UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ______
Commission file number 0-24532
FLAG FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-2094179
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(State of incorporation) (I.R.S. Employer Identification No.)
3475 Piedmont Road N. E. Suite 550
Atlanta, Georgia 30305
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(Address of principal executive offices) (Zip Code)
(404) 760-7700
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(Telephone Number)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES XX NO
Common stock, par value $1 per share: 8,464,472 shares
outstanding as of May 08, 2003
FLAG FINANCIAL CORPORATION AND SUBSIDIARY
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TABLE OF CONTENTS
Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003,
December 31, 2002 and March 31, 2002. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2003 and 2002. . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Market Risk Information . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FLAG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
-------------------------------------------
ASSETS (UNAUDITED) (AUDITED) (UNAUDITED)
------
Cash and due from banks. . . . . . . . . . . . . . . . . . . . 15,260,779 14,006,428 14,586,901
Interest-bearing deposits in banks . . . . . . . . . . . . . . 6,000,000 6,000,000 -
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . 48,113,000 18,304,000 1,437,000
------------- ------------- -------------
Total cash and cash equivalents. . . . . . . . . . . . . . 69,373,779 38,310,428 16,023,901
------------- ------------- -------------
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . 12,453,149 12,411,492 160,311
Investment securities available-for-sale . . . . . . . . . . . 126,777,199 138,853,580 122,092,669
Other investments. . . . . . . . . . . . . . . . . . . . . . . 6,795,257 6,795,257 5,835,098
Mortgage loans held-for-sale . . . . . . . . . . . . . . . . . 11,856,927 12,606,080 3,800,656
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . 368,653,749 374,783,897 337,289,308
Premises and equipment, net. . . . . . . . . . . . . . . . . . 20,828,134 21,063,278 13,989,471
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 31,577,762 31,306,554 26,204,413
------------- ------------- -------------
Total assets. . . . . . . . . . . . . . . . . . $648,315,956 636,130,566 525,395,827
============= ============= =============
LIABILITIES
-----------
Non interest-bearing deposits. . . . . . . . . . . . . . . . . $ 40,977,116 40,039,052 40,319,470
Interest-bearing demand deposits . . . . . . . . . . . . . . . 210,567,589 170,856,638 132,525,964
Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,328,050 24,500,243 25,516,338
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243,688,411 274,334,991 233,675,679
------------- ------------- -------------
Total deposits. . . . . . . . . . . . . . . . . . . . . . . 520,561,166 509,730,924 432,037,451
------------- ------------- -------------
Advances from Federal Home Loan Bank . . . . . . . . . . . . . 58,000,000 58,000,000 30,000,000
Accrued expenses and other liabilities . . . . . . . . . . . . 7,780,686 7,650,689 8,123,225
------------- ------------- -------------
Total liabilities. . . . . . . . . . . . . . . 586,341,852 575,381,613 470,160,676
------------- ------------- -------------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock (10,000,000 shares authorized, none
issued and outstanding) - - -
Common stock ($1 par value, 20,000,000 shares authorized,
9,664,751, 9,638,501 and 9,393,006 shares issued at
March 31, 2003, December 31, 2002 and
March 31, 2002, respectively. . . . . . . . . . . . . . . 9,664,751 9,638,501 9,393,006
Additional paid-in capital . . . . . . . . . . . . . . . . . . 23,645,117 23,463,132 21,292,328
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 36,226,996 35,224,936 32,697,411
Accumulated other comprehensive income . . . . . . . . . . . . 2,013,950 1,999,094 1,319,916
Less: Treasury stock at cost; 1,246,961 shares at March 31,
2003, 1,246,961 shares at December 31, 2002 and 1,236,961
shares at March 31, 2002, respectively . . . . . . . . . . (9,576,710) (9,576,710) (9,467,510)
------------- ------------- -------------
Total stockholders' equity . . . . . . . . . 61,974,104 60,748,953 55,235,151
------------- ------------- -------------
