UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period Ended September 30, 2005
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
|
(Exact
name of registrant as specified in its
charter)
|
|
Georgia
|
|
58-2094179
|
|
|
(State
of incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
|
3475
Piedmont Road N.E. Suite 550
|
Atlanta,
Georgia 30305
|
(Address
of principal executive
offices)
|
(404)
760-7700
|
(Registrant’s
telephone number)
|
Indicate
by check mark whether the registrant has (1) filed all reports required to
be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act). Yes x
No ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No x
Common
stock, par value $1 per share: 8,546,086 shares outstanding as of November
2,
2005
Table
of Contents
|
|
|
Page
|
PART
I.
|
Financial
Information
|
|
|
|
|
|
Item
1.
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3
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4
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5
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6
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7
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Item
2.
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11
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Item
3.
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30
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Item
4.
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30
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|
PART
II.
|
Other
Information
|
|
|
|
|
Item
1.
|
|
31
|
|
|
|
Item
2.
|
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31
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Item
3.
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31
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Item
4.
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31
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Item
5.
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31
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Item
6.
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31
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32
|
Part
I.
|
Financial
Information
|
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
|
|
|
|
|
|
|
|
|
|
September
30,
2005
|
|
December
31,
2004
|
|
September
30,
2004
|
|
|
|
(unaudited)
|
|
(audited)
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
16,101
|
|
$
|
13,345
|
|
$
|
13,721
|
|
Other
interest-bearing deposits in banks
|
|
|
5,946
|
|
|
13,397
|
|
|
15,852
|
|
Federal
funds sold
|
|
|
24,578
|
|
|
13,574
|
|
|
18,826
|
|
Total
cash and cash equivalents
|
|
|
46,625
|
|
|
40,316
|
|
|
48,399
|
|
Other
interest-bearing deposits in banks
|
|
|
4,000
|
|
|
5,473
|
|
|
1,626
|
|
Investment
securities available-for-sale
|
|
|
99,878
|
|
|
111,390
|
|
|
94,607
|
|
Other
investments
|
|
|
12,332
|
|
|
13,161
|
|
|
13,211
|
|
Mortgage
loans held-for-sale
|
|
|
10,401
|
|
|
10,688
|
|
|
6,666
|
|
Loans,
net of allowance for loan losses of $9,511, $8,602 and $8,328,
respectively
|
|
|
691,488
|
|
|
596,101
|
|
|
582,046
|
|
Premises
and equipment, net
|
|
|
13,458
|
|
|
14,458
|
|
|
14,284
|
|
Intangible
assets
|
|
|
20,986
|
|
|
20,919
|
|
|
16,246
|
|
Other
assets
|
|
|
19,957
|
|
|
15,831
|
|
|
15,953
|
|
Total
assets
|
|
$
|
919,125
|
|
$
|
828,337
|
|
$
|
793,038
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$
|
57,372
|
|
$
|
48,812
|
|
$
|
42,679
|
|
Interest-bearing
demand deposits
|
|
|
347,971
|
|
|
347,940
|
|
|
320,777
|
|
Savings
|
|
|
20,697
|
|
|
20,940
|
|
|
21,863
|
|
Time
|
|
|
358,766
|
|
|
289,155
|
|
|
277,998
|
|
Total
deposits
|
|
|
784,806
|
|
|
706,847
|
|
|
663,317
|
|
Advances
from Federal Home Loan Bank
|
|
|
25,000
|
|
|
25,000
|
|
|
40,000
|
|
Federal
funds purchased and repurchase agreements
|
|
|
1,420
|
|
|
2,295
|
|
|
4,144
|
|
Other
borrowings
|
|
|
-
|
|
|
4,300
|
|
|
-
|
|
Junior
subordinated debentures
|
|
|
24,743
|
|
|
14,433
|
|
|
14,433
|
|
Other
liabilities
|
|
|
8,504
|
|
|
6,260
|
|
|
6,106
|
|
Total
liabilities
|
|
|
844,473
|
|
|
759,135
|
|
|
728,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, 10,000,000 shares authorized, none issued and
outstanding
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common
stock , $1 par value, 20,000,000 shares authorized, 10,097,272,
10,053,572
and 9,810,849 shares issued and outstanding at September 30, 2005,
December 31, 2004 and September 30, 2004, respectively
|
|
|
10,097
|
|
|
10,054
|
|
|
9,811
|
|
Additional
paid-in capital
|
|
|
28,296
|
|
|
27,954
|
|
|
24,799
|
|
Retained
earnings
|
|
|
49,875
|
|
|
44,642
|
|
|
43,460
|
|
Accumulated
other comprehensive (loss) income
|
|
|
(112
|
)
|
|
56
|
|
|
472
|
|
Less:
Treasury stock at cost; 1,551,186 shares at September 30, 2005,
December
31, 2004 and September 30, 2004
|
|
|
(13,504
|
)
|
|
(13,504
|
)
|
|
(13,504
|
)
|
Total
stockholders' equity
|
|
|
74,652
|
|
|
69,202
|
|
|
65,038
|
|
Total
liabilities and stockholders' equity
|
|
$
|
919,125
|
|
$
|
828,337
|
|
$
|
793,038
|
|
See
accompanying notes to unaudited consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF EARNINGS
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
14,279
|
|
$
|
9,515
|
|
$
|
38,120
|
|
$
|
26,313
|
|
Interest
on investment securities
|
|
|
1,339
|
|
|
1,177
|
|
|
3,719
|
|
|
3,925
|
|
Interest
on federal funds sold and other interest-bearing deposits in
banks
|
|
|
315
|
|
|
121
|
|
|
945
|
|
|
320
|
|
Total
interest income
|
|
|
15,933
|
|
|
10,813
|
|
|
42,784
|
|
|
30,558
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
2,339
|
|
|
1,343
|
|
|
5,963
|
|
|
3,576
|
|
Savings
|
|
|
35
|
|
|
32
|
|
|
98
|
|
|
99
|
|
Time
|
|
|
2,857
|
|
|
1,436
|
|
|
7,369
|
|
|
3,857
|
|
Interest
on other borrowings
|
|
|
586
|
|
|
354
|
|
|
1,412
|
|
|
887
|
|
Total
interest expense
|
|
|
5,817
|
|
|
3,165
|
|
|
14,842
|
|
|
8,419
|
|
Net
interest income before provision for loan losses
|
|
|
10,116
|
|
|
7,648
|
|
|
27,942
|
|
|
22,139
|
|
Provision
for loan losses
|
|
|
375
|
|
|
375
|
|
|
750
|
|
|
1,470
|
|
Net
interest income after provision for loan losses
|
|
|
9,741
|
|
|
7,273
|
|
|
27,192
|
|
|
20,669
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
855
|
|
|
946
|
|
|
2,428
|
|
|
2,796
|
|
Mortgage
banking activities
|
|
|
890
|
|
|
744
|
|
|
2,157
|
|
|
1,869
|
|
Fees
on payroll services
|
|
|
542
|
|
|
-
|
|
|
1,622
|
|
|
-
|
|
Insurance
commissions and brokerage fees
|
|
|
66
|
|
|
162
|
|
|
198
|
|
|
438
|
|
Gain
on sale of branch
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,000
|
|
Gain
on sales of other real estate owned
|
|
|
336
|
|
|
78
|
|
|
558
|
|
|
113
|
|
Gain
on sales of investment securities available-for-sale
|
|
|
-
|
|
|
7
|
|
|
129
|
|
|
700
|
|
Other
|
|
|
345
|
|
|
317
|
|
|
1,136
|
|
|
621
|
|
Total
noninterest income
|
|
|
3,034
|
|
|
2,254
|
|
|
8,228
|
|
|
9,537
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
5,539
|
|
|
4,480
|
|
|
15,759
|
|
|
13,347
|
|
Occupancy
|
|
|
977
|
|
|
974
|
|
|
2,915
|
|
|
2,747
|
|
Professional
fees
|
|
|
429
|
|
|
235
|
|
|
1,462
|
|
|
817
|
|
Postage,
printing and supplies
|
|
|
257
|
|
|
244
|
|
|
734
|
|
|
693
|
|
Communications
|
|
|
539
|
|
|
556
|
|
|
1,648
|
|
|
1,670
|
|
Other
|
|
|
1,114
|
|
|
808
|
|
|
2,876
|
|
|
2,744
|
|
Total
noninterest expense
|
|
|
8,855
|
|
|
7,297
|
|
|
25,394
|
|
|
22,018
|
|
Earnings
before provision for income taxes
|
|
|
3,920
|
|
|
2,230
|
|
|
10,026
|
|
|
8,188
|
|
Provision
for income taxes
|
|
|
1,283
|
|
|
571
|
|
|
3,256
|
|
|
2,512
|
|
Net
earnings
|
|
$
|
2,637
|
|
$
|
1,659
|
|
$
|
6,770
|
|
$
|
5,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.31
|
|
$
|
0.20
|
|
$
|
0.79
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.28
|
|
$
|
0.19
|
|
$
|
0.73
|
|
$
|
0.63
|
|
See
accompanying notes to unaudited consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(in
thousands)
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
2,637
|
|
$
|
1,659
|
|
$
|
6,770
|
|
$
|
5,676
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) arising during the period, net of income tax (benefit)
of
$165, $271, $7 and $(187), respectively
|
|
|
270
|
|
|
441
|
|
|
11
|
|
|
(306
|
)
|
Reclassification
adjustment for gains included in net earnings, net of income tax
of $0,
$3, $49 and $267, respectively
|
|
|
-
|
|
|
(4
|
)
|
|
(80
|
)
|
|
(433
|
)
|
Unrealized
losses on cash flow hedges, net of income tax (benefit) of $(80),
$0,
$(61) and $0, respectively
|
|
|
(131
|
)
|
|
-
|
|
|
(99
|
)
|
|
-
|
|
Other
comprehensive income (loss)
|
|
|
139
|
|
|
437
|
|
|
(168
|
)
|
|
(739
|
)
|
Comprehensive
income
|
|
$
|
2,776
|
|
$
|
2,096
|
|
$
|
6,602
|
|
$
|
4,937
|
|
See
accompanying notes to unaudited consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
6,770
|
|
$
|
5,676
|
|
Adjustment
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation,
amortization and accretion
|
|
|
1,484
|
|
|
2,322
|
|
Provision
for loan losses
|
|
|
750
|
|
|
1,470
|
|
Gain
on sale of branch office
|
|
|
-
|
|
|
(3,000
|
)
|
Gain
on sales of investment securities available-for-sale
|
|
|
(129
|
)
|
|
(700
|
)
|
Gain
on sales of loans
|
|
|
(1,249
|
)
|
|
(1,028
|
)
|
(Gain)
loss on disposals of premises and equipment
|
|
|
(23
|
)
|
|
56
|
|
Gain
on sales of other real estate owned
|
|
|
(558
|
)
|
|
(113
|
)
|
Change
in:
|
|
|
|
|
|
|
|
Mortgage
loans held-for-sale
|
|
|
1,536
|
|
|
(1,404
|
)
|
Other
assets and liabilities
|
|
|
(2,162
|
)
|
|
(3,084
|
)
|
Net
cash provided by operating activities
|
|
|
6,419
|
|
|
195
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Cash
paid in branch sale
|
|
|
-
|
|
|
(14,141
|
)
|
Net
change in other interest-bearing deposits in banks
|
|
|
1,473
|
|
|
1,049
|
|
Proceeds
from sales, calls and maturities of investment securities
available-for-sale
|
|
|
81,449
|
|
|
65,603
|
|
Purchases
of investment securities available-for-sale
|
|
|
(70,118
|
)
|
|
(39,649
|
)
|
Purchases
of other investments
|
|
|
(242
|
)
|
|
(750
|
)
|
Proceeds
from sales of other investments
|
|
|
1,071
|
|
|
3,160
|
|
Net
change in loans
|
|
|
(98,629
|
)
|
|
(123,110
|
)
|
Proceeds
from sale of other real estate owned
|
|
|
3,277
|
|
|
1,650
|
|
Proceeds
from sale of premises and equipment
|
|
|
871
|
|
|
183
|
|
Purchases
of premises and equipment
|
|
|
(1,013
|
)
|
|
(1,136
|
)
|
Purchases
of cash surrender value life insurance
|
|
|
(186
|
)
|
|
(115
|
)
|
Net
cash used in investing activities
|
|
|
(82,047
|
)
|
|
(107,256
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
|
77,959
|
|
|
128,502
|
|
Change
in federal funds purchased and repurchase agreements
|
|
|
(875
|
)
|
|
(2,453
|
)
|
Change
in other borrowings
|
|
|
(4,300
|
)
|
|
1,400
|
|
Proceeds
from FHLB advances
|
|
|
-
|
|
|
15,000
|
|
Payments
of FHLB advances
|
|
|
-
|
|
|
(33,000
|
)
|
Proceeds
from issuance of junior subordinated debt
|
|
|
10,310
|
|
|
14,433
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
(3,927
|
)
|
Proceeds
from exercise of stock options
|
|
|
385
|
|
|
278
|
|
Cash
dividends paid
|
|
|
(1,542
|
)
|
|
(1,510
|
)
|
Net
cash provided by financing activities
|
|
|
81,937
|
|
|
118,723
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
6,309
|
|
|
11,662
|
|
Cash
and cash equivalents at beginning of period
|
|
|
40,316
|
|
|
36,737
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
46,625
|
|
$
|
48,399
|
|
See
accompanying notes to unaudited consolidated financial statements.
