<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of report (Date of earliest event reported): November 30, 1998
Appalachian Bancshares, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as Specified in Charter)
Georgia 000-21383 58-2242407
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(State or other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
829 Industrial Blvd., Ellijay, Georgia 30540
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(Address of Principal Executive Offices) (Zip Code)
706/276-8000
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(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 30, 1998, Appalachian Bancshares, Inc. (the "Company")
completed its acquisition of First National Bank of Union County ("First
National") from Century South Banks, Inc. ("Century South"). Pursuant to the
terms of the acquisition agreement, the Company acquired First National, in a
cash transaction, for a purchase price of $6.1 million. The purchase price of
the transaction was determined through arms length negotiations between the
parties. The Company funded a portion of the purchase price with the proceeds of
a private placement of 132,500 shares of the Company's Common Stock. The
aggregate gross proceeds of the private placement were $2.65 million. The
Company funded the remainder of the purchase price though a new $3.6 million
loan with The Bankers Bank. The acquisition will be treated as a purchase for
accounting and financial reporting purposes.
First National is a nationally-chartered bank organized in 1981 with its
main banking office located in Blairsville, Georgia. First National will operate
as a wholly-owned subsidiary of the Company and will continue its business and
operations in Blairsville.
Prior to the acquisition, there were no material relationships between the
Company, Century South and First National or any of their respective affiliates,
directors or officers.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The audited financial statements of First National as of and for the years
ended December 31, 1996 and 1997 are included herein.
(B) PRO FORMA FINANCIAL INFORMATION.
It is impracticable for the Company to provide the required pro forma
financial information for the acquired business at the time this report on Form
8-K is filed. The Company will file such pro forma financial information as soon
as it is available, which shall not be later than sixty (60) days following the
due date of this report on Form 8-K.
(C) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
2.1* Purchase Sale and Assumption Agreement, dated July
10, 1998, by and between Century South Banks, Inc.
and Appalachian Bancshares, Inc.
23 Consent of Schauer, Taylor, Cox & Edwards, P.C.
</TABLE>
* previously filed as Exhibit 2.1 to the Company's Form 8-K dated
July 10, 1998 and incorporated herein by this reference.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPALACHIAN BANCSHARES, INC.
Date: December 15, 1998 /s/ Kent W. Sanford
------------------------------------
Kent W. Sanford
Executive Vice President
(Principal financial officer)
<PAGE> 4
FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
<TABLE>
<S> <C>
Independent Auditors' Report............................................... 1
Statements of Financial Condition.......................................... 2
Statements of Income....................................................... 4
Statements of Shareholders' Equity......................................... 5
Statements of Cash Flows................................................... 6
Notes to Financial Statements.............................................. 8
</TABLE>
<PAGE> 5
[SCHAUER, TAYLOR, COX & EDWARDS P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
First National Bank of Union County
Blairsville, Georgia
We have audited the accompanying statements of financial condition of First
National Bank of Union County as of December 31, 1997 and 1996, and the related
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First National Bank of Union
County as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Birmingham, Alabama
August 21, 1998
/S/ Schauer, Taylor, Cox & Edwards P. C.
SCHAUER, TAYLOR, COX & EDWARDS P. C.
