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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, 1998 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)
829 Industrial Boulevard 30540
Ellijay, Georgia (Zip Code)
(Address of Principal Executive Offices)
(706) 276-8000
(Issuer's Telephone Number, Including Area Code)
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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. |_|
The issuer's revenues for its most recent fiscal year were $11,799,913.
There is no established trading market for the registrant's capital
stock. The aggregate market value of the stock held by non-affiliates of the
registrant at March 29, 1999 was $18,456,760, based on a per share price of
$20.00, 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 29, 1999, there were 1,323,188 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 1999
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Report.
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APPALACHIAN BANCSHARES, INC.
1998 Form 10-KSB Annual Report
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number Page or
in Form 10-KSB Description Location
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<S> <C> <C>
Item 1. Business............................................................... 1
Item 2. Properties............................................................. 24
Item 3. Legal Proceedings...................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................... 25
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters................................................................ 26
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 27
Item 7. Financial Statements................................................... F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 40
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act........................................................... 41
Item 10. Executive Compensation................................................. 41
Item 11. Security Ownership of Certain Beneficial Owners
and Management......................................................... 41
Item 12. Certain Relationships and Related Transactions......................... 41
Item 13. Exhibits, List and Reports on Form 8-K................................. 41
</TABLE>
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PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made in this Report and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as oral statements made by the Company or its officers,
directors or employees, may constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements are based on Management's
beliefs, current expectations, estimates and projections about the financial
services industry, the economy and about the Company and the Banks in general.
The words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate" and similar expressions are intended to identify such forward-looking
statements; however, this Report also contains other forward-looking statements
in addition to historical information. Such forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to differ materially from historical results or from any results
expressed or implied by such forward-looking statements. Such factors include,
without limitation, (i) increased competition with other financial institutions,
(ii) lack of sustained growth in the economy in Gilmer County, primarily in the
local poultry industry, and in Union County (iii) rapid fluctuations in interest
rates, (iv) the inability of the Banks (as defined herein) to maintain
regulatory capital standards, and (v) changes in the legislative and regulatory
environment. Many of such factors are beyond the Company's ability to control or
predict, and readers are cautioned not to put undue reliance on such
forward-looking statements. The Company disclaims any obligation to update or
revise any forward-looking statements contained in this Report, whether as a
result of new information, future events or otherwise.
Item 1. Business
History and Development of the Company
Appalachian Bancshares, Inc. (the "Company" or "Registrant") is a bank
holding company which engages in providing a full range of banking services
through its two commercial bank subsidiaries: Gilmer County Bank and First
National Bank of Union County (the Company's two bank subsidiaries are
collectively referred to as the "Banks"). The Company 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. 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 Gilmer County Bank entered into a reorganization
(the "Reorganization") pursuant to which the Company acquired 100% of the
outstanding shares of Gilmer County Bank, and the shareholders of Gilmer County
Bank became the shareholders of the capital stock of the Company.
On November 30, 1998, the Company completed an acquisition of First
National Bank of Union County ("First National") from Century South Banks, Inc.
("Century South"). First National is a nationally-chartered bank organized in
1981 with its main banking office located in Blairsville, Georgia. 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, with the assumption of
certain existing liabilities and assets of First National by Century South or
certain of its affiliates. 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 to certain accredited investors. The aggregate gross proceeds of
the private placement were $2.65 million. Purchasers of shares of the Company's
Common Stock in the private placement are entitled to certain registration
rights with respect to such shares and are subject to certain call rights of the
Company. The Company funded the remainder of the purchase price through a new
$3.6 million loan with The Bankers Bank.
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At December 31, 1998, the assets of the Company consisted primarily of
its ownership of the capital stock of the Banks. Unless otherwise indicated, the
information presented herein relating to the Company refers to the Company and
the Banks on a consolidated basis.
The Company's executive office is located at 829 Industrial Boulevard,
Ellijay, Georgia, and its telephone number at such location is (706) 276-8000.
Business of the Company
The Company is authorized to engage in any activity permitted by law to
a corporation, subject to applicable federal and state regulatory restrictions
on the activities of bank holding companies. The Company's holding company
structure provides it with greater flexibility than the respective Banks would
otherwise have to expand and diversify their business activities through newly
formed subsidiaries, or through acquisitions. While management of the Company
has no present plans to engage in any other business activities, management may
from time to time study the feasibility of establishing or acquiring
subsidiaries to engage in other business activities to the extent permitted by
law.
Gilmer County Bank
Gilmer County 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").
Gilmer County 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.
Gilmer County Bank was organized by a group of individuals from Gilmer
County and the surrounding area and commenced business from its main office
location at 829 Industrial Boulevard, Ellijay, Georgia on March 3, 1995. Gilmer
County Bank operated in development stage prior to that time.
Gilmer County Bank has a correspondent relationship with several banks,
including The Bankers Bank, Federal Home Loan Bank and Compass Bank.
First National Bank of Union County
First National Bank was organized in 1981 as an insured national bank
chartered under the federal banking laws of the United States of America. First
National is a member of the Federal Reserve System and is subject to the
supervision of the Office of the Comptroller of the Currency (the "OCC"). First
National's deposits are insured by the FDIC.
First National conducts business from its main banking office located
in Blairsville, Georgia. First National has a correspondent relationship with
several banks, including The Bankers Bank, Federal Home Loan Bank and Compass
Bank.
Subsequent Event
On March 12, 1999, the Company received approval from the DBF to
convert First National into a state-chartered bank under the laws of the State
of Georgia. The Company is currently in the process of converting First National
into a state-chartered bank. The Company anticipates that it will complete the
conversion in the second quarter of 1999. Concurrently, with the conversion of
First National, the Company plans to change First National's name to Appalachian
Community Bank.
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Banking Services and Operations
The Banks perform 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. Gilmer County 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. First National draw most of its customer
deposits and conducts most of its lending transactions from and within a primary
service area which includes Union County, Towns County and Fannin County,
Georgia.
The principal business of the Banks is to attract and accept deposits
from the public and to make loans and other investments. The principal sources
of funds for the Banks' 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 Banks to such lenders or
institutions and (5) borrowings. The principal sources of income for the Banks
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
Banks are (1) interest paid on savings and other deposits (including NOW
accounts), (2) interest paid on borrowings by the Banks, (3) employee
compensation, (4) office expenses and (5) other overhead expenses.
Employees
Except for the officers of the Company, who are also officers of the
Banks, the Company does not have any employees. At December 31, 1998, Gilmer
County Bank had a total of 41 employees, 37 of which were full-time employees,
and First National had a total of 24 employees, 22 of which were full-time
employees. The Company and the Banks are not parties to any collective
bargaining agreements with employees, and management believes that employee
relations are generally good.
Lending Activities
General. The Banks are authorized to make both secured and unsecured
commercial and consumer loans to individuals, partnerships, corporations and
other entities. The Banks' lending business consists principally of making
secured real estate loans, including residential and commercial construction
loans, and primary and secondary mortgage loans for the acquisition or
improvement of personal residences. In addition, the Banks make consumer loans
to individuals and commercial loans to small and medium-sized businesses and
professional concerns. Loans to the poultry industry constituted approximately
18% of the Banks' total loans at December 31, 1998.
The Banks have engaged in secondary-market mortgage activities,
obtaining commitments, through intermediaries, from secondary mortgage
purchasers to purchase mortgage loans originated by the Banks. Based on these
commitments, the Banks originate mortgage loans on terms corresponding to such
commitments and generates fee income to supplement its interest income. No
mortgage loans are held by the Banks for resale nor are any loans held for
mortgage servicing.
Real Estate Loans. Loans secured by real estate are the primary
component of the Banks' loan portfolio, constituting approximately $88 million,
or 67%, of the Banks' total loans at December 31, 1998. 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 Banks make loans for commercial purposes in
various lines of businesses. At December 31, 1998, the Banks held approximately
$27 million, or 21% of the Banks' total loans, in commercial loans, excluding
for these purposes commercial loans secured by real estate which are included in
the real estate category above.
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Consumer Loans. The Banks make 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, 1998, the Banks held approximately $14
million in consumer loans, representing 11% of the Banks' total loans.
Loan Approval and Review. The Banks' 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.
Each of the Banks has a continuous loan review procedure involving
multiple officers of each of the respective Banks 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 Banks' have employed an in-house specialist to review all loans
in excess of $100,000.
Deposits
The Banks offer 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 Banks are 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
Banks as a percentage of total deposits at December 31, 1998.
Deposit Mix
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Non-interest bearing demand............................................ 5.7%
Interest-bearing demand................................................ 29.3%
Savings................................................................ 17.7%
Time Deposits.......................................................... 31.5%
Certificates of Deposit of $100,000 or more............................ 15.8%
Total............................................................... 100.0%
</TABLE>
Both of the Banks are members of the Cirrus ATM network of automated
teller machines, which permits the Banks' customers to perform certain
transactions in numerous cities throughout Georgia and in other states. Gilmer
County Bank's charter provides that Gilmer County Bank has trust powers but only
upon application to the DBF. To date, Gilmer County Bank has not submitted and
has no plans to submit such an application. First National does not have trust
powers.
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Competition and Market Area
The banking business is highly competitive. The Banks compete as
financial intermediaries with other commercial banks, thrift institutions,
credit unions, and money market mutual funds operating in Ellijay, Gilmer County
and Blairsville, Union County, Georgia and elsewhere. Some banks with which the
Banks compete have significantly greater resources and higher lending limits (by
virtue of their greater capitalization). Credit unions and money market mutual
funds with which the Banks compete may have competitive advantages as a result
of being subject to different, and possibly less stringent, regulatory
requirements.
Gilmer County Bank serves the areas of Gilmer County, southwestern
Fannin County, northern Pickens County, western Dawson County and southeastern
Murray County, Georgia. First National serves the areas of Union County, Towns
County and Fannin County, Georgia.
As of December 31, 1998, three non-locally owned banks had offices in
Gilmer County and two locally owned banks had offices in Blairsville. The Bank
of Ellijay, which is owned by Century South Banks, Inc., a bank holding company
headquartered in Gainesville, Georgia, operates a main office and one branch
office in Gilmer County. RegionsBank, an Alabama bank holding company, operates
two offices in Gilmer County. United Community Bank, a branch of Peoples Bank in
Fannin County, maintains a branch office in Gilmer County. Bank of Blairsville,
a branch of Bank of Hiawassee, operates an office in Blairsville. Union County
Bank, headquartered in Blairsville, operates an office in Blairsville. In
addition, many local businesses and individuals have deposits outside the
primary service areas of Gilmer County Bank and First National.
Recent legislation enacted by the Georgia General Assembly allow banks
in Georgia to establish de novo branch banks in areas in which the Banks serve,
which branches, if established, would also compete with the Banks. See
"Supervision and Regulation--Regulation and Legislative Changes."
Monetary Policies
The results of operations of the Company and the Banks 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 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 Banks.
SUPERVISION AND REGULATION
The Company and the Banks are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous
additional regulatory requirements have been placed on the banking industry in
the past five years, and additional changes have been proposed. The operations
of the Company and the Banks may be affected by legislative changes and the
policies of various regulatory authorities. The Company is unable to predict the
nature or the extent of the effect on its business and earnings that fiscal or
monetary policies, economic control or new federal or state legislation may have
in the future.
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The Company
The Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956, as amended (the "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
Banks 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 that 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 that 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 DBF. Registration with
the DBF includes information relating to the financial condition, operations,
management and inter-company relationships of the Company and the Banks. 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
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5% of the voting shares of the Banks; (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 Banks
Gilmer County Bank is 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 Gilmer County 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.
First National is a national banking association and a member of the
Federal Reserve System. The OCC is the primary regulator for the Bank. The OCC
regulates or monitors all areas of the Bank's operations, including security
devices and procedures, adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends, interest rates payable on deposits, interest rates or fees chargeable
on loans, establishment of branches, corporate reorganizations, maintenance of
books and records and adequacy of staff training to carry on safe lending and
deposit gathering practices. The Bank must maintain certain capital ratios and
is subject to limitations on aggregate investments in real estate, bank
premises, and furniture and fixtures.
Additionally, each of the Banks is 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, such as Gilmer County
Bank, to determine the condition of such banks for insurance purposes. 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 of 1977 (the "CRA") and
the Truth-in-Lending Act.
Dividends
The Company is a legal entity separate and distinct from the Banks. The
principal source of cash flow for the Company are dividends from the Banks.
There are various statutory and regulatory limitations on the payment of
dividends by the Banks, as well as by the Company to its shareholders.
The payment of dividends by the Company and the Banks may 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."
Gilmer County Bank. Under Georgia law, Gilmer County 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)
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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 Banks'
ability to pay dividends to the Company. See "--Capital Adequacy."
First National. As a national bank, First National may not pay
dividends from its paid-in-capital. All dividends must be paid out of undivided
profits then on hand, after deducting expenses, including reserves for losses
and bad debts. In addition, a national bank is prohibited from declaring a
dividend on its shares of common stock until its surplus equals its stated
capital, unless there has been transferred to surplus no less than one-tenth of
the bank's net profits of the preceding two consecutive half-year periods (in
the case of an annual dividend). The approval of the OCC is required if the
total of all dividends declared by a national bank in any calendar year exceeds
the total of its net profits for that year combined with its retained net
profits for the preceding two years, less any required transfers to surplus.
First National is also subject to the provisions of Section 23A of the
Federal Reserve Act, which place limits on the amount of loans or extensions of
credit to, or investments in, or certain other transactions with, affiliates and
on the amount of advances to third parties collateralized by the securities or
obligations of affiliates. In addition, most of these loans and certain other
transactions must be secured in prescribed amounts. First National is also
subject to the provisions of Section 23B of the Federal Reserve Act that, among
other things, prohibit an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non-affiliated
companies. First National is subject to certain restrictions on extensions of
credit to executive officers, directors, certain principal stockholders and
their related interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (ii)
must not involve more than the normal risk of repayment or present other
unfavorable features.
Capital Adequacy
Federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums.
FDICIA established a capital-based regulatory plan designed to promote
early intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The capital-based regulatory framework
contains five categories of compliance with regulatory capital requirements,
including "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." To qualify
as a "well capitalized" institution, a bank must have a leverage ratio of no
less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under any
order or directive from the appropriate regulatory agency to meet and maintain a
specific capital level.