Notes
to Consolidated Financial Statements
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.
Note
1.
|
Basis
of Presentation
|
The
consolidated financial statements include the accounts of Flag Financial
Corporation (“Flag” or the “Company”) and its wholly owned subsidiary, Flag Bank
(the “Bank”). All significant intercompany 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, changes in cash flows 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 related notes
included in Flag’s annual report on Form 10-K for the year ended December 31,
2004.
Note
2.
|
Mergers
and Acquisitions
|
On
May
26, 2005, Flag and First Capital Bancshares, Inc. (“First Capital”) entered into
a definitive agreement for Flag to acquire First Capital. First Capital,
a bank
holding company, is headquartered in Norcross, Georgia and is the parent
company
of First Capital Bank, which operates five banking offices in the north metro
Atlanta market. The acquisition of First Capital will significantly accelerate
Flag’s growth strategy, more than doubling its presence in the metro Atlanta
market. As of September 30, 2005, First Capital has approximately $675 million
in assets. The consideration will be a combination of cash and stock with
the
transaction valued at approximately $123.0 million. Intangible assets of
$86.3
million will result from the merger. The agreement has been approved by the
board of directors and the shareholders of each company and is subject to
regulatory approvals. The merger is expected to close in the fourth quarter
of
2005.
To
finance the First Capital merger, Flag anticipates it
will
issue an additional $15.0 million in trust preferred securities and
plans
to raise additional capital of up to $8.3 million through the exercise of
the
outstanding warrants to purchase up to 1.25 million shares of common stock.
Flag
issued the warrants during 2002, 2003 and 2004 in connection with a series
of
private placements of Flag common stock. The warrants were issued and sold
at a
price of $1.00 per warrant and have an original term of 10 years. In
consideration for the selling shareholders’ agreement to forfeit the remaining
term of the warrants and exercise them in connection with the merger, Flag
has
agreed to adjust the exercise prices of the warrants. Related parties hold
840,000 of the outstanding warrants with an original weighted exercise price
of
$9.10 per share and an adjusted weighted average exercise price of $6.51
per
share.
Flag
Financial Corporation and Subsidiary
Notes
to Consolidated Financial Statements
Note
3.
|
Recent
Accounting Pronouncements
|
As
permitted by SFAS No. 123, Accounting
for Stock-Based Compensation,
Flag
currently accounts for share-based payments to employees using APB Opinion
No.
25’s intrinsic value method and, as such, generally recognizes no compensation
expense for employee stock options. The impact of adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had we adopted SFAS No.123(R) in
prior
periods, the impact of that standard would have approximated the impact of
SFAS
No. 123 as described in the disclosure of pro forma net income earnings per
share in Note 5 to our consolidated financial statements. SFAS No. 123(R)
also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating
cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in the periods
after
adoption. While the Company cannot estimate what those amounts will be in
the
future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods
for such excess tax deductions were insignificant. On
April
14, 2005, the Securities and Exchange Commission (the “SEC”) announced a new
rule that amends the compliance dates for SFAS No. 123(R). The SEC’s new rule
allows companies to implement SFAS No. 123(R) at the beginning of their next
fiscal year, instead of the next reporting period that begins after June
15,
2005; consequently; Flag will adopt the standard in the first quarter of
2006.
Note
4.
|
Net
Earnings Per Common Share
|
Net
earnings per common share are based on the weighted average number of common
shares outstanding during each period. The calculation of basic and diluted
earnings per share is as follows (in thousands, except per share
amounts):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
2,637
|
|
$
|
1,659
|
|
$
|
6,770
|
|
$
|
5,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
8,546
|
|
|
8,263
|
|
|
8,533
|
|
|
8,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.31
|
|
$
|
0.20
|
|
$
|
0.79
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
2,637
|
|
$
|
1,659
|
|
$
|
6,770
|
|
$
|
5,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
8,546
|
|
|
8,263
|
|
|
8,533
|
|
|
8,416
|
|
Effect
of stock options and warrants
|
|
|
729
|
|
|
593
|
|
|
710
|
|
|
562
|
|
Total
weighted average common shares and common stock
equivalents
|
|
|
9,275
|
|
|
8,856
|
|
|
9,243
|
|
|
8,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.28
|
|
$
|
0.19
|
|
$
|
0.73
|
|
$
|
0.63
|
|
Note
5.
|
Stock-based
Compensation
|
Flag
currently accounts for stock-based compensation to employees and non-employee
members of the Board 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 earnings, 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.
Flag
Financial Corporation and Subsidiary
Notes
to Consolidated Financial Statements
Note
5.
|
Stock-based
Compensation (continued)
|
The
following table illustrates the effect on net earnings and earnings per share
if
Flag had applied the fair value recognition provisions of SFAS No.123,
Accounting
for Stock-Based Compensation,
to
stock-based employee compensation (in thousands, except per share amounts):
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Net
earnings as reported
|
|
$
|
2,637
|
|
$
|
1,659
|
|
$
|
6,770
|
|
$
|
5,676
|
|
Compensation
expense determined by fair value method
|
|
|
(45
|
)
|
|
(49
|
)
|
|
(135
|
)
|
|
(104
|
)
|
Pro
forma net earnings
|
|
$
|
2,592
|
|
$
|
1,610
|
|
$
|
6,635
|
|
$
|
5,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.31
|
|
$
|
0.20
|
|
$
|
0.79
|
|
$
|
0.67
|
|
Pro
forma
|
|
$
|
0.30
|
|
$
|
0.19
|
|
$
|
0.78
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.28
|
|
$
|
0.19
|
|
$
|
0.73
|
|
$
|
0.63
|
|
Pro
forma
|
|
$
|
0.28
|
|
$
|
0.18
|
|
$
|
0.72
|
|
$
|
0.62
|
|
During
the nine months ended September 30, 2005, Flag issued 81,500 options with
a
weighted average grant date fair value of $3.93 each. The fair value of each
option was estimated on the date of grant using the Black-Scholes
options-pricing model with the following assumptions: dividend yield ranged
from
1.72% to 1.80%, volatility ranged from .2185 to .2225, risk free interest
rate
ranged from 4.24% to 4.36%, and an expected life of seven years.
Flag
engages in a full complement of lending activities, including permanent
residential mortgage loans, permanent residential construction loans, commercial
mortgage loans, commercial business loans, financial loans, agricultural
loans
and consumer installment loans. Flag generally concentrates lending efforts
on
real estate related loans. As of September 30, 2005, Flag’s loan portfolio
consisted of 53.8% real estate mortgage loans, including 1-4 family residential
loans, multi-family loans and commercial real estate loans, 30.7% real estate
construction loans, 13.2% commercial, financial and agricultural loans, and
2.3%
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
reported at outstanding unpaid balances and unamortized premiums or discounts
on
purchased loans. Balances within the major loans receivable categories are
represented in the following table (in thousands):
|
|
September
30,
2005
|
|
%
of
Total
Loans
|
|
December
31,
2004
|
|
%
of
Total
Loans
|
|
September
30,
2004
|
|
%
of
Total
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial/financial/agricultural
|
|
$
|
92,457
|
|
|
13.2
|
%
|
$
|
57,231
|
|
|
9.5
|
%
|
$
|
64,603
|
|
|
10.9
|
%
|
Real
estate - Construction
|
|
|
215,501
|
|
|
30.7
|
%
|
|
176,111
|
|
|
29.1
|
%
|
|
159,308
|
|
|
27.0
|
%
|
Real
estate - Mortgage
|
|
|
376,877
|
|
|
53.8
|
%
|
|
355,575
|
|
|
58.8
|
%
|
|
351,669
|
|
|
59.6
|
%
|
Consumer
installment loans
|
|
|
16,160
|
|
|
2.3
|
%
|
|
15,644
|
|
|
2.6
|
%
|
|
14,620
|
|
|
2.5
|
%
|
Lease
financing
|
|
|
4
|
|
|
-
|
|
|
142
|
|
|
-
|
|
|
174
|
|
|
-
|
|
Total
loans
|
|
|
700,999
|
|
|
100.0
|
%
|
|
604,703
|
|
|
100.0
|
%
|
|
590,374
|
|
|
100.0
|
%
|
Less:
Allowance for loan losses
|
|
|
9,511
|
|
|
|
|
|
8,602
|
|
|
|
|
|
8,328
|
|
|
|
|
Total
net loans
|
|
$
|
691,488
|
|
|
|
|
$
|
596,101
|
|
|
|
|
$
|
582,046
|
|
|
|
|
Flag
Financial Corporation and Subsidiary
Notes
to Consolidated Financial Statements
Note
7.
|
Stock
Repurchase Program
|
In
March
2004, Flag’s Board of Directors authorized a stock repurchase program covering
an amount equal to 10% of the outstanding shares of Flag’s common stock. As of
September 30, 2005, the Company has repurchased approximately 304,000 shares
of
the approximately 853,000 shares authorized to be purchased, at an average
price
of $12.91.
Note
8.
|
Trust
Preferred Securities
|
On
July
18, 2005, the Company closed a private offering of 10,000 floating rate
Preferred Securities offered and sold by Flag Financial Corporation Statutory
Trust II (“Trust II”) having a liquidation amount of $1,000 each. The proceeds
from such issuances, together with the proceeds of the related issuance of
common securities of Trust II purchased by the Company in the amount of
$310,000, were invested in floating rate Junior Subordinated Debentures (the
“July 2005 Debentures”) of the Company totaling $10.3 million. The
July
2005 Debentures are due September 30, 2035 and may be redeemed after five
years,
and sooner in certain specific events, including in the event that certain
circumstances render them ineligible for treatment as Tier 1 capital, subject
to
prior approval by the Federal Reserve Board, if then required. Such debentures
presently qualify as Tier 1 capital for regulatory reporting. The
sole
assets of Trust II are the July 2005 Debentures. The July 2005 Debentures
are
unsecured and rank junior to all senior debt of the Company and on par with
the
debentures issued in connection with the Company’s other trust preferred
securities.