<PAGE> 6
STATEMENTS OF FINANCIAL CONDITION
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks ................. $ 1,674,703 $ 1,424,846
Interest-bearing deposits with banks .... 7,973 15,260
Federal funds sold ...................... 310,000 1,550,000
Securities held-to-maturity ............. 2,475,068 2,524,164
Securities available-for-sale ........... 4,672,540 5,254,497
Loans ................................... 34,277,941 37,313,745
Less: Unearned income .................. 18,050 16,277
Allowance for loan losses ........ 1,225,189 496,259
----------- -----------
NET LOANS ........................ 33,034,702 36,801,209
Premises and equipment, net ............. 2,044,144 2,103,835
Accrued interest ........................ 326,537 455,659
Foreclosed real estate, net ............. 482,542 290,948
Other assets ............................ 629,799 910,622
----------- -----------
TOTAL ASSETS ..................... $45,658,008 $51,331,040
=========== ===========
</TABLE>
2
<PAGE> 7
<TABLE>
<CAPTION>
1997 1996
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Deposits:
Noninterest-bearing ................................ $ 3,638,722 $ 3,552,943
Interest-bearing ................................... 37,566,172 42,738,265
------------ ------------
TOTAL DEPOSITS .................................. 41,204,894 46,291,208
Accrued interest ....................................... 463,279 586,074
Other liabilities ...................................... 157,443 170,705
------------ ------------
TOTAL LIABILITIES ............................... 41,825,616 47,047,987
SHAREHOLDERS' EQUITY
Common stock - par value $12.50 per share,
75,000 shares authorized, issued and outstanding
at December 31, 1997 and 1996 ........................ 937,500 937,500
Capital surplus ........................................ 1,062,500 1,062,500
Retained earnings ...................................... 1,834,976 2,309,644
Net unrealized holding losses on securities
available-for-sale, net of deferred income tax ..... (2,584) (26,591)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ...................... 3,832,392 4,283,053
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 45,658,008 $ 51,331,040
============ ============
</TABLE>
See notes to financial statements
3
<PAGE> 8
STATEMENTS OF INCOME
FIRST NATIONAL BANK OF UNION COUNTY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans ............................. $ 3,636,667 $3,830,373
Interest and dividends on investment securities:
Taxable securities ................................. 349,614 401,343
Securities exempt from federal income taxes ........ 84,683 93,634
Interest on federal funds sold ......................... 88,253 71,387
Interest on deposits in banks .......................... 1,004 1,106
----------- ----------
TOTAL INTEREST INCOME .............................. 4,160,221 4,397,843
----------- ----------
INTEREST EXPENSE
Interest on deposits ................................... 1,999,869 2,212,543
Interest on short-term borrowings ...................... 2,216 4,103
----------- ----------
TOTAL INTEREST EXPENSE ............................. 2,002,085 2,216,646
----------- ----------
Net interest income ........................................ 2,158,136 2,181,197
Provision for loan losses .................................. 952,801 66,000
----------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ........ 1,205,335 2,115,197
NONINTEREST INCOME
Service charges on deposits ............................ 232,484 238,910
Investment security gains .............................. -0- 8,501
Other operating income ................................. 128,229 142,456
----------- ----------
TOTAL NONINTEREST INCOME ........................... 360,713 389,867
----------- ----------
NONINTEREST EXPENSES
Salaries and employee benefits ......................... 795,334 633,037
Occupancy and equipment expense ........................ 271,239 204,025
Other operating expenses ............................... 787,143 724,091
----------- ----------
TOTAL NONINTEREST EXPENSES ......................... 1,853,716 1,561,153
----------- ----------
Income (loss) before income taxes .......................... (287,668) 943,911
Provision (benefits) for income taxes ...................... (149,000) 315,500
----------- ----------
NET INCOME (LOSS) .......................................... $ (138,668) $ 628,411
=========== ==========
Basic earnings per share ................................... $ (1.85) $ 8.38
Basic weighted average shares outstanding .................. 75,000 75,000
</TABLE>
See notes to financial statements
4
<PAGE> 9
STATEMENTS OF SHAREHOLDERS' EQUITY
FIRST NATIONAL BANK OF UNION COUNTY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Unrealized
Gains
Common Capital Retained (Losses) On
Stock Surplus Earnings Securities Total
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1995.......... $937,500 $1,062,500 $1,946,233 $(44,573) $3,901,660
Dividend..................... (265,000) (265,000)
Net change in
unrealized gains
(losses) on securities..... 17,982 17,982
Net income - 1996............ 628,411 628,411
-------- ---------- ---------- -------- ---------
BALANCE AT
DECEMBER 31, 1996.......... 937,500 1,062,500 2,309,644 (26,591) 4,283,053
DIVIDEND..................... (336,000) (336,000)
NET CHANGE IN
UNREALIZED GAINS
(LOSSES) ON SECURITIES..... 24,007 24,007
NET LOSS - 1997.............. (138,668) (138,668)
-------- ---------- ---------- -------- ---------
BALANCE AT
DECEMBER 31, 1997.......... $937,500 $1,062,500 $1,834,976 $ (2,584) $3,832,392
======== ========== ========== ======== ==========