The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Under the FDICIA
regulations, the applicable agency can treat an institution as if it were in the
next lower category if the agency determines (after notice and an opportunity
for hearing) that the institution is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of
a financial institution will increase, and the permissible activities of the
institution will decrease, as it moves downward through the capital categories.
Institutions that fall into one of the three undercapitalized categories may be
required to (i) submit a capital restoration plan; (ii) raise additional
capital; (iii) restrict their growth, deposit interest rates, and other
activities; (iv) improve their management; (v) eliminate management fees; or
(vi) divest themselves of all or a part of their operations. Bank holding
companies controlling financial institutions can be called upon to boost the
institutions' capital and to partially guarantee the institutions' performance
under their capital restoration plans. Tier 1 capital
8
<PAGE> 11
includes stockholders' equity, qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangible assets and excludes the allowance for loan and lease
losses. 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 reserves for
loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
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."
The Federal Reserve has also implemented a leverage ratio, which is
Tier 1 capital as a percentage of average total assets less intangible assets,
to be used as a supplement to the risk-based guidelines. The principal objective
of the leverage ratio is to place a constraint on the maximum degree to which a
bank holding company may leverage its equity capital base. The Federal Reserve
has 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."
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 Gilmer County 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 was imposed during the
first three years of Gilmer County Bank's operation, after which time Gilmer
County Bank became subject to a 6% primary capital ratio. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."
FDICIA. 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
9
<PAGE> 12
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 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) <8% <4% <4%
Significantly Undercapitalized <6% <3% <3%
Critically Undercapitalized - - <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
10
<PAGE> 13
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.
Federal Deposit Insurance Premiums and Assessments
The deposits of the Banks 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
("BIF") and the Savings Association Insurance Fund ("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 Banks 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 designated ratio for the BIF was reached in May 1995, the FDIC
was authorized to reduce the minimum assessment rate below the 23 basis points
and to set future assessment rates at such levels that would maintain the fund's
reserve ratio at the designated level. In August 1995, the FDIC adopted
regulations reducing the assessment rates for BIF-member banks. Subsequently, on
November 14, 1995, the FDIC announced that, beginning in 1997, it would further
reduce the deposit insurance premiums for 92% of all BIF members that are in the
highest capital and supervisory categories to $2,000 per year, regardless of
deposit size. At the same time, the FDIC elected to retain the existing
assessment rate range for SAIF members for the foreseeable future given the
undercapitalized nature of that insurance fund. Thrift industry representatives
argued that this significant premium disparity resulted in savings associations
having to operate at a competitive disadvantage to their BIF insured bank
counterparts.
On September 30, 1996, the President signed the Deposit Insurance Fund
Act of 1996 ("DIFA"). DIFA mandated that the FDIC impose a one-time special
assessment on the SAIF-assessable deposits of each insured depository
institution at a rate applicable to all such institutions that the FDIC
determined would cause the SAIF to achieve its designated reserve ratio of 1.25%
as of October 1, 1996. The assessment was based on the amount of SAIF-insured
deposits owned by each institution as of March 31, 1995. DIFA provides that the
FDIC may not set semi-annual assessments with respect to SAIF or BIF in excess
of the amount needed to maintain the 1.25% designated reserve ratio or, if the
reserve ratio is less than the designated reserve ratio, to increase the reserve
ratio to the designated reserve ratio. On October 10, 1996, the FDIC adopted a
final rule governing the payment of the SAIF special assessment to recapitalize
the fund in the amount of 65.7 basis points for SAIF members.
In addition, DIFA mandates the merger of the SAIF and BIF, effective
January 1, 1999, but only if no insured depository institution is a savings
association on that date. The combined deposit insurance fund would be called
the "deposit insurance fund" or "DIF."
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
Regulatory and Legislative Changes
Georgia Interstate Banking Act. The Company and the Banks are 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
11
<PAGE> 14
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, any future acquisition of Gilmer County 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 were permitted,
subject to certain restrictions, to establish new or additional branch banks in
any three counties in the State of Georgia in which the bank or group of banks
were not currently operating. Effective July 1, 1998, the restrictions on the
number of de novo branch banks which could be established lapsed.
Several federal statutes impact the ways in which the Banks conduct
business, include FDICIA, the Riegle Community Development and Regulatory
Improvement Act of 1994 ("RCDRIA"), and 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 Interstate Banking Act, and 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 could merge, beginning on June
1, 1997, with a bank in another state if the transaction did not involve a bank
in a home state which had enacted a law after the date of enactment of the
Interstate Banking Act and before June 1, 1997 that applied equally to all out
of state banks and expressly prohibited such interstate merger transactions.
Such a law would have no effect on merger transactions approved before the
effective date of such state law. States were also allowed to permit merger
transactions before June 1, 1997. Georgia 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
12
<PAGE> 15
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 CRA which are intended to set distinct assessment standards for financial
institutions. The revised regulations contain three evaluation tests: (i) 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. Gilmer County Bank was examined for CRA compliance in May
1996 and received a CRA rating of 1. Prior to the Conversion, First National was
examined for CRA compliance in April 1996 and received a rating of
"satisfactory".
Congress and various federal agencies (including, in addition to the
bank regulatory agencies, the Housing and Urban Development Agency, 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 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 Credit 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.
13
<PAGE> 16
On July 3, 1997, President Clinton signed legislation to clarify that
branches of state-chartered banks operating in host states are covered by the
laws of their home chartering state. The Riegle-Neal Amendment Act of 1997 is
intended to preserve the dual banking system by subjecting state banks only to
the rules of their chartering states.
Other legislative and regulatory proposals regarding changes in banking
and the regulation of banks, thrifts and other financial institutions and bank
and bank holding company powers are being considered by the executive branch of
the Federal government, Congress and various state governments, including
Georgia. Among other items under consideration are the possible combination of
the BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial banking from investment banking, and changes in the BHCA to broaden
the powers of "financial services" companies to own and control depository
institutions and engage in activities not closely related to banking. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. It cannot be predicted whether any of these
proposals will be adopted, and, if adopted, how these proposals will affect the
Company and 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)
14
<PAGE> 17
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.
<TABLE>
<CAPTION>
Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Year Ended December 31, 1998 Year Ended December 31, 1997
------------------------------------- -----------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- -----
(amounts in thousands, except percentages)
Assets
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income (1) .... $ 95,353 $ 9,645 10.12% $ 74,753 $7,675 10.27%
Securities:
Taxable ........................... 15,919 1,009 6.34 17,498 1,160 6.63
Tax-exempt ........................ 7,943 570 7.18 3,257 258 7.92
--------- ------- --------- ------
Total securities ..................... 23,862 1,579 6.62 20,755 1,418 6.83
Federal funds sold ................... 4,448 271 6.09 2,895 160 5.53
--------- ------- --------- ------
Total interest-earning assets ..... 123,663 11,495 9.30 98,403 9,253 9.40
Non interest-earning assets:
Cash and due from banks .............. 3,587 2,170
Premises and equipment ............... 2,419 1,644
Accrued interest and other assets .... 2,551 1,818
Allowance for loan losses ............ (1,141) (774)
--------- ---------
Total assets ........................... $ 131,079 $ 103,261
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits ...................... $ 30,238 1,444 4.78 $ 22,681 1,116 4.92
Savings deposits ..................... 24,463 1,210 4.95 17,984 933 5.19
Time deposits ........................ 52,104 3,237 6.21 45,616 2,862 6.27
--------- ------- --------- ------
106,805 5,891 5.47 86,281 4,911 5.69
Other short-term borrowings ............ 4,106 178 4.34 4,471 201 4.50
Long-term debt ......................... 6,649 428 6.44 2,090 150 7.18
--------- ------- --------- ------
Total interest-bearing liabilities 117,560 6,497 5.54 92,842 5,262 5.67
--------- ------- --------- ------
Noninterest-bearing liabilities:
Demand deposits ...................... 3,940 3,527
Accrued interest and other liabilities 654 500
Shareholders' equity ................. 8,925 6,392
--------- ---------
Total liabilities and shareholders'
equity ............................. $ 131,079 $ 103,261
========= =========
Net interest income/net interest
spread .............................. 4,998 3.76% 3,991 3.73%
==== ====
Net yield on earning assets ............ 4.04% 4.06%
==== ====
Taxable equivalent adjustment:
Loans ............................... 31 22
Investment securities ............... 194 88
------- ------
Total taxable equivalent
adjustment ...................... 225 110
------- ------
Net interest income .................... $ 4,773 $3,881
======= ======
</TABLE>
- ----------------
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
15
<PAGE> 18
The following tables set forth, for the years ended December 31, 1998,
1997, and 1996 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.
Rate/Volume Variance Analysis
<TABLE>
<CAPTION>
Change Interest Variance (1)
Average Volume in Volume Average Rate Income/Expense Variance Attributed to 1998
-------------- --------- ------------ -------------- -------- ------------------
1998 1997 1998-97 1998 1997 1998 1997 1998-97 Volume Rate
---- ---- ------- ---- ---- ---- ---- ------- ------ ----
(amounts in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned
income .................... $ 95,353 $74,753 $ 20,600 10.12% 10.27% $ 9,645 $7,675 $ 1,970 $ 2,084 $(114)
-------- ------- -------- ------- ------ ------- ------- -----
Investment securities:
Taxable ................... 15,919 17,498 (1,579) 6.34 6.63 1,009 1,160 (151) (102) (49)
Tax Exempt ................ 7,943 3,257 4,686 7.18 7.92 570 258 312 338 (26)
-------- ------- -------- ------- ------ ------- ------- -----
Total investment
securities ............. 23,862 20,755 3,107 6.62 6.83 1,579 1,418 161 236 (75)
-------- ------- -------- ------- ------ ------- ------- -----
Federal funds sold .......... 4,448 2,895 1,553 6.09 5.53 271 160 111 93 8
-------- ------- -------- ------- ------ ------- ------- -----
Total earning assets .... $123,663 $98,403 $ 25,260 9.30 9.40 11,495 9,253 2,242 2,413 (171)
======== ======= ========
Interest-bearing liabilities:
Deposits:
Demand .................... $ 30,238 $22,681 $ 7,557 4.78 4.92 1,444 1,116 328 361 (33)
Savings ................... 24,463 17,984 6,479 4.95 5.19 1,210 933 277 322 (45)
Time ...................... 52,104 45,616 6,488 6.21 6.27 3,237 2,862 375 403 (28)
-------- ------- -------- ------- ------ ------- ------- -----
Total interest-bearing
deposits ............... 106,805 86,281 20,524 5.52 5.69 5,891 4,911 980 1,086 (106)
Other short-term borrowings . 4,106 4,471 (365) 4.34 4.50 178 201 (23) (16) (17)
Long-term debt .............. 6,649 2,090 4,559 6.44 7.18 428 150 278 295 (7)
-------- ------- -------- ------- ------ ------- ------- -----
Total interest-bearing
liabilities ............ $117,560 $92,842 $ 24,718 5.53 5.67 6,497 5,262 1,235 1,365 (130)
======== ======= ======== ------- ------ ------- ------- -----
Net interest income/net
interest spread ........... 3.77% 3.73% $ 4,998 $3,991 $ 1,007 $ 1,048 $ (41)
===== ===== ======= ====== ======= ======= =====
Net yield on earning assets . 4.04% 4.06%
===== =====
Net cost of funds ........... 5.26% 5.34%
===== =====
</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.
16
<PAGE> 19
<TABLE>
<CAPTION>
Change Interest Variance (1)
Average Volume in Volume Average Rate Income/Expense Variance Attributed to 1997
----------------- --------- ------------- --------------- -------- ------------------
1997 1996 1997-96 1997 1996 1997 1996 1997-96 Volume Rate
(amounts in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned
income .................... $74,753 $51,008 $ 23,745 10.27% 10.23% $7,675 $5,219 $ 2,456 $ 2,436 $ 20
------- ------- -------- ------ ------ ------- ------- -----
Investment securities:
Taxable ................... 17,498 15,277 2,221 6.63 6.41 1,160 979 181 146 35
Tax Exempt ................ 3,257 445 2,812 7.92 8.09 258 36 222 223 (1)
------- ------- -------- ------ ------ ------- ------- -----
Total investment
securities ............. 20,755 15,722 5,033 6.83 6.45 1,418 1,015 403 369 34
------- ------- -------- ------ ------ ------- ------- -----
Federal funds sold .......... 2,895 2,025 870 5.53 5.14 160 104 56 48 8
------- ------- -------- ------ ------ ------- ------- -----
Total earning assets .... $98,403 $68,755 $ 29,648 9.40 9.22 9,253 6,338 2,915 2,842 73
======= ======= ========
Interest-bearing liabilities:
Deposits:
Demand .................... $22,681 $14,849 $ 7,832 4.92 4.96 1,116 737 379 385 (6)
Savings ................... 17,984 10,829 7,155 5.19 5.28 933 572 361 371 (10)
Time ...................... 45,616 33,365 12,251 6.27 6.37 2,862 2,127 735 768 (33)
------- ------- -------- ------ ------ ------- ------- -----
Total interest-bearing
deposits ............... 86,281 59,043 27,238 5.69 5.82 4,911 3,436 1,475 1,524 (49)
Other short-term borrowings . 4,471 4,777 (306) 4.50 4.58 201 219 (18) (14) (4)
Long-term debt .............. 2,090 62 2,028 7.18 8.06 150 5 145 146 (1)
------- ------- -------- ------ ------ ------- ------- -----
Total interest-bearing
liabilities ............ $92,842 $63,882 $ 28,960 5.67 5.73 5,262 3,660 1,602 1,656 (54)
======= ======= ======== ------ ------ ------- ------- -----
Net interest income/net
interest spread ........... 3.73% 3.49% $3,991 $2,678 $ 1,313 $ 1,186 $ 127
===== ===== ====== ====== ======= ======= =====
Net yield on earning assets . 4.06% 3.90%
===== =====
Net cost of funds ........... 5.34% 5.32%
===== =====
</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.