Total liabilities and stockholders' equity . $648,315,956 636,130,566 $525,395,827
============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
(UNAUDITED)
INTEREST INCOME
Interest and fees on loans. . . . . . . . . . . . . . . . . . . . . 7,219,738 7,000,932
Interest on securities. . . . . . . . . . . . . . . . . . . . . . . 1,663,063 1,787,410
Interest on federal funds sold and interest-bearing deposits. . . . 198,537 41,957
------------------------
Total interest income . . . . . . . . . . . . . . . . . . . . 9,081,338 8,830,299
------------------------
INTEREST EXPENSE
Interest on deposits. . . . . . . . . . . . . . . . . . . . . . . . 2,629,784 3,272,021
Interest on borrowings. . . . . . . . . . . . . . . . . . . . . . . 213,396 373,822
------------------------
Total interest expense. . . . . . . . . . . . . . . . . . . . 2,843,180 3,645,843
------------------------
Net interest income before provision for loan losses. . . . . 6,238,158 5,184,456
PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . 256,000 4,054,000
------------------------
Net interest income after
provision for loan losses . . . . . . . . . . . . . . . . . 5,982,158 1,130,456
------------------------
OTHER INCOME
Service charges on deposit accounts . . . . . . . . . . . . . . . . 903,644 886,082
Mortgage banking activities . . . . . . . . . . . . . . . . . . . . 860,532 286,296
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 688,996 728,986
------------------------
Total other income. . . . . . . . . . . . . . . . . . . . . . 2,453,172 1,901,364
------------------------
OTHER EXPENSES
Salaries and employee benefits. . . . . . . . . . . . . . . . . . . 3,812,492 7,037,762
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . 276,653 1,093,938
Postage, printing and supplies. . . . . . . . . . . . . . . . . . . 252,962 306,304
Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . 513,588 614,772
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782,020 1,073,604
Other operating . . . . . . . . . . . . . . . . . . . . . . . . . . 651,083 2,201,902
------------------------
Total other expenses. . . . . . . . . . . . . . . . . . . . . 6,288,798 12,328,282
------------------------
Earnings (loss) before provision for
income taxes . . . . . . . . . . . . . . . . . . . . . . . 2,146,532 (9,296,462)
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . 639,254 (3,426,137)
-----------------------
Earnings (loss) before extraordinary item. . . . . . . . . . 1,507,278 (5,870,325)
Extraordinary item - loss on redemption of debt, net of income tax.
benefit of $101,377 in 2002 . . . . . . . . . . . . . . . . - 165,404
------------------------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . $1,507,278 $(6,035,729)
========================
Basic earnings (loss) per share before extraordinary item . . . . . $ 0.18 $ (0.76)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . - (0.02)
------------------------
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . $ 0.18 $ (0.78)
========================
Diluted earnings (loss) per share before extraordinary item . . . . $ 0.17 $ (0.76)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . - (0.02)
------------------------
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . $ 0.17 $ (0.78)
========================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
2003 2002
-------------------------
(UNAUDITED)
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,507,278 $(6,035,729)
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available-for-sale:
Unrealized gains (losses) arising during the period,
net of tax of $88,003 and $130,901 respectively . . . . . . . . . 143,584 (213,576)
Less: Reclassification adjustment for gains included in
net earnings, net of tax of $33,058 and $2,579 respectively. . . (53,937) (4,209)
Unrealized loss on cash flow hedges, net of tax of $45,840
and $45,837 respectively. . . . . . . . . . . . . . . . . . . . . (74,791) (74,787)
-------------------------
Other comprehensive income (loss). . . . . . . . . . . . . . . . . . . . . 14,856 (292,572)
-------------------------
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 1,522,134 $(6,328,301)
=========================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,507,278 $ (6,035,729)
Adjustment to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation, amortization and accretion . . . . . . . . . . . . . . 607,747 532,717
