SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
-
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NO. 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 or other jurisdiction of. (I.R.S. Employer
incorporation or organization). Identification No.)
3475 PIEDMONT ROAD, N. E., SUITE 550, ATLANTA, GA 30305
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(Address of principal executive offices)
(404) 760-7700
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$1.00 PAR VALUE
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Indicate by check mark whether the Registrant (1) has 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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes X No _
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The aggregate market value of the Registrant's outstanding Common Stock held by
non-affiliates of the Registrant on June 30, 2002 based on 7,310,760 shares was
approximately $78,078,917.
As of March 21, 2003 there were 8,410,290 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 15, 2003, are incorporated by reference in Part
III hereof.
FLAG FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Table of Contents
Item Page
Number Number
PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . 13
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS. . . . . . . . . . . . . . . . . . . 13
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . 56
PART III.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 56
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 56
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS . . . . . . . 56
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 57
ITEM 14 CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . 57
ITEM 15 PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . 58
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 16 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . 58
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
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SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. These forward-looking statements may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from future results,
performance or achievements expressed or implied by the forward-looking
statements. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify the
forward-looking statements. The Company's actual results may differ materially
from the results anticipated in these forward-looking statements due to a
variety of factors, including, without limitation:
(1) The effects of future economic conditions;
(2) Governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
(3) The risks of changes in interest rates on the level and composition of
deposits, loan demand, and the values of loan collateral, securities
and interest rate protection agreements, as well as interest rate
risks;
(4) The effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and
other mutual funds and other financial institutions operating in the
Company's market area and elsewhere, including institutions operating
locally, regionally, nationally and internationally, together with
such competitors offering banking products and services by mail,
telephone, and computer and the Internet; and
(5) The failure of assumptions underlying the establishment of reserves
for possible loan losses and estimations of values of collateral and
various financial assets and liabilities.
All written or oral forward-looking statements attributable to the Company
are expressly qualified in their entirety by these cautionary statements.
ii
PART I
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ITEM 1. BUSINESS
THE COMPANY
Flag Financial Corporation ("Flag" or the "Company") is a bank holding
company headquartered in Atlanta, Georgia and is registered under the Bank
Holding Company Act of 1956, as amended. The Company is the sole shareholder of
Flag Bank (the "Bank") and was incorporated under the laws of the State of
Georgia on February 9, 1993.
As a bank holding company, the Company facilitates the Bank's abilities to
serve its customers' requirements for financial services. The holding company
structure provides greater financial and operating flexibility than is available
to the Bank. For example, the Company may assist the Bank in maintaining its
required capital ratios by borrowing money and contributing the proceeds of the
debt to the Bank as primary capital. Additionally, the Articles of Incorporation
and Bylaws of the Company contain terms that provide a degree of anti-takeover
protection to the Company that is currently unavailable to the Bank and its
shareholders under regulations of the Federal Deposit Insurance Corporation (the
"FDIC"), but is permissible for the Company under Georgia law.
Flag is also a service provider of mortgage, investment and insurance
services though Flag Mortgage, Flag Investment Services and Flag Insurance
Services. All of these services are provided by a division of Flag Bank.
Flag's website address is www.Flag.net. You may obtain free electronic
copies of our annual reports and Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports at the investor
relations section of our website. These reports are available on our website as
soon as reasonably practicable after we electronically file them with the SEC.
THE BANK
Flag Bank is a state bank organized under the laws of the State of Georgia
with banking offices in the following cities and counties: Atlanta (Fulton
County, Dekalb County and Cobb County), Unadilla (Dooly County), Vienna (Dooly
County), Montezuma (Macon County), Buena Vista (Marion County), LaGrange (Troup
County), Hogansville (Troup County), Thomaston (Upson County), Stockbridge
(Henry County) and Suwanee (Forsyth County), Georgia. Flag Bank was originally
chartered in 1931 as the Citizens Bank and became a wholly-owned subsidiary of
the Company through a series of acquisitions commencing in 1998.
Flag Mortgage operates as a division of Flag Bank and operates mortgage
loan production offices in Atlanta (Fulton County), LaGrange (Troup County),
Columbus (Muscogee County) and Newnan (Coweta County), Georgia.
BUSINESS OF THE BANK. The Bank's business consists primarily of attracting
deposits from the general public and, with these and other funds, making
residential mortgage loans, consumer loans, commercial loans, commercial real
estate loans, residential construction loans and securities investments. In
addition to deposits, sources of funds for the Banks' loans and other
investments include amortization and prepayment of loans, loan origination and
commitment fees, sales of loans or participations in loans, fees received for
servicing loans sold to others and advances from the Federal Home Loan Bank of
Atlanta ("FHLBA"). The Bank's principal sources of income are interest and fees
collected on loans, including fees received for originating and selling loans
and for servicing loans sold to others, and, to a lesser extent, interest and
dividends collected on other investments and service charges on deposit
accounts. The Bank's principal expenses are interest paid on deposits, interest
paid on FHLBA advances, employee compensation and office expenses and other
overhead expenses.
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While the Bank attempts to avoid concentrations of loans to a single
industry or based on a single type of collateral, the various types of loans the
Bank makes have certain risks associated with them. Consumer and commercial
loans present risks which, among other things, include fraud, bankruptcy,
economic downturn, deteriorated or non-existing collateral, changes in interest
rates and customer financial problems. Real estate construction loans present
risks related to, among other things, whether the builder is able to sell the
property, whether the buyer is able to obtain permanent financing and the nature
of changing economic conditions. Real estate mortgage loans present risks
involving, among other things, economic and demographic changes, deterioration
of collateral and customer financial problems.
The Company's primary asset is its stock in the Bank. Accordingly, its
financial performance is determined primarily by the results of operations of
the Bank. For information regarding the consolidated financial condition and
results of operations of the Company as of December 31, 2002 and 2001 and for
the three years in the period ended December 31, 2002, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements of the Company, and the related notes
presented in Part II hereof. All average balances presented in this report were
derived based on daily averages.
EMPLOYEES
As of December 31, 2002, the Company (including the Bank) had 230 full-time
and 20 part-time employees. The employees are not represented by any collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
COMPETITION
The banking business in Georgia is highly competitive. The Bank competes
not only with other banks and thrifts that are located in the same counties as
the Bank and in surrounding counties, but also with other financial service
organizations including credit unions, finance companies, and certain
governmental agencies. To the extent that the Bank must maintain non-interest
earning reserves against deposits, it may be at a competitive disadvantage when
compared with other financial service organizations that are not required to
maintain reserves against substantially equivalent sources of funds. Also,
other financial institutions with which the Bank competes may have substantially
greater resources and lending capabilities due to the size of the organization.
SUPERVISION AND REGULATION
Both the Company and the Bank are subject to extensive state and federal
banking regulations that impose restrictions on and provide for general
regulatory oversight of their operations. These laws are generally intended to
protect depositors and not shareholders. The following discussion describes the
material elements of the regulatory framework that applies to us.
THE COMPANY
Since the Company owns all of the capital stock of the Bank, it is a bank
holding company under the federal Bank Holding Company Act of 1956. As a
result, the Company is primarily subject to the supervision, examination, and
reporting requirements of the Bank Holding Company Act and the regulations of
the Federal Reserve.
ACQUISITIONS OF BANKS. The Bank Holding Company Act requires every bank
holding company to obtain the Federal Reserve's prior approval before:
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- acquiring direct or indirect ownership or control of any voting shares
of any bank if, after the acquisition, the bank holding company will
directly or indirectly own or control more than 5% of the bank's
voting shares;
- acquiring all or substantially all of the assets of any bank; or
- merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal
Reserve may not approve any of these transactions if it would result in or tend
to create a monopoly or, substantially lessen competition or otherwise function
as a restraint of trade, unless the anticompetitive effects of the proposed
transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the community to be served. The Federal Reserve is
also required to consider the financial and managerial resources and future
prospects of the bank holding companies and banks concerned and the convenience
and needs of the community to be served. The Federal Reserve's consideration of
financial resources generally focuses on capital adequacy, which is discussed
below.
Under the Bank Holding Company Act, if adequately capitalized and
adequately managed, the Company or any other bank holding company located in
Georgia may purchase a bank located outside of Georgia. Conversely, an
adequately capitalized and adequately managed bank holding company located
outside of Georgia may purchase a bank located inside Georgia. In each case,
however, restrictions may be placed on the acquisition of a bank that has only
been in existence for a limited amount of time or will result in specified
concentrations of deposits. For example, Georgia law prohibits a bank holding
company from acquiring control of a financial institution until the target
financial institution has been incorporated for three years. Because the Bank
has been incorporated for more than three years, this limitation does not apply
to the Bank or to the Company.
CHANGE IN BANK CONTROL. Subject to various exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with related
regulations, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is refutably presumed to exist
if a person or company acquires 10% or more, but less than 25%, of any class of
voting securities and either:
- the bank holding company has registered securities under Section 12 of
the Securities Act of 1934; or
- no other person owns a greater percentage of that class of voting
securities immediately after the transaction.
Our common stock is registered under the Securities Exchange Act of 1934. The
regulations provide a procedure for challenging any rebuttable presumption of
control.
PERMITTED ACTIVITIES. A bank holding company is generally permitted under
the Bank Holding Company Act to engage in or acquire direct or indirect control
of more than 5% of the voting shares of any company engaged in the following
activities:
- banking or managing or controlling banks; and
- any activity that the Federal Reserve determines to be so closely
related to banking as to be a proper incident to the business of
banking.
Activities that the Federal Reserve has found to be so closely related to
banking as to be a proper incident to the business of banking include:
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- factoring accounts receivable;
- making, acquiring, brokering or servicing loans and usual related
activities;
- leasing personal or real property;
- operating a non-bank depository institution, such as a savings
association;
- trust company functions;
- financial and investment advisory activities;
- conducting discount securities brokerage activities;
- underwriting and dealing in government obligations and money market
instruments;
- providing specified management consulting and counseling activities;
- performing selected data processing services and support services;
- acting as agent or broker in selling credit life insurance and other
types of insurance in connection with credit transactions; and
- performing selected insurance underwriting activities.
Despite prior approval, the Federal Reserve may order a bank holding
company or its subsidiaries to terminate any of these activities or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that the bank holding company's continued ownership, activity or control
constitutes a serious risk to the financial safety, soundness, or stability of
it or any of its bank subsidiaries.
In addition to the permissible bank holding company activities listed
above, a bank holding company may qualify and elect to become a financial
holding company, permitting the bank holding company to engage in additional
activities that are financial in nature or incidental or complementary to
financial activity. The Bank Holding Company Act expressly lists the following
activities as financial in nature:
- lending, trust and other banking activities;
- insuring, guaranteeing, or indemnifying against loss or harm, or
providing and issuing annuities, and acting as principal, agent, or
broker for these purposes, in any state;
- providing financial, investment, or advisory services;
- issuing or selling instruments representing interests in pools of
assets permissible for a bank to hold directly;
- underwriting, dealing in or making a market in securities;
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- other activities that the Federal Reserve may determine to be so
closely related to banking or managing or controlling banks as to be a
proper incident to managing or controlling banks;
- foreign activities permitted outside of the United States if the
Federal Reserve has determined them to be usual in connection with
banking operations abroad;
- merchant banking through securities or insurance affiliates; and
- insurance company portfolio investments.
To qualify to become a financial holding company, the Bank and any other
depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least
satisfactory. Additionally, the Company must file an election with the Federal
Reserve to become a financial holding company and must provide the Federal
Reserve with 30 days' written notice prior to engaging in a permitted financial
activity. While the Company meets the qualification standards applicable to
financial holding companies, the Company has not elected to become a financial
holding company at this time.
SUPPORT OF SUBSIDIARY INSTITUTIONS. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength for the Bank and to
commit resources to support the Bank. This support may be required at times
when, without this Federal Reserve policy, the Company might not be inclined to
provide it. In addition, any capital loans made by the Company to the Bank will
be repaid only after its deposits and various other obligations are repaid in
full. In the unlikely event of the Company's bankruptcy, any commitment by it
to a federal bank regulatory agency to maintain the capital of the Bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
THE BANK
Because the Bank is a commercial bank chartered under the laws of the State
of Georgia, it is primarily subject to the supervision, examination and
reporting requirements of the FDIC and the Georgia Department of Banking and
Finance. The FDIC and Georgia Department of Banking and Finance regularly
examine the Bank's operations and have the authority to approve or disapprove
mergers, the establishment of branches and similar corporate actions. Both
regulatory agencies have the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of law. Additionally,
the Bank's deposits are insured by the FDIC to the maximum extent provided by
law. The Bank is also subject to numerous state and federal statutes and
regulations that affect its business, activities and operations.
BRANCHING. Under current Georgia law, the Bank may open branch offices
throughout Georgia with the prior approval of the Georgia Department of Banking
and Finance. In addition, with prior regulatory approval, the Bank may acquire
branches of existing banks located in Georgia. The Bank and any other national
or state-chartered bank generally may branch across state lines by merging with
banks in other states if allowed by the applicable states' laws. Georgia law,
with limited exceptions, currently permits branching across state lines through
interstate mergers.
Under the Federal Deposit Insurance Act, states may "opt-in" and allow
out-of-state banks to branch into their state by establishing a new start-up
branch in the state. Currently, Georgia has not opted-in to this provision.
Therefore, interstate merger is the only method through which a bank located
outside of Georgia may branch into Georgia. This provides a limited barrier of
entry into the Georgia banking market, which protects us from an important
segment of potential competition. However, because Georgia has elected not to
opt-in, our ability to establish a new start-up branch in another state may be
limited. Many states that have elected to opt-in have done so on a reciprocal
basis, meaning that an out-of-state bank may establish a new start-up branch
only if their home state has also elected to opt-in. Consequently, until
Georgia changes its election, the only way we will be able to branch into states
that have elected to opt-in on a reciprocal basis will be through interstate
merger.
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PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 establishes a system of prompt corrective action to
resolve the problems of undercapitalized financial institutions. Under this
system, the federal banking regulators have established five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) in which all institutions are
placed.
Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital levels for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to various limitations. The
controlling holding company's obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary's assets at the
time it became undercapitalized or the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except under
an accepted capital restoration plan or with FDIC approval. The regulations
also establish procedures for downgrading an institution to a lower capital
category based on supervisory factors other than capital.
FDIC INSURANCE ASSESSMENTS. The FDIC has adopted a risk-based assessment
system for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3)
undercapitalized. These three categories are substantially similar to the
prompt corrective action categories described above, with the "undercapitalized"
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three supervisory
subgroups based on a supervisory evaluation that the institution's primary
federal regulator provides to the FDIC and information that the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of
deposits, depending on the institution's capital group and supervisory subgroup.
In addition, the FDIC imposes assessments to help pay off the $780 million in
annual interest payments on the $8 billion Financing Corporation bonds issued in
the late 1980s as part of the government rescue of the thrift industry. This
assessment rate is adjusted quarterly and is set at 1.68 cents per $100 of
deposits for the first quarter of 2003.
The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve or the FDIC shall evaluate the
record of each financial institution in meeting the credit needs of its local
community, including low and moderate-income neighborhoods. These facts are
also considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could impose
additional requirements and limitations on the Bank and the Company.
Additionally, we must publicly disclose the terms of various Community
Reinvestment Act-related agreements.
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OTHER REGULATIONS. Interest and other charges collected or contracted for
by the Bank are subject to state usury laws and federal laws concerning interest
rates. For example, under the Soldiers' and Sailors' Civil Relief Act of 1940,
a lender is generally prohibited from charging an annual interest rate in excess
of 6% on any obligation for which the borrower is a person on active duty with
the United States military.
The Bank's loan operations are also subject to federal laws applicable to
credit transactions, such as the:
- Federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers;
- Home Mortgage Disclosure Act of 1975, requiring financial institutions
to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation
to help meet the housing needs of the community it serves;
- Equal Credit Opportunity Act, prohibiting discrimination on the basis
of race, creed or other prohibited factors in extending credit;
- Fair Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
- Fair Debt Collection Act, governing the manner in which consumer debts
may be collected by collection agencies;
- Soldiers' and Sailors' Civil Relief Act of 1940, governing the
repayment terms of, and property rights underlying, secured
obligations of persons in military service; and
- Rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal laws.
In addition to the federal and state laws noted above, the Georgia Fair
Lending Act ("GFLA") became effective on October 1, 2002. GFLA imposes new
restrictions and procedural requirements on most mortgage loans made in Georgia,
including home equity loans and lines of credit. While many of the GFLA
requirements will apply regardless of the interest rate or charges on the loan,
"high cost home loans," as defined by GFLA, are subject to the most
requirements.
Due to the high compliance burdens associated with high cost home loans in
Georgia, the Company has determined that it will not make such loans in Georgia
in 2003.
However, because the Company generally has not made a significant number of
"high cost home loans" in prior years, ceasing to make high cost loans should
not have a significant impact on the Company's lending volume. With respect to
our other lending, we have implemented procedures to comply with GFLA.
