<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
-------------------
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission File No. 000-21383
APPALACHIAN BANCSHARES, INC.
(Name of Small Business Issuer in Its Charter)
Georgia 58-2242407
(State of Incorporation) (I.R.S. Employer Identification Number)
315 Industrial Boulevard
Ellijay, Georgia 30540
(Address of Principal Executive Offices) (Zip Code)
(706) 276-8000
(Issuer's Telephone Number, Including Area Code)
-------------------
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on Which Registered
- ------------------- ------------------------------------
None N/A
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $5.00 par value per share
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $6,564,243.
There is no established trading market for the registrant's capital stock.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 14, 1997 was $6,823,744, based on a per share price of
$16.00, which is the price of the last trade of which management is aware as of
such date. Although directors and executive officers of the registrant were
assumed to be "affiliates" of the registrant for purposes of this calculation,
the classification is not to be interpreted as an admission of such status.
At March 14, 1997, there were 568,000 shares of the registrant's Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Report.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
APPALACHIAN BANCSHARES, INC.
1997 Form 10-KSB Annual Report
TABLE OF CONTENTS AND CROSS-REFERENCE SHEET
Item Number Page or
in Form 10-KSB Description Location
- -------------- ----------- --------
<C> <S> <C>
Item 1. Business........................................................................... 1
Item 2. Properties......................................................................... 19
Item 3. Legal Proceedings.................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders................................ 20
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters......... 20
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 21
Item 7. Financial Statements............................................................... F-1 to F-25
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... 29
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act....................................................................... Proxy Statement
pages 3 to 4
Item 10. Executive Compensation............................................................. Proxy Statement
pages 11 to 12
Item 11. Security Ownership of Certain Beneficial Owners
and Management..................................................................... Proxy Statement
page 2
Item 12. Certain Relationships and Related Transactions..................................... Proxy Statement
page 5
Item 13. Exhibits and Reports on Form 8-K................................................... 30
</TABLE>
i
<PAGE>
PART I
ITEM 1. BUSINESS
HISTORY AND BUSINESS OF THE COMPANY
Appalachian Bancshares, Inc. (the "Company" or "Registrant") was
incorporated as a business corporation in May 1996 under the laws of the State
of Georgia for the purpose of acquiring 100% of the issued and outstanding
shares of common stock of Gilmer County Bank (the "Bank"). In July 1996, the
Company received approval from the Federal Reserve Bank of Atlanta (the "Federal
Reserve") and the Georgia Department of Banking and Finance ("DBF") to become a
bank holding company. In August 1996, the Company and the Bank entered into a
reorganization (the "Reorganization") pursuant to which the Company acquired
100% of the outstanding shares of the Bank, and the shareholders of the Bank
became the shareholders of the capital stock of the Company.
At December 31, 1996 the assets of the Company consisted solely of
its ownership of the capital stock of the Bank. Unless otherwise indicated, the
information presented herein relating to the Company refers to the Company and
the Bank on a consolidated basis.
The Company's executive office is located at 315 Industrial
Boulevard, Ellijay, Georgia, and its telephone number at such location is (706)
276-8000.
BUSINESS OF THE BANK
The Bank was organized in 1994 under the laws of the State of Georgia
to conduct a commercial banking business in Gilmer County, Georgia, with its
deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank
was formed to meet the banking needs of individuals, small- to medium-sized
businesses, and farmers, especially those engaged in apple and poultry
production.
The Bank performs banking services customary for full service banks
of similar size and character. Such services include the receipt of demand and
time deposit accounts, the extension of personal and commercial loans and the
furnishing of personal and commercial checking accounts. The Bank draws most of
its customer deposits and conducts most of its lending transactions from and
within a primary service area encompassing Gilmer County, southwestern Fannin
County, northern Pickens County, western Dawson County and southeastern Murray
County, Georgia.
The principal business of the Bank is to attract and accept deposits
from the public and to make loans and other investments. The principal sources
of funds for the Bank's loans and investments are (1) demand, time, savings, and
other deposits (including negotiable order of withdrawal ("NOW") accounts), (2)
amortization and prepayment of loans granted, (3) sales to other lenders or
institutions of loans or participation in loans, (4) fees paid by other lenders
or institutions for servicing loans sold by the Bank to such lenders or
institutions and (5) borrowings. The principal sources of income for the Bank
are interest and fees collected on loans, including fees received for servicing
loans sold to other lenders or institutions and, to a lesser extent, interest
and dividends collected on other investments. The principal expenses of the Bank
are (1) interest paid on savings and other deposits (including NOW accounts),
(2) interest paid on borrowings by the Bank, (3) employee compensation, (4)
office expenses and (5) other overhead expenses.
The Bank was organized by a group of individuals from Gilmer County
and the surrounding area and commenced business from its main office location at
315 Industrial Boulevard, Ellijay, Georgia on March 3, 1995. The Bank operated
in development stage prior to that time.
The Bank has a correspondent relationship with several banks,
including Georgia Bankers' Bank, South Trust Bank and Compass Bank.
<PAGE>
EMPLOYEES
Except for the officers of the Company, who are also officers of the
Bank, the Company does not have any employees. At December 31, 1996, the Bank
had a total of 31 employees, 27 of which were full-time employees. Neither the
Company nor the Bank are party to any collective bargaining agreements with
employees, and management believes that employee relations are generally good.
LENDING ACTIVITIES
General. The Bank is authorized to make both secured and unsecured
commercial and consumer loans to individuals, partnerships, corporations and
other entities. The Bank's lending business consists principally of making
consumer loans to individuals and commercial loans to small- and medium-sized
businesses and professional concerns. In addition, the Bank makes secured real
estate loans, including residential and commercial construction loans, and
primary and secondary mortgage loans for the acquisition or improvement of
personal residences. Loans to the poultry industry, which have been decreasing
as a percentage of the Bank's loan portfolio, constituted 17% of the Bank's
total loans at December 31, 1996.
The Bank has engaged in secondary-market mortgage activities,
obtaining commitments, through intermediaries, from secondary mortgage
purchasers to purchase mortgage loans originated by the Bank. Based on these
commitments, the Bank originates mortgage loans on terms corresponding to such
commitments and generates fee income to supplement its interest income. No
mortgage loans are held by the Bank for resale nor are any loans held for
mortgage servicing.
Real Estate Loans. Loans secured by real estate are the primary
component of the Bank's loan portfolio, constituting approximately $40 million,
or 61.7%, of the Bank's total loans at December 31, 1996. These loans consist of
commercial real estate loans, construction and development loans and residential
real estate loans but exclude home equity loans, which are classified as
consumer loans.
Commercial Loans. The Bank makes loans for commercial purposes in
various lines of businesses. At December 31, 1996, the Bank held approximately
$13.9 million, or 21.4% of the Bank's total loans, in commercial loans,
excluding for these purposes commercial loans secured by real estate which are
included in the real estate category above.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. At December 31, 1996, the Bank held approximately $8.6
million in consumer loans, representing 13.3% of total loans.
Loan Approval and Review. The Bank's loan approval policies provide
for various levels of officer lending authority. When the aggregate outstanding
loans to a single borrower exceeds that individual officer's lending authority,
the loan request must be considered and approved by an officer with a higher
lending limit or the officers' loan committee. Individual officers' lending
limits range from $15,000 to $100,000, depending on seniority and type of loan.
The officers' loan committee, which consists of the president, executive vice
president and senior lending officer, has a lending limit of $150,000 for
secured loans. Loans between $150,000 and $300,000 must be approved by a
directors' loan committee, which is made up of the president, the senior lending
officer and three outside directors. Loans above $300,000 require approval by
the majority of the full Board of Directors.
The Bank has a continuous loan review procedure involving multiple
officers of the Bank which is designed to promote early identification of credit
quality problems. All loan officers are charged with the responsibility of
rating their loans and reviewing those loans on a periodic basis, the frequency
of which increases as the quality of the loan decreases. The Bank's senior
lending officer is charged with the responsibility of ensuring that all loans or
lines of credit in excess of $100,000 are reviewed annually, with random sample
checks of loans less than $100,000. All loans or lines of credit of $250,000 and
over are reviewed by a consulting firm, which the Bank has engaged to conduct
periodic reviews of the Bank's loan portfolio.
2
<PAGE>
DEPOSITS
The Bank offers a variety of deposit programs to individuals and to
small- to medium-sized businesses and other organizations at interest rates
generally consistent with local market conditions. The Bank is authorized to
accept and pay interest on deposits from individuals, corporations, partnerships
and any other type of legal entity, including fiduciaries (such as private
trusts). Qualified deposits are insured by the FDIC in an amount up to $100,000.
The following table sets forth the mix of depository accounts at the
Bank as a percentage of total deposits at December 31, 1996.
<TABLE>
<CAPTION>
Deposit Mix
December 31, 1996
<S> <C>
Non-interest bearing demand........................................................ 4.3%
Interest-bearing demand............................................................ 24.3%
Savings............................................................................ 17.8%
Time Deposits...................................................................... 38.8%
Certificates of Deposit of $100,000 or more........................................ 14.8%
Total.......................................................................... 100.0%
</TABLE>
The Bank is a member of the Cirrus ATM network of automated teller
machines, which permits Bank customers to perform certain transactions in
numerous cities throughout Georgia and in other states. The Bank's charter
provides that the Bank has trust powers but only upon application to the DBF. To
date, the Bank has not submitted and has no plans to submit such an application.
COMPETITION AND MARKET AREA
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, thrift institutions, credit
unions, and money market mutual funds operating in Ellijay, Gilmer County,
Georgia, and elsewhere. Some banks with which the Bank competes have
significantly greater resources and higher lending limits (by virtue of their
greater capitalization). Credit unions and money market mutual funds with which
the Bank competes may have competitive advantages as a result of being subject
to different, and possibly less stringent, regulatory requirements.
The Bank serves the areas of Gilmer County, southwestern Fannin
County, northern Pickens County, western Dawson County and southeastern Murray
County, Georgia. As of December 31, 1996, three non-locally owned banks had
offices in Gilmer County. The Bank of Ellijay, which is owned by Century South
Banks, Inc., a bank holding company headquartered in Gainsville, Georgia,
operates a main office and two branch offices in Gilmer County. RegionsBank, an
Alabama bank holding company, operates two offices in Gilmer County. The Bank of
North Georgia, headquartered in Canton, Georgia, maintains a branch office in
Gilmer County. In addition, many local businesses and individuals have deposits
outside of Gilmer County.
Recent legislation enacted by the Georgia General Assembly allow
banks in Georgia to establish de novo branch banks in Gilmer County, which
branches, if established, would also compete with the Bank. See "Supervision and
Regulation--Regulation and Legislative Changes."
MONETARY POLICIES
The results of operations of the Company and the Bank are
significantly affected by the credit policies of monetary authorities,
particularly the Board of Governors of the Federal Reserve System. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in discount rates on
member bank borrowings, and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and
3
<PAGE>
fiscal authorities, including the Federal Reserve System, no prediction can be
made as to possible future changes in interest rates, deposit levels, loan
demand, or the business and earnings of the Bank.
SUPERVISION AND REGULATION
The following information is not intended to be an exhaustive
description of the statutes and regulations applicable to the Company and the
Bank. The discussion of the regulatory provisions applicable to the Company and
the Bank is qualified in its entirety by reference to the particular statutory
or regulatory provisions.
THE COMPANY
The Company is a bank holding company within the meaning of the
federal Bank Holding Company Act ("BHC Act") and is registered with and subject
to the regulation of the Federal Reserve under the BHC Act. As a bank holding
company, the Company is required to file with the Federal Reserve annual reports
and such other reports and information as may be required under the BHC Act. The
Federal Reserve may conduct examinations of the Company and the Bank to
determine whether such institutions are in compliance with the regulations
promulgated under the BHC Act.
The BHC Act requires a bank holding company to obtain prior approval
of the Federal Reserve (i) before it may acquire directly or indirectly the
ownership or control of more than 5% of any class of voting stock of any bank
not already controlled by it, (ii) before it or any subsidiary (other than a
bank) may acquire all or substantially all of the assets of a bank, and (iii)
before it may merge or consolidate with any other bank holding company. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") facilitates branching and permits the establishment of
agency relationships across state lines and permits bank holding companies to
acquire banks in any state without regard to whether the transaction is
prohibited under the laws of such state, subject to certain state provisions,
including minimum age requirements of banks that are the target of the
acquisition. The minimum age of local banks subject to interstate acquisition is
limited to a maximum of five years. See "--Regulation and Legislative Changes."
Bank holding companies are also generally prohibited under the BHC
Act from engaging in non-banking activities or acquiring direct or indirect
control of any company engaged in non-banking activities. However, the Federal
Reserve may permit bank holding companies to engage in certain non-banking
activities found by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Such
activities determined by the Federal Reserve to fall under this category
include, but are not limited to, making or servicing loans and certain leases,
providing certain data processing services, acting as a fiduciary or investment
or financial advisor, providing discount brokerage services, underwriting bank
eligible securities, and making investments designed to promote community
welfare.
The Federal Reserve Act imposes certain limitations on extensions of
credit and other transactions by and between banks which are members of the
Federal Reserve System and other affiliates (which includes any holding company
of which such bank is a subsidiary and any other non-bank subsidiary of such
holding company). Banks which are not members of the Federal Reserve System are
also subject to these limitations. Further, federal law prohibits a bank holding
company and its subsidiaries from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property, or the
furnishing of services.
Under Federal Reserve policy, a bank holding company is expected to
act as a source of financial strength to its bank subsidiaries and to commit
resources to support such subsidiaries. This support may be required at times
when, absent such policy, the bank holding company might not otherwise provide
such support. Under these provisions, a bank holding company may be required to
loan money to its subsidiary banks in the form of capital notes or other
instruments which qualify for capital under regulatory rules. Any loans by the
bank holding company to such subsidiary banks are likely to be unsecured and
subordinate to such bank's depositors and possibly to other creditors of such
bank.
The Company is also subject to regulation as a bank holding company
under the Georgia Financial Institutions Code (the "Code"), which requires
registration and filing of periodic information with the Georgia Department of
4
<PAGE>
Banking and Finance ("DBF"). Registration with the DBF includes information
relating to the financial condition, operations, management and inter-company
relationships of the Company and the Bank. The DBF may also require such other
information or make examinations as is necessary to keep itself informed as to
whether the Company is in compliance with the provisions of Georgia law and the
regulations and orders promulgated or issued thereunder.
Under the provisions of the Code, it is unlawful without the prior
approval of the DBF (i) for any bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting shares of the Bank;
(ii) for any bank holding company or a subsidiary thereof (other than a bank) to
acquire all or substantially all of the assets of a bank; or (iii) for any bank
holding company to merge or consolidate with any other bank holding company. It
is also unlawful under the Code for any bank holding company to acquire direct
or indirect ownership or control of more than 5% of the voting shares of any
presently operating bank unless such bank has been in existence and continuously
operating or incorporated as a bank for a period of five years or more prior to
the date of application to the DBF for approval of such acquisition. In
addition, in any such acquisition by an existing bank holding company, the
initial banking subsidiary of such bank holding company must have been
incorporated for not less than two years before the holding company can acquire
another bank.
The Bank
The Bank operates as a banking institution incorporated under the
laws of the State of Georgia and subject to examination by the DBF. The DBF
regulates all areas of the Bank's commercial banking operations, including
reserves, loans, mergers, consolidations, reorganizations, issuance of
securities, payment of dividends, interest rates, establishment of branches, and
other aspects of its operations. The Bank must also comply with the state usury
laws which limit the rates of interest which may be charged on certain types of
loans.
In addition to state banking laws and regulations applicable to the
Bank as a state banking institution, the Bank is also insured and regulated by
the FDIC. The major functions of the FDIC with respect to insured banks include
paying off depositors to the extent provided by law in the event a bank is
closed without adequate provisions having been made to pay the claims of
depositors, acting as the receiver of state banks placed in receivership when
appointed receiver by state authorities, and preventing the continuance or
development of unsound and unsafe banking practices. In addition, the FDIC is
authorized to examine insured banks which are not members of the Federal Reserve
System to determine the condition of such banks for insurance purposes. (The
Bank is not a member of the Federal Reserve System.) The FDIC is also authorized
to approve mergers, consolidations and assumption of deposit liability
transactions between insured banks and non-insured banks or institutions, and to
prevent capital or surplus diminution in such transactions where the resulting,
continued, or assumed bank is an insured non-member state bank. The FDIC closely
examines non-member banks for compliance with certain federal statutes such as
the Community Reinvestment Act and the Truth-in-Lending Act.
Dividends
The principal source of cash flow for the Company is dividends from
the Bank. Various statutory provisions require regulatory approval before the
Bank may pay dividends to the Company. Under Georgia law, the Bank must obtain
approval of the DBF before it may pay cash dividends out of retained earnings if
(1) the total classified assets at the most recent examination of such bank
exceed 80% of the equity capital, (2) the aggregate amount of dividends declared
or anticipated to be declared in the calendar year exceeds 50% of the net
profits, after taxes but before dividends, for the previous calendar year, or
(3) the ratio of equity capital to adjusted assets is less than 6%. As discussed
below, additional capital requirements imposed by the DBF may limit the Bank's
ability to pay dividends to the Company. See "--Capital Adequacy."
The payment of dividends by the Company and the Bank may also be
affected or limited by regulatory requirements and policies, such as the
maintenance of adequate capital. If, in the opinion of the applicable regulatory
authority, a bank under its jurisdiction is engaged in or is about to engage in
an unsafe or unsound practice (which could include the payment of dividends
depending on the institution's financial condition), such authority may require,
after notice and hearing, that such bank cease and desist from such practice.
The FDIC issued a policy statement that provides that insured banks should
generally only pay dividends out of current operating earnings. The Federal
Reserve has issued a policy statement to the same effect for bank holding
companies. In addition, all insured depository institutions are subject to the
capital-based limitations required by FDICIA. See "Capital Adequacy--FDICIA."
5
<PAGE>
Capital Adequacy
The Federal Reserve and the FDIC have implemented substantially
similar risk-based rules for assessing the capital adequacy of banks and bank
holding companies. These regulations establish minimum guidelines for the ratio
of qualifying total capital to risk-weighted assets (including certain
off-balance sheet items, such as standby letters of credit). Banks and bank
holding companies are required to have (1) a minimum level of total capital to
risk-weighted assets of 8%; (2) a minimum Tier 1 capital ratio to risk-weighted
assets of 4%; and (3) a minimum shareholder's equity to risk-weighted assets
ratio of 4%. Tier 1 capital includes common equity, retained earnings, minority
interests in equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill and most other intangibles. Tier 2 capital includes the
excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term preferred stock, and general reserve for loan and lease losses
up to 1.25% of risk-weighted assets.
In addition, the Federal Reserve and the FDIC have established a
minimum 3% leverage ratio of Tier 1 capital to total assets for the most
highly-rated bank holding companies and insured banks, respectively. All other
bank holding companies and insured banks will be required to maintain a leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance
on intangible assets. Furthermore, the guidelines indicate that the regulatory
agencies will continue to consider a tangible Tier 1 leverage ratio and other
indicia of capital strength in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 capital, less all intangibles, to total assets, less all
intangibles. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital Resources."
Failure to meet capital guidelines could subject a bank to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "--FDICIA."
Federal banking agencies recently adopted final regulations mandating
that regulators take into consideration concentrations of interest rate and
credit risk and risks from nontraditional activities, as well as the
institution's ability to manage such risks, when determining the adequacy of an
institution's capital position. Under these rules, regulators must explicitly
include an institution's exposure to declines in the economic value of its
capital due to interest rates in evaluating an institution's capital adequacy.
The final rules do not codify a framework for assessing an institution's
exposure to interest rate risk; rather, such exposure would be considered as one
quantitative factor used in evaluating capital adequacy. Other quantitative
factors would include the institution's historical financial performance and its
earnings exposure to interest rate movements. Examiners will also consider
certain qualitative factors, including the institution's internal interest rate
risk management.
DBF Capital Requirements. Notwithstanding the uniform risk-based
capital guidelines and leverage ratios discussed above, regulatory authorities
have the discretion to set individual minimum capital requirements for the
specific institutions at rates significantly exceeding the above minimum
guidelines and ratios. In addition to the capital standards imposed by federal
banking regulators, the DBF imposed an 8% primary capital ratio as a condition
to the approval of the Bank's charter. This standard, which exceeds the FDIC
capital standards, is calculated as the ratio of total equity to total assets,
each as adjusted for unrealized gains and losses on securities and allowance for
loan losses. This heightened requirement will continue through the first three
years of the Bank's operation, at which time the Bank will be subject to a 6%
primary capital ratio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Resources."
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was enacted on December 19, 1991 in large measure to improve the
supervision and examination of insured depository institutions in an effort to
reduce the number of bank failures and the resulting demands on the deposit
insurance system. Among other matters, the FDICIA requires that all depository
institutions with assets in excess of $150 million, or such larger threshold as
may be established by the FDIC (currently $500 million), prepare and submit to
the FDIC and appropriate federal and state banking regulators annual financial
statements that have been audited by independent public accountants, file
reports prepared by the depository institutions containing a statement by
Management of its
6
<PAGE>
responsibilities and by the depository institutions' independent public
accountant attesting to the accuracy of management's annual assessment of its
financial reporting, internal controls and regulatory compliance, and establish
an audit committee composed of members of the board of directors who are
independent of management. The FDIC has provided by regulation that these
provisions of the FDICIA do not apply to depository institutions with assets
less than $500 million. An enactment of the FDICIA has also resulted in the
promulgation of regulations by regulatory agencies which will tend to restrict
to some degree the real estate lending practices of financial institutions. The
FDICIA otherwise provides for additional supervision and regulation of financial
institutions.
Under the FDICIA, regulators must take prompt corrective action
against depository institutions that do not meet minimum capital requirements.
FDICIA and the regulations thereunder establish five capital categories as shown
in the following table:
<TABLE>
<CAPTION>
Total Risk- Tier 1 Risk- Tier 1
Classification Based Capital Based Capital Leverage
-------------- ------------- ------------- --------
<S> <C> <C> <C>
Well Capitalized (1) 10% 6% 5%
Adequately Capitalized (1) 8% 4% 4%(2)
Undercapitalized (3) Less than-8% Less than-4% Less than-4%
Significantly Undercapitalized Less than-6% Less than-3% Less than-3%
Critically Undercapitalized - - Less than-2%
</TABLE>
----------
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(3) An institution is classified as "undercapitalized" if it is
below the specified capital level for any of the three capital
measures.
A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives a less than satisfactory examination rating in any one of four
categories. As a depository institution moves downward through the
capitalization categories, the degree of regulatory scrutiny will increase and
the permitted activities of the institution will decrease. Action may be taken
by a depository institution's primary federal regulator against an institution
that falls into one of the three "undercapitalized" categories, including the
requirement of filing a capital plan with the institution's primary federal
regulator, prohibition on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory monitoring.
Other restrictions may be imposed on the institution either by its primary
federal regulator or by the FDIC, including requirements to raise additional
capital, to sell assets, or to sell the institution.
The foregoing capital guidelines may have an effect on the Company in
a variety of ways. Rapid growth, poor loan portfolio performance or poor
earnings performance, or a combination of these factors, could change the
Company's capital position in a short period of time, making an additional
capital infusion necessary. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources."
Safety and Soundness
FDICIA imposes certain restrictions on transactions and required
federal banking agencies to prescribe overall safety and soundness standards
relating to internal controls, loan underwriting and documentation and asset
growth. If an insured depository institution or its holding company fails to
meet any of the regulatory standards promulgated by the regulation, then such
institution or company must submit a plan within 30 days to the FDIC describing
the steps it will take to correct the deficiency. If an institution or company
fails to submit a plan or implement the plan within the time period allowed by
the agency, the FDIC must order the institution or company to correct the
deficiency and may take such additional steps as restricting asset growth,
requiring an increase in the institution's ratio of tangible equity to assets,
restricting rates of interest that the institution may pay or take any further
corrective action the agency deems necessary.
7
<PAGE>
Federal Deposit Insurance Premiums and Assessments
The deposits of the Bank are currently insured to a maximum of
$100,000 per depositor, subject to certain aggregation rules. The FDIC
establishes rates for the payment of premiums by federally insured banks and
thrifts for deposit insurance. Separate insurance funds (the Bank Insurance Fund
or "BIF" and the Savings Association Insurance Fund or "SAIF") are maintained
for commercial banks and thrifts, with insurance premiums from the banking
industry used to offset losses from insurance payouts when banks and thrifts
fail. Since 1993, insured depository institutions like the Bank have paid for
deposit insurance under a risk-based premium system. Under this system, until
mid-1995 depository institutions paid to the BIF or the SAIF from $0.23 to $0.31
per $100 of insured deposits depending on their capital levels and risk profile,
as determined by their primary federal regulator on a semi-annual basis. Once
the BIF reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks to $.04 per $100. Subsequently, the FDIC
revised the range of premiums from $.00 to $.31 per $100. In 1996, the Bank paid
the legally required $1,000 minimum semiannual assessment.
Regulatory and Legislative Changes
Georgia Interstate Banking Act. The Bank is also subject to other
state and federal governmental regulations. On March 16, 1994, the Georgia
General Assembly adopted the Georgia Interstate Banking Act (the "Georgia Act").
The Georgia Act revised the existing regional interstate banking law to expand
the scope nationwide. The Georgia Act, as amended by the 1996 Georgia Interstate
Banking Act, permits bank holding companies located in any state outside of
Georgia to acquire Georgia banks, or to acquire bank holding companies owning
Georgia banks. However, the Georgia Act retains the existing prohibition,
subject to certain limitations, on acquiring banks in operation less than five
years. Further, the board of directors of a Georgia bank or bank holding company
may adopt a resolution to exempt its bank or bank holding company from
acquisition under the Georgia Act. Finally, acquisition of the Bank must receive
prior approval from the Federal Reserve and the DBF.
Georgia Intrastate Banking Act. The Georgia General Assembly recently
enacted legislation (the "Georgia Intrastate Banking Act") altering the public
policy of the State regarding intrastate branch banking. Essentially, the
legislation allows a bank to establish de novo branch banks on a limited basis
beginning July 1, 1996. Between July 1, 1996 and June 30, 1998, any Georgia bank
or group of affiliated banks under a single holding company may, subject to
certain restrictions, establish new or additional branch banks in any three
counties in the State of Georgia in which the bank or group of banks are not
currently operating. Beginning July 1, 1998, the number of de novo branch banks
which may be established is no longer limited by statute.
Several federal statutes impact the ways in which the Bank conducts
business include FDICIA, the Riegle Community Development and Regulatory
Improvement Act of 1994 ("RCDRIA"), and the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act").
RCDRIA. RCDRIA was enacted September 23, 1994, to promote economic
revitalization and community development to "investment areas." RCDRIA
establishes a Community Development Financial Institutions Fund to achieve these
objectives. The fund is authorized to provide financial assistance through a
variety of mechanisms, including equity investments, grants, loans, credit union
shares and deposits. The amount of assistance any community development
financial institution and its subsidiaries and affiliates may receive is
generally limited to $5 million. A qualifying institution may receive an
additional $3.75 million for the purpose of serving an investment area in
another state.
RCDRIA provides certain regulatory relief, requiring each federal
agency to streamline and modify its regulations and policies, remove
inconsistencies and eliminate outmoded and duplicative requirements. RCDRIA
directs the federal agencies to coordinate examinations among affiliate banks,
coordinate examinations with other federal banking agencies, and work to
coordinate with state banking agencies. The federal banking agencies are also
directed to work jointly in developing a system for banks and savings
associations to file reports and statements electronically and to adopt a single
form for filing core information in reports and statements.
Interstate Banking Act. The Interstate Banking Act, enacted September
29, 1994, permits, among other things, bank holding companies to merge their
multi-state bank subsidiaries into a single bank by June 1, 1997, unless state
legislators act to "opt-out" of this provision, to acquire banks in any state
one year after the effective date of the
8
<PAGE>
Interstate Banking Act, and permit banks to establish de novo branches across
state lines if the individual states into which a potential de novo entrant
proposes to branch specifically pass legislation to "opt-in."