The
Company owns all of the common securities of Trust II. For the quarter ended
September 30, 2005, the floating rate securities had a 6.17% interest rate,
which will reset quarterly at the three-month LIBOR rate plus 1.50%. Flag
intends to use the capital for the merger with First Capital and for other
general corporate purposes. Flag anticipates it will issue additional trust
preferred securities prior to the close of the First Capital
transaction.
Flag
Financial Corporation and Subsidiary
Forward-Looking
Statements
The
following discussion and comments contain "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, (i) the strength
of
the U.S. economy as well as the strength of the local economies in which
operations are conducted; (ii) the effects of changing interest rates, which
could lower margins; (iii) unanticipated inflation, interest rate, market
and
monetary fluctuations; (iv) unanticipated
regulatory proceedings or legal actions, or changes in accounting policies
and
practices as adopted by the Financial Accounting Standards Board; (v) issues
involved in the integration of acquisitions,
including but not limited to our pending First Capital acquisition; and
(vi)
the
timely development of products and services that position Flag to succeed
in an
increasingly competitive industry. If we are unsuccessful in managing the
risks
relating to these factors, together with other risks incident to the operation
of our business, our financial condition, results of operations and cash
flows
could be adversely affected.
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.
Critical
Accounting Policies
The
accounting principles we follow and our methods of applying these principles
conform with accounting principles generally accepted in the United States
and
with general practices within the banking industry. In connection with the
application of those principles, we have made judgments, estimates and
assumptions which, in the case of estimating our allowance for loan losses
(ALL), have been critical to the determination of our financial position
and
results of operations. Management assesses the adequacy of the ALL regularly
during the year, and formally prior to the end of each calendar quarter.
This
assessment includes procedures to estimate the allowance and test the adequacy
and appropriateness of the resulting balance.
This
estimation process can affect our estimated loan loss expense for a given
period. Generally, the allowance for loan losses increases as the outstanding
balance of loans or the level of classified or impaired loans increases.
Loans
or portions of loans that are deemed uncollectible are charged against and
reduce the allowance. The allowance is replenished by means of a provision
for
loan losses that is charged as an expense. As a result, our estimate of the
allowance for loan losses affects our earnings directly.
The
ALL
consists of two portions (1) allocated amounts representing the potential
exposures on specifically identified credits and other exposures readily
predictable by historical or comparative experience; and (2) an unallocated
amount representative of inherent loss which is not readily identifiable.
Even
though the ALL is composed of two components, the entire ALL is available
to
absorb any credit losses. Allocated amounts are used on loans where management
has determined that there is an increased probability or severity of loss
than
on the loan portfolio as a whole. We base the allocation for these unique
loans
primarily on risk rating grades assigned to each of these loans as a result
of
our loan management and review processes. We then assign each risk-rating
grade
a loss ratio, which is determined based on the experience of management,
discussions with banking regulators and our independent loan review process.
We
estimate losses on impaired loans based on estimated cash flows discounted
at
the loan's original effective interest rate or based on the underlying
collateral value. To the extent that management does not believe that a certain
loan's risk is appropriately represented by the risk rating grades, a specific
review of the credit is performed which would result in a specific allocation
for that particular loan.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Unallocated
amounts are particularly subjective and do not lend themselves to exact
mathematical calculation. The unallocated amount represents estimated inherent
credit losses which may exist, but have not yet been identified, as of the
balance sheet date. In estimating the unallocated amount, we consider such
matters as changes in the local or national economy, the depth or experience
in
the lending staff, any concentrations of credit in any particular industry
group, and new banking laws or regulations. After we assess applicable factors,
we evaluate the aggregate unallocated amount based on our management's
experience. We then evaluate the resulting ALL balance by comparing the balance
in the ALL to historical trends and peer information. Our management then
evaluates the result of the procedures performed, including the result of
our
testing, and concludes on the appropriateness of the balance of the ALL in
its
entirety.
The
audit
committee of our board of directors reviews the assessment prior to the filing
of quarterly and annual financial information. In assessing the adequacy
of the
ALL, we also rely on an ongoing independent loan review process. We undertake
this process both to ascertain whether there are loans in the portfolio whose
credit quality has weakened over time and to assist in our overall evaluation
of
the risk characteristics of the entire loan portfolio. Our loan review process
includes the judgment of management, input from our independent loan reviewer,
and reviews that may have been conducted by bank regulatory agencies as part
of
their usual examination process.
See
"Provision and Allowance for Loan Losses" for additional
information.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
The
Company’s net income for the quarter ended September 30, 2005, was $2.6 million,
or $0.28 per diluted share, compared to net income of $1.7 million, or $0.19
per
diluted share, for the September 30, 2004 quarter. Net income for the nine
months ended September 30, 2005, was $6.8 million, or $0.73 per diluted share,
compared to $5.7 million, or $0.63 per diluted share for the nine months
ended
September 30, 2004.
Net
interest income grew 32.3% and 26.2% to $10.1 million and $27.9 million for
the
quarter and nine months ended September 30, 2005, respectively. Net interest
income for the quarter and nine months ended September 30, 2004 was $7.6
million
and $22.1 million, respectively. The improvement in net interest income resulted
from an increase in average loans outstanding as well as an increase in the
yield on loans of 175 basis points and 123 basis points to 8.39% and 7.98%
for
the quarter and nine months ended September 30, 2005, respectively. This
compares to 6.64% and 6.75% for the same periods last year. Average loans
outstanding grew $111.8 million and $117.8 million for the quarter and nine
months ended September 30, 2005. Average interest-bearing deposits also
increased by $121.0 million and $128.2 million, respectively, during the
same
periods. While the increase in average interest-bearing deposits was greater
than the increase in average loans outstanding, the increase in the cost
of
interest-bearing deposits for the quarter and nine months ended September
30,
2005, was 103 basis points and 82 basis points, respectively.
Return
on
average assets for the quarter and nine months ended September 30, 2005,
was
1.18% and 1.05%, respectively, compared to 0.87% and 1.04%, respectively,
for
the same periods in 2004. Return on average equity for the quarter and nine
months ended September 30, 2005, was 14.46% and 12.67%, respectively, compared
to 10.21% and 11.50%, respectively, for
the
same periods in 2004.
During
the nine months ended September 30, 2005, Flag’s total assets increased by $90.8
million to $919.1 million from $828.3 million at December 31, 2004. Gross
loans
outstanding and total deposits have increased $96.3 million and $78.0 million,
respectively, from December 31, 2004. Gross loans outstanding and total deposits
in the metro Atlanta region grew $76.6 million and $99.3 million, respectively,
during the same time period.
Nonperforming
assets declined during the quarter ended September 30, 2005. Nonperforming
assets were 0.49% of total assets at September 30, 2005, compared to 0.64%
and
0.74% at December 31, 2004 and September 30, 2004, respectively. Net recoveries
to average loans were 0.13% and 0.05% for the quarters ended September 30,
2005
and 2004, respectively. Net recoveries for the nine months ended September
2005
were 0.03% compared to net charge-offs of 0.06% for the nine months ended
September 30, 2004. The allowance for loan losses at September 30, 2005,
was
1.36% of gross loans outstanding compared to 1.42% at December 31, 2004 and
1.41% at September 30, 2004. The ratio of the allowance for loan losses to
nonperforming loans was 2.75, 2.00 and 1.82 times at September 30, 2005,
December 31, 2004 and September 30, 2004, respectively.
Mergers
and Acquisitions
On
May
26, 2005, Flag and First Capital Bancshares, Inc. (“First Capital”) entered into
a definitive agreement for Flag to acquire First Capital. First Capital,
a bank
holding company, is headquartered in Norcross, Georgia and is the parent
company
of First Capital Bank, which operates five banking offices in the north metro
Atlanta market. The acquisition of First Capital will significantly accelerate
Flag’s growth strategy, more than doubling its presence in the metro Atlanta
market. As of September 30, 2005, First Capital has approximately $675 million
in assets. The consideration will be a combination of cash and stock with
the
transaction valued at approximately $123.0 million. Intangible assets of
$86.3
million will result from the merger. The agreement has been approved by the
board of directors and the shareholders of each company and is subject to
regulatory approvals. The merger is expected to close in the fourth quarter
of
2005.
To
finance the First Capital merger, Flag anticipates it
will
issue an additional $15.0 million in trust preferred securities and
plans
to raise additional capital of up to $8.3 million through the exercise of
the
outstanding warrants to purchase up to 1.25 million shares of common stock.
Flag
issued the warrants during 2002, 2003 and 2004 in connection with a series
of
private placements of Flag common stock. The warrants were issued and sold
at a
price of $1.00 per warrant and have an original term of 10 years. In
consideration for the selling shareholders’ agreement to forfeit the remaining
term of the warrants and exercise them in connection with the merger, Flag
has
agreed to adjust the exercise prices of the warrants. Related parties hold
840,000 of the outstanding warrants with an original weighted exercise price
of
$9.10 per share and an adjusted weighted average exercise price of $6.51
per
share.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Summary
Financial Data
The
following table presents summary financial data for the previous five quarters
(in thousands, except per share data).