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . 256,000 4,054,000
Gain on sale of available-for-sale securities. . . . . . . . . . . . (86,995) (6,788)
Gain on sale of loans. . . . . . . . . . . . . . . . . . . . . . . . (407,968) (222,892)
(Gain) loss on sale, write-down of fixed assets. . . . . . . . . . . (1,650) 365,866
Gain on sale of other real estate. . . . . . . . . . . . . . . . . . (106,387) (24,186)
Change in:
Mortgage loans held-for-sale. . . . . . . . . . . . . . . . . 1,157,121 2,876,363
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (718,876) (8,199,651)
----------------------------
Net cash provided by (used in) operating activities. . . . 2,206,270 (6,660,300)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits. . . . . . . . . . . . . . . . . . . (41,657) (218)
Proceeds from sales and maturities of investment
securities available-for-sale. . . . . . . . . . . . . . . . . . . . . . 29,472,787 11,126,015
Purchases of investment securities available-for-sale. . . . . . . . . . . . (17,204,835) (2,371,300)
Purchases of other investments . . . . . . . . . . . . . . . . . . . . . . . - (50,000)
Net change in loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,874,148 27,623,781
Proceeds from sale of other real estate. . . . . . . . . . . . . . . . . . . 587,946 493,259
Proceeds from sale of premises and equipment . . . . . . . . . . . . . . . . 1,650 44,200
Purchases of premises and equipment. . . . . . . . . . . . . . . . . . . . . (317,589) (761,257)
Purchases of cash surrender value life insurance . . . . . . . . . . . . . . (48,628) (44,575)
----------------------------
Net cash provided by investing activities. . . . . . . . . . 18,323,822 36,059,905
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,830,242 (8,543,875)
Change in federal funds purchased. . . . . . . . . . . . . . . . . . . . . . - (18,001,000)
Change in other borrowed funds . . . . . . . . . . . . . . . . . . . . . . . - (5,000,000)
Payments of FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . - (9,448,435)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . - (3,022,871)
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . . . . 208,234 173,568
Proceeds from issuance of stock. . . . . . . . . . . . . . . . . . . . . . . - 9,835,260
Proceeds from issuance of warrants . . . . . . . . . . . . . . . . . . . . . - 1,044,000
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (505,217) (489,992)
----------------------------
Net cash provided by (used in) financing activities . . . . . 10,533,259 (33,453,345)
----------------------------
Net change in cash and cash equivalents . . . . . . . . . . 31,063,351 (4,053,740)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . 38,310,428 20,077,641
----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . . . . . . . $ 69,373,779 16,023,091
============================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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The accompanying consolidated financial statements have not been audited. The
results of operations are not necessarily indicative of the results of
operations for the full year or any other interim periods.
The accounting principles followed by Flag Financial Corporation ("Flag") and
its bank subsidiary and the methods of applying these principles conform with
accounting principles generally accepted in the United States of America and
with general practices within the banking industry. Certain principles, which
significantly affect the determination of financial position, results of
operations, and cash flows are summarized below and in Flag's annual report on
Form 10-K for the year ended December 31, 2002.
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Flag and its
wholly owned subsidiary, Flag Bank (Atlanta, Georgia). All significant
inter-company accounts and transactions have been eliminated in consolidation.
The consolidated financial information furnished herein represents all
adjustments that are, in the opinion of management, necessary to present a fair
statement of the results of operations, and financial position for the periods
covered herein and are normal and recurring in nature. For further information,
refer to the consolidated financial statements and footnotes included in Flag's
annual report on Form 10-K for the year ended December 31, 2002.