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The deposit operations of the Bank are subject to:
- The Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records; and
- The Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve to implement that act, which govern automatic deposits
to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and
other electronic banking services.
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve, in the case of the Company, and
the FDIC and Georgia Department of Banking and Finance, in the case of the Bank.
The Federal Reserve has established a risk-based and a leverage measure of
capital adequacy for bank holding companies. The Bank is also subject to
risk-based and leverage capital requirements adopted by the FDIC, which are
substantially similar to those adopted by the Federal Reserve for bank holding
companies.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted
assets is 8%. Total capital consists of two components, Tier 1 Capital and Tier
2 Capital. Tier 1 Capital generally consists of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of qualifying cumulative
perpetual preferred stock, less goodwill and other specified intangible assets.
Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital
generally consists of subordinated debt, other preferred stock and a limited
amount of loan loss reserves. The total amount of Tier 2 Capital is limited to
100% of Tier 1 Capital. At December 31, 2002 our ratio of total capital to
risk-weighted assets was 11.3% and our ratio of Tier 1 Capital to risk-weighted
assets was 10.1%.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve's risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. At December 31, 2002, our leverage ratio was 7.6%. The guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without reliance on intangible assets. The
Federal Reserve considers the leverage ratio and other indicators of capital
strength in evaluating proposals for expansion or new activities.
The Bank and the Company are also both subject to leverage capital
guidelines issued by the Georgia Department of Banking and Finance, which
provide for minimum ratios of Tier 1 capital to total assets. These guidelines
are substantially similar to those adopted by the Federal Reserve in the case of
the Company and those adopted by the FDIC in the case of the Bank.
Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital
directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting brokered deposits, and certain other restrictions on its business. As
described above, significant additional restrictions can be imposed on
FDIC-insured depository institutions that fail to meet applicable capital
requirements. See "-Prompt Corrective Action."
8
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from the Bank. The
principal sources of the Company's cash flow, including cash flow to pay
dividends to its shareholders, are dividends that the Bank pays to its sole
shareholder, the Company. Statutory and regulatory limitations apply to the
Bank's payment of dividends to the Company as well as to the Company's payment
of dividends to its shareholders.
The payment of dividends by the Company and the Bank may also be affected
by other factors, such as the requirement to maintain adequate capital above
regulatory guidelines. If, in the opinion of the federal banking regulator, the
Bank were engaged in or about to engage in an unsafe or unsound practice, the
federal banking regulator could require, after notice and a hearing, that the
Bank stop or refrain from engaging in the practice. The federal banking
agencies have indicated that paying dividends that deplete a depository
institution's capital base to an inadequate level would be an unsafe and unsound
banking practice. Under the Federal Deposit Insurance Corporation Improvement
Act of 1991, a depository institution may not pay any dividend if payment would
cause it to become undercapitalized or if it already is undercapitalized.
Moreover, the federal agencies have issued policy statements that provide that
bank holding companies and insured banks should generally only pay dividends out
of current operating earnings. See "-Prompt Corrective Action" above.
The Georgia Department of Banking and Finance also regulates the Bank's
dividend payments and must approve dividend payments that would exceed 50% of
the Bank's net income for the prior year. Our payment of dividends may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.
At December 31, 2002, the Bank was unable to pay dividends to the Company
without prior regulatory approval.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
The Company and the Bank are subject to the provisions of Section 23A of
the Federal Reserve Act. Section 23A places limits on the amount of:
- a bank's loans or extensions of credit to affiliates;
- a bank's investment in affiliates;
- assets a bank may purchase from affiliates, except for real and
personal property exempted by the Federal Reserve;
- loans or extensions of credit to third parties collateralized by the
securities or obligations of affiliates; and
- a bank's guarantee, acceptance or letter of credit issued on behalf of
an affiliate.
The total amount of the above transactions is limited in amount, as to any
one affiliate, to 10% of a bank's capital and surplus and, as to all affiliates
combined, to 20% of a bank's capital and surplus. In addition to the limitation
on the amount of these transactions, each of the above transactions must also
meet specified collateral requirements. The Bank must also comply with other
provisions designed to avoid the taking of low-quality assets.
9
The Company and the Bank are also subject to the provisions of Section 23B
of the Federal Reserve Act which, among other things, prohibit an institution
from engaging in the above transactions with affiliates unless the transactions
are on terms substantially the same, or at least as favorable to the institution
or its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with third parties, and (2) must not involve
more than the normal risk of repayment or present other unfavorable features.
PRIVACY
Financial institutions are required to disclose their policies for
collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing nonpublic personal financial
information with nonaffiliated third parties except under narrow circumstances,
such as the processing of transactions requested by the consumer or when the
financial institution is jointly sponsoring a product or service with a
nonaffiliated third party. Additionally, financial institutions generally may
not disclose consumer account numbers to any nonaffiliated third party for use
in telemarketing, direct mail marketing or other marketing to consumers.
ANTI-TERRORISM LEGISLATION
In the wake of the tragic events of September 11th, on October 26, 2001,
the President signed the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act
of 2001. Under the USA PATRIOT Act, financial institutions are subject to
prohibitions against specified financial transactions and account relationships
as well as enhanced due diligence and "know your customer" standards in their
dealings with foreign financial institutions and foreign customers. For
example, the enhanced due diligence policies, procedures, and controls generally
require financial institutions to take reasonable steps-
- to conduct enhanced scrutiny of account relationships to guard against
money laundering and report any suspicious transaction;
- to ascertain the identity of the nominal and beneficial owners of, and
the source of funds deposited into, each account as needed to guard
against money laundering and report any suspicious transactions;
- to ascertain for any foreign bank, the shares of which are not
publicly traded, the identity of the owners of the foreign bank, and
the nature and extent of the ownership interest of each such owner;
and
- to ascertain whether any foreign bank provides correspondent accounts
to other foreign banks and, if so, the identity of those foreign banks
and related due diligence information.
Under the USA PATRIOT Act, financial institutions must establish anti-money
laundering programs. The USA PATRIOT Act sets forth minimum standards for
these programs, including:
- the development of internal policies, procedures, and controls;
- the designation of a compliance officer;
- an ongoing employee training program; and
- an independent audit function to test the programs.
10
Pursuant to the mandate of the USA PATRIOT Act, the Secretary of the
Treasury issued regulations effective April 24, 2002 applicable to financial
institutions. Because all federally insured depository institutions are
required to have anti-money laundering programs, the regulations provide that a
financial institution which is subject to regulation by a "federal functional"
is in compliance with the regulations if it complies with the rules of its
primary federal regulator governing the establishment and maintenance of
anti-money laundering programs.
Under the authority of the USA PATRIOT Act, the Secretary of the Treasury
adopted rules on September 26, 2002 increasing the cooperation and information
sharing between financial institutions, regulators and law enforcement
authorities regarding individuals, entities and organizations engaged in, or
reasonably suspected based on credible evidence of engaging in, terrorist acts
or money laundering activities. Under the new rules, a financial institution is
required to:
- expeditiously search its records to determine whether it maintains or
has maintained accounts, or engaged in transactions with individuals
or entities, listed in a request submitted by the Financial Crimes
Enforcement Network ("FinCEN");
- notify FinCEN if an account or transaction is identified;
- designate a contact person to receive information requests;
- limit use of information provided by FinCEN to: (1) reporting to
FinCEN, (2) determining whether to establish or maintain an account or
engage in a transaction and (3) assisting the financial institution in
complying with the Bank Secrecy Act; and
- maintain adequate procedures to protect the security and
confidentiality of FinCEN requests.
Under the new rules, a financial institution may also share information
regarding individuals, entities, organizations and countries for purposes of
identifying and, where appropriate, reporting activities that it suspects may
involve possible terrorist activity or money laundering. Such
information-sharing is protected under a safe harbor if the financial
institution:
- notifies FinCEN of its intention to share information, even when
sharing with an affiliated financial institution;
- takes reasonable steps to verify that, prior to sharing, the financial
institution or association of financial institutions with which it
intends to share information has submitted a notice to FinCEN;
- limits the use of shared information to identifying and reporting on
money laundering or terrorist activities, determining whether to
establish or maintain an account or engage in a transaction, or
assisting it in complying with the Bank Security Act; and
- maintains adequate procedures to protect the security and
confidentiality of the information.
Any financial institution complying with these rules will not be deemed to
have violated the privacy requirements discussed above.
The Secretary of the Treasury also adopted a new rule on September 26, 2002
intended to prevent money laundering and terrorist financing through
correspondent accounts maintained by U.S. financial institutions on behalf of
foreign banks. Under the new rule, financial institutions:
- are prohibited from providing correspondent accounts to foreign shell
banks;
11
- are required to obtain a certification from foreign banks for which
they maintain a correspondent account stating the foreign bank is not
a shell bank and that it will not permit a foreign shell bank to have
access to the U.S. account;
- must maintain records identifying the owner of the foreign bank for
which they may maintain a correspondent account and its agent in the
Unites States designated to accept services of legal process;
- must terminate correspondent accounts of foreign banks that fail to
comply with or fail to contest a lawful request of the Secretary of
the Treasury or the Attorney General of the United States, after being
notified by the Secretary or Attorney General.
The new rule applies to correspondent accounts established after October
28, 2002.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions operating and doing
business in the United States. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which our
business may be affected by any new regulation or statute.
EFFECT OF GOVERNMENTAL MONETARY POLICES
Our earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and its agencies. The
Federal Reserve Bank's monetary policies have had, and are likely to continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve affect the levels of bank loans, investments and deposits through its
control over the issuance of United States government securities, its regulation
of the discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject. We cannot predict the nature or
impact of future changes in monetary and fiscal policies.
ITEM 2. PROPERTIES
The executive offices of the Company are located at 3475 Piedmont Road,
N.E., Suite 550, Atlanta, Georgia 30305. The Company leases this property. The
Company and the Bank conduct business from facilities primarily owned by the
Bank, all of which are in good condition and are adequate for the Bank's current
and foreseeable needs. The Company and Flag Bank provide services or perform
operational functions at 24 locations, of which 16 locations are owned and 8 are
leased. See "Item 1 - Business" for a list of the locations in which the
Company and the Bank have offices.
ITEM 3. LEGAL PROCEEDINGS
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.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted by the Company to a vote of its shareholders during
the fourth quarter of 2002.
PART II
--------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
As of December 31, 2002, the Company had 811 shareholders of record. The
following table sets forth the high and low sales prices for the Flag common
stock, as reported by the Nasdaq Stock Market, and the cash dividends paid per
share of common stock for the periods indicated.
Quarter High Low Dividend
-------------------------------- ------ ------ ---------
2003
First (through March 26, 2003) $13.39 $11.00 $ 0.06
2002
Fourth $11.60 $11.15 $ 0.06
Third 11.70 10.39 0.06
Second 11.25 9.94 0.06
First 10.25 9.10 0.06
2001
Fourth $ 8.60 $ 7.64 $ 0.06
Third 7.87 7.16 0.06
Second 7.00 6.01 0.06
First 7.38 6.38 0.06
Subject to board approval, the Company pays quarterly dividends on the
first business day of January, April, July and October. See "Item 1 - Business
- Supervision and Regulation - Payment of Dividends" for information regarding
regulatory restrictions on the Company's ability to pay dividends.
13
During the first and second quarters of 2002, the Company issued a total of
1,272,000 shares of common stock and 1,272,000 warrants to purchase common stock
to directors and members of senior management in a private placement under Rule
506 of the Securities Act of 1933, as amended. The purchase prices of the
common stock and the exercise prices of the warrants are set forth below:
NO. OF SHARES PURCHASE AND
AND WARRANTS EXERCISE PRICE
------------- ---------------
1,068,000 $ 9.10
6,000 9.51
78,000 9.53
30,000 9.69
24,000 9.75
6,000 9.90
6,000 9.94
6,000 10.00
48,000 10.10
The increased prices represent adjustments necessary to match the price of
the securities with the market price of the common stock at the time of the
sale. The purchase price of the warrants was $1.00 per warrant in each case.
The total number of securities authorized for issuance was 1.3 million shares
and 1.3 million warrants.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in
conjunction with our consolidated financial statements, which are included
elsewhere in this report.
(In thousands except per share data) 2002 2001 2000 1999 1998
--------- -------- -------- -------- --------
FOR THE YEAR
Net interest income $ 24,302 23,980 24,961 26,490 25,952
Provision for loan losses 4,549 2,488 3,597 4,656 3,475
Non-interest income 7,395 10,668 11,962 10,072 9,952
Non-interest expense 31,005 25,701 27,633 30,615 28,882
Income taxes (2,028) 1,753 1,409 78 708
Extraordinary item 165 696 -- -- --
Net earnings (loss) (1,994) 4,010 4,284 1,213 2,839
PER COMMON SHARE
Basic earnings (loss) per share $ (0.24) .51 .52 .15 .35
Diluted earnings (loss) per share (0.24) .51 .52 .15 .34
Cash dividends declared .24 .24 .24 .24 .20
Book value 7.24 7.33 6.83 6.43 6.92
AT YEAR END
Loans, net $374,784 368,967 384,661 419,079 424,660
Earning assets 569,755 520,290 507,929 521,452 568,133
Assets 636,131 570,202 559,037 587,870 635,192
Deposits 509,731 440,582 461,438 483,987 521,671
Stockholders' equity 60,749 54,023 55,498 53,197 56,869
Common shares outstanding 8,394 7,370 8,123 8,273 8,223
AVERAGE BALANCES
Loans $366,571 378,867 405,101 449,689 435,422
Earning assets 511,737 508,752 510,898 556,577 576,245
Assets 560,984 560,816 566,355 617,764 624,487
Deposits 442,645 449,985 455,338 496,998 505,337
Stockholders' equity 58,865 56,294 53,853 55,365 55,337
Weighted average shares outstanding 8,201 7,808 8,210 8,258 8,218
KEY PERFORMANCE RATIOS
Return on average assets (0.36%) .72% .77% .20% .45%
Return on average stockholders' equity (3.39%) 7.12% 7.95% 2.19% 5.13%
Net interest margin, tax equivalent basis 4.86% 4.83% 4.99% 4.90% 4.56%
Dividend payout ratio N/A 46.27% 45.98% 153.50% 49.49%
Average equity to average assets 10.49% 10.04% 9.51% 8.96% 8.86%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Flag Financial Corporation ("Flag") is a bank holding company that owns 100
percent of the common stock of Flag Bank (the "Bank"). The Bank is a
full-service, retail oriented bank primarily engaged in retail banking, small
business, residential and commercial real estate lending, and mortgage banking.
The following discussion focuses on significant changes in the financial
condition and results of operations of Flag during the three years ended
December 31, 2002. This discussion and the financial information contained
herein are presented to assist the reader in understanding and evaluating the
financial condition, results of operations, and future prospects of Flag and
should be read as a supplement to and in conjunction with the Consolidated
Financial Statements and Related Notes.
RECENT ACQUISITIONS
Effective November 8, 2002, the Bank acquired six branches located in
metropolitan Atlanta from Encore Bank. Included in the purchase were real
estate, personal property and other assets used in the operation of the
branches, and $96 million in deposits. The Bank did not purchase or assume any
loans in the transaction.
Effective November 12, 2002, Flag acquired a specialized real estate
lending business from Atlanta-based Bankers' Capital Group, LLC (BCG), including
approximately $23 million in loans subject to various participation interests.
Principals of BCG include Flag Chairman and Chief Executive Officer, Joseph W.
Evans, board member William H. Anderson and executives and board members J.
Thomas Wiley, Jr. and Stephen W. Doughty. None of these individuals participated
in Flag's evaluation or approval of the transaction in view of their positions
as principals of BCG.
See Note 2 in the Notes to Consolidated Financial Statements for additional
information regarding the Encore and BCG transactions.
Effective December 31, 2001, Flag sold selected loans, deposits and
property of its bank branches in Milan and McRae, Georgia.
Effective September 30, 2000, Flag sold the loans, deposits and property of
its bank branches in Cobbtown, Metter and Statesboro, Georgia.
Effective September 30, 2000, Flag sold the loans, deposits and property of
its bank branches in Blackshear, Homerville and Waycross, Georgia.
On December 29, 2000, Flag acquired certain loans, deposits and property of
bank branches in Montezuma, Oglethorpe, Cusseta and Buena Vista, Georgia.
RESULTS OF OPERATIONS
Flag recorded a net loss in 2002 of $1,994,000 or $0.24 per share, compared
to net income of $4,010,000 or $0.51 per share in 2001 and net income of
$4,284,000 or $0.52 per share in 2000.
Flag's net loss in 2002 resulted primarily from the $6,044,000 after tax
charge taken in the first quarter to effect its management restructuring, loss
on the early repayment of Federal Home Loan Bank (FHLB) advances, and a larger
than normal addition to the provision for loan losses. Flag recorded after tax
extraordinary items related to the early repayment of FHLB advances totaling
$165,000 and $696,000 in 2002 and 2001, respectively.