|
|
2005
|
|
2004
|
|
(unaudited)
|
|
Third
Quarter
|
|
Second
Quarter
|
|
First
Quarter
|
|
Fourth
Quarter
|
|
Third
Quarter
|
|
INCOME
SUMMARY
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
15,933
|
|
$
|
14,064
|
|
$
|
12,787
|
|
$
|
12,063
|
|
$
|
10,813
|
|
Interest
expense
|
|
|
5,817
|
|
|
4,817
|
|
|
4,208
|
|
|
3,639
|
|
|
3,165
|
|
Net
interest income
|
|
|
10,116
|
|
|
9,247
|
|
|
8,579
|
|
|
8,424
|
|
|
7,648
|
|
Provision
for loan losses
|
|
|
375
|
|
|
-
|
|
|
375
|
|
|
375
|
|
|
375
|
|
Noninterest
income
|
|
|
3,034
|
|
|
2,592
|
|
|
2,602
|
|
|
1,931
|
|
|
2,254
|
|
Noninterest
expense
|
|
|
8,855
|
|
|
8,422
|
|
|
8,117
|
|
|
7,490
|
|
|
7,297
|
|
Earnings
before taxes
|
|
|
3,920
|
|
|
3,417
|
|
|
2,689
|
|
|
2,490
|
|
|
2,230
|
|
Income
taxes
|
|
|
1,283
|
|
|
1,111
|
|
|
862
|
|
|
798
|
|
|
571
|
|
Net
earnings
|
|
$
|
2,637
|
|
$
|
2,306
|
|
$
|
1,827
|
|
$
|
1,692
|
|
$
|
1,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PERFORMANCE
RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
$
|
0.27
|
|
$
|
0.21
|
|
$
|
0.20
|
|
$
|
0.20
|
|
Diluted
|
|
|
0.28
|
|
|
0.25
|
|
|
0.20
|
|
|
0.19
|
|
|
0.19
|
|
Cash
dividends declared
|
|
|
0.06
|
|
|
0.06
|
|
|
0.06
|
|
|
0.06
|
|
|
0.06
|
|
Book
value per share
|
|
|
8.74
|
|
|
8.47
|
|
|
8.24
|
|
|
8.14
|
|
|
7.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average equity
|
|
|
14.46
|
%
|
|
12.96
|
%
|
|
10.49
|
%
|
|
10.25
|
%
|
|
10.21
|
%
|
Return
on average assets
|
|
|
1.18
|
%
|
|
1.09
|
%
|
|
0.88
|
%
|
|
0.86
|
%
|
|
0.87
|
%
|
Net
interest margin
|
|
|
4.83
|
%
|
|
4.74
|
%
|
|
4.63
|
%
|
|
4.62
|
%
|
|
4.33
|
%
|
Yield
on interest-earning assets
|
|
|
7.59
|
%
|
|
7.19
|
%
|
|
6.84
|
%
|
|
6.59
|
%
|
|
6.11
|
%
|
Cost
of interest-bearing liabilities
|
|
|
3.05
|
%
|
|
2.71
|
%
|
|
2.44
|
%
|
|
2.16
|
%
|
|
1.94
|
%
|
Efficiency
ratio
|
|
|
67.76
|
%
|
|
70.99
|
%
|
|
71.83
|
%
|
|
72.66
|
%
|
|
74.00
|
%
|
Net
overhead ratio
|
|
|
2.60
|
%
|
|
2.76
|
%
|
|
2.66
|
%
|
|
2.83
|
%
|
|
2.64
|
%
|
Dividend
payout ratio
|
|
|
19.45
|
%
|
|
22.16
|
%
|
|
27.97
|
%
|
|
30.14
|
%
|
|
29.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET
QUALITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
9,511
|
|
$
|
8,915
|
|
$
|
8,862
|
|
$
|
8,602
|
|
$
|
8,328
|
|
Nonperforming
assets
|
|
|
4,507
|
|
|
4,925
|
|
|
6,740
|
|
|
5,310
|
|
|
5,907
|
|
Allowance
for loan losses to loans
|
|
|
1.36
|
%
|
|
1.38
|
%
|
|
1.44
|
%
|
|
1.42
|
%
|
|
1.41
|
%
|
Nonperforming
assets to total assets
|
|
|
0.49
|
%
|
|
0.57
|
%
|
|
0.80
|
%
|
|
0.64
|
%
|
|
0.74
|
%
|
Net
(recoveries) charge-offs to average loans
|
|
|
(0.13
|
)%
|
|
(0.03
|
)%
|
|
0.08
|
%
|
|
0.07
|
%
|
|
(0.05
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE
BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans outstanding
|
|
$
|
672,860
|
|
$
|
619,511
|
|
$
|
603,412
|
|
$
|
590,355
|
|
$
|
566,691
|
|
Mortgage
loans held-for-sale
|
|
|
11,846
|
|
|
7,153
|
|
|
6,780
|
|
|
6,156
|
|
|
6,240
|
|
Interest-earning
assets
|
|
|
838,482
|
|
|
789,448
|
|
|
772,409
|
|
|
733,709
|
|
|
710,765
|
|
Total
assets
|
|
|
895,843
|
|
|
845,847
|
|
|
830,013
|
|
|
786,976
|
|
|
762,679
|
|
Deposits
|
|
|
765,055
|
|
|
725,350
|
|
|
707,934
|
|
|
670,725
|
|
|
629,221
|
|
Stockholders’
equity
|
|
|
72,921
|
|
|
71,183
|
|
|
69,657
|
|
|
66,016
|
|
|
65,003
|
|
Common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,546
|
|
|
8,537
|
|
|
8,515
|
|
|
8,337
|
|
|
8,263
|
|
Diluted
|
|
|
9,275
|
|
|
9,231
|
|
|
9,268
|
|
|
8,993
|
|
|
8,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT
PERIOD END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans outstanding
|
|
$
|
700,999
|
|
$
|
647,862
|
|
$
|
615,115
|
|
$
|
604,703
|
|
$
|
590,374
|
|
Mortgage
loans held-for-sale
|
|
|
10,401
|
|
|
9,106
|
|
|
7,271
|
|
|
10,688
|
|
|
6,666
|
|
Interest-earning
assets
|
|
|
858,134
|
|
|
805,442
|
|
|
780,756
|
|
|
772,387
|
|
|
741,162
|
|
Total
assets
|
|
|
919,125
|
|
|
862,509
|
|
|
840,415
|
|
|
828,337
|
|
|
793,038
|
|
Deposits
|
|
|
784,806
|
|
|
740,803
|
|
|
713,360
|
|
|
706,847
|
|
|
663,317
|
|
Stockholders’
equity
|
|
|
74,652
|
|
|
72,389
|
|
|
70,297
|
|
|
69,202
|
|
|
65,038
|
|
Common
shares outstanding
|
|
|
8,546
|
|
|
8,546
|
|
|
8,528
|
|
|
8,503
|
|
|
8,260
|
|
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
of Financial Condition
Total
assets were $919.1 million at September 30, 2005, an increase of $90.8 million
or 11.0% from $828.3 million at December 31, 2004. Interest-earning assets
(consisting of loans, investment securities, other interest-bearing deposits
in
banks and short-term investments) totaled $858.1 million or 93.4% of total
assets at September 30, 2005, compared to $772.4 million or 93.2% of total
assets at December 31, 2004. During the same period, stockholders’ equity
increased $5.5 million or 7.9% to $74.7 million at September 30, 2005, compared
to $69.2 million at December 31, 2004.
Loans
Gross
loans outstanding (excluding mortgage loans held-for-sale) at September 30,
2005, totaled $701.0 million, an increase of $96.3 million or 15.9% from
$604.7
million at December 31, 2004. The increase is primarily attributable to the
Company’s continued growth in the metro Atlanta area. Loans in the metro Atlanta
region grew to $456.0 million at September 30, 2005, compared to $379.4 million
at December 31, 2004. As of September 30, 2005, loans in metro Atlanta
represented 65.0% of gross loans outstanding. Mortgage loans held-for-sale
totaled $10.4 million compared to $10.7 million at December 31, 2004. Flag
concentrates its lending activities in several areas that management believes
provides adequate diversification with acceptable yield and risk levels.
These
areas include, but are not limited to construction, commercial real estate,
agricultural and correspondent lending (lending services to other community
banks). For more information see Note 6 to the Notes to Consolidated Financial
Statements and Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Provision and Allowance for Loan Losses.
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 United States Treasury
or
other state and federal governmental agencies. Investment securities at
September 30, 2005, totaled $112.2 million, a decrease of $12.3 million or
9.9%
from $124.6 million at December 31, 2004. Investment securities comprised
13.1%
and 16.1% of interest-earning assets at September 30, 2005 and December 31,
2004, respectively.
Federal
Funds Sold and Other Interest-bearing Deposits in Banks
Short-term
investments (federal funds sold and other interest-bearing deposits in banks)
totaled $30.5 million at September 30, 2005, a decrease of $3.6 million or
13.2%
from $27.0 million at December 31, 2004. Short-term investments amounted
to 3.6%
of interest-earning assets at September 30, 2005 and 3.5% of interest-earning
assets at December 31, 2004.
Premises
and Equipment
Premises
and equipment at September 30, 2005, totaled $13.5 million compared to $14.5
million at December 31, 2004. In the first quarter of 2005, Flag sold one
of its
banking centers with a net book value of $828,000 and recognized a pre-tax
gain
of $36,000. Flag maintains a branch location in the center under a lease
agreement with the buyer.
Deposits
and Other Funding
Total
deposits at September 30, 2005, were $784.8 million, an increase of $78.0
million or 11.0% from $706.8 million at December 31, 2004. Core deposits
offer
the Bank a lower cost source of funds. Core deposits (noninterest-bearing
demand
deposits, interest-bearing demand deposits, and savings) were $426.0 million
at
September 30, 2005, compared to $417.7 million at December 31, 2004. Core
deposits comprise 54.3% of the total deposit base at September 30, 2005 versus
59.1% at December 31, 2004. Total time deposits amounted to $358.8 million
at
September 30, 2005, compared to $289.2 million at December 31, 2004. Customer
deposits represented 93.9% of total funding at September 30, 2005 and December
31, 2004. Total deposits in the Company’s metro Atlanta region increased $99.3
million or 27.3% to $463.0 million at September 30, 2005, compared to $363.7
million at December 31, 2004. Core deposits in the same region increased
$46.6
million to $237.9 million at September 30, 2005, from $191.3 million at December
31, 2004. During the current quarter, Flag repaid the outstanding balance
on a
line of credit and has no outstanding other borrowings at September 30, 2005,
compared to $4.3 million from December 30, 2004.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Advances
from the Federal Home Loan Bank
Advances
from the Federal Home Loan Bank (“FHLB”) remained unchanged at $25.0 million at
September 30, 2005 and December 31, 2004. Borrowings from the FHLB decreased
during the past 12 months as a result of Flag’s successful implementation of its
deposit sales program.
Junior
Subordinated Debentures
Junior
subordinated debentures increased $10.3 million to $24.7 million at September
30, 2005, compared to $14.4 million at December 31, 2004. On
July
18, 2005, the Company closed a private offering of 10,000 floating rate
Preferred Securities offered and sold by Flag Financial Corporation Statutory
Trust II (“Trust II”) having a liquidation amount of $1,000 each. The proceeds
from such issuances, together with the proceeds of the related issuance of
common securities of Trust II purchased by the Company in the amount of
$310,000, were invested in floating rate Junior Subordinated Debentures of
the
Company totaling $10.3 million. Flag
intends to use the capital for the merger with First Capital and for other
general corporate purposes. For more information see Note 8 to the Notes
to
Consolidated Financial Statements and Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Capital.
Liquidity
Management and Funding Sources
Liquidity
management involves Flag’s ability to maintain adequate short-term assets to
meet the cash flow expectations of depositors and other lending institutions
and
to provide funds for the growth in interest-earning assets on a timely and
cost
effective basis. Liquidity is managed daily by understanding the cash flow
expectations of depositors and other lending institutions and maintaining
enough
liquid assets to meet these expectations.
Liquid
assets (assets that can be easily converted to cash) at September 30, 2005,
totaled $113.0 million and included cash and due from banks, federal funds
sold
and other interest-bearing deposits, unpledged investment securities
available-for-sale and mortgage loans held-for-sale.
Deposits
provide a significant portion of the Company’s cash flow needs and continue to
provide a relatively stable, low cost source of funds. As of
September 30,
2005,
Flag had $405.3 million of deposits due on demand, $20.7 million in savings
deposits and $277.9
million of time deposits and other borrowings due within one year. Other
funding
sources readily available to the Company are purchased funds, including
wholesale funding sources. Wholesale funding sources include advances from
the
Federal Home Loan Bank, federal funds purchased and securities sold under
agreements to repurchase. Flag maintains available lines of credit with other
financial institutions.
These include federal funds and other lines of credit totaling $72 million
and a
line of credit with the FHLB totaling $49 million. Flag also maintains a
line of
credit with the Federal Reserve Bank of Atlanta totaling $136 million. At
September 30, 2005, $25.0 million of the available $257 million in total
lines
was advanced to Flag.
Cash
flows from operations are also a source of liquidity. Net cash from operations
results primarily from net income adjusted for certain items such as
depreciation and amortization, provision for loan losses, gains on the sale
of
investments in real estate and timing differences from the sale of loans
held
for sale versus originations of loans held for sale.
Off-Balance
Sheet Arrangements
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. These financial
instruments consist of commitments to extend credit and standby letters of
credit. Commitments to extend credit are agreements to lend to a customer
as
long as there is no violation of any condition established in the contract.
Standby
letters of credit are written conditional commitments issued by the Bank
to
guarantee the performance of a customer to a third party. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. A commitment involves, to varying degrees, elements
of
credit and interest rate risk in excess of the amount recognized in the balance
sheets. Flag’s exposure to credit loss in the event of non-performance by the
other party to the instrument is represented by the contractual notional
amount
of the instrument.
Since
certain commitments are expected to expire without being drawn upon, the
total
commitment amounts do not necessarily represent future cash requirements.