Note 2. Earnings Per Share
Net earnings (loss) per common share are based on the weighted average number of
common shares outstanding during each period. The calculation of basic and
diluted earnings (loss) per share is as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
-------------------------
Basic earnings (loss) per share:
Net earnings(loss). . . .. . . . . . . . $ 1,507,278 (6,035,729)
Weighted average common shares
outstanding. . . . . . . . . . . . . 8,396,207 7,750,248
Basic earnings (loss) per share. . . . . $ 0.18 (0.78)
Diluted earnings (loss) per share:
Net earnings (loss). . . . . . . . . . . $ 1,507,278 (6,035,729)
Effect of dilutive securities -
stock options. . . . . . . . . . . . 478,808 -
Diluted earnings (loss) per share. . . . $ 0.17 (0.78)
7
Note 3. Stock-based Compensation
Flag sponsors stock-based compensation plans. 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 Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
Three Months Ended March 31,
2003 2002
------------ -----------
Net earnings (loss) as reported $ 1,507,278 (6,035,729)
Deduct: Total stock-based employee compensation
expense determined under fair-value based method
for all awards, net of tax (76,546) (459,648)
------------ -----------
Pro forma net earnings (loss) $ 1,430,732 (6,495,377)
============ ===========
Basic earnings (loss) per share:
As reported $ .18 ( .78)
============ ===========
Pro forma $ .17 ( .84)
============ ===========
Diluted Earnings (loss) per share:
As reported $ .17 (.78)
============ ===========
Pro forma $ .16 (.84)
============ ===========
Note 4. Goodwill and Intangible Assets
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. Flag restated its financial statements in 2002 for the adoption of SFAS
No. 141 and 142 resulting in an after-tax increase in net income for the first
quarter of 2002 of $80,811.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
The following is a discussion of our financial condition as of March 31, 2003
compared to December 31, 2002 and the results of our operations for the quarter
ended March 31, 2003 compared to the quarter ended March 31, 2002. These
comments should be read in conjunction with our consolidated financial
statements and accompanying footnotes appearing in this report. This report
contains "forward-looking statements" relating to, without limitation, future
economic performance, plans and objectives of management for future operations,
and projections of revenues and other financial items that are based on the
beliefs of our management, as well as assumptions made by and information
currently available to our management. The words "expect," "estimate,"
"anticipate" and "believe," as well as similar expressions, are intended to
identify forward-looking statements. Our actual results may differ materially
from the results discussed in the forward-looking statements, and our operating
performance each quarter is subject to various risks and uncertainties.
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to:
(1) the strength of the U.S. economy in general and the strength of the
local economies in which operations are conducted;
(2) the effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of
the Federal Reserve System;
(3) inflation, interest rate, market and monetary fluctuations;
(4) the timely development of and acceptance of new products and services
and perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits;
(6) technological changes;
(7) acquisitions;
(8) the ability to increase market share and control expenses;
(9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with
which the Company and its subsidiary must comply;
(10) the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as the Financial Accounting
Standards Board;
(11) changes in the Company's organization, compensation and benefit plans;
(12) the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; and
(13) the Company's success at managing the risks involved in the foregoing.
Forward-looking statements speak only as of the date on which they are made. We
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made to reflect
the occurrence of unanticipated events.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
FINANCIAL CONDITION
ASSETS AND FUNDING
Total assets were $648.3 million at March 31, 2003, an increase of $12.2 million
or 1.9% from December 31, 2002, and $122.9 million or 23.4% from March 31, 2002.
This increase in total assets is mainly attributable to the purchase of six
Atlanta branches with approximately $100 million in deposits.
At March 31, 2003, earning assets represented 90.6% of total assets compared to
December 31, 2002 levels of 90.7% and March 31, 2002 levels of 91.0%. Flag's
earning asset mix at the end of the first quarter contained significant amounts
of short-term investments due to the fourth quarter 2002 purchase of six banking
offices with approximately $100.0 million in deposits. Federal funds sold and
interest bearing deposits in other banks amounted to $66.6 million or 11.3% of
earning assets, compared to March 31, 2002 when only 0.33% of earning assets
were federal funds sold or interest bearing deposits in other banks. Flag's
investment portfolio (including securities available for sale and other
investments) was $133.6 million at the end of the first quarter of 2003 compared
to the end of 2002 levels of $145.6 million and first quarter of 2002 levels of
$127.9 million. Gross loans outstanding at March 31, 2003 represented
approximately 63.9% of total earning assets. This level represents a decrease of
$6.6 million or 1.7% from December 31, 2002, and an increase of $30.2 million or
8.7% from March 31, 2002 when gross loans outstanding totaled $344.8 million.
Flag's funding mix continues to benefit from disciplined sales and repricing
behavior. At March 31, 2003, demand deposits amounted to approximately $251.5
million or 48.3% of total deposits. This represents an increase of $41.0 million
from December 31, 2002 levels of $210.5 million and an increase of $78.7 million
from March 31, 2002 levels of $172.8 million. Time deposits at March 31, 2003
and 2002 accounted for 46.8% and 54.1% of total deposits, respectively.