16
NET INTEREST INCOME
Net interest income (the difference or spread between interest income on
earning assets and interest expense on borrowed funds) is the largest component
of Flag's operating income. Flag manages net interest income in a manner that
realizes the largest spread while accepting certain levels of credit, liquidity
and interest rate risks. Managing these risks requires systems and processes to
identify and evaluate these risks at various levels in the organization. Net
interest income was $24.3 million in 2002, compared to $24.0 million and $25.0
million in 2001 and 2000, respectively. Flag's margin has been pressured
downward over the past few years by a decreasing interest rate environment.
Flag's refinancing of FHLB advances in 2001 and 2002, coupled with aggressive
repricing efforts on the deposit base, helped Flag reduce interest rate expense
by approximately 38% during 2002, and more than offset decreases in interest
income. Net interest margin increased to 4.86% in 2002 compared to 4.83% and
4.99% in 2001 and 2000, respectively.
Total interest income in 2002 was $36.7 million, compared to $44.5 million
and $46.4 million in 2001 and 2000, respectively. Yields on average earning
assets in 2002 decreased to 7.28% from 8.87% in 2001 and 9.18% in 2000. The
falling interest rate environment, evidenced by a prime rate of 4.25% at the end
of 2002 versus 8.50% at the beginning of 2000, has been the largest contributor
to lower yields on earning assets.
Total interest expense in 2002 was $12.4 million, compared to $20.6 million
and $21.4 million in 2001 and 2000, respectively. Aggressive repricing of
deposit accounts, accompanied by early repayment and refinancing of FHLB debt,
has allowed Flag to significantly reduce interest expense over the time frame
discussed. Flag's total deposits cost 2.81%, 4.06%, and 4.17% in 2002, 2001 and
2000, respectively, while FHLB and other borrowings cost 2.16%, 5.70% and 6.34%
over the same time periods. (see TABLES 1 & 2).
17
TABLE 1 - CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES - TAXABLE EQUIVALENT BASIS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------------------------------
INTEREST WEIGHTED INTEREST WEIGHTED INTEREST WEIGHTED
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- --------- ------- -------- --------- ------- -------- ---------
ASSETS
Interest-earning assets:
Loans . . . . . . . . . . . $366,571 29,702 8.10% 378,867 36,798 9.71% 405,101 40,014 9.88%
Taxable investment
securities . . . . . . . . 120,364 6,513 5.41% 107,777 6,825 6.33% 84,833 5,471 6.45%
Tax-free investment
securities . . . . . . . . 10,294 768 7.46% 10,155 887 8.74% 11,180 861 7.70%
Interest-bearing deposits
in other banks. . . . . . 1,748 74 4.23% 2,962 159 5.37% 2,718 163 6.00%
Federal funds sold. . . . . 12,760 186 1.46% 8,991 435 4.84% 7,066 409 5.79%
-------- -------- --------- ------- -------- --------- ------- -------- ---------
Total interest-
earning assets . . . . . 511,737 37,243 7.28% 508,752 45,104 8.87% 510,898 46,918 9.18%
Other assets. . . . . . . . . 49,247 52,064 55,457
-------- ------- -------
Total assets. . . . . . . $560,984 560,816 566,355
======== ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand
deposits . . . . . . . . $131,967 2,151 1.63% 109,375 2,494 2.28% 90,539 2,228 2.46%
Savings deposits. . . . . . 25,322 214 0.85% 25,283 371 1.47% 27,107 535 1.97%
Other time deposits . . . . 244,113 8,900 3.65% 267,703 15,381 5.75% 284,307 16,237 5.71%
Federal funds purchased . . 3,406 54 1.59% 3,210 158 4.92% 7,990 506 6.33%
FHLB advances and
other borrowings . . . . 48,715 1,053 2.16% 37,768 2,151 5.70% 30,349 1,925 6.34%
-------- -------- --------- ------- -------- --------- ------- -------- ---------
Total interest-
bearing liabilities . . 453,523 12,372 2.73% 443,339 20,555 4.64% 440,292 21,431 4.87%
Non-interest bearing
demand deposits. . . . . 41,243 47,624 53,385
Other liabilities . . . . . . 7,353 13,559 18,825
Stockholders' equity. . . . . 58,865 56,294 53,853
-------- ------- -------
Total liabilities and
stockholders' equity. . $560,984 560,816 566,355
======== ======= =======
Tax-equivalent adjustment 570 569 526
-------- -------- --------
Net interest income . . . . . 24,301 23,980 24,961
======== ======== ========
Interest rate spread. . . . . 4.55% 4.23% 4.31%
Net interest margin . . . . . 4.86% 4.83% 4.99%
Interest-earning assets/
interest-bearing liabilities 113% 115% 116%
CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES
TABLE 1 presents for the three years ended December 31, 2002, average
balances of interest-earning assets and interest-bearing liabilities, and the
weighted average interest rates earned and paid on those balances. In addition,
interest rate spreads, net interest margins and the ratio of interest-earning
assets versus interest-bearing liabilities for those years are presented.
Average interest-earning assets were $511.7 million in 2002 versus $508.8
million in 2001 and $510.9 million in 2000. Average interest-bearing
liabilities were $453.5 million in 2002 versus $443.3 million and $440.3 million
in 2001 and 2000, respectively.
.
Flag's ratio average earning assets to average total assets was 91.2% in
2002, 90.7% in 2001 and 90.2% in 2000
18
TABLE 2 shows the change in net interest income from 2001 to 2000 and from
2000 to 1999 due to changes in volumes and rates.
TABLE 2 - RATE/VOLUME VARIANCE ANALYSIS - TAXABLE EQUIVALENT BASIS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2002 COMPARED TO 2001 2001 COMPARED TO 2000
-------------------------- -------------------------
RATE/ NET RATE/ NET
VOLUME YIELD CHANGE VOLUME YIELD CHANGE
-------- ------- ------- ------- ------- -------
INTEREST INCOME:
LOANS . . . . . . . . . . . . . . . $(1,005) (6,091) (7,096) (2,564) (651) (3,215)
TAXABLE INVESTMENT SECURITIES . . . 681 (993) (312) 1,453 (99) 1,354
TAX-FREE INVESTMENT SECURITIES . 10 (129) (119) (89) 115 26
INTEREST-BEARING DEPOSITS IN
OTHER BANKS . . . . . . . . . . . (20) (65) (85) 13 (17) (4)
FEDERAL FUNDS SOLD. . . . . . . . . 55 (304) (249) 93 (67) 26
-------- ------- ------- ------- ------- -------
TOTAL INTEREST INCOME. . . . . . (279) (7,582) (7,861) (1,094) (719) (1,813)
INTEREST EXPENSE:
INTEREST BEARING DEMAND DEPOSITS. . 515 (858) (343) 464 (198) 266
SAVINGS DEPOSITS. . . . . . . . . . 1 (158) (157) (36) (128) (164)
OTHER TIME DEPOSITS . . . . . . . . (1,355) (5,126) (6,481) (948) 92 (856)
FEDERAL FUNDS PURCHASED . . . . . . 10 (114) (104) (303) (45) (348)
FHLB ADVANCES AND OTHER BORROWINGS. 623 (1,721) (1,098) 471 (245) 226
-------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE . . . . . (206) (7,977) (8,183) (352) (524) (876)
-------- ------- ------- ------- ------- -------
NET INTEREST INCOME . . . . . . . . . $ (73) 395 322 (742) (195) (937)
======== ======= ======= ======= ======= =======
NON-INTEREST INCOME
Total non-interest income decreased to $7.4 million in 2002 from $10.7
million in 2001 and $12.0 million in 2000. The decrease in other income in 2002
resulted largely from the absence of a gain on the sale of branches. Flag
recorded gains on the sale of branches in 2001 of $3.3 million and $5.1 million
in 2000.
Service charges on deposit accounts decreased during 2002 to $3.5 million
from $3.9 million in 2001and $3.5 million in 2000. The decrease in 2002 from
2001 is due largely to the sale of two branch offices in December 2001 with
approximately $31 million in deposits. The increase in 2001 over 2000 levels
relates in part to increased demand deposits and lower earnings credits.
Mortgage banking activities includes origination fees, service release
premiums and the gain on the sale of mortgage loans originated solely for the
purpose of being sold. The lower interest rate environment, coupled with more
effective originators, helped Flag improve the income from its mortgage banking
activities in 2002 by 21% as compared to 2001. Total income from mortgage
banking activities increased to $2.9 million in 2002 from 2001 and 2000 levels
of $2.4 million and $1.7 million, respectively.
Effective December 31, 2001, Flag sold selected loans, deposits and
property of its branches in Milan and McRae, Georgia and recognized a gain on
sale of approximately $3.3 million.
During 2000, Flag sold the loans, deposits and property of its bank
branches in Cobbtown, Metter and Statesboro, Georgia and recognized a gain on
sale of approximately $2.0 million. Flag also sold the loans, deposits and
property of its bank branches in Blackshear, Homerville and Waycross, Georgia
and recognized a gain on sale of approximately $3.1 million.
19
NON-INTEREST EXPENSES
Salary and employee benefits increased during 2002 to $18.6 million from
$13.9 million in 2001 and $14.4 million in 2000. The increase in 2002 relates
largely to the management restructuring undertaken in the first quarter of 2002,
in which Flag took a special charge related to buyouts of employment contracts
and severance of approximately $3.1 million. The decrease in 2001 compared to
2000 relates to the lower number of staff due to the sale of branch offices
during 2000.
Occupancy expenses continued a trend, decreasing to $3.6 million in 2002
from $3.8 million in 2001 and $4.3 million in 2000. This positive trend for
Flag is the result of an effort to consolidate branch offices to improve
individual branch performance as well as that of the consolidated company. This
effort has resulted in 16 offices being closed or sold since the beginning of
2000.
Professional fees increased to $1.8 million from $1.2 million in 2001 and
were flat against 2000 levels of $1.7 million. The higher amounts in 2002 relate
to approximately $350,000 of professional fees related to the management
restructuring and private placement effected in the first quarter, whereas the
higher amounts in 2000 relate to the professional fees incurred in conjunction
with branch divestiture in six markets. Other expenses increased slightly over
the prior year to $3.8 million from $3.7 million. Other expenses were $5.0
million in 2000 and relate in part to increased operating and conversion expense
associated with the disposition of branches in six markets.
INVESTMENT SECURITIES
The composition of the investment securities portfolio reflects
management's strategy of maintaining an appropriate combination of liquidity,
interest rate risk and yield. Flag seeks to maintain an investment portfolio
with minimal credit risk, investing mostly in obligations of the US Treasury or
other state and federal governmental agencies.
Investment securities increased to $138.9 million at December 31, 2002
from $131.5 million at December 31, 2001. At December 31, 2002, all investment
securities outstanding were classified as available-for-sale. The increase in
investments resulted from the investment of a portion of the proceeds received
from the acquisition of branch offices from Encore Bank in November 2002. At
December 31, 2002, gross unrealized gains in the total portfolio amounted to
$3.2 million and gross unrealized losses amounted to $58,000.
TABLE 3 reflects the carrying amount of the investment securities portfolio
for the past three years.
TABLE 3 - CARRYING VALUE OF INVESTMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
2002 2001 2000
-------- ------- -------
SECURITIES AVAILABLE-FOR-SALE:
U.S. TREASURIES AND AGENCIES $ 23,577 25,859 22,554
CORPORATE DEBT SECURITIES. . 2,201 2,673 2,014
STATE, COUNTY AND MUNICIPAL. 9,972 10,572 10,652
MORTGAGE-BACKED SECURITIES . 86,784 77,418 56,202
TRUST PREFERRED SECURITIES . 15,886 14,448 8,811
EQUITY SECURITIES. . . . . . 434 556 489
-------- ------- -------
TOTAL. . . . . . . . . $138,854 131,526 100,722
======== ======= =======
20
LOANS
Gross loans increased to $381.7 million in 2002 from $376.3 million at
December 31, 2001. Gross loans decreased during the first half of 2002 to
approximately $339.5 million as Flag chose to exit lower yielding and higher
risk relationships. Flag's focus on existing markets, correspondent lending and
the line of business purchased from BCG helped outstanding loans grow 12.5%
during the second half of 2002.
TABLE 4 shows the changes in the makeup of Flag's loan portfolio from 1998
through 2002.
TABLE 4 - LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
COMMERCIAL/FINANCIAL
/AGRICULTURAL . . . . . $ 56,052 14.7% 74,569 19.8% 92,757 23.7% 117,728 27.6% 121,744 28.3%
REAL ESTATE CONSTRUCTION 68,169 17.7% 65,052 17.3% 37,501 9.6% 43,602 10.2% 31,814 7.4%
REAL ESTATE MORTGAGE. . . 240,182 62.9% 213,748 56.8% 228,508 58.4% 218,920 51.4% 205,753 47.8%
INSTALLMENT LOANS TO
INDIVIDUALS . . . . . . 15,848 4.2% 17,793 4.7% 28,767 7.4% 40,620 9.5% 63,869 14.8%
LEASE FINANCINGS. . . . . 1,421 0.5% 5,153 1.4% 3,711 0.9% 5,226 1.2% 7,674 1.8%
-------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
TOTAL LOANS. . . . . 381,672 100% 376,315 100% 391,244 100% 426,096 100% 430,854 100%
LESS:
ALLOWANCE FOR LOAN LOSSES 6,888 7,348 6,583 7,017 6,194
-------- ------- ------- ------- -------
TOTAL NET LOANS. . . $374,784 368,967 384,661 419,079 424,660
======== ======= ======= ======= =======
TABLE 5 represents the expected maturities for commercial, financial, and
agricultural loans and real estate construction loans at December 31, 2002. The
table also presents the rate structure for these loans that mature after one
year.
TABLE 5 - LOAN PORTFOLIO MATURITY
(DOLLARS IN THOUSANDS)
RATE STRUCTURE FOR LOANS
MATURITY MATURITY OVER ONE YEAR
--------------------------------------------------------------------------------
OVER ONE YEAR
ONE YEAR THROUGH OVER FIVE FLOATING OR ADJUSTABLE PREDETERMINED
OR LESS FIVE YEARS YEARS TOTAL INTEREST RATE RATE
--------------------------------------------------------------------------------
COMMERCIAL, FINANCIAL, AND
AGRICULTURAL. . . . . . $ 19,097 17,586 19,369 56,052 22,959 13,996
REAL ESTATE - CONSTRUCTION 58,448 9,721 0 68,169 8,615 1,106
--------- ---------- --------- ------- ---------------------- -------------
$ 77,545 27,307 19,369 124,221 31,574 15,102
========= ========== ========= ======= ====================== =============
PROVISION AND ALLOWANCE FOR LOAN LOSSES
TABLE 6 presents an analysis of activities in the allowance for loan
losses for the past five years. An allowance for possible losses is provided
through charges to Flag's earnings in the form of a provision for loan losses.
The provision for loan losses was $4.5 million in 2002, $2.5 million in 2001 and
$3.6 million in 2000. Flag's increase in the provision for loan losses during
2002 was needed to replenish the allowance for loan losses due to the higher
than normal amount of net charge-offs experienced. The provision for loan
losses included approximately $1.0 million in 2001 for certain large
agricultural credits and approximately $1.8 million in 2000 related to retained
loans in the branch divestitures and one agricultural credit in South Georgia.
Management determines the level of the provision for loan losses based on
outstanding loan balances, the levels of non-performing assets, and reviews of
assets classified as substandard, doubtful, or loss and larger credits, together
with an analysis of historical loss experience and current economic conditions.
21
As shown in Table 6, the year-end allowance for loan losses decreased to
$6.9 million at December 31, 2002, from $7.3 million at December 31, 2001. The
decrease in the allowance during 2002 was the result of higher charge-offs of
problem loans during 2002 than experienced in 2001. Net charge-offs were $5.0
million in 2002, $1.7 million in 2001, and $3.2 million in 2000. The allowance
for loan losses was 1.80% of gross loans at December 31, 2002, versus 1.95% and
1.68% at December 31, 2001 and 2000, respectively.
Management believes that the allowance for loan losses is both adequate and
appropriate. However, the future level of the allowance for loan losses is
highly dependent upon loan growth, loan loss experience, and other factors,
which cannot be anticipated with a high degree of certainty.
.