Flag
uses the same credit policies in making commitments to extend credit as they
do
for on-balance sheet instruments. Collateral held for commitments to extend
credit varies but may include accounts receivable, inventory, property, plant,
equipment, and income-producing commercial properties.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following table summarizes Flag’s off-balance sheet financial instruments whose
contract amounts represent credit risk as of September 30, 2005 and December
31,
2004 (in thousands):
|
|
2005
|
|
2004
|
|
Commitments
to extend credit
|
|
$
|
239,535
|
|
$
|
142,036
|
|
Standby
letters of credit
|
|
$
|
10,165
|
|
$
|
3,650
|
|
Market
Risk Sensitivity
Market
rate sensitivity is the tendency for changes in the interest rate environment
to
be reflected in Flag’s net interest income and results of operations. Flag,
through its asset and liability management program, seeks to balance maturities
and rates on interest-earning assets and the corresponding funding such that
interest rate fluctuations have a minimal impact on earnings and the value
of
Flag’s equity.
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). Flag’s primary source of
funding has been demand deposits (interest-bearing and noninterest-bearing)
instead of time deposits and wholesale borrowings with longer maturities.
This
method of funding interest-earning assets has issues concerning interest
rate
risk, liquidity and profitability, all of which were contemplated and measured
by the Company. Flag concluded that this strategy is the most profitable
method
of funding growth in interest-earning assets of the Company for the foreseeable
future and has committed significant sales, marketing and training resources
at
being successful in this effort. Where interest rate risk is concerned, Flag
considered factors such as account size, relationship strength and historical
rate levels needed to remain competitive. Generally speaking, it is the opinion
of management that these deposits are less sensitive to rate movements than
the
interest-earning assets they are funding. Flag uses an interest rate simulation
model that uses management assumptions and theories regarding rate movements
and
the impact each movement will have on individual components of the balance
sheet. As of September 30, 2005, Flag’s simulation model shows that Flag’s
balance sheet is asset-sensitive, meaning a rising rate environment would
have a
positive impact on Flag’s net interest income. The Company uses three standard
scenarios — rates unchanged, rising rates, and declining rates — in analyzing
interest rate sensitivity. At September 30, 2005, Flag’s simulation model
indicated that a 100 basis points increase or decrease over the next twelve
months would increase net interest income approximately 5.23%, and decrease
net
interest income approximately 7.71% in the rising and declining rate scenarios,
respectively, versus the projection under unchanged rates. Management
expects that the Federal Reserve will continue to raise interest rates in
2005.
Management
carefully measures and monitors market 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 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.
Flag’s
management from time to time uses certain derivative instruments in an effort
to
add stability to the Company’s net interest income and manage exposure to
changing interest rates. All derivatives are classified as either fair value
hedges (those designed to hedge the fair market value of asset or liabilities
affected by changing interest rates) or cash flow hedges (those designed
to
mitigate exposure to variability in expected future cash flows due to changing
interest rates).
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
At
September 30, 2005, the Company had interest rate swaps and interest rate
floors
designated as cash flow hedges. No fair value hedges were outstanding. The
following table summarizes the outstanding derivative instruments (dollars
in
thousands):
Interest
Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
Transaction
Date
|
|
Term
Date
|
|
Notional
|
|
Receive
Rate
|
|
Pay
Rate
|
|
Current
Spread
|
|
Fair
Value
|
|
Receive
Fixed, Pay LIBOR Swap
|
|
|
June
2004
|
|
|
Dec
2005
|
|
$
|
5,000
|
|
|
2.68
|
%
|
|
3.8375
|
%
|
|
(1.1575
|
)%
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive
Fixed, Pay LIBOR Swap
|
|
|
June
2004
|
|
|
June
2006
|
|
|
15,000
|
|
|
3.00
|
%
|
|
3.8375
|
%
|
|
(0.8375
|
)%
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive
Fixed, Pay LIBOR Swap
|
|
|
June
2004
|
|
|
Dec
2006
|
|
|
5,000
|
|
|
3.27
|
%
|
|
3.8375
|
%
|
|
(0.5675
|
)%
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Received Fixed Swaps
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
2.99
|
%
|
|
3.8375
|
%
|
|
(0.8475
|
)%
|
$
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Floors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
|
|
Transaction
Date
|
|
|
Term
Date
|
|
|
Notional
|
|
|
Strike
Rate
|
|
|
Current
Rate
|
|
|
Current
Spread
|
|
|
Fair
Value
|
|
Prime
Based Floor
|
|
|
May
2005
|
|
|
May
2008
|
|
$
|
50,000
|
|
|
5.50
|
%
|
|
6.75
|
%
|
|
(1.25
|
)%
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
Based Floor
|
|
|
May
2005
|
|
|
May
2010
|
|
|
50,000
|
|
|
5.50
|
%
|
|
6.75
|
%
|
|
(1.25
|
)%
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Rate Floors
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
5.50
|
%
|
|
6.75
|
%
|
|
(1.25
|
)%
|
$
|
86
|
|
As
of
September 30, 2005, the change in net unrealized losses of $160,000, pretax,
for
derivatives designated as cash flow hedges is separately disclosed in
comprehensive income. No hedging ineffectiveness on cash flow hedges was
recognized during the nine months ended September 30, 2005.
Capital
At
September 30, 2005, the capital ratios of Flag and the Bank were adequate
compared to the minimum regulatory capital requirements. Minimum regulatory
capital levels for banks and holding companies require Tier 1 capital (core
capital accounts less intangible assets) to risk-weighted assets of at least
4%,
total capital (Tier 1 capital plus a portion of the allowance for loan losses)
to risk-weighted assets of 8%, and Tier 1 capital to average assets of at
least
4%.
On
April
15, 2004, the Company closed a private offering of 14,000 floating rate Capital
Securities offered and sold by Flag Financial Corporation Statutory Trust
(the
“Trust”) having a liquidation amount of $1,000 each. The proceeds from such
issuances, together with the proceeds of the related issuance of common
securities of the Trust purchased by the Company in the amount of $433,000,
were
invested in floating rate Junior Subordinated Debentures (the “2004 Debentures”)
of the Company totaling $14.4 million. The
2004
Debentures are due April 15, 2034 and may be redeemed after five years, and
sooner in certain specific events, including in the event that the certain
circumstances render them ineligible for treatment as Tier 1 capital, subject
to
prior approval by the Federal Reserve Board, if then required. Such debentures
presently qualify as Tier 1 capital for regulatory reporting. The
sole
assets of the Trust are the 2004 Debentures. The 2004 Debentures are unsecured
and rank junior to all senior debt of the Company and on par with the debentures
issued in connection with the Company’s other trust preferred
securities.
The
Company owns all of the common securities of the Trust. For the quarter ended
September 30, 2005, the floating rate securities had a 6.32% interest rate,
which will reset quarterly at the three-month LIBOR rate plus
2.75%.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
On
July
18, 2005, the Company closed a private offering of 10,000 floating rate
Preferred Securities offered and sold by Flag Financial Corporation Statutory
Trust II (“Trust II”) having a liquidation amount of $1,000 each. The proceeds
from such issuances, together with the proceeds of the related issuance of
common securities of Trust II purchased by the Company in the amount of
$310,000, were invested in floating rate Junior Subordinated Debentures (the
“July 2005 Debentures”) of the Company totaling $10.3 million. The
July
2005 Debentures are due September 30, 2035 and may be redeemed after five
years,
and sooner in certain specific events, including in the event that certain
circumstances render them ineligible for treatment as Tier 1 capital, subject
to
prior approval by the Federal Reserve Board, if then required. Such debentures
presently qualify as Tier 1 capital for regulatory reporting. The
sole
assets of Trust II are the July 2005 Debentures. The July 2005 Debentures
are
unsecured and rank junior to all senior debt of the Company and on par with
the
debentures issued in connection with the Company’s other trust preferred
securities.
The
Company owns all of the common securities of Trust II. For the quarter ended
September 30, 2005, the floating rate securities had a 6.17% interest rate,
which will reset quarterly at the three-month LIBOR rate plus 1.50%. Flag
intends to use the capital for the merger with First Capital and for other
general operating purposes. Flag anticipates it will issue additional trust
preferred securities prior to the close of the First Capital transaction.
For
more information see Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Mergers and Acquisitions.
In
March
2004, Flag’s Board of Directors authorized a stock repurchase program covering
an amount equal to 10% of the outstanding shares of Flag’s common stock. As of
September 30, 2005, the Company has repurchased approximately 304,000 shares
of
the approximately 853,000 shares authorized to be purchased, at an average
price
of $12.91. See Item 2. “Unregistered Sales of Equity Securities and Use of
Proceeds” for additional information about Flag’s share
repurchases.
The
following table reflects Flag’s capital position with respect to the regulatory
minimums as of September 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
Amount
|
|
%
|
|
Required
Amount
|
|
%
|
|
Excess
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk Weighted Assets)
|
|
$
|
86,819
|
|
|
11.96%
|
|
$
|
58,089
|
|
|
8.00%
|
|
$
|
28,730
|
|
|
3.96%
|
|
Tier
1 Capital (to Risk Weighted Assets)
|
|
$
|
77,726
|
|
|
10.70%
|
|
$
|
29,044
|
|
|
4.00%
|
|
$
|
48,682
|
|
|
6.70%
|
|
Tier
1 Capital (to Average Assets)
|
|
$
|
77,726
|
|
|
8.88%
|
|
$
|
34,994
|
|
|
4.00%
|
|
$
|
42,732
|
|
|
4.88%
|
|
Provision
and Allowance for Loan Losses
Flag’s
overall credit quality improved in the quarter ended September 30, 2005.
Net
recoveries to average loans were 0.13% and 0.05% for the quarters ended
September 30, 2005 and 2004, respectively. Net recoveries for the nine months
ended September 2005 were 0.03% compared to net charge-offs of 0.06% for
the
nine months ended September 30, 2004. Loan loss provision for each of the
quarters ended September 30, 2005 and 2004 totaled $375,000. For the nine
months
ended September 30, 2005, loan loss provision totaled $750,000 compared to
$1.5
million in the same period in 2004. Flag’s
provision for the nine months ended September 30, 2004 included a $345,000
charge for specific credits taken in the first quarter of 2004.
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 for loan losses totaled $9.5 million at September 30, 2005, compared
to $8.6 million and $8.3 million at December 31, 2004 and September 30, 2004,
respectively. The allowance for loan losses to gross loans outstanding decreased
slightly to 1.36% at September 30, 2005, compared to 1.42% at December 31,
2004
and 1.41% at September 30, 2004. The ratio of the allowance for loan losses
to
nonperforming loans improved to 2.75 times at September 30, 2005, from 2.00
times and 1.82 times at December 31, 2004 and September 30, 2004, respectively.
Management considered the level of charge-offs and nonperforming loans, as
well
as the mix of nonperforming loans, in determining the level of allowance
for
loan losses.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
An
allocation of the allowance for loan losses has been made according to the
respective amounts deemed necessary to provide for the probability of incurred
losses within the various loan categories. Although other relevant factors
are
considered, management believes that the level of loan loss allowance at
September 30, 2005, was adequate based primarily on previous charge-off
experience, adjusted for risk characteristics associated with changes in
the
composition and growth in the loan portfolio, the specific circumstances
of the
concentrations in the nonaccrual loans and loans past due 90 days and still
accruing, including the market value of collateral and economic conditions
that
may affect the borrowers’ ability to repay and such other factors which, in
management’s judgment, deserve recognition under existing economic conditions.
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. For
more
information see Note 6 to the Notes to Consolidated Financial Statements
and
Management’s Discussion and Analysis of Financial Condition and Results of
Operation - Nonperforming Assets.