(Remainder of Page Intentionally Left Blank)
17
<PAGE> 20
Securities Portfolio
The carrying amount of securities at the end of each of the years
presented is set forth in the following table:
Securities Portfolio
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
------- -------
Securities Available-for-Sale: (amounts in thousands)
<S> <C> <C>
U.S. Treasury and U.S. Government agencies $13,642 $13,980
Mortgage-backed securities ............... 1,908 1,165
State and municipal securities ........... 5,776 -0-
Equity securities ........................ 614 400
------- -------
Total .................................. $21,940 $15,545
======= =======
Securities Held-to-Maturity:
State and municipal securities ........... $ 6,218 $ 4,181
======= =======
</TABLE>
Average taxable securities were 66.7 percent of the portfolio in 1998
compared to the prior year level of 84.3 percent. The increase of tax exempt
securities in 1998 reflects the Bank's intent to reduce the effect of federal
income taxation.
The maturities and weighted average yields of the investments in the
1998 portfolio of securities are presented below. The average maturity of the
securities portfolio is 6.4 years with an average yield of 6.6 percent. Taxable
equivalent adjustments (using a 34 percent tax rate) have been made in
calculating yields on tax-exempt obligations. Equity securities have been
excluded since these instruments have no maturity date.
Security Portfolio Maturity Schedule
<TABLE>
<CAPTION>
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, except percentages)
Securities Available-for-Sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury .......... $ 502 6.14% $ 510 6.10% $ -0- -0-% $ -0- -0-%
U.S. Government agencies 1,197 6.01 4,945 6.22 5,986 5.95 500 6.00
Mortgage-backed ........ -0- -0- 1,908 6.98 -0- -0- -0- -0-
State and municipal .... 103 5.87 104 6.84 3,395 6.54 2,176 7.12
------ ---- ------ ---- ------ ---- ------ ----
$1,802 6.04 $7,467 6.50 $9,381 6.16 $2,676 6.91
====== ==== ====== ==== ====== ==== ====== ====
Securities Held-to-Maturity:
State and municipal .... $ 250 6.04% $1,109 6.42% $ 669 7.90% $4,190 7.83%
====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
There were no securities held by the Bank of which the aggregate value
on December 31, 1998 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.)
18
<PAGE> 21
Loan Portfolio
The following table shows the classification of loans by major category
at December 31, 1998 and 1997.
Types of Loans
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(amounts in thousands, except percentages)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural..... $ 26,883 20.7% $ 16,536 19.5%
Real estate - construction................. 8,543 6.5% 5,119 6.1%
Real estate - other (1).................... 78,965 60.8% 50,928 60.2%
Consumer................................... 13,743 10.5% 10,835 12.8%
Other loans................................ 1,697 1.5% 1,166 1.4%
------------ ----- ----------- -----
129,831 100.0% 84,584 100.0%
===== =====
Less:
Allowance for loan losses.................. 1,686 930
------------ -----------
Net loans.................................. $ 128,145 $ 83,654
============ ===========
</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, 1998 and an analysis of these loans maturing in
over one year.
Selected Loan Maturity and Interest Rate Sensitivity
<TABLE>
<CAPTION>
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
-------- ---------- ----- ------- -------------- ------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ........ $14,516 $12,099 $268 $26,883 $9,523 $2,844
Real estate - construction . 8,543 -0- -0- 8,543 -0- -0-
-------- ---------- ----- ------- -------------- ------------
Total ................. $23,059 $12,099 $268 $35,426 $9,523 $2,844
======== ========== ===== ======= ============== ============
</TABLE>
19
<PAGE> 22
The following table presents information concerning outstanding
balances of nonperforming assets at December 31, 1998 and 1997.
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
--------- ----------
(amounts in thousands, except ratios)
<S> <C> <C>
Nonaccruing loans ................................. $ 4 $ 15
Loans past due 90 days or more .................... 23 13
Restructured loans ................................ -0- -0-
--------- ------
Total nonperforming loans ......................... 27 28
Nonaccruing securities ............................ -0- -0-
Other real estate ................................. -0- -0-
--------- ------
Total nonperforming assets ........................ $ 27 $ 28
========= ======
Ratios:
Loan loss allowance to total nonperforming assets 62.44 33.21
========= ======
Total nonperforming loans to total loans
(net of unearned interest) ................... 0.0002 0.0003
========= ======
Total nonperforming assets to total assets ...... 0.0001 0.0002
========= ======
</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
$1,686,395 in the allowance for loan losses at December 31, 1998 (1.2% 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.
20
<PAGE> 23
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 three fiscal years:
Analysis of Loan Loss Experience
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(amounts in thousands, except ratios)
<S> <C> <C> <C>
Allowance for loan losses at beginning of year ...... $ 930 $ 655 $ 325
Adjustment of business acquisition .................. 557 -0- -0-
Loans charged off:
Commercial, financial, and agricultural .......... 32 95 -0-
Real estate-construction ......................... -0- 45 -0-
Real estate - other .............................. -0- 2 6
Consumer ......................................... 104 85 32
-------- ------- -------
Total loans charged off ........................ 136 227 38
-------- ------- -------
Recoveries on loans previously charged off:
Commercial, financial, and agricultural .......... 6 2 -0-
Real estate-construction ......................... -0- 8 -0-
Real estate-other ................................ -0- 1 -0-
Consumer ......................................... 29 11 -0-
-------- ------- -------
Total recoveries on loans previously charged off 35 22 -0-
-------- ------- -------
Net loans charged off ............................... 101 205 38
-------- ------- -------
Provisions for loan losses .......................... 300 480 368
-------- ------- -------
Allowance for loan losses at end of period .......... $ 1,686 $ 930 $ 655
======== ======= =======
Loans, net of unearned income, at end of period ..... $129,831 $84,584 $64,962
======== ======= =======
Average loans, net of unearned income, outstanding
for the period ................................... $ 95,353 $74,753 $51,008
======== ======= =======
Ratios:
Allowance at end of period to loans, net of
unearned income .................................. 1.02% 1.10% 1.01%
Allowance at end of period to average loans,
net of unearned income ........................... 1.70% 1.24% 1.28%
Net charge-offs to average loans, net of
unearned income .................................. .10% .27% .07%
Net charge-offs to allowance at end of period ....... 5.90% 22.04% 5.80%
Recoveries to prior year charge-offs ................ 15.40% 57.89% -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.
21
<PAGE> 24
Management allocated the reserve for loan losses to specific loan
classes as follows:
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
------------------ ------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(amounts in thousands, except percentages)
<S> <C> <C> <C> <C>
Domestic Loans (1)
Commercial, financial and agricultural $ 421 25% $186 20%
Real estate - construction ........... 118 7 55 6
Real estate - other .................. 894 53 567 61
Consumer ............................. 253 15 122 13
------ --- ---- ---
Total ............................. $1,686 100% $930 100%
====== === ==== ===
</TABLE>
- --------------
(1) The Bank 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, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997
-------------------- --------------------
Amount Rate Amount Rate
------ ---- ------ ----
(amounts in thousands, except percentages)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 3,940 -0-% $ 3,527 -0-%
Demand ............................ 30,238 4.78% 22,681 4.92%
Savings ........................... 24,463 4.95% 17,984 5.19%
Time deposits ..................... 52,104 6.21% 45,616 6.27%
-------- -------
Total interest-bearing deposits 106,805 5.47% 86,281 5.69%
-------- -------
Total average deposits ..... $110,745 5.32% $89,808 5.47%
======== =======
</TABLE>
(Remainder of Page Intentionally Left Blank)
22
<PAGE> 25
The two categories of lowest cost deposits comprised the following
percentages of average total deposits during 1998: average noninterest-bearing
demand deposits, 3.6 percent; and average interest-bearing demand deposits, 27.3
percent. Of average time deposits, approximately 13.7 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, 1998 are
summarized in the table below.
Maturities of Large Time Deposits
<TABLE>
<CAPTION>
Time
Certificates
of Deposit
----------
(amounts in thousands)
<S> <C>
Three months or less ......... $ 5,255
Over three through six months 4,529
Over six through twelve months 8,469
Over twelve months ........... 7,695
-------
Total ................... $25,948
=======
</TABLE>
Return on Equity and Assets
The following table summarizes certain financial ratios for the Company
for the years ended December 31, 1998 and 1997.
Return on Equity and Assets
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Return on average assets ............. .92% .98%
Return on average equity ............. 13.50 15.90
Dividend payout ratio ................ -0- -0-
Average equity to average assets ratio 6.80 6.19
</TABLE>
(Remainder of Page Intentionally Left Blank)
23
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of
the Company for the years ended December 31, 1998, 1997 and 1996. All averages
are daily averages.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1998 1997 1996
----------------- ------------- ---------------
(amounts in thousands except per share data and ratios)
<S> <C> <C> <C>
Consolidated Statement of Operations Data
Interest income........................................................ $ 11,271 $ 9,143 $ 6,311
Interest expense....................................................... 6,498 5,262 3,660
Net interest income.................................................... 4,773 3,881 2,651
Provision for loan losses.............................................. 300 480 368
Non-interest income.................................................... 529 385 253
Non-interest expense................................................... 3,221 2,385 1,715
Net income............................................................. 1,208 1,018 517
Per Share Data
Net income - basic..................................................... 1.04% .88 .45
Net income - diluted................................................... .99% .87 .45
Cash dividends......................................................... -0-% -0- -0-
Shareholders' equity (book value) at period end ....................... 8.68% 6.04 5.10
Consolidated Balance Sheet Data
Loans.................................................................. $ 129,831 $ 84,584 $ 64,962
Deposits............................................................... 163,861 95,348 81,148
Average equity......................................................... 8,925 6,392 5,503
Average assets......................................................... 131,079 103,261 72,346
Total assets........................................................... 189,745 112,181 93,154
Ratios
Return on average assets............................................... .92% .98% .71%
Return on average equity............................................... 13.50 15.90 9.40
Dividend payout ratio.................................................. -0- -0- -0-
Average equity to average assets....................................... 6.80 6.19 7.61
Total capital.......................................................... 7.88 9.33 10.30
Tier 1 capital......................................................... 6.64 8.23 9.40
Leverage ratio......................................................... 4.99 6.40 5.90
</TABLE>
Item 2. Properties
The Company's offices are located in the Gilmer County Bank's main
office at 829 Industrial Boulevard, Ellijay, Georgia, between the business
districts of Ellijay and East Ellijay. The office building, which contains 9,780
square feet, and the land on which it is located, which is approximately 1.22
acres, are owned by Gilmer County Bank. The building houses offices, operations,
storage, and a lobby. The main banking office of First National is located at
236 Highway 515, Blairsville, Georgia. This office, which opened in November
1996 and contains approximately 11,900 square feet, and the land on which it is
located are owned by First National.
In May 1998, the Company purchased a 1,250 sq. ft. brick building near
Gilmer County Bank's existing facility for a purchase price of $155,000. The
building is located on seven-tenths of an acre. On March 29, 1999, the Company
sold the building and the property for $155,000.
24
<PAGE> 27
In October 1998, the Company entered into a lease for an 0.88 acre
parcel of unimproved land located on First Avenue in East Ellijay, Gilmer
County, Georgia. The lease commenced on January 1, 1999 and has a 30 year term.
The lease payments are $2,500 per annum initially, and increase at a rate of 2%
per annum starting in the fourth year of the lease. The Company plans to use the
land to build a branch office of Gilmer County Bank, although no date has been
set for such expansion.
Management believes that the physical facilities maintained by the
Banks 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 Banks are a party or to which any of their property is
subject, other than ordinary routine legal proceedings incidental to the
business of the Banks.
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.
(Remainder of Page Intentionally Left Blank)
25
<PAGE> 28
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.
In 1998, Interstate/Johnson Lane Corporation was approved as a market maker for
the Company's Common Stock.
In May 1998, the Company effected a two-for-one share split of its
Common Stock (the "Stock Split") in the form of a common stock dividend, payable
on or about May 15, 1998 to shareholders of record as of the close of business
on May 1, 1998. All amounts presented in this Report and in the financial
statements are adjusted to reflect the Stock Split. This net effect of the Stock
Split did not change total shareholders' equity.
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 Common Stock for each quarter of the last
two fiscal years, as adjusted for the Stock Split on May 15, 1998. 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.
<TABLE>
<CAPTION>
Estimated Price Range
Per Share
---------------------
High Low
---- ---
<S> <C> <C>
1997:
First Quarter....................................................... $ 8.00 $ 8.00
Second Quarter...................................................... 9.25 9.00
Third Quarter....................................................... 11.00 8.00
Fourth Quarter...................................................... 10.50 9.25
1998:
First Quarter....................................................... $11.75 $11.75
Second Quarter...................................................... 15.00 15.00
Third Quarter....................................................... 20.00 15.00
Fourth Quarter...................................................... 20.00 20.00
</TABLE>
At March 29, 1999, the Company had 1,323,188 shares of Common Stock
outstanding held by approximately 768 shareholders of record.
Recent Sales of Unregistered Securities
In November 30, 1998, the Company sold 132,500 shares of the Company's
Common Stock in a private placement to three institutional accredited investor
at a price of $20.00 per share. The aggregate gross proceeds of the private
placement were $2.65 million. The Company used all of the proceeds to fund a
portion of the purchase price of its acquisition of First National. Under the
terms of the private placement, each of the purchasers is entitled to certain
registration rights with respect to the shares of Common Stock purchased by such
purchaser.
On November 30, 1998, the Company issued 10,668 shares of its Common
Stock to the Company's 401(k) plan at a price of $20.00 (total purchase price of
$213,360). On March 16, 1998, the Company issued 8,646 shares of its Common
Stock to the Company's 401(k) plan at a price of $11.25 per shares (total
purchase price of $97,267.50). On
26
<PAGE> 29
February 26, 1998, the Company repurchased 14,000 shares of its Common Stock
from one of the Company's directors at a price of $11.00 per share (total
purchase price of $154,000).
Dividends
Gilmer County Bank is subject to restrictions on the payment of
dividends under Georgia law and the regulations of the DBF. First National is
subject to restrictions on the payment of dividends under federal law and the
regulations of the OCC. In March 1998, Gilmer County Bank paid a $500,000
dividend to the Company, which was used by the Company for repayment of debt and
other expenses.