TABLE 6 - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
Years Ended December 31,
-------------------------------------------------
2002 2001 2000 1999 1998
-------------------------------------------------
Average loans . . . . . . . . . . . . . . . . . . . $366,571 378,867 405,101 449,689 435,422
Allowance for loan losses, beginning
of the period. . . . . . . . . . . . . . . . . . 7,348 6,583 7,017 6,194 5,637
Charge-offs for the period:
Commercial/financial/agricultural . . . . . . . . 1,009 400 1,246 722 1,834
Real estate construction loans. . . . . . . . . . 284 24 - - -
Real estate mortgage loans. . . . . . . . . . . . 3,737 980 2,308 1,305 296
Installment loans to individuals. . . . . . . . . 462 453 894 1,007 818
Lease financings. . . . . . . . . . . . . . . . . 77 206 6 1,056 314
-------------------------------------------------
Total charge-offs . . . . . . . . . . . . . . . . . 5,569 2,063 4,454 4,090 3,262
-------------------------------------------------
Recoveries for the period:
Commercial/financial/agricultural . . . . . . . . 107 102 86 46 77
Real estate construction loans. . . . . . . . . 2 - - - -
Real estate mortgage loans. . . . . . . . . . . . 316 134 964 60 52
Installment loans to individuals. . . . . . . . . 100 34 93 149 165
Lease financings. . . . . . . . . . . . . . . . . 35 70 109 2 50
-------------------------------------------------
Total recoveries . . . . . . . . . . . . . . . 560 340 1,252 257 344
-------------------------------------------------
Net charge-offs for the period . . . . . . . 5,009 1,723 3,202 3,833 2,918
Provision for loan losses . . . . . . . . . . . . . 4,549 2,488 3,597 4,656 3,475
Allowance related to assets purchased and sold. . . - - (829) - -
-------------------------------------------------
Allowance for loan losses, end of period. . . . . . $ 6,888 7,348 6,583 7,017 6,194
=================================================
Ratio of allowance for loan losses to total
loans outstanding . . . . . . . . . . . . . . . . 1.80% 1.95% 1.68% 1.65% 1.44%
Ratio of net charge-offs during the period to total
average loans outstanding during the period . . . 1.37% 0.45% 0.79% 0.85% 0.67%
ASSET QUALITY
At December 31, 2002, non-performing assets totaled $11.1 million compared
to $20.5 million at the end of 2001. The decrease in 2002 is attributed to a
combination of Flag's comprehensive loan review program, its intense management
of problem assets, and the larger than normal amount of net charge-offs for the
year. At December 31, 2002, there were no commitments to advance additional
funds on any loan classified "non-accrual."
22
TABLE 7 summarizes the non-performing assets for each of the last five years.
TABLE 7 - RISK ELEMENTS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------
LOANS ON NONACCRUAL . . . . . . . . . . . $ 9,243 17,122 7,144 12,118 7,729
LOANS PAST DUE 90 DAYS AND STILL ACCRUING 122 594 4,701 2,775 813
OTHER REAL ESTATE OWNED . . . . . . . . . 1,718 2,831 992 939 2,251
--------------------------------------------
TOTAL NON-PERFORMING ASSETS . . . . . . . $11,083 20,547 12,837 15,832 10,793
============================================
TOTAL NON-PERFORMING LOANS AS A
PERCENTAGE OF GROSS LOANS . . . . . . . 2.90% 5.57% 3.34% 3.78% 2.54%
============================================
RISK ELEMENTS
There may be additional loans within Flag's loan portfolio that may become
classified as conditions may dictate; however, management was not aware of any
such loans that are material in amount at December 31, 2002. At December 31,
2002, management was unaware of any known trends, events, or uncertainties that
will have, or that are reasonably likely to have a material effect on the Bank's
or Flag's liquidity, capital resources, or operations.
DEPOSITS AND BORROWINGS
Total deposits increased approximately $69.1 million during 2002, totaling
$509.7 million at December 31, 2002 compared to $440.6 million at December 31,
2001. The increase in Flag's deposit base in 2002 is attributable to the
acquisition of the six banking offices with approximately $100 million in
deposits in north metropolitan Atlanta in the fourth quarter with approximately
$96 million in deposits.
The maturities of time deposits of $100,000 or more issued by the Bank at
December 31, 2002, are summarized inTABLE 8.
TABLE 8 - MATURITIES OF TIME DEPOSITS OVER $100,000
(DOLLARS IN THOUSANDS)
THREE MONTHS OR LESS. . . . . . . . . $ 34,566
OVER THREE MONTHS THROUGH SIX MONTHS. 23,569
OVER SIX MONTHS THROUGH TWELVE MONTHS 31,137
OVER TWELVE MONTHS. . . . . . . . . . 12,956
--------
$102,228
========
At December 31, 2002, the Bank was a shareholder in the Federal Home Loan
Bank of Atlanta ("FHLB"). Through this affiliation, advances totaling $58.0
million were outstanding at rates competitive with time deposits of like
maturities. Management anticipates continued utilization of this short- and
long-term source of funds to minimize interest rate risk and to fund competitive
fixed rate loans to customers.
During 2002, Flag repaid $8.4 million in fixed rate advances from the FHLB
prior to their original maturity date, incurring a prepayment penalty totaling
approximately $266,000. In 2001, Flag repaid approximately $26 million in
advances with prepayment penalties totaling approximately $1.1 million. These
advances were repaid in both years due to a falling interest rate environment in
which Flag could obtain new borrowings at significantly lower rates.
23
ASSET-LIABILITY MANAGEMENT
A primary objective of Flag's asset and liability management program is to
control exposure to interest rate risk (the exposure to changes in net interest
income due to changes in market interest rates) so as to enhance its earnings
and protect its net worth against potential loss resulting from interest rate
fluctuations.
Historically, the average term to maturity or repricing (rate changes) of
assets (primarily loans and investment securities) has exceeded the average
repricing period of liabilities (primarily deposits and borrowings). TABLE 9
provides information about the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 2002 that are
expected to mature, prepay, or reprice in each of the future time periods shown
(i.e., the interest rate sensitivity). As presented in this table, at December
31, 2002, the liabilities subject to rate changes within one year exceeded our
assets subject to rate changes within one year. This mismatched condition
suggests that an increasing rate environment would be detrimental to Flag's
margin. However, interest bearing liabilities are not as sensitive to changing
rates as are Flag's assets, so management believes a rising interest rate
scenario would not result in a decrease in net interest income. Management
assumptions and theories regarding the interest rate risk are the products of
systems that project net interest income under various scenarios and considers
the sensitivity of individual components of the balance sheet. This approach is
believed to produce more accurate results than the approach summarized in the
following table.
Management carefully measures and monitors interest rate sensitivity and
believes that its operating strategies offer protection against interest rate
risk. As required by various regulatory authorities, Flag's Board of Directors
has established an interest rate risk policy, which sets specific limits on
interest rate risk exposure. Adherence to this policy is reviewed by Flag's
executive committee and presented at least annually to the Board of Directors.
Management has maintained positive ratios of average interest-earning
assets to average interest-bearing liabilities. As represented in TABLE 1 this
ratio, based on average balances for the respective years, was 113% in 2002,
115% in 2001 and 116% in 2000.
24
TABLE 9 - INTEREST RATE SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2002
MATURING OR REPRICING IN
----------------------------------------------------------
OVER 1 YEAR OVER 3 YEARS
ONE YEAR THROUGH THROUGH OVER
OR LESS 3 YEARS 5 YEARS 5YEARS TOTAL
----------------------------------------------------------
INTEREST-EARNING ASSETS:
ADJUSTABLE RATE MORTGAGES . . . . . . . $ 127,982 4,949 - - 132,931
FIXED RATE MORTGAGES. . . . . . . . . . 26,356 41,977 18,085 20,833 107,251
OTHER LOANS . . . . . . . . . . . . . . 109,109 13,439 12,371 19,177 154,096
INVESTMENT SECURITIES . . . . . . . . . 47,089 25,981 11,263 61,316 145,649
INTEREST-BEARING DEPOSITS
IN OTHER BANKS AND FEDERAL FUNDS SOLD 36,715 - - - 36,715
----------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS . . . 347,251 86,346 41,719 101,326 576,642
----------------------------------------------------------
INTEREST-BEARING LIABILITIES:
FIXED MATURITY DEPOSITS . . . . . . . . 216,441 43,056 14,290 548 274,335
NOW AND MONEY MARKET DEMAND
ACCOUNTS . . . . . . . . . . . . . . 170,857 - - - 170,857
PASSBOOK ACCOUNTS. . . . . . . . . . . . 24,500 - - - 24,500
FHLB ADVANCES. . . . . . . . . . . . . . 5,000 - 53,000 - 58,000
----------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES . . . 416,798 43,056 67,290 548 527,692
----------------------------------------------------------
INTEREST RATE SENSITIVITY GAP. . . . . . (69,547) 43,290 (25,571) 100,778 48,950
CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (69,547) (26,257) (51,828) 48,950
CUMULATIVE INTEREST RATE SENSITIVITY GAP
TO TOTAL ASSETS. . . . . . . . . . (10.9%) (4.1%) (8.1%) 7.7%
TABLE 10 represents the expected maturity of investment securities
by maturity date and average yields based on amortized cost at December 31,
2002. It should be noted that the composition and maturity/repricing
distribution of the investment portfolio is subject to change depending on rate
sensitivity, capital needs, and liquidity needs.
TABLE 10 - EXPECTED MATURITY OF INVESTMENT SECURITIES AVAILABLE-FOR-SALE
(DOLLARS IN THOUSANDS)
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
------------------- ------------------- ------------------ ------------------ --------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- --------- ------- ---------- ------- --------- ------- --------- --------
U.S. TREASURY AND AGENCIES . . . . . $ 500 6.20% $22,565 5.45% $ - - $ - - $ 23,065
STATE, COUNTY AND MUNICIPALS . . . . 400 4.36% 3,612 3.80% 1,146 4.69% 4,432 4.42% 9,590
CORPORATE DEBT SECURITIES. . . . . . - - 2,024 6.63% - - - - 2,024
EQUITY SECURITIES. . . . . . . . . . - - - - - - 416 - 416
MORTGAGE-BACKED SECURITIES . . . . . 108 6.46% 29,122 3.92% 30,992 4.67% 25,068 6.33% 85,290
TRUST PREFERRED SECURITIES . . . . . - - 500 6.50% - - 14,866 9.34% 15,366
-------- --------- ------- ---------- ------- --------- ------- --------- --------
$ 1,008 5.50% $57,823 4.63% $32.138 4.67% $44,782 7.08% $135,751
======== ========= ======= ========== ======= ========= ======= ========= ========
LIQUIDITY
The objective of liquidity management is to ensure that sufficient funding
is available, at reasonable cost, to meet the ongoing operational cash needs of
Flag and to take advantage of income producing opportunities as they arise.
While the desired level of liquidity will vary depending upon a variety of
factors, it is the primary goal of Flag to maintain a sufficient level of
liquidity in all expected economic environments. Liquidity is defined as the
ability of a bank to convert assets into cash or cash equivalents without
significant loss and to raise additional funds by increasing liabilities.
Liquidity management involves maintaining Flag's ability to meet the daily cash
flow requirements of the Bank's customers, both depositors and borrowers.
The primary objectives of asset/liability management are to provide
for adequate liquidity in order to meet the needs of customers and to maintain
an optimal balance between interest-sensitive assets and interest-sensitive
liabilities, so that Flag can also meet the investment requirements of its
shareholders as market interest rates change. Daily monitoring of the sources
and use of funds is necessary to maintain a position that meets both
requirements
25
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments and the maturities and sales of securities.
Mortgage loans held for sale totaled $12.6 million at December 31, 2002, and
typically turn over every 45 days as the closed loans are sold to investors in
the secondary market. Real estate-construction and commercial loans that mature
in one year or less amounted to $77.5 million, or 19.7% of the total loan
portfolio at December 31, 2002. Other short-term investments such as federal
funds sold are additional sources of liquidity.
The liability section of the balance sheet provides liquidity through
depositors' interest bearing and non-interest bearing deposit accounts. Federal
funds purchased, FHLB advances, other borrowings and securities sold under
agreements to repurchase are additional sources of liquidity and represent
Flag's incremental borrowing capacity. These sources of liquidity are
short-term in nature and are used as necessary to fund asset growth and meet
other short-term liquidity needs.
As disclosed in Flag's consolidated statements of cash flows included
in the consolidated financial statements, net cash used by operating activities
was $6.8 million during 2002. The major uses of cash by operating activities
were the changes in mortgage loans held for sale and the changes in other assets
and liabilities. Net cash provided by investing activities of $48.5 million
consisted primarily of funds acquired in the acquisition of the six north-metro
Atlanta branch offices and proceeds from sales and maturities of investment
securities, offset by net changes in loans, interest bearing deposits in other
banks and purchases of investment securities. Net cash used by financing
activities was $23.5 million, and consisted mostly of the net change in deposits
and the increase in amounts due to the FHLB.
In the opinion of management, Flag's liquidity position at December
31, 2002 is sufficient to meet its expected cash flow requirements. Reference
should be made to the consolidated statements of cash flows appearing in the
consolidated financial statements for the three-year analysis of the changes in
cash and cash equivalents resulting from operating, investing and financing
activities.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity at December 31, 2002 increased 12.5% to $60.7
million from $54.0 million at December 31, 2001. This increase is largely due
to the 1,300,000 share private placement approved by Flag's Board of Directors
during the first quarter of 2002. During 2002, 1,272,000 shares and 1,272,000
warrants had been sold for $11.7 million to the Company's management or
employees.
Flag continued its stock repurchase program during 2002. Flag repurchased
338,960 shares of its common stock in 2002, 755,257 shares of its common stock
in 2001 and 145,244 shares of its common stock in 2000.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
requires federal banking agencies to take "prompt corrective action" with regard
to institutions that do not meet minimum capital requirements. As a result of
FDICIA, the federal banking agencies introduced an additional capital measure
called the "Tier 1 risk-based capital ratio." The Tier 1 ratio is the ratio of
core capital to risk adjusted total assets. Note 12 to the Consolidated
Financial Statements presents a summary of FDICIA's capital tiers compared to
Flag's and the Bank's actual capital levels. The Bank exceeded all requirements
of a "well-capitalized" institution at December 31, 2002.
26
TABLE 11 - EQUITY RATIOS
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
--------- ---------- --------
RETURN ON AVERAGE ASSETS . . . . (0.36%) .72% .77%
RETURN ON AVERAGE EQUITY . . . . (3.39%) 7.12% 7.95%
DIVIDEND PAYOUT RATIO. . . . . . N/A 46.27% 45.98%
AVERAGE EQUITY TO AVERAGE ASSETS 10.49% 10.04% 9.51%
Provision for Income Taxes
The benefit for income taxes was $2.0 million in 2002, compared to a
provision for income taxes of $1.8 million in 2001 and of $1.4 million in 2000.
The effective tax rate in 2002 was higher than the Federal statutory rate of 34%
due to interest income on tax exempt securities and general business credits.
Also, during 2002 the amount of loss before income taxes was lower than the
earnings before income taxes in prior years. The effect of tax exempt interest
income and general business credits is greater in years that income (loss)
before taxes is lower. The tax rates for 2001 and 2000 are lower than the
statutory Federal rate of 34% primarily due to interest income on tax exempt
securities and general business credits. See Flag's consolidated financial
statements for an analysis of income taxes.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. The liquidity and
maturity structures of Flag's assets and liabilities are critical to the
maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been issued or proposed by the Financial
Accounting Standards Board and other standard setting entities that do not
require adoption until a future date are not expected to have a material impact
on Flag's consolidated financial statements upon adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's net interest income and the fair value of its financial
instruments (interest-earning assets and interest-bearing liabilities) are
influenced by changes in market interest rates. The Company actively manages
its exposure to interest rate fluctuations through policies established by its
senior management and Board of Directors. The Company's senior management
implements asset/liability management policies, develops and implements
strategies to improve balance sheet positioning and net interest income and
regularly assesses the interest rate sensitivity of the Bank.
The Company utilizes an interest rate simulation model to monitor and
evaluate the impact of changing interest rates on net interest income and the
market value of its investment portfolio. The ALCO policy limits the maximum
percentage changes in net interest income and investment portfolio equity,
assuming a simultaneous, instantaneous change in interest rate. These
percentage changes are as follows:
Changes in Percentage Percent Change in
Interest Rates Change in Net Market Value of
(In Basis Points) Interest Income Portfolio Equity
----------------- --------------- -----------------
300 20% 20%
200 20% 20%
100 20% 20%
As of December 31, 2002, the Company was in compliance with its ALCO policy.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are included herein:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Flag Financial Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of Flag Financial
Corporation and subsidiary as of December 31, 2002 and 2001, and the related
statements of operations, comprehensive income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of Flag's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Flag Financial
Corporation and subsidiary as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 24, 2003
29
FLAG FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
------
2002 2001
--------- --------
(In Thousands)
Cash and due from banks, including reserve requirements
of $730 and $9,362 $ 14,006 20,078
Interest-bearing deposits in banks 6,000 -
Federal funds sold 18,304 -
--------- --------
Cash and cash equivalents 38,310 20,078
Interest-bearing deposits 12,412 160
Investment securities available-for-sale 138,854 131,526
Other investments 6,795 5,835
Mortgage loans held-for-sale 12,606 6,454
Loans, net 374,784 368,967
Premises and equipment, net 21,063 13,944
Other assets 31,307 23,238
--------- --------
$636,131 570,202
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 40,039 48,554
Interest-bearing demand 170,857 119,986
Savings 24,500 24,249
Time 172,107 162,570
Time, over $100,000 102,228 85,223
--------- --------
Total deposits 509,731 440,582
Federal funds purchased and repurchase agreements - 18,001
Advances from Federal Home Loan Bank 58,000 39,448
Other borrowings - 5,000
Other liabilities 7,651 13,148
--------- --------
Total liabilities 575,382 516,179
--------- --------
Stockholders' equity:
Preferred stock (10,000,000 shares authorized; none issued and outstanding) - -
Common stock ($1 par value, 20,000,000 shares authorized, 9,638,501 and
8,277,995 shares issued in 2002 and 2001, respectively) 9,639 8,278
Additional paid-in capital 23,463 11,355
Retained earnings 35,225 39,223
Accumulated other comprehensive income 1,999 1,612
Less: treasury stock, at cost; 1,246,961 shares in 2002 and 908,001 shares in 2001 (9,577) (6,445)
--------- --------
Total stockholders' equity 60,749 54,023
--------- --------
$636,131 570,202
========= ========
See accompanying notes to consolidated financial statements.