The
following table presents an analysis of the allowance for loan losses for
the
three and nine month periods ended (in thousands):
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Balance
of allowance for loan losses at beginning of period
|
|
$
|
8,915
|
|
$
|
7,489
|
|
$
|
8,602
|
|
$
|
6,685
|
|
Allowance
for loan losses added for acquisition
|
|
|
-
|
|
|
400
|
|
|
-
|
|
|
400
|
|
Provision
charged to operating expense
|
|
|
375
|
|
|
375
|
|
|
750
|
|
|
1,470
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
(78
|
)
|
|
(266
|
)
|
|
(90
|
)
|
Real
estate - mortgage
|
|
|
(39
|
)
|
|
(9
|
)
|
|
(46
|
)
|
|
(402
|
)
|
Consumer
installment loans
|
|
|
(24
|
)
|
|
(8
|
)
|
|
(55
|
)
|
|
(155
|
)
|
Lease
financing
|
|
|
(1
|
)
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
Total
charge-offs
|
|
|
(64
|
)
|
|
(95
|
)
|
|
(368
|
)
|
|
(647
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
38
|
|
|
65
|
|
|
163
|
|
|
202
|
|
Real
estate - mortgage
|
|
|
238
|
|
|
68
|
|
|
328
|
|
|
136
|
|
Consumer
installment loans
|
|
|
9
|
|
|
26
|
|
|
36
|
|
|
82
|
|
Total
recoveries
|
|
|
285
|
|
|
159
|
|
|
527
|
|
|
420
|
|
Net
recoveries (charge-offs)
|
|
|
221
|
|
|
64
|
|
|
159
|
|
|
(227
|
)
|
Balance
of allowance for loan losses at end of period
|
|
$
|
9,511
|
|
$
|
8,328
|
|
$
|
9,511
|
|
$
|
8,328
|
|
See
“Critical Accounting Policies” for an explanation of our methodology for
determining the appropriate level for the allowance and its effect on our
results of operations.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Nonperforming
Assets
Nonperforming
assets (nonaccrual loans, loans past due 90 days and still accruing, other
real
estate owned and repossessions) totaled $4.5 million at September 30, 2005,
compared to $5.3 million at December 2004 and $5.9 million at September 30,
2004. Nonperforming assets to total assets were 0.49% at September 30, 2005,
compared to 0.64% and 0.74% at December 31, 2004 and September 30, 2004,
respectively. Nonaccrual loans decreased $813,000 to $3.4 million at September
30, 2005, from $4.2 million at December 31, 2004. Loans past due 90 days
and
still accruing and other real estate owned and repossessions totaled $1.1
million at September 30, 2005 and December 31, 2004.
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 nonperforming assets and to return current
nonperforming assets to earning status.
Flag’s
credit quality has improved significantly over the past few years. This is
due
to several factors including a stricter credit culture that focuses more
heavily
on the quality of the borrower’s financial condition and collateral values. In
addition, Flag’s expansion into lending in metro Atlanta presents more credit
opportunities than in the Company’s past, allowing the Company to be more
selective in the credit approval process without hindering or slowing the
growth
in loans outstanding.
The
following table summarizes the nonperforming assets for the periods presented
(in thousands):
|
|
September
30,
2005
|
|
December
31,
2004
|
|
September
30,
2004
|
|
|
|
|
|
|
|
|
|
Loans
on nonaccrual
|
|
$
|
3,411
|
|
$
|
4,224
|
|
$
|
4,557
|
|
Loans
past due 90 days and still accruing
|
|
|
49
|
|
|
74
|
|
|
15
|
|
Other
real estate owned and repossessions
|
|
|
1,047
|
|
|
1,012
|
|
|
1,335
|
|
Total
nonperforming assets
|
|
$
|
4,507
|
|
$
|
5,310
|
|
$
|
5,907
|
|
Total
nonperforming assets as a percentage of total assets
|
|
|
0.49
|
%
|
|
0.64
|
%
|
|
0.74
|
%
|
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Results
of Operations for the Three Month Periods Ended September 30, 2005 and
2004
Net
income - Net
income for the quarter ended September 30, 2005, was $2.6 million or $0.28
per
diluted share, compared to $1.7 million or $0.19 per diluted share for the
same
quarter in 2004. Return on average assets was 1.18% and 0.87% for the quarter
ended September 30, 2005 and 2004, respectively, while return on average
equity
was 14.46% and 10.21% for the same quarters.
Net
interest income
- Net
interest income for the quarter ended September 30, 2005, was $10.1million,
an
increase of $2.5 million or 32.3% from $7.6 million for the third quarter
of
2004. Flag’s net interest margin (net interest income on a taxable-equivalent
basis divided by average interest-earning assets) increased 50 basis points
to
4.83% from 4.33% on average interest-earning assets of $838.5 million and
$710.8
million for the quarters ended September 30, 2005 and September 30, 2004,
respectively. In 2004, in anticipation of rising interest rates, Flag began
to
reposition its balance sheet to a more asset-sensitive position. A balance
sheet
is considered asset sensitive when its assets (loans and securities) reprice
faster or to a greater extent than liabilities (deposits and borrowings).
An
asset-sensitive balance sheet will produce more net interest income when
interest rates rise and less net interest income when interest rates
decline. The
Federal Reserve has increased the discount rate eight times since September
30,
2004, increasing the rate from 1.75% to 3.75%. For more information on Flag’s
asset and liability management program see Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Market Risk
Sensitivity.
Interest
income - Interest
income for the quarter ended September 30, 2005, was $15.9 million, an increase
of $5.1 million or 47.4% compared to $10.8 million in the same quarter in
2004.
The increase is primarily due to a higher level of average loans coupled
with an
increase in the yield on loans.
Interest
income and fees on loans increased $4.8 million or 50.1% to $14.3 million
for
the quarter ended September 30, 2005, compared to $9.5 million in the same
quarter last year. Average loans outstanding, including mortgage loans
held-for-sale, during the quarter ended September 30, 2005, were $684.7 million
compared to $572.9 million for the same quarter in 2004. The yield on loans
in
the quarter ended September 30, 2005, was 8.39%, an increase of 175 basis
points
from 6.64% in the same quarter last year. The increase in yield is primarily
attributable to re-pricing of the adjustable rate loan portfolio as a result
of
the rising rate environment.
Interest
income on investment securities increased
$162,000 or 13.8% to $1.3 million for the quarter ended September 30, 2005,
from
$1.2 million in the same quarter in 2004. The average balance of investment
securities increased to $116.2 million in the quarter ended September 30,
2005,
from $110.1 million in the third quarter of 2004. The yield on investment
securities increased 32 basis points to 4.76% in the quarter ended September
30,
2005, from 4.44% in the same quarter in 2004.
Interest
on federal funds sold and other interest-bearing deposits in banks increased
$194,000 or 160.3% in the quarter ended September 30, 2005, to $315,000 from
$121,000 in the third quarter of 2004. Interest on federal funds sold and
other
interest-bearing deposits in banks increased primarily as a result of an
increase in the average balance of federal funds sold and an increase in
the
yields. The yield on federal funds sold and other interest-bearing deposits
increased to 3.32% from 1.73% during the quarter ended September 30, 2005,
compared to 2004. The increase in yield reflects the impact of the rise in
the
discount rate over the past 12 months.
Interest
expense - Interest
expense for the quarter ended September 30, 2005, was $5.8 million, an increase
of $2.7 million or 83.8% from $3.2 million in the same quarter in 2004. The
increase is due to higher levels of average interest-bearing liabilities
coupled
with a rising interest rate environment. In the quarter ended September 30,
2005, average interest-bearing liabilities increased $107.8 million or 16.6%
to
$757.6 million from $649.8 million in the third quarter of 2004. Flag’s total
cost of interest-bearing liabilities increased 111 basis points to 3.05%
from
1.94% over the same period last year.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Interest
expense on deposits increased $2.4 million or 86.1% to $5.2 million in the
quarter ended September 30, 2005, from $2.8 million in the third quarter
of
2004. The increase is due to both an increase in the average balance and
cost of
interest-bearing deposits. Average interest-bearing demand deposits in the
quarter ended September 30, 2005, were $367.3 million, an increase of $22.6
million or 6.5%, from $344.8 million in the third quarter of 2004. Average
time
deposits in the quarter ended September 30, 2005, were $341.1 million, an
increase of $98.4 million or 40.5% from $242.7 million in the third quarter
of
2004. The weighted average interest rate for interest-bearing demand deposits
was 2.56% and 1.59% in the quarters ended September 30, 2005 and 2004,
respectively. The weighted average interest rate for time deposits was 3.32%
and
2.35% in the quarters ended September 30, 2005 and 2004, respectively. The
increase in the weighted average interest rate is primarily attributable
to
increased pricing of Flag’s deposit products as a result of the rising rate
environment.
Interest
expense on FHLB advances and other borrowings for the quarter ended September
30, 2005, was $237,000, an increase of $75,000 or 46.3%, from $162,000 for
the
same quarter of 2004. Average FHLB advances and other borrowings in the quarter
ended September 30, 2005, were $26.4 million, a decrease of $14.1 million
or
34.8%, from $40.5 million in the same quarter of 2004. The increase in the
weighted average rate to 3.56% in the quarter ended September 30, 2005, from
1.59% in the same period last year, offset the decrease in average other
borrowings.
Interest
expense on junior subordinated debt was $338,000 for the quarter ended September
30, 2005, an increase of $167,000 or 97.7% from $171,000 for the same quarter
of
2004. The weighted average balance increased $6.9 million or 48.1% to $21.4
million for the quarter ended September 30, 2005, from $14.4 million in the
same
quarter last year. The weighted average interest rate was 6.27% for the quarter
ended September 30, 2005, compared to 4.71% for the same period of
2004.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following tables reflect the average balances, the interest income or expense
and the average yield and cost of the Company’s interest-earning assets and
interest-bearing liabilities during the three month periods presented (dollars
in thousands):
Consolidated
Average Balance Sheets
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Weighted
Average
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
|
|
$
|
684,706
|
|
$
|
14,326
|
|
|
8.39
|
%
|
$
|
572,931
|
|
$
|
9,559
|
|
|
6.64
|
%
|
Taxable
investment securities
|
|
|
108,547
|
|
|
1,252
|
|
|
4.58
|
%
|
|
102,537
|
|
|
1,094
|
|
|
4.24
|
%
|
Tax-exempt
investment securities
|
|
|
7,630
|
|
|
141
|
|
|
7.33
|
%
|
|
7,527
|
|
|
134
|
|
|
7.11
|
%
|
Other
interest-bearing deposits in banks
|
|
|
18,322
|
|
|
153
|
|
|
3.31
|
%
|
|
17,360
|
|
|
87
|
|
|
1.99
|
%
|
Federal
funds sold
|
|
|
19,277
|
|
|
162
|
|
|
3.33
|
%
|
|
10,410
|
|
|
34
|
|
|
1.30
|
%
|
Total
interest-earning assets
|
|
|
838,482
|
|
$
|
16,034
|
|
|
7.59
|
%
|
|
710,765
|
|
$
|
10,908
|
|
|
6.11
|
%
|
Noninterest-earning
assets
|
|
|
57,361
|
|
|
|
|
|
|
|
|
51,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
895,843
|
|
|
|
|
|
|
|
$
|
762,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
346,211
|
|
$
|
2,339
|
|
|
2.68
|
%
|
$
|
322,561
|
|
$
|
1,343
|
|
|
1.66
|
%
|
Savings
deposits
|
|
|
21,120
|
|
|
35
|
|
|
0.66
|
%
|
|
22,189
|
|
|
32
|
|
|
0.57
|
%
|
Time
deposits
|
|
|
341,115
|
|
|
2,857
|
|
|
3.32
|
%
|
|
242,723
|
|
|
1,436
|
|
|
2.35
|
%
|
Total
interest-bearing deposits
|
|
|
708,446
|
|
|
5,231
|
|
|
2.93
|
%
|
|
587,473
|
|
|
2,811
|
|
|
1.90
|
%
|
FHLB
advances and other borrowings
|
|
|
26,391
|
|
|
237
|
|
|
3.56
|
%
|
|
40,452
|
|
|
162
|
|
|
1.59
|
%
|
Federal
funds purchased and repurchase agreements
|
|
|
1,392
|
|
|
11
|
|
|
3.14
|
%
|
|
7,415
|
|
|
21
|
|
|
1.13
|
%
|
Junior
subordinated debentures
|
|
|
21,381
|
|
|
338
|
|
|
6.27
|
%
|
|
14,433
|
|
|
171
|
|
|
4.71
|
%
|
Total
interest-bearing liabilities
|
|
|
757,610
|
|
$
|
5,817
|
|
|
3.05
|
%
|
|
649,773
|
|
$
|
3,165
|
|
|
1.94
|
%
|
Noninterest-bearing
demand deposits
|
|
|
56,609
|
|
|
|
|
|
|
|
|
41,748
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
|
|
8,703
|
|
|
|
|
|
|
|
|
6,155
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
72,921
|
|
|
|
|
|
|
|
|
65,003
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
895,843
|
|
|
|
|
|
|
|
$
|
762,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest rate spread
|
|
|
|
|
$
|
10,217
|
|
|
4.54
|
%
|
|
|
|
$
|
7,743
|
|
|
4.17
|
%
|
Taxable-equivalent
adjustment
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
Net
interest income, actual
|
|
|
|
|
$
|
10,116
|
|
|
|
|
|
|
|
$
|
7,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest-earning assets/net interest margin
|
|
$
|
80,872
|
|
|
|
|
|
4.83
|
%
|
$
|
60,992
|
|
|
|
|
|
4.33
|
%
|
Interest-earning
assets as a percentage of interest-bearing liabilities
|
|
|
|
|
|
|
|
|
110.67
|
%
|
|
|
|
|
|
|
|
109.39
|
%
|
(1)
|
Nonaccrual
loans are included in average balances and income on such loans,
if
recognized, is recognized on a cash
basis.