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." The primary source of funds available for the
payment of cash dividends by the Company are dividends from the Banks. There are
various statutory and regulatory limitations on the payment of dividends by the
Banks, as well as by the Company to its shareholders. No assurance can be given
that any dividends will be declared by the Company in the future, or if
declared, what amounts would be declared or whether such dividends would
continue. The Company has not paid any dividends to date.
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.
Results of Operations
Earnings Summary
The Company's net income of $1,208,231 for the year ended December 31,
1998 represents an increase of $190,425 from the net income of $1,017,766 for
the year ended December 31, 1997. The Company's net income in 1997 represented
an increase of $501,030 over net income of $516,736 in 1996. The increase in net
income for these periods relates to the growth in the Gilmer County Bank's
deposit and loan base as well as an increase in Gilmer County Bank's net
interest margin and interest rate spread.
After restatement for the 2-for-1 stock split in 1998, earnings per
share increased to $1.04 ($.99 on a fully diluted basis) in 1998 compared to a
$.88 per share net income in 1997 and a $0.45 per share net income in 1996.
Return on average assets, which reflects the Banks' abilities to utilize their
assets, was .92% in 1998, compared with .98% in 1997 and .71% in 1996. Return on
average shareholders' equity decreased to 13.5% in 1998 compared with 15.9% in
1997, due to the acquisition of First National.
27
<PAGE> 30
Comparison of Years Ended December 31, 1998 and 1997
Net Interest Income
Net interest income is the principal source of the Banks' 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 $4,772,773 in 1998, compared to
$3,880,715 in 1997, representing an increase of 23.0%. This increase was caused
by the growth of the Bank's deposit base and loan portfolio.
Interest and fees earned on loans increased 25.6% from $7,652,481 in
1997 to $9,614,165 in 1998. The increase was primarily from the increase in
volume of average loans from approximately $74,753,000 in 1997 to approximately
$95,353,000 in 1998.
Interest earned on taxable securities decreased 13.1% from $1,160,497
in 1997 to $1,009,595 in 1998, while interest earned on non-taxable securities
increased from $205,883 to $376,157 during the same period. The variance in the
income figures reflects management's strategy to decrease income taxes by
investing in tax-free municipal bonds.
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 1998 was 4.04% compared to a net interest rate margin of
4.06% in 1997.
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 perspective
on the effect of market interest rate movements. The net interest spread was
3.76% in 1998 compared to 3.73% in 1997.
The following tabulation presents certain net interest income data
without modification for assumed tax equivalency:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Rate earned on earning assets...................................... 9.30% 9.40% 9.22%
Rate paid on borrowed funds........................................ 5.54% 5.67% 5.73%
Interest rate spread............................................... 3.76% 3.73% 3.49%
Net yield on earning assets........................................ 4.04% 4.06% 3.90%
</TABLE>
During 1998, interest on federal funds sold increased $109,396 (68.5%)
from 1997. This increase in income is the result of maintaining larger average
federal funds balances with correspondent banks of approximately $4,448,000 and
$2,895,000 in 1998 and 1997, respectively. The average yield for such years was
6.09% and 5.53%, respectively.
Interest Expense
Total interest expense increased $1,235,966 (23.5%) from $5,262,253 in
1997 to $6,498,219 in 1998. This increase was the combined effect of an increase
in the average balance of interest-bearing deposits to approximately
28
<PAGE> 31
$106,805,000 in 1998 from approximately $86,281,000 in 1997. The average rate
paid on deposits in 1998 and 1997, respectively was 5.47% and 5.69%. The effect
of these changes increased the interest expense on interest-bearing deposits to
$5,891,778 in 1998 from $4,911,266 in 1997, and increase of $980,532 (20.0%).
Noninterest Income
Noninterest income for 1998 and 1997 totaled $528,921 and $378,996,
respectively. 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 Banks' deposit
base. Other operating income increased from $161,086 in 1997 to $251,717 in
1998, primarily due to an increase in credit card fees earned by the Banks.
Noninterest Expenses
Noninterest expenses totaled $3,221,213 in 1998 and $2,379,358 in 1997.
Salaries and benefits increased $342,287 (29.6%) to $1,496,743 in 1998, due to
the Banks' increased staffing to accommodate the growth in the Banks' loans and
deposits, as well as, the acquisition of First National in November 1998.
Furniture and equipment expenses increased $102,448 (68.1%) in 1998 due to
increased data processing costs and the cost associated with expanded
facilities. Other operating expenses increased $321,353 (32.9%) to 1,298,630 in
1998 due mainly to increase in advertising and supplies.
The table below sets forth the Company's noninterest expenses for the
periods indicated.
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---------- ---------- ----------
(amounts in thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits.................................... $ 1,438 $ 1,154 $ 893
Occupancy expense................................................. 173 96 96
Furniture and equipment expense................................... 253 150 126
Director and committee fees....................................... 127 119 19
Advertising....................................................... 191 122 93
Checking account expense.......................................... 39 33 29
Data processing................................................... 128 87 47
Insurance......................................................... 52 56 27
Postage........................................................... 87 70 52
Professional and regulatory fees.................................. 146 195 121
Supplies.......................................................... 143 117 106
Correspondent bank charges........................................ 35 35 -0-
Taxes and licenses................................................ 36 26 22
Other............................................................. 373 119 84
---------- ---------- ----------
Total........................................................... $ 3,221 $ 2,379 $ 1,715
========== ========== ==========
</TABLE>
Income Taxes
The Company's net operating income of $1,780,481 in 1998 resulted in
$572,250 (32.1%) of income tax expense. Net operating income for 1997 was
$1,400,353 with a related income tax expense of $382,587.
Comparison of Years Ended December 31, 1997 and 1996
Net Interest Income
29
<PAGE> 32
Net interest income was $3,880,715 in 1997, as compared to $2,651,070
in 1996, representing an increase of $1,229,645, or 46.4%. This increase was
caused by the growth of Gilmer County Bank's deposit base and loan portfolio as
well as an increase in the Gilmer County Bank's interest rate spread and net
interest margin.
Interest earned on fees and loans increased from $5,205,131 in 1996 to
$7,652,481 in 1997, an increase of $2,447,350 or approximately 47%. This
increase was caused by the increase in the average loan portfolio balance from
approximately $51,008,000 in 1996 to approximately $74,753,000 in 1997.
Interest earned on taxable investment securities increased $182,580
(18.7%) from $977,917 in 1996 to $1,160,497 in 1997 while interest earned on
nontaxable investment securities increased from $24,228 in 1996 to $170,274 in
1997. The increase in interest earned on nontaxable securities in 1997 is a
result of an increase of approximately $2,812,000 (632%) in the average
investment portfolio for such securities from 1996.
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 1997 was 4.06%, compared with a net interest rate margin of
3.90% in 1996. This increase was due primarily to the growth of the Bank related
specifically to an increase in interest-bearing assets as a percentage of
interest-earning liabilities.
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 perspective
on the effect of market interest rate movements. The net interest spread for
1997 was 3.73% from earning assets as compared to a net interest spread of 3.49%
in 1996.
During 1997, interest on federal funds sold increased $55,695 (53.5%)
from 1996. The increase in income from federal funds sold is the result of an
increase in the average amount of federal funds sold from approximately
$2,025,000 in 1996 to approximately $2,895,000 in 1997 and an increase in the
average yield for such funds from 5.14% in 1996 to 5.53% in 1997.
Interest Expense
Total interest expense increased $1,602,026 (43.8%), from $3,660,227 in
1996 to $5,262,253 in 1997. This increase was the combined effect of an increase
in the average balance of interest-bearing deposits from approximately
$59,043,000 in 1996 to approximately $86,281,000 in 1997 and a decrease in the
average rate paid on deposits from 5.82% in 1996 to 5.69% in 1997. The effect of
these changes increased the interest expense on interest-bearing deposits from
$3,436,060 in 1996 to $4,911,266 in 1997.
Noninterest Income
Noninterest income for 1997 and 1996 totaled $384,831 and $252,946,
respectively. 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 Gilmer County Bank's
deposit base. Other noninterest income increased from $85,055 in 1996 to
$161,086 in 1997, primarily due to an increase of approximately $39,562 in
credit card fees earned by the Bank in 1997.
Noninterest Expenses
Noninterest expenses totaled $2,379,358 in 1997 and $1,715,372 in 1996.
Salaries and benefits increased $261,464 (29.3%) to $1,154,456, which reflects
the Bank's increased staffing to accommodate the growth in Gilmer County Bank's
loans and deposits. Furniture and equipment expenses increased $23,919 (18.9%)
primarily due to depreciation on equipment of $98,296 in 1997 ($8,070 over 1996)
and repair and maintenance costs of $51,671
30
<PAGE> 33
($15,459 over 1996). Other operating expenses increased $377,501 (62.9%).
Directors' fees increased $100,422 due to payments made by the Company in the
first full year the Company paid directors' fees. The $73,411 increase in
professional fees was primarily attributable to compliance with reporting
requirements under the federal securities laws.
Income Taxes
The Company attempts to maximize its net income through active tax
planning. This planning resulted in a provision for income taxes of $382,587
(27.3%) for 1997 on pre-tax income of $1,400,353. The tax for 1996 was $303,908
(37%) on income of $820,644 and for 1995 was a benefit of ($126,952) (34%) on a
loss of $373,644. The 1997 tax amount and rate is lower than the statutory
federal tax rate of 34 percent primarily due to investments in loans and
securities earning interest income that is exempt from federal taxation. In 1997
the effective tax rate was 80.3 percent of the statutory federal tax rate
compared to 108.8 percent in 1996. A more detailed explanation of income tax
expense is included in the accompanying Notes to Consolidated Financial
Statements.
Financial Condition
Earning Assets
The Banks' earning assets, which include deposits in other banks,
federal funds sold, securities and loans, averaged $123,663,000 in 1998 or 94.3%
of average total assets compared to $98,403,000 or 95.3% of average total assets
in 1997. The mix of average earning assets comprised the following percentages:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deposits in other banks..................................... -0-% -0-%
Federal funds sold.......................................... 3.60% 2.94%
Investment securities....................................... 19.30% 21.10%
Loans....................................................... 77.20% 75.96%
</TABLE>
The mix of average earning assets reflects management's attempt to
maximize interest income while maintaining acceptable levels of risk.
The Banks have 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 Banks' earning assets. At
December 31, 1998, the Banks' total loans were $129,831,095 compared to total
loans of $84,583,853 at the end of 1997. In 1998, average net loans represented
77.1% of average earning assets and 72.7% of total average assets, while in
1997, average net loans represented 76.0% of average earning assets and 72.4% of
average total assets. This was the result of an increase in loan demand in the
Banks' market area, combined with an increase in the Banks' market share of
loans in such area. The ratio of total loans to total deposits was 79.2% in
1998, and 88.7% in 1997.
Securities and Federal Funds Sold
The Banks have classified their securities as either available-for-sale
or held-to-maturity, depending on whether the Banks have the intent and ability
to hold such securities to maturity. At December 31, 1998, $21,940,281 was
classified as available-for-sale, while at December 31, 1997, $15,544,585 of the
Banks' securities were classified as available-for-sale. Securities classified
as held-to-maturity were $6,218,354 at year-end 1998, and $4,181,021 at year-end
1997.
31
<PAGE> 34
The composition of the Banks' securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and to provide a tool
to assist in controlling the Banks' interest rate position while at the same
time producing adequate levels of interest income. For securities classified as
held-to-maturity, it is the Company's intentions for the Banks 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 1998, gross sales amounted to $9,515,761 and maturities amounted to
$11,597,617, representing 40% and 55.9% of the average portfolio, respectively.
Net gains associated with these transactions were $15,950. Gross unrealized
gains at year end 1998 amounted to $423,178 and unrealized losses amounted to
$30,074. During 1997, gross securities sales were $9,982,814 and maturities were
$8,513,974 representing 48.1% and 41.0%, respectively, of the average portfolio
for the year. Net losses associated with sales and maturities totaled $78 in
1997. Gross unrealized gains in the portfolio amounted to $171,823 at year end
1997 and unrealized losses amounted to $29,090.
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 Banks' purchases of mortgage-backed
securities during 1998 and 1997 did not include securities with these
characteristics. The recoverability of the Banks' investments in mortgage-backed
securities is reviewed periodically, and the Company intends to make appropriate
adjustments to income for impaired values.
Management maintains federal funds sold as a tool in managing its daily
cash needs. Federal funds sold at December 31, 1998, was $18,392,213 and
$1,828,000 in 1997. Average federal funds sold for 1998 was approximately
$4,448,000 or 3.6% of average earning assets, and for 1997 was $2,895,000 or
2.9% of average earning assets. The large increase in year end federal funds
resulted from the acquisition of First National and effective management of
interest yield.
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 Company's primary source of funds is derived from deposits of the
Banks' customers. Average deposits increased 23.3% from approximately
$89,808,000 in 1997 to approximately $110,745,000 in 1998. At December 31, 1998
total deposits were $163,861,478 of which $154,573,545 (94.3%) were interest
bearing. At December 31, 1997, total deposits were $95,347,946, of which
$91,547,035 (96%) were interest bearing. The acquisition of First National, as
well as the continued enhancement of existing products and emphasis upon better
customer service, fueled the growth in the deposit base. The Company intends to
emphasize attracting consumer deposits in order to expand the consumer bases of
the Banks and to continue to fund asset growth.
Securities sold under agreements to repurchase amounted to $2,478,344
at December 31, 1998 compared to $4,228,129 at December 31, 1997. The weighted
average rates were 4.26% and 4.50% for 1998 and 1997, respectively. Securities
sold under agreements to repurchase averaged $4,095,716 during 1998 and
$4,471,499 during 1997. The maximum amount outstanding at any month end during
1998 was $4,468,355 and $4,693,265 during 1997. The total of securities sold
under agreements to repurchase are associated with the cash flow needs of our
corporate customers that participate in repurchase agreements.