30
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
--------------- ----------- -------
(In Thousands Except Per Share Data)
Interest income:
Interest and fees on loans $ 29,424 36,566 39,815
Interest on investment securities 6,989 7,375 6,005
Interest-bearing deposits and federal funds sold 261 594 572
--------------- ----------- -------
Total interest income 36,674 44,535 46,392
--------------- ----------- -------
Interest expense:
Deposits 11,264 18,246 19,000
Borrowings 1,108 2,309 2,431
--------------- ----------- -------
Total interest expense 12,372 20,555 21,431
--------------- ----------- -------
Net interest income before provision for loan losses 24,302 23,980 24,961
Provision for loan losses 4,549 2,488 3,597
--------------- ----------- -------
Net interest income after provision for loan losses 19,753 21,492 21,364
--------------- ----------- -------
Other income:
Service charges on deposit accounts 3,508 3,891 3,549
Gain (loss) on sales of investment securities (341) - (263)
Mortgage banking activities 2,902 2,399 1,653
Gain on sale of branches - 3,285 5,080
Other 1,326 1,093 1,943
--------------- ----------- -------
Total other income 7,395 10,668 11,962
--------------- ----------- -------
Other expenses:
Salaries and employee benefits 18,611 13,946 14,374
Professional fees 1,796 1,211 1,663
Postage, printing and supplies 1,019 898 991
Communications 1,840 1,702 1,382
Occupancy 3,589 3,764 4,273
Other operating 4,150 4,180 4,950
--------------- ----------- -------
Total other expenses 31,005 25,701 27,633
--------------- ----------- -------
Earnings (loss) before provision for income taxes and extraordinary item (3,857) 6,459 5,693
Provision (benefit) for income taxes (2,028) 1,753 1,409
--------------- ----------- -------
Earnings (loss) before extraordinary item (1,829) 4,706 4,284
Extraordinary item - loss on redemption of debt,
net of income tax benefit of $101 in 2002 and $427 in 2001 165 696 -
--------------- ----------- -------
Net earnings (loss) $ (1,994) 4,010 4,284
=============== =========== =======
Basic and diluted earnings (loss) per share:
Earnings (loss) before extraordinary item $ (.22) .60 .52
Extraordinary item (.02) (.09) -
--------------- ----------- -------
Net earnings (loss) $ (.24) .51 .52
=============== =========== =======
See accompanying notes to consolidated financial statements.
31
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
-----------------------
(In Thousands)
Net earnings (loss) $(1,994) 4,010 4,284
-------- ------ -----
Other comprehensive income, net of tax:
Unrealized gains on investment securities
available-for-sale:
Unrealized gains arising during the period,
net of tax of $291, $1,169, and $177, respectively 475 1,907 288
Reclassification adjustment for losses included
in net earnings (loss), net of tax of $130 in 2002 and $100
in 2000 211 - 163
Unrealized gain (loss) on cash flow hedges, net of tax of $183 in
2002, $18 in 2001 and $247 in 2000 (299) (29) 403
-------- ------ -----
Other comprehensive income 387 1,878 854
-------- ------ -----
Comprehensive income (loss) $(1,607) 5,888 5,138
======== ====== =====
See accompanying notes to consolidated financial statements.
32
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumulated
Common Stock Additional Other
------------------ Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Income (Loss) Stock Total
--------- ------- ---------- --------- -------------- --------- -------
(In Thousands Except Share Data)
Balance, December 31, 1999 8,272,815 $ 8,273 11,342 34,754 (1,120) (52) 53,197
Purchase of treasury stock - - - - - (876) (876)
Exercise of stock options 2,590 2 6 - - - 8
Change in accumulated other
comprehensive income - - - - 854 - 854
Net earnings - - - 4,284 - - 4,284
Dividends declared - - - (1,969) - - (1,969)
--------- ------- ---------- --------- -------------- --------- -------
Balance, December 31, 2000 8,275,405 8,275 11,348 37,069 (266) (928) 55,498
Purchase of treasury stock - - - - - (5,517) (5,517)
Exercise of stock options 2,590 3 7 - - - 10
Change in accumulated other
comprehensive income - - - - 1,878 - 1,878
Net earnings - - - 4,010 - - 4,010
Dividends declared - - - (1,856) - - (1,856)
--------- ------- ---------- --------- -------------- --------- -------
Balance, December 31, 2001 8,277,995 8,278 11,355 39,223 1,612 (6,445) 54,023
Sale of common stock 1,272,000 1,272 10,435 - - 11,707
Sale of warrants - - 1,236 - - - 1,236
Purchase of treasury stock - - - - - (3,132) (3,132)
Exercise of stock options 88,506 89 437 - - - 526
Change in accumulated other
comprehensive income - - - - 387 - 387
Net loss - - - (1,994) - - (1,994)
Dividends declared - - - (2,004) - - (2,004)
--------- ------- ---------- --------- -------------- --------- -------
Balance, December 31, 2002 9,638,501 $ 9,639 23,463 35,225 1,999 (9,577) 60,749
========= ======= ========== ========= ============== ========= =======
See accompanying notes to consolidated financial statements.
33
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
--------- -------- --------
(In Thousands)
Cash flows from operating activities:
Net earnings (loss) $ (1,994) 4,010 4,284
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation, amortization and accretion 2,265 2,706 2,615
Provision for loan losses 4,549 2,488 3,597
Deferred tax benefit (1,947) (1,159) (219)
Gain on sale of branches - (3,285) (5,080)
Loss on sales of securities 341 - 263
Loss (gain) on other real estate (128) - 146
Loss on disposal of premises and equipment 912 - -
Change in:
Mortgage loans held-for-sale (6,152) (2,333) (637)
Other assets and liabilities (4,634) 5,862 1,554
--------- -------- --------
Net cash provided (used) by operating activities (6,788) 8,289 6,523
--------- -------- --------
Cash flows from investing activities (net of effect of branch sales and acquisitions):
Net change in interest-bearing deposits (12,252) 3,291 (660)
Proceeds from sales and maturities of securities available-for-sale 74,196 41,496 23,552
Proceeds from sale of other investments 154 - 1,081
Purchases of other investments (1,114) (474) (28)
Purchases of securities available-for-sale (80,471) (69,142) (34,572)
Net change in loans (12,738) (2,953) (8,061)
Proceeds from sales of real estate 1,194 1,903
Purchases of premises and equipment (2,061) (1,609) (590)
Cash acquired in branch acquisition, net of premium paid 84,167 - 48,790
Cash paid in branch sale - (18,749) (6,676)
Cash paid in business acquisition (1,405) - -
--------- -------- --------
Net cash provided (used) by investing activities 48,476 (46,946) 24,739
--------- -------- --------
Cash flows from financing activities (net of effect of branch sales and acquisitions):
Net change in deposits (27,400) 15,956 (24,920)
Change in federal funds purchased and repurchase agreements (18,001) 17,340 (15,011)
Change in other borrowings (5,000) 3,500 1,500
Proceeds from FHLB advances 53,000 40,000 21,000
Payments of FHLB advances (34,448) (32,525) (16,200)
Proceeds from exercise of stock options 526 10 8
Purchase of treasury stock (3,132) (5,517) (876)
Proceeds from issuance of common stock 11,707 - -
Proceeds from issuance of warrants 1,236 - -
Cash dividends paid (1,944) (1,902) (1,974)
--------- -------- --------
Net cash provided (used) by financing activities (23,456) 36,862 (36,473)
--------- -------- --------
Net change in cash and cash equivalents 18,232 (1,795) (5,211)
Cash and cash equivalents at beginning of year 20,078 21,873 27,084
--------- -------- --------
Cash and cash equivalents at end of year $ 38,310 20,078 21,873
========= ======== ========
34
FLAG FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------- ------- -------
(In Thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $12,814 20,820 20,382
Income taxes $ - 1,910 1,442
Supplemental schedule of noncash investing and financing activities:
Real estate acquired through foreclosure $ 2,372 1,627 2,928
Change in unrealized gain/loss on securities available-for-sale, net of tax $ 480 1,907 451
Increase (decrease) in dividends payable $ 60 (46) (5)
Deposit liabilities assumed in branch acquisition $96,549 - 76,288
Assets acquired in branch acquisition, other than cash
and cash equivalents $ 8,221 - 22,191
Assets disposed of in branch sale $ - 14,858 62,212
See accompanying notes to consolidated financial statements.
35
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
-----------------------
The consolidated financial statements include the accounts of Flag
Financial Corporation ("Flag") and its wholly-owned subsidiary, Flag Bank
(the "Bank"). All significant intercompany accounts and transactions have
been eliminated in consolidation. Flag is a bank holding company formed in
1994 whose business is conducted by the Bank. Flag is subject to regulation
under the Bank Holding Company Act of 1956. The Bank is primarily regulated
by the Georgia Department of Banking and Finance ("DBF") and the Federal
Deposit Insurance Corporation ("FDIC"). The Bank provides a full range of
commercial, mortgage and consumer banking services in West-Central, Middle
and South Georgia and metropolitan Atlanta, Georgia.
The accounting principles followed by Flag and its subsidiary, and the
methods of applying these principles, conform with accounting principles
generally accepted in the United States of America ("GAAP") and with
general practices within the banking industry. In preparing financial
statements in conformity with GAAP, management is required to make
estimates and assumptions that affect the reported amounts in the financial
statements. Actual results could differ significantly from those estimates.
Material estimates common to the banking industry that are particularly
susceptible to significant change in the near term include, but are not
limited to, the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with or in lieu of
foreclosure on loans, the valuation allowance for mortgage servicing rights
and valuation allowances associated with the realization of deferred tax
assets which are based on future taxable income.
Cash and Cash Equivalents
----------------------------
Cash equivalents include amounts due from banks, interest-bearing demand
deposits with banks and federal funds sold. Generally, federal funds are
sold for one-day periods. As of December 31, 2002, the Company maintained
cash balances with financial institutions totaling $5,500,000 that exceeded
federal deposit insurance limits.
Investment Securities
----------------------
Flag classifies its securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are securities
held for the purpose of generating profits on short-term differences in
price. Securities held-to-maturity are those securities for which Flag has
the ability and intent to hold to maturity. All other securities are
classified as available-for-sale. As of December 31, 2002 and 2001, all of
Flag's investment securities were classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding
gains and losses on trading securities are included in earnings in the
period in which the gain or loss occurs. Unrealized holding gains and
losses, net of the related tax effect, on securities available-for-sale are
excluded from earnings and are reported as a separate component of
stockholders' equity until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer.
A decline in the market value of any available-for-sale or held-to-maturity
investment below cost that is deemed other than temporary is charged to
earnings and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses
are included in earnings and the cost of securities sold are derived using
the specific identification method.
36
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Other Investments
------------------
Other investments include Federal Home Loan Bank ("FHLB") stock, other
equity securities with no readily determinable fair value and an investment
in a limited partnership. Flag owns a 43% interest in a limited
partnership, which invests in multi-family real estate and passes low
income housing credits to the investors. Flag recognizes these tax credits
in the year received. These investments are carried at cost, which
approximates fair value.
Mortgage Loans Held-for-Sale
------------------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. The amount by which
cost exceeds market value is accounted for as a valuation allowance.
Changes, if any, in the valuation allowance are included in the
determination of net earnings in the period in which the change occurs.
Flag has recorded no valuation allowance related to its mortgage loans
held-for-sale as their cost approximates market value. Gains and losses
from the sale of loans are determined using the specific identification
method.
Loans and Interest Income
----------------------------
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at their outstanding
unpaid principal balances, net of the allowance for loan losses, deferred
fees or costs on originated loans and unamortized premiums or discounts on
purchased loans.
Flag considers a loan impaired when, based on current information and
events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. Impaired loans are
measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or at the loan's
observable market price, or the fair value of the collateral of the loan if
the loan is collateral dependent. Interest income from impaired loans is
recognized using a cash basis method of accounting during the time within
that period in which the loans were impaired.
Allowance for Loan Losses
----------------------------
The allowance for loan losses is established through provisions for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collection of the principal is
unlikely. The allowance is an amount which, in management's judgment, will
be adequate to absorb losses on existing loans that may become
uncollectible. The allowance is established through consideration of such
factors as changes in the nature and volume of the portfolio, adequacy of
collateral, delinquency trends, loan concentrations, specific problem
loans, and economic conditions that may affect the borrower's ability to
pay.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review Flag's allowance for loan
losses. Such agencies may require Flag to recognize additions to the
allowance based on their judgments about information available to them at
the time of their examination.
Other Real Estate Owned
--------------------------
Real estate acquired through foreclosure is carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs
to dispose. Fair value is defined as the amount that is expected to be
received in a current sale between a willing buyer and seller other than in
a forced or liquidation sale. Fair values at foreclosure are based on
appraisals. Losses arising from the acquisition of foreclosed properties
are charged against the allowance for loan losses. Subsequent writedowns
are provided by a charge to operations through the allowance for losses on
other real estate in the period in which the need arises.
Premises and Equipment
------------------------
Premises and equipment are stated at cost less accumulated depreciation.
Major additions and improvements are charged to the asset accounts while
maintenance and repairs that do not improve or extend the useful lives of
the assets are expensed currently. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any gain or loss is reflected in earnings for the period.
37
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Premises and Equipment, continued
------------------------------------
Depreciation expense is computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements 15-40 years
Furniture and equipment 3-10 years
Income Taxes
-------------
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Future tax benefits, such as net operating loss carryforwards,
are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
the assets and liabilities are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of Flag's assets and
liabilities results in deferred tax assets, an evaluation of the
probability of being able to realize the future benefits indicated by such
assets is required. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax asset will not
be realized. In assessing the ability to realize the deferred tax assets,
management considers the scheduled reversals of deferred tax liabilities,
projected future taxable income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance
for loan losses for income tax purposes in excess of the financial
statement balance, as described in note 9. Such a deferred tax liability
will only be recognized when it becomes apparent that those temporary
differences will reverse in the foreseeable future.
Stock-Based Compensation
-------------------------
At December 31, 2002, Flag sponsors stock-based compensation plans, which
are described more fully in Note 11. Flag accounts for these plans under
the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings (loss) and earnings (loss) per
share if Flag had applied the fair value recognition provisions of
Statement of Financing Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation", to stock-based employee compensation (in
thousands, except per share amounts).
Year Ended December 31
2002 2001 2000
--------- --------- --------
Net earnings (loss) as reported $ (1,994) 4,010 4,284
Deduct: Total stock-based employee compensation
expense determined under fair-value based method
for all awards, net of tax (1,839) (880) (873)
--------- --------- --------
Pro forma net earnings (loss) $ (3,833) 3,130 3,411
========= ========= ========
Basic and diluted earnings (loss) per share:
As reported $ (.24) .51 .52
========= ========= ========
Pro forma $ (.47) .40 .42
========= ========= ========
38
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Net Earnings Per Common Share
---------------------------------
Flag is required to report earnings per common share with and without the
dilutive effects of potential common stock issuances from instruments such
as options, convertible securities and warrants on the face of the
statements of operations. Basic earnings per common share are based on the
weighted average number of common shares outstanding during the period
while the effects of potential common shares outstanding during the period
are included in diluted earnings per share. Additionally, Flag must
reconcile the amounts used in the computation of both "basic earnings per
share" and "diluted earnings per share". Antidilutive stock options and
warrants have not been included in the diluted earnings per share
calculations. Antidilutive stock options and warrants totaled 2,152,427,
603,624, and 896,198 as of December 31, 2002, 2001 and 2000, respectively.
For 2002, the potential effect of outstanding options and warrants would be
antidilutive, and therefore is not presented. Earnings per common share
amounts for the years ended December 31, 2001 and 2000 are as follows (in
thousands, except share and per share amounts):
FOR THE YEAR ENDED DECEMBER 31, 2001
Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Basic earnings per share $ 4,010 7,808,001 $ .51
Effect of dilutive securities - stock options - 35,695 -
-------------- ------------- ----------
Diluted earnings per share $ 4,010 7,843,696 $ .51
============== ============= ==========
FOR THE YEAR ENDED DECEMBER 31, 2000
Net Earnings Common Share Per Share
(Numerator) (Denominator) Amount
-------------- ------------- ----------
Basic earnings per share $ 4,284 8,210,485 $ .52
Effect of dilutive securities - stock options - 15,521 -
-------------- ------------- ----------
Diluted earnings per share $ 4,284 8,226,006 $ .52
============== ============= ==========
Derivative Instruments and Hedging Activities
-------------------------------------------------
Flag recognizes the fair value of derivatives as assets or liabilities in
the financial statements. The accounting for the changes in the fair value
of a derivative depends on the intended use of the derivative instrument at
inception. The change in fair value of instruments used as fair value
hedges is accounted for in the income of the period simultaneous with
accounting for the fair value change of the item being hedged. The change
in fair value of the effective portion of cash flow hedges is accounted for
in comprehensive income rather than income, and the change in fair value of
foreign currency hedges is accounted for in comprehensive income as part of
the translation adjustment. The change in fair value of derivative
instruments that are not intended as a hedge is accounted for in the income
of the period of the change.