In addition to customer deposits, Flag relies on advances from the Federal Home
Loan Bank (FHLB) for funding. At March 31, 2003 advances from the FHLB amounted
to $58 million, compared to $58 million at December 31, 2002 and $30 million at
March 31, 2002. During 2002, Flag restructured substantially all of its
borrowings from the FHLB to take advantage of the low interest rate environment.
At March 31, 2003, December 31, 2002, and March 31, 2002, advances from the FHLB
amounted to 10.0%, 10.2% and 6.5% of total funding.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains borrowing lines with various other financial institutions
including the Federal Home Loan Bank. At March 31, 2003, the Company had total
borrowing agreements of approximately $98 million of which $58 million was
advanced.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Shareholders' equity at March 31, 2003, amounted to $61.9 million or 9.6% of
total assets. This compares to $61 million or 9.5% of total assets at December
31, 2002, and $55.2 million or 10.5% of total assets at March 31, 2002. The
increase in shareholders' equity of $6.7 million from the same date a year ago
is primarily attributable to an increase in retained earnings of $3.5 million
and a $694,000 increase in accumulated other comprehensive income resulting
primarily from the unrealized gains on the investment portfolio.
RESULTS OF OPERATIONS
OVERVIEW OF THE THREE MONTH PERIOD ENDING MARCH 31, 2003
Net earnings for the quarter ended March 31, 2003 were $1.5 million or $.17 per
diluted share. This compares to a net loss for the three months ending March 31,
2002 of $6.0 million or $.78 per share. The net loss in 2002 included an after
tax restructuring charge of $3.4 million, an after tax provision for loan losses
of $2.5 million, and an after tax extraordinary charge of $165,000 related to
the prepayment of a portion of the Flag's FHLB borrowings. Flag's annualized
return on assets (ROA) and return on equity (ROE) for the first quarter of 2003
were 0.95% and 9.94%, respectively.
NET INTEREST INCOME
Net interest income for the three months ending March 31, 2003 increased
approximately $1.1 million or 20.3% over the comparable period in 2002. Net
interest income as a percentage of average earning assets increased
approximately 0.08% from 4.28% to 4.36%.
Interest income for the first quarter of 2003 was approximately $9.1 million
representing an increase of $251,000 or 2.8%. This increase in interest income
was the net effect of substantially higher levels of earning assets and lower
yields resulting from the low interest rate environment during 2003. The yield
on earning assets for the first quarter of 2003 was 6.35% compared to 7.29% for
the same period in 2002. The impact of these lower yields on earning assets was
more than offset by a 22.8% increase in earning assets.
Interest expense decreased approximately $803,000 to $2.8 million during the
quarter ended March 31, 2003 versus $3.6 million during the quarter ended March
31, 2002, a decrease of approximately 22%. Total cost of funds for the first
quarter of 2003 was 2.01% compared to 3.09% in the same quarter in 2002. This
decrease resulted from a significant improvement in the funding mix such that at
March 31, 2003, approximately 48% were demand deposits.
Lower borrowing costs on FHLB advances also contributed to the decline in
interest expense. Interest expense on advances from the FHLB was approximately
$213,000 in the first quarter of 2003 compared to $374,000 in the same quarter
of 2002.
NON-INTEREST INCOME AND EXPENSE
Non-interest income for the three months ended March 31, 2003 increased $552,000
or 29.0% compared to the first three months of 2002. The increase in
non-interest income is mostly attributed to an increase of $575,000 in mortgage
related income (origination fees, gain on sale of loans and service release
premiums) from $286,000 at March 31, 2002 to $861,000 at March 31, 2003.
Service charges on deposit accounts increased only slightly from $886,000 in the
first quarter of 2002 to $904,000 in the first quarter of 2003.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Non-interest expense decreased $6.0 million to $6.3 million for the quarter
ended March 31, 2003 compared to the same period in 2002. Most of this decrease
relates to the pre-tax restructuring charges of approximately $5.4 million that
Flag recorded in 2002. During 2002, Flag focused on improving the efficiency of
its people and locations. At March 31, 2003, Flag had $2.7 million of assets
per employee and $27.0 million of assets per location, reflecting improvements
of 42.1% and 28.8%, respectively over the comparable period in 2002.