Shareholders' Equity
Shareholders' equity increased $4,499,641 from December 31, 1997 to
December 31, 1998, due in part to net earnings of $1,208,211 and the increase in
unrealized gains on securities available-for-sale totaling $90,542, net
32
<PAGE> 35
of deferred tax liability. The increase was also a result of the issuance of
19,314 shares of the Company's common stock to the Company's 401(k) plan (total
purchase price $310,628), the sale of 132,500 shares of stock in a private
placement in November 1998 (aggregate proceeds $2,650,000), and the issuance of
30,800 shares in connection with the exercise of options by the certain of the
Company's directors (aggregate proceeds $394,240). The decrease in Shareholders'
equity resulting from the purchase of 14,000 shares of Common Stock by the
Company on February 26, 1998 from one of the Company's directors at a price of
$11.00 per share (total purchase price of $154,000).
All amounts presented in this Report and in the financial statements
are adjusted to reflect the Stock Split in May 1998. This net effect of the
Stock Split did not change total Shareholders' equity. See "Market Information".
Liquidity and Capital Resources
Year 2000
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The approach of the Year 2000 presents a
problem in that many computer programs have been written using two digits rather
than four to define the applicable year. Computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. For example, computer systems may compute payment, interest,
delinquency or other figures important to the operations of the Company based on
the wrong date. This could result in internal system failure or miscalculation,
and also creates risk for the Company from third parties with whom the Company
deals on financial transactions.
The FDIC has issued guidelines for insured financial institutions with
respect to Year 2000 compliance. The Company has developed a Year 2000 action
plan based in part on the guidelines and timetables issued by the FDIC. The
Company's action plan focuses on four primary areas: (1) information systems,
(2) embedded systems located at the Banks' offices and within its off-site ATM
machines, (3) third party and customer relationships, and (4) contingency
planning. The Company has designated a Year 2000 compliance team, headed by its
Chief Financial Officer and Chief Operating Officer, who reports to the board of
directors. In addition, the Company has engaged outside consultants for purposes
of conducting Year 2000 readiness assessments and remediation where necessary.
Information Systems. The Company has identified all mission critical
information ("IT") systems and has developed a schedule for testing and
remediation of such systems. Testing of key computer hardware has been
completed, and the Company has completed modification and replacement of its
mission critical hardware that was not Year 2000 compliant. The Company has
completed its inventory of mission critical software and is in the process of
contacting software vendors for certification of Year 2000 compliance, which the
Company expects to complete in the second quarter of 1999. The Company plans to
complete any programming changes to critical systems and commence testing of the
new programming in the early part of the second quarter of 1999. Testing of
internal mission-critical systems commenced during the first quarter of 1999 and
implementation is scheduled to be completed by June 30, 1999.
Embedded Systems. The Company is performing a comprehensive inventory
of its embedded systems, such as microcontrollers used to operate security
systems and elevators, and has completed its inventory of mission critical
non-IT systems. The Company is in the process of contacting manufacturers and
vendors of those components utilized in operations to determine whether such
components are Year 2000 compliant. The Company intends to remediate or replace,
as applicable, any non-compliant components and expects to complete this process
for mission critical systems by June 30, 1999. The quality of the responses from
manufacturers and vendors, the estimated impact of the individual system or
component on the Banks' operations, and the ability of the Company to perform
meaningful and verifiable tests will influence its decision regarding whether to
have independent tests conducted on its embedded systems.
33
<PAGE> 36
Third Party and Customer Relationships. The Company is in the process
of initiating communications with all suppliers and vendors to determine the
potential impact of such third parties' failure to remediate their own Year 2000
issues. These third parties include other financial institutions, office supply
vendors and telephone, electric and other utility companies. The Company is
encouraging its counterparties and customers to conduct their own Year 2000
assessment and take appropriate steps to become Year 2000 compliant.
The Company outsources its principal data processing activities to
another financial institution, and the Company is actively communicating with
and monitoring the progress of such institution to assess the impact of Year
2000 issues on such institution and its ability to provide such data processing
services. The Company will consider new business relationships with alternate
providers of products and services if necessary. Additionally, the Company has
initiated communications with its larger and commercial borrowers to assess the
potential impact of Year 2000 on them and their ability to remain current on
loan repayments.
Contingency Plans. As part of the Company's normal business practice,
it maintains contingency plans to follow in the event of emergency situations,
some of which could arise from Year 2000-related problems. The Company is in the
process of formulating a detailed Year 2000 contingency plan, which will assess
several possible scenarios to which the Company may be required to react. The
Company's formal Year 2000 contingency plan is expected to be completed by the
end of second quarter 1999.
Financial Implications. The Company believes that, since a majority of
its equipment is relatively new, the Year 2000 problem will not pose significant
internal operational problems or generate material additional expenditures.
Maintenance, testing, and modification costs will be expensed as incurred, while
the costs of new software or hardware will be capitalized and amortized over
their useful lives. Management currently does not expect the amounts required to
be expensed to resolve Year 2000 issues to have a material effect on its
financial position or results of operations. In connection with its assessment,
testing and remediation of Year 2000 issues, the Company incurred costs of
approximately $10,000 in 1998. The Company currently estimates that the costs of
assessing, testing and remediation of Year 2000 issues will total approximately
$80,000 in 1999. The anticipated costs associated with the Company's Year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become Year 2000 compliant
or costs to implement the Company's contingency plans. The Company is funding
its costs associated with the Year 2000 issue through its regular operating
income. While the Company does not expect the cost of these efforts to be
material to its financial position or its operating results, there can be no
assurance to this effect.
Potential Risks. The Year 2000 issue presents a number of risks to the
business and financial condition of the Company and the Banks. External factors,
which include but are not limited to electric and telephone service, are beyond
the control of the Company and the failure of such systems could have a material
adverse effect on the Company, its customers and third parties on whom the
Company relies for its day-to-day operations. The business of many of the
Company's customers may be negatively affected by the Year 2000 issue, and any
financial difficulties incurred by the Company's customers in connection with
the century change could negatively affect such customers' ability to repay
loans to the Company. The failure of the Banks' computer system or applications
or those operated by customers or third parties could have a material adverse
effect on the Company's results of operations and financial condition.
In light of its compliance efforts, the Company does not believe that
the Year 2000 issue will materially adversely effect operations or results of
operations, and does not expect implementation to have a material impact on its
business, financial condition or operating results. However, there can be no
assurance that the Company's and the Banks' systems will be Year 2000 ready
prior to December 31, 1999, or that the failure of any such system will not have
a material adverse effect on the Company's business, financial condition or
operating results. In addition, to the extent the Year 2000 issue has a material
adverse effect on the business, financial condition or operating results of
third parties which whom the Company has material relationships, such as other
financial institutions, the Year 2000 issue could have a material adverse effect
on the Company's business, financial condition or operating results.
The foregoing are forward-looking statements reflecting management's
current assessment and estimates
34
<PAGE> 37
with respect to the Company's Year 2000 compliance efforts and the impact of
Year 2000 issues on the Company's business and operations. Various factors could
cause actual plans and results to differ materially from those contemplated by
such assessments, estimates and forward-looking statements, many of which are
beyond the control of the Company. Some of these factors include, but are not
limited to, representations by the Company's vendors and counterparties,
technological advances, economic considerations, and consumer perceptions. The
Company's Year 2000 compliance program is an ongoing process involving continual
evaluation and may be subject to change in response to new developments.
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 Banks' abilities 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 Banks would not be able to perform the primary function of
financial intermediaries 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 Banks to meet the needs of their
customer bases, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Company
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 $23.0 million or
17.8% of the total loan portfolio at December 31, 1998 and investment securities
maturing in one year or less equaled $2.1 million or 7.3% of the portfolio.
Other sources of liquidity include short-term investments such as federal funds
sold.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal 1998, funds were also available through the purchase of
federal funds from correspondent commercial banks from available lines of up to
an aggregate of $4,000,000.
In an effort to maintain and improve the liquidity position of Gilmer
County Bank, management made application for membership with the Federal Home
Loan Bank of Atlanta in 1997. As a member of the Federal Home Loan Bank, Gilmer
County Bank is able to improve its ability to manage liquidity and reduce
interest rate risk by having a funding source to match longer term loans. The
application was approved on April 17, 1997, and Gilmer County Bank received an
initial credit line of up to $8,000,000. Gilmer County Bank's credit line was
increased to $12,000,000 in March 1998. At December 31, 1998, the outstanding
balance of Gilmer County Bank's credit line was $7,407,143. See Note 9 to the
Notes to Consolidated Financial Statements herein. First National also has a
credit line with the Federal Home Loan Bank, which provides for a credit line of
up to $6,000,000. At December 31, 1998, First National did not have an
outstanding balance on its credit line.
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. A majority of the
Company's capital requirements have been provided from the proceeds from Gilmer
County Bank's initial stock offering in 1994, through draws by Gilmer County
Bank on the credit line with the Federal Home Loan Bank, through draws on a line
of credit with Hardwick Bank and Trust Company (described below), through a $3.6
million loan from The Bankers Bank (described below), from the proceeds of the
$2.65 private placement of the
35
<PAGE> 38
Common Stock in November 1998, and through the retention of earnings and the
sale of Company stock to the Company's 401(k) plan.
Term Loan. In November 1998, the Company obtained a $3.6 million term
loan under a Loan and Stock Pledge Agreement and a Promissory Note
(collectively, the "Term Loan") with The Bankers Bank. The Company used $3.45 of
the proceeds of the Term Loan to fund a portion of its acquisition of First
National. The Company used the remaining $150,000 of the proceeds of the Term
Loan to repay a portion of principal amounts outstanding under its former line
of credit with Hardwick Bank & Trust Company ("Hardwick"). At December 31, 1998,
the balance on the Term Loan was $3.6 million. Interest on the outstanding
amounts under the Term Loan is payable quarterly, commencing January 1, 1999, at
the prime rate (as defined in the Promissory Note) less 3/4 of a percentage
point. The Company began making interest payments on January 1, 1999. Principal
is due in seven equal annual installments, each in the amount of $450,000, plus
accrued and unpaid interest, beginning on November 30, 2000. The entire
outstanding balance of the Term Loan, together with all accrued and unpaid
interest, is due and payable in a final installment on November 30, 2008. The
Term Loan contains certain affirmative and negative covenants, including, but
not limited to, requiring the Company to cause the Banks at all times to
maintain certain minimum capital ratios, maintain nonperforming assets below a
specified level, and maintain a minimum ratio of consolidated loan loss reserves
to total loans.
Line of Credit. In November 1996, the Company obtained a $1 million
unsecured line of credit under an agreement (the "Line of Credit Agreement")
with Hardwick. On October 29, 1997 the Company and Hardwick agreed to a
modification of the Line of Credit Agreement increasing the amount of credit
available to the Company to $1.5 million. In November 1998, the Company paid off
the Line of Credit using part of the proceeds of the Term Loan together with the
dividend paid by Gilmer County Bank to the Company. Upon repayment of the Line
of Credit, the Company terminated the Line of Credit Agreement.
Federal Capital Standards. 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 Company's
Tier 1 capital, which consists of common equity, paid-in capital and retained
earnings (less intangible assets), amounted to $9.0 million at December 31,
1998. 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 Capital and
was $10.7 million at year-end 1998. The Company's percentage ratios as
calculated under regulatory guidelines were 6.64% and 7.88% for Tier 1 and Total
Capital, respectively, at year-end 1998. The Company's Tier 1 Capital exceeded
the minimum ratio of 4% whereas the Company's Total Capital was slightly under
the minimum ratio of 8%.
The Company's failure to meet the minimum Total Capital ratio at
December 31, 1998 was primarily attributable to the amount of goodwill resulting
from the Company's acquisition of First National. Over future periods the
effects of the goodwill on the Company's Total Capital ratio will decrease as
the goodwill is amortized on a straight-line basis over a period of twenty
years. Additionally, management intends to closely monitor the asset mix of the
Banks and to take such additional steps as are necessary in order to avoid a
future failure to meet the applicable minimum capital ratios. These additional
steps may include limiting the payment of dividends by the Company or raising
additional capital. The Company, however, cannot be assured that such steps will
be successful or that the Company will be able to meet its minimum capital
ratios. The failure of the Company to meet its minimum capital ratios could
result in, among other things, increased scrutiny from applicable regulatory
authorities, a reduction in the permissible activities of the Company or a
default under the Company's credit facilities. Any of these events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Another important indicator of capital adequacy in the banking industry
is the leverage ratio. The leverage ratio is defined as the ratio which
shareholders' equity, minus intangibles bears to total assets minus intangibles.
At December 31, 1998, the Company's leverage ratio was 4.99% exceeding the
regulatory minimum requirement of 4%.
(Remainder of Page Intentionally Left Blank)
36
<PAGE> 39
The table below illustrates the Company's regulatory capital ratios
under federal guidelines at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Capital Adequacy Ratios
Years ended December 31,
Statutory -------------------------------
Minimum 1998 1997
------------- ------------- -------------
(amounts in thousands,
except percentages)
<S> <C> <C> <C>
Tier 1 Capital.......................................... $ 9,035 $ 6,916
Tier 2 Capital.......................................... 1,686 930
-------- --------
Total Qualifying Capital................................ $ 10,721 $ 7,846
======== ========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)......................... $136,122 $ 84,074
======== ========
Tier 1 Risk-Based Capital Ratio......................... 4.0% 6.64% 8.23%
Total Risk-Basked Capital Ratio......................... 8.0% 7.88% 9.33%
Leverage Ratio.......................................... 4.0% 4.99% 6.40%
</TABLE>
Gilmer County Bank; DBF Capital Requirement. In addition to the capital
standards imposed by federal banking regulators, the DBF imposes a 6% primary
capital ratio on Gilmer County Bank. The DBF's standard is calculated as the
ratio of total equity to total assets, each as adjusted for unrealized gains and
losses on securities and allowances for loan losses. At December 31, 1998,
Gilmer County Bank's capital ratio as calculated under the DBF standard was
6.89%.
In March 1998, Gilmer County Bank paid a $500,000 dividend to the
Company, which was used by the Company for the repayment of debt and other
expenses.
In the first quarter of 1998, Gilmer County Bank completed several
expansion and renovation projects on its offices and grounds, including
construction of a community center. Total expenditures on these projects
aggregated $243,138 and were funded through current operations cash flow.
First National. The applicable federal guidelines require First
National to maintain a minimum risk-based total capital ratio of 8% and a Tier 1
risk-based capital ratio of 4%. At December 31, 1998, First National's total
capital ratio was 12.7% and its Tier 1 capital ratio was 11.4%.