Accumulated Other Comprehensive Income
-----------------------------------------
At December 31, 2002 and 2001, accumulated other comprehensive income
consisted of net unrealized gains on investment securities
available-for-sale of $1,924,000 and $1,239,000, respectively; and net
gains on derivatives of $75,000 and $374,000, respectively.
39
------
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Goodwill and Intangible Assets
---------------------------------
Effective January 1, 2002, Flag adopted SFAS No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets" and
SFAS No. 147, "Acquisitions of Certain Financial Institutions". SFAS No.
141 requires all business combinations completed after its adoption to be
accounted for under the purchase method of accounting and establishes
specific criteria for the recognition of intangible assets separately from
goodwill. SFAS No. 142 addresses the accounting for goodwill and intangible
assets subsequent to their initial recognition. Upon adoption of SFAS No.
142, goodwill and some intangible assets will no longer be amortized and
will be tested for impairment at least annually. SFAS No. 147 requires that
the acquisition of all or a part of a financial institution that meets the
definition of a business combination shall be accounted for in accordance
with SFAS No. 141.
Reclassifications
-----------------
Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform with classifications for 2002.
(2) BUSINESS COMBINATIONS
Branch Purchases
-----------------
On November 8, 2002, Flag acquired the Atlanta banking facilities of Encore
Bank ("Encore Branches") for a total purchase price of $12,905,000, which
was all paid in cash. The results of the Encore Branches have been included
in the consolidated financial statements since that date. The Encore
Branches provide an excellent platform for Flag to continue the metro
Atlanta expansion strategy.
The following table summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition (in
thousands):
Cash $ 96,767
Premises and equipment 8,059
Deposit intangible 900
Goodwill 5,214
--------
Total assets acquired 110,940
--------
Deposits 97,817
Accrued interest payable 218
--------
Total liabilities assumed 98,035
--------
Net assets acquired $ 12,905
=========
The deposit intangible is subject to amortization and has a
weighted-average useful life of approximately ten years. The goodwill
recorded is expected to be fully deductible for tax purposes.
Other Acquisitions and Dispositions
--------------------------------------
On November 12, 2002, Flag acquired the assets and the lending line of
business of Bankers Capital Group, LLC ("BCG"). BCG is a company owned by
certain members of management of Flag who purchased common stock and
warrants during 2002 as described in note 10. The results of this line of
business have been included in the consolidated financial statements since
the date of acquisition. BCG is a commercial loan origination company,
specializing in higher-yielding, non-traditional financing. As a result of
the acquisition, Flag expects this line of business to become a source of
high-yielding assets.
The aggregate purchase price paid for BCG was $1,405,000 in cash, which was
paid at the time of closing, and $1,500,000, which is contingently payable
based on the future performance of BCG. If paid, the contingent
consideration will increase the amount of goodwill recorded by Flag at the
time that it is paid.
40
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) BUSINESS COMBINATIONS, CONTINUED
Other Acquisitions and Dispositions, continued
--------------------------------------------------
The following table summarizes the estimated fair values of the assets
acquired at the date of acquisition (amounts in thousands):
Premises and equipment $ 130
Goodwill 1,275
------
Total assets acquired $1,405
======
The goodwill recorded is expected to be fully deductible for tax purposes.
During 2001, Flag sold the loans, deposits and property of its branches in
McRae and Milan, Georgia and recognized a gain of approximately $3,285,000.
During 2000, Flag sold the loans, deposits, and property of its bank
branches in Cobbtown, Metter and Statesboro, Georgia and recognized a gain
on sale of approximately $2,011,000. Flag also sold the loans, deposits,
and property of its bank branches in Blackshear, Homerville and Waycross,
Georgia and recognized a gain on sale of approximately $3,069,000. Also
during 2000, Flag acquired certain loans, deposits and property of bank
branches in Montezuma, Oglethorpe, Cusseta and Buena Vista, Georgia for a
net purchase price of approximately $5,462,000.
Intangible Assets and Goodwill
---------------------------------
As a result of these business combinations, Flag has recorded intangible
assets. As of December 31, 2002, Flag had recorded deposit intangible
assets that are subject to amortization totaling $900,000 with accumulated
amortization of $15,000. Flag recognized amortization expense on this
intangible of $15,000 during the year ended December 31, 2002 and expects
amortization expense to total $90,000 per year through 2012.
The changes in the carrying amount of goodwill for the year ended December
31, 2002, are as follows:
Balance as of January 1, 2002 $ 7,904,342
Goodwill acquired during the year 6,489,286
-----------
Balance as of December 31, 2002 $14,393,628
===========
The majority of the goodwill recorded as of January 1, 2002, resulted from
Flag's adoption of SFAS No. 147 and this amount resulted from previously
recognized unidentified intangible assets reclassified as goodwill. Flag
tests its goodwill for impairment on an annual basis using the expected
present value of future cash flows. Flag initially applied SFAS No. 141 and
142 on January 1, 2002. The pro forma effect of the adoption of these
statements is shown in the table below:
2002 2001 2000
--------- ----- -----
Reported net earnings (loss) $ (1,994) 4,010 4,284
Add back goodwill amortization - 515 184
--------- ----- -----
Adjusted net earnings (loss) $ (1,994) 4,525 4,468
========= ===== =====
Basic and diluted earnings per share:
Reported net earnings (loss) $ (.24) .51 .52
Goodwill amortization - .07 .02
--------- ----- -----
$ (.24) .58 .54
========= ===== =====
41
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES
Investment securities available-for-sale at December 31, 2002 and 2001 are
summarized as follows (in thousands):
December 31, 2002
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
U.S. Treasuries and agencies $ 23,065 512 - 23,577
State, county and municipals 9,590 383 1 9,972
Equity securities 416 72 54 434
Mortgage-backed securities 85,290 1,497 3 86,784
Corporate debt securities 2,024 177 - 2,201
Trust preferred securities 15,366 520 - 15,886
---------- ---------- ---------- ---------
$ 135,751 3,161 58 138,854
========== ========== ========== =========
December 31, 2001
---------- ---------- ---------- ---------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ---------
U.S. Treasuries and agencies $ 25,263 596 - 25,859
State, county and municipals 10,470 206 104 10,572
Equity securities 863 103 410 556
Mortgage-backed securities 76,534 1,001 117 77,418
Collateralized mortgage obligations 2,544 129 - 2,673
Trust preferred securities 13,855 593 - 14,448
---------- ---------- ---------- ---------
$ 129,529 2,628 631 131,526
========== ========== ========== =========
The amortized cost and estimated fair value of investment securities
available-for-sale at December 31, 2002, by contractual maturity, are shown
below (in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
---------- ----------
U.S. Treasuries and agencies, state, county
and municipals and corporate debt:
Within 1 year $ 900 907
1 to 5 years 28,201 29,057
5 to 10 years 1,146 1,211
More than 10 years 4,432 4,575
Equity securities 416 434
Mortgage-backed securities 85,290 86,784
Trust preferred securities 15,366 15,886
---------- ----------
$ 135,751 138,854
========== ==========
42
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) INVESTMENT SECURITIES, CONTINUED
Proceeds from sales of securities available-for-sale during 2002, 2001 and
2000 totaled approximately $17,723,000, $306,000,and $14,706,000,
respectively. Gross gains of approximately $72,000 and gross losses of
approximately $413,000 were realized on those sales during 2002. No gain or
loss was realized on those sales during 2001. Gross losses of approximately
$263,000 were realized on those sales for the year ended December 31, 2000.
Securities and interest-bearing deposits with a carrying value of
approximately $103,853,000 and $94,443,000 at December 31, 2002 and 2001,
respectively, were pledged to secure advances from FHLB, U.S. Government
and other public deposits.
(4) LOANS
Major classifications of loans at December 31, 2002 and 2001 are summarized
as follows (in thousands):
2002 2001
-------- -------
Commercial, financial and agricultural $ 56,052 74,569
Real estate - construction 68,189 65,052
Real estate - mortgage 240,162 213,748
Installment loans to individuals 15,848 17,793
Lease financings 1,421 5,153
-------- -------
Gross loans 381,672 376,315
Less allowance for loan losses 6,888 7,348
-------- -------
$374,784 368,967
======== =======
Flag concentrates its lending activities in the origination of permanent
residential mortgage loans, permanent residential construction loans,
commercial mortgage loans, commercial business loans, and consumer
installment loans. The majority of Flag's real estate loans are secured by
real property located in West-Central, Middle and South Georgia and
metropolitan Atlanta, Georgia.
Flag has recognized impaired loans of approximately $1,513,0000 and
$10,259,000 at December 31, 2002 and 2001, respectively, with a total
allowance for loan losses related to these loans of approximately $910,000
and $2,893,000, respectively. The average balance of impaired loans was
approximately $4,236,000, $3,650,000 and $977,000 during 2002, 2001 and
2000, respectively. Interest income on impaired loans of approximately
$88,000, $480,000 and $839,000 was recognized for cash payments received in
2002, 2001 and 2000, respectively.
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31, 2001, 2000 and 1999 (in thousands):
2002 2001 2000
-------- ------- -------
Balance at beginning of year $ 7,348 6,583 7,017
Provisions charged to operations 4,549 2,488 3,597
Loans charged off (5,569) (2,063) (4,454)
Recoveries on loans previously charged off 560 340 1,252
Allowance related to loans sold and purchased - - (829)
-------- ------- -------
Balance at end of year $ 6,888 7,348 6,583
======== ======= =======
Mortgage loans secured by 1-4 family residences totaling approximately
$50,700,000 and $33,519,000 were pledged as collateral for outstanding FHLB
advances as of December 31, 2002 and 2001, respectively.
43
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2002 and 2001 are summarized as
follows (in thousands):
2002 2001
------- ------
Land and land improvements $ 6,311 1,911
Buildings and improvements 15,832 11,943
Furniture and equipment 16,478 16,672
------- ------
38,621 30,526
Less accumulated depreciation 17,558 16,582
------- ------
$21,063 13,944
======= ======
Depreciation expense approximated $2,037,000, $2,273,000, and $3,573,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
(6) TIME DEPOSITS
At December 31, 2002, contractual maturities of time deposits are
summarized as follows (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
2003 $216,441
2004 24,155
2005 18,901
2006 7,425
2007 6,865
Thereafter 548
--------
$274,335
========
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from FHLB are collateralized by FHLB stock, certain investment
securities and certain first mortgage loans. Advances from FHLB outstanding
at December 31, 2002 mature and bear fixed interest rates as follows (in
thousands):
Maturing In Amount Interest Rate
----------- ------- ---------------
2003 $ 5,000 1.859%
2007 53,000 1.220% - 1.590%
-------
$58,000 1.220% - 1.859%
=======
In 2002 and 2001, Flag repaid $9,434,000 and $26,000,000, respectively, in
advances from the FHLB prior to their original maturity date and incurred a
prepayment penalty of approximately $266,000 and $1,123,000, respectively.
These advances were repaid due to a falling interest rate environment in
which Flag could obtain new borrowings at significantly lower rates. These
redemptions of debt have been recorded as an extraordinary item, net of
income taxes of approximately $101,000 and $427,000, in the 2002 and 2001
statements of operations, respectively.
44
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) OTHER BORROWINGS
Other borrowings as of December 31, 2001 consisted of a line of credit with
a bank with a total commitment amount of $5,000,000. The line of credit
bore interest at .5% below the prime rate and was secured by common stock
of the Bank. The line of credit was repaid in 2002 and expired on October
1, 2002.
(9) INCOME TAXES
The following is an analysis of the components of income tax expense
(benefit) for the years ended December 31, 2002, 2001 and 2000 (in
thousands):
2002 2001 2000
-------- ------- ------
Current. $ (81) 2,912 1,628
Deferred (1,947) (1,159) (219)
-------- ------- ------
$(2,028) 1,753 1,409
======== ======= ======
The differences between income tax expense (benefit) and the amount
computed by applying the statutory federal income tax rate to earnings
(loss) before taxes for the years ended December 31, 2002, 2001 and 2000
are as follows (in thousands):
2002 2001 2000
-------- ------ ------
Pretax income (loss) at statutory rate $(1,311) 2,196 1,936
Add (deduct):
Tax-exempt interest income (316) (309) (366)
State income taxes, net of federal effect (343) 258 228
Increase in cash surrender value of life insurance (63) (52) (79)
General business credits (42) (123) (120)
Other 47 (217) (190)
-------- ------ ------
$(2,028) 1,753 1,409
======== ====== ======
The following summarizes the net deferred tax asset. The deferred tax asset
is included as a component of other assets at December 31, 2002 and 2001
(in thousands).
2002 2001
------ -----
Deferred tax assets:
Allowance for loan losses $2,615 2,738
Net operating loss carryforwards and credits 2,601 201
Nondeductible interest on non-accrual loans 139 139
Nondeductible expenses 313 158
Nondeductible loss 138 -
Other 417 454
------ -----
Total gross deferred tax assets 6,223 3,690
------ -----
Deferred tax liabilities:
Premises and equipment 400 77
Unrealized gain on cash flow hedges 46 299
Goodwill 270 -
Unrealized gain on securities available-for-sale 1,179 759
Other 23 30
------ -----
Total gross deferred tax liabilities 1,918 1,165
------ -----
Net deferred tax asset $4,305 2,525
====== =====
45
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) INCOME TAXES, CONTINUED
As of December 31, 2002, Flag had federal and state net operating loss
carryforwards totaling $5,157,000 and $6,452,000, respectively, that will
begin to expire in 2017 unless previously utilized.
The Internal Revenue Code ("IRC") was amended during 1996 and the IRC
section 593 reserve method for loan losses for thrift institutions was
repealed. Effective January 1, 1996, certain banks that have been merged
into the Bank began to compute their tax bad debt reserves under the rules
of IRC section 585, which apply to commercial banks. In years prior to
1996, these banks obtained tax bad debt deductions approximating $2.9
million in excess of their financial statement allowance for loan losses
for which no provision for federal income tax was made. These amounts were
then subject to federal income tax in future years pursuant to the prior
IRC section 593 provisions if used for purposes other than to absorb bad
debt losses. Effective January 1, 1996, approximately $2.9 million of the
excess reserve is subject to recapture only if the Bank ceases to qualify
as a bank pursuant to the provisions of IRC section 585.
(10) STOCKHOLDERS' EQUITY
During 2002, the Company sold 1,272,000 shares of common stock through a
private placement at a price between $9.10 and $10.10 per share. The
private placement resulted in total proceeds of $11,707,740 and was
completed on May 17, 2002. The proceeds of this offering were used for
general corporate purposes.
Shares of preferred stock may be issued from time to time in one or more
series as established by resolution of the Board of Directors of Flag, up
to a maximum of 10000000 shares. Each resolution shall include the number
of shares issued, preferences, special rights and limitations as determined
by the Board.
(11) EMPLOYEE AND DIRECTOR BENEFIT PLANS
Defined Contribution Plan
---------------------------
Flag sponsors the Flag Financial Profit Sharing Thrift Plan that is
qualified pursuant to IRC section 401(k). The plan allows eligible
employees to defer a portion of their income by making contributions into
the plan on a pretax basis. The plan provides a matching contribution based
on a percentage of the amount contributed by the employee. The plan also
provides that the Board of Directors may make discretionary profit-sharing
contributions up to 15% of eligible compensation to the plan. The plan
allows participants to direct up to 75% of their account balance and/or
contributions to be invested in the common stock of Flag. The trustee of
the plan is required to purchase the Flag stock at market value and may not
acquire more than 25% of the issued and outstanding shares. During the
years ended December 31, 2002, 2001 and 2000, the Company contributed
approximately $430,000, $420,000, and $391,000, respectively, to this plan
under its matching provisions.
Directors' Retirement Plan
----------------------------
The Bank sponsors a defined contribution postretirement benefit plan to
provide retirement benefits to certain of their Board of Directors and to
provide death benefits for their designated beneficiaries. Under this plan,
the Bank purchased split-dollar whole life insurance contracts on the lives
of each Director. The increase in cash surrender value of the contracts,
less the Bank's cost of funds, constitutes their contribution to the plan
each year. In the event the insurance contracts fail to produce positive
returns, the Bank has no obligation to contribute to the plan. At December
31, 2002 and 2001, the cash surrender value of the insurance contracts was
approximately $4,629,000 and $4,478,000, respectively. Expenses incurred
for benefits were approximately $6,000 and $8,250, during 2002 and 2001,
respectively.