Under the Interstate Banking Act, a bank may merge, beginning on June
1, 1997, with a bank in another state if the transaction does not involve a bank
in a home state which has enacted a law after the date of enactment of the
interstate banking act and before June 1, 1997, that applies equally to all out
of state banks and expressly prohibits such interstate merger transactions. Such
a law would have no effect on merger transactions approved before the effective
date of such state law. States may also elect to permit merger transactions
before June 1, 1997. Georgia has elected to allow such mergers beginning June 1,
1997. The Interstate Banking Act authorizes interstate mergers involving the
acquisition of a branch of a bank without the acquisition of the bank only as
state law permits an out of state bank to acquire a branch without acquiring the
bank; Georgia has not authorized such transactions. State minimum age laws for
banks to be acquired will be preserved unless state law provides for a minimum
age period of more than five years. After consummation of any interstate merger
transaction, a resulting bank may establish or operate additional branches at
any location where any bank involved in the transaction could have established
or operated a branch under applicable federal or state law.
Beginning September 29, 1995, the Board of Governors of the Federal
Reserve System was authorized to approve the acquisition by a well capitalized
and adequately managed bank holding company of a bank that is located in another
state without regard to whether the acquisition is prohibited under the laws of
any state. Again, state minimum age laws for banks to be acquired will be
preserved unless the state law provides for a minimum age period of more than
five years. The Federal Reserve may not approve an interstate acquisition which
would result in the acquirer's controlling more than 10% of the total amount of
deposits of insured depository institutions in the United States with 30% or
more of the deposits in the home state of the target bank. A state may waive the
30% limit based on criteria that does not discriminate against out of state
institutions. The limitations do not apply to the initial entry into a state by
a bank holding company unless the state has a deposit concentration cap that
applies on a nondiscriminatory basis to in state or out of state bank holding
companies making an initial acquisition. Notwithstanding the foregoing,
anti-trust laws are not affected by the Interstate Banking Act.
The Interstate Banking Act now provides that banks may establish
branches across state lines upon approval of the appropriate federal regulator
if the state "opts-in" by enacting legislation that expressly permits de novo
interstate branching. The establishment of the initial branch in a host state
which permits de novo interstate branching is subject to the same requirements
which apply to the initial acquisition of a bank in a host state, other than the
deposit concentration limits, since the bank would not control any deposits in
the host state at the time of entry. Once a branch has been established by de
novo branching, the bank may establish and acquire additional branches at any
location in the host state in the same manner as any bank in the host state
could have established or acquired additional branches under applicable federal
or state law.
Other Regulatory Initiatives. On April 19, 1995, the four federal
bank regulatory agencies adopted revisions to the regulations promulgated
pursuant to the Community Reinvestment Act (the "CRA") which are intended to set
distinct assessment standards for financial institutions. The revised
regulations contain three evaluation tests: (1) a lending test which will
compare the institution's market share of loans in low and moderate income areas
to its market share of loans in its entire service area and the percentage of a
bank's outstanding loans to low and moderate income areas or individuals, (ii) a
services test which will evaluate the provisions of services that promote the
availability of credit to low and moderate income areas, and (iii) an investment
test, which will evaluate an institution's record of investments in
organizations designed to foster community development, small and minority-owned
businesses and affordable housing lending, including state and local government
housing or revenue bonds. The regulations are designed to reduce some paperwork
requirements of the current regulations and provide regulators, institutions and
community groups with a more objective and predictable manner with which to
evaluate the CRA performance of financial institutions. The rule became
effective on January 1, 1996, at which time evaluation under streamlined
procedures began for institutions with assets of less than $250 million that are
owned by a holding company with total assets of less than $1 billion.
Congress and various federal agencies (including, in addition to the
bank regulatory agencies, HUD, the Federal Trade Commission and the Department
of Justice) (collectively the "Federal Agencies") responsible for implementing
the nation's fair lending laws have been increasingly concerned that prospective
home buyers and other borrowers are experiencing discrimination in their efforts
to obtain loans. In recent years, the Department of Justice has filed
9
<PAGE>
suit against financial institutions, which it determined had discriminated,
seeking fines and restitution for borrowers who allegedly suffered from
discriminatory practices. Most, if not all, of these suits have been settled
(some for substantial sums) without a full adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Opportunity Act and the Fair Housing Act. In the policy statement,
three methods of proving lending discrimination were identified: (1) overt
evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (2) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where this is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person, and (3) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, where such practices are neutral on their face and are
applied equally, unless the practice can be justified on the basis of business
necessity.
Proposals to change the laws and regulations governing the banking
industry are regularly introduced on the state and federal level. It cannot be
predicted whether or in what form any proposed legislation will be adopted or
the extent to which such legislation may affect the business of the Company or
the Bank.
SELECTED STATISTICAL INFORMATION
The following tables set forth certain statistical information and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in this Report and the
Company's consolidated financial statements and notes thereto beginning at page
F-1 of this Report. The average statistical data presented in this report are
generally based on daily average balances.
(Remainder of Page Intentionally Left Blank)
10
<PAGE>
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential
The table below shows, for the periods indicated, the daily average
balances outstanding for the major categories of interest-bearing assets and
interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities.
Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Year Ended December 31, 1995
---------------------------------- --------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------- -------- ------ --------- --------- ------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning assets:
Loans, net of unearned income (1)... $ 51,008 $ 5,219 10.23% $ 14,831 $ 1,655 11.16%
Investment securities:
Taxable........................... 15,277 979 6.41 6,954 496 7.13
Tax-exempt........................ 445 36 8.09 -0- -0- -0-
--------- -------- --------- ---------
Total investment securities......... 15,722 1,015 6.45 6,954 496 7.13
Federal funds sold.................. 2,025 104 5.14 2,802 178 6.35
Interest on deposits at other
banks (2)......................... -0- -0- -0- -0- -0- -0-
--------- -------- --------- ---------
Total interest-earning assets..... 68,755 6,338 9.22 24,587 2,329 9.47
Non interest-earning assets:
Cash and due from banks............. 1,522 938
Premises and equipment.............. 1,658 1,517
Accrued interest and other assets... 911 365
Allowance for loan losses........... (500) (142)
--------- ---------
Total assets.............................. $ 72,346 $ 27,265
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits..................... $ 14,849 737 4.96 $ 5,605 300 5.35
Savings deposits.................... 10,829 572 5.28 4,772 270 5.66
Time deposits....................... 33,365 2,127 6.37 9,339 656 7.02
--------- -------- --------- ---------
59,043 3,436 5.82 19,716 1,226 6.22
Other short-term borrowings............ 4,777 219 4.58 1,029 52 5.05
Long-term debt......................... 62 5 8.06 -0- -0- -0-
--------- -------- --------- ---------
Total interest-bearing liabilities. 63,882 3,660 5.73 20,745 1,278 6.16
--------- -------- --------- ---------
Noninterest-bearing liabilities:
Demand deposits..................... 2,617 1,079
Accrued interest and other
liabilities....................... 344 120
Shareholders' equity................ 5,503 5,321
--------- ---------
Total liabilities and shareholders'
equity.................................... $ 72,346 $ 27,265
========= =========
Net interest income/net interest spread... 2,678 3.49% 1,051 3.31%
----- ======
Net yield on earning assets............... 3.90% 4.27%
===== ======
Taxable equivalent adjustment:
Loans.................................. 14 -0-
Investment securities.................. 13 -0-
-------- ---------
Total taxable equivalent
adjustment........................ 27 -0-
-------- ---------
Net interest income....................... $ 2,651 $ 1,051
======== =========
</TABLE>
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax exempt earning assets.
11
<PAGE>
The following table sets forth, for the years ended December 31, 1996
and 1995, a summary of the changes in interest income and interest expense
resulting from changes in interest rates and in changes in the volume of earning
assets and interest-bearing liabilities, segregated by category. The change due
to volume is calculated by multiplying the change in volume by the prior year's
rate. The change due to rate is calculated by multiplying the change in rate by
the prior year's volume. The change attributable to both volume and rate is
calculated by multiplying the change in volume by the change in rate. Figures
are presented on a taxable equivalent basis.
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis
Change Interest Variance (1)
Average Volume in Volume Average Rate Income/Expense Variance Attributed to 1996
------------------- --------- ---------------- -------------- -------- ------------------
1996 1995 1996-95 1996 1995 1996 1995 1996-95 Volume Rate
-------- ------- -------- ---- ---- ------- ------- --------- -------- -----
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned
income.....................$ 51,008 $ 14,831 $ 36,177 10.23% 11.16% $ 5,219 $ 1,655 $ 3,564 $ 3,690 (126)
--------- -------- -------- -------- -------- --------
Investment securities:
Taxable.................... 15,277 6,954 8,323 6.41 7.13 979 496 483 528 (45)
Tax Exempt................. 445 -- 445 8.09 -- 36 -- 36 33 3
--------- -------- -------- -------- -------- --------
Total investment
securities............. 15,722 6,954 8,768 6.45 7.13 1,015 496 519 561 (42)
--------- -------- -------- -------- -------- --------
Federal funds sold........... 2,025 2,802 (777) 5.14 6.35 104 178 (74) (44) (30)
--------- -------- -------- -------- -------- --------
Total earning assets.....$ 68,755 $ 24,587 $ 44,168 9.22 9.47 $ 6,338 $ 2,329 $ 4,009 4,207 (198)
========= ======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits:
Demand.....................$ 14,849 $ 5,605 $ 9,244 4.96 5.35 $ 737 $ 300 $ 437 457 (20)
Savings.................... 10,829 4,772 6,057 5.28 5.66 572 270 302 319 (17)
Time....................... 33,365 9,339 24,026 6.37 7.02 2,127 656 1,471 1,526 (55)
--------- -------- -------- -------- -------- --------
Total interest-bearing
deposits............... 59,043 19,716 39,327 5.82 6.22 3,436 1,226 2,210 2,302 (92)
Other short-term borrowings.. 4,777 1,029 3,748 4.58 5.05 219 52 167 171 (4)
Long-term debt............... 62 -- 62 8.06 -0- 5 -- 5 5 --
--------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities............$ 63,882 $ 20,745 $ 43,137 5.73 6.16 3,660 1,278 2,382 2,478 (96)
========= ======== ======== -------- -------- -------- ------- -----
Net interest income/net
interest spread............ 3.49% 3.31% $ 2,678 $ 1,051 $ 1,627 $ 1,729 $(102)
====== ====== ======== ======== ======== ======= =====
Net yield on earning assets.. 3.90% 4.27%
====== ======
Net cost of funds............ 5.32% 5.20%
====== ======
</TABLE>
- --------------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
12
<PAGE>
Investment Portfolio
The carrying amount of investment securities at the end of each of
the years presented is set forth in the following table:
Investment Portfolio
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1996 1995 1994
--------------- -------------- ------------
<S> <C> <C> <C>
(in thousands)
Securities Available for Sale:
U.S. Treasury and U.S. Government agencies.................. $ 17,769 $ 14,051 $ 732
Mortgage-backed securities............................... 2,217 -0- -0-
State and municipal securities........................... 145 -0- -0-
------------- ------------ ------------
Total............................................... $ 20,131 $ 14,051 $ 732
============= ============ ============
Securities Held to Maturity:
State and municipal securities........................... $ 2,247 $ -0- $ 3,215
============= ============ ============
</TABLE>
Average taxable securities were 97 percent of the portfolio in 1996
compared to the prior year level of 100 percent. The purchase of tax exempt
securities in 1996 reflects the Bank's intent to reduce the effect of federal
income taxation.
The maturities and weighted average yields of the investments in the
1996 portfolio of investment securities are presented below. The average
maturity of the investment portfolio is 5.6 years with an average yield of 6.5
percent. Taxable equivalent adjustments (using a 34 percent tax rate) have been
made in calculating yields on tax-exempt obligations.
<TABLE>
<CAPTION>
Investment Portfolio Maturity Schedule
Maturing
--------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------- ----------------- ---------------- ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury................. $ -0- -0-% $ 508 5.72% $ -0- -0-% $ -0- -0-%
U.S. Government agencies...... -0- -0- 8,151 6.46 9,110 6.87 -0- -0-
Mortgage-backed................ 1,242 5.59 478 6.03 497 7.06 -0- -0-
State and municipal............ -0- -0- -0- -0- -0- -0- 145 8.06
--------- --------- --------- --------
$ 1,242 5.59 $ 9,137 6.40 $ 9,607 6.88 $ 145 8.06
========= ========= ========= ========
Securities Held to Maturity:
State and municipal.............. $ -0- -0-% $ -0- -0-% $ 165 6.29% $ 2,082 8.14%
--------- --------- --------- --------
$ -0- -0- $ -0- -0- $ 165 6.29 $ 2,082 8.14
========= ========= ========= ========
</TABLE>
There were no securities held by the Bank of which the aggregate
value on December 31, 1996 exceeded ten percent of shareholders' equity at that
date. (Securities which are payable from and secured by the same source of
revenue or taxing authority are considered to be securities of a single issuer.
Securities of the U.S. Government and U.S. Government agencies and corporations
are not included.)
13
<PAGE>
Loan Portfolio
The following table shows the classification of loans by major
category at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Types of Loans
December 31,
-------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------
Percent Percent
Amount of Total Amount of Total
---------------- ---------------- --------------- ------------
(amounts in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural..... $ 13,911 21.4% $ 10,893 33.9%
Real estate - construction................. 4,811 7.4% 1,634 5.1%
Real estate - other........................ 35,289 54.3% 13,672 42.5%
Consumer (installment loans to
individuals)............................ 8,628 13.3% 5,117 15.9%
Other loans................................ 2,323 3.6% 853 2.6%
-------------- ------- ------------ -------
64,962 100.0% 32,169 100.0%
======= =======
Less:
Allowance for loan losses.................. 656 325
-------------- ------------
Net loans.................................. $ 64,306 $ 31,844
============== ============
</TABLE>
(1) The "real estate - other" category includes multi-family residential, home
equity, commercial real estate and undeveloped agricultural real estate
loans.
The following table shows the maturity distribution of selected loan
classifications at December 31, 1996 and an analysis of these loans maturing in
over one year.
<TABLE>
<CAPTION>
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure for Loans
Maturity Maturing Over One Year
--------------------------------------------------------------- ------------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
----------- ------------- ------------ ------------ --------------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural......... $ 9,390 $ 4,507 $ 14 $ 13,911 $ 3,228 $ 1,293
Real estate - construction.. 4,811 -0- -0- 4,811 -0- -0-
---------- ----------- ----------- ----------- ------------- ------------
Total................. $ 14,201 $ 4,507 $ 14 $ 18,722 $ 3,228 $ 1,293
========== =========== =========== =========== ============= ============
</TABLE>
14
<PAGE>
The following table presents information concerning outstanding
balances of nonperforming assets at December 31, 1996 and 1995.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
--------- ------
<S> <C> <C>
(in thousands)
Nonaccruing loans ......................... $ 57 $ 46
Loans past due 90 days or more............. 9 -0-
Restructured loans......................... -0- -0-
------------- ------------
Total nonperforming loans.................. 66 46
Nonaccruing securities..................... -0- -0-
Other real estate.......................... -0- -0-
------------- ------------
Total nonperforming assets................. $ 66 $ 46
============= ============
Ratios:
Loan loss allowance to total
nonperforming assets................... 9.94 7.07
============= ============
Total nonperforming loans to
total loans (net of unearned interest). 0.001 0.001
============= ============
Total nonperforming assets
to total assets........................ 0.001 0.001
============= ============
</TABLE>
It is the general policy of the Bank to stop accruing interest income
and place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than ninety days delinquent. When a loan is placed on
a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest.
There has been no significant impact on the Company's financial
statements as a result of the provisions of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, or
Statement of Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures.
Summary of Loan Loss Experience
The provision for loan losses, which is charged to operating results,
is based on the growth of the loan portfolio, the amount of net loan losses
incurred and management's estimation of potential future losses based on an
evaluation of the risk in the loan portfolio. Management believes that the
$655,296 in the allowance for loan losses at December 31, 1996 (1.01% of total
net outstanding loans at that date) was adequate to absorb known risks in the
portfolio based upon the Bank's historical experience. No assurance can be
given, however, that increased loan volume, adverse economic conditions or other
circumstances will not result in increased losses in the Bank's loan portfolio.
15
<PAGE>
The following table sets forth certain information with respect to
the Company's loans, net of unearned income, and the allowance for loan losses
for each of the last two fiscal years:
Analysis of Loan Loss Experience
<TABLE>
<CAPTION>
1996 1995
--------------- ------------
(in thousands)
<S> <C> <C>
Allowance for loan losses at beginning of year...................................... $ 325 $ -0-
Loans charged off:
Real estate - mortgage........................................................ 6 -0-
Installment loans to individuals.............................................. 32 5
Total loans charged off............................................................. 38 5
--------- ------------
Recoveries on loans previously charged off.......................................... -0- -0-
--------- ------------
Net loans charged off.............................................................. 38 5
---------- ------------
Provisions for loan losses......................................................... 368 330
----------- ------------
Allowance for loan losses at end of period......................................... $ 655 $ 325
=========== ============
Loans, net of unearned income, at end of period.................................... $ 64,962 $ 32,169
=========== ============
Average loans, net of unearned income,
outstanding for the period...................................................... $ 51,008 $ 14,831
=========== ============
Ratios:
Allowance at end of period to loans, net of
unearned income................................................................. 1.01% 1.01%
Allowance at end of period to average loans,
net of unearned income.......................................................... 1.28% 2.19%
Net charge-offs to average loans, net of
unearned income................................................................. .07% .03%
Net charge-offs to allowance at end of period...................................... 5.80% 1.50%
Recoveries to prior year charge-offs............................................... -0-% -0-%
</TABLE>
In assessing adequacy, management relies predominantly on its ongoing
review of the loan portfolio, which is undertaken both to ascertain whether
there are probable losses which must be charged off and to assess the risk
characteristics of the portfolio in the aggregate. This review takes into
consideration the judgments of the responsible lending officers and senior
management, and also those of bank regulatory agencies that review the loan
portfolio as part of the regular bank examination process. In evaluating the
allowance, management also considers the loan loss experience of the Bank, the
amount of past due and nonperforming loans, current and anticipated economic
conditions, lender requirements and other appropriate information.
16
<PAGE>
Management allocated the reserve for loan losses to specific loan
classes as follows:
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------
Percent Percent
Amount of Total Amount of Total
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
(amounts in thousands)
Domestic Loans (1)
Commercial, financial and agricultural............. $ 144 22% $ 118 36%
Real estate - construction......................... 52 8 20 6
Real estate - other................................ 354 54 135 42
Consumer........................................... 105 16 52 16
-------- ------ ------- -------
Total........................................... $ 655 100% $ 325 100%
======== ====== ======= =======
</TABLE>
(1) The Company had no foreign loans.
Deposits
The average amounts of and the average rate paid on each of the
following categories of deposits for the years ended December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------
Amount Rate Amount Rate
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
(amounts in thousands)
Noninterest-bearing demand deposits..................... $ 2,617 -0-% $ 1,079 -0-%
Demand.................................................. 14,849 4.96 5,605 5.35
Savings................................................. 10,829 5.28 4,772 5.66
Time deposits........................................... 33,365 6.37 9,339 7.02
----------- ---------
Total interest-bearing deposits..................... 59,043 5.82 19,716 6.22
----------- ---------
Total average deposits.......................... $ 61,660 5.57% $ 20,795 6.14%
=========== =========
</TABLE>
(Remainder of Page Intentionally Left Blank)
17
<PAGE>
The two categories of lowest cost deposits comprised the following
percentages of average total deposits during 1996: average noninterest-bearing
demand deposits, 4.2 percent; and average interest-bearing demand deposits, 24.1
percent. Of average time deposits, approximately 26.1 percent were large
denomination certificates of deposit. The maturities of the time certificates of
deposit of $100,000 or more issued by the Bank at December 31, 1996 are
summarized in the table below.
Maturities of Large Time Deposits
<TABLE>
<CAPTION>
Time
Certificates
of Deposit
--------------------
(in thousands)
<S> <C>
Three months or less....................... $ 1,325
Over three through six months.............. 2,072
Over six through twelve months............. 2,745
Over twelve months......................... 5,951
--------------
Total................................ $ 12,093
==============
</TABLE>
Return on Equity and Assets
The following table summarizes certain financial ratios for the Bank
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Return on Equity and Assets
Years ended December 31,
-----------------------------------------
1996 1995
----------------- -------------
<S> <C> <C>
Return on average assets............. .71% (.91)%
Return on average equity............. 9.40% (4.64)%
Dividend payout ratio................ -0-% -0- %
Average equity to average
assets ratio........................ 7.60% 19.52 %
</TABLE>
(Remainder of Page Intentionally Left Blank)
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data
of the Company for the years ended December 31, 1996 and 1995. All averages are
daily averages.
<TABLE>
<CAPTION>
<S> <C> <C>
Years ended December 31,
---------------------------------------
1996 1995
----------------- -------------
(in thousands except per share data)
Consolidated Statement of Operations Data
Interest income.......................... $ 6,311 $ 2,328
Interest expense......................... 3,660 1,278
Net interest income...................... 2,651 1,050
Provision for loan losses................ 368 330
Non-interest income...................... 253 111
Non-interest expense..................... 1,715 1,204
Net income (loss)........................ 517 (247)
Per Share Data
Net income (loss)........................ 91 (.43)
Cash dividends........................... -0- -0-
Shareholders' equity (book value) at
period end .............................. 10.22 9.44
Consolidated Balance Sheet Data
Loans.................................... 64,962 32,169
Deposits................................. 81,148 42,128
Average equity........................... 5,503 5,321
Average assets........................... 72,346 27,265
Total assets........................ $ 93,154 $ 51,949
Ratios
Return on average assets................. .71% (.91)%
Return on average equity................. 9.40 (4.64)
Dividend payout ratio.................... -0- -0-
Average equity to average assets......... 7.61 19.52
Total risk-based capital................. 10.85 14.18
Leverage ratio........................... 6.96 10.32
</TABLE>
Item 2. Properties
The Company's and the Bank's main office is located at 315 Industrial
Boulevard, Ellijay, Georgia, between the business districts of Ellijay and East
Ellijay. The office building, which contains 9,600 square feet, and the land on
which it is located, which is approximately 1.22 acres, are owned by the Bank.
The building houses offices, operations, storage, and a lobby. The Bank has five
indoor teller stations, a vault with safe deposit boxes and three drive-up
teller lanes, two with pneumatic tubes. The Bank has a drive-up automatic teller
machine ("ATM") which is on-line and part of the Cirrus ATM network. The ATM
island unit is located adjacent to the drive-up windows and pneumatic tubes and
is in a well-lighted, high traffic area.
Management believes that the physical facilities maintained by the
Bank are suitable for its current operations.
Item 3. Legal Proceedings
The Company is not aware of any material pending legal proceedings to
which the Company or the Bank is a party or to which any of their property is
subject, other than ordinary routine legal proceedings incidental to the
business of the Bank.
19
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the Company
during the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
Market Information
There is no established trading market for the Company's Common
Stock, $5.00 par value (the "Common Stock"), which has been traded inactively in
private transactions. Therefore, no reliable information is available as to
trades of the Common Stock or as to the prices at which Common Stock has traded.
Management has reviewed the limited information available as to the ranges at
which the Common Stock has been sold. The following table sets forth the
estimated price range for sales of Bank Common Stock (prior to the
Reorganization) or Company Common Stock (after the Reorganization) for each
quarter of the last two fiscal years. The following data regarding the Common
Stock is provided for information purposes only and should not be viewed as
indicative of the actual or market value of the Common Stock.
Estimated Price Range
Per Share
---------------------
High Low
------ ------
1996:
First Quarter................... $15.00 $14.00
Second Quarter.................. 13.50 10.00
Third Quarter................... 14.00 8.00
Fourth Quarter.................. 15.00 10.00
1995:
First Quarter................... $12.00 $10.00
Second Quarter.................. 12.00 10.00
Third Quarter................... 12.00 10.00
Fourth Quarter.................. 12.00 10.00
At March 14, 1997, the Common Stock of the Company was held by
approximately 707 shareholders of record. At such time, approximately 49 persons
had not yet surrendered their certificates representing Gilmer County Bank
common stock, which was automatically converted into Company Common Stock
pursuant to the Reorganization.
Dividends
The Bank paid a dividend to the Company of $30,000 in August 1996 to
cover costs of the Reorganization. The Company has not paid any dividends to
date.
The Bank is subject to restrictions on the payment of dividends under
Georgia law and the regulations of the DBF. The Company is also subject to
limits on payment of dividends by the rules, regulations and policies of federal
banking authorities. See "Supervision and Regulation--Dividends." In addition to
regulatory restrictions on the Company's ability to pay dividends, the agreement
relating to the Company's $1 million line of credit with Hardwick Bank & Trust
Company (the "Credit Agreement") contains financial and other covenants,
including covenants that restrict the payment of dividends by the Company. See
Note 8 to the Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources" for information concerning restrictions in the
Credit Agreement. No assurance can
20
<PAGE>
be given that any dividends will be declared by the Company in the future, or if
declared, what the amount would be or whether such dividends would continue.
Future dividend policy will depend on the Bank's earnings, capital position,
financial condition and other factors.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the following discussion is to address information
relating to the financial condition and results of operations of the Company
that may not be readily apparent from a review of the consolidated financial
statements and notes thereto, which begin on page F-1 of this Report. This
discussion should be read in conjunction with information provided in the
Company's consolidated financial statements and accompanying footnotes, and with
the statistical information appearing elsewhere in this Report under the caption
"Selected Statistical Information." Unless otherwise noted, the discussion of
net interest income in this financial review is presented on a taxable
equivalent basis to facilitate performance comparisons among various taxable and
tax-exempt assets.
Earnings Summary
The Company's net income of $516,736 for the 1996 fiscal year
represents an increase of $763,448 over the Company's net loss in 1995 of
$246,712. The increase in net income relates to the growth in the Bank's deposit
and loan base and the effect of start-up costs incurred in connection with the
opening of the Bank in 1995.
Earnings per share increased to $0.91 in 1996 compared to a $0.43 net
loss per share in 1995. Return on average assets, which reflects the Bank's
ability to utilize its assets, was .71% in 1996 compared with (.91)% in 1995.
Return on average shareholders' equity increased from (4.64)% in 1995 to 9.4% in
1996.
Results of Operations
Net Interest Income
Net interest income is the principal source of the Bank's earnings
stream and represents the difference or spread between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities materially impact net
interest income. Net interest income was $2,651,070 in 1996, as compared to
$1,050,028 in 1995, representing an increase of $1,601,042, or 152%. This
increase was caused by the growth of the Bank's deposit base and loan portfolio
since the Bank's first full year of operation.
Interest earned on fees and loans increased from $1,654,502 in 1995
to $5,205,131 in 1996, an increase of $3,550,629 or approximately 215%. This
increase was caused by the increase in the average loan portfolio balance from
approximately $14,831,000 in 1995 to approximately $51,008,000 in 1996.
Interest earned on taxable investment securities increased $484,636
(98%) from $493,281 in 1995 to $977,917 in 1996, while interest earned on
nontaxable investment securities increased from zero in 1995 to $24,228 in 1996.
The increase in interest earned on taxable securities in 1996 is a result of an
increase of approximately $8,323,000 in the average investment portfolio for
such securities from 1995.
The trend in net interest income is also evaluated in terms of
average rates using the net interest margin and the interest rate spread. The
net interest margin, or the net yield on earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield returned on average
earning assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The net
interest margin for 1996 was 3.90%, compared with a net interest rate margin of
4.27% in 1995. This decrease was due primarily to the growth of the Bank related
specifically to an increase in interest-bearing liabilities as a percentage of
interest-earning assets.
The interest rate spread measures the difference between the average
yield on earning assets and the average rate paid on interest-bearing sources of
funds. The interest rate spread calculation provides a more direct
21
<PAGE>
perspective on the effect of market interest rate movements. The net interest
spread for 1996 was 3.49% from earning assets as compared to a net interest
spread of 3.31% in 1995.
The following tabulation presents certain net interest income data
without modification for assumed tax equivalency:
<TABLE>
<CAPTION>
Period from
May 26, 1994
to
Years ended December 31, December 31,
------------------------ ---------------
1996 1995 1994
-------- -------- -----------
<S> <C> <C> <C>
Rate earned on earning assets.......... 9.22% 9.47% 3.83 %
Rate paid on borrowed funds............ 5.73% 6.16% 7.74 %
Interest rate spread................... 3.49% 3.31% (3.91)%
Net yield on earning assets............ 3.90% 4.27% 3.25 %
</TABLE>
During 1996, interest on federal funds sold decreased $76,399 (42.3%)
from 1995. The decrease in income from federal funds sold is the result of a
decrease in the average amount of federal funds sold from approximately
$2,802,000 in 1995 to approximately $2,025,000 in 1996 and a decrease in the
average yield for such funds from 6.35% in 1995 to 5.14% in 1996.