</TABLE>
See notes to financial statements
5
<PAGE> 10
STATEMENTS OF CASH FLOWS
FIRST NATIONAL BANK OF UNION COUNTY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .......................................... $ (138,668) $ 628,411
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for loan losses ............................. 952,801 66,000
Depreciation, amortization, and accretion, net ........ 158,720 122,798
Deferred tax provision (benefit) ...................... (360,324) 19,623
Decrease in accrued interest receivable ............... 129,122 59,252
Increase (decrease) in accrued interest payable ....... (122,795) 29,881
Realized investment security gains .................... -0- (8,501)
Realized losses on disposition of other real estate ... 26,601 1,721
Other, net ............................................ 613,196 (740,064)
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............. 1,258,653 179,121
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available-for-sale ...... (1,246,472) (1,001,918)
Proceeds from sales of investment securities
available-for-sale ....................................... -0- 1,256,023
Proceeds from maturities of investment securities
available-for-sale ....................................... 1,846,826 780,537
Proceeds from maturities and paydowns of
investment securities held-to-maturity ................... 70,000 1,187,370
Net (increase) decrease in loans to customers .............. 2,449,912 (1,394,864)
Purchase of premises and equipment ......................... (129,977) (1,662,168)
Proceeds from disposition of fixed assets .................. 30,343 643,247
Proceeds from disposition of other real estate ............. 145,599 13,315
----------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ............................... 3,166,231 (178,458)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
and savings accounts ..................................... 353,602 350,504
Net increase (decrease) in certificates of deposit ......... (5,439,916) 195,190
Cash dividends ............................................. (336,000) (265,000)
----------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............................... (5,422,314) 280,694
----------- ----------
</TABLE>
6
<PAGE> 11
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... $ (997,430) $ 281,357
Cash and Cash Equivalents at Beginning of Year ................. 2,990,106 2,708,749
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................... $ 1,992,676 $2,990,106
=========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for interest ..................... $ 2,124,880 $2,186,765
Cash paid during the year for income taxes ................. 168,697 352,711
Loans transferred to foreclosed real estate during the
year ................................................... 413,794 33,936
Proceeds from sales of foreclosed real estate financed
through loans .......................................... 40,000 18,900
Net increase (decrease) in unrealized gains on securities
available-for-sale ..................................... 18,740 (28,639)
</TABLE>
See notes to financial statements
7
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First National Bank of Union County (the "Bank") was organized under the laws of
the State of Georgia on April 3, 1981 and approval was obtained from the Georgia
Department of Banking and Finance to commence operations as a nationally
chartered commercial bank. The Bank was acquired in 1990 by Century South Banks,
Inc., ("CSBI") a Georgia-based bank holding company, and currently operates as
one of its wholly-owned bank subsidiaries. The Bank operates one full service
banking location in Blairsville, Georgia and services customers primarily in
Union County of North East Georgia.
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 judgements 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.
8
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Securities Available-for-Sale: Available-for-sale securities consist of
investment securities not classified as trading securities nor 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 Bank does not have any trading securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, when material, 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 non-accrual 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
9
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 values 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 the straight-line method 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 amount 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 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.
10
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Earnings Per Common Share
Basic earnings per common share are computed by dividing earnings available to
stockholders by the weighted average number of common shares outstanding during
the period.
Benefit Plans
The Bank has adopted a 401(k) Plan which covers substantially all of its
employees. Contributions to the plan are determined by the Board of Directors
and are included in salaries and employee benefits expense.
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, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they become payable.
The Bank has available as a source of short-term financing the purchase of
federal funds from other commercial banks from available lines totaling
$8,000,000. The bank also has available a secured line of credit from the
Federal Home Loan Bank of Atlanta in the aggregate amount of $6,000,000.