Interest Rate Sensitivity Management
Interest rate sensitivity is a function of the repricing
characteristics of the Banks' portfolios 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.
37
<PAGE> 40
The following tables show interest sensitivity gaps for these different
intervals as of December 31, 1998.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
0-30 31-90 91-365 1-5 Over 5
Days Days Days Years Years Total
----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1)
Loans................................... $ 10,236 $ 22,782 $ 34,425 $ 56,438 $ 5,946 $ 129,827
Securities:
Taxable............................... 280 402 1,514 7,619 6,349 16,164
Tax-exempt............................ 150 -0- 203 1,211 10,430 11,994
Time deposits in other banks............ 99 99 -0- 209 -0- 407
Federal funds sold...................... 18,392 -0- -0- -0- -0- 18,392
-------- ------- ------- -------- -------- --------
29,157 23,283 36,142 65,477 22,725 176,784
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities (2)
Demand deposits (3)..................... 16,014 16,013 16,013 -0- -0- 48,040
Savings deposits (3).................... 9,670 9,670 9,669 -0- -0- 29,009
Time deposits........................... 7,143 15,900 36,892 17,590 -0- 77,525
Other short-term borrowings (3)......... 826 826 826 2,478
Long-term debt.......................... -0- -0- -0- 2,150 8,857 11,007
------- -------- ------- -------- ------- --------
33,653 42,409 63,400 19,740 8,857 168,059
-------- --------- -------- -------- -------- ---------
Interest sensitivity gap.................. $ (4,496) $(19,126) $(27,258) $ 45,737 $ 13,868 $ 8,725
======== ======== ======== ======== ======== =========
Cumulative interest sensitivity gap....... $ (4,496) $(23,622) $(50,880) $ (5,143) $ 8,725
======== ======== ======== ======== ========
Ratio of interest-earning assets to
interest-bearing liabilities............ .87 .55 .57 3.32 2.57
======== ========= ======== ======= =======
Cumulative ratio.......................... .87 .69 .64 .97 1.05
======== ========= ======== ======= =======
Ratio of cumulative gap to total
interest-earning assets................. (.03) (.13) (.29) (.03) .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 instruments 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 Company'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 approximately 4.5 million.
For the first 365 days, interest-bearing liabilities exceed earning assets by
nearly $51 million. During this one year time frame, 83% of all interest-bearing
liabilities will reprice compared to 50.1% 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 continued emphasis on profitability, many of the
higher yielding securities presented in the table above have call features,
which may result
38
<PAGE> 41
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.
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 ability of the Banks 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 the
Company in the understanding of how well the Banks are 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.
Recent Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Statement No. 130 establishes standards
for reporting and displaying comprehensive income, as defined therein, and its
components in financial statements issued for the fiscal years beginning after
December 15, 1997. Statement No. 130 requires the inclusion in comprehensive
income of the change in certain previously recognized components of
shareholders's equity. In compliance with Statement No. 130, the Company has
included, as an additional financial statement, Consolidated Statements of
Comprehensive Income for the years ended December 31, 1998, 1997 and 1996. For
the Company, this required the inclusion of unrealized gains (losses) on
investment and available for sale securities, net of taxes, arising during the
respective periods. For the year ended December 31, 1998, the change in
unrealized gains on securities represented an increase in net income, as
reported, by $90,5542 (7.5%), net of tax. For the year ended December 31, 1997,
the change in unrealized gains on securities represented an increase in net
income, as reported, of $42,744 (4.2%), net of tax. For the year ended December
31, 1996, the change in unrealized gains on securities represented a decrease in
net income, as reported, of $75,130 (14.5%), net of tax.
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments. This statement is effective for financial
statements for periods beginning after December 15, 1997. All of the Company's
offices offer similar products and services, are located in the same geographic
region, and serve the same customer segments of the market. As a result,
management considers all units as one operating segment and therefore feels that
the basic financial statements and related footnotes provide details related to
segment reporting.
Effective for years ending after December 15, 1998, SFAS 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits" was
issued by FASB which standardizes the disclosure requirements for
39
<PAGE> 42
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit 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 132 will have a material impact on the Company's consolidated
financial statements.
In June 1998, the Financial Accounting Standards Board also issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative is to be determined based upon the
intended use of the derivative. For certain hedge designations (cash flow and
foreign currency exposure) the derivative's gain or loss is reported as a
component of other comprehensive income. Other designations require the gain or
loss to be recognized in earnings in the period of change. This statement is
effective for financial statements for periods beginning after June 15, 1999.
Management does not believe that the adoption of SFAS No. 133 will have a
material impact on the Company's consolidated financial statements.
Conclusion
The Company, principally through Gilmer County Bank, has experienced
continued growth since it acquired Gilmer County Bank in July 1996.
Additionally, the Company recently acquired First National. While management
remains optimistic about the prospects for continued growth and profitability of
the Company and the Banks, management does not anticipate that such growth will
be at the level experienced during its initial years of operation. No assurance
can be given that the Company or the Banks 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 those discussed in the section entitled "Cautionary Notice Regarding
Forward-Looking Information" appearing at the beginning 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.
40
<PAGE> 43
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 "1999 Proxy Statement")
relating to the annual meeting of shareholders of the Company, scheduled to be
held on May 25, 1999, is incorporated herein by reference.
Item 10. Executive Compensation
The information appearing under the heading "Compensation of Executive
Officers and Directors" in the 1999 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 1999 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 1999 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:
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
- -------------- ----------------------
<S> <C>
2.1 Purchase Sale and Assumption Agreement, dated July 10, 1998, by and between Century
South Banks, Inc. and the Company (included as Exhibit 2.1 to the Current Report on
Form 8-K of the Company, dated November 30, 1998 (File No. 000-21383), 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 (File No. 000-21383),
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 (File No. 000-21383), previously filed with the
Commission and incorporated herein by reference).
4.1 Registration Rights Agreement, dated November 30, 1998, by and among the Company and
Community Financial Services, Inc.
</TABLE>
41
<PAGE> 44
<TABLE>
<S> <C>
4.2 Registration Rights Agreement, dated November 30, 1998, by and among the Company and
Ellijay Telephone Company, Inc.
4.3 Registration Rights Agreement, dated November 30, 1998, by and among the Company and
JBC Bancshares, Inc.
10.1 1997 Directors' Non-Qualified Stock Option Plan (included as Exhibit 10.1 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996
(File No. 000-21383) and incorporated herein by reference).*
10.2 1997 Employee Incentive Stock Incentive Plan (included as Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996
(File No. 000-21383) and incorporated herein by reference).*
10.3 Adoption Agreement for the Appalachian Bancshares, Inc. Section 401(k) Profit Sharing
Plan (filed as Exhibit 4.3(a) to the Company's Registration Statement on Form S-8
(No. 333-27127) and incorporated herein by reference).
10.4 Georgia Bankers Association Master 401(k) Profit Sharing Plan (filed as Exhibit 4.3(b)
to the Company's Registration Statement on Form S-8 (No. 333-27127) and incorporated
herein by reference).
10.5 First Amendment to the Georgia Bankers Association Master Section 401(k) Profit
Sharing Plan (filed as Exhibit 4.3(c) to the Company's Registration Statement on Form
S-8 (No. 333-27127) and incorporated herein by reference).
10.6 Form of Deferred Fee Agreement between Gilmer County Bank and certain directors and
executive officers, with addendum (filed as Exhibit 10.6 to the Company's Quarterly
Report on Form 10-QSB for the period ended June 30, 1997 (File No. 000-21383) and
incorporated herein by reference).
10.7 Loan and Stock Pledge Agreement, dated as of November 30, 1998, between the Company
and The Bankers Bank.
10.8 Promissory Note, dated November 30, 1998, issued by the Company to The Bankers Bank.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Information required by Form 11-K with respect to the Appalachian Bancshares, Inc.
Section 401(k) profit Sharing Plan will be filed as an amendment to this Form 10-KSB
within 180 days after the end of the fiscal year of the plan as permitted by Rule
15d-21 under the Securities Exchange Act of 1934.
* The referenced exhibit is a compensatory contract, plan or arrangement.
</TABLE>
(b) On December 15, 1998, the Company filed a report on Form 8-K with
respect to the consummation of its acquisition of First National Bank of Union
County reporting information under Items 2 and 7. On February 12, 1999, the
Company filed an amendment to a report on Form 8-K/A with respect to the
consummation of its acquisition of First National Bank of Union County reporting
information under Item 7.
42
<PAGE> 45
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 30, 1999
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.
<TABLE>
<S> <C>
/s/ Tracy R. Newton Date: March 30, 1999
- --------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director
[Principal Executive Officer]
/s/ Kent W. Sanford Date: March 30, 1999
- --------------------------------------------
Kent W. Sanford, Executive Vice President,
Chief Financial Officer and Chief Operating Officer
[Principal Financial and Accounting Officer]
/s/ Alan S. Dover Date: March 30, 1999
- --------------------------------------------
Alan S. Dover, Director
/s/ Charles A. Edmondson Date: March 30, 1999
- --------------------------------------------
Charles A. Edmondson, Director
/s/ Roger E. Futch Date: March 30, 1999
- --------------------------------------------
Roger E. Futch, Director
/s/ Joseph C. Hensley Date: March 30, 1999
- --------------------------------------------
Joseph C. Hensley, Director
/s/ Frank E. Jones Date: March 30, 1999
- --------------------------------------------
Frank E. Jones, Director
/s/ J. Ronald Knight Date: March 30, 1999
- --------------------------------------------
J. Ronald Knight, Director
/s/ P. Joe Sisson Date: March 30, 1999
- --------------------------------------------
P. Joe Sisson, Director
/s/ Kenneth D. Warren Date: March 30, 1999
- --------------------------------------------
Kenneth D. Warren, Director
</TABLE>
43
<PAGE> 46
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
FOR FINANCIAL INFORMATION
Appalachian Bancshares, Inc. and Subsidiaries
The management of Appalachian Bancshares, Inc. and Subsidiaries (the " Company")
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
meets 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 board of directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.
F-1
<PAGE> 47
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
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, 1998 and 1997............................. F-4
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.......................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................................................................... F-7
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996............................................................................ F-8
Notes to Consolidated Financial Statements.................................................................. F-9
</TABLE>
SCHAUER, TAYLOR, COX & VISE, P.C.
F-2
<PAGE> 48
SCHAUER, TAYLOR, COX & VISE, P.C.
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
150 OLDE TOWNE ROAD
BIRMINGHAM, ALABAMA 35216
DOUGLAS B. SCHAUER, CPA TELEPHONE (205) 822-3488 STEVEN W. BROWN, CPA
EDWARD R. TAYLOR, CPA WATS (800) 466-3488 M. BRYANT KING, CPA
W. ERNEST COX, CPA FAX (205) 822-3541 RAYMOND A. PATTON, CPA
DONALD G. VISE, CPA RUSSELL D. PAYNE, CPA
MICHAEL WHITEHURST, CBA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Appalachian Bancshares, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Appalachian Bancshares, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
cash flows, and comprehensive income for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company'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 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 Subsidiaries as of December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Birmingham, Alabama
February 5, 1999
/s/ Schauer, Taylor, Cox & Vise, P.C.
SCHAUER, TAYLOR, COX & VISE, P.C.