INCOME TAXES
Income tax expense for the first quarter of 2003 was $639,000 compared to income
tax benefit of $3.5 million for the same period in 2002. The effective tax rate
for the quarter ended March 31, 2003 was 30% compared 37% for the quarter ended
March 31, 2002.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
LOANS
Flag engages in a full complement of lending activities, including real
estate-related, commercial and financial loans and consumer installment loans.
Flag generally concentrates lending efforts on real estate related loans. As of
March 31, 2003, Flag's loan portfolio consisted of 82.9% real estate-related
loans, 13.0% commercial and financial loans, and 4.1% consumer installment
loans. While risk of loss is primarily tied to the credit quality of the various
borrowers, risk of loss may also increase due to factors beyond Flag's control,
such as local, regional and/or national economic downturns. General conditions
in the real estate market may also impact the relative risk in the real estate
portfolio. Of the target areas of lending activities, commercial and financial
loans are generally considered to have a greater risk of loss than real estate
loans or consumer installment loans.
Loans are stated at unpaid balances, net of unearned income and deferred loan
fees. Balances within the major loans receivable categories are represented in
the following table: (000's omitted)
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
---------- ------------ ---------
Commercial/financial/agricultural $ 48,824 57,473 63,504
Real estate - construction 75,172 68,169 68,584
Real estate - mortgage 55,246 57,560 45,533
Real estate - other 180,476 182,622 149,979
Installment loans to individuals 15,338 15,848 17,219
---------- ------------ ---------
Total loans 375,056 381,672 344,819
Less: Allowance for loan losses 6,402 6,888 7,530
---------- ------------ ---------
Total net loans $ 368,654 374,784 337,289
========== ============ =========
PROVISION AND ALLOWANCE FOR LOAN AND LEASE LOSSES
Flag maintains an allowance for loan losses appropriate for the quality of the
loan portfolio and sufficient to meet anticipated future loan losses. Flag
utilizes a comprehensive loan review and risk identification process and the
analysis of Flag's financial trends to determine the adequacy of the allowance.
Many factors are considered when evaluating the allowance. The analysis is based
on historical loss trends; trends in criticized and classified loans in the
portfolio; trends in past due and non-accrual loans; trends in portfolio volume,
composition, maturity, and concentrations; changes in local and regional
economic market conditions; the accuracy of the loan review and risk
identification system, and the experience, ability, and depth of lending
personnel and management.
Management evaluates the allowance on a quarterly basis. Through this
evaluation, the appropriate provision for loan losses is determined by
considering the current allowance level, actual loan losses and loan recoveries.
The provision for loan losses for the first quarter of 2003 was $256,000 versus
$4.1 million for the comparable period in 2002. The allowance for loan and lease
losses at March 31, 2003, was $6.4 million, compared to $7.5 million at March
31, 2002. The allowance for loan losses as a percentage of gross loans was 1.71%
and 2.18% at March 31, 2003, and 2002, respectively.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following table summarizes the changes in the allowance for loan losses
arising from loans charged off and recoveries on loans previously charged off by
loan category, and additions to the allowance that have been charged to
operations in the Company's consolidated statements of operations. (000's
omitted)
THREE MONTHS ENDED
MARCH 31
2003 2002
----------- ----------
Balance of allowance for loan losses at beginning of period $ 6,888 7,348
Provision charged to operating expense 256 4,054
Charge offs:
Commercial - 407
Real estate - mortgage - 286
Real estate - other 791 3,094
Consumer 57 141
----------- ----------
Total charge-offs 848 3,928
Recoveries:
Commercial 25 24
Real estate - mortgage 7 5
Real estate - other 30 -
Consumer 44 27
----------- ----------
Total recoveries 106 56
----------- ----------
Net charge-offs 742 3,872
----------- ----------
Balance of allowance for loan losses at end of period $ 6,402 7,530
=========== ==========
NON-PERFORMING ASSETS
Non-performing assets (nonaccrual loans, real estate owned and repossessions)
totaled approximately $11.3 million at March 31, 2003, compared to $11.1 million
at December 31, 2002, and $10.5 million at March 31, 2002. These levels as a
percentage of total assets represented 1.74%, 1.74% and 2.00%, respectively.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Flag has a loan review function that continually monitors selected accruing
loans for which general economic conditions or changes within a particular
industry could cause the borrowers financial difficulties. The loan review
function also identifies loans with high degrees of credit or other risks. The
focus of loan review is to maintain a low level of non-performing assets and to
return current non-performing assets to earning status.