Cash Flow Information
The Bank considers all cash and amounts due from depository institutions and
federal funds sold to be cash equivalents for purposes of the statements of cash
flows.
11
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 is 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 in 1996 did not have a material impact
on the Bank's 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 in
1996 did not have a material impact on the Bank's 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
non-employee compensation. These transactions must be accounted for based on the
fair value of the consideration received or the 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
12
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
of accounting as prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The adoption of this statement in 1996 did not have a material
effect on the Bank's 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 Bank's 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. SFAS No. 126 has allowed the Bank to be exempt from the
reporting requirements of SFAS No. 107.
Effective for years ending after December 15, 1997, SFAS No. 128, "Earnings Per
Share" was issued by FASB which simplifies previous standards for reporting
earnings per share. Under SFAS No. 128, earnings per share is stated on the
income statement based on two separate measurements: basic and diluted. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. The adoption of this
statement did not have a material effect on the Bank's financial statements.
13
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Effective for years beginning after December 15, 1997, SFAS No. 130, "Reporting
Comprehensive Income" was issued by FASB which establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Statement requires that an
enterprise classify items of other comprehensive income by their nature in the
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid in capital in the
equity section of a statement of financial position. Comprehensive income is
generally defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Management
does not believe that the adoption of SFAS No. 130 will have a material impact
on the Bank's financial statements.
Effective for years beginning after December 15, 1997, SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" was issued by FASB
which standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefits obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain other
disclosures previously required. Management does not believe that the adoption
of SFAS No. 132 will have a material impact on the Bank's financial statements.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances either in vault cash
or on deposit with the Federal Reserve. The average amount of the reserve
requirement at December 31, 1997 and 1996 was approximately $260,000 and
$175,000, respectively.
[The remainder of this page intentionally left blank]
14
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 3 - INVESTMENT SECURITIES
The carrying amounts of investment securities as shown in the statements of
financial condition and their approximate fair values at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
- ------------------------------
DECEMBER 31, 1997:
U. S. GOVERNMENT AND
AGENCY SECURITIES.................. $2,993,412 $16,106 $ -0- $3,009,518
STATE AND MUNICIPAL SECURITIES 671,632 11,345 474 682,503
MORTGAGE-BACKED SECURITIES........... 326,458 5,476 834 331,100
OTHER SECURITIES..................... 444,501 -0- 9,082 435,419
EQUITY SECURITIES.................... 214,000 -0- -0- 214,000
---------- ------- ------- ----------
$4,650,003 $32,927 $10,390 $4,672,540
========== ======= ======= ==========
December 31, 1996:
U. S. Government and
agency securities.................. $3,047,010 $13,993 $ 3,425 $3,057,578
State and municipal securities....... 671,304 14,514 3,354 682,464
Mortgage-backed securities........... 876,510 5,576 6,495 875,591
Other securities..................... 444,676 -0- 17,012 427,664
Equity securities.................... 211,200 -0- -0- 211,200
---------- ------- ------- ----------
$5,250,700 $34,083 $30,286 $5,254,497
========== ======= ======= ==========
</TABLE>
15
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 3 - INVESTMENT SECURITIES - CONTINUED
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
SECURITIES HELD-TO-MATURITY:
- ----------------------------
DECEMBER 31, 1997:
U. S. GOVERNMENT AND AGENCY
SECURITIES......................... $1,522,597 $27,228 $ 8,100 $1,541,725
STATE AND MUNICIPAL SECURITIES 952,471 17,016 804 968,683
---------- ------- ------- ----------
$2,475,068 $44,244 $ 8,904 $2,510,408
========== ======= ======= ==========
December 31, 1996:
U. S. Government and agency
securities......................... $1,501,272 $46,828 $20,335 $1,527,765
State and municipal securities....... 1,022,892 8,651 13,795 1,017,748
---------- ------- ------- ----------
$2,524,164 $55,479 $34,130 $2,545,513
========== ======= ======= ==========
</TABLE>
[The remainder of this page intentionally left blank]
16
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 3 - INVESTMENT SECURITIES - CONTINUED
The contractual maturities of securities at December 31, 1997, 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>
Securities Securities
Held-to-Maturity Available-for-Sale
------------------------- ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less............. $1,022,596 $1,042,056 $1,409,869 $1,411,505
Due after one year through
five years...................... 970,992 974,937 2,128,652 2,147,989
Due after five years through
ten years....................... 481,480 493,415 897,482 899,046
Due after ten years................. -0- -0- -0- -0-
Equity securities................... -0- -0- 214,000 214,000
---------- ---------- ---------- ----------
$2,475,068 $2,510,408 $4,650,003 $4,672,540
========== ========== ========== ==========
</TABLE>
Mortgage-backed securities have been included in the maturity tables based upon
the guaranteed payoff date of each security.