Interest Expense
Total interest expense increased $2,382,052 (186.4%), from $1,278,175
in 1995 to $3,660,227 in 1996. This increase was the combined effect of an
increase in the average balance of interest-bearing deposits from approximately
$19,716,000 in 1995 to approximately $59,043,000 in 1996 and a decrease in the
average rate paid on deposits from 6.22% in 1995 to 5.82% in 1996. The effect of
these changes increased the interest expense on interest-bearing deposits from
$1,225,610 in 1995 to $3,436,060 in 1996. Interest on federal funds purchased
for 1996 increased $166,935 (317.6%) over 1995.
Noninterest Income
Noninterest income for 1996 totaled $252,946 and $110,526 in 1995.
These amounts are primarily from service charges on deposit accounts, insurance
commissions and fees on services to customers. Noninterest income increased
primarily due to the continued growth in the Company's deposit base. Other
noninterest income increased from $25,107 in 1995 to $85,055 in 1996, primarily
due to an increase of approximately $45,000 in credit card fees earned by the
Bank in 1996.
Noninterest Expenses
Noninterest expenses totaled $1,715,372 in 1996 and $1,204,218 in
1995. Salaries and benefits increased $234,753 (35.7%) to $892,992, which
reflects the Bank's increased staffing to accommodate the growth in the Bank's
loans and deposits. Occupancy expense increased $34,587 (56.2%) due to increases
in building repair and maintenance of $17,472 and telecommunication expenses
which exceeded costs in 1995 by $7,433. Furniture and equipment expenses
increased $61,619 (95.1%) due to depreciation on equipment of $90,226 in 1996
($36,306 over 1995) and repair and maintenance costs of $36,212 ($25,312 over
1995). Other operating expenses increased $180,195 (42.9%) due to expenses
related to increased usage (such as supplies, postage and data processing) as
well as an increase in professional and regulatory fees attributable primarily
to the formation of the Company as a bank holding company and compliance with
reporting requirements under the federal securities laws.
22
<PAGE>
The table below sets forth the Company's noninterest expenses for the
periods indicated.
<TABLE>
<CAPTION>
Period from
Years ended December 31, May 21, 1994 to
-------------------------------- December 31,
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Salaries and employee benefits.............. $ 893 $ 658 $ 126
Occupancy expense........................... 96 62 7
Furniture and equipment expense............. 126 65 -0-
Director and committee fees................. 19 -0- -0-
Advertising................................. 93 78 7
Checking account expense.................... 29 22 -0-
Data processing............................. 47 31 -0-
Insurance................................... 27 31 2
Postage..................................... 52 26 1
Professional and regulatory fees............ 121 63 2
Supplies.................................... 106 89 5
Taxes and licenses.......................... 22 15 -0-
Other....................................... 84 64 18
--------- --------- -----------
Total..................................... $ 1,715 $ 1,204 $ 168
========= ========= ===========
</TABLE>
Income Taxes
The Company's net operating losses of $348,143 from 1995 and 1994
resulted from accumulated losses sustained during start up of the Bank. The full
amount of the net operating losses were applied to 1996 taxable income, thereby
reducing its income tax liability at year end.
Financial Condition
Earning Assets
The Bank's earning assets, which include deposits in other banks,
federal funds sold, investment securities and loans, averaged $68,755,141 in
1996 or 95% of average total assets compared to $24,587,927 or 90% of average
total assets in 1995. The mix of average earning assets comprised the following
percentages:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------------ ------------- -----------
Deposits in other banks................ -0-% -0-% 29.47%
Federal funds sold..................... 2.95% 11.40% 2.99%
Investment securities.................. 22.87% 28.29% 67.54%
Loans.................................. 74.18% 60.31% -0-%
</TABLE>
The mix of average earning assets reflects management's attempt to
maximize interest income while maintaining acceptable levels of risk.
The Bank has intentionally avoided the growing national market in
loans to finance leveraged buy-outs, participating in no nationally syndicated
leveraged buy-out loans. Concurrently, it has avoided exposure to lesser
developed country ("LDC") debt, having no LDC loans in its portfolio.
Loans
Loans made up the largest component of the Bank's earning assets. At
December 31, 1996, the Bank's total loans were $64,961,742 compared to
$32,168,696 at the end of 1995. In 1996, average net loans represented 74.18% of
average earning assets and 70.5% of average total assets, compared to 60.32% of
average earning assets and 54.4% of average total assets in 1995. This was the
result of an increase in loan demand in the Bank's market
23
<PAGE>
area, combined with an increase in the Bank's market share of loans in such
area. As a result of the increase in loan growth, the ratio of total loans to
total deposits increased from 76.4% in 1995 to 80.1% in 1996.
During the early stages of the Bank's operation, a number of poultry
integrators were expanding operations in the Bank's market area, and several new
poultry farms were financed at such time. This expansion was complete by 1996,
and as the Bank's loan portfolio shifted to reflect decreasing loans to the
poultry industry, the percentage of commercial loans decreased from 33.9% in
1995 to 21.4% in 1996. The increase in other real estate loans reflects the
Bank's emphasis on real estate-backed loans as opposed to loans backed by other
forms of collateral.
Investment Securities and Federal Funds Sold
The Bank has classified its investment securities as either available
for sale or held to maturity, depending on whether the Bank has the intent and
ability to hold such securities to maturity. At December 31, 1996, $20,131,443
of the Bank's investment securities were classified as available for sale,
compared to $14,050,902 at year-end 1995. Securities classified as held to
maturity were $2,247,479 at year-end 1996, as compared to no held to maturity
securities at the end of 1995.
The composition of the Bank's investment securities portfolio
reflects the Bank's investment strategy of maximizing portfolio yields subject
to risk and liquidity considerations. The primary objectives of the Bank's
investment strategy are to maintain an appropriate level of liquidity and to
provide a tool to assist in controlling the Bank's interest rate position while
at the same time producing adequate levels of interest income. For securities
classified as investment securities, it is the Bank's intention to hold such
securities for the foreseeable future. Management of the maturity of the
portfolio is necessary to provide liquidity and to control interest rate risk.
During 1995, the Bank transferred all held to maturity securities to an
available for sale category to appropriately reflect the nature of the Bank's
holdings that are available for sale should liquidity needs dictate. The
transfers of securities to available for sale occurred due to unanticipated
growth in the Bank's loan portfolio. At December 31, 1995, the entire portfolio
was appropriately classified as available for sale. In 1996, no transfers
between investment classifications occurred. During 1996, gross investment
securities sales were $4.50 million and maturities were $4.53 million,
representing 28.6% and 28.8%, respectively, of the average portfolio for the
year. Gains associated with sales and maturities totaled $8,894, accounting for
3.5 percent of noninterest income. Gross unrealized gains in the portfolio
amounted to $66,391 at year end 1996 and unrealized losses amounted to $85,941.
Mortgage-backed securities have varying degrees of risk of impairment
of principal, as opposed to U.S. Treasury and U.S. government agency
obligations, which are considered to contain virtually no default or prepayment
risk. Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Bank's purchase of mortgage-backed
securities during 1996 did not include securities with these characteristics.
The recoverability of the Bank's investment in mortgage-backed securities is
reviewed periodically, and if necessary, appropriate adjustments would be made
to income for impaired values.
Management maintains federal funds sold as a tool in managing its
daily cash needs. Federal funds sold decreased from $1,970,000 for 1995 to
$1,150,000 for 1996. Average federal funds sold at December 31, 1996 was
$2,025,246 or 2.9% of average earning assets, compared with approximately
$2,802,000 or 11.4% of average earning assets for 1995. The decrease of 27.7% in
average federal funds sold from 1995 reflects an emphasis by management on
profitability, which resulted in a negative impact on liquidity. Management
plans to increase the percentage of federal funds sold and increase short-term
investment to improve the Company's liquidity position relative to the current
size of the Company.
There has been no significant impact on the Company's financial
statements as a result of the provisions of Statement of Financial Accounting
Standards No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments.
Deposits and Repurchases
The Bank's primary source of funds is derived from deposits of Bank
customers. Average deposits increased 196.5% from approximately $20,795,000 in
1995 to approximately $61,660,000 in 1996. At December
24
<PAGE>
31, 1996, total deposits were $81,147,881, of which $77,683,071 (95.7%) were
interest-bearing and $3,464,810 (4.3%) were noninterest-bearing. At year-end
1995, total deposits were $42,128,831, of which $39,354,469 (93.4%) were
interest-bearing and $2,774,362 (6.6%) were noninterest-bearing. Continued
enhancement of existing products and emphasis upon better customer service fuels
the growth in the deposit base. Emphasis has been placed upon attracting
consumer deposits. It is the Bank's intent to expand its consumer base in order
to continue to fund asset growth.
Securities sold under agreements to repurchase amounted to $5,283,972
at December 31, 1996. The weighted average maturity of the agreements was 90
days. The weighted average rate was 4.5 percent. Securities sold under
agreements to repurchase averaged $4,487,562 during 1996. The maximum amount
outstanding at any month end during 1996 was $5,283,972.
Liquidity and Capital Resources
Liquidity Management
Liquidity is defined as the ability of a company to convert assets
into cash or cash equivalents without significant loss. Liquidity management
involves maintaining the Bank's ability to meet the day-to-day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs. Without proper
liquidity management, the Bank would not be able to perform the primary function
of a financial intermediary and would, therefore, not be able to meet the
production and growth needs of the communities it serves.
The primary function of assets and liabilities management is not only
to assure adequate liquidity in order for the Bank to meet the needs of its
customer base, but to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that the Bank can also meet the
investment requirements of its shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets
both requirements. In the banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments or sales of investment and trading account
securities. Real estate construction and commercial, financial and agricultural
loans that mature in one year or less equaled approximately $14.2 million or 22%
of the total loan portfolio at December 31, 1996 and investment securities
maturing in one year or less equaled $1.24 million or 5.5% of the portfolio.
Other sources of liquidity include short-term investments such as federal funds
sold and maturing interest-bearing deposits with other banks.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal 1996, funds were also available through the purchase of
federal funds from correspondent commercial banks from available lines of up to
an aggregate of $1,500,000, which subsequently has been increased to $2,000,000.
Liquidity management involves the daily monitoring of the sources and uses of
funds to maintain an acceptable cash position.
In an effort to maintain and improve the liquidity position of the
Bank, management has made application for membership with the Federal Home Loan
Bank of Atlanta. As a member of the Federal Home Loan Bank, the Bank would
improve its ability to manage liquidity and reduce interest rate risk by having
a funding source to match longer term loans. While management believes that the
Bank's application will be approved, there can be no assurances that such
approval will occur, and if so, on what time frame.
Capital Resources
A strong capital position is vital to the continued profitability of
the Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. The Bank has provided
the majority of its capital requirements from proceeds from the Bank's initial
stock offering in 1994, through draws by the Company on the Hardwick $1 million
line of credit and through the retention of earnings.
25
<PAGE>
Line of Credit. In November 1996, the Company obtained a $1 million
unsecured line of credit with Hardwick Bank & Trust Company. At December 31,
1996, the balance on the line of credit was $700,000. The Company subsequently
drew down the remaining amount in January 1997. Interest on the outstanding
amounts under the line of credit is payable on a quarterly basis at the prime
rate (as defined in the Credit Agreement) less 3/4 of a percentage point. The
first interest payment is due April 1, 1997. Principal is due in five equal
annual installments beginning January 1, 1999 with the last payment due January
1, 2003. The Credit Agreement contains certain restrictive covenants, including
but not limited to certain restrictions on (i) additional indebtedness; (ii)
creating or allowing liens on the capital stock of the Bank; (iii) guaranteeing
certain obligations of other persons; (iv) merging, consolidating or exchanging
shares with, or acquiring the stock or assets of, any Person (as defined in the
Credit Agreement); (v) payment of dividends; and (vi) disposing of the stock of
the Bank. The Company also covenanted to cause its depository institution
subsidiaries (presently only the Bank ) at all times to be classified as "well
capitalized" under FDICIA capital ratios, maintain nonperforming assets below a
specified level, and maintain a minimum ratio of consolidated loan loss reserves
to total loans. The Credit Agreement also contains certain customary affirmative
covenants.
Federal Capital Standards. Bank regulatory authorities are placing
increased emphasis on the maintenance of adequate capital. In 1990, new
risk-based capital requirements became effective under FDICIA. The guidelines
take into consideration risk factors, as defined by regulators, associated with
various categories of assets, both on and off the balance sheet. Under the
guidelines, capital strength is measured in two tiers which are used in
conjunction with risk-adjusted assets to determine the risk-based capital
ratios. The Bank's Tier 1 capital, which consists of common equity, paid-in
capital and retained earnings (less intangible assets), amounted to $6.4 million
at December 31, 1996. Tier 2 capital components include supplemental capital
components such as qualifying allowance for loan losses and qualifying
subordinated debt. Tier 1 capital plus the Tier 2 capital components is referred
to as Total Risk-based capital and was $7.1 million at year-end 1996. The
percentage ratios as calculated under FDICIA guidelines were 9.36 percent and
10.31 percent for Tier 1 and Total Risk-based capital, respectively, at year-end
1996. Both levels exceeded the minimum ratios of four percent and eight percent,
respectively.
Other important indicators of capital adequacy in the banking
industry are the leverage ratio and the tangible leverage ratio. The leverage
ratio is defined as the ratio the Bank's shareholders' equity, minus goodwill,
bears to total assets minus goodwill. The tangible leverage ratio is defined as
the Bank's shareholders' equity, minus all intangibles, divided by total assets
minus all intangibles. At December 31, 1996, the Bank's leverage and intangible
leverage ratios were 6.96% and 6.89%, respectively, exceeding the regulatory
minimum requirements which are generally 3% plus an additional cushion of at
least 100-200 basis points depending on risk profiles and other factors. Under
federal capital guidelines, the Company's Tier 1 capital, Total capital and
Leverage ratios were 8.73%, 9.72% and 6.23%, respectively.
(Remainder of Page Intentionally Left Blank)
26
<PAGE>
The table below illustrates the Bank's regulatory capital ratios
under federal guidelines at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Capital Adequacy Ratios
<S> <C> <C> <C>
Years ended December 31,
Statutory -----------------------------
Minimum 1996 1995
---------------- ---------- ----------
(amounts in thousands)
Tier 1 Capital........................ $ 6,467 $ 5,260
Tier 2 Capital........................ 655 261
---------- ---------
Total Qualifying Capital.............. $ 7,122 $ 5,521
========== ==========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)....... $ 65,667 $ 38,932
=========== ===========
Tier 1 Risk-Based Capital Ratio....... 4.0% 9.36% 13.51%
Total Risk-Basked Capital Ratio....... 8.0% 10.31% 14.18%
Leverage Ratio........................ 4.0% 6.96% 10.32%
Tangible Leverage Ratio............... 3.0% 6.89% 10.22%
</TABLE>
DBF Capital Requirement. In addition to the capital standards imposed
by federal banking regulators, the DBF imposed an 8% primary capital ratio as a
condition to the approval of the Bank's charter. This standard, which exceeds
the FDIC capital standards, is calculated as the ratio of total equity to total
assets, each as adjusted for unrealized gains and losses on securities and
allowance for loan losses. This heightened requirement will continue through the
first three years of the Bank's operation, at which time the Bank will be
subject to a 6% capital ratio. At December 31, 1996, the capital ratio as
calculated under the DBF standard was 7.7%. At such time, $300,000 remained
available under the $1 million line of credit obtained by the Company from
Hardwick Bank & Trust, which had been taken out to inject capital into the Bank.
Management subsequently drew down the remaining amount under the line of credit
in order to restore the Bank's capital ratio to exceed 8%.
The Bank's capital ratio as calculated by the DBF has fallen below
the 8% level from time to time since December 31, 1996. Management closely
monitors the Bank's capital ratios for day-to-day fluctuations, which may be
affected by increases in deposits or other assets. Management has proposed plans
to the DBF to offset daily fluctuations in assets (primarily deposits), which
may cause the capital ratio to fall below the 8% level imposed by the DBF. Such
plans include (1) the utilization of the Bank's monthly net profits as retained
earnings, (2) amending the Bank's 401(k) plan to allow for the purchase of
Company stock by the plan, and, if necessary, (3) the issuance of subordinated
debt securities and the implementation of a controlled growth plan to enhance
profitability relative to the Bank's asset growth.
Interest Rate Sensitivity Management
Interest rate sensitivity is a function of the repricing
characteristics of the Bank's portfolio of assets and liabilities. These
repricing characteristics are the time frames within which the interest-bearing
assets and liabilities are subject to change in interest rates either at
replacement or maturity during the life of the instruments. Sensitivity is
measured as the difference between the volume of assets and liabilities in the
Bank's current portfolio that are subject to repricing in future time periods.
The differences are known as interest sensitivity gaps and are usually
calculated separately for segments of time ranging from zero to thirty days,
thirty-one to ninety days, ninety-one days to one year, one to five years, over
five years and on a cumulative basis.
27
<PAGE>
The following tables show interest sensitivity gaps for these
different intervals as of December 31, 1996.
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
----------- ------------ ------------ ----------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1)
Loans........................... $ 2,707 $ 22,001 $ 19,184 $ 20,927 $ 86 $ 64,905
Investment Securities:
Taxable....................... -0- -0- 1,242 9,137 9,607 19,986
Tax-exempt.................... -0- -0- -0- -0- 2,393 2,393
Federal funds sold............ 1,150 -0- -0- -0- -0- 1,150
---------- ---------- ----------- --------- ---------- -----------
3,857 22,001 20,426 30,064 12,086 88,434
---------- ---------- ----------- --------- ---------- -----------
Interest-bearing liabilities (2)
Demand deposits (3)............. 6,564 6,564 6,563 -0- -0- 19,691
Savings deposits (3)............ 4,812 4,812 4,812 -0- -0- 14,436
Time deposits................... 1,768 3,535 19,718 18,534 -0- 43,555
Other short-term borrowings (3). 1,761 1,761 1,761 -0- -0- 5,283
Long-term debt.................. -0- -0- -0- 700 -0- 700
--------- --------- ---------- -------- --------- ----------
14,905 16,672 32,854 19,234 -0- 83,665
--------- --------- ---------- -------- --------- ----------
Interest sensitivity gap........... $ (11,048) $ 5,329 $ (12,428) $ 10,830 $ 12,086 $ 4,769
========== ========== =========== ========= ========== ===========
Cumulative interest
sensitivity gap................... $ (11,048) $ (5,719) $ (18,147) $ (7,317) $ 4,769
========== ========== =========== ========= ==========
Ratio of interest-earning assets
to interest-bearing liabilities.. .26 1.32 .62 1.56 100.00
========== ========== =========== ========= ==========
Cumulative ratio................... .26 .82 .72 .91 1.06
========== ========== =========== ========= ==========
Ratio of cumulative gap to total
interest-bearing assets.......... (0.12) (0.06) (0.21) (0.83) 0.05
========== ========= =========== ========= ==========
</TABLE>
(1) Excludes nonaccrual loans and securities.
(2) Excludes matured certificates which have not been redeemed by the
customer and on which no interest is accruing.
(3) Demand and savings deposits and other short term borrowings are assumed
to be subject to movement into other deposit instrumen ts in equal
amounts during the 0-30 day period, the 31-90 day period, and the 91-365
day period.
The above table indicates that in a rising interest rate environment,
the Bank's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table, for
the first 30 days of repricing opportunity there is an excess of
interest-bearing liabilities over earning assets of $11 million. For the first
365 days, interest-bearing liabilities exceed earning assets by $18.1 million.
During this one year time frame, 77% of all interest-bearing liabilities will
reprice compared to 52% of all interest-earning assets. Changes in the mix of
earning assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread between an asset and its supporting liability can vary
significantly while the timing of repricing for both the asset and the liability
remain the same, thus impacting net interest income. Due to management's
emphasis on profitability during the 1995 and 1996 fiscal years, many of the
higher yielding securities presented in the table above have call features,
which will result in such securities having a shorter effective life. This in
turn may reduce the interest rate sensitivity gap presented above. It should be
noted, therefore, that a matched interest-sensitive position by itself will not
ensure maximum net interest income.
28
<PAGE>
Management continually evaluates the condition of the economy, the
pattern of market interest rates and other economic data to determine the types
of investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.
Impact of Inflation and Changing Prices
A bank's asset and liability structure is substantially different
from that of an industrial company in that virtually all assets and liabilities
of a bank are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Bank's ability to react to changes in
interest rates and by such reaction to reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or at
the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
Various information shown elsewhere in this Report will assist in the
understanding of how well the Bank is positioned to react to changing interest
rates and inflationary trends. In particular, the summary of net interest
income, the maturity distributions, the composition of the loan and security
portfolios and the data on the interest sensitivity of loans and deposits should
be considered.
Conclusion
The Bank has experienced significant growth since its opening in
1995. It has enjoyed continued increases in its customer base, as shown by the
rapid increase in deposits and loans for the 1996 fiscal year. While management
remains optimistic about the prospects for continued growth and profitability,
management does not anticipate that such growth will be at the level experienced
during the Bank's initial two years of operation. No assurance can be given that
the Bank will continue to grow and be profitable.
The foregoing is a forward-looking statement which reflects
significant assumptions and subjective judgments believed by management to be
reasonable as of the date of this Report. It does not constitute a forecast or
prediction of actual results, and actual performance and financial results may
differ materially from those anticipated due to a variety of factors, including
but not limited to (i) increased competition with other financial institutions,
(ii) lack of sustained growth in the economy in Gilmer County, primarily in the
local poultry industry, (iii) rapid fluctuations in interest rates, (iv) the
inability of the Bank to maintain regulatory capital standards, and (v) changes
in the legislative and regulatory environment. The foregoing list should not be
construed as exhaustive and the Company disclaims any obligation to subsequently
update or revise any forward-looking statements after the date of this Report.
Item 7. Financial Statements
The consolidated financial statements of the Company, including notes
thereto, and the report of independent auditors are included in this Report
beginning at page F-1 and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During the Company's two most recent fiscal years, there has been no
change in the Company's independent accountants or any disagreement with its
accountants on any matter of accounting principles or practices or financial
statement disclosure.
29
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information appearing under the heading "Election of Directors" and the
subheadings "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement (the "1997 Proxy Statement")
relating to the annual meeting of shareholders of the Company, scheduled to be
held on April 17, 1997, is incorporated herein by reference.
Item 10. Executive Compensation
The information appearing under the heading "Compensation of Executive
Officers and Directors" in the 1997 Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the heading "Outstanding Voting Securities
of the Company and Principal Holders Thereof" in the 1997 Proxy Statement is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information appearing under the caption "Certain Relationships and
Transactions" in the 1997 Proxy Statement is incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this Report:
Exhibit Number Description of Exhibit
-------------- ----------------------
2 Plan of Reorganization and Agreement of Merger,
dated May 24, 1996, by and among Gilmer County Bank,
Appalachian Bancshares, Inc. and Gilmer Interim,
Inc. (included as Exhibit 2.2 to the Company's
Quarterly Report on Form 10-QSB for the period ended
September 30, 1996, previously filed with the
Commission and incorporated herein by reference).
3.1 Articles of Incorporation of the Company (included
as Exhibit 3.1 to the Company' s Registration
Statement on Form 8-A, dated September 16, 1996,
previously filed with the Commission and
incorporated herein by reference).
3.2 Bylaws of the Company (included as Exhibit 3.2 to
the Company's Registration Statement on Form 8-A,
dated September 16, 1996, previously filed with the
Commission and incorporated herein by reference).
10.1 1997 Directors' Non-Qualified Stock Option Plan.*
10.2 1997 Employee Incentive Stock Incentive Plan.*
30
<PAGE>
10.3 Credit Agreement, dated as of November 25, 1996,
between the Company and Hardwick Bank & Trust
Company.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
27 Financial Data Schedule
* The referenced exhibit is a compensatory contract, plan or
arrangement.
(b) No reports on Form 8-K were filed by the Company during the period
covered by this Report.
31
<PAGE>
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
Appalachian Bancshares, Inc. and Subsidiary
The management of Appalachian Bancshares, Inc. and Subsidiary is
responsible for the preparation, integrity, and objectivity of the financial
statements, related financial data, and other information in this annual report.
The financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's best estimates
and judgment where appropriate. Financial information appearing throughout this
annual report is consistent with the financial statements.
In meeting its responsibility both for the integrity and fairness of
these statements and information, management depends on the accounting systems
and related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded and (iii) proper and
reliable records are maintained.
The concept of reasonable assurance is based on the recognition that
the cost of internal control systems should not exceed the related benefits. As
an integral part of internal control systems, the Company maintains a
professional staff of internal auditors who monitor compliance and assess the
effectiveness of internal control systems and coordinate audit coverage with
independent certified public accountants.
The responsibility of the Company's independent certified public
accountants is limited to an expression of their opinion as to the fairness of
the financial statements presented. Their opinion is based on an audit conducted
in accordance with generally accepted auditing standards as described in their
report.
The Board of Directors is responsible for insuring that both
management and the independent certified public accountants fulfill their
respective responsibilities with regard to the financial statements. The Audit
Committee may meet periodically with both management and the independent
certified public accountants to assure that each is carrying out its
responsibilities. The independent certified public accountants have full and
free access to the Audit Committee and the Board of Directors and may meet with
them, with and without management being present, to discuss auditing and
financial reporting matters.
F-1
<PAGE>
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
Consolidated Financial Statements
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Independent Auditors' Report........................................................................................ F-3
Consolidated Statements of Financial Condition as of December 31, 1996 and 1995..................................... F-4
Consolidated Statements of Income for the years (period) ended
December 31, 1996 and 1995 and 1994............................................................................... F-5
Consolidated Statements of Shareholders' Equity for the years (period) ended
December 31, 1996 and 1995 and 1994.............................................................................. F-6
Consolidated Statements of Cash Flows for the years (period) ended
December 31, 1996 and 1995 and 1994.............................................................................. F-7
Notes to Consolidated Financial Statements......................................................................... F-9
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Appalachian Bancshares, Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of Appalachian Bancshares, Inc. and Subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 1996 and 1995 and for the period from May
26, 1994 (inception) to December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Appalachian Bancshares, Inc. and Subsidiary as of December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1996 and 1995 and for the period from May 26, 1994
(inception) to December 31, 1994, in conformity with generally accepted
accounting principles.
/s/ Schauer, Taylor, Cox & Edwards, P.C.
----------------------------------------
Schauer, Taylor, Cox & Edwards, P.C.