AMERICAN INSTITUTE OF CPAS ALABAMA SOCIETY OF CPA'S
F-3
<PAGE> 49
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 5,481,853 $ 3,383,533
Interest-bearing deposits with other banks................................... 407,229 -0-
Federal funds sold........................................................... 18,392,213 1,828,000
Securities available for sale................................................ 21,940,281 15,544,585
Securities held-to-maturity, estimated fair value of $6,457,522
and $4,308,947, respectively............................................... 6,218,354 4,181,021
Loans, net of unearned income................................................ 129,831,095 84,583,853
Allowance for loan losses.................................................... (1,686,395) (929,590)
--------------- ---------------
NET LOANS................................................................ 128,144,700 83,654,263
Premises and equipment, net.................................................. 3,940,032 1,653,043
Accrued interest............................................................. 1,319,601 971,550
Cash surrender value on life insurance....................................... 615,438 585,615
Intangible, net.............................................................. 2,345,055 -0-
Other assets................................................................. 940,194 379,180
--------------- ---------------
TOTAL ASSETS............................................................. $ 189,744,950 $ 112,180,790
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing........................................................ $ 9,287,933 $ 3,800,911
Interest-bearing........................................................... 154,573,545 91,547,035
--------------- ---------------
TOTAL DEPOSITS........................................................... 163,861,478 95,347,946
Securities sold under agreements to repurchase............................... 2,478,344 4,228,129
Accrued interest............................................................. 665,883 188,230
Long-term debt............................................................... 11,007,143 5,320,000
Other liabilities............................................................ 252,408 116,432
--------------- ---------------
TOTAL LIABILITIES........................................................ 178,265,256 105,200,737
--------------- ---------------
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share, 20,000,000 shares authorized,
1,367,188 and 1,184,574 shares issued, respectively........................ 6,835,940 5,922,870
Treasury stock, 44,000 and 30,000 shares at cost............................. (428,000) (274,000)
Capital surplus.............................................................. 2,576,849 135,051
Retained earnings............................................................ 2,394,590 1,186,359
Accumulated comprehensive income: net unrealized holding
gains on securities available-for-sale, net of deferred income tax......... 100,315 9,773
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY............................................... 11,479,694 6,980,053
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 189,744,950 $ 112,180,790
=============== ===============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 50
CONSOLIDATED STATEMENTS OF INCOME
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................. $ 9,614,165 $ 7,652,481 $ 5,205,131
Interest on investment securities:
Taxable securities....................................... 1,009,595 1,160,497 977,917
Nontaxable securities.................................... 376,157 170,274 24,228
Interest on deposits in banks.............................. 1,963 -0- -0-
Interest on federal funds sold............................. 269,112 159,716 104,021
---------------- --------------- ---------------
TOTAL INTEREST INCOME.................................. 11,270,992 9,142,968 6,311,297
---------------- --------------- ---------------
INTEREST EXPENSE
Interest on deposits....................................... 5,891,798 4,911,266 3,436,060
Interest on federal funds purchased and securities sold
under agreements to repurchase........................... 178,437 201,407 219,500
Interest on long-term debt................................. 427,984 149,580 4,667
---------------- --------------- ---------------
TOTAL INTEREST EXPENSE................................. 6,498,219 5,262,253 3,660,227
---------------- --------------- ---------------
NET INTEREST INCOME........................................... 4,772,773 3,880,715 2,651,070
Provision for loan losses.................................. 300,000 480,000 368,000
---------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES........... 4,472,773 3,400,715 2,283,070
NONINTEREST INCOME
Service charges on deposits................................ 238,921 197,333 134,642
Insurance commissions...................................... 22,333 20,655 24,355
Other operating income..................................... 251,717 161,086 85,055
Investment securities gains (losses)....................... 15,950 (78) 8,894
---------------- --------------- ---------------
TOTAL NONINTEREST INCOME............................... 528,921 378,996 252,946
---------------- --------------- ---------------
NONINTEREST EXPENSES
Salaries and employee benefits............................. 1,496,743 1,154,456 892,992
Occupancy expense.......................................... 173,034 97,267 96,165
Furniture and equipment expense............................ 252,806 150,358 126,439
Other operating expenses................................... 1,298,630 977,277 599,776
---------------- --------------- ---------------
TOTAL NONINTEREST EXPENSES............................. 3,221,213 2,379,358 1,715,372
---------------- --------------- ---------------
Income (Loss) before income taxes.......................... 1,780,481 1,400,353 820,644
Income tax (provision) benefit............................. (572,250) (382,587) (303,908)
---------------- --------------- ---------------
NET INCOME (LOSS)............................................. $ 1,208,231 $ 1,017,766 $ 516,736
================ =============== ===============
EARNINGS (LOSS) PER COMMON SHARE - BASIC AND DILUTIVE
Net income (loss) per common share-
Basic earnings per share................................. $ 1.04 $ .88 $ .45
Basic weighted average shares outstanding................ 1,166,425 1,154,990 1,136,000
Diluted earnings per share............................... $ 0.99 $ .88 $ .45
Diluted weighted average shares outstanding.............. 1,220,976 1,162,206 1,136,000
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 51
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON TREASURY CAPITAL RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS INCOME TOTAL
---------- ---------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........ $2,840,000 $ -0- $ 2,829,314 $ (348,143) $ 42,159 $ 5,363,330
Two-for-one stock split........... 2,840,000 (2,840,000) -0-
---------- ---------- ------------ ------------- ------------- --------------
Restated beginning balance........ 5,680,000 (10,686) (348,143) 42,159 5,363,330
Net Change in Unrealized Gains
(Losses) on Securities......... -0- -0- -0- -0- (75,130) (75,130)
Net Income 1996................... -0- -0- -0- 516,736 -0- 516,736
---------- --------- ------------ ------------- ------------ --------------
Balance at December 31, 1996...... 5,680,000 -0- (10,686) 168,593 (32,971) 5,804,936
Proceeds from sale of common
stock to 401(k) plan........... 242,870 -0- 145,737 -0- -0- 388,607
Purchase of Treasury Stock........ -0- (274,000) -0- -0- -0- (274,000)
Net Change in Unrealized Gains
on Securities.................. -0- -0- -0- -0- 42,744 42,744
Net Income 1997................... -0- -0- -0- 1,017,766 -0- 1,017,766
---------- --------- ----------- ------------- ------------ -------------
BALANCE AT DECEMBER 31, 1997... 5,922,870 (274,000) 135,051 1,186,359 9,773 6,980,053
PROCEEDS FROM SALE OF COMMON
STOCK TO 401(K) PLAN........... 96,570 214,058 -0- -0- 310,628
PURCHASE OF TREASURY STOCK........ -0- (154,000) -0- -0- -0- (154,000)
NET CHANGE IN UNREALIZED GAINS
ON SECURITIES.................. -0- -0- -0- -0- 71,614 71,614
PROCEEDS FROM EXERCISE
OF OPTIONS..................... 154,000 -0- 240,240 -0- -0- 394,240
PRIVATE PLACEMENT SALE OF STOCK... 662,500 -0- 1,987,500 -0- -0- 2,650,000
EFFECT OF BUSINESS COMBINATION.... -0- -0- -0- -0- 18,928 18,928
NET INCOME 1998................... -0- -0- -0- 1,208,231 -0- 1,208,231
--------- ---------- ----------- ------------- ------------ --------------
BALANCE AT DECEMBER 31, 1998... $6,835,940 $ (428,000) $ 2,576,849 $ 2,394,590 $ 100,315 $ 11,479,694
========== ========== ============ ============= ============ ==============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 52
CONSOLIDATED STATEMENTS OF CASH FLOWS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................ $ 1,208,231 $ 1,017,766 $ 516,736
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization, and accretion, net ...... 188,653 165,242 127,620
Provision for loan losses ........................... 300,000 480,000 368,000
Deferred tax (benefit) .............................. -0- (73,426) (8,622)
Realized security (gains) losses, net ............... (15,950) 78 (8,894)
Losses on disposition of foreclosed real estate ..... -0- 3,927 -0-
Increase in cash surrender value on life insurance .. (29,823) (17,215) -0-
Increase in accrued interest receivable ............. (122,861) (164,739) (414,018)
Increase in accrued interest payable ................ 46,854 33,769 59,109
Other ............................................... (301,959) 19,186 (28,100)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... $ 1,273,145 $ 1,464,588 $ 611,831
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale .. 9,515,761 9,982,814 4,497,500
Proceeds from maturity of securities available for sale 11,597,023 8,513,974 4,531,902
Proceeds from maturity of securities held-to-maturity . 594 145,000 -0-
Purchase of securities available for sale ............. (23,834,942) (13,991,323) (15,208,797)
Purchase of securities held-to-maturity ............... (1,091,138) (1,939,327) (2,247,479)
Net increase in loans to customers .................... (21,786,395) (19,827,817) (32,830,349)
Capital expenditures, net ............................. (548,857) (121,199) (118,918)
Proceeds from disposition of foreclosed real estate ... 113,500
Purchase of life insurance plan ....................... -0- (568,400) -0-
Cash received in bank acquisition, net ................ 10,721,749 -0- -0-
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ............. (15,312,705) (17,806,278) (41,376,141)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
and savings accounts ................................ 19,557,448 11,384,300 16,452,274
Net increase in certificates of deposit ............... 6,413,648 2,815,766 22,554,275
Net increase (decrease) in securities sold
under agreement to repurchase ....................... (1,749,785) (1,055,843) 972,056
Issuance of long-term debt ............................ 7,007,143 4,620,000 700,000
Repayment of long-term debt ........................... (1,320,000) -0- -0-
Issuance of common stock .............................. 3,354,868 388,607 -0-
Purchase of treasury stock ............................ (154,000) (274,000) -0-
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......... 33,109,322 17,878,830 40,678,605
------------ ------------ ------------
Net increase in cash and cash equivalents ................ 19,069,762 1,537,140 (85,705)
Cash and cash equivalents at beginning of year ........... 5,211,533 3,674,393 3,760,098
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................. $ 24,281,295 $ 5,211,533 $ 3,674,393
============ ============ ============
</TABLE>
F-7
<PAGE> 53
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid during the year for:
Interest ........................................... $ 6,451,365 $5,228,484 $ 3,601,118
Income taxes ....................................... 632,799 435,511 301,983
Loans transferred to foreclose real estate ........... 223,056 109,209 59,275
Net increase (decrease) in unrealized gains and losses
on securities available for sale ................... 108,620 64,762 (114,114)
Proceeds from sales of foreclosed real estate financed
through loans ...................................... 109,556 105,282 54,170
Assets acquired in business combination .............. 29,977,439 -0- -0-
Liabilities assumed in business combination .......... 43,035,046 -0- -0-
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE> 54
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
NET INCOME........................................................... $ 1,208,231 $ 1,017,766 $ 516,736
Other comprehensive income, net of tax:
Unrealized gains on securities
Unrealized holding gains (losses) arising during period......... 155,080 64,684 (104,939)
Reclassified adjustments for (gains) losses
included in net income........................................ (15,950) 78 (8,894)
------------- ------------- -------------
Net unrealized gains (losses)................................... 139,130 64,762 (113,833)
Income tax related to items of other comprehensive income......... (48,588) (22,018) 38,703
------------- ------------- -------------
Other comprehensive income........................................... 90,542 42,744 (75,130)
------------- ------------- -------------
COMPREHENSIVE INCOME................................................. $ 1,298,773 $ 1,060,510 $ 441,606
============= ============= =============
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Appalachian Bancshares, Inc. and its wholly owned subsidiaries: Gilmer County
Bank ("GCB") and First National Bank of Union County ("FNB") (referred to herein
collectively as the "Banks"). Prior to August 1996, Gilmer County Bank operated
as an independent bank. Prior to November 1998, First National Bank of Union
County operated as a wholly-owned subsidiary bank of Century South Banks, Inc.
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. The acquisition of GCB was accounted for as a pooling of interests. The
acquisition of FNB was accounted for as a purchase. These entities are
collectively referred to herein as the Company. All significant intercompany
transactions and balances have been eliminated in consolidation. Unless
otherwise indicated herein, the financial results of the Company refer to the
Company and the Banks on a consolidated basis. The Banks provide a full range of
banking services to individual and corporate customers in North Georgia and the
surrounding areas.
Consolidated Statements of Comprehensive Income
The company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement 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 condition.
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 non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
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.
Securities
Securities are classified as either held-to-maturity, available-for-sale, or
trading.
Held-to-maturity securities are securities for which management has the ability
and intent to hold on a long-term basis or until maturity. These securities are
carried at amortized cost, adjusted for amortization of premiums, and accretion
of discount to the earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
F-10
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific
identification method.
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 has no trading securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and unearned discounts.
Unearned discounts on installment 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 origination costs, when
material, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method.
Allowance for Possible Loan Losses
A loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans which consist of residential mortgages and consumer loans are
evaluated collectively and reserves are established based on historical loss
experience.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is determined
to be uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.
Management's periodic evaluation of the adequacy of the allowance is based on
the Banks' past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and an analysis of current economic
conditions. While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken into
account the views of its regulators and the current economic environment; there
can be no assurance that in the future the Banks' regulators or its economic
environment will not require further increases in the allowance.
F-11
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well collateralized and in the process
of collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 1998, 1997, and 1996.
Premises and Equipment
Land is carried at cost. Other premises and equipment are carried at cost net of
accumulated depreciation. Depreciation is computed using the straight-line and
the declining balance methods based principally on the estimated useful lives of
the assets. Maintenance and repairs are expended as incurred while major
additions and improvements are capitalized. Gains and losses on dispositions are
included in current operations.
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.
F-12
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 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 the allowance for loan
losses and accumulated depreciation. 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 files consolidated income tax returns with its
subsidiaries.
Earnings per Common Share
The Company adopted SFAS No. 128, Earnings Per Share, on December 31, 1997. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. All prior year earnings per share data have been restated to
reflect the presentation required under SFAS No. 128.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
Weighted average of common shares outstanding............................... 1,166,425 1,154,990 1,136,000
Effect of dilutive options.................................................. 54,551 7,216 -0-
---------- ----------- -----------
Weighted average of common shares outstanding effected for dilution......... 1,220,976 1,162,206 1,136,000
========== =========== ===========
</TABLE>
In May 1998, the Company issued a 2-for-1 stock split. All per share amounts
included in these financial statements have been retroactively adjusted to give
effect to this split.
Stock-Based Compensation
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 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.
F-13
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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, organizational costs, and goodwill.
Organizational costs are generally amortized over 5 years using the
straight-line method. The goodwill intangible represents a premium paid on the
purchase of assets and deposit liabilities. The asset is stated at cost, net of
accumulated amortization, which is provided using the straight-line method over
the estimated useful life of 20 years.
Off Balance Sheet Financial Instruments
In the ordinary course of business the Company 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 Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from an available line of up to
$4.5 million and a line of credit with the Federal Home Loan Bank of up to $12
million.
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.
Reclassifications
Certain amounts in 1997 and 1996 have been reclassified to conform with the 1998
presentation.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This statement requires the reporting of
financial and descriptive information about an enterprise's reportable operating
segments. This statement is effective for financial statements for periods
beginning after December 15, 1997. All of the Company's offices offer similar
products and services, are located in the same geographic region, and serve the
same customer segments of the market. As a result, management considers all
units as one operating segment and therefore feels that the basic financial
statements and related footnotes provide details related to segment reporting.
F-14
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain other
disclosures previously required. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board also issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial condition and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative is to be determined based upon the intended use of the derivative.
For certain hedge designations (cash flow and foreign currency exposure) the
derivative's gain or loss is reported as a component of other comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change. This statement is effective for financial statements
for periods beginning after June 15, 1999. Management does not believe that the
adoption of SFAS No. 133 will have a material impact on the Company's
consolidated financial statements.
NOTE 2 - BUSINESS COMBINATION
On December 1, 1998 the Company purchased First National Bank of Union County, a
wholly-owned subsidiary of Century South Banks, Inc., for $6,100,000. Assets of
approximately $46,789,991 were acquired with approximately $43,035,046 in
liabilities, resulting in a goodwill intangible of approximately $2,345,055.
Amortization of this goodwill is provided on the straight-line basis over a
period of twenty years.