|
Noninterest
income
-
Noninterest income for the quarter ended September 30, 2005, increased $780,000
or 34.6% to $3.0 million compared to $2.3 million in the third quarter of
2004.
Traditionally service charges on deposit accounts and revenues from mortgage
banking activities have been the largest components of noninterest income.
Service charges on deposit accounts decreased to $855,000 for the quarter
ended
September 30, 2005, a decrease of $91,000 or 9.6%, from $946,000 in the third
quarter of 2004. While Flag maintained strong growth in deposits during the
past
year, much of the growth came from higher-balance money market and
interest-bearing checking balances where customers carry balances sufficient
to
qualify for reduced or eliminated fees. Mortgage banking activities includes
origination fees, service release premiums and the gain on the sales of mortgage
loans held-for-sale. Mortgage banking activities totaled $890,000 for the
quarter ended September 30, 2005, an increase of $146,000 or 19.6%, compared
to
$744,000 in the third quarter of 2004.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Payroll
Solutions generated fee income of $542,000 in the quarter ended September
30,
2005. Flag acquired Payroll Solutions, a leading provider of payroll services,
in the fourth quarter of 2004..
Gains
on
sales of other real estate owned increased $258,000 to $336,000 in the quarter
ended September 30, 2005, from $78,000 in the third quarter of 2004. In the
quarter ended September 30, 2005, Flag recognized a $317,000 gain on the
sale of
29.5 acres of land.
Other
income increased $28,000 or 8.8% to $345,000 in the quarter ended September
30,
2005, compared to $317,000 in the same quarter last year.
Noninterest
expense - Noninterest
expense for the quarter ended September 30, 2005, totaled $8.9 million, an
increase of $1.6 million or 21.4%, compared to $7.3 million in the same quarter
of 2004.
Salaries
and employee benefits totaled $5.5 million, an increase of $1.1 million or
23.6%, from $4.5 million in the third quarter of 2004. The increase
in salaries and benefits relates primarily to increases in production personnel
in the metro Atlanta region and the addition of Payroll Solutions personnel
totaling $266,000. In the quarter ended September 30, 2005, salaries and
employee benefits increased $843,000 million in metro Atlanta, excluding
Payroll
Solutions, and decreased $50,000 in the Company’s Central and West
regions.
Occupancy
expense for the quarters ended September 30, 2005 and 2004, totaled $977,000
and
974,000, respectively.
Professional
fees were $429,000 in the quarter ended September 30, 2005, an increase of
$194,000 or 82.6%, compared to $235,000 in the same quarter of 2004. This
increase is in part due to additional expenses related to continued compliance
with the Sarbanes-Oxley Act.
Other
noninterest expense totaled $1.1 million for the quarter ended September
30,
2005, an increase of $306,000 or 37.9%, compared to $808,000 in the same
quarter
of 2004. Marketing expense totaled $250,000, an increase of $68,000 or 37.4%,
from $182,000 in the third quarter of 2004. The increase in marketing expense
is
primarily attributable to advertising costs associated with building Flag’s
metro Atlanta franchise. Similarly, travel and entertainment increased to
$135,000 in the quarter ended September 30, 2005, an increase of $43,000
or
46.7% from $92,000 in the quarter ended September 30, 2004. Other outside
service fees totaled $155,000 in the quarter ended September 30, 2005, an
increase of $49,000 or 46.2% from $106,000 in the third quarter of
2004.
Income
taxes -
Income
tax expense for the quarter ended September 30, 2005, totaled $1.3 million
compared to $571,000 million for the same quarter of 2004. Flag’s effective tax
rate increased to 32.7% in the quarter ended September 30, 2005, compared
to
25.6% in the same quarter of 2004. Flag’s lower effective tax rate in the
quarter ended September 30, 2004 relates to certain state income tax credits
taken during the third quarter of 2004.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Results
of Operations for the Nine Month Periods Ended September 30, 2005 and
2004
Net
income
- Net
income for the nine months ended September 30, 2005, was $6.8 million or
$0.73
per diluted share compared to net income of $5.7 million or $0.63 per diluted
share for the same period in 2004. Return on average assets was 1.05% and
1.04%
for the nine months ended September 30, 2005 and 2004, respectively, while
return on average equity was 12.67% and 11.50% for the same periods. Included
in
the 2004 earnings is an after-tax gain on the sale of its Thomaston, Georgia
branch of approximately $1.47 million. In addition to the one-time gain,
Flag
had other charges to earnings of 2004, including credit related charges of
approximately $376,000 after-tax and a charge relating to its benefit plans
of
approximately $234,000 after-tax. Excluding the effects of the one-time gain
and
other charges, earnings for the first nine months of 2004 were approximately
$4.8 million.
Net
interest income
- Net
interest income for the nine months ended September 30, 2005, was $27.9 million,
an increase of $5.8 million or 26.2% from $22.1 million for the first nine
months of 2004. Flag’s net interest margin (net interest income on a
taxable-equivalent basis divided by average interest-earning assets) increased
27 basis points to 4.71% from 4.44% on average interest-earning assets of
$800.4
million and $675.6 million for the nine months ended September 30, 2005 and
2004, respectively. In 2004, in anticipation of rising interest rates, Flag
began to reposition its balance sheet to a more asset-sensitive position.
A
balance sheet is considered asset sensitive when its assets (loans and
securities) reprice faster or to a greater extent than liabilities (deposits
and
borrowings). An asset-sensitive balance sheet will produce more net interest
income when interest rates rise and less net interest income when interest
rates
decline. The
Federal Reserve has increased the discount rate eight times since September
30,
2004, increasing the rate from 1.75% to 3.75%. For more information on Flag’s
asset and liability management program see Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Market Risk
Sensitivity.
Interest
income - Interest
income for the nine months ended September 30, 2005, was $42.8 million, an
increase of $12.2 million or 40.0% compared to $30.6 million in the same
period
in 2004. The increase is primarily due to a higher level of average loans
coupled with an increase in the yield on loans.
Interest
income and fees on loans increased $11.8 million or 44.9% to $38.1 million
for
the nine months ended September 30, 2005, compared to $26.3 million in the
same
period last year. Average loans outstanding, including mortgage loans
held-for-sale, during the nine months ended September 30, 2005, were $640.8
million compared to $523.0 million for the first nine months of 2004. The
yield
on loans in the nine months ended September 30, 2005, was 7.98% an increase
of
123 basis points from 6.75% in the same period last year. The increase in
yield
is primarily attributable to re-pricing of the adjustable rate loan portfolio
as
a result of the rising rate environment.
Interest
income on investment securities decreased $206,000 or 5.3% to $3.7 million
for
the nine months ended September 30, 2005, from $3.9 million for the same
period
in 2004. The decrease is the result of a decline in the average balance of
investment securities. The average balance of investment securities decreased
to
$116.6 million in the nine months ended September 30, 2005, from $123.5 million
in the first nine months of 2004. The yield on investment securities in the
nine
months ended September 30, 2005, was 4.44% compared to 4.43% in the same
period
in 2004.
Interest
on federal funds sold and other interest-bearing deposits in banks increased
$625,000 or 195.3% in the nine months ended September 30, 2005, to $945,000
from
$320,000 in the first nine months of 2004. Interest on federal funds sold
and
other interest-bearing deposits increased primarily as a result of a higher
average balance of federal funds sold and an increase in the yields. The
yield
on federal funds sold and other interest-bearing deposits in banks increased
to
2.94% from 1.47% during the nine months ended September 30, 2005, compared
to
2004. The increase in yield reflects the impact of the rise in the discount
rate
over the past 12 months.
Interest
expense - Interest
expense for the nine months ended September 30, 2005, was $14.8 million,
an
increase of $6.4 million or 76.3% from $8.4 million in the same period in
2004.
The increase is due to higher levels of average interest-bearing liabilities
coupled with a rising interest rate environment. In the nine months ended
September 30, 2005, average interest-bearing liabilities increased $110.2
million or 18.0% to $723.6 million from $613.4 million in the first nine
months
of 2004. Flag’s total cost of interest-bearing liabilities increased 91 basis
points to 2.74% from 1.83% over the same period last year.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Interest
expense on deposits increased $5.9 million or 78.3% to $13.4 million in the
nine
months ended September 30, 2005, from $7.5 million in the same period in
2004.
The increase is due to both an increase in the average balance and cost of
interest-bearing deposits. Average interest-bearing demand deposits in the
nine
months ended September 30, 2005, were $359.5 million, an increase of $33.7
million or 10.3%, from $325.8 million in the first nine months of 2004. Average
time deposits in the nine months ended September 30, 2005, were $318.3 million,
an increase of $94.5 million or 42.2% from $223.8 million in the first nine
months of 2004. The weighted average interest rate for interest-bearing demand
deposits was 2.25% and 1.51% in the nine months ended September 30, 2005
and
2004, respectively. The weighted average interest rate for time deposits
was
3.10% and 2.30% during the nine months ended September 30, 2005 and 2004,
respectively. The increase in the weighted average interest rate is primarily
attributable to increased pricing of Flag’s deposit products as a result of the
rising rate environment.
Interest
expense on FHLB advances and other borrowings for the nine months ended
September 30, 2005, was $639,000, an increase of $91,000 or 16.6%, from $548,000
for the same period of 2004. Average FHLB advances and other borrowings in
the
nine months ended September 30, 2005, were $26.8 million, a decrease of $22.8
million or 46.0%, from $49.6 million in the same period of 2004. An increase
in
the weighted average rate, offset the decrease in average other borrowings,
increasing to 3.19% compared to 1.47% in the first nine months of 2005 and
2004,
respectively.