Birmingham, Alabama
February 3, 1997
F-3
<PAGE>
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Assets
Cash............................................................. $ 866,211 $ 244,111
Due from banks................................................... 1,658,182 1,545,987
Federal funds sold............................................... 1,150,000 1,970,000
Securities available for sale.................................... 20,131,443 14,050,902
Securities held to maturity, estimated fair value of
$2,277,884 for 1996............................................ 2,247,479 -0-
Loans............................................................ 64,961,742 32,168,696
Allowance for loan losses........................................ (655,296) (324,599)
------------ -------------
Net Loans............................................... 64,306,446 31,844,097
Premises and equipment, net...................................... 1,673,203 1,672,504
Accrued interest................................................. 806,811 392,793
Other assets..................................................... 314,116 228,401
------------ -------------
Total Assets............................................ $ 93,153,891 $ 51,948,795
============ =============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing........................................ $ 3,464,810 $ 2,774,362
Interest-bearing........................................... 77,683,071 39,354,469
------------ -------------
Total Deposits........................................... 81,147,881 42,128,831
Securities sold under agreements to repurchase................. 5,283,972 4,311,916
Accrued interest............................................... 154,461 95,352
Long-term debt................................................. 700,000 -0-
Other liabilities.............................................. 62,641 49,366
------------ -------------
Total Liabilities........................................ 87,348,955 46,585,465
Shareholders' Equity
Common stock, par value $5 per share, 20,000,000
shares authorized, 568,000 shares issued and
outstanding................................................... 2,840,000 2,840,000
Capital surplus................................................ 2,829,314 2,829,314
Accumulated earnings (deficit)................................. 168,593 (348,143)
Unrealized gains (losses) on investment securities
available for sale, net of deferred tax or tax benefit....... (32,971) 42,159
------------ -------------
Total Shareholders' Equity............................... 5,804,936 5,363,330
------------ -------------
Total Liabilities and Shareholders' Equity............... $ 93,153,891 $ 51,948,795
============ =============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended For the Period
December 31, May 26, 1994
-------------------------------------------- to December 31,
1996 1996 1994
------------------ ------------------ -----------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans......................... $ 5,205,131 $ 1,654,502 $ -0-
Interest on investment securities:
Taxable securities................................ 977,917 493,281 62,147
Nontaxable securities............................. 24,228 -0- -0-
Interest on federal funds sold..................... 104,021 180,420 3,331
Interest on deposits in other banks................ -0- -0- 12,658
----------------- ----------------- ----------------
Total Interest Income...................... 6,311,297 2,328,203 78,136
----------------- ----------------- ----------------
Interest Expense
Interest on deposits............................... 3,436,060 1,225,610 -0-
Interest on federal funds purchased and
securities sold under agreements to
repurchase........................................ 219,500 52,565 -0-
Interest on notes payable.......................... 4,667 -0- 12,031
----------------- ----------------- ----------------
Total Interest Expense..................... 3,660,227 1,278,175 12,031
----------------- ----------------- ----------------
Net Interest Income..................................... 2,651,070 1,050,028 66,105
Provision for loan losses............................... 368,000 330,000 -0-
----------------- ----------------- ----------------
Net Interest Income
After Provision For Loan Losses.................... 2,283,070 720,028 66,105
----------------- ----------------- ----------------
Noninterest Income
Service charges on deposits........................ 134,642 54,592 -0-
Insurance commissions.............................. 24,355 19,410 -0-
Other operating income............................. 85,055 25,107 -0-
Investment securities gains........................ 8,894 11,417 -0-
----------------- ----------------- ----------------
Total Noninterest Income................... 252,946 110,526 -0-
----------------- ----------------- ----------------
Noninterest Expenses
Salaries and employee benefits..................... 892,992 658,239 126,442
Occupancy expense.................................. 96,165 61,578 6,409
Furniture and equipment expense.................... 126,439 64,820 -0-
Other operating expenses........................... 599,776 419,581 34,685
----------------- ----------------- ----------------
Total Noninterest Expenses................. 1,715,372 1,204,218 167,536
----------------- ----------------- ----------------
Income (Loss) before income taxes....................... 820,644 (373,664) (101,431)
Income tax (provision) benefit.......................... (303,908) 126,952 -0-
----------------- ----------------- ----------------
Net Income (Loss)....................................... $ 516,736 $ (246,712) $ (101,431)
================= ================= ================
Earnings (Loss) Per Common Share
Primary and Fully Diluted
Net earnings (loss) common share................... $ .91 $ (.43) $ (.18)
Weighted average common shares
outstanding....................................... 568,000 568,000 568,000
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31,
1996 and 1995 and For the Period May 26, 1994
(inception) to December 31, 1994
<TABLE>
<CAPTION>
Unrealized
Accumulated Gains
Common Capital Earnings (Losses) on
Stock Surplus (Deficit) Securities Total
---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at May 26, 1994................ $ -0- $ -0- $ -0- $ -0- $ -0-
Net Loss - 1994........................ -0- -0- (101,431) -0- (101,431)
Issuance of Common Stock............... 2,840,000 2,840,000 -0- -0- 5,680,000
Stock offering costs................... -0- (10,686) -0- -0- (10,686)
Net Change in Unrealized Gains
(Losses) on Securities............. -0- -0- -0- (5,995) (5,995)
---------- ---------- ----------- -------- ----------
Balance at December 31, 1995........... 2,840,000 2,829,314 (101,431) (5,995) 5,561,888
Net Loss - 1995........................ -0- -0- (246,712) -0- (246,712)
Net Change in Unrealized Gains
(Losses) on Securities............. -0- -0- -0- 48,154 48,154
---------- ---------- ----------- -------- ----------
Balance at December 31, 1995........... 2,840,000 2,829,314 (348,143) 42,159 5,363,330
Net Income - 1996...................... -0- -0- 516,736 -0- 516,736
Net Change in Unrealized Gains
(Losses) on Securities............. -0- -0- -0- (75,130) (75,130)
---------- ---------- ----------- -------- ----------
Balance at December 31, 1996........... $2,840,000 $2,829,314 $ 168,593 $(32,971) $5,804,936
========== ========== =========== ======== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
For the Period
For the Years ended December 31, May 26, 1994
-------------------------------------------- to Dec. 31
1996 1995 1994
-------------------- ------------------- --------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)..................................... $ 516,736 $ (246,712) $ (101,431)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for depreciation and amortization........... 133,986 86,268 -0-
Amortization of investment security premiums
and accretion of discounts.......................... (6,366) (31,214) (6,089)
Provision for loan losses............................. 368,000 330,000 -0-
Deferred tax (benefit)................................ 925 (126,952) -0-
Realized investment security gains.................... (8,894) (11,417) -0-
Increase in accrued interest receivable............... (414,018) (366,131) (26,662)
Increase in accrued interest payable.................. 59,109 95,352 -0-
Other................................................. (37,647) (11,660) (71,798)
---------------- ------------------ -------------
Net cash provided by (used in) operating
activities....................................... 611,831 (282,466) (205,980)
---------------- ------------------ -------------
Investing activities:
Proceeds from sales of securities available for sale.. 4,497,500 2,708,282 -0-
Proceeds from maturity of securities available
for sale............................................ 4,531,902 3,400,000 -0-
Purchase of securities available for sale............. (15,208,797) (6,643,363) (738,508)
Purchase of securities held to maturity............... (2,247,479) (9,474,574) (3,189,860)
Net increase in loans to customers.................... (32,830,349) (32,174,097) -0-
Capital expenditures.................................. (118,918) (864,569) (884,828)
---------------- ------------------ -------------
Net cash used in investing activities............... (41,376,141) (43,048,321) (4,813,196)
---------------- ------------------ -------------
Financing activities:
Net increase in demand deposits, NOW accounts,
and savings accounts................................ 16,452,274 21,127,653 -0-
Net increase in certificates of deposit............... 22,554,275 21,001,178 -0-
Net increase in securities sold under agreement to
repurchase.......................................... 972,056 4,311,916 -0-
Proceeds from notes payable........................... 700,000 -0- 600,075
Repayment of notes payable............................ -0- -0- (600,075)
Issuance of common stock.............................. -0- -0- 5,680,000
Stock issue costs..................................... -0- -0- (10,686)
---------------- ------------------ -------------
Net cash provided by financing activities........... 40,678,605 46,440,747 5,669,314
---------------- ------------------ -------------
Net increase (decrease) in cash and cash equivalents..... (85,705) 3,109,960 650,138
Cash and cash equivalents at beginning of year........... 3,760,098 650,138 -0-
---------------- ------------------ ------------
Cash and cash equivalents at end of year................. $ 3,674,393 $ 3,760,098 $ 650,138
================ ================== =============
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Cash paid during the year for:
<S> <C> <C> <C>
Interest.............................................. $ 3,601,118 $ 1,182,823 $ 12,031
Income taxes.......................................... 301,983 -0- -0-
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
Investment securities of $13,175,783 were transferred during 1995 to
securities available for sale in accordance with the provisions of SFAS 115.
Other real estate of $59,275 was acquired in 1996 through foreclosure.
See notes to consolidated financial statements
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
Note 1 - Summary of Significant Accounting Policies
Basis of Consolidation: The consolidated financial statements include the
accounts of Appalachian Bancshares, Inc. (the "Company") and its wholly-owned
subsidiary, Gilmer County Bank (the "Bank"). Prior to August 1996, Gilmer County
Bank operated as an independent bank. The Company was formed in May 1996 for the
purpose of acquiring all the outstanding stock of Gilmer County Bank, and
operating as a bank holding company. On August 8, 1996 Gilmer County Bank became
a wholly-owned subsidiary of the Company. The acquisition was accounted for as a
pooling of interests. Net income of the subsidiary has been included for all
prior periods. Unless otherwise indicated herein, the financial results of the
Company refer to the Company and the Bank on a consolidated basis. References to
the Company relating to the period prior to the consolidation on August 8, 1996,
relate to Gilmer County Bank as an independent entity.
Business: On May 25, 1994, Gilmer County Bank's charter was approved by the
Georgia Department of Banking and Finance. On May 26, 1994, the Bank was
incorporated under the laws of the State of Georgia. The Bank opened for
business on March 3, 1995. The Bank provides a full range of banking services to
individual and corporate customers in Gilmer County and surrounding areas.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of foreclosed real estate. In connection with the determination of the
estimated losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, further reductions in the carrying amounts of loans and
foreclosed assets may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the estimated losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
Investment Securities:
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in other income.
Securities Held-to-Maturity: Government, Federal agency, and corporate debt
securities that management has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts that are recognized in interest income using methods
approximating the interest method over the period to maturity. Mortgage-backed
securities represent participating interest in pools of long-term first mortgage
loans originated and serviced by issuers of the securities. Mortgage-backed
securities are carried at unpaid principal balances, adjusted for unamortized
premiums and unearned discounts. Premiums and discounts are amortized using
methods approximating the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
F-9
<PAGE>
Securities Available for Sale: Available-for-sale securities consist of
investment securities not classified as trading securities or as
held-to-maturity securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and losses on the sale
of available-for-sale securities are determined using the
specific-identification method. The amortization of premiums and the accretion
of discounts are recognized in interest income using methods approximating the
interest method over the period of maturity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company and its subsidiaries have no trading securities.
Loans: Loans are stated at unpaid principal balances, less the allowance for
loan losses and net deferred loan fees and unearned discounts.
Unearned discounts on installments loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other impaired loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determined based on collateral values or the
present value of the estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Expenditures for additions and major improvements that
significantly extend the useful lives of the assets are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred. The
carrying value of assets traded in are used to adjust the carrying values of the
new assets acquired by trade. Assets which are disposed of are removed from the
accounts and the resulting gains or losses are recorded in operations.
Depreciation is provided generally by accelerated and straight-line methods
based on the estimated useful lives of the respective assets.
Foreclosed Real Estate: Foreclosed real estate includes both formally foreclosed
property and in-substance foreclosed property. In-substance foreclosed
properties are those properties for which the institution has taken physical
possession, regardless of whether formal foreclosure proceedings have taken
place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amounts or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at the
date of acquisition are charged to the allowance for loan losses. After
foreclosure, these assets are carried at the lower of their new cost basis or
fair value less cost to sell. Costs incurred in maintaining foreclosed real
estate and subsequent adjustments to the carrying amount of the property are
included in income (loss) on foreclosed real estate.
F-10
<PAGE>
Income Taxes: Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
available-for-sale securities, allowance for loan losses, estimated losses on
foreclosed real estate, accumulated depreciation, and accrued employee benefits
for financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
The Company and its subsidiaries file a consolidated federal income tax return.
The subsidiaries provide for income taxes on a separate return basis, and remit
to the Company amounts determined to be currently payable.
Earnings Per Common Share: Earnings per common share are calculated on the basis
of the weighted average number of common shares outstanding.
Employee Benefit Plan: The Company has a 401(k) profit-sharing plan covering
substantially all of its employees. Eligible participating employees may elect
to contribute tax deferred contributions. Company contributions to the plan are
determined by the Board of Directors.
Intangibles: Intangibles consist primarily of legal, consulting and regulatory
fees charged to organizational costs. Organizational costs are generally
amortized over 5 years using the straight-line method.
Off-Balance Sheet Financial Instruments: In the ordinary course of business the
Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements,
commercial letters of credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.
The Bank also has available as a source of short-term financing the purchase of
federal funds from another commercial bank from an available line of up to
$1,500,000. The Bank increased this line to $2,000,000 subsequent to the end of
fiscal 1996.
Cash Flow Information: For purposes of the statements of cash flows, the Company
considers cash, due from banks and federal funds sold as cash and cash
equivalents.
Fair Values of Financial Instruments: Statement of Financial Accounting Standard
No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosures of fair value information about financial instruments, whether or
not recognized in the statement of financial condition. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instruments. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statements of
financial condition for cash and cash equivalents approximate those assets' fair
values.
Investment securities (including trading account securities): Fair values for
investment securities are based on quoted market prices, where available. If a
quoted market price is not available, fair values are based on quoted market
prices of comparable instruments.
F-11
<PAGE>
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values of other loans (for example, fixed rate commercial real estate and rental
property mortgage loans and commercial and industrial loans) are estimated using
discounted cash flow analysis, based on interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. Loan fair
value estimates include judgments regarding future expected loss experience and
risk characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where applicable.
Accrued interest receivable: The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable rate, fixed-term money
market accounts and certificates of deposit approximate their fair values. Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Accrued interest payable: The carrying amount of accrued interest payable
approximates its fair value.
Short-term borrowings and notes payable: The carrying amounts of short-term
borrowings and notes payable approximates their fair values.
Long Term Debt: For long-term debt, which bears interest at a current rate, the
carrying amount is a reasonable estimate of fair value.
Loan commitments: Commitments to extend credit were evaluated and fair value was
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair
value also considers the difference between current levels of interest rates and
the committed rates.
Reclassification: Certain amounts in 1994 and 1995 have been reclassified to
conform with the 1996 presentation.
Recently Issued Accounting Standards: In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." This statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of the assets
described above is measured by a comparison of the carrying amount of the asset
to future undiscounted cash flows expected to be generated by the asset. If such
assets are considered impaired, the amount of impairment to be recognized it
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. Adoption of SFAS No. 121
did not have a material impact on the Company's consolidated financial
statements.
In May 1995, the FASB also issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights." This statement amends certain provisions of SFAS No. 65 to
substantially eliminate the accounting distinction between rights to service
mortgage loans for others that are acquired through loan origination activities
and those acquired through purchase transactions. The statement requires an
allocation of the total cost of mortgage loans held for sale to mortgage
servicing rights and mortgage loans held for sale (without mortgage servicing
rights) based on their relative fair values. The adoption of SFAS No. 122 did
not have a material impact on the Company's consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for an
employee stock option plan. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and stock-based
nonemployee compensation. These transactions must be accounted for based on the
fair value of the consideration received or the
F-12
<PAGE>
fair value of the equity instruments issued, whichever is more reliably
measured. Under the fair value based method, compensation is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, SFAS No. 123 allows an
entity to continue to measure compensation costs for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The adoption of this statement did
not have a material effect on the Company's consolidated financial statements.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
was amended by SFAS No. 127, which defers the effective date of certain
provisions of SFAS No. 125 until January 1, 1998. SFAS No. 125 is to be applied
prospectively to transfers and servicing of financial assets and extinguishments
of liabilities after December 31, 1996. This statement utilizes the financial
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. Management does not believe that adoption of SFAS No. 125 will
have a material impact on the Company's consolidated financial statements.
Effective for fiscal years ending after December 15, 1996, SFAS No. 126
"Exemption from Certain Required Disclosures about Financial Instruments for
Certain Nonpublic Entities" was issued by the FASB which amends FASB No. 107
"Disclosures about Fair Value of Financial Instruments." This statement allows
an entity to be exempt from the SFAS No. 107 disclosures if the following
criteria are met: the entity is a nonpublic entity, the entity's total assets
are less than $100 million on the date of the financial statements, and the
entity has not held or issued any derivative financial instruments, as defined
in FASB No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," other than loan commitments, during the
reporting period. This statement did not impact the Company's consolidated
financial statements.
Note 2 - Restrictions on Cash and Due from Bank Accounts
The Company is required to maintain average reserve balances either in vault
cash or on deposit with the Federal Reserve Bank. At December 31, 1996, the
average amount of the required reserves was $466,000.
Note 3 - Investment Securities
During 1995, the Financial Accounting Standards Board issued a report clarifying
several provisions of SFAS 115. The report authorized entities to "reassess the
appropriateness of the classifications of all securities" that were held when
the current rule took effect, without risking the classification of other
securities, for a limited period of time from November 15, 1995 to December 31,
1995. On November 30, 1995, the Bank transferred securities with a carrying
value of $8,985,745 and fair value of $9,015,431 from held to maturity to
available for sale.
At December 31, 1996, the Company's available for sale securities reflected net
unrealized losses of $49,995 which resulted in a decrease in shareholders'
equity of $32,971, net of the deferred tax asset. At December 31, 1995, the
Company's available for sale securities reflected net unrealized gains of
$64,159, which resulted in an increase in shareholders' equity of $42,159, net
of deferred tax liability, as opposed to net unrealized losses of $9,083 and a
resultant decrease in shareholders' equity of $5,995, net of deferred tax
benefit, at December 31, 1994.
F-13
<PAGE>
The carrying amounts of investment securities as shown in the statement of
financial condition of the Bank and their approximate fair values at December
31, 1996 and 1995 are presented below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Unrealized Unrealized Estimated
Amortized Cost Gains Losses Fair Value
--------------- -------------- ------------------ ---------------
As of December 31, 1996:
Securities Available for Sale:
U.S. Government agency
securities........................ $ 17,812,497 $ 26,849 $ 70,167 $ 17,769,179
Mortgage backed securities........... 2,223,901 4,681 11,318 2,217,264
State and municipal securities....... 145,000 -0- -0- 145,000
---------------- -------------- -------------- ----------------
$ 20,181,398 $ 31,530 $ 81,485 $ 20,131,443
================ ============== ============== ================
Securities Held to Maturity:
State and municipal securities....... $ 2,247,479 $ 34,861 $ 4,456 $ 2,277,884
================ ============== ============== ================
As of December 31, 1995:
Securities Available for Sale:
U.S. Government agency
securities......................... $ 13,986,743 $ 71,022 $ 6,863 $ 14,050,902
================ ============== ============== ================
</TABLE>
The contractual maturities of securities available for sale at December 31, 1996
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> -------------------- ------------------
<C> <C>
Securities Available for Sale:
Due in one year or less............................................ $ 1,247,425 $ 1,242,229
Due after one year through five years.............................. 9,142,211 9,137,302
Due after five years through ten years............................. 9,646,762 9,606,912
Due after ten years................................................ 145,000 145,000
----------------- ------------------
$ 20,181,398 $ 20,131,443
================= ==================
Securities Held to Maturity:
Due after five years through ten years............................. $ 165,007 $ 165,007
Due after ten years................................................ 2,082,472 2,112,877
----------------- ------------------
$ 2,247,479 $ 2,277,884
================= ==================
</TABLE>
Proceeds from sales of investments in debt securities during 1996 were
$4,497,500. Gross gains of $5,626 and gross losses of $825 were realized on
those sales. Proceeds from such sales in 1995 were $2,708,282. Gross gains of
$11,417 were realized on those sales. Net gains on maturities of investment
securities totaled $4,093 for 1996.
F-14
<PAGE>
The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $7,197,000 and $4,989,000 at
December 31, 1996 and 1995, respectively.
Approximately sixty days subsequent to the Bank's opening on March 3, 1995,
management evaluated its investment securities portfolio for purposes of proper
categorization between held to maturity and available for sales in consideration
of the existing maturities and rates of the loans and deposits acquired in the
first two months of operation. As a result of this evaluation, held to maturity
securities with a carrying value of $4,190,038 and fair value of $4,197,772 were
transferred to available for sale.
Note 4 - Loans
The Company grants loans to customers primarily in the North Georgia area. The
major classifications of loans as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural........ $ 13,911,050 $ 10,892,707
Real estate - construction.................... 4,811,413 1,633,719
Real estate - mortgage........................ 35,288,824 13,671,555
Consumer...................................... 8,627,652 5,117,308
Other loans................................... 2,322,803 853,407
------------ ------------
64,961,742 32,168,696
Allowance for loan losses..................... (655,296) (324,599)
------------ ------------
Net loans..................................... $ 64,306,446 $ 31,844,097
============ ============
</TABLE>
As of December 31, 1996, there were no loans which the Company had specifically
classified as impaired. Other nonaccrual loans at December 31, 1996 and 1995,
amounted to approximately $57,000 and $46,000, respectively. For the years ended
December 31, 1996 and 1995, the difference between gross interest income that
would have been recorded in such period if nonaccruing loans had been current in
accordance with their original terms and the amount of interest income on those
loans that was included in such period's net income was negligible.
The Company has no commitments to loan additional funds to the borrowers of
nonaccrual loans.
Note 5 - Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Balance at beginning of year.................. $ 324,599 $ -0-
Charge-offs................................... 38,225 5,401
Recoveries.................................... 922 -0-
--------- ---------
Net Charge-offs............................... 37,303 5,401
Provision for loan losses..................... 368,000 330,000
--------- ---------
Balance at end of year........................ $ 655,296 $ 324,599
========= =========
</TABLE>
F-15
<PAGE>
Note 6 - Premises and Equipment
Premises and equipment as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land..................................... $ 329,900 $ 329,900
Vehicles................................. 48,134 -0-
Buildings and improvements............... 883,084 877,584
Furniture................................ 602,434 537,149
----------- -----------
1,863,552 1,744,633
Less allowance for depreciation.......... 190,349 72,129
----------- -----------
$ 1,673,203 $ 1,672,504
=========== ===========
</TABLE>
The provision for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 1996 and 1995, was $118,219 and
$72,129, respectively. No depreciation expense was recognized for the period May
26, 1994 through December 31, 1994.
Note 7 - Deposits
The major classifications of deposits as of December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Noninterest-bearing demand.......................... $ 3,464,810 $ 2,774,362
Interest-bearing demand............................. 19,691,248 11,526,025
Savings............................................. 14,436,370 6,827,266
Time................................................ 31,462,158 15,304,240
Certificates of deposit of $100,000 or more......... 12,093,295 5,696,938
------------ ------------
$ 81,147,881 $ 42,128,831
============ ============
</TABLE>
The maturities of time certificates of deposit and other time deposits of
$100,000 or more issued by the Company at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Time
Certificates
of Deposit
-----------------
<S> <C>
Three months or less............................ $ 1,324,979
Over three through six months................... 2,072,425
Over six through twelve months.................. 2,744,929
Over twelve months.............................. 5,950,962
-----------------
$ 12,093,295
=================
</TABLE>
Note 8 - Long-Term Debt
In November 1996, the Company obtained a $1 million unsecured line of credit at
another financial institution. At December 31, 1996, the balance on the line of
credit was $700,000. Interest is payable on a quarterly basis at the prime rate
less 3/4 of a percentage point. The first interest payment is due April 1, 1997.
Principal is due in five equal annual installments beginning January 1, 1999
with the last payment due January 1, 2003.
F-16
<PAGE>
Maturities of long-term debt following December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997................................................................ $ -0-
1998................................................................ 0-
1999................................................................ 140,000
2000................................................................ 140,000
2001................................................................ 140,000
Thereafter.......................................................... 280,000
------------
Total long-term debt............................................. $ 700,000
============
</TABLE>
The loan agreement requires that the Company maintain, among other things,
certain financial ratios. At December 31, 1996 the Company was in compliance
with these ratios.
Note 9 - Securities Sold Under Agreement to Repurchase
Securities sold under agreements to repurchase amounted to $5,283,972 as of
December 31, 1996. The weighted average maturity of the agreements was 90 days.
The weighted average rate was 4.5 percent. The securities sold under the
agreement to repurchase relate to U.S. government agency securities held in the
Company's investment portfolio. The Company may substitute the underlying
securities with other securities held in its portfolio in its discretion.
Accrued interest on the underlying securities was $61,761.
Securities sold under agreements to repurchase averaged $4,487,562 during 1996.
The maximum amount outstanding at any month end during 1996 was $5,283,972.
Note 10 - Other Operating Expenses
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Advertising...................................... $ 93,020 $ 78,660 $ 7,028
Checking account expense......................... 29,751 21,980 -0-
Data Processing.................................. 46,843 30,676 -0-
Director and committee fees...................... 18,900 -0- -0-
Insurance........................................ 26,468 30,764 1,587
Other............................................ 84,001 63,818 18,058
Postage.......................................... 51,511 26,221 924
Professional fees................................ 121,102 62,657 1,702
Stationery and supplies.......................... 105,949 89,501 5,386
Taxes and licenses............................... 22,231 15,304 -0-
--------- --------- --------
Total other operating expenses................ $ 599,776 $ 419,581 $ 34,685
========= ========= ========
</TABLE>
F-17
<PAGE>
Note 11 - Income Taxes
The Company had income taxes payable of $9,547 as of December 31, 1996.
The components of the net deferred income tax asset included in other assets are
as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax asset:
Federal............................................ $198,341 $141,601
Deferred tax liability:
Federal............................................ (45,782) (36,649)
-------- --------
Net deferred income tax asset...................... $152,559 $104,952
======== ========
</TABLE>
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net operating loss carryover......................... $ -0- $ 71,542
Net unrealized losses (gains) on securities
available for sale................................. 16,985 (22,000)
Depreciation......................................... (45,782) (14,649)
Provision for loan losses............................ 159,138 72,902
Other................................................ 22,218 (2,843)
-------- --------
$152,559 $104,952
======== ========
</TABLE>
The principal sources of temporary differences resulting in deferred income
taxes included in the accompanying statement of income and the tax effect of
each are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net operating loss carryover......................... $ 71,542 $ (71,542)
Depreciation......................................... 31,133 14,649
Provision for loan losses............................ (100,756) (72,902)
Other................................................ (10,541) 2,843
--------- ---------
$ (8,622) $(126,952)
========= =========
</TABLE>
Tax effects of securities transactions resulted in an increase in income tax
provision of $3,024 for 1996 and a decrease in income tax benefit for 1995 of
$3,882.
The components of income tax expense for the years 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Current Federal income tax expense.................... $312,530 $ -0-
Deferred income tax expense........................... (8,622) (126,952)
-------- ---------
$303,908 $(126,952)
======== =========
</TABLE>
F-18
<PAGE>
A reconciliation of income tax expense with the amount computed by applying the
statutory income tax rate to income before taxes is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Federal annualized rate of 34% of income before income taxes.......... $ 279,019 $(127,046)
Tax exempt interest from securities and loans......................... (17,485) -0-
Other Adjustments..................................................... 42,374 94
--------- ----------
$ 303,908 $(126,962)
========= =========
</TABLE>
Note 12 - Commitments and Contingencies
In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit, and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extension of credit that are recorded on the statement of
financial condition. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Company. The Company has not been
required to perform on any financial guarantees nor has it incurred any losses
on its commitments in 1996 or 1995. Following is a discussion of these
commitments:
Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. As of December
31, 1996 and 1995, the Company had issued standby letters of credit of
approximately $56,000 and $5,000, respectively.
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Company's allowance for loan losses. Management does not anticipate any material
losses as a result of these letters of credit.
Loan Commitments: As of December 31, 1996 and 1995, the Company had commitments
outstanding to extend credit totaling approximately $6,410,000 and $5,353,000
respectively. These commitments generally require the customers to maintain
certain credit standards.
Management does not anticipate any material losses as a result of these
commitments.
Litigation: The Company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims are not
material to the financial statements.
Note 13 - Concentrations of Credit
All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. The concentrations of credit by type of
loan are set forth in Note 4. Additionally, there exists a substantial
concentration of loans in the poultry industry. At December 31, 1996 there
existed approximately $11 million of such loans outstanding. The commitments to
extend credit relate primarily to unused real estate draw lines.
The Company maintains its cash accounts at various commercial banks. The total
cash balances are insured by the FDIC up to $100,000. Total uninsured balances
held at other commercial banks amounts to $332,000 at December 31, 1996. All
cash balances held at other commercial banks were insured at December 31, 1995.
F-19
<PAGE>
Note 14 - Shareholders' Equity
The Bank raised $5,680,000 in capital as part of its initial stock offering in
1994, of which $2,840,000 was allocated to common stock and $2,840,000 was
allocated to capital surplus. Legal, printing and other costs of issuance of
stock amounting to $10,686, were applied against capital surplus.
The Board of Directors of any state-chartered bank in Georgia may declare and
pay cash dividends on its outstanding capital stock without any request for
approval of the Company's regulatory agency if the following conditions are met:
1. Total classified assets at the most recent examination of the Company do not
exceed 80% of equity capital.
2. The aggregate amount of dividends declared in the calendar year does not
exceed 50% of the prior year's net income.
3. The ratio of equity capital to adjusted assets shall not be less than 6%.
As of January 1, 1997, the Company could declare dividends of approximately
$160,000 without regulatory consent, subject to the Bank's compliance with
regulatory capital restrictions. It is anticipated that any such dividend will
be used for the payment of long term debt service.
Note 15 - Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary--actions by
regulators that, if undertaken, could have a direct material effect on the Bank
and the consolidated financial statements. Under regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective guidelines are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all federal capital adequacy requirements to which it is subject.
As of June 3, 1996, the most recent notification from the Georgia Department of
Banking and Finance, the Bank was "well capitalized" under the federal
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum Total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that date that management believes has changed the institution's
category. However, as is discussed below, the Bank from time to time has not
been in full compliance with additional capital requirements imposed by the DBF.