Stock Option Plan and Warrants
----------------------------------
Flag sponsors an employee stock incentive plan and a director stock
incentive plan. The plans were adopted for the benefit of directors and key
officers and employees in order that they may purchase Flag stock at a
price equal to the fair market value on the date of grant. A total of
1,314,000 shares were reserved for possible issuance under the employee
plan and 266,938 shares were reserved under the director plan. The options
generally vest over a four-year period and expire after ten years.
46
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) EMPLOYEE AND DIRECTOR BENEFIT PLANS, CONTINUED
Stock Option Plan and Warrants, continued
----------------------------------
In connection with the Company's private placement in 2002, warrants for
1,236,000 shares were issued to the purchasers of the common stock for $1
per warrant. The warrants allow each holder to purchase one additional
share of common stock for each share purchased in connection with the
private placement and were issued as of the date of issuance of common
stock sold in the private placement. The warrants will be exercisable for a
period of ten years following issuance at the private placement price of
$9.10 per share.
A summary of activity in the warrants and stock option plans is presented
below:
2002 2001 2000
---------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
---------- ---------- -------- ---------- --------- ----------
Outstanding , beginning of year 998,095 $ 9.22 949,949 $ 9.48 813,409 $ 10.34
Granted during the year 1,415,000 9.12 90,250 6.93 257,751 6.62
Cancelled during the year (172,162) 10.25 (39,514) 9.20 (118,621) 9.73
Exercised during the year (88,506) 5.94 (2,590) 3.47 (2,590) 3.47
---------- ---------- -------- ---------- --------- ----------
Outstanding, end of year 2,152,427 $ 9.21 998,095 $ 9.22 949,949 $ 9.48
========== ========== ======== ========== ========= ==========
A summary of options and warrants outstanding as of December 31, 2002 is
presented below:
Weighted Options Weighted
Options Range of Average and Warrants Average
and Warrants Price per Price Years Currently Price
Outstanding Share Per Share Remaining Exercisable Per Share
------------ -------------- ---------- --------- ------------ ---------
20,029 $ 3.46 - 5.13 $ 4.06 7 12,897 3.93
1,836,317 6.00 - 9.69 8.70 9 1,493,596 8.84
296,081 10.00 - 13.75 12.72 6 404,894 12.17
------------ -------------- ---------- --------- ------------ ---------
2,152,427 $10.00 - 13.75 $ 9.21 9 1,911,387 9.51
============ ============== ========== ========= ============ =========
The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions: dividend yield of 2.35%, volatility of .2973 to .9803; risk
free interest rate ranging from 3.85% to 6.00% and an expected life of 5
years. The weighted average grant-date fair value of options and warrants
granted in 2002, 2001 and 2000 was $1.82, $1.79, and $5.21, respectively.
47
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) REGULATORY MATTERS
Flag and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, action by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2002 that Flag and the Bank meet all capital adequacy
requirements to which they are subject.
Minimum ratios required by the Bank to ensure capital adequacy are 8% for
total capital to risk weighted assets and 4% each for Tier 1 capital to
average assets. Minimum ratios required by the Bank to be well capitalized
under prompt corrective action provisions are 10% for total capital to risk
weighted assets, 6% for Tier 1 capital to risk weighted assets and 5% for
Tier 1 capital to average assets. Minimum amounts required for capital
adequacy purposes and to be well capitalized under prompt corrective action
provisions are presented below for Flag and the Bank. Prompt corrective
action provisions do not apply to bank holding companies.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- --------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ---------- --------- ------------ ----------
(000's) (000's) (000's)
AS OF DECEMBER 31, 2002:
Total Capital (to Risk Weighted Assets)
Flag consolidated. . . . . . . . . . . $ 51,551 11.3% $ 36,347 8.00% N/A N/A
Flag Bank. . . . . . . . . . . . . . . $ 46,088 10.2% $ 36,103 8.00% $ 45,129 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Flag consolidated. . . . . . . . . . . $ 45,910 10.1% $ 18,173 4.00% N/A N/A
Flag Bank. . . . . . . . . . . . . . . $ 40,447 9.0% $ 18,052 4.00% $ 27,078 6.0%
Tier 1 Capital (to Average Assets)
Flag consolidated. . . . . . . . . . . $ 45,910 7.6% $ 24,127 4.00% N/A N/A
Flag Bank. . . . . . . . . . . . . . . $ 40,447 6.8% $ 23,779 4.00% $ 29,724 5.0%
AS OF DECEMBER 31, 2001:
Total Capital (to Risk Weighted Assets)
Flag consolidated. . . . . . . . . . . $ 51,196 11.5% $ 35,754 8.0% N/A N/A
Flag Bank. . . . . . . . . . . . . . . $ 53,211 12.0% $ 35,458 8.0% $ 44,322 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Flag consolidated. . . . . . . . . . . $ 45,640 10.3% $ 17,877 4.0% N/A N/A
Flag Bank. . . . . . . . . . . . . . . $ 47,897 10.8% $ 17,729 4.0% $ 26,593 6.0%
Tier 1 Capital (to Average Assets)
Flag consolidated. . . . . . . . . . . $ 45,640 8.1% $ 22,634 4.0% N/A N/A
Flag Bank. . . . . . . . . . . . . . . $ 47,897 8.5% $ 22,512 4.0% $ 28,141 5.0%
Banking regulations limit the amount of dividends the Bank can pay to Flag
without prior regulatory approval. These limitations are a function of
excess regulatory capital and net earnings in the year the dividend is
declared. In 2003, the Bank cannot pay dividends without prior regulatory
approval.
48
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) COMMITMENTS AND CONTINGENCIES
Flag is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and
to manage its cost of funds. These financial instruments include
commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit risk in excess
of the amounts recognized in the consolidated balance sheets. The contract
amounts of these instruments reflect the extent of involvement the Bank has
in particular classes of financial instruments.
Commitments to originate first mortgage loans and to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counterparty. The Bank's
loans are primarily collateralized by residential and other real
properties, automobiles, savings deposits, accounts receivable, inventory
and equipment.
Standby letters of credit are written conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. Most letters of credit extend for less than one year. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers.
Flag's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
All standby letters of credit are secured at December 31, 2002 and 2001.
2002 2001
------- ------
Financial instruments whose contract amounts
represent credit risk (in thousands):
Commitments to extend credit $53,621 71,599
Standby letters of credit $ 1,245 955
In connection with its private placement of common stock, in 2002 Flag
agreed to guarantee loans used to fund the purchase of stock and warrants
by certain employees. The loans approximate $2,427,000 and the guarantees
are collateralized by the stock and warrants purchased.
Flag maintains an overall interest rate risk-management strategy that
incorporates the use of derivative instruments to minimize significant
unplanned fluctuations in earnings that are caused by interest rate
volatility. The goal is to manage interest rate sensitivity by modifying
the repricing or maturity characteristics of certain assets and liabilities
so that the net interest margin is not, on a material basis, adversely
affected by certain movements in interest rates. Flag views this strategy
as a prudent management of interest rate sensitivity, such that earnings
are not exposed to undue risk presented by changes in interest rates.
Derivative instruments that are used as part of Flag's interest rate
risk-management strategy include interest rate contracts. As a matter of
policy, Flag does not use highly leveraged derivative instruments for
interest rate risk management. During 2001, Flag settled a previously
outstanding interest rate contract. The gain realized upon settlement is
being recognized over the original life of the contract.
49
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) COMMITMENTS AND CONTINGENCIES, CONTINUED
By using derivative instruments, Flag is exposed to credit and market risk.
If the counterparty fails to perform, credit risk is equal to the extent of
the fair-value gain in a derivative. When the fair value of a derivative
contract is positive, this generally indicates that the counterparty owes
Flag, and, therefore, creates a repayment risk for Flag. When the fair
value of a derivative contract is negative, Flag owes the counterparty and,
therefore, it has no repayment risk. Flag minimizes the credit (or
repayment) risk in derivative instruments by entering into transactions
with high-quality counterparties that are reviewed periodically.
Flag's derivative activities are monitored by its asset/liability
management committee as part of that committee's oversight of Flag's
asset/liability and treasury functions. Flag's asset/liability committee is
responsible for implementing various hedging strategies that are developed
through its analysis of data from financial simulation models and other
internal and industry sources. The resulting hedging strategies are then
incorporated into the overall interest-rate risk management.
For the year ended December 31, 2002, there were no material amounts
recognized which represented the ineffective portion of cash flow hedges.
All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness, unless otherwise noted.
(14) RELATED PARTY TRANSACTIONS
Flag conducts transactions with its directors and executive officers,
including companies in which they have beneficial interest, in the normal
course of business. It is the policy of Flag that loan transactions with
directors and executive officers be made on substantially the same terms as
those prevailing at the time for comparable loans to other persons. The
following is a summary of activity for related party loans for 2002 (in
thousands).
Balance at December 31, 2001 $1,097
New loans 2,917
Repayments (377)
Changes in directors and executive officers, net (916)
-------
Balance at December 31, 2002 $2,721
=======
At December 31, 2002, deposits from directors, executive officers and their
related interests aggregated approximately $2,904,000. These deposits were
taken in the normal course of business at market interest rates.
50
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) FLAG FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance Sheets
December 31, 2002 and 2001
Assets
------
2002 2001
-------- -------
(In Thousands)
Cash $ 2,880 706
Investment securities 1,276 1,403
Investment in subsidiary 55,268 56,538
Equipment, net - 32
Other assets 1,840 1,013
-------- -------
$ 61,264 59,692
======== =======
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable and accrued expenses $ 515 669
Other borrowings - 5,000
Stockholders' equity 60,749 54,023
-------- -------
$ 61,264 59,692
======== =======
Statements of Operations
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------- ----- -------
(In Thousands)
Income:
Dividend income from subsidiaries $ 5,021 3,250 2,000
Interest income 5 5 6
Other 2 3 7,715
-------- ----- -------
Total income 5,028 3,258 9,721
-------- ----- -------
Operating expenses:
Interest expense 42 93 110
Loss on investments 380 - -
Other 851 200 10,278
-------- ----- -------
Total operating expenses 1,273 293 10,388
-------- ----- -------
Earnings (loss)before income tax benefit and dividends received in
excess of earnings of subsidiaries and equity in undistributed
earnings of subsidiaries 3,755 2,965 (667)
Income tax benefit 209 107 1,004
-------- ----- -------
Earnings before dividends received in excess of earnings of
subsidiaries and equity in undistributed earnings of subsidiaries 3,964 3,072 337
Dividends received in excess of earnings of subsidiaries (5,958) - -
Equity in undistributed earnings of subsidiaries - 938 3,947
-------- ----- -------
Net earnings (loss) $(1,994) 4,010 4,284
======== ===== =======
51
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) FLAG FINANCIAL CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
CONTINUED
Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------- ------- -------
(In Thousands)
Cash flows from operating activities:
Net earnings (loss) $(1,994) 4,010 4,284
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 3 15 502
Loss on investments 380 - -
Write down of premises and equipment 29 - -
Dividends received in excess of earnings of subsidiaries 5,958 - -
Equity in undistributed earnings of subsidiaries - (938) (3,947)
Change in other assets and liabilities (1,162) (1,020) 148
-------- ------- -------
Net cash provided by operating activities 3,214 2,067 987
-------- ------- -------
Cash flows from investing activities:
Purchase of investment securities (50) (450) -
Proceeds from sale of investment securities 117 34 1
Purchase of equipment - - (328)
Proceeds from sale of equipment to subsidiary - 2,590 -
Investment in subsidiary (4,500) - -
-------- ------- -------
Net cash used (provided) by investing activities (4,433) 2,174 (327)
-------- ------- -------
Cash flows from financing activities:
Sale of common stock 11,707 - -
Sale of stock warrants 1,236
Change in other borrowings (5,000) 3,500 1,500
Exercise of stock options 526 10 8
Purchase of treasury stock (3,132) (5,517) (876)
Dividends paid (1,944) (1,902) (1,974)
-------- ------- -------
Net cash used (provided) by financing activities 3,393 (3,909) (1,342)
-------- ------- -------
Net change in cash 2,174 332 (682)
Cash at beginning of year 706 374 1,056
-------- ------- -------
Cash at end of year $ 2,880 706 374
======== ======= =======
52
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) QUARTERLY OPERATING RESULTS (UNAUDITED)
The following is a summary of the unaudited condensed consolidated
quarterly operating results of Flag for the years ended December 31, 2002
and 2001 (amounts in thousands, except per share amounts):
2002
----------------------------------------
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
---------- -------- ------- ---------
Interest income $ 9,117 9,611 9,116 8,830
Interest expense 2,978 2,866 2,882 3,646
---------- -------- ------- ---------
Net interest income 6,139 6,745 6,234 5,184
Provision for loan losses 150 195 150 4,054
---------- -------- ------- ---------
Net interest income after provision
for loan losses 5,989 6,550 6,084 1,130
Noninterest income 2,042 1,984 1,833 1,536
Noninterest expense 6,362 6,440 6,239 11,964
---------- -------- ------- ---------
Earnings (loss) before income taxes
and extraordinary item 1,669 2,094 1,678 (9,298)
Provision (benefit) for income taxes 367 656 376 (3,427)
---------- -------- ------- ---------
Earnings (loss) before extraordinary item 1,302 1,438 1,302 (5,871)
Extraordinary item - - - 165
---------- -------- ------- ---------
Net earnings (loss) $ 1,302 1,438 1,302 (6,036)
========== ======== ======= =========
Net earnings (loss) per share $ .16 .17 .16 (.78)
========== ======== ======= =========
Weighted average shares outstanding 8,391 8,393 8,260 7,750
========== ======== ======= =========
2001
----------------------------------------
QUARTER ENDED
DEC. 31 SEPT. 30 JUNE 30 MARCH 31
---------- -------- ------- ---------
Interest income $ 10,013 11,118 11,550 11,854
Interest expense 4,785 5,101 5,215 5,454
---------- -------- ------- ---------
Net interest income 5,228 6,017 6,335 6,400
Provision for loan losses 1,900 84 252 252
---------- -------- ------- ---------
Net interest income after provision
for loan losses 3,328 5,933 6,083 6,148
Noninterest income 5,226 1,931 1,678 1,833
Noninterest expense 6,746 6,260 6,466 6,229
---------- -------- ------- ---------
Earnings before income taxes
Provision for income taxes 1,808 1,604 1,295 1,752
509 438 323 483
---------- -------- ------- ---------
Earnings before extraordinary item 1,299 1,166 972 1,269
Extraordinary item 696 - - -
---------- -------- ------- ---------
Net earnings $ 603 1,166 972 1,269
========== ======== ======= =========
Net earnings per share $ .08 .15 .12 .16
========== ======== ======= =========
Weighted average shares outstanding 7,465 7,769 7,973 8,032
========== ======== ======= =========
53
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
Flag is required to disclose fair value information about financial
instruments, whether or not recognized on the face of the balance sheet,
for which it is practicable to estimate that value. The assumptions used in
the estimation of the fair value of Flag's financial instruments are
detailed below. Where quoted prices are not available, fair values are
based on estimates using discounted cash flows and other valuation
techniques. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be considered a
surrogate of the liquidation value of Flag or the Bank, but rather a
good-faith estimate of the increase or decrease in value of financial
instruments held by Flag since purchase, origination or issuance.
Cash and Cash Equivalents and Interest-Bearing Deposits
-------------------------------------------------------------
For cash, due from banks, federal funds sold and interest-bearing deposits
with other banks the carrying amount is a reasonable estimate of fair
value.
Securities Available-for-Sale
------------------------------
Fair values for securities available-for-sale are based on quoted market
prices.
Other investments
------------------
The carrying value of other investments approximates fair value.
Loans and Mortgage Loans Held-for-Sale
------------------------------------------
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
-------------------------------------------
The carrying value of cash surrender value of life insurance approximates
fair value.
Deposits
--------
The fair value of demand deposits, savings accounts, NOW accounts, certain
money market deposits, advances from borrowers and advances payable to
secondary market is the amount payable on demand at the reporting date. The
fair value of fixed maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
Federal Funds Purchased, Repurchase Agreements and Other Borrowings
--------------------------------------------------------------------------
For federal funds purchased and repurchase agreements, the carrying amount
is a reasonable estimate of fair value.
Advances from the Federal Home Loan Bank
----------------------------------------------
The fair value of the FHLB fixed rate borrowings are estimated using
discounted cash flows, based on the current incremental borrowing rates for
similar types of borrowing arrangements.
Commitments to Originate First Mortgage Loans, Commitments to Extend
----------------------------------------------------------------------
Credit and Standby Letters of Credit
----------------------------------------
Because commitments to originate first mortgage loans, commitments to
extend credit and standby letters of credit are generally short-term and at
variable rates, the contract value and estimated fair value associated with
these instruments are immaterial.
Interest Rate Contracts
-------------------------
The fair value of interest rate contracts is obtained from dealer quotes.
These values represent the amount the Company would receive to terminate
the contracts or agreements, taking into account current interest rates
and, when appropriate, the current creditworthiness of the counterparties.