The following is summary operating information for Appalachian Bancshares, Inc.
showing the effect of the business combination described in the preceding
paragraph for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
As Effect of Pro Forma
Reported Purchase Results
------------- ------------ -------------
<S> <C> <C> <C>
AS OF DECEMBER 31, 1998:
INTEREST INCOME........................................... $ 11,270,992 $ 3,430,926 $ 14,701,918
INTEREST EXPENSE.......................................... 6,498,219 1,800,728 8,298,947
NET INTEREST INCOME....................................... 4,772,773 1,630,198 6,402,971
PROVISION FOR LOAN LOSSES................................. 300,000 31,331 331,331
NONINTEREST INCOME........................................ 528,921 309,282 838,203
NONINTEREST EXPENSE....................................... 3,221,213 1,628,913 4,850,126
PROVISION (BENEFIT) FOR INCOME TAXES...................... 572,250 69,000 641,250
NET INCOME (LOSS)......................................... 1,208,231 210,236 1,418,467
</TABLE>
F-15
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2 - BUSINESS COMBINATION - CONTINUED
<TABLE>
<CAPTION>
As Effect of Pro Forma
Reported Purchase Results
-------------- ------------- ------------
<S> <C> <C> <C>
As of December 31, 1997:
Interest income........................................... $ 9,142,968 $ 4,160,221 $ 13,303,189
Interest expense.......................................... 5,262,253 2,002,085 7,264,338
Net interest income....................................... 3,880,715 2,158,136 6,038,851
Provision for loan losses................................. 480,000 952,801 1,432,801
Noninterest income........................................ 378,996 360,713 739,709
Noninterest expense....................................... 2,379,358 1,853,716 4,233,074
Provision (benefit) for income taxes...................... 382,587 (149,000) 233,587
Net income (loss)......................................... 1,017,766 (138,668) 879,098
As of December 31, 1996:
Interest income........................................... $ 6,311,297 $ 4,397,843 $ 10,709,140
Interest expense.......................................... 3,660,227 2,216,646 5,876,873
Net interest income....................................... 2,651,070 2,181,197 4,832,267
Provision for loan losses................................. 368,000 66,000 434,000
Noninterest income........................................ 252,946 389,867 642,813
Noninterest expense....................................... 1,715,372 1,561,153 3,276,525
Provision (benefit) for income taxes...................... 303,908 315,500 619,408
Net income (loss)......................................... 516,736 628,411 1,145,147
</TABLE>
NOTE 3 - 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, 1998 and 1997,
the average amount of the required reserves was $1,155,000 and $635,000,
respectively.
F-16
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4 - SECURITIES
The carrying amounts of securities as shown in the consolidated statement of
financial condition of the Company and their approximate fair values at December
31, 1998 and 1997 are presented below.
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1998
U.S. GOVERNMENT AND AGENCY SECURITIES............... $ 13,581,536 $ 72,564 $ 11,942 $ 13,642,158
STATE AND MUNICIPAL SECURITIES...................... 5,677,978 98,856 1,020 5,775,814
MORTGAGE BACKED SECURITIES.......................... 1,912,831 9,559 14,081 1,908,309
EQUITY SECURITIES................................... 614,000 -0- -0- 614,000
------------- ------------- ------------- --------------
$ 21,786,345 $ 180,979 $ 27,043 $ 21,940,281
============= ============= ============= ==============
December 31, 1997
U.S. government and agency securities............... $ 13,960,630 $ 43,613 $ 24,892 $ 13,979,351
Mortgage backed securities.......................... 1,169,148 -0- 3,914 1,165,234
Equity securities................................... 400,000 -0- -0- 400,000
------------- ------------- ------------- --------------
$ 15,529,778 $ 43,613 $ 28,806 $ 15,544,585
============= ============= ============= ==============
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1998
STATE AND MUNICIPAL SECURITIES...................... $ 6,218,354 $ 242,199 $ 3,031 $ 6,457,522
============= ============= ============= ==============
December 31, 1997
State and municipal securities...................... $ 4,181,021 $ 128,210 $ 284 $ 4,308,947
============= ============= ============= ==============
</TABLE>
At December 31, 1998, the Company's available-for-sale securities reflected net
unrealized gains of $153,936, which resulted in an increase in stockholders'
equity of $100,315, net of deferred tax liability. At December 31, 1997, the
Company's available-for-sale securities reflected net unrealized gains of
$14,807 which resulted in an increase in stockholders' equity of $9,773, net of
deferred tax liability.
The contractual maturities of securities available-for-sale at December 31, 1998
are shown as follows. 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.
F-17
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4 - SECURITIES - CONTINUED
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------- ---------------
<S> <C> <C>
As of December 31, 1998:
Securities Available-for-Sale:
Due in one year or less...................................................... $ 1,794,684 $ 1,801,575
Due after one year through five years........................................ 7,397,640 7,467,540
Due after five years through ten years....................................... 9,327,219 9,381,651
Due after ten years.......................................................... 2,652,802 2,675,515
Equity securities............................................................ 614,000 614,000
--------------- ---------------
$ 21,786,345 $ 21,940,281
=============== ===============
Securities Held-to-Maturity:
Due in one year or less...................................................... $ 250,000 $ 250,290
Due after one year through five years........................................ 1,109,321 1,137,175
Due after five through ten years............................................. 669,140 715,980
Due after ten years.......................................................... 4,189,893 4,354,077
--------------- ---------------
$ 6,218,354 $ 6,457,522
=============== ===============
</TABLE>
Mortgage-backed securities have been included in the maturity tables based upon
guaranteed payoff date of each security.
Gross realized gains and losses on the sale of securities available-for-sale for
each of the three years in the period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Gross realized gains.......................................... $ 15,956 $ 5,757 $ 5,626
Gross realized losses......................................... 6 5,835 825
</TABLE>
There were no net gains on the maturities of securities for 1998 and 1997. Net
gains on the maturities of securities for 1996 amounted to $4,093.
Other 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 investment in this stock amounted to $554,000 and $400,000 at December
31, 1998 and 1997, respectively.
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 $12,552,000 and $6,606,000 at
December 31, 1998 and 1997.
F-18
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5 - 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>
1998 1997
--------------- ---------------
<S> <C> <C>
Commercial, financial and agricultural.......................................... $ 26,883,464 $ 16,535,602
Real estate - construction...................................................... 8,542,640 5,118,961
Real estate - mortgage.......................................................... 78,965,161 50,928,334
Consumer........................................................................ 13,742,818 10,835,331
Other loans..................................................................... 1,697,012 1,165,625
--------------- ---------------
129,831,095 84,583,853
Allowance for loan losses....................................................... (1,686,395) (929,590)
--------------- ---------------
Net loans....................................................................... $ 128,144,700 $ 83,654,263
=============== ===============
</TABLE>
Total loans which the Company considered to be impaired at December 31, 1998 and
1997, were $4,000 and $15,000, respectively. All of these loans were on
nonaccrual status and had related allowances of $1,000 and $4,000, respectively.
Impaired loans consisted primarily of unsecured consumer loans as of December
31, 1998 and 1997. The average recorded investment in impaired loans for the
years ended December 31, 1998 and 1997 was approximately $10,000 and $36,000,
respectively. No material amount of interest income was recognized on impaired
loans for the years ended December 31, 1998 and 1997. For the years ended
December 31, 1998 and 1997, the difference between gross interest income that
would have been recorded in such period if the 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 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the three years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year.................................. $ 929,590 $ 655,296 $ 324,599
Charge-offs................................................... (136,222) (228,087) (38,225)
Recoveries.................................................... 34,947 22,381 922
--------------- --------------- ---------------
Net charge-offs............................................ (101,275) (205,706) (37,303)
Addition due to acquisition................................... 558,080 -0- -0-
Provision for loan losses..................................... 300,000 480,000 368,000
--------------- --------------- ---------------
Balance at end of year........................................ $ 1,686,395 $ 929,590 $ 655,296
=============== =============== ===============
</TABLE>
F-19
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Land .......................................................................... $ 851,546 $ 329,900
Buildings and improvements...................................................... 2,396,161 964,398
Furniture and equipment......................................................... 1,766,961 671,303
--------------- ---------------
5,014,668 1,965,601
Less allowance for depreciation................................................. 1,074,636 312,558
--------------- ---------------
$ 3,940,032 $ 1,653,043
=============== ===============
</TABLE>
The provisions for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 1998, 1997 and 1996, were $177,407,
$137,432, and $118,219, respectively.
NOTE 8 - DEPOSITS
The major classifications of deposits as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Noninterest-bearing demand...................................................... $ 9,287,933 $ 3,800,911
Interest-bearing demand......................................................... 48,039,917 24,431,854
Savings......................................................................... 29,008,638 20,743,964
Time ........................................................................... 51,576,805 31,635,604
Certificates of deposit of $100,000 or more..................................... 25,948,185 14,735,613
--------------- ---------------
$ 163,861,478 $ 95,347,946
=============== ===============
</TABLE>
The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 1998 and 1997 were
$25,948,185 and $14,735,613, respectively.
F-20
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 - DEPOSITS - CONTINUED
The maturities of time certificates of deposit and other time deposits issued by
the Company at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Time
Certificates
of Deposit
---------------
<S> <C>
Years ending December 31,
-------------------------
1999......................................................................... $ 59,935,110
2000......................................................................... 10,726,476
2001......................................................................... 5,485,078
2002......................................................................... 978,565
2003......................................................................... 399,761
Thereafter................................................................... -0-
---------------
$ 77,524,990
===============
</TABLE>
NOTE 9 - LONG-TERM DEBT
At December 31, 1998 and 1997, the Company had notes payable totaling
$11,007,143 and $5,320,000, respectively.
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Note payable to another financial institution, interest at prime less 3/4 of
a percentage point; principal is due in five equal annual installments
beginning January 1, 1999, unsecured......................................... $ -0- $ 1,320,000
Note payable on $8 million line of credit at FHLB, with varying maturities; $1
million due October 2002, $1 million due December 2004, $2 million due June
and September 2007, $4 million due January, September and October 2008,
interest rate varies from 5.27% to 6.77%,
secured by residential mortgages............................................. 7,407,143 4,000,000
Note payable to another financial institution, interest at prime less 3/4 of a
percentage point; 2 years interest only paid quarterly with principal paid in
8 annual installments, secured by stock of Gilmer County Bank
and First National Bank of Union County...................................... 3,600,000 -0-
--------------- ---------------
$ 11,007,143 $ 5,320,000
=============== ===============
</TABLE>
F-21
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9 - LONG-TERM DEBT - CONTINUED
Maturities of long-term debt following December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1999................................................................................ $ -0-
2000................................................................................ -0-
2001................................................................................ 450,000
2002................................................................................ 1,250,000
2003................................................................................ 450,000
Thereafter.......................................................................... 8,857,143
---------------
$ 11,007,143
===============
</TABLE>
NOTE 10 - SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Average balance during the year................................................. $ 4,095,716 $ 4,471,499
Average interest rate during the year........................................... 4.26% 4.50%
Maximum month-end balance during the year....................................... $ 4,468,355 $ 4,693,265
</TABLE>
NOTE 11 - OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Professional fees............................................. $ 220,515 $ 194,513 $ 121,102
Advertising................................................... 203,021 122,358 93,020
Stationery and supplies....................................... 166,137 116,537 105,949
Data processing............................................... 136,256 87,095 46,843
Director and committee fees................................... 125,686 119,322 18,900
Postage....................................................... 89,354 69,806 51,511
Insurance..................................................... 53,554 55,524 26,468
Taxes and licenses............................................ 46,788 25,608 22,231
Checking account expense...................................... 40,921 32,830 29,751
Correspondent bank charges.................................... 35,458 34,648 27,953
Other......................................................... 180,940 119,036 56,048
---------------- --------------- ---------------
Total other operating expenses............................. $ 1,298,630 $ 977,277 $ 599,776
================ =============== ===============
</TABLE>
F-22
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 - INCOME TAXES
Federal and state income taxes receivable (payable) as of December 31, 1998 and
1997 included in other assets and other liabilities, respectively, were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Current
Federal...................................................................... $ 95,605 $ (25,049)
State........................................................................ -0- (3,000)
</TABLE>
The components of the net deferred income tax asset included in other assets are
as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax asset:
Federal...................................................................... $ 448,671 $ 266,289
Deferred tax liability:
Federal...................................................................... (53,622) (62,323)
--------------- ---------------
Net deferred tax asset.......................................................... $ 395,049 $ 203,966
=============== ===============
</TABLE>
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Net unrealized gains on securities available for sale........................... $ (53,622) $ (5,034)
Depreciation.................................................................... (54,514) (57,289)
Allowance for loan losses....................................................... 497,302 253,064
Other........................................................................... 5,883 13,225
--------------- ---------------
$ 395,049 $ 203,966
=============== ===============
</TABLE>
The components of income tax expense for the years 1998, 1997, and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Current
Federal.................................................. $ 597,500 $ 456,013 $ 312,530
State.................................................... 37,750 -0- -0-
Deferred
Federal.................................................. (63,000) (73,426) (8,622)
---------------- --------------- ---------------
$ 572,250 $ 382,587 $ 303,908
================ =============== ===============
</TABLE>
F-23
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12 - INCOME TAXES - CONTINUED
Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 1998, 1997, and 1996 of $5,423, ($27), and $3,024,
respectively.
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, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate.......................................... 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities................................................... (7.2) (4.1) (1.0)
Tax-exempt loans........................................................ (1.1) (1.0) (1.1)
Interest expense disallowance........................................... 1.7 1.0 .4
State income tax, net of federal tax benefit............................ 1.4 -0- -0-
Other................................................................... 3.3 (2.6) 4.7
------ ----- -----
Effective income tax rate.................................................. 32.1% 27.3% 37.0%
====== ===== =====
</TABLE>
NOTE 13 - 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. 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 commitments.
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, 1998 and 1997, the Company has issued standby letters of credit of
approximately $643,000 and $385,000.
Loan Commitments: As of December 31, 1998 and 1997, the Company had commitments
outstanding to extend credit totaling approximately $16,290,000 and $11,049,000
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.
F-24
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13 - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 14 - 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. The commitments to extend credit relate primarily
to unused real estate draw lines. Commercial and standby letters of credit were
granted primarily to commercial borrowers.
The Company maintains its cash accounts at various commercial banks in Georgia.
The total cash balances are insured by the FDIC up to $100,000. Total uninsured
balances held at other commercial banks amounted to $31,000 and $929,000 at
December 31, 1998 and 1997, respectively.
NOTE 15 - STOCK OPTION PLAN
On June 1, 1997 the Company issued a total of 286,000 options, restated for the
2-for-1 stock split, to purchase its common shares to its directors and
executive officers. Each director received 22,000 shares, the Chief Financial
Officer received 44,000 shares and the President received 66,000 shares. Each of
the stock option agreements contained an option price of $8.00 per share, the
market value of the shares at the time of issuance as adjusted for the stock
split. The options vest on an equal incremental basis over a period of five
years beginning June 1, 1998.
The following sets forth certain information regarding stock options for the
year ended December 31, 1998.
<TABLE>