F-20
<PAGE>
The Bank's actual capital amounts and ratios as of December 31, 1996 are also
presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Correct
Actual Adequacy Purposes Action Provisions
--------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
greater than or greater than or greater than or greater than or
Total Capital equal to equal to equal to equal to
(to Risk-Weighted Assets)....... $7,122,433 10.3% $5,446,913 8.0% $6,908,641 10.0%
greater than or greater than or greater than or greater than or
Tier 1 Capital equal to equal to equal to equal to
(to Risk-Weighted Assets)....... $6,467,137 9.4% $2,723,457 4.0% $4,085,186 6.0%
greater than or greater than or greater than or greater than or
Tier 1 Capital equal to equal to equal to equal to
(to Average Assets)............. $6,467,137 5.9% $2,893,855 4.0% $3,283,370 5.0%
</TABLE>
The Georgia Department of Banking and Finance also imposes capital requirements
on the Bank. As a condition to its charter approval in 1994, the Bank undertook
to maintain an 8% ratio of total capital to total assets. As of December 31,
1996, this ratio (as calculated by the DBF) was 7.7%. The DBF has required the
Bank to implement measures to maintain the ratio at 8% through March 1998.
Management and the Bank have approved plans to establish an employee stock
purchase feature within the Company's 401(k) pension plan, the issue, if needed,
of subordinated debt, and the implementation of a controlled growth plan to
enhance profitability and achieve compliance with the DBF's capital
requirements.
Note 16 - Employee Benefit Plan
The Company adopted a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company's contribution to the plan is
determined by the Board of Directors. In 1996, the plan was amended to allow
employer and employee contributions to be made in the form of cash or Company
stock. The Company made a discretionary cash contribution of $36,693 to the plan
in 1996. No contributions were made by the Company in 1995 and 1994.
Subsequent to year end 1996, the Company approved an employee stock ownership
plan (ESOP) which allows the Company to purchase Company stock for the
participants of the plan.
Note 17 - Related Party Transactions
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Bank during 1996 and 1995. Such loans are made in the ordinary course of
business at normal credit terms, including interest rates and collateral and do
not represent more than a normal risk of collection. An analysis of related
party activity during 1996 and 1995 is presented below.
<TABLE>
<CAPTION>
1996 1995
------------------ ----------------
<S> <C> <C>
Beginning of year....................... $ 4,385,960 $ -0-
New Loans............................... 537,949 4,866,802
Other................................... 121,329 480,842
---------------- ----------------
End of Year............................. $ 4,802,580 $ 4,385,960
================ ================
</TABLE>
Deposits: Deposits held from related parties were $569,006 and $539,316 at
December 31, 1996 and 1995, respectively.
F-21
<PAGE>
Other: The Company utilized the services of an accounting firm, of which a
director is a partner, for internal review and various other accounting and tax
services. Amounts paid were at a rate comparable to that which could have been
obtained from unrelated parties.
Note 18 - Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments........... $ 3,674 $ 3,674 $ 3,760 $ 3,760
Investment securities..................... 22,379 22,409 14,051 14,051
Loans..................................... 64,962 65,108 32,169 32,323
Accrued interest receivable............... 807 807 393 393
--------- --------- --------- ---------
Total Financial Assets................. $ 91,822 $ 91,988 $ 50,373 $ 50,527
========= ========= ========= =========
Financial Liabilities:
Deposits.................................. 81,148 81,263 42,129 42,137
Short-Term borrowings..................... 5,284 5,284 4,312 4,312
Accrued interest payable.................. 154 154 95 95
Long-Term Debt............................ 700 700 -0- -0-
--------- --------- --------- ---------
Total Financial Liabilities............ $ 87,286 $ 87,401 $ 46,536 $ 46,544
========= ========= ========= =========
Unrecognized financial instruments:
Commitments to extend credit.............. $ 6,410 $ 6,410 $ 5,353 $ 5,353
Standby letters of credit................. 56 56 5 5
--------- --------- --------- ---------
Total unrecognized financial
instruments............................... $ 6,466 $ 6,466 $ 5,358 $ 5,358
========= ========= ========= =========
</TABLE>
(Remainder of Page Intentionally Left Blank)
F-22
<PAGE>
Note 19 - Business Combination
On August 8, 1996, the Company effected a business combination with Gilmer
County Bank by exchanging 568,000 shares of its common stock for all the
outstanding common stock of Gilmer County Bank. The combination has been
accounted for as a pooling of interests and, accordingly, all prior financial
statements have been restated to include Gilmer County Bank. The results of
operations of the separate entities for periods prior to the combination are
summarized as follows:
<TABLE>
<CAPTION>
Net Income
-----------------
<S> <C>
For the period from January 1, 1996 through August 8, 1996:
Appalachian Bancshares, Inc..................................................................... $ -0-
Gilmer County Bank.............................................................................. 276,370
-----------------
276,370
=================
Year ended December 31, 1995:
Appalachian Bancshares, Inc..................................................................... $ -0-
Gilmer County Bank.............................................................................. (246,712)
-----------------
$ (246,712)
=================
For the period May 26, 1994 through December 31, 1994:
Appalachian Bancshares, Inc.................................................................... $ -0-
Gilmer County Bank............................................................................. (101,431)
-----------------
$ (101,431)
=================
</TABLE>
Note 20 - Condensed Parent Information
<TABLE>
<CAPTION>
Statement of Financial Condition
December 31,
1996
-----------------
<S> <C>
Assets
Cash and due from banks........................................................................ $ 844
Investment in Subsidiary (equity method)
eliminated upon consolidation................................................................. 6,479,620
Intangibles, net............................................................................... 26,726
Other Assets................................................................................... 2,413
---------------
Total Assets............................................................................... $ 6,509,603
===============
Liabilities and Shareholders' Equity
Note Payable................................................................................... $ 700,000
Other Assets................................................................................... 4,667
---------------
Total Liabilities.......................................................................... 704,667
Total Shareholders' Equity................................................................. 5,804,936
---------------
Total Liabilities and Shareholders' Equity................................................. $ 6,509,603
===============
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
Statement of Income
Period from
August 8, 1996
to Dec. 31,
1996
--------------
<S> <C>
Income
From subsidiary - eliminated upon consolidation
Dividends................................................................... $ 30,000
---------
Expenses
Interest.................................................................... 4,667
Other expenses.............................................................. 2,430
---------
7,097
---------
Income before income taxes and equity in
undistributed earnings of subsidiary........................................ 22,903
Income tax benefits........................................................... (2,413)
---------
Income before equity in undistributed earnings
of subsidiary............................................................... 25,316
Equity in undistributed earnings of subsidiary................................ 240,366
---------
Net Income.................................................................. $ 265,682
=========
</TABLE>
(Remainder of Page Intentionally Left Blank)
F-24
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
Period from
August 8, 1996
to Dec. 31, 1996
-----------------
<S> <C>
Cash flows from operating activities:
Net Income............................................................................. $ 265,682
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of subsidiaries.......................................... (240,366)
Provision for amortization.............................................................. 2,430
Increase in other assets................................................................ (31,569)
Increase in other liabilities.......................................................... 4,667
---------
Net cash provided by operating activities............................................... 844
---------
Cash flows from financing activities:
Proceeds from notes payable............................................................. 700,000
Increase to investment in subsidiary.................................................... (700,000)
----------
Net cash provided by financing activities............................................... -0-
----------
Net increase in cash and cash equivalents.................................................. 844
----------
Cash due from banks at beginning of year................................................ -0-
----------
Cash and due from banks at end of year..................................................... $ 844
==========
Supplemental disclosures of cash flow information
Cash paid (received) during the year for:
Interest............................................................................... -0-
Income Taxes........................................................................... -0-
Supplemental schedule of non-cash investing and financial activities:
None
</TABLE>
F-25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
--------------------------
Tracy R. Newton, President
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
/s/ Tracy R. Newton Date: March 24, 1997
- --------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director
[Principal Executive Officer]
/s/ Kent W. Sanford Date: March 24, 1997
- --------------------------------------------
Kent W. Sanford, Executive Vice President,
Chief Financial Officer and Chief Operating
Officer
[Principal Financial and Accounting Officer]
/s/ Alan S. Dover Date: March 24, 1997
- --------------------------------------------
Alan S. Dover, Director
/s/ Charles A. Edmondson Date: March 24, 1997
- --------------------------------------------
Charles A. Edmondson, Director
/s/ Roger E. Futch Date: March 24, 1997
- --------------------------------------------
Roger E. Futch, Director
/s/ Joseph C. Hensley Date: March 24, 1997
- --------------------------------------------
Joseph C. Hensley, Director
/s/ Frank E. Jones Date: March 24, 1997
- --------------------------------------------
Frank E. Jones, Director
/s/ J. Ronald Knight Date: March 24, 1997
- --------------------------------------------
J. Ronald Knight, Director
<PAGE>
/s/ P. Joe Sisson Date: March 24, 1997
- ---------------------------
P. Joe Sisson, Director
/s/ Kenneth D. Warren Date: March 24, 1997
- ---------------------------
Kenneth D. Warren, Director
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
10.1 1997 Directors' Non-Qualified Stock Option Plan.
10.2 1997 Employee Incentive Stock Incentive Plan.
10.3 Credit Agreement, dated as of November 25, 1996, between the
Company and Hardwick Bank & Trust Company.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
27 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
APPALACHIAN BANCSHARES, INC.
1997 DIRECTORS' NON-QUALIFIED STOCK OPTION PLAN
1. Establishment and Purpose.
-------------------------
(a) Appalachian Bancshares, Inc., a Georgia corporation (the
"Company"), hereby adopts its 1997 Directors' Non-Qualified Stock Option Plan.
The Plan is intended to provide a means whereby eligible members of the Board
may be given an opportunity to purchase shares of Stock pursuant to options
which are not intended to qualify as incentive stock options under Section 422
of the Code.
(b) The purpose of the Plan is to enable the Company to attract
qualified individuals to serve as members of the Board, to provide additional
performance incentives to such individuals while serving as directors, and to
encourage their continued service on the Board.
2. Definitions.
-----------
As used herein, the following definitions shall apply:
(a) "Affiliate" shall mean any parent or subsidiary corporations of the
Company, as defined in Sections 424(e) and (f) of the Code (but substituting
"the Company" for "employer corporation"), including parents or subsidiaries of
the Company that become such after adoption of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the committee appointed by the Board
pursuant to Section 4.
(e) "Company" shall mean Appalachian Bancshares, Inc., a Georgia
corporation.
(f) "Director" shall mean a member of the Board.
(g) "Effective Date" shall mean the date this Plan is adopted by the
Board.
(h) "Employee" shall mean any person who is an employee of the Company,
or any Affiliate of the Company, for purposes of tax withholding under the Code.
The payment of a director's fee by the Company shall not be sufficient to render
the recipient of such fee an Employee.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" shall mean, as of any date, the value of a
share of Stock determined as follows:
(i) If the Stock is listed on any established stock exchange or
on Nasdaq, its Fair Market Value shall be the closing selling price for such
stock on the principal securities exchange on which the Common Stock is at the
time listed for trading. If there are no sales of Common Stock on that date,
then the closing selling price for the Common Stock on the next preceding day
for which such closing selling price is quoted shall be determinative of Fair
Market Value; or
(ii) If the Stock is not traded on any exchange, its Fair Market
Value shall be determined in good faith by the Board, and such determination
shall be conclusive and binding on all persons.
(k) "Option" shall mean an option to purchase shares of Stock granted
pursuant to the Plan.
<PAGE>
(l) "Option Agreement" shall mean the written agreement setting forth
the terms of an Option.
(m) "Optionee" shall mean an Outside Director who receives an Option.
(n) "Outside Director" shall mean a Director who is not an Employee.
(o) "Person" shall mean a natural person, corporation, partnership,
limited liability company, joint venture, trust, or any other entity and any
government or instrumentality of a government.
(p) "Plan" shall mean this Appalachian Bancshares, Inc. 1997 Directors'
Non-Qualified Stock Option Plan.
(q) "Securities Act" shall mean the Securities Act of 1933, as amended.
(r) "Stock" shall mean the common stock, $5.00 par value per share, of
the Company.
3. Stock Subject to the Plan.
-------------------------
Subject to the provisions of Section 12 of the Plan, the maximum number
of shares of Stock which may be made subject to Options and sold under the Plan
is 100,000 shares of Stock. If an Option expires or becomes unexercisable for
any reason and has not been exercised in full, the Stock subject to such Option
shall be available for future grant under the Plan. If Stock which was acquired
upon exercise of an Option is subsequently repurchased by the Company, such
Stock shall not be available for future grants under the Plan.
4. Interpretation and Administration of the Plan.
---------------------------------------------
(a) Any questions concerning interpretation or execution of the Plan or
grants hereunder shall be decided by the Board. All decisions, determinations
and interpretations of the Board shall be final and binding on all holders of
any Options granted under the Plan.
(b) Subject to the provisions and restrictions of the Plan, the Board
shall have the authority to: (i) authorize any person to execute on behalf of
the Company any agreements or other documents in connection with the grant of an
Option under the Plan; (ii) approve forms of agreement for use under the Plan
consistent with the terms of the Plan; (iii) make all other determinations
deemed necessary or advisable for the implementation of the Plan and (iv) to
designate a Committee of the Board to act on behalf of the Board for all
purposes under this Plan. Members of the Committee shall serve at the pleasure
of the Board. The Committee shall select one of its members as chair of the
Committee and shall hold meetings at such times and places as it may determine.
A majority of the Committee shall constitute a quorum, and acts of the Committee
at which a quorum is present, or acts reduced to or approved in writing by all
the members of the Committee shall be the valid acts of the Committee. If the
Board does not delegate administration of the Plan to the Committee, each
reference in this Plan to the Committee shall be construed to refer to the
Board.
5. Option Grants.
-------------
The Board shall determine the form and amount of options for Outside
Directors. All options shall be subject to the terms and conditions of the Plan
and to such other terms and conditions as the Board deems appropriate.
6. Terms and Conditions of Options.
-------------------------------
(a) Each Option granted pursuant to the Plan shall be evidenced by an
Option Agreement executed by the Company and the Optionee.
2
<PAGE>
(b) The exercise price per share of Options granted under the Plan
shall be 100% of the Fair Market Value per share of Stock on the date of grant
of the Option, subject to adjustment to the extent provided in Section 12
hereof.
(c) Subject to the provisions in the Option Agreement and Section 10
hereof, each Option shall vest and become exercisable with respect to 20% of the
shares of stock subject to the Option on the first anniversary of the date of
grant and with respect to an additional 20% on each subsequent anniversary of
the date of grant.
(d) The term of each Option shall be ten (10) years from the date of
grant, unless a shorter period is required to comply with any applicable law, in
which case such shorter period shall apply.
7. Eligibility.
-----------
Options may be granted only to Outside Directors. No Optionee shall
have any rights as a shareholder of the Company as a result of the grant of an
Option under the Plan or his or her exercise of such Option pending the actual
issuance by the Company of the Stock subject to such Option. The Plan shall not
confer upon any Outside Director any right with respect to continuation of
service as a Director or nomination to serve as a Director, nor shall it
interfere in any way with any rights that the Director or the Company may have
to terminate his or her directorship at any time.
8. Term of Plan, Effective Date and Shareholder Approval.
-----------------------------------------------------
The Plan shall become effective on the Effective Date; provided that
continuance of the Plan shall be subject to approval by the shareholders of the
Company within twelve (12) months before or after the Effective Date. In
addition, any Options granted hereunder shall become effective only upon
shareholder approval of the Plan. The Board may grant Options hereunder prior to
shareholder approval of the Plan, but until such shareholder approval is
obtained, no such Option shall be exercisable. In the event that such
shareholder approval is not obtained, all affected Options shall terminate. If
such shareholder approval is obtained at a duly held shareholders' meeting, the
Plan must be approved by a majority of the votes cast at such shareholders'
meeting at which a quorum representing a majority of all outstanding voting
stock of the Company is, either in person or by proxy, present and voting on the
Plan. Options may be granted under the Plan at any time on or before the tenth
anniversary of the date of adoption of the Plan.
9. Payment Upon Exercise.
---------------------
Payment of the exercise price and any applicable withholding amounts
upon exercise of any Option shall be made in cash, by optionee's personal check,
a certified check, bank draft, or postal or express money order payable to the
order of the Company in lawful money of the United States.
10. Exercise of Option.
------------------
(a) An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option Agreement by the person entitled to exercise the Option and full payment
for the Stock has been received by the Company in accordance with Section 9
hereof. An Option may not be exercised for a fraction of a share of Stock.
(b) If an Optionee ceases to serve as a Director (other than as a
result of disability or death), he or she may, but only within three (3) months
after the date he or she ceases to be a Director, exercise his or her then
outstanding Options to the extent that he or she was entitled to exercise them
at the date of such termination. To the extent that the Optionee was not
entitled to exercise an Option at the date of such termination, or does not
exercise such Option (that he or she was entitled to exercise) within the time
specified herein, the Option shall terminate.
3
<PAGE>
(c) Notwithstanding the provisions of Section 10(b) above, in the event
an Optionee is unable to continue his or her service as a Director as a result
of his or her death or total and permanent disability (as defined in Section
22(e)(3) of the Code), he or she (or his or her personal representative) may,
within twelve (12) months from the date of such termination, exercise his or her
then outstanding Options to the extent he or she was entitled to exercise them
at the date of such termination. To the extent that the Optionee was not
entitled to exercise an Option at the date of such termination, or does not
exercise such Option (that he or she was entitled to exercise) within the time
specified herein, the Option shall terminate.
(d) Notwithstanding the provisions of Sections 10(b) and 10(c) above,
in no event may any Option be exercised after expiration of its term set forth
in Section 6.
11. Nontransferability of Options.
-----------------------------
No Option shall be transferable by an Optionee other than by operation
of law or by will or by the laws of descent or distribution.
12. Adjustment Upon Changes in Capitalization.
-----------------------------------------
If there is any change in the Stock through merger, consolidation,
reorganization, recapitalization, reincorporation, stock split, stock dividend
(in excess of 2%) or other change in the capital structure of the Company
without consideration, the number of shares of Stock available under the Plan,
the number of shares of Stock deliverable in connection with any Option and the
exercise price per share of such Option shall be proportionately adjusted to
preserve, but not to increase the benefits to the outstanding options under the
Plan; provided, however, that no certificate or scrip representing fractional
shares shall be issued and any resulting fractions of a share shall be ignored.
13. Change in Control.
-----------------
(a) For purposes of this Section 13, a "Change in Control" shall be
deemed to occur upon:
(i) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan) of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding Stock;
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership or by one or more actions by written consent of
shareholders, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time such election or nomination was approved by the Board.
(b) For purposes of this Section 13, a "Corporate Transaction" shall be
deemed to occur upon any of the following transactions to which the Company is a
party:
(i) approval by the Company's shareholders of a merger or
consolidation in which the Company is not the surviving entity, except for a
transaction the principal purpose of which is to change the state in which the
Company is incorporated;
(ii) approval by the Company's shareholders of the sale, transfer
or other disposition of all or substantially all of the assets of the Company
(including the capital stock of the Company's subsidiary corporations) in
connection with a complete liquidation or dissolution of the Company; or
4
<PAGE>
(iii) approval by the Company's shareholders of any reverse merger
in which the Company is the surviving entity but in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from those who held such securities immediately prior to such merger.
(c) In its discretion, the Board may provide in any stock option
agreement (or in an amendment thereto) evidencing an option hereunder that, in
the event of any Corporate Transaction or an event giving rise to a Change in
Control, any outstanding options covered by such an agreement shall be fully
vested, nonforfeitable and become exercisable, as of the date of the Change in
Control or Corporate Transaction or such other date as determined by the Board.
However, the Board may provide in any such agreement that, in the case of a
Corporation Transaction, the Board may determine that an outstanding option will
not be so accelerated if and to the extent (i) such option is either to be
assumed by the successor or parent thereof or to be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation or
parent thereof, or (ii) such option is to be replaced with a cash incentive
program of the successor corporation that preserves the option spread existing
at the time of the Corporate Transaction and provides for subsequent payment in
accordance with the same vesting schedule applicable to such option.
(d) If the Board determines to incorporate a Change in Control or
Corporate Transaction acceleration provision in any option agreement hereunder,
the agreement shall provide that, (i) in the event of a Change in Control or
Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of
Section 13 above, the option shall remain exercisable for the remaining term of
the option and (ii) in the event of a Corporate Transaction described in clauses
(i) or (ii) of Section 13(b) above, the option shall terminate as of the
effective date of the Corporate Transaction described therein unless such option
is assumed by a successor corporation in the event of a Corporate Transaction
described in clause (i) of Section 13(b). If an option is assumed in the event
of a Corporate Transaction described in clause (i) of Section 13(b) above, the
option shall remain exercisable for the remaining term of the option. In no
event shall any option under the Plan be exercised after the expiration of the
term provided for in the related stock option agreement pursuant to Section
6(d).
14. Amendment, Suspension, or Termination of the Plan.
-------------------------------------------------
(a) The Board may at any time amend, suspend or terminate the Plan as
it deems advisable; provided that such amendment, suspension or termination
complies with all applicable requirements of state and federal law, including
any applicable requirement that the Plan or an amendment to the Plan be approved
by the shareholders.
(b) No option may be granted under the Plan during any suspension or
after the termination of the Plan, and no amendment, suspension, or termination
of the Plan shall, without the affected individual's consent, alter or impair
any rights or obligations under any option previously granted under the Plan.
The Plan shall terminate with respect to the grant of stock options on the tenth
anniversary of the date of adoption of the Plan, unless previously terminated by
the Board pursuant to this Section 14.
15. Conditions Upon Issuance of Stock.
---------------------------------
(a) Stock shall not be issued pursuant to the exercise of an Option
unless the exercise of such Option and the issuance and delivery of such Stock
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, the rules and
regulations promulgated thereunder, state securities laws, and the requirements
of any stock exchange or national market system upon which the Stock may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.
(b) Inability of the Company to obtain authority from any regulatory
body having jurisdictional authority deemed by the Company's counsel to be
necessary for the lawful issuance and sale of any Stock hereunder shall relieve
the Company of any liability for failure to issue or sell such Stock.
16. Reservation of Stock.
--------------------
5
<PAGE>
The Company, during the term of the Plan, will at all times reserve and
keep available such number of shares of Stock as shall be sufficient to satisfy
the requirements of the Plan.
17. Rule 16b-3.
----------
(a) Transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To
the extent any provision of the Plan or action by the Board or Committee fails
to so comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Board. Moreover, in the event the Plan does not
include a provision required by Rule 16b-3 to be stated therein, such provision
shall be deemed automatically to be incorporated by reference into the Plan.
(b) If, subsequent to adoption of the Plan, Rule 16b-3 is amended to
delete any of the Rule 16b-3 requirements addressed by the provisions of the
Plan governing grants or awards to persons subject to Section 16(b) of the
Exchange Act ("Insiders"), the Board may amend the Plan without shareholder
approval (unless such approval is required by Rule 16b-3 as so amended) to
delete or otherwise amend any such provisions no longer required for grants of
Options under the Plan to be exempt from Section 16(b) liability under the
Exchange Act or for Outside Directors to be able to make exempt Rule 16b-3
grants of stock options or other stock awards to Insiders under other stock
option or stock incentive plans of the Company.
18. Right of First Refusal.
----------------------
(a) As a condition to the grant of any option hereunder, the Optionee
shall agree not to transfer, sell, assign, pledge, or in any manner dispose of
or encumber any of the Stock acquired pursuant to the exercise of an Option
until he shall have offered to sell such Stock to the Company at the price per
share calculated pursuant to subsection (b) below. Notwithstanding the
foregoing, the Optionee may pledge the Stock as security for a loan from an
affiliate of the Company and may assign such Stock to his or Spouse and/or
children for estate planning purposes; provided, however, that any such assignee
shall be subject to the restrictions of this Section 18 with respect to such
Stock. Upon a determination by the Optionee that he desires to sell any or all
of the Stock, the Optionee shall give the Company not less than ten (10) days
prior written notice (the "Notice of Disposition") of such Optionee's desire to
dispose of a specific number of the shares of Stock (the "Notice Securities").
The Notice of Disposition (i) shall be signed by the Optionee and (ii) shall be
mailed by registered mail to the Company, at its then principal place of
business. Upon receipt of the Notice of Disposition, the Company (or its
respective designee, as allowed below) shall have five (5) business days from
the time of receipt of the Notice of Disposition to notify the Optionee that it
intends to purchase the Notice Securities, free and clear of all claims, liens,
or encumbrances, at the price per share calculated pursuant to subsection (b)
below. The closing of any such purchases shall be at a time and place mutually
agreed to by the parties thereto, provided that if the parties are unable to
make such an agreement, the closing shall be held at the principal office of the
Company at 10:00 a.m. on the tenth business day following the day on which the
Notice of Disposition is received by the required recipient thereof. The Company
may designate an Affiliate as the purchaser of all or any portion of Notice
Securities which the Company has the right to purchase hereunder; provided
however, that if the Company cannot legally purchase the Notice Securities at
the time of receipt of the Notice of Disposition, then such designation of the
Affiliate as an alternative purchaser, as the case may be, shall be deemed to
have been made.
(b) Purchase Price. In the event that the Company (or any designee)
does elect to purchase any of the Notice Securities pursuant to subsection (a)
hereof, it shall purchase Notice Securities for the price per share determined
by the Committee as the average of the highest and lowest sales price of the
Stock in the ninety (90) day period immediately preceding the date the Company
receives the Notice of Disposition. The Committee shall have absolute discretion
to determine the prices at which Stock has traded in such ninety (90) day
period, and any determination of the Committee shall be conclusive and binding
on all persons notwithstanding that the information used by the Committee in
making its determination may be incomplete or unreliable if there is no
established trading market for the Stock.
(c) Non-exercise of Right of First Refusal. If the Company, or its
respective assignees do not exercise their rights hereunder to purchase all of
the Notice Securities, the Optionee may sell all, but not less than all, of the
unpurchased Notice Securities, for a period of ninety (90) days following the
6
<PAGE>
delivery of the Notice of Disposition to the Company (the "Unrestricted Transfer
Period"). After expiration of the Unrestricted Transfer Period, the provisions
of Subsections (a) and (b) shall again be applicable to any transfer of the
former Notice Securities.
7
<PAGE>
EXHIBIT 10.2
APPALACHIAN BANCSHARES, INC.
1997 EMPLOYEE STOCK INCENTIVE PLAN
1. Establishment, Purpose, and Definitions.
---------------------------------------
(a) Appalachian Bancshares, Inc. (the "Holding Company") hereby adopts
the Appalachian Bancshares, Inc. 1997 Employee Stock Incentive Plan (the
"Plan").
(b) The purpose of the Plan is to allow the Holding Company and its
Affiliates to attract and retain eligible individuals (as defined in Section 5
below) and to provide incentives to such individuals for their services to the
Holding Company and its Affiliates and to maximize the rewards due them for
those efforts and achievements. The Plan provides employees (including officers
and directors who are employees) of the Holding Company and of its Affiliates an
opportunity to purchase shares of the Holding Company's common stock $5.00 par
value per share ("Stock") pursuant to options which may qualify as incentive
stock options (referred to as "incentive stock options") under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and employees,
officers, independent contractors, and consultants of the Holding Company and of
its Affiliates an opportunity to purchase shares of Stock pursuant to options
which are not described in Section 422 of the Code (referred to as "nonqualified
stock options").
(c) The term "Affiliate" as used in the Plan means parent or subsidiary
corporations of the Holding Company, as defined in Sections 424(e) and (f) of
the Code (but substituting "the Holding Company" for "employer corporation"),
including parents or subsidiaries of the Holding Company that become such after
adoption of the Plan.
2. Administration of the Plan.
--------------------------
(a) The Plan shall be administered by the Board of Directors of the
Holding Company (the "Board"). The Board may delegate the responsibility for
administering the Plan to a committee, under such terms and conditions as the
Board shall determine (the "Committee"). Members of the Committee shall serve at
the pleasure of the Board. The Committee shall select one of its members as
chair of the Committee and shall hold meetings at such times and places as it
may determine. A majority of the Committee shall constitute a quorum, and acts
of the Committee at which a quorum is present, or acts reduced to or approved in
writing by all the members of the Committee, shall be the valid acts of the
Committee. If the Board does not delegate administration of the Plan to the
Committee, then each reference in this Plan to the "Committee" shall be
construed to refer to the Board.
(b) The Board shall determine which eligible individuals (as defined in
Section 5 below) shall be granted options under the Plan, the timing of such
grants, the terms thereof (including any restrictions on the Stock), and the
number of shares subject to such options.
(c) The Committee may amend the terms of any outstanding option granted
under this Plan, but any amendment that would adversely affect the holder's
rights under an outstanding option shall not be made without the holder's
written consent. The Committee may, with the holder's written consent, cancel
any outstanding option or accept any outstanding option in exchange for a new
option under the Plan on such terms determined by the Committee.