NON-PERFORMING ASSETS (000's omitted) MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
--------- ------------ ---------
Loans on nonaccrual . . . . . . . . . . . . . . . $ 7,914 9,243 8,914
Loans past due 90 days and still accruing . . . . 234 122 221
Other real estate owned and reposessions. . . . . 3,149 1,718 1,395
--------- ------------ ---------
Total non-performing assets . . . . . . . . . . . $ 11,297 11,083 10,530
========= ============ =========
Total non-performing assets as a percentage of
total assets. . . . . . . . . . . . . . . . . . 1.74% 1.74% 2.00%
CAPITAL
At March 31, 2003, Flag and its bank were in compliance with various regulatory
capital requirements administered by Federal and State banking agencies. The
following is a table representing the Company's consolidated Tier-1 Capital,
Tangible Capital, and Risk-Based Capital:
MARCH 31, 2003
-----------------------------------------------------------------------------------------
ACTUAL REQUIRED EXCESS
AMOUNT % AMOUNT % AMOUNT %
-----------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) $52,874 11.48% $49,986 8.00% $ 2,888 3.48%
Tier 1 Capital (to Risk Weighted Assets) $47,119 10.23% $24,993 4.00% $22,126 6.23%
Tier 1 Capital (to Average Assets) $47,119 7.54% $18,424 4.00% $28,695 3.54%
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2003, there were no substantial changes in the composition of
the Company's market-sensitive assets and liabilities or their related market
values from that reported as of December 31, 2002. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company's audited consolidated financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 2002 included in the Company's 2002
Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiary) 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.
16
PART 2. OTHER INFORMATION
FLAG FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------
PART II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
Pursuant to Rule 14a-14(c)(1) promulgated under the Securities Exchange Act of
1934, as amended, shareholders desiring to present a proposal for consideration
at the Company's 2004 Annual Meeting of Shareholders must notify the Company in
writing to the Secretary of the Company, at 3475 Piedmont Road, N.E., Suite 550,
Atlanta, Georgia, 30305, of the contents of such proposal no later than December
15, 2003 to be included in the 2004 Proxy Materials. A shareholder must notify
the Company before January 15, 2004 of a proposal for the 2004 Annual Meeting
that the shareholder intends to present other than by inclusion in the Company's
proxy material. If the Company does not receive such notice prior to January
15, 2004, proxies solicited by the management of the Company will confer
discretionary authority upon the management of the Company to vote upon any such
matter.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
99.1 Certification by Chief Executive Officer and Chief Financial
Officer.
(b) Reports on Form 8-K
Reports on Form 8-K filed during the First Quarter of 2003: None.
17
FLAG FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Flag Financial Corporation
By: /s/ Joseph W. Evans
---------------------
Joseph W. Evans
(Chief Executive Officer)
Date: 5/14/03
-------------------
By: /s/ J. Daniel Speight
----------------------
J. Daniel Speight
(Chief Financial Officer)
Date: 5/14/03
--------------------
18
Certification
I, Joseph W. Evans, Chief Executive Officer of Flag Financial Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flag Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Joseph W. Evans
----------------------
Joseph W. Evans
Chief Executive Officer
19
Certification
I, J. Daniel Speight, Chief Financial Officer of Flag Financial Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Flag Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer 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
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ J. Daniel Speight
------------------------
J. Daniel Speight
Chief Financial Officer
20