Equity securities include a restricted investment in Federal Home Loan Bank
stock which must be maintained to secure the available lines of credit. The
amount of the investment in this stock amounted to $154,000 and $151,200 at
December 31, 1997 and 1996, respectively.
Gross realized gains and losses on the sale of investments in debt securities
available-for-sale for the years ended December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Gross realized gains............................ $ -0- $ 6,991
Gross realized losses........................... -0- 859
</TABLE>
Net gains on the maturities of investment securities totaled $2,369 for 1996.
Investment securities pledged to secure public funds on deposit and for other
purposes as required by law amounted to approximately $5,106,000 and $5,713,000
at December 31, 1997 and 1996, respectively. (See Note 19)
17
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 4 - LOANS
The Bank grants loans to customers primarily in Union County of North East
Georgia.
The major classifications of loans as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Commercial, financial and agricultural...... $ 7,435,148 $ 6,535,772
Real estate - construction.................. 4,318,939 5,747,479
Real estate - mortgage...................... 19,968,681 22,153,462
Consumer.................................... 2,130,689 2,603,559
Other....................................... 424,484 273,473
------------- -----------
34,277,941 37,313,745
Unearned income............................. 18,050 16,277
Allowance for loan losses................... 1,225,189 496,259
------------- -----------
Net loans................................... $ 33,034,702 $36,801,209
============= ===========
</TABLE>
As of December 31, 1997 and 1996, there were no loans which the Bank had
specifically classified as impaired. Other loans on which the accrual of
interest had been discontinued or reduced amounted to approximately $1,845,000
and $899,000 at December 31, 1997 and 1996, respectively. For the years ended
December 31, 1997 and 1996, the difference between gross interest income that
would have been recorded in such period if non-accruing 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 approximately
$86,000 and $28,000 at December 31, 1997 and 1996, respectively.
The Bank had no commitments to loan additional funds to the borrowers of
non-accrual loans.
18
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Balance at beginning of year................ $ 496,259 $518,343
Charge-offs................................. (263,465) (93,061)
Recoveries.................................. 39,594 4,977
---------- --------
Net (charge-offs) recoveries............ (223,871) (88,084)
Provision for loan losses................... 952,801 66,000
---------- --------
Balance at end of year...................... $1,225,189 $496,259
========== ========
</TABLE>
The significant provision for 1997 related primarily to a management decision to
enhance the Bank's reserve to a level indicated necessary based upon evaluation
of the loan portfolio and other factors as listed in Note 1 to these financial
statements.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land........................................ $ 441,032 $ 441,032
Buildings................................... 1,245,115 1,205,899
Land improvements........................... 56,635 56,635
Furniture and equipment..................... 791,328 727,121
Automobiles................................. 19,939 45,595
Computer software........................... 117,370 110,754
---------- ----------
2,671,419 2,587,036
Less allowance for depreciation............. 627,275 483,201
---------- ----------
$2,044,144 $2,103,835
========== ==========
</TABLE>
The provision for depreciation charged to occupancy and equipment expense for
the years ended December 31, 1997 and 1996 was $159,325 and $117,740,
respectively.