(d) The Committee shall have the sole authority, in its absolute
discretion, to adopt, amend, and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan, to construe and
interpret the Plan, the rules and the regulations, and the instruments
evidencing options granted under the Plan and to make all other determinations
deemed necessary or advisable for the administration of the Plan. All decisions,
determinations, and interpretations of the Committee shall be binding on all
participants.
<PAGE>
3. Fair Market Value.
-----------------
Where this Plan uses the term "fair market value" in connection with
the Stock, such fair market value shall be determined by the Board as follows:
(a) If the Stock is listed on any established stock exchange or on
Nasdaq, its fair market value shall be the closing selling price for such stock
on the principal securities exchange on which the Stock is at the time listed
for trading. If there are no sales of Stock on that date, then the closing
selling price for the Stock on the next preceding day for which such closing
selling price is quoted shall be determinative of fair market value; or,
(b) If the Stock is not traded on an exchange, its fair market value
shall be determined in good faith by the Board, and such determination shall be
conclusive and binding on all persons.
4. Stock Subject to the Plan.
-------------------------
(a) Subject to adjustment pursuant to Section 4(c) below, the maximum
aggregate number of shares of Stock available for issuance under the Plan and
during the life of the Plan shall equal 100,000 shares of Stock.
(b) If an option is surrendered or for any other reason ceases to be
exercisable in whole or in part, the shares of Stock that were subject to such
option, but as to which the option had not been exercised, shall continue to be
available under the Plan.
(c) If there is any change in the Stock through merger, consolidation,
reorganization, recapitalization, reincorporation, stock split, stock dividend
(in excess of 2%), or other change in the corporate structure of the Holding
Company, without consideration, appropriate adjustments shall be made by the
Committee in order to preserve but not to increase the benefits to the
outstanding options under the Plan, including adjustments to the aggregate
number and kind of shares subject to the Plan and the number and kind of shares
and the price per share subject to outstanding options. No certificate or scrip
representing fractional shares shall be issued and any resulting fractions of a
share shall be ignored.
5. Eligible Individuals.
--------------------
Individuals who shall be eligible to have granted to them options under
the Plan shall be such employees, officers, independent contractors, and
consultants of the Holding Company or an Affiliate as the Committee, in its
discretion, shall designate from time to time. Notwithstanding the foregoing,
only employees of the Holding Company or an Affiliate (including officers and
directors who are bona fide employees) shall be eligible to receive incentive
stock options.
6. Terms and Conditions of Options.
-------------------------------
(a) Each option granted pursuant to the Plan will be evidenced by a
written stock option agreement executed by the Holding Company, the Affiliate,
if applicable, and the person to whom such option is granted.
(b) The Committee shall determine the term of each option granted under
the Plan; provided, however, that the term of an incentive stock option shall
not be for more than ten years and that, in the case of an incentive stock
option granted to a person possessing more than ten percent (10%) of the
combined voting power of the Holding Company or an Affiliate, the term of each
incentive stock option shall be no more than five years.
(c) In the case of incentive stock options, the aggregate fair market
value (determined as of the time such option is granted) of the Stock with
respect to which incentive stock options are exercisable for the first time by
an eligible employee in any calendar year (under this Plan and any other plans
of the Holding Company or its Affiliates) shall not exceed $100,000. If the
aggregate fair market value of stock with respect to which incentive stock
options are exercisable by an optionee for the first time during any calendar
year exceeds $100,000, such options shall be treated as nonqualified options to
<PAGE>
the extent required by Section 422 of the Code. The rule set forth in the
preceding sentence shall be applied by taking options into account in the order
in which they were granted.
(d) The exercise price of each incentive stock option shall be not less
than the per share fair market value of the Stock subject to such option on the
date the option is granted. The exercise price of each nonqualified stock option
shall be as determined by the Board of Directors. Notwithstanding the foregoing,
in the case of an incentive stock option granted to a person possessing more
than 10% of the combined voting power of the Holding Company or an Affiliate,
the exercise price shall be not less than 110% of the fair market value of the
Stock on the date the option is granted. The exercise price of an option shall
be subject to adjustment to the extent provided in Section 4(c) above.
(e) Payment of the purchase price and any withholding amounts pursuant
to Section 11 upon exercise of any option granted under this Plan shall be made
in cash or by optionee's personal check, a certified check, a bank draft, or a
postal or express money order payable to the order of the Holding Company in
lawful money of the United States. An option may not be exercised with respect
to a fraction of a share of Stock.
(f) The stock option agreement may contain such other terms,
provisions, and conditions consistent with this Plan as may be determined by the
Committee, including not by way of limitation, restrictions on transfer,
forfeiture provisions, repurchase provisions, and vesting provisions. If an
option, or any part thereof is intended to qualify as an incentive stock option,
the stock option agreement shall contain those terms and conditions which are
necessary to so qualify it.
7. Right of First Refusal
----------------------
(a) As a condition to the grant of any option hereunder, the holder
shall agree not to transfer, sell, assign, pledge, or in any manner dispose of
or encumber any of the Stock acquired pursuant to the exercise of an option
until he shall have offered to sell such Stock to the Holding Company at the
price per share calculated pursuant to subsection (b) below. Notwithstanding the
foregoing, the holder may pledge the Stock as security for a loan from an
affiliate of the Holding Company or assign such Stock to his or her spouse
and/or children for estate planning purposes; provided, however, that any such
assignee shall be subject to the restrictions of this Section 7 with respect to
such Stock. Upon a determination by the holder that he desires to sell any or
all of the Stock, the holder shall give the Holding Company not less than ten
(10) days prior written notice (the "Notice of Disposition") of such holder's
desire to dispose of a specific number of the shares of Stock (the "Notice
Securities"). The Notice of Disposition (i) shall be signed by the holder and
(ii) shall be mailed by registered mail to the Holding Company, at its then
principal place of business. Upon receipt of the Notice of Disposition, the
Holding Company (or its respective designee, as allowed below) shall have five
(5) business days from the time of receipt of the Notice of Disposition to
notify the holder that it intends to purchase the Notice Securities, free and
clear of all claims, liens, or encumbrances, at the price per share calculated
pursuant to subsection (b) below. The closing of any such purchases shall be at
a time and place mutually agreed to by the parties thereto, provided that if the
parties are unable to make such an agreement, the closing shall be held at the
principal office of the Holding Company at 10:00 a.m. on the tenth business day
following the day on which the Notice of Disposition is received by the required
recipient thereof. The Holding Company may designate an Affiliate as the
purchaser of all or any portion of Notice Securities which the Holding Company
has the right to purchase hereunder; provided however, that if the Holding
Company cannot legally purchase the Notice Securities at the time of receipt of
the Notice of Disposition, then such designation of the Affiliate as an
alternative purchaser, as the case may, be shall be deemed to have been made.
(b) Purchase Price. In the event that the Holding Company (or any
--------------
designee) does elect to purchase any of the Notice Securities pursuant to
subsection (a) hereof, it shall purchase Notice Securities for the price per
share determined by the Committee as the average of the highest and lowest sales
price of the Stock in the ninety (90) day period immediately preceding the date
the Holding Company receives the Notice of Disposition. The Committee shall have
absolute discretion to determine the prices at which Stock has traded in such
ninety (90) day period, and any determination of the Committee shall be
conclusive and binding on all persons notwithstanding that the information used
by the Committee in making its determination may be incomplete or unreliable if
there is no established trading market for the Stock.
<PAGE>
(c) Non-exercise of Right of First Refusal. If the Holding Company or
--------------------------------------
its respective assignees do not exercise their rights hereunder to purchase all
of the Notice Securities, the holder may sell all, but not less than all, of the
unpurchased Notice Securities for a period of ninety (90) days following the
delivery of the Notice of Disposition to the Holding Company (the "Unrestricted
Transfer Period") without further compliance with Subsections (a) and (b)
hereof. After expiration of the Unrestricted Transfer Period, the provisions of
Subsections (a) and (b) shall again be applicable to any transfer of the former
Notice Securities.
8. Use of Proceeds.
---------------
Cash proceeds realized from the exercise of options granted under the
Plan or from other sales of Stock under the Plan shall constitute general funds
of the Holding Company.
9. Amendment, Suspension, or Termination of the Plan.
-------------------------------------------------
(a) The Board may at any time amend, suspend or terminate the Plan as
it deems advisable; provided that such amendment, suspension or termination
complies with all applicable requirements of state and federal law, including
any applicable requirement that the Plan or an amendment to the Plan be approved
by the shareholders.
(b) No option may be granted under the Plan during any suspension or
after the termination of the Plan, and no amendment, suspension, or termination
of the Plan shall, without the affected individual's consent, alter or impair
any rights or obligations under any option or previously granted under the Plan.
The Plan shall terminate on the tenth anniversary of the date of adoption of the
Plan, unless previously terminated by the Board pursuant to this Section 9.
10. Assignability
-------------
Each option under the Plan shall be transferable by the optionee only
by will or the laws of descent and distribution, and, during the optionee's
lifetime, may be exercised only by the optionee.
11. Withholding Taxes.
-----------------
No Stock shall be granted or sold under the Plan to any individual, and
no option may be exercised, until the individual has made arrangements
acceptable to the Committee for the satisfaction of federal, state, and local
income and employment tax withholding obligations, including without limitation,
obligations incident to the receipt of Stock under the Plan, the lapsing of
restrictions applicable to such Stock, the failure to satisfy the conditions for
treatment as incentive stock options under applicable tax law, or the receipt of
cash payments.
12. Restrictions on Transfer of Shares.
----------------------------------
The Committee may require that the Stock acquired pursuant to the Plan
be subject to such restrictions and agreements and bear any legend regarding
sale, assignment, encumbrances, or other transfers as are in effect among the
shareholders of the Holding Company at the time such Stock is acquired, as well
as to such other restrictions as the Committee shall deem appropriate.
13. Change in Control.
-----------------
(a) For purposes of this Section 13, a "Change in Control" shall be
deemed to occur upon:
(i) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Holding Company or by
a Holding Company-sponsored employee benefit plan) of beneficial ownership
(within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Holding Company's outstanding
Stock;
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
<PAGE>
elections for Board membership or by one or more actions by written consent of
shareholders, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (A) who were still in office
at the time such election or nomination was approved by the Board.
(b) For purposes of this Section 13, a "Corporate Transaction" shall be
deemed to occur upon any of the following transactions to which the Holding
Company is a party:
(i) approval by the Holding Company's shareholders of a merger or
consolidation in which the Holding Company is not the surviving entity, except
for a transaction the principal purpose of which is to change the state in which
the Holding Company is incorporated;
(ii) approval by the Holding Company's shareholders of the sale,
transfer or other disposition of all or substantially all of the assets of the
Holding Company (including the capital stock of the Holding Company's subsidiary
corporations) in connection with a complete liquidation or dissolution of the
Holding Company; or
(iii) approval by the Holding Company's shareholders of any reverse
merger in which the Holding Company is the surviving entity but in which
securities possessing more than fifty percent (50%) of the total combined voting
power of the Holding Company's outstanding securities are transferred to a
person or persons different from those who held such securities immediately
prior to such merger.
(c) In its discretion, the Board may provide in any stock option
agreement (or in an amendment thereto) evidencing an option hereunder that, in
the event of any Corporate Transaction or an event giving rise to a Change in
Control, any outstanding options covered by such an agreement shall be fully
vested, nonforfeitable and become exercisable as of the date of the Change in
Control or Corporate Transaction or such other date determined by the Board.
However, the Board may provide in any such agreement that, in the case of a
Corporation Transaction, the Board may determine that an outstanding option will
not be so accelerated if and to the extent (i) such option is either to be
assumed by the successor or parent thereof or to be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation or
parent thereof, or (ii) such option is to be replaced with a cash incentive
program of the successor corporation that preserves the option spread existing
at the time of the Corporate Transaction and provides for subsequent payment in
accordance with the same vesting schedule applicable to such option.
(d) If the Board determines to incorporate a Change in Control or
Corporate Transaction acceleration provision in any option agreement hereunder,
the agreement shall provide that, (i) in the event of a Change in Control or
Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of
Section 13 above, the option shall remain exercisable for the remaining term of
the option and (ii) in the event of a Corporate Transaction described in clauses
(i) or (ii) of Section 13(b) above, the option shall terminate as of the
effective date of the Corporate Transaction described therein unless such option
is assumed by a successor corporation in the event of a Corporate Transaction
described in clause (i) of Section 13(b). If an option is assumed in the event
of a Corporate Transaction described in clause (i) of Section 13(b) above, the
option shall remain exercisable for the remaining term of the option. In no
event shall any option under the Plan be exercised after the expiration of the
term provided for in the related stock option agreement pursuant to Section
6(b).
14. Shareholder Approval.
--------------------
Continuance of the Plan shall be subject to approval by the
shareholders of the Holding Company within twelve (12) months before or after
the date the Plan is adopted. Any incentive stock options granted hereunder
shall become effective only upon such shareholder approval of the Plan. The
Board may grant incentive stock options prior to shareholder approval of the
Plan, but until such shareholder approval is obtained, no such option shall be
exercisable. In the event that such shareholder approval is not obtained within
the period provided above, all options previously granted above, shall
terminate. If such shareholder approval is obtained at a duly held shareholders'
meeting, the Plan must be approved by a majority of the votes cast at such
shareholders' meeting at which a quorum representing a majority of all
outstanding voting stock of the Holding Company is, either in person or by
proxy, present and voting on the Plan.
<PAGE>
15. Rule 16b-3 Compliance.
---------------------
(a) With respect to persons subject to Section 16 of the Exchange Act
("Insiders"), transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3. To the extent any provision of the Plan or
action by the Board or Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Board.
Moreover, in the event the Plan does not include a provision required by Rule
16b-3 to be stated therein, such provision (other than one relating to
eligibility requirements or the price and amount of awards) shall be deemed
automatically to be incorporated by reference into the Plan insofar as Insiders
are concerned.
(b) If, subsequent to the Board's adoption of the Plan, Rule 16b-3 is
amended to delete any of the Rule 16b-3 requirements addressed by the provisions
of the Plan governing grants or awards to Insiders, the Board may amend the Plan
without shareholder approval (unless such approval is required by Rule 16b-3 as
so amended) to delete or otherwise amend any such provisions no longer required
for grants of options, and Stock under the Plan to Insiders to be exempt from
Section 16(b) liability under the Exchange Act.
16. The Right of the Holding Company to Terminate Employment.
--------------------------------------------------------
No provision in the Plan or any Option shall confer upon any Optionee
any right to continue in the employment of the Holding Company or an Affiliate
or to interfere in any way with the right of the Holding Company or an Affiliate
to terminate his employment at any time.
<PAGE>
EXHIBIT 10.3
CREDIT AGREEMENT
BETWEEN
APPALACHIAN BANCSHARES INC.
AND
HARDWICK BANK & TRUST COMPANY
Dated as of
November 25, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - DEFINITIONS; CONSTRUCTION.................................................................... 1
Section 1.01. Specific Definitions........................................................... 1
Section 1.02. Accounting Terms and Determinations............................................ 5
Section 1.03. Other Definitional Terms....................................................... 5
ARTICLE II - LOANS....................................................................................... 6
Section 2.01. Loans Commitment; Use of Proceeds; Request for and Disbursement of Loans....... 6
Section 2.02. Note; Repayment of Principal and Interest...................................... 6
Section 2.03. Interest....................................................................... 6
Section 2.04. Payments, Prepayments and Computations......................................... 6
Section 2.05. Loans Account.................................................................. 7
ARTICLE III - CONDITIONS PRECEDENT....................................................................... 7
Section 3.01. Initial Documentation.......................................................... 7
Section 3.02. Additional Conditions Precedent................................................ 7
ARTICLE IV - REPRESENTATIONS AND WARRANTIES.............................................................. 8
Section 4.01. Organization; Subsidiaries; Authorization...................................... 8
Section 4.02. Financial Statements........................................................... 9
Section 4.03. Actions Pending................................................................ 9
Section 4.04. Outstanding Indebtedness....................................................... 9
Section 4.05. Title to Properties............................................................ 9
Section 4.06. Taxes.......................................................................... 9
Section 4.07. Conflicting Agreements and Other Matters....................................... 9
Section 4.08. ERISA.......................................................................... 9
Section 4.09. Governmental Consent.......................................................... 10
Section 4.10. Compliance with Laws and Regulations.......................................... 10
Section 4.11. Possession of Franchises, Etc................................................. 10
Section 4.12. Licenses, Etc................................................................. 10
Section 4.13. Environmental Law Compliance.................................................. 10
Section 4.14. Solvency...................................................................... 11
Section 4.15. Margin Regulations; Investment Company Act; Etc............................... 11
Section 4.16. Insurance..................................................................... 11
Section 4.17. Labor Matters................................................................. 11
Section 4.18. Disclosure.................................................................... 11
ARTICLE V - AFFIRMATIVE COVENANTS....................................................................... 12
Section 5.01. Financial Statements and Notices.............................................. 12
Section 5.02. Inspection of Property........................................................ 13
Section 5.03. Books and Records............................................................. 13
Section 5.04. Maintenance of Insurance...................................................... 13
Section 5.05. Maintenance of Corporate Existence, Properties, Franchises, Etc............... 13
Section 5.06. Payment of Taxes and Claims................................................... 14
Section 5.07. Compliance with Laws, Etc..................................................... 14
Section 5.08. Maintenance of Properties..................................................... 14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Section 5.09. Type of Business.............................................................. 14
ARTICLE VI - NEGATIVE COVENANTS......................................................................... 14
Section 6.01. Indebtedness.................................................................. 14
Section 6.02. Liens......................................................................... 15
Section 6.03. Guaranties.................................................................... 15
Section 6.04. Merger and Sale of Assets..................................................... 15
Section 6.05. Acquisitions, Etc............................................................. 15
Section 6.06. ERISA Matters................................................................. 15
Section 6.07. Dividends, Etc................................................................ 15
Section 6.08 Subsidiaries.................................................................. 15
Section 6.09. Change in Executive Management................................................ 16
Section 6.10. Financial Covenants........................................................... 16
ARTICLE VII - EVENTS OF DEFAULT......................................................................... 16
Section 7.01. Events of Default............................................................. 16
Section 7.02 Remedies..................................................................... 18
ARTICLE VIII - MISCELLANEOUS............................................................................ 18
Section 8.01. Notices....................................................................... 18
Section 8.02. No Waiver; Remedies Cumulative................................................ 19
Section 8.03. Payment of Expenses, Etc...................................................... 19
Section 8.04. Right of Setoff............................................................... 19
Section 8.05. Benefit of Agreement.......................................................... 19
Section 8.06. Participations................................................................ 20
Section 8.07. Amendments; Exercise of Discretion............................................ 20
Section 8.08. Eastern Time; Time of Essence................................................. 20
Section 8.09. Governing Law................................................................. 20
Section 8.10. Counterparts.................................................................. 20
Section 8.11. Effectiveness; Term; Survival................................................. 20
Section 8.12. Severability.................................................................. 20
Section 8.13. Independence of Covenants..................................................... 20
Section 8.14. Headings Descriptive; Entire Agreement........................................ 20
Signatures................................................................................... 21
Exhibit A - Form of Note
Exhibit B - Form of Borrower Secretary Certificate
Exhibit C - Form of Borrower Counsel's Opinion
</TABLE>
ii
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT made and entered into as of November 25, 1996
between APPALACHIAN BANCSHARES INC. ("Borrower"), a Georgia corporation, and
HARDWICK BANK & TRUST COMPANY ("Bank"), a Georgia banking corporation.
W I T N E S S E T H:
-------------------
WHEREAS, Borrower has requested that Bank provide Borrower with a
$1,000,000 loan facility; and
WHEREAS, Bank is willing to provide such facility to Borrower on the
terms and conditions and subject to the requirements set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties to this Agreement hereby agree as
follows:
ARTICLE I.
DEFINITIONS; CONSTRUCTION
-------------------------
SECTION 1.01 SPECIFIC DEFINITIONS. For purposes of this Agreement, the
--------------------
following terms shall have the indicated meanings as set forth below:
"Affiliate" of any Person means any other Person directly or indirectly
---------
controlling, controlled by, or under common control with, such Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" shall mean this Credit Agreement, as amended, supplemented
---------
or modified from time to time.
"Bank" shall mean Hardwick Bank & Trust Company, a Georgia banking
----
corporation, and its successors and assigns.
"Bankruptcy Code" shall mean Bankruptcy Code of 1978, as amended (11
---------------
U.S.C. ss. 101 et seq.).
"Bank Subsidiary" shall mean Gilmer County Bank, a Georgia banking
---------------
corporation, and its successors and assigns.
"Borrower" shall mean Appalachian Bancshares Inc., a Georgia
--------
corporation, and its successors and permitted assigns.
"Business Day" shall mean a day on which the Federal Reserve Bank of
------------
Atlanta is open for business in Atlanta, Georgia.
"Certifying Officer" shall mean the president, the chief executive
------------------
officer, the chief operating officer, or the chief financial officer of
Borrower.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
"Commitment Termination Date" shall mean the earlier of (i) December
---------------------------
31, 1998, or (ii) the date on which Bank terminates its obligations hereunder to
make any further Loans pursuant to the provisions of Article VII hereof.
<PAGE>
"Contractual Obligation" of any Person shall mean any provision of any
----------------------
security issued by such Person or of any material agreement, instrument or
undertaking to which such Person is a party or by which it or any of the
material property owned by it is bound.
"Credit Documents" shall mean, collectively, this Agreement and the
----------------
Note.
"Credit Parties" shall mean, collectively, Borrower and its
--------------
Subsidiaries.
"Default" shall mean any condition or event which, with the giving of
-------
notice or lapse of time or both, would constitute an Event of Default.
"Environmental Laws" shall mean all federal, state and local laws,
------------------
rules, regulations, ordinances, programs, permits, guidelines, orders and
consent decrees relating to health, safety or environmental matters, including
but not limited to: the Resource Conservation and Recovery Act, as amended; the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended; the Clean Air Act, as amended; the Superfund Amendments and
Reauthorization Act of 1986, as amended; any and all state and federal
"superlien" and environmental clean-up programs and laws; and any relevant
United States Department of Transportation regulations.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
-----
as amended from time to time.
"Event of Default" shall have the meaning provided in Article VII
----------------
hereof.
"Executive Management" shall mean, with respect to any particular
--------------------
Person, its president, chief executive officer or chief financial officer.
"Final Maturity Date" shall mean the earlier of (i) January 1, 2003, or
-------------------
(ii) the date on which all amounts outstanding under this Agreement and the Note
have been declared due and payable pursuant to the provisions of Article VII
hereof.
"GAAP" shall mean, as in effect from time to time, United States
----
generally accepted accounting principles consistently applied.
"Guaranty" shall mean any contractual obligation, contingent or
--------
otherwise, of a Person with respect to any Indebtedness or other obligation or
liability of another Person, including without limitation, any such
Indebtedness, obligation or liability directly or indirectly guaranteed,
endorsed, co-made or discounted or sold with recourse by that Person, or in
respect of which that Person is otherwise directly or indirectly liable,
including contractual obligations (contingent or otherwise) arising through any
agreement to purchase, repurchase, or otherwise acquire such Indebtedness,
obligation or liability or any security therefor, or any agreement to provide
funds for the payment or discharge thereof (whether in the form of Loans,
advances, stock purchases, capital contributions or otherwise), or to maintain
solvency, assets, level of income, or other financial condition, or to make any
payment other than for value received. The amount of any Guaranty shall be
deemed to be an amount equal to the stated or determinable amount of the primary
obligation in respect of which guaranty is made or, if not so stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by such
Person in good faith.
"Indebtedness" of any Person shall mean, without duplication:
------------
(i) all obligations of such Person which in accordance with
GAAP would be shown on the balance sheet of such Person as a liability
(including, without limitation, obligations for borrowed money and for the
deferred purchase price of property or services, and obligations evidenced
by bonds, debentures, notes or other similar instruments);
(ii) all rental obligations under leases required to be capitalized
under GAAP;
2
<PAGE>
(iii) all Guaranties of such Person (including contingent reimbursement
obligations under undrawn letters of credit); and
(iv) Indebtedness of others secured by any Lien upon property owned by
such Person, whether or not assumed.
"Lien" shall mean any interest in Property securing any Indebtedness
----
owed to a Person other than the owner of the Property, whether such interest is
based on the common law, statute or contract, and including, but not limited to,
any security interest, security title or lien arising from a security agreement,
mortgage, deed of trust, deed to secure debt, encumbrance, pledge, conditional
sale or trust receipt or a lease, consignment or bailment for security purposes.
The term "Lien" shall include reservations, exceptions, encroachments,
easements, rights-of-way, covenants, conditions, restrictions, leases and other
title exceptions and encumbrances affecting Property. For purposes of this
Agreement and the other Credit Documents, Borrower shall be deemed to be the
owner of any Property which it has acquired or holds subject to a conditional
sale agreement or other arrangements pursuant to which title to the Property has
been retained by or vested in some other Person for security purposes.
"Loans" shall mean any and all advances made by Lender to Borrower
-----
pursuant to Section 2.01 hereof.
"Loan Commitment" shall mean $1,000,000.
---------------
"Margin Regulations" shall mean Regulation G, Regulation T, Regulation
------------------
U and Regulation X of the Board of Governors of the Federal Reserve System, as
the same may be in effect from time to time.
"Non-Performing Assets" shall mean, with respect to any Person and as
---------------------
of any particular date, such Person's (i) Loans that are 90 days or more past-
due, (ii) Loans on non-accrual status, (iii) restructured Loans (as defined in
the FFIEC Consolidated Reports of Condition and Income), plus (iv) other real
estate owned.
"Note" shall mean the promissory note executed by Borrower in favor of
----
Bank pursuant to this Agreement in the form attached hereto as Exhibit A, and
any renewal, extension, modification or replacement thereof.
"Obligations" shall mean any and all indebtedness, obligations or
-----------
liabilities of Borrower to Bank which may now or hereafter arise or be owing
under or by reason of this Agreement or any of the other Credit Documents and
whether direct or indirect, joint or several, absolute or contingent, or
liquidated or unliquidated, together with any and all extensions, renewals,
modifications or replacements thereof or therefor.
"Officer's Certificate" shall mean a certificate signed in the name of
---------------------
Borrower by a Certifying Officer.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
----
successor thereto.
"Permitted Liens" shall mean (i) Liens at any time granted in favor of
---------------
Bank; (ii) Liens for taxes not yet due or which are being contested as permitted
under Section 5.06 hereof, but only if in Bank's judgment such Liens do not
materially and adversely affect Bank's rights or the priority of Bank's Lien on
the Collateral involved; (iii) Liens securing the claims or demands of
materialmen, mechanics, carriers, warehousemen, landlords and other like Persons
for labor, materials, supplies or rentals incurred in the ordinary course of
Borrower or any Subsidiary's business, but only if the payment thereof is not at
the time required (or if payment is then required, only if and for so long as
the execution or other enforcement of such Lien is and continues to be
effectively stayed and bonded in a manner satisfactory to Bank for the full
amount thereof, the validity and amount of the claims secured thereby are being
actively contested in good faith and by appropriate lawful proceedings and such
Liens do not, in the aggregate, materially detract from the value of the
Property of Borrower and its Subsidiaries or materially impair the use thereof
in the operation of such Person's business); (iv) Liens incurred in the ordinary
course of business in connection with workmen's compensation, unemployment
insurance, social security and other like laws; (v) attachment, judgment and
other similar non-tax Liens arising in connection with court proceedings, but
only if and for so long as the execution or other enforcement of such Liens is
and continues to be effectively stayed and bonded on appeal in a manner
satisfactory to Bank for the full amount thereof, the validity and amount of the
3
<PAGE>
claims secured thereby are being actively contested in good faith and by
appropriate lawful proceedings, and such Liens do not, in the aggregate,
materially detract from the value of the Property of Borrower or its
Subsidiaries or materially impair the use thereof in the operation of such
Person's business; (vi) reservations, exceptions, easements, rights-of-way and
other similar encumbrances affecting Real Property provided that, in Bank's sole
judgment, such Liens do not in the aggregate materially detract from the value
of said Properties or materially interfere with their use in the ordinary course
of Borrower and its Subsidiaries' business and, if said Real Property
constitutes Property in which Bank has a Lien under the Security Documents, Bank
has consented thereto; (vii) Liens granted by any Credit Party to secure public
deposits, or repurchase agreements, or interest rate or currency swap
agreements, or other banking transactions entered into by any such Subsidiary in
the ordinary course of its business; (viii) Purchase Money Liens securing
Purchase Money Indebtedness if not prohibited under Section 6.01(e); (ix) Liens
granted to secure Indebtedness of a type described in Section 6.01(c) hereof;
and (x) such other Liens as Bank may hereafter approve in writing.
