets. Total
funding for FLAG at June 30, 2002 was $468.9 million with an overall cost for
the quarter of 2.50%, compared to $483.9 million, costing 4.32% in the
comparable quarter of 2001. The decreases in cost and balances resulted in a
savings of $2.3 million or 44.7% for the quarter, and allowed FLAG to offset
nearly all of the decrease in interest income.
Interest expense on customer deposits for the second quarter decreased by $2.0
million to $2.7 million when compared to the quarter ended June 30, 2001. This
43% decrease was mainly attributable to aggressive repricing efforts on all
elements of FLAG's deposit base. Interest bearing demand deposits averaged
$125.1 million with a cost of 1.48% for the quarter ending June 30, 2002
compared to $107.0 million costing 2.35% for the comparable quarter of 2001.
Time deposits averaged $227.4 million and $269.2 million with costs of 3.79% and
5.95% for the second quarter of 2002 and 2001, respectively.
Interest expense on other borrowings consists of interest on FHLB advances and
federal funds purchased. For the second quarter of 2002, interest expense on
other borrowings was approximately $212,000 compared to $503,000 for the same
quarter in 2001. This decrease of 58% is the result of the early repayment and
refinance of fixed FHLB advances in recent quarters. This refinancing allowed
FLAG to reduce the overall cost on other borrowings to 2.01% for the second
quarter of 2002 compared to 6.17% a year ago.
Non-Interest Income and Expense
Non-interest income grew 9.25% during the second quarter of 2002 compared to the
same period in 2001. Although deposits decreased 8.7% as the result of our
divestiture of two offices, service charges on deposits increased 1.8% to
$795,000 from $781,000. Income from mortgage banking activities (origination
fees, gain on sale of loans and service release premiums) grew $311,000 to
$768,000 in the second quarter of 2002, mostly the result of very favorable
interest rates on home mortgages. Non-interest income as a percent of total
revenue grew to 23.2%, up from the 2001 level of 21.6%.
11
Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Non-interest expenses decreased during the quarter ended June 30, 2002 to $6.4
million from $6.5 million in the same quarter of 2001. This 1.5% decrease
includes a $118,000 decrease in occupancy expense, a $223,000 decrease in other
operating expense and a $294,000 increase in salaries and benefits. There was
very little impact in the second quarter of FLAG's recently announced
restructuring including, but not limited to, the closing of five banking
locations and a 20% reduction of its workforce. The majority of the savings from
these actions is expected during the fourth quarter of 2002.
Income Taxes
Income tax expense for the quarter ending June 30, 2002 was $327,000 compared to
$323,000 for the same quarter in 2001. FLAG's effective tax rate for the quarter
ended June 30, 2002 was 21% compared to 25% for the quarter ended June 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
June 30, 2002, FLAG's loan portfolio consisted of 81.9% real estate-related
loans, 12.9% commercial and financial loans, and 5.2% 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:
June 30, December 31, June 30,
2002 2001 2001
-------- ------------ ----------
Commercial/financial/agricultural $ 46,032 79,722 61,622
Real estate construction ........ 75,380 65,052 57,165
Real estate - mortgage .......... 51,062 47,180 45,752
Real estate - other ............. 165,597 166,568 185,797
Installment loans to individuals 18,455 17,793 23,830
-------- ------------ ----------
Total loans ..................... 356,526 376,315 374,166
less:
Allowance for loan losses ....... 7,662 7,348 6,647
-------- ------------ ----------
Total net loans ................. $348,864 368,967 367,519
======== ============ ==========
12
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Provision and Allowance for Possible 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 second quarter of 2002 was $150,000 versus
$252,000 for comparable period in 2001. The allowance for loan and lease losses
at June 30, 2002 was $7.7 million compared to $7.3 million at December 31, 2001.
The ratio of the allowance for loan losses to outstanding loans at June 30, 2002
and December 31, 2001 was 2.15% and 1.95%, 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 which have been charged to
operations in the Company's consolidated statements of operations.