54
FLAG FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Limitations
-----------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time Flag's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
Flag's financial instruments, fair value estimates are based on many
judgments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
mortgage banking operation, deferred income taxes, premises and equipment
and purchased core deposit intangible. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
the estimates.
The carrying amount and estimated fair values of Flag's financial
instruments at December 31, 2002 and 2001 are as follows (In Thousands):
2002 2001
--------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- -------- ----------
ASSETS:
Cash and cash equivalents $ 38,310 38,310 20,078 20,078
Interest-bearing deposits 12,412 12,412 160 160
Investment securities available-for-sale 138,854 138,854 131,526 131,526
Other investments 6,795 6,795 5,835 5,835
Mortgage loans held-for-sale 12,606 12,606 6,454 6,454
Loans, net 374,784 376,214 368,967 369,611
Cash surrender value of life insurance 4,629 4,629 4,478 4,478
Interest rate contracts 121 121 673 673
LIABILITIES:
Deposits $ 509,731 517,139 440,582 444,957
Federal funds purchased and repurchase agreements - - 18,001 18,001
FHLB advances 58,000 58,653 39,448 39,904
Other borrowings - - 5,000 5,000
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors and executive officers of the Company
is set forth under the captions "Proposal 1 - Election of Directors-Nominees, -
Information Regarding Nominees and Continuing Directors and - Executive
Officers" in the Company's Proxy Statement for its 2002 Annual Meeting of
Shareholders to be held on April 15, 2003. Such information is incorporated
herein by reference.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, by directors and executive officers of the
Company and the Bank is set forth under the caption "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement referred to
above. Such information is incorporated herein by reference. To the Company's
knowledge, no person was the beneficial owner of more than 10% of the Company's
common stock during 2002.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
captions "Proposal 1- Election of Directors- Director Compensation" and
"Executive Compensation" in the Proxy Statement referred to in Item 10 above.
Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Information regarding ownership of the Company's common stock by management
and beneficial owners of 5% of the Company's common stock is set forth under the
caption "Proposal 1 - Election of Directors - Management Stock Ownership" in the
Proxy Statement referred in Item 10 above and is incorporated herein by
reference.
56
The following table provides information regarding compensation plans under
which equity securities of the Company are authorized for issuance. All data is
presented as of December 31, 2002.
--------------------------------------------------------------------------------------------------------------
Equity Compensation Plan Table
--------------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------- --------------------------- ----------------------------- -----------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under
warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
------------------------- --------------------------- ----------------------------- -----------------------
Equity compensation plans
approved by security 2,152,427 9.21 664,511
holders
------------------------- --------------------------- ----------------------------- -----------------------
Equity compensation plans
not approved by security 0 - 0
holders
------------------------- --------------------------- ----------------------------- -----------------------
Total 2,152,427 9.21 664,511
------------------------- --------------------------- ----------------------------- -----------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain transactions between the Bank and directors
and executive officers of the Company and the Bank is set forth under the
caption "Related Party Transactions" in the Proxy Statement referred to in Item
10 above and is incorporated herein by reference.
ITEM 14. 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.
57
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to the fees paid to the Company's independent
accountants is set forth under the captions "Audit Fees" and "Other Fees" in the
Proxy Statement referred to in Item 10 above and is incorporated herein by
reference.
PART IV
-------
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The list of financial statements is included at Item 8.
(a)(2) The financial statement schedules are either included in the
financial statements or are not applicable.
(a)(3) Exhibit List
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation of the Company, as amended through
October 15, 1993 (incorporated by reference from Exhibit 3.1(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
3.2 Bylaws of the Company, as amended through March 30, 1998
(incorporated by reference from Exhibit 3.1(ii) to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
3.3 Amendment to Bylaws of the Company as adopted by resolution of
Board of Directors on October 19, 1998 (incorporated by reference
from Exhibit 3.3 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998)
3.4 Amendment to Bylaws of the Company as adopted by resolution of
the Board of Directors on December 20, 2000 (incorporated by
reference from Exhibit 3.4 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
3.5 Amendment to Bylaws of the Company as adopted by resolution of
the Board of Directors on February 19, 2001 (incorporated by
reference from Exhibit 3.5 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2001)
4.1 Instruments Defining the Rights of Security Holders (See Articles
of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibits
3.2, 3.3, 3.4 and 3.5 hereto)
10.1* Amended and Restated Employment Agreement between J. Daniel
Speight, Jr. and the Company dated as of February 21, 2002
(incorporated by reference from exhibit of the same number to the
Annual Report on Form 10-K for the fiscal year ended December 31,
2001)
10.2* Amended and Restated Employment Agreement between John S. Holle
and the Company dated as of January 1, 2001 (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000), as
cancelled pursuant to the Cancellation Agreement between John S.
Holle and the Company dated as of February 20, 2002, as amended
as of March 26, 2002 (each incorporated by reference to exhibit
of the same number to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2001)
58
10.3* Amended and Restated Employment Agreement between Charles O.
Hinely and the Company dated as of February 21, 2002
(incorporated by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001), as cancelled pursuant to the Cancellation Agreement
between Charles O. Hinely and the Company dated as of July 31,
2002
10.4* Employment Agreement between Stephen W. Doughty and the Company
dated January 13, 2003
10.5* Employment Agreement between J. Thomas Wiley, Jr. and the Company
dated January 13, 2003
10.6* Split Dollar Insurance Agreement between J. Daniel Speight, Jr.
and Citizens Bank dated November 2, 1992 (incorporated by
reference from Exhibit 10.7 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.7* Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995 (incorporated by reference from Exhibit 10.8 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1997)
10.8* Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed on
exhibit cover page (incorporated by reference from Exhibit 10.9
to Amendment No. 1 to the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1997)
10.9* Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Director Indexed Retirement
Program for Citizens Bank) for individuals listed on exhibit
cover page (incorporated by reference from Exhibit 10.10 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1997)
10.10* Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995 (incorporated
by reference from Exhibit 10.12 to Amendment No. 1 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997)
10.11* Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of LaGrange)
for individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.13 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.12* Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Director Indexed Fee
Continuation Program of First Federal Savings Bank of LaGrange)
for individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.14 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.13* Form of Indexed Executive Salary Continuation Plan Agreement by
and between First Federal Savings Bank of LaGrange and
individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.15 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
59
10.14* Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Executive Salary Continuation
Plan for First Federal Savings Bank of LaGrange) for individuals
listed on exhibit cover page (incorporated by reference from
Exhibit 10.16 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)
10.15* Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William F.
Holle, Jr. dated February 3, 1995 (incorporated by reference from
Exhibit 10.17 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)
10.16* Form of Deferred Compensation Plan by and between The Citizens
Bank and individuals listed on exhibit cover page (incorporated
by reference from exhibit of the same number to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2000)
10.17* Flag Financial Corporation 1994 Employees Stock Incentive Plan
(as amended and restated through March 30, 1998) (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.18* Flag Financial Corporation 1994 Directors Stock Incentive Plan
(as amended through September 18, 1997) (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.19* First Amendment to the Flag Financial Corporation 1994 Employees
Stock Incentive Plan (as amended and restated as of March 30,
1998), dated as of March 15, 1999 (incorporated by reference from
exhibit of the same number to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
10.20* Second Amendment to the Flag Financial Corporation 1994 Employees
Stock Incentive Plan (as amended and restated as of March 30,
1998), dated as of January 16, 2001 (incorporated by reference
from exhibit of the same number to the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000)
10.21* First Amendment to the Flag Financial Corporation 1994 Directors
Stock Incentive Plan (as amended and restated as of September 18,
1997), dated as of December 21, 1998 (incorporated by reference
from exhibit of the same number to the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000)
10.22* Second Amendment to the Flag Financial Corporation 1994 Directors
Stock Incentive Plan (as amended and restated as of September 18,
1997), dated as of October 25, 1999 (incorporated by reference
from exhibit of the same number to the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000)
10.23* Third Amendment to the Flag Financial Corporation 1994 Directors
Stock Incentive Plan (as amended and restated as of September 18,
1997), dated January 16, 2001 (incorporated by reference from
exhibit of the same number to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
10.24* Third Amendment to Flag Financial Corporation 1994 Employees
Stock Incentive Plan (as amended and restated as of March 30,
1998), dated as of February 19, 2002 (incorporated by reference
from exhibit of same number to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
60
10.25* Fourth Amendment to Flag Financial Corporation 1994 Directors
Stock Incentive Plan (as amended and restated as of September 18,
1997), dated as of February 19, 2002 (incorporated by reference
to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002)
21 Subsidiaries (incorporated by reference from exhibit of the same
number to the Annual Report on Form 10-K for the fiscal year
ended December 31, 2000)
23 Consent of Porter Keadle Moore, LLP
99.1 Certifications by Chief Executive Officer and Chief Financial
Officer
____________________
* The indicated exhibit is a compensatory plan required to be filed
as an exhibit to this Form 10-K.
(b) Reports on Form 8-K filed during Fourth Quarter of 2002
Report on Form 8-K filed on November 22, 2002 reporting the Company's
acquisition of six branches from Encore Bank.
(c) The Exhibits not incorporated herein by reference are submitted as a
separate part of this report.
(d) Financial Statements Schedules: The financial statement schedules are
either included in the financial statements or are not applicable.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
FLAG FINANCIAL CORPORATION
(Registrant)
Date: March 27, 2003 By: /s/ Joseph W. Evans
--------------------------
Joseph W. Evans
Chief Executive Officer
62
Certification
I, Joseph W. Evans, Chief Executive Officer of Flag Financial Corporation,
certify that:
1. I have reviewed the annual report on Form 10-K of Flag Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 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 and I have indicated in this
annual 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: March 27, 2003
/s/ Joseph W. Evans
----------------------
Joseph W. Evans
Chief Executive Officer
63
Certification
I, J. Daniel Speight, Chief Financial Officer of Flag Financial Corporation,
certify that:
1. I have reviewed this annual report on Form 10-K of Flag Financial
Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 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 and I have indicated in this
annual 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: March 27, 2003
/s/ J. Daniel Speight
------------------------
J. Daniel Speight
Chief Financial Officer
64
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed by the following persons in the capacities indicated on March 27, 2003:
Signature Title
--------- -----
/s/ William H. Anderson, II Director
----------------------------------------
William H. Anderson, II
/s/ H. Speer Burdette, III Director
----------------------------------------
H. Speer Burdette, III
/s/ Stephen W. Doughty Vice Chairman, Chief Risk
---------------------------------------- Management Officer and Director
Stephen W. Doughty
/s/ David B. Dunaway Director
----------------------------------------
David B. Dunaway
/s/ Joseph W. Evans Chairman, President and Chief
---------------------------------------- Executive Officer
Joseph W. Evans (principal executive officer)
/s/ James W. Johnson Director
----------------------------------------
James W. Johnson
/s/ J. Daniel Speight Vice Chairman, Chief
---------------------------------------- Financial Officer, Secretary
J. Daniel Speight and Director (principal financial
officer)
/s/ J. Thomas Wiley, Jr. Vice Chairman, Chief Banking
---------------------------------------- Officer
J. Thomas Wiley, Jr. and Director
/s/Dennis J. Zember Treasurer
---------------------------------------- (principal accounting officer)
Dennis J. Zember
65
EXHIBIT INDEX
--------------
The following exhibits are filed as part of or incorporated by reference in
this report. Where such filing is made by incorporation by reference to a
previously filed registration statement or report, such registration statement
or report is identified in parentheses.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation of the Company, as amended through
October 15, 1993 (incorporated by reference from Exhibit 3.1(i)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
3.2 Bylaws of the Company, as amended through March 30, 1998
(incorporated by reference from Exhibit 3.1(ii) to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
3.3 Amendment to Bylaws of the Company as adopted by resolution of
Board of Directors on October 19, 1998 (incorporated by reference
from Exhibit 3.3 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998)
3.4 Amendment to Bylaws of the Company as adopted by resolution of
the Board of Directors on December 20, 2000 (incorporated by
reference from Exhibit 3.4 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2000)
3.5 Amendment to Bylaws of the Company as adopted by resolution of
the Board of Directors on February 19, 2001 (incorporated by
reference from Exhibit 3.5 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 2001)
4.1 Instruments Defining the Rights of Security Holders (See Articles
of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibits
3.2, 3.3, 3.4 and 3.5 hereto)
10.1* Amended and Restated Employment Agreement between J. Daniel
Speight, Jr. and the Company dated as of February 21, 2002
(incorporated by reference from exhibit of the same number to the
Annual Report on Form 10-K for the fiscal year ended December 31,
2001)
10.2* Amended and Restated Employment Agreement between John S. Holle
and the Company dated as of January 1, 2001 (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000), as
cancelled pursuant to the Cancellation Agreement between John S.
Holle and the Company dated as of February 20, 2002, as amended
as of March 26, 2002 (each incorporated by reference to exhibit
of the same number to the Annual Report on Form 10-K for the
fiscal year ended December 31, 2001)
10.3* Amended and Restated Employment Agreement between Charles O.
Hinely and the Company dated as of February 21, 2002
(incorporated by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001), as cancelled pursuant to the Cancellation Agreement
between Charles O. Hinely and the Company dated as of July 31,
2002
10.4* Employment Agreement between Stephen W. Doughty and the Company
dated January 13, 2003
66
10.5* Employment Agreement between J. Thomas Wiley, Jr. and the
Company dated January 13, 2003
10.6* Split Dollar Insurance Agreement between J. Daniel Speight, Jr.
and Citizens Bank dated November 2, 1992 (incorporated by
reference from Exhibit 10.7 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.7* Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995 (incorporated by reference from Exhibit 10.8 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1997)
10.8* Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed on
exhibit cover page (incorporated by reference from Exhibit 10.9
to Amendment No. 1 to the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1997)
10.9* Form of Flexible Premium Life Insurance Endorsement Method Split
Dollar Plan Agreement (pursuant to Director Indexed Retirement
Program for Citizens Bank) for individuals listed on exhibit
cover page (incorporated by reference from Exhibit 10.10 to
Amendment No. 1 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1997)
10.10* Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995 (incorporated
by reference from Exhibit 10.12 to Amendment No. 1 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997)
10.11* Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of LaGrange)
for individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.13 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.12* Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed Fee
Continuation Program of First Federal Savings Bank of LaGrange)
for individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.14 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.13* Form of Indexed Executive Salary Continuation Plan Agreement by
and between First Federal Savings Bank of LaGrange and
individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.15 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.14* Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Federal Savings Bank of LaGrange) for
individuals listed on exhibit cover page (incorporated by
reference from Exhibit 10.16 to Amendment No. 1 to the Company's
Annual Report on Form 10-K/A for the fiscal year ended December
31, 1997)
10.15* Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William F.
Holle, Jr. dated February 3, 1995 (incorporated by reference from
Exhibit 10.17 to Amendment No. 1 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1997)
67
10.16* Form of Deferred Compensation Plan by and between The Citizens
Bank and individuals listed on exhibit cover page (incorporated
by reference from exhibit of the same number to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2000)
10.17* Flag Financial Corporation 1994 Employees Stock Incentive Plan
(as amended and restated through March 30, 1998) (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.18* Flag Financial Corporation 1994 Directors Stock Incentive Plan
(as amended through September 18, 1997) (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.19* First Amendment to the Flag Financial Corporation 1994
Employees Stock Incentive Plan (as amended and restated as of
March 30, 1998), dated as of March 15, 1999 (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.20* Second Amendment to the Flag Financial Corporation 1994
Employees Stock Incentive Plan (as amended and restated as of
March 30, 1998), dated as of January 16, 2001 (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.21* First Amendment to the Flag Financial Corporation 1994
Directors Stock Incentive Plan (as amended and restated as of
September 18, 1997), dated as of December 21, 1998 (incorporated
by reference from exhibit of the same number to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2000)
10.22* Second Amendment to the Flag Financial Corporation 1994
Directors Stock Incentive Plan (as amended and restated as of
September 18, 1997), dated as of October 25, 1999 (incorporated
by reference from exhibit of the same number to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2000)
10.23* Third Amendment to the Flag Financial Corporation 1994
Directors Stock Incentive Plan (as amended and restated as of
September 18, 1997), dated January 16, 2001 (incorporated by
reference from exhibit of the same number to the Annual Report on
Form 10-K for the fiscal year ended December 31, 2000)
10.24* Third Amendment to Flag Financial Corporation 1994 Employees
Stock Incentive Plan (as amended and restated as of March 30,
1998), dated as of February 19, 2002 (incorporated by reference
from exhibit of the same number to the Annual Report on Form 10-K
for the fiscal year ended December 31, 2001).
10.25* Fourth Amendment to Flag Financial Corporation 1994 Directors
Stock Incentive Plan (as amended and restated as of September 18,
1997), dated as of February 19, 2002 (incorporated by reference
to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002)
68
22 Subsidiaries (incorporated by reference from exhibit of the same
number to the Annual Report on Form 10-K for the fiscal year
ended December 31, 2000)
23 Consent of Porter Keadle Moore, LLP
99.1 Certifications by Chief Executive Officer and Chief Financial
Officer
____________________
* The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Form 10-K.
69