Interest
expense on junior subordinated debt was $743,000 for the nine months ended
September 30, 2005, an increase of $454,000 from $289,000 for the same period
of
2004. The weighted average balance increased $8.1 million or 92.8% to $16.8
million for the nine months ended September 30, 2005, from $8.7 million in
the
same period last year. The weighted average interest rate was 5.92% for the
nine
months ended September 30, 2005, compared to 4.44% for the same period of
2004.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
The
following tables reflect the average balances, the interest income or expense
and the average yield and cost of the Company’s interest-earning assets and
interest-bearing liabilities during the nine month periods presented (dollars
in
thousands):
Consolidated
Average Balance Sheets
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
2005
|
|
|
|
|
|
2004
|
|
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Weighted
Average
Rate
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Weighted
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1)
|
|
$
|
640,793
|
|
$
|
38,247
|
|
|
7.98
|
%
|
$
|
523,032
|
|
$
|
26,443
|
|
|
6.75
|
%
|
Taxable
investment securities
|
|
|
109,530
|
|
|
3,473
|
|
|
4.24
|
%
|
|
115,434
|
|
|
3,652
|
|
|
4.23
|
%
|
Tax-exempt
investment securities
|
|
|
7,092
|
|
|
399
|
|
|
7.51
|
%
|
|
8,029
|
|
|
442
|
|
|
7.36
|
%
|
Other
interest-bearing deposits in banks
|
|
|
18,718
|
|
|
426
|
|
|
3.04
|
%
|
|
15,748
|
|
|
216
|
|
|
1.83
|
%
|
Federal
funds sold
|
|
|
24,221
|
|
|
519
|
|
|
2.86
|
%
|
|
13,331
|
|
|
104
|
|
|
1.04
|
%
|
Total
interest-earning assets
|
|
|
800,354
|
|
$
|
43,064
|
|
|
7.19
|
%
|
|
675,574
|
|
$
|
30,857
|
|
|
6.10
|
%
|
Noninterest-earning
assets
|
|
|
57,122
|
|
|
|
|
|
|
|
|
52,770
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
857,476
|
|
|
|
|
|
|
|
$
|
728,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
337,999
|
|
$
|
5,963
|
|
|
2.36
|
%
|
$
|
302,789
|
|
$
|
3,576
|
|
|
1.58
|
%
|
Savings
deposits
|
|
|
21,548
|
|
|
98
|
|
|
0.61
|
%
|
|
23,043
|
|
|
99
|
|
|
0.57
|
%
|
Time
deposits
|
|
|
318,300
|
|
|
7,369
|
|
|
3.10
|
%
|
|
223,782
|
|
|
3,857
|
|
|
2.30
|
%
|
Total
interest-bearing deposits
|
|
|
677,847
|
|
|
13,430
|
|
|
2.65
|
%
|
|
549,614
|
|
|
7,532
|
|
|
1.83
|
%
|
FHLB
advances and other borrowings
|
|
|
26,807
|
|
|
639
|
|
|
3.19
|
%
|
|
49,632
|
|
|
548
|
|
|
1.47
|
%
|
Federal
funds purchased and repurchase agreements
|
|
|
2,212
|
|
|
30
|
|
|
1.81
|
%
|
|
5,481
|
|
|
50
|
|
|
1.22
|
%
|
Junior
subordinated debentures
|
|
|
16,774
|
|
|
743
|
|
|
5.92
|
%
|
|
8,702
|
|
|
289
|
|
|
4.44
|
%
|
Total
interest-bearing liabilities
|
|
|
723,640
|
|
$
|
14,842
|
|
|
2.74
|
%
|
|
613,429
|
|
$
|
8,419
|
|
|
1.83
|
%
|
Noninterest-bearing
demand deposits
|
|
|
55,142
|
|
|
|
|
|
|
|
|
43,619
|
|
|
|
|
|
|
|
Noninterest-bearing
liabilities
|
|
|
7,428
|
|
|
|
|
|
|
|
|
5,497
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
71,266
|
|
|
|
|
|
|
|
|
65,799
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
857,476
|
|
|
|
|
|
|
|
$
|
728,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest rate spread
|
|
|
|
|
$
|
28,222
|
|
|
4.45
|
%
|
|
|
|
$
|
22,438
|
|
|
4.27
|
%
|
Taxable-equivalent
adjustment
|
|
|
|
|
|
280
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
Net
interest income, actual
|
|
|
|
|
$
|
27,942
|
|
|
|
|
|
|
|
$
|
22,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest-earning assets/net interest margin
|
|
$
|
76,714
|
|
|
|
|
|
4.71
|
%
|
$
|
62,145
|
|
|
|
|
|
4.44
|
%
|
Interest-earning
assets as a percentage of interest-bearing liabilities
|
|
|
|
|
|
|
|
|
110.60
|
%
|
|
|
|
|
|
|
|
110.13
|
%
|
(1)
|
Nonaccrual
loans are included in average balances and income on such loans,
if
recognized, is recognized on a cash
basis.
|
Noninterest
income
-
Noninterest income for the nine months ended September 30, 2005, decreased
$1.3
million or 13.7% to $8.2 million from $9.5 million in the first nine months
of
2004. In the first nine months of 2004, noninterest income includes a $3.0
million pre-tax gain on the sale of Flag’s Thomaston, Georgia
branch.
Traditionally
service charges on deposit accounts and revenues from mortgage banking
activities have been the largest components of noninterest income. Service
charges on deposit accounts decreased to $2.4 million for the nine months
ended
September 30, 2005, a decrease of $368,000 or 13.2%, from $2.8 million in
the
first nine months of 2004. While Flag maintained strong growth in deposits
during the past year, much of the growth came from higher-balance money market
and interest-bearing checking balances where customers carry balances sufficient
to qualify for reduced or eliminated fees. Mortgage banking activities includes
origination fees, service release premiums and the gains on sales of mortgage
loans held-for-sale. Mortgage banking activities totaled $2.2 million, an
increase of $288,000 or 15.4%, compared to $1.9 million in the first nine
months
of 2004.
Flag
Financial Corporation and Subsidiary
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Payroll
Solutions generated $1.6 million in fee income in the nine months ended
September 30, 2005. Flag acquired Payroll Solutions, a leading provider of
payroll services, in the fourth quarter of 2004.
In
the
nine months ended September 30, 2005, gains on sales of securities were
$129,000, a decrease of $571,000, compared to $700,000 in the same period
last
year. Gains on sales of other real estate owned increased $445,000 to $558,000
in the nine months ended September 30, 2005, from $113,000 in the first nine
months of 2004. In the quarter ended September 30, 2005, Flag recognized
a
$317,000 gain on the sale of 29.5 acres of land.
Other
income increased $515,000 or 82.9% to $1.1 million in the nine months ended
September 30, 2005, compared to $621,000 in the same period last year. Other
miscellaneous income on loans, which are included in other income, increased
$230,000 or 100.9% to $458,000 in the nine months ended September 30, 2005,
compared to $228,000 in the first nine months of 2004. The rise in other
miscellaneous income on loans is primarily due to increased loan activity
generated by Flag’s correspondent and structured lending groups.
Noninterest
expense - Noninterest
expense for the nine months ended September 30, 2005, totaled $25.4 million,
an
increase of $3.4 million or 15.3%, compared to $22.0 million in the same
period
of 2004.
Salaries
and employee benefits totaled $15.8 million in the nine months ended September
30, 2005, an increase of $2.4 million or 18.1%, from $13.3 million in the
first
nine months of 2004. The increase in salaries and benefits relates primarily
to
increases in production personnel in metro Atlanta and the addition of Payroll
Solutions personnel totaling $789,000. In the nine months ended September
30,
2005, salaries and employee benefits increased $1.9 million in metro Atlanta,
excluding Payroll Solutions, and decreased $276,000 in the Company’s Central and
West regions. In the first nine months of 2004, salaries and employee benefits
included a $376,000 charge related to deferred compensation plans.
Occupancy
expense for the nine months ended September 30, 2005, totaled $2.9 million,
an
increase of $168,000 or 6.1% from $2.7 million in the first nine months of
2004.
Professional
fees were $1.5 million in the nine months ended September 30, 2005, an increase
of $645,000 or 79.0%, compared to $817,000 in the same period of 2004. This
increase is in part due to additional expenses related to continued compliance
with the Sarbanes-Oxley Act.
Other
noninterest expense totaled $2.9 million for the nine months ended September
30,
2005, a decrease of $132,000 or 4.8%, compared to $2.7 million in the same
period of 2004. Included in other noninterest expense in 2004, were real
estate
write-downs totaling $262,000, compared to $61,000 in the nine months ended
September 30, 2005, a decrease of $201,000 or 229.5%. Marketing expense totaled
$563,000, an increase of $200,000 or 55.1%, from $363,000 in the first nine
months of 2004. The increase in marketing expense is primarily attributable
to
advertising costs associated with building Flag’s metro Atlanta
franchise.
Income
taxes -
Income
tax expense for the nine months ended September 30, 2005, totaled $3.3 million
compared to $2.5 million for the same period of 2004. Flag’s effective tax rate
increased to 32.5% in the nine months ended September 30, 2005, compared
to
30.7% in the same period of 2004. Flag’s higher effective tax rate relates to
certain state income tax credits taken in the nine months ended September
30,
2004.
Flag
Financial Corporation and Subsidiary
As
of
September 30, 2005, there were no substantial changes in the composition
of
Flag’s market-sensitive assets and liabilities or their related market values
from those reported as of December 31, 2004. The foregoing disclosures related
to the market risk of Flag should be read in conjunction with Flag’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, 2004, included in Flag’s 2004 Annual Report on Form
10-K.
As
of the
end of the period covered by this report, Flag carried out an evaluation,
under
the supervision and with the participation of Flag’s management, including
Flag’s Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of Flag’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, Flag’s Chief
Executive Officer and Chief Financial Officer concluded that Flag’s disclosure
controls and procedures are effective in timely alerting them to material
information relating to Flag (including its consolidated subsidiary) that
is
required to be included in Flag’s periodic filings with the Securities and
Exchange Commission. There have been no significant changes in Flag’s internal
controls or, to Flag’s knowledge, in other factors that could significantly
affect those internal controls subsequent to the date Flag carried out its
evaluation, and there have been no corrective actions with respect to
significant deficiencies or material weaknesses.
PART
II.
|
Other
Information
|
Flag
Financial Corporation and Subsidiary
The
following table sets forth information regarding the Company’s purchases of its
common stock on a monthly basis during the quarter ended September 30, 2005
(in
thousands):
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price
Paid
Per Share
|
|
Total
Number of
Shares
Purchased as
Part
Of Publicly
Announced
Plans
Or
Programs (1)
|
|
Maximum
Number
Of Shares
that
May Yet Be
Purchased
Under the
Plans
or Programs
|
|
|
|
|
|
|
|
|
|
|
|
July
1 through
July
31, 2005
|
|
|
-
|
|
|
-
|
|
|
1,551
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
1 through
August
31, 2005
|
|
|
-
|
|
|
-
|
|
|
1,551
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1 through
September
30,2005
|
|
|
-
|
|
|
-
|
|
|
1,551
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
1,551
|
|
|
549
|
|
(1)
On March
19, 2004, Flag Financial Corporation announced a stock repurchase plan. The
Company’s Board of Directors authorized the repurchase of up to 10% of the
Company’s outstanding shares of common stock. No expiration date was specified,
and no shares were repurchased under or outside of the plan during the quarter
ended September 30, 2005. As of September 30, 2005, the Company has repurchased
304,000 shares at an aggregate cost of $3.9 million.
|
Section
302 Certification by Chief Executive Officer
|
|
Section
302 Certification by Chief Financial Officer
|
|
Section
906 Certification by Chief Executive Officer and Chief Financial
Officer
|
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
|
|
|
|
|
|
/s/
Joseph W Evans
|
|
Joseph
W. Evans
|
|
Chief
Executive Officer
|
|
|
|
November
08, 2005
|
|
/s/
J. Daniel Speight
|
|
J.
Daniel Speight
|
|
Chief
Financial Officer
|
|
|
|
November
08, 2005
|