June 30, June 30,
2002 2001
Balance of allowance for loan losses at beginning of period $7,348 6,592
Provision charged to operating expense 4,204 504
Charge offs:
Commercial ................................ 574 112
Construction
Real estate - mortgage .................... 338 335
Real estate - other ....................... 3,116 45
Consumer .................................. 273 183
-------- -----
Total charge-offs ...................... 4,301 675
Recoveries:
Commercial ................................ 77 77
Construction .............................. 1
Real estate - mortgage .................... 11 3
Real estate - other ....................... 269 132
Consumer .................................. 53 14
-------- -----
Total recoveries ....................... 411 226
-------- -----
Net charge-offs ........................ 3,890 449
-------- -----
Balance of allowance for loan losses at end of period $7,662 6,647
======== =====
13
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Non-Performing Assets
Non-performing assets (non-accrual loans, real estate owned and repossessions)
totaled approximately $11.5 million at June 30, 2002 compared to $18.9 million
at December 31, 2001 and $9.4 million at June 30, 2001. These levels as a
percentage of loans outstanding represented 3.29%, 5.14% and 2.55%,
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 June 30, December 31, June 30,
2002 2001 2001
-------- ------------ ----------
Loans on nonaccrual ......................... $10,470 17,122 7,066
Loans past due 90 days and still accruing ... 46 594 1,049
Other real estate owned ..................... 950 1,231 1,240
-------- ------------ ----------
Total non-performing assets ................. $11,466 18,947 9,355
======= ============ ==========
Total non-performing loans as a percentage of
net loans ................................. 3.29% 5.14% 2.55%
Capital
At June 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:
June 30, 2002
- -----------------------------------------------------------------------------------------
Actual Required Excess
Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------
Tier 1 Capital $50,608 9.62% $21,046 4.00% $29,562 5.62%
Tangible Capital $50,608 9.62% $ 7,892 1.50% $42,716 8.12%
Risk-Based Capital $56,533 13.49% $33,532 8.00% $23,001 5.49%
14
Part 2. Other Information
FLAG Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
PART II. Other Information
Item 1. Legal Proceedings
Walter Terry Branyan and Robert Tommy Gilder III. Terry Branyan was a
borrower from the Company, borrowing $1,271,324.54 in three separate promissory
notes on March 17, 1999. Terry Branyan's obligation was guaranteed by Walter
Branyan for $300,000 and Tommy Gilder for $1,000,000. Terry Branyan defaulted on
his obligation, and the Company initiated suit to collect against all three.
Walter Branyan has settled his portion of the guaranty. Default judgment was
entered against Terry Branyan on January 3, 2001. Mr. Gilder answered the
complaint and counterclaimed against the Company for breach of fiduciary duty in
connection with his guaranty. The Company and Mr. Gilder have reached a
settlement agreement that is favorable to the Company.
The Company and the Bank are periodically involved as plaintiff or
defendant in various other legal actions in the ordinary course of their
business. We do not believe that such litigation presents a material risk to the
Company's business, financial condition or results of operations.
Item 2. Changes in Securities
The Company issued the following numbers of shares of common stock and warrants
at the prices and on the dates indicated to members of its senior management
team in a private placement under Rule 506 of the Securities Act of 1933 as
amended. The warrants were purchased at a price of $1.00 per warrant, are
immediately exercisable in full and have a ten-year term.
Stock Purchase Price/
Date Issued No. of Shares No. of Warrants Warrant Exercise Price
----------- ------------- --------------- ----------------------
02/19/02 996,000 996,000 9.10
03/05/02 6,000 6,000 9.90
03/22/02 30,000 30,000 9.10
03/27/02 6,000 6,000 9.10
03/29/02 6,000 6,000 9.51
04/01/02 30,000 30,000 9.69
04/05/02 6,000 6,000 9.94
04/08/02 24,000 24,000 9.56
05/14/02 12,000 12,000 9.53
05/22/02 28,500 28,500 10.10
06/05/02 66,000 66,000 9.53
06/17/02 6,000 6,000 10.00
06/24/02 19,500 19,500 10.10
Item 3. Defaults upon Senior Securities - None
15
Other Information
FLAG Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2002 Annual Meeting of Shareholders was held on May 28, 2002
(b) Election of Directors
The following are the results of the votes cast by shareholders
present at the 2002 annual meeting of Shareholders, by proxy or in
person, for the following directors to serve until the 2005 Annual
Meeting of Shareholders:
For Withhold
--- ---------
Stephen W. Doughty 6,237,786 49,517
James W. Johnson 6,237,786 49,517
(c) Ratifying the appointment of Porter Keadle Moore LLP, as independent
accountants of the Company for the fiscal year ending December 31,
2002.
The shareholders voted 6,268,648 shares in the affirmative, 17,475
shares in the negative, with 1,180 shares abstaining for the
ratification and appointment of Porter Keadle Moore LLP as independent
accountants for the Company for the fiscal year ending December 31,
2002.
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.
16
Other Information
FLAG Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
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 Second Quarter of 2002:
None
Reports on Form 8-K filed from Second Quarter End 2002 to Present:
None.
17
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: 8/12/02
-------
By: /s/ J. Daniel Speight, Jr.
----------------------
J. Daniel Speight, Jr.
(Chief Financial Officer)
Date: 8/12/02
-------
18