"Person" shall mean any individual, partnership, firm, corporation,
------
association, joint venture, trust or other entity, or any government or
political subdivision or agency, department or instrumentality thereof.
"Prime Lending Rate" shall mean, for any particular day, a per annum
------------------
rate of interest equal to the highest rate quoted as the "Prime Rate" in the
Money Rates column (or other comparable column or section) of the issue of The
Wall Street Journal published on such day (or, if such day is not a Business
Day, as published on the immediately preceding Business Day). In the event such
newspaper ceases publication (or ceases publication of the aforesaid "Prime
Rate"), the Prime Lending Rate for purposes of this Agreement shall mean a per
annum rate of interest equal to the highest rate quoted as the "Prime Rate" in
such other nationally-recognized financial publication or as quoted by such
other nationally-recognized quote service as may be selected by Bank, subject to
daily adjustments as provided above.
"Property" shall mean any interest in any kind of property of any
--------
Person, whether real, personal or mixed, and whether tangible or intangible.
"Purchase Money Indebtedness" shall mean (i) Indebtedness for the
---------------------------
payment of all or any part of the purchase price of any fixed assets, (ii) any
Indebtedness incurred for the sole purpose of financing or refinancing all or
any part of the purchase price of any fixed assets, (iii) capitalized lease
obligations, and (iv) any renewals, extensions or refinancings of any of the
foregoing (but not any increases in the principal amounts thereof outstanding at
that time), except that Purchase Money Indebtedness shall not include any
unsecured current liabilities covered by Section 6.01(b) hereof.
"Purchase Money Lien" shall mean a Lien upon fixed assets which secures
-------------------
the Purchase Money Indebtedness relating thereto but only if such Lien shall at
all times be confined solely to the fixed assets the purchase price of which was
financed or refinanced through the incurrence of the Purchase Money Indebtedness
secured by such Lien and only if such Lien secures solely such Purchase Money
Indebtedness.
"Requirement of Law" for any person shall mean the articles or
------------------
certificate of incorporation and by-laws or other organizational or governing
documents of such Person, and any material law, treaty, rule or regulation, or
determination of an arbitrator or a court or other governmental authority, in
each case applicable to or binding upon such Person or any of its material
property or to which such Person or any of its material property is subject.
"Subsidiary" means, as applied to Borrower, (a) the Bank Subsidiary,
----------
and (b) any other corporation of which 50% or more of the outstanding stock
(other than directors' qualifying shares) having ordinary voting power to elect
a majority of its board of directors (or other governing body), regardless of
the existence at the time of a right of the holders of any class or classes
(however designated) of securities of such corporation to exercise such voting
power by reason of the happening of any contingency, or any partnership of which
50% or more of the outstanding partnership interests is, at the time, owned by
Borrower or by one or more subsidiaries of Borrower, or by Borrower and one or
more subsidiaries of Borrower.
"Taxes" shall mean any present or future taxes, levies, imposts,
-----
duties, fees, assessments, deductions, withholdings or other charges of whatever
nature, including without limitation, income, gross receipts, excise, property,
sales, transfer, license, payroll, withholding, social security or franchise
4
<PAGE>
taxes now or hereafter imposed or levied by the United States, or any state,
local or foreign government or by any department, agency or other political
subdivision or taxing authority thereof or therein and all interest, penalties,
additions to tax and similar liabilities with respect thereto.
"Voting Stock" shall mean securities of any class or classes of a
------------
corporation the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the directors of such
corporation.
SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
-----------------------------------
defined or specified herein, all accounting terms used herein shall be construed
herein, all accounting determinations hereunder shall be made, all financial
statements required to be delivered hereunder shall be prepared, and all
financial records required hereunder shall be maintained in accordance with
GAAP.
SECTION 1.03. OTHER DEFINITIONAL TERMS. The words "hereof", "herein"
------------------------
and "hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement, and Article, Section, Schedule, Exhibit and like references are to
this Agreement unless otherwise specified.
5
<PAGE>
ARTICLE II
LOANS
SECTION 2.01. LOANS COMMITMENT; USE OF PROCEEDS; REQUEST FOR AND
--------------------------------------------------
DISBURSEMENT OF LOANS.
---------------------
(a) Subject to and upon the terms and conditions herein set forth, Bank
agrees to make Loans to Borrower from time to time on or prior to the Commitment
Termination Date in an aggregate outstanding principal amount not to exceed the
Loan Commitment at any one time.
(b) The proceeds of the Loans shall be used solely to provide capital
to the Bank Subsidiary and to pay closing costs related to this Agreement.
(c) Subject to the terms and conditions of this Agreement, Borrower may
borrow, repay and re-borrow up to the full amount of the Loan Commitment on or
prior to the Commitment Termination Date.
SECTION 2.02. NOTE; REPAYMENT OF PRINCIPAL AND INTEREST.
-----------------------------------------
(a) Borrower's obligations to pay the principal of, and interest on,
the Loans shall be evidenced by the Note and by the records of the Lender.
(b) Borrower shall repay the Loans in accordance with the provisions of
the Note. The Loans, if not sooner paid, shall be due and payable in full on the
Final Maturity Date.
SECTION 2.03. INTEREST.
--------
(a) Borrower agrees to pay interest in respect of the unpaid principal
amount of the Loans at the rate per annum set forth in the Note.
(b) Upon the occurrence and during the continuation of any Event of
Default, the Bank may increase the interest rate applicable to the Loans as
provided in the Note.
(c) Pursuant to the Official Code of Georgia Annotated ss. 7-4-2,
Borrower and Bank hereby agree that the only charges imposed or to be imposed by
Bank upon Borrower for the use of money in connection with the Loans is and will
be the interest required to be paid under the provisions of Section 2.03(a)
hereof and the Note. In no event shall the amount of interest due and payable
under this Agreement or the Note exceed the maximum rate of interest allowed by
applicable law (including without limitation Official Code of Georgia Annotated
ss. 7-4-18) and, in the event any such payment is made by Borrower or any other
Credit Party or received by Bank, such excess shall be credited as a payment of
principal. It is the express intent hereof that Borrower not pay and that Bank
not receive, directly or indirectly, interest in excess of that which may be
lawfully paid under applicable law.
SECTION 2.04. PAYMENTS, PREPAYMENTS AND COMPUTATIONS.
--------------------------------------
(a) Except as otherwise specifically provided herein, all payments due
with respect to the Loans under this Agreement or the Note shall be made without
defense, set-off or counterclaim to Bank at its main office in Dalton, Georgia
on the date when due and shall be made in lawful money of the United States of
America in immediately available funds.
(b) Whenever any payment to be made hereunder or under the Note shall
be stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day and, with respect to
payments of principal, interest thereon shall be payable at the applicable rate
during such extension.
6
<PAGE>
(c) All computations of interest hereunder and under the Note shall be
made on the basis of a year of 360 days for the actual number of days (including
the first day but excluding the last day) occurring in the period for which such
interest or fees are payable (to the extent computed on the basis of days
elapsed).
(d) The Loans may be prepaid in whole or in part at any time without
premium or penalty; provided that any prepayment made on the Loans shall be
applied, first, to interest accrued therein through the date of such prepayment
and then to the principal balance thereof, all as provided in and subject to the
terms and conditions of the Note.
SECTION 2.05. LOANS ACCOUNT. Bank shall open and maintain on its books
-------------
a loan account for Borrower in which shall be recorded (i) the amount of each
Loan made hereunder, (ii) the amount of any principal, interest or any other
amounts due or to become due from Borrower hereunder or under the Note, and
(iii) the amount of any payment or prepayment received by the Bank in respect of
any such principal, interest or fees. The entries made in the Loans account
pursuant to this Section shall be prima facie evidence, in the absence of
manifest error, of the existence and amounts of the Obligations of Borrower
there recorded. Bank will account to Borrower monthly with a statement of
borrowings, charges, and payments made pursuant to this Agreement and the Note,
and each such account rendered by Bank to Borrower shall be deemed final,
binding and conclusive against Borrower unless Bank is notified by Borrower in
writing within thirty (30) days after the date the account is so rendered that
Borrower disputes any item thereof (but any such notice by Borrower shall be
deemed an objection only to those items specifically set forth in such notice).
Failure by Bank to render any such account shall in no way affect its rights
hereunder or under the Note.
ARTICLE III.
CONDITIONS PRECEDENT
--------------------
The obligation of Bank to make any of the Loans to Borrower hereunder
is subject to the satisfaction of the following conditions:
SECTION 3.01. INITIAL DOCUMENTATION. At the time of the making of the
---------------------
initial Loan under this Agreement, Bank shall have received the following, in
form and substance satisfactory to Bank:
(a) this Agreement duly completed and executed;
(b) the duly completed and executed Note;
(c) a certificate of the President and an Executive Vice President of
Borrower in the form of Exhibit B attached hereto, duly completed and
executed;
(d) the favorable opinion of counsel to Borrower in the form of Exhibit
C attached hereto;
(e) all corporate proceedings and all other legal matters in connection
with the authorization, legality, validity and enforceability of the Credit
Documents shall be satisfactory in form and substance to Bank; and
(f) such other documents, certificates, approvals or filings as Bank
may reasonably request.
SECTION 3.02. ADDITIONAL CONDITIONS PRECEDENT. At the time of (and
-------------------------------
after giving effect to) the making of each Loan under this Agreement, the
following conditions shall have been satisfied or shall exist:
(a) there shall then exist no Default or Event of Default;
(b) all representations and warranties by Borrower contained herein or
in the other Credit Documents (other than those representations and
warranties which are, by their express terms, expressly limited to the date
7
<PAGE>
made or given) shall be true and correct in all material respects with the
same effect as those such representations and warranties had been made on
and as of the date of such Loan;
(c) since the date of the most recent financial statements described in
Section 4.02 below or received by Bank pursuant to Section 5.01 below,
there shall have been no change which has had or could reasonably be
expected to have a material adverse effect on the business, properties,
assets or financial condition of Borrower and its Subsidiaries taken as a
whole;
(d) there shall be no action or proceeding instituted or pending before
any court or governmental authority or, to the knowledge of the Executive
Management of Borrower, threatened (i) which reasonably could be expected
to have a materially adverse effect on the business, property, assets or
financial condition of Borrower and its Subsidiaries taken as a whole or
(ii) seeking to prohibit or restrict Borrower's or any Subsidiary's
ownership or operation of any material portion of its business or assets or
to compel any such Credit Party to dispose of or hold all or any material
portion of its business or assets, which reasonably could be expected to
have a material adverse effect on the business, properties, assets or
financial condition of Borrower and its Subsidiaries taken as a whole; and
(e) the Loan to be made and the use of the proceeds thereof shall not
contravene, violate or conflict with, or involve any Credit Party or the
Bank in a violation of, any law, rule, injunction or regulation or any
determination of any court of law or other governmental authority.
Borrower's request for each Loan and the acceptance by Borrower of the
proceeds thereof shall constitute a representation and warranty by Borrower, as
of the date of such Loan, that the conditions specified in Sections 3.01 and
3.02 hereof have been and remain satisfied.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower (as to itself and all of its Subsidiaries) hereby represents
and warrants as follows:
SECTION 4.01. ORGANIZATION; SUBSIDIARIES; AUTHORIZATION.
-----------------------------------------
(a) Borrower is a corporation duly organized and validly existing in
good standing under the laws of the State of Georgia. Borrower is registered as
a bank holding company with the Board of Governors of the Federal Reserve System
and the appropriate banking authorities of the State of Georgia. The Bank
Subsidiary is a banking corporation duly organized, validly existing and in good
standing under the laws of the State of Georgia and the deposits of the Bank
Subsidiary are insured by the Federal Deposit Insurance Corporation (or its
successor). Each other Subsidiary of the Borrower is duly organized and validly
existing in good standing under the laws of the jurisdiction in which it is
incorporated.
(b) As of the date of this Agreement, the Borrower has no Subsidiaries
other than the Bank Subsidiary. As of the date of this Agreement, Borrower owns
all of the issued and outstanding capital stock of the Bank Subsidiary and the
Bank Subsidiary has no issued and outstanding options, warrants or other rights
which can be converted into shares of capital stock of the Bank Subsidiary
(other than those, if any, issued in favor of Borrower).
(c) Borrower and each Subsidiary is duly qualified as a foreign
corporation and in good standing in each jurisdiction where the ownership of
property or the nature of the business transacted by it makes such qualification
necessary, and Borrower has and each Subsidiary has the corporate power to own
its respective property and to carry on its respective business as now being
conducted.
(d) Borrower has all requisite corporate power and authority to own its
respective property and to carry on its respective business as now being
conducted, to execute and deliver the Credit Documents and to perform its
obligations under the Credit Documents. The Credit Documents have been duly
authorized by all requisite corporate action and duly executed and delivered by
authorized officers of Borrower.
8
<PAGE>
(e) Each of the Credit Documents constitutes a valid obligation of
Borrower, legally binding upon and enforceable against Borrower in accordance
with its terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity.
SECTION 4.02. FINANCIAL STATEMENTS. Each financial statement of
--------------------
Borrower or any Subsidiary which has been delivered to Bank presents fairly the
financial condition of Borrower or such Subsidiary as of the date indicated
therein and the results of its operations for the period show therein. There has
been no material adverse charge in the financial condition or operations of
Borrower or any Subsidiary since the date of said financial statement.
SECTION 4.03. ACTIONS PENDING. Except as may be disclosed on Schedule
---------------
4.03 attached hereto, there is no action, suit, investigation or proceeding
pending or, to the knowledge of the Executive Management of the Borrower,
threatened against Borrower or any of its Subsidiaries, or any properties or
rights of Borrower or any of its Subsidiaries, by or before any court,
arbitrator or administrative or governmental body which might result in any
material and adverse affect on the business, property or assets, or financial
condition of Borrower and its Subsidiaries taken as a whole.
SECTION 4.04. OUTSTANDING INDEBTEDNESS. Neither Borrower nor any of its
------------------------
Subsidiaries has outstanding any Indebtedness except as has been disclosed in
the copies of the financial statements of Borrower and Subsidiaries delivered to
Bank or as otherwise disclosed in writing to Bank or as may be permitted by
Section 6.01. There exists no default under the provisions of any instrument
evidencing such Indebtedness or of any agreement relating thereto.
SECTION 4.05. TITLE TO PROPERTIES. Borrower has and each of its
-------------------
Subsidiaries has good and indefeasible title to its respective real properties
(other than properties which it leases) and good title to all of its other
respective properties and assets (other than properties and assets disposed of
in the ordinary course of business), subject to no Lien of any kind except
Permitted Liens. All leases necessary in any material respect for the conduct of
the respective businesses of Borrower and its Subsidiaries are valid and
subsisting and are in full force and effect, there has not been asserted against
Borrower any claim of default, and there exists no default or event or condition
which, with notice or lapse of time or both, would constitute a default under
such leases.
SECTION 4.06. TAXES. Borrower and each of its Subsidiaries has filed
-----
all federal, state and other income tax returns which, to the best knowledge of
the Executive Management of Borrower, are required to be filed, and each has
paid all taxes as shown on such returns and on all assessments received by it to
the extent that such taxes have become due, except such taxes as are being
contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with GAAP.
SECTION 4.07. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither
----------------------------------------
Borrower nor any of its Subsidiaries is a party to any contract or agreement or
subject to any charter or other corporate restriction which materially and
adversely affects its business, property or assets, or financial condition.
Neither the execution nor delivery of this Agreement, nor fulfillment of or
compliance with the terms and provisions of this Agreement, will conflict with,
or result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in any violation of, or result in the creation of any
Lien upon any of the properties or assets of Borrower or any of its Subsidiaries
pursuant to, the charter or bylaws of Borrower or any of its Subsidiaries, any
award of any arbitrator or any agreement, instrument, order, judgment, decree,
statute, law, rule or regulation to which Borrower or any of its Subsidiaries is
subject. Neither Borrower nor any of its Subsidiaries is a party to, or
otherwise subject to any provision contained in, any instrument evidencing
indebtedness of Borrower or such Subsidiary, any agreement relating thereto or
any other contract or agreement (including its charter) which limits the amount
of, or otherwise imposes restrictions on the incurring of, Indebtedness of
Borrower of the type to be evidenced by this Agreement or the Note.
SECTION 4.08. ERISA. No accumulated funding deficiency (as defined in
-----
Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists
with respect to any plan (other than a multiemployer plan). No liability to the
PBGC has been or is expected by Borrower to be incurred with respect to any plan
(other than a multiemployer plan) by Borrower or any of its Subsidiaries which
9
<PAGE>
is or would have a material and adverse affect on the business, property or
assets, or financial condition of Borrower or any of its Subsidiaries. Neither
Borrower nor any of its Subsidiaries has incurred or presently expects to incur
any withdrawal liability under Title IV of ERISA with respect to any
multiemployer plan which is or would have a material and adverse affect on the
business, property or assets, or financial condition of Borrower or any of its
Subsidiaries. The execution and delivery of the Credit Documents will not
involve any transaction which is subject to the prohibitions of section 406 of
ERISA or in connection with which a tax could be imposed pursuant to Section
4975 of the Code. For the purpose of this Section, the term "plan" shall mean an
"employee pension benefit plan" (as defined in Section 3 of ERISA) which is or
has been established or maintained, or to which contributions are or have been
made, by Borrower or by any trade or business, whether or not incorporated,
which, together with Borrower, is under common control, as described in Section
414(b) or (c) of the Code; and the term "multiemployer plan" shall mean any plan
------------------
which is a "multiemployer plan" (as such term is defined in section 4001(a)(3)
of ERISA).
SECTION 4.09. GOVERNMENT CONSENT. Other than those already obtained,
------------------
neither the nature of Borrower or of any Subsidiary, nor any of their respective
businesses or properties, nor any relationship between Borrower or any
Subsidiary and any other Person is such as to require any authorization,
consent, approval, exemption or other action by or any notice to or filing with
any court or administrative or governmental body in connection with the
Borrower's execution, delivery or performance of any of the Credit Documents or
the consummation of the transactions contemplated thereby.
SECTION 4.10. COMPLIANCE WITH LAWS AND REGULATIONS. Borrower and each
------------------------------------
of its Subsidiaries complies in all material respects with all material federal,
state, local, and other laws, ordinances and other governmental rules or
regulations to which any of them is subject, including without limitation,
material laws and regulations relating to pollution and environmental control,
equal employment opportunity and employee safety, and Borrower will promptly
comply in all material respects and will cause each of its Subsidiaries promptly
to comply in all material respects with all such laws and regulations which may
be legally imposed on Borrower or any Subsidiary in the future.
SECTION 4.11. POSSESSION OF FRANCHISES, ETC. Borrower and its
-----------------------------
Subsidiaries possess all franchises, certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities that are necessary in any material respect for the ownership,
maintenance and operation of their respective properties and assets, and neither
Borrower nor any Subsidiary is in violation of any thereof in any material
respect.
SECTION 4.12. LICENSES, ETC. Borrower and each Subsidiary of Borrower
-------------
have obtained all patents, trademarks, service marks, trade names, service
names, copyrights, licenses and other rights, including distributorships and
franchise agreements that are necessary for the operation of its business as
presently conducted and as proposed to be conducted. Nothing has come to the
attention of Borrower or any Subsidiary or to the attention of any of their
Executive Management to the effect that (i) any product, process, method,
substance, part or other material presently contemplated to be sold by or
employed by Borrower or any Subsidiary of Borrower in connection with such
business may infringe any patent, trademark, service mark, trade name, service
names, copyright, license or other right owned by any other Person, or (ii)
there is pending or threatened any claim or litigation against or affecting
Borrower or any Subsidiary of Borrower contesting its right to sell or use any
such product, process, method, substance, part or other material.
SECTION 4.13. ENVIRONMENTAL LAW COMPLIANCE. Borrower and each of its
----------------------------
Subsidiaries have obtained all material permits, licenses and other
authorizations which are required under Environmental Laws, and Borrower and
each of its Subsidiaries are in compliance in all material respects with all
terms and conditions of such material required permits, licenses and
authorizations and are also in compliance in all material respects with all
other material limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in any applicable
Environmental Laws. Neither the Executive Management of Borrower nor the
Executive Management of any of its Subsidiaries is aware of, or has received
actual notice of, any past, present or future events, conditions, circumstances,
activities, practices, incidents, actions or plans which, with respect to
Borrower or any Subsidiary, may interfere with or prevent compliance or
continued compliance in all material respects with Environmental Laws, or may
give rise to any material common law or legal liability, or otherwise form the
basis of any material claim, action, demand, suit, proceeding, hearing, study or
investigation, based on or related to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling, or the emission,
discharge, release or, threatened release into the environment, of any
pollutant, contaminant, chemical, or industrial, toxic or hazardous substance or
10
<PAGE>
waste. There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice or demand proceeding pending or, to the best of the
knowledge of the Executive Management of Borrower, threatened against Borrower
or any Subsidiary relating in any way to Environmental Laws.
SECTION 4.14. SOLVENCY. After giving effect to the making of each Loan
--------
hereunder and the use of the proceeds thereof, (i) the property of the Borrower,
at a fair valuation, will exceed its debts, (ii) the Borrower's capital will not
be unreasonably small to conduct its business, (iii) the Borrower will not have
incurred debts, or have intended to incur debts, beyond its ability to pay such
debts as they mature, and (iv) the present fair salable value of the Borrower's
assets will be materially greater than the amount that will be required to pay
its probable liabilities (including debts) as they become absolute and matured.
For purposes of this Section, "debt" means any liability on a claim, and "claim"
means (i) the right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured or unsecured, or (ii) the right
to an equitable remedy for breach of performance if such breach gives rise to a
right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.
SECTION 4.15. MARGIN REGULATIONS; INVESTMENTS COMPANY ACT; ETC. No part
------------------------------------------------
of the proceeds of any Loan will be used for any purpose which violates, or
which would not be in compliance with, the provisions of the applicable Margin
Regulations. No Credit Party is an "investment company" or a company
"controlled" by an "investment company" (as each of the quoted terms is defined
or used in the Investment Company Act of 1940, as amended). Borrower is not
subject to regulation under the Public Utility Holding Company Act of 1935, the
Federal Power Act, or any foreign, federal or local statute or regulation
limiting its ability to incur indebtedness for money borrowed, to guarantee such
indebtedness or to pledge any of its assets to secure such indebtedness, as
contemplated by this Agreement or by any other Credit Document.
SECTION 4.16. INSURANCE. Borrower and its Subsidiaries currently
---------
maintain insurance with respect to their respective properties and businesses,
with financially sound and reputable insurers, having coverages against losses
or damages of the kinds customarily insured against by reputable companies in
the same or similar businesses, such insurance being in amounts no less than
those amounts which are customary for such companies under similar
circumstances. Borrower and its Subsidiaries have paid all insurance premiums
now due and owing with respect to such insurance policies and coverages.
SECTION 4.17. LABOR MATTERS. Neither Borrower nor any Subsidiary of
-------------
Borrower has experienced any strike, labor dispute, slow down or work stoppage
due to labor disagreements, and, to the best knowledge of the Executive
Management of Borrower, there is no strike, dispute, slow down or work stoppage
threatened against Borrower or any Subsidiary. There are no claims or lawsuits
which have been instituted against Borrower on the basis that it did not perform
in respect of any undertakings made towards its employees or their
representatives, and to the best knowledge of the Executive Management of
Borrower, no such claims have been asserted and no basis for such claim or
lawsuits exists. Borrower has acted in all material respects in accordance with
any agreements entered into with representatives of its employees relating to
their relations with and obligations towards their employees.
SECTION 4.18. DISCLOSURE. Neither this Agreement nor any other
----------
document, certificate or statement furnished to Bank by or on behalf of Borrower
or any Subsidiary in connection herewith contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein and therein not materially misleading. There is no
fact known to the Executive Management of Borrower and peculiar to Borrower or
any of its Subsidiaries which materially adversely effects or in the future may
materially adversely effect the business, property or assets, or financial
condition of Borrower or any of its Subsidiaries and which has not been set
forth in this Agreement or in the other documents, certificates and statements
furnished to Bank by or on behalf of Borrower prior to the date hereof in
connection with the transactions contemplated hereby.
11
<PAGE>
ARTICLE V.
AFFIRMATIVE COVENANTS
For so long as this Agreement is in effect, and unless Bank expressly
consents in writing to the contrary, Borrower hereby expressly covenants and
agrees (for itself and its Subsidiaries) that:
SECTION 5.01. FINANCIAL STATEMENTS AND NOTICES. Borrower shall promptly
deliver to Bank:
(a) within 45 days after the end of each of the first three quarters of
each fiscal year, copies of interim consolidated statements of income and
cash flow of Borrower and its Subsidiaries for the period from the
beginning of such fiscal year to the end of such period and a consolidated
balance sheet of Borrower and its Subsidiaries as at the end of such
period, all in reasonable detail, prepared in accordance with GAAP (subject
to normal year-end adjustments and the absence of footnotes) and certified
by the president or chief financial officer of Borrower, together with a
copy of the Report of Condition and the Report of Income and Dividends of
the Bank Subsidiary and of each other Subsidiary which is a bank or other
depository institution as filed by such Subsidiary with the Federal Deposit
Insurance Corporation, the Federal Reserve Bank of Atlanta, or its other
primary federal bank regulatory agency;
(b) within 120 days after the end of each fiscal year, annual
consolidated statements of income and statements of cash flows of Borrower
and its Subsidiaries for such year, and consolidated balance sheets of
Borrower and its Subsidiaries as at the end of such year, all in reasonable
detail, prepared in accordance with GAAP and reasonably satisfactory in
scope to Bank and audited in accordance with generally accepted auditing
standards and certified to Borrower by independent certified public
accountants of recognized standing selected by Borrower whose opinion shall
be unqualified;
(c) with reasonable promptness after the transmission thereof, copies
of all such financial statements, notices and reports as it shall send to
its public stockholders, if any, and copies of all registration statements
and all reports which it files with the Securities and Exchange Commission
(or any governmental body or agency succeeding to the functions of the
Securities and Exchange Commission);
(d) with reasonable promptness after the receipt thereof, a copy of
each other report submitted to Borrower or any Subsidiary by independent
accountants in connection with any annual, interim or special audit made by
them of the books of Borrower or any Subsidiary (including any management
letter);
(e) with reasonable promptness after the Executive Management of
Borrower obtaining knowledge of an Event of Default, an Officer's
Certificate specifying the nature and period of existence thereof and what
action Borrower proposes to take with respect thereto;
(f) with reasonable promptness after the Executive Management of
Borrower becoming aware that the holder of any evidence of indebtedness or
security of Borrower or any Subsidiary has given notice or taken any other
action with respect to a claimed default or event of default with respect
to such indebtedness or security or event which, with the giving of notice
or passage of time, or both, would constitute a default with respect to
such indebtedness or security, an Officer's Certificate specifying the
notice given or action taken by such holder and the nature of the claimed
default or event and what action Borrower or the Subsidiary is taking or
proposes to take with respect thereto;
(g) with reasonable promptness after the Executive Management of
Borrower learning thereof, any (i) notice that Borrower or any Subsidiary
is not in compliance in all material respects with all terms and conditions
of all material permits, licenses and authorizations which are required
under Environmental Laws, or that Borrower or any Subsidiary is not in
compliance in all material respects with all other material limitations,
restrictions, conditions, standards, prohibitions, requirements,
12
<PAGE>
obligations, schedules and timetables contained in any applicable
Environmental Laws; (ii) notice of any past, present or future events,
conditions, circumstances, activities, practices, incidents, actions or
plans which, with respect to Borrower or any Subsidiary, may interfere with
or prevent compliance in all material respects or continued compliance in
all material respects with material Environmental Laws, or may give rise to
any liability, or otherwise form the basis of any claim, action, demand,
suit, proceeding, hearing, study or investigation, based on or related to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling, or the emission, discharge, release or
threatened release into the environment, of any pollutant, contaminant,
chemical, or industrial, toxic or hazardous substance or waste; and (iii)
notice or claim of any civil, criminal or administrative action, suit,
demand, claim, hearing, notice or demand letter, notice of violation,
investigation, or proceeding pending or threatened against Borrower or any
Subsidiary relating in any way to Environmental Laws;
(h) with reasonable promptness after (i) the occurrence thereof, notice
of the institution by any Person of any action, suit or proceeding or any
governmental investigation or any arbitration, before any court or
arbitrator or any governmental or administrative body, agency, or official,
against Borrower, any Subsidiary, or any material property of any of them,
in which the amount in controversy is stated to be more than $100,000 or,
where no amount in controversy is stated, which might, if adversely
determined, have a material and adverse effect on the business, property or
assets or financial condition of Borrower and its Subsidiaries taken as a
whole, or (ii) the receipt by the Executive Management of Borrower of
actual knowledge thereof, notice of the threat of any such action, suit,
proceeding, investigation or arbitration, each such notice under this
subsection to specify, if known, the amount of damages being claimed or
other relief being sought, the nature of the claim, the Person instituting
the action, suit, proceeding, investigation or arbitration, and any other
significant features of the claim;
(i) with reasonable promptness after the Executive Management of the
Borrower becoming aware thereof, written notice of (x) any reduction in the
beneficial ownership of any of Borrower's Voting Stock by any member of
Borrower's Executive Management or by any 5% or greater shareholder of
Borrower, (y) any acquisition after the date hereof by any Person of
beneficial ownership of 10% or more of Borrower's Voting Stock, or (z) any
change in the Executive Management of the Borrower or of the Bank
Subsidiary; and
(j) with reasonable promptness, such other information relating to the
operations, business and financial condition of Borrower or its
Subsidiaries, as Bank may reasonably request.