19
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 7 - DEPOSITS
The major classifications of deposits as of December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Noninterest-bearing demand....................... $ 3,638,722 $ 3,552,943
NOW accounts..................................... 9,585,423 8,711,298
Savings.......................................... 2,819,612 3,649,089
Time............................................. 19,415,153 23,041,407
Certificates of deposit of $100,000 or more...... 5,745,984 7,336,471
----------- -----------
$41,204,894 $46,291,208
=========== ===========
</TABLE>
The maturities of time certificates of deposit and other time deposits of
$100,000 or more issued by the Bank at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Three months or less............................................... $1,470,070
Over three through twelve months................................... 2,122,841
Over twelve months................................................. 2,153,073
----------
$5,745,984
==========
</TABLE>
NOTE 8 - SHAREHOLDERS' EQUITY
At December 31, 1997 and 1996, shareholders' equity of the Bank consisted of the
following:
Common Stock: 75,000 shares authorized, issued and outstanding, with a par value
of $12.50 per share, as of December 31, 1997 and 1996. Voting rights equal to
one vote per share.
Capital Surplus: Represents the funds received in excess of par value upon the
issuance of stock, net of issuance costs.
Retained Earnings: Represents the accumulated net earnings of the Bank as
reduced by dividends paid to shareholders.
Net Unrealized Holding Gains (Losses) on Securities: Represents the net
unrealized gains or losses on securities available-for-sale, net of deferred
taxes at December 31, 1997 and 1996. This account
20
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
adjusts as the market values of the related investment securities change.
NOTE 9 - REGULATORY CAPITAL 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 possible additional discretionary actions by
regulators, that if undertaken, could have a direct material effect on the Bank
and the financial statements. Under regulatory capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines involving 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
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To remain
categorized as well capitalized, the Bank will have to maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the
table below. There are no conditions or events since the most recent
notification that management believes have changed the Bank's prompt corrective
action category.
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------- ----------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
- -----------------------
TOTAL RISK-BASED CAPITAL
(TO RISK-WEIGHTED ASSETS) $4,174 12.6% > $2,651 > 8.0% > $3,314 > 10.0%
- - - -
TIER 1 CAPITAL
(TO RISK-WEIGHTED ASSETS) 3,760 11.4 > 1,326 > 4.0 > 1,988 > 6.0
- - - -
TIER 1 CAPITAL
(TO ADJUSTED TOTAL ASSETS) 3,760 8.2 > 1,841 > 4.0 > 2,302 > 5.0
- - - -
</TABLE>
21
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 9 - REGULATORY CAPITAL MATTERS - CONTINUED
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
--------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- --------- --------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
- ------------------------
Total Risk-Based Capital
(to Risk-Weighted Assets) $4,730 13.3% > $2,853 > 8.0% > $3,566 > 10.0%
- - - -
Tier 1 Capital
(to Risk-Weighted Assets) 4,284 12.0 > 1,426 > 4.0 > 2,139 > 6.0
- - - -
Tier 1 Capital
(to Adjusted Total Assets) 4,284 8.4 > 2,041 > 4.0 > 2,552 > 5.0
- - - -
</TABLE>
NOTE 10 - OTHER OPERATING EXPENSES
The major components of other operating expenses included in noninterest
expenses at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Management fee expense...................... $220,110 $181,916
Professional fees........................... 132,836 143,344
Data processing............................. 71,559 62,498
Advertising................................. 61,248 60,399
Supplies.................................... 33,191 41,014
Postage..................................... 29,063 29,785
Foreclosed real estate expenses............. 27,043 746
Telephone................................... 23,777 32,162
Taxes & licenses............................ 22,328 13,567
Operational service fees.................... 21,935 25,901
Courier expense............................. 18,989 15,967
ATM expense................................. 13,830 13,820
Other....................................... 111,234 102,972
-------- --------
$787,143 $724,091
======== ========
</TABLE>
22
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 11 - INCOME TAXES
Federal and state income taxes receivable and payable as of December 31, 1997
and 1996 included in other assets and other liabilities, respectively, were as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Current
Federal....................................... $ 207 $ 58,834
State......................................... 14,000 (2,000)
The components of the deferred income tax asset included in other assets as of
December 31, 1997 and 1996 are as follows:
Deferred tax asset:
Federal........................................... $ 458,500 $ 208,226
State ........................................... 80,912 36,746
--------- ----------
Total deferred income tax asset................. 539,412 244,972
Deferred tax liability:
Federal........................................... (69,749) (113,265)
State ........................................... (12,308) (19,987)
--------- ----------
Total deferred income tax liability............. (82,057) (133,252)
--------- ----------
Net deferred tax asset................................ $ 457,355 $ 111,720
========= ==========
</TABLE>
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Allowance for loan losses......................... $ 477,320 $ 176,180
Depreciation...................................... (51,518) (121,156)
Deferred compensation............................. 45,184 48,638
Net unrealized losses on securities............... 1,582 16,271
Other............................................. (15,213) (8,213)
--------- ----------
Net deferred tax asset............................ $ 457,355 $ 111,720
========= ==========
</TABLE>
23
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 11 - INCOME TAXES - CONTINUED
The components of income tax expense (benefit) for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current
Federal....................................... $ 209,324 $261,377
State......................................... 2,000 34,500
Deferred
Federal....................................... (306,275) 16,680
State......................................... (54,049) 2,943
--------- --------
$(149,000) $315,500
========= ========
</TABLE>
The principal reasons for the difference in the effective tax rate and the
federal statutory rate are as follows for the years ended December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Statutory federal income tax rate................. 34.0% 34.0%
Effect on rate of:
Tax exempt securities......................... 10.0 (3.4)
State income tax, net of federal tax.......... 11.9 2.3
Interest expense disallowance................. (1.6) .6
Other......................................... (2.5) (.1)
------- -----
Effective income tax rate......................... 51.8% 33.4%
======= =====
</TABLE>
NOTE 12 - RETIREMENT PLAN
The Bank adopted a 401(k) Plan ("the Plan") on January 1, 1985. The Plan covers
substantially all employees, subject to eligibility requirements. Employees may
defer up to fifteen percent of their compensation with a fifty percent matching
employer contribution of up to six and a half percent of compensation. Total
expense included in salary and benefits for years ended December 31, 1997 and
1996 was $10,202 and $10,587, respectively.
24
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 13 - DEFERRED COMPENSATION AGREEMENT
The Bank entered into a deferred compensation agreement with the President that
provides for monthly payments of $1,662 payable for a period of ten years.
Payment of this benefit commenced in January, 1996 and continued throughout 1996
and 1997 according to the terms of the plan. As of December 31, 1997 and 1996,
the accrued deferred compensation liability was $112,960 and $121,595,
respectively. For the years ended December 31, 1997 and 1996, total deferred
compensation expense of $11,315 and $3,604, respectively, was charged to
operations and is included in salaries and employee benefits. Both charges to
operations relate solely to the interest cost of the obligation.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank 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 Bank'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 statements 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 Bank.
A summary of the Bank's commitments and contingent liabilities at December 31,
1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Contract or
Notional Amount
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Commitments to extend credit........................ $3,043,000 $4,933,000
Standby letters of credit........................... 11,000 -0-
</TABLE>
25
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 14 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of the
Bank's allowance for loan losses. Management does not anticipate any material
losses as a result of these commitments.
NOTE 15 - CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. The
concentrations of credit by type of loan are set forth in Note 4.
The bank maintains its cash accounts at various commercial banks in Alabama and
Georgia. The total cash balances in commercial banks are insured by the FDIC up
to $100,000. Total uninsured balances held at commercial banks at December 31,
1997 and 1996 amounted to $926,820 and $858,712, respectively.
NOTE 16 - RESTRICTIONS ON DIVIDENDS
Dividends are paid by the Bank from its assets, however, certain restrictions
exist. Under such restrictions, the Bank may not, without the prior approval of
its regulators, declare dividends in excess of the sum of the current year's
earnings plus the retained net profits from the preceding two years. As of
December 31, 1997, the Bank could have declared dividends of $217,979 without
regulatory approval.