SECTION 5.02. INSPECTION OF PROPERTY. Upon two (2) Business Days'
----------------------
notice from Bank, Borrower will permit, and will cause each of its Subsidiaries
to permit, any Person designated by Bank in writing, at Bank's sole expense, to
visit and inspect any of the properties of Borrower and its Subsidiaries, to
examine the books and records of Borrower and its Subsidiaries and such other
documents as Bank may reasonably request and make copies thereof or extracts
therefrom, and to discuss the affairs, finances and accounts of any of such
corporations with the officers of Borrower and Borrower's Subsidiaries and with
Borrower's independent certified public accountants, during normal business
hours and as often as Bank may reasonably request.
SECTION 5.03. BOOKS AND RECORDS. Borrower shall, and shall cause each
-----------------
Subsidiary to, keep its books, records and accounts in accordance with GAAP
applied on a basis consistent with preceding years.
SECTION 5.04. MAINTENANCE OF INSURANCE. Borrower shall maintain and
------------------------
cause each Subsidiary to maintain, with financially sound insurers reasonably
acceptable to Bank, insurance with respect to its properties and business
against such casualties and contingencies (including worker's compensation and
public liability, larceny, embezzlement or other criminal misappropriation) and
in such amounts as is customary in the case of a similarly situated corporation
engaged in the same or similar business. From time to time, upon written request
by the Bank at reasonable intervals, Borrower will deliver to the Bank an
Officer's Certificate specifying the details of such insurance as then in
effect.
SECTION 5.05. MAINTENANCE OF CORPORATE EXISTENCE, PROPERTIES,
----------------------------------------------
FRANCHISES, ETC. Borrower and each Subsidiary will do or cause to be done all
- ---------------
things necessary to preserve, renew and keep in full force and effect the
13
<PAGE>
corporate existence of Borrower and its Subsidiaries and the patents,
trademarks, service marks, trade names, service names, copyrights, licenses,
permits, franchises and other rights that continue to be useful to the business
of Borrower or such Subsidiary, and comply in all material respects with all
material laws and regulations (including, without limitation, laws and
regulations relating to equal employment opportunity and employee safety and
Environmental Laws) applicable to it and its Subsidiaries; at all times
maintain, preserve and protect all patents, trademarks, service marks, trade
names, service names, copyrights, licenses, permits, franchises and other rights
that continue to be materially useful to the business of Borrower or such
Subsidiary, and preserve all the remainder of its property materially useful in
the conduct of its business and keep the same in good repair, working order and
condition, and from time to time, make, or cause to be made, all needful and
proper repairs, renewals, replacements, betterments and improvements thereto so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.
SECTION 5.06. PAYMENT OF TAXES AND CLAIMS. Borrower and each Subsidiary
---------------------------
will pay and discharge or cause to be paid and discharged all taxes, assessments
and governmental charges or levies imposed upon it or upon its respective income
and profits or upon any of its property, real, personal or mixed or upon any
part thereof, before the same shall become in default as well as all lawful
claims for labor, materials and supplies or otherwise, which, if unpaid, might
become a Lien or charge upon such properties or any part thereof, provided that
Borrower and its Subsidiaries shall not be required to pay and discharge or
cause to be paid and discharged any such tax, assessment, charge, levy or claim
so long as the validity thereof shall be timely contested in good faith by
appropriate proceedings and it shall have set aside on its books adequate
reserves with respect to any such tax, assessment, charge, levy or claim, so
contested; and provided, further, that payment with respect to any such tax,
assessment, charge, levy or claim shall be made before any of its property shall
be seized or sold in satisfaction thereof.
SECTION 5.07. COMPLIANCE WITH LAWS, ETC. Borrower shall comply, and
-------------------------
cause each of its Subsidiaries to comply, in all material respects, with all
Requirements of Law and Contractual Obligations applicable to or binding on any
of them.
SECTION 5.08. MAINTENANCE OF PROPERTIES. Borrower shall cause, and
-------------------------
cause each of its Subsidiaries to cause, all properties materially useful in the
conduct of its business or the business of any Subsidiary to be maintained and
kept in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, settlements and improvements thereof, as may be necessary so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that nothing in this
Section shall prevent Borrower from discontinuing the operation or maintenance
of any such properties if such discontinuance is desirable in the conduct of its
business or the business of any Subsidiary.
SECTION 5.09. TYPE OF BUSINESS. Borrower will remain, and will cause
----------------
each of its Subsidiaries to remain, (i) in substantially the same businesses in
which Borrower and its Subsidiaries are engaged in as of the date of this
Agreement or in such other types of business as are reasonably related or
incidental thereto or (ii) such other non-banking activities as are permitted to
be engaged in by Borrower and its Subsidiaries by their bank regulators.
ARTICLE VI.
NEGATIVE COVENANTS
------------------
For so long as this Agreement is in effect, and unless Bank expressly
consents in writing to the contrary, Borrower hereby expressly covenants and
agrees (for itself and its Subsidiaries) as follows:
SECTION 6.01. INDEBTEDNESS. Borrower will not, and will not permit any
------------
Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, except
(a) Indebtedness evidenced by this Agreement or the Note;
(b) Unsecured current liabilities (not resulting from any borrowing)
incurred in the ordinary course of business for current purposes which, in
14
<PAGE>
the aggregate, do not exceed $100,000, are not represented by a promissory
note or other evidence of indebtedness and are not more than sixty (60)
days past due unless the payment is being diligently contested in good
faith by Borrower or a Subsidiary and adequate reserves therefor are
established and maintained on such Person's books;
(c) Deposits, repurchase agreements, interest rate and currency swap
agreements, Federal Funds purchases, Federal Home Loans Bank borrowings,
and other banking transactions entered into by any Credit Party in the
ordinary course of its business;
(d) Indebtedness owed to another Credit Party;
(e) Purchase Money Indebtedness having an aggregate outstanding
principal balance at any time of not more than $500,000; and
(f) Renewals or extensions of any Indebtedness described in paragraphs
(a), (b), (c), (d) or (e) above.
SECTION 6.02. LIENS. Borrower will not, and will not permit any
-----
Subsidiary to, create, assume or suffer to exist any Lien upon any of the
capital stock of the Bank Subsidiary or any other property or assets of any
Credit Party, whether now owned or hereafter acquired, except for Permitted
Liens.
SECTION 6.03. GUARANTIES. Borrower shall not, and shall not permit any
----------
of its Subsidiaries, in any manner, directly or indirectly, to become a
guarantor of any obligation of, or an endorser of, or otherwise assume or become
liable upon any notes, obligations or other indebtedness of any other Person
(other than another Credit Party) except in connection with the depositing of
checks in the ordinary course of business, or in connection with deposits,
repurchase agreements, interest rate or currency swap agreements and other
banking transactions entered into by any Credit Party in the ordinary course of
its business.
SECTION 6.04. MERGER AND SALE OF ASSETS. Borrower will not, and will
-------------------------
not permit any Subsidiary to, merge, consolidate or exchange shares with any
other corporation, or sell, lease or transfer or otherwise dispose of all or
substantially all of its assets to any Person, other than sales of inventory in
the ordinary course of business, except: (a) any Subsidiary may merge or
consolidate with Borrower (provided that Borrower shall be the continuing or
surviving corporation) or with any one or more other wholly-owned Subsidiaries;
and (b) any Subsidiary may sell, lease, transfer or otherwise dispose of all or
any substantial part of its assets to Borrower or another wholly-owned
Subsidiary.
SECTION 6.05. ACQUISITIONS, ETC. Borrower will not, and will not permit
-----------------
any Subsidiary to, acquire all or substantially all of the assets or capital
stock of any other Person, or create any new Subsidiary or enter into any
partnership or joint venture, except that Borrower or any Subsidiary may acquire
all or substantially all of the assets or capital stock of another Subsidiary.
SECTION 6.06. ERISA MATTERS. Neither Borrower nor any Subsidiary shall
-------------
incur or suffer to exist any material accumulated funding deficiency within the
meaning of ERISA or incur any material liability to the PBGC established under
ERISA (or any successor thereto under ERISA).
SECTION 6.07 DIVIDENDS, ETC. Borrower shall not declare or pay any
--------------
dividend on its capital stock, or make any payment to purchase, redeem, retire
or acquire any of its capital stock or any option, warrant, or other right to
acquire such capital stock, without the prior written consent of Bank; provided,
however, that Borrower may declare and pay (i) stock dividends or (ii) cash
dividends in any fiscal year in which its net income after taxes exceeds
$250,000.
SECTION 6.08. SUBSIDIARIES. Borrower will not permit any Subsidiary
------------
(either directly or indirectly by the issuance of rights or options for, or
securities convertible into, such shares) to issue, sell or otherwise dispose of
any shares of any class of its stock (other than directors' qualifying shares)
except to Borrower or a wholly-owned Subsidiary of Borrower (except that the
Bank Subsidiary must remain a wholly-owned direct Subsidiary of Borrower).
Borrower will not sell or otherwise dispose of, or part with control of, any
securities or indebtedness of any Subsidiary.
15
<PAGE>
SECTION 6.09 CHANGE IN EXECUTIVE MANAGEMENT. Borrower shall give Lender
------------------------------
reasonably prompt notice of any change of the Executive Management of Borrower
or of the Bank Subsidiary.
SECTION 6.10. FINANCIAL COVENANTS. Borrower shall not violate any of
-------------------
the following covenants on or after the date of this Agreement:
(a) Borrower shall, and shall cause each of its Subsidiaries which is a
bank or other depository institution to, have at all times sufficient risk-
based capital values (as defined by the Federal Deposit Insurance
Corporation Improvement Act) so that the Borrower and each such Subsidiary
maintains the status of a "well capitalized" institution as set forth in
such Act.
(b) The Borrower's Non-Performing Assets at any one time shall not
equal or exceed 2.5% of the sum of its total loans as of such date plus its
other real estate owned as of such date, all as determined on a
consolidated basis.
(c) Borrower shall maintain a consolidated loan loss reserve that is
satisfactory to the Borrower's federal and state regulatory agencies based
on the mix of Borrower's consolidated loan portfolio, and at all times
Borrower's consolidated loan loss reserve must be not less than 1.0% of its
consolidated total loans.
ARTICLE VII.
EVENTS OF DEFAULT
-----------------
SECTION 7.01. EVENTS OF DEFAULT. Each of the following events shall
-----------------
constitute an Event of Default under this Agreement:
(i) failure by Borrower to pay any interest due under the Note within
ten (10) days from when due, or failure by Borrower to pay any principal
under the Note when due;
(ii) any representation or warranty made by Borrower herein shall be
false or misleading in any material respect on the date as of which made;
or
(iii) any default shall occur in the performance or observance of any
term, condition or provision contained in Article VI of this Agreement; or
(iv) any default shall occur in the performance or observance of any
term, condition or provision contained in this Agreement and not referred
to in clauses (i) through (iii) above, which shall continue for thirty (30)
days after Bank gives Borrower notice thereof; or
(v) any provision of this Agreement or the Note shall at any time for
any reason cease to be valid and binding in accordance with its terms on
Borrower, or the validity, enforceability, or priority thereof shall be
contested by Borrower; or
(vi) Borrower or any Subsidiary shall (i) apply for or consent to the
appointment of or the taking of possession by a receiver, custodian,
conservator, trustee or liquidator of Borrower or such Subsidiary or of all
or a substantial part of the property of Borrower or such Subsidiary, (ii)
admit in writing the inability of Borrower or such Subsidiary, or be
generally unable, to pay the debts of Borrower or such Subsidiary as such
debts become due, (iii) make a general assignment for the benefit of the
creditors of Borrower or such Subsidiary, (iv) commence a voluntary case
under the Bankruptcy Code (as now or hereafter in effect), (v) file a
petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, winding-up, or composition or adjustment of
debts, (vi) fail to controvert in a timely or appropriate manner, or
acquiesce in writing to, any petition filed against Borrower or such
Subsidiary in an involuntary case under the Bankruptcy Code, or (vii) take
any action for the purpose of effecting any of the foregoing; or
16
<PAGE>
(vii) a proceeding or case shall be commenced, without the application
of Borrower or any Subsidiary, in any court of competent jurisdiction,
seeking (i) the liquidation, reorganization, dissolution, winding-up or
composition or readjustment of debts of Borrower or such Subsidiary, (ii)
the appointment of a trustee, receiver, custodian, conservator, liquidator
or the like of Borrower or such Subsidiary or of all or any substantial
part of the assets of Borrower or such Subsidiary, or (iii) similar relief
in respect of Borrower or such Subsidiary under any law relating to
bankruptcy, insolvency, reorganization, winding-up or composition and
adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of
the foregoing shall be entered and continue unstayed and in effect, for a
period of sixty (60) days from commencement of such proceeding or case or
the date of such order, judgment or decree, or any order for relief against
Borrower or such Subsidiary shall be entered in an involuntary case or
proceeding under the Bankruptcy Code; or
(viii) default in the payment of principal of or interest on any other
Indebtedness of Borrower or any Subsidiary for money borrowed (or any
Indebtedness under conditional sale or other title retention agreement or
any Indebtedness secured by purchase money mortgage or deed to secure debt
or any Indebtedness under notes payable or drafts accepted representing
extensions of credit), or default in the performance of any other
agreement, term or condition contained in any agreement under which any
such Indebtedness is created, guaranteed or secured, but only after giving
effect to any applicable notice and/or cure rights expressly applicable
thereto and only if the effect of such default is to entitle the holder or
holders of such obligation (or a trustee on behalf of such holder or
holders) to cause such Indebtedness to become due prior to its stated
maturity, but only if the aggregate then outstanding principal balance of
all such Indebtedness equals or exceeds $100,000; or
(ix) default in the payment of principal of or interest on any
Indebtedness of Borrower or any Subsidiary for money borrowed from Bank, or
default in the performance of any other agreement, term, or condition
contained in any agreement under which any such Indebtedness is created,
guaranteed or secured, but only after giving effect to any applicable
notice and/or cure rights expressly applicable thereto and only if the
effect of such default is to entitle Bank to then cause such obligation to
become due prior to its stated maturity. [The parties intend that a default
may constitute an Event of Default under this paragraph (ix) even if such
default would not constitute an Event of Default under paragraph (viii)
immediately above]; or
(x) a judgment or order for the payment of money in excess of $100,000
or otherwise having a material adverse effect on Borrower and its
Subsidiaries taken as a whole shall be rendered against Borrower or any of
its Subsidiaries and such judgment or order shall not be released, vacated,
stayed or fully bonded-off within thirty (30) days after the date of its
issue or entry; or
(xi) Borrower or any of its Subsidiaries shall have been indicted or
convicted or shall have plead guilty or nolo contendere to any charge that
Borrower or such Subsidiary has violated the Federal Money Laundering
Control Act, the Control Substances Act, the Currency and Foreign
Transactions Reporting Act or any other federal, state or local drug,
controlled substances, money laundering, currency reporting, racketeering,
or racketeering-influenced-and-corrupt-organization statute or regulations,
or any other similar federal, state or local forfeiture statute (including
without limitation 18 USC ss. 1963); or
(xii) if any cease and desist order has been entered against Borrower
or any Subsidiary by any federal or state bank or bank holding company
regulatory agency or body, or the Borrower or any Subsidiary shall enter
into any form of memorandum of understanding with any such federal or state
bank or bank holding company regulatory agency or body, or if any other
regulatory enforcement action shall be taken against Borrower or any
Subsidiary relating to the capitalization, management or operation of the
Borrower or any Subsidiary; or
17
<PAGE>
(xiii) if any Person or group of Persons acting in concert shall at any
time after the date of this Agreement acquire ownership or control,
directly or indirectly, of twenty-five percent (25%) or more of the total
Voting Stock of Borrower then outstanding or if the Bank Subsidiary shall
no longer be a wholly-owned subsidiary of Borrower.
SECTION 7.02. REMEDIES. Upon the occurrence of an Event of Default Bank
--------
may, in its sole discretion, but shall not be obligated to, exercise one or more
of the following remedies:
(i) by written notice to Borrower, terminate the Bank's remaining
obligation to make any further Loans hereunder and declare the principal of
and any accrued interest on the Loans, and all other Obligations owing
under this Agreement or the Note, to be, whereupon the same shall become,
forthwith due and payable, and the same shall thereupon become due and
payable without demand, presentment, protest or further notice of any kind,
all of which are hereby expressly waived by Borrower; and
(ii) exercise all or any of its rights and remedies as it may otherwise
have under law; provided, however, that upon the occurrence of an Event of
Default specified in Section 7.01(vi) or Section 7.01(vii), the result
which would occur upon the giving of notice pursuant to Section 7.02(i)
shall occur automatically without the giving of any such notice. Bank may
apply all moneys recovered through the exercise of its remedies to the
payment of the Obligations in such order and priority as determined by Bank
in its sole and exclusive judgment. No failure or delay on the part of Bank
to exercise any right or remedy hereunder or under the Note shall operate
as a waiver thereof, nor shall any single or partial exercise of any right
or remedy hereunder preclude any further exercise thereof or the exercise
of any further right or remedy hereunder or under the Note. No exercise by
Bank of any remedy under the Note shall operate as a limitation on any
rights or remedies of Bank under this Agreement, except to the extent of
moneys actually received by Bank under the Note.
ARTICLE VIII.
MISCELLANEOUS
-------------
SECTION 8.01. NOTICES. Except as otherwise provided herein, all
-------
notices, requests and demands to or upon a party hereto to be effective shall be
in writing (and, if sent by mail, shall be sent by certified or registered mail,
return receipt requested) or by telegraph or telex or telecopy and, unless
otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered when delivered against receipt or one (1) Business
Day after being entrusted to a reputable national overnight delivery service
(such as Federal Express) or three (3) Business Days after deposit in the United
States mail, postage prepaid, or, in the case of telegraphic notice, when
delivered to the telegraph company, or, in the case of telex notice, when sent,
answerback received, or, in the case of telecopy notice, when telecopied, and in
each case directed or addressed to the recipient at the following address or
telex or telecopy number:
(A) If to Secured Party: Hardwick Bank & Trust Company
One Hardwick Square
Dalton, Georgia 30720
Attention: Stanley A. Crawford
Executive Vice President
(B) If to Debtor: Appalachian Bancshares Inc.
315 Industrial Boulevard
Ellijay, Georgia 30540
Attention: Kent Sanford
Executive Vice President
or to such other address or telex or telecopy number as each party may designate
for itself by like notice given in accordance with this Section.
18
<PAGE>
SECTION 8.02. NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on
------------------------------
the part of Bank in exercising any right or remedy hereunder and no course of
dealing between Borrower and Bank shall operate as a waiver thereof, nor shall
any single or partial exercise of any right or remedy hereunder or under the
Note preclude any other or further exercise thereof or the exercise of any other
right or remedy hereunder. The rights and remedies herein expressly provided are
cumulative and not exclusive of any rights or remedies which Bank would
otherwise have. No notice to or demand on Borrower not required hereunder or
under the Note in any case shall entitle Borrower to any other or further notice
or demand in similar or other circumstances or constitute a waiver of the rights
of Bank to any other or further action in any circumstances without notice or
demand.
SECTION 8.03. PAYMENT OF EXPENSES, ETC. Borrower shall:
(i) whether or not the transactions hereby contemplated are
consummated, pay all out-of-pocket costs and expenses of Bank (not to
exceed actual costs and expenses) in the administration (both before and
after the execution hereof and including advice of counsel as to the rights
and duties of Bank with respect thereto) of, and in connection with the
preparation, execution and delivery of, preservation of rights under,
administration or enforcement of, and, after a Default, refinancing,
renegotiation or restructuring of, this Agreement, the Note or any other
instruments referred to therein and any amendment, waiver or consent
relating thereto, including, without limitation, the reasonable fees and
disbursements of counsel, accountants or other consultants for Bank (not to
exceed actual fees and disbursements);
(ii) pay and hold Bank harmless from and against any and all present
and future stamp, documentary and other similar Taxes with respect to this
Agreement or the Note, or any payments due thereunder, and save Bank
harmless from and against any and all liabilities with respect to or
resulting from any delay or omission to pay such Taxes; and
(iii) indemnify Bank and its officers, directors, employees,
representatives and agents (the "Indemnified Persons") from, and hold each
of them harmless against, any and all (x) claims, demands or causes of
action of any nature whatsoever brought by any Person not a party to this
Agreement and arising from or related or incident to this Agreement or the
Note, (y) actual and reasonable costs and expenses incident to the defense
of any such claims, demands or causes of action, including without
limitation reasonable attorney's fees actually incurred and (z)
liabilities, judgments, settlements, penalties and assessments arising from
such claims, demands or causes of action; provided, however, that the
foregoing indemnities shall not apply to any such claims, demands, causes
of action, costs, expenses, liabilities, judgments, settlements, penalties
or assessments which are proximately caused by the Indemnified Person's own
gross negligence, willful misconduct, or intentional violation of any
Requirement of Law.
SECTION 8.04. RIGHT OF SETOFF.
---------------
(a) To the fullest extent permitted by law, upon the occurrence and
during the continuance of any Event of Default, Bank is hereby authorized at any
time and from time to time, without notice to Borrower (any such notice being
expressly waived by Borrower), to set-off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by Bank to or for the credit or the account
of Borrower against any of the obligations of Borrower now or hereafter existing
under this Agreement, or the Note, irrespective of whether Bank shall have made
any demand hereunder or thereunder and although such obligations may be
unmatured.
(b) Bank agrees promptly to notify Borrower after any set-off and
application, provided that the failure to give such notice shall not effect the
validity of such set-off and application. Subject to the provisions of
subsection (a), the rights of Bank under this Section are in addition to other
rights and remedies (including, without limitation, other rights of set-off)
which Bank may have.
SECTION 8.05. BENEFIT OF AGREEMENT. This Agreement shall be binding
--------------------
upon and inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto, provided that Borrower may not assign or
transfer any of its interest hereunder without the prior written consent of
Bank.
19
<PAGE>
SECTION 8.06. PARTICIPATIONS. Bank may participate to participants of
--------------
Bank's choosing all or any portion of its obligations under the Loans and its
rights under the Credit Documents, provided that Borrower shall in such event
continue to deal solely with the Bank.
SECTION 8.07. AMENDMENTS; EXERCISE OF DISCRETION.
----------------------------------
(a) This Agreement may be amended, and Borrower may take any action
herein prohibited, or omit to perform any act herein required to be performed,
only if Borrower shall first obtain the written consent of Bank thereto. No
course of dealing between Borrower and Bank nor any delay in exercising any
rights hereunder, shall operate as a waiver of any rights of Bank hereunder.
(b) Unless otherwise specifically indicated, if any agreement,
certificate or other writing, or any action taken or to be taken, is by the
terms of this Agreement required to be satisfactory to Bank, the determination
of such satisfaction shall be made by the Bank in its sole and exclusive
judgment.
SECTION 8.08. EASTERN TIME; TIME OF ESSENCE. In each instance in which
-----------------------------
this Agreement contemplates that an event occur or an action be taken by a
certain time of day, current time in the Eastern time zone shall be the
applicable time. Time is of the essence of this Agreement and the Note.
SECTION 8.09. GOVERNING LAW. This Agreement is intended to be performed
-------------
in the State of Georgia, and shall be construed and enforced in accordance with,
and the rights of the parties shall be governed by, the internal laws of the
State of Georgia.
SECTION 8.10. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
SECTION 8.11. EFFECTIVENESS; TERM; SURVIVAL.
-----------------------------
(a) This Agreement shall become effective on the date on which all of
the parties hereto shall have signed a copy hereof (whether the same or
different copies) and Bank shall have received the same.
(b) This Agreement shall remain in full force and effect so long as
Bank is under any obligation to make the Loans or any Obligation remains
outstanding and unpaid.
(c) The obligations under Section 8.03, hereof shall survive the
payment in full of the Note and the termination of this Agreement. All
representations and warranties made herein, in the certificates, reports,
notices, and other documents delivered pursuant to this Agreement shall survive
the execution and delivery of this Agreement, the Note, and such other
agreements and documents, the making of the Loans hereunder and the execution
and delivery of the Note.
SECTION 8.12. SEVERABILITY. ln case any provision in or Obligation
------------
under this Agreement or the Note shall be invalid, illegal or unenforceable, in
whole or in part, in any jurisdiction, the validity, legality and enforceability
of the remaining provisions or obligations, or of such provision or obligation
in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 8.13. INDEPENDENCE OF COVENANTS. All covenants hereunder shall
-------------------------
be given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitation of, another covenant, shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
SECTION 8.14. HEADINGS DESCRIPTIVE; ENTIRE AGREEMENT. The headings of
--------------------------------------
the several sections, articles and subsections of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any provision of this Agreement. This Agreement and the Note constitute the
sole and entire agreement among the parties hereto and thereto regarding the
subject matters hereof and thereof and supersede all prior agreements,
commitments, representations, negotiations, correspondence and understandings
related to such subject matters.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in their behalf as of the date first above stated.
APPALACHIAN BANCSHARES INC.
By: /s/ Tracy R. Newton
-------------------------------------
President
HARDWICK BANK & TRUST COMPANY
By: /s/ Stanley A. Crawford
-------------------------------------
Title: EVP
21
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARY
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
The following tabulation presents the calculation of primary and
fully diluted earnings per common share for the years ended December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ------------
<S> <C> <C> <C>
Reported net income (loss)................................ $ 516,736 $ (246,712) $ (101,431)
============= ============ ============
Earnings (loss) on common shares.......................... $ 516,736 $ (246,712) $ (101,431)
============= ============ ============
Weighted average common shares outstanding................ 568,000 568,000 568,000
============= ============ ============
Earnings (loss) per common share - primary and
fully diluted income from continuing operations........ $ .91 $ (.43) $ (.18)
============= ============ ============
Net income (loss)......................................... $ .91 $ (.43) $ (.18)
============= ============ ============
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Gilmer County Bank, a Georgia banking corporation (100%)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,524,393
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,150,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,131,443
<INVESTMENTS-CARRYING> 2,247,479
<INVESTMENTS-MARKET> 2,277,884
<LOANS> 64,961,742
<ALLOWANCE> (655,296)
<TOTAL-ASSETS> 93,153,891
<DEPOSITS> 81,147,881
<SHORT-TERM> 5,283,972
<LIABILITIES-OTHER> 217,102
<LONG-TERM> 700,000
0
0
<COMMON> 2,840,000
<OTHER-SE> 2,964,936
<TOTAL-LIABILITIES-AND-EQUITY> 93,153,891
<INTEREST-LOAN> 5,205,131
<INTEREST-INVEST> 1,002,145
<INTEREST-OTHER> 104,021
<INTEREST-TOTAL> 6,311,297
<INTEREST-DEPOSIT> 3,436,060
<INTEREST-EXPENSE> 3,660,227
<INTEREST-INCOME-NET> 2,651,070
<LOAN-LOSSES> 368,000
<SECURITIES-GAINS> 8,894
<EXPENSE-OTHER> 599,776
<INCOME-PRETAX> 820,644
<INCOME-PRE-EXTRAORDINARY> 820,664
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516,736
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 10.23
<LOANS-NON> 57,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 131,000
<ALLOWANCE-OPEN> 324,599
<CHARGE-OFFS> 38,225
<RECOVERIES> 922
<ALLOWANCE-CLOSE> 655,296
<ALLOWANCE-DOMESTIC> 655,296
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