NOTE 17 - LITIGATION
While the Bank is party to various legal proceedings arising from the ordinary
course of business, management believes after consultation with legal counsel
that there are no proceedings threatened or pending against the Bank that will,
individually or in the aggregate, have a material adverse effect on the business
or financial condition of the Bank.
26
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 18 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and principal shareholders including their
immediate families and associates were loan customers of the Bank during 1997
and 1996. 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. The following is a summary of such loans
outstanding and the activities in these loans for the year ended December 31,
1997.
<TABLE>
<S> <C>
Beginning of year......................................... $ 1,750,395
Adjustment for executive officer and director changes..... (142,651)
New loans................................................. 971,436
Repayments................................................ (1,117,010)
-----------
End of the year........................................... $ 1,462,170
===========
</TABLE>
NOTE 19 - SECURITIES SHARING PROGRAM AGREEMENT
The Bank is a party to an agreement with CSBI to share investment securities.
The securities sharing program aides CSBI affiliate banks to better utilize
excess securities for use in pledge. An affiliate bank that needs collateral for
pledging against public deposits may utilize surplus collateral of other CSBI
banks for a fee. Ownership of the securities remains with the providing bank.
Either the provider or user of the securities may unwind the transaction at any
time. The overall responsibility for the daily administration of the program
rests with the Securities Sharing Program Administrator of CSBI. As of December
31, 1997 and 1996, securities of the Bank pledged on behalf of affiliated banks
amounted to approximately $2,369,000 and $4,632,000, respectively.
NOTE 20 - MANAGEMENT SERVICES AGREEMENT
The Bank is a party to an agreement with CSBI to receive management services.
The services provided by CSBI include loan review, loan operations, credit
administration, loan collections, audit, investments, compliance, accounting and
reporting, marketing, human resources, deposit operations and general overhead.
The service fees charged the Bank will consist of the salaries and benefits of
the employees of CSBI providing the service, as well as any direct costs
associated with providing the service such as, but not limited to, special
software, equipment or supplies. For the years ended December 31, 1997 and 1996,
management services fees were $220,110 and $181,916, respectively.
27
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
FIRST NATIONAL BANK OF UNION COUNTY
DECEMBER 31, 1997 AND 1996
NOTE 21 - PROPOSED BUSINESS COMBINATION
On July 10, 1998, Century South Banks, Inc. ("CSBI") and subsidiary First
National Bank of Union County, the ("Bank") entered into an agreement with
Appalachian Bancshares Inc. ("ABI") for the proposed sale of the Bank to ABI.
ABI is a Georgia-based bank holding company whose principal office is located in
Ellijay, Georgia. The purchase, sale and assumption agreement ("the Agreement")
generally calls for ABI to pay six million one hundred thousand dollars,
$6,100,000, to CSBI in exchange for all 75,000 common shares of the Bank's
stock. In addition, the Agreement calls for the Bank to sell CSBI certain
designated assets comprised primarily of loans having a then outstanding
principal balance not to exceed the sum of nine million dollars, $9,000,000,
minus the sum of six hundred thousand dollars, $600,000. Furthermore, the
Agreement calls for the Bank to transfer and convey to a designated CSBI
subsidiary certain designated liabilities not to exceed the sum of eleven
million six hundred thousand dollars, $11,600,000.
28
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
- ----------- -----------------------
<S> <C>
2.1* Purchase Sale and Assumption Agreement, dated July 10, 1998, by
and between Century South Banks, Inc. and Appalachian Bancshares,
Inc.
23 Consent of Schauer, Taylor, Cox & Edwards, P.C.
</TABLE>
* previously filed as Exhibit 2.1 to the Company's Form 8-K dated July 10,
1998 and incorporated herein by this reference.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the fourth quarter, 1998 Form 8-K
of Appalachian Bancshares, Inc., of our report on the statements of financial
condition of First National Bank of Union County as of December 31, 1997 and
1996, and the related statements of income, shareholders' equity, and cash flows
for the years then ended.
/s/ SCHAUER, TAYLOR, COX & EDWARDS, P.C.
SCHAUER, TAYLOR, COX & EDWARDS, P.C.
Birmingham, Alabama
December 11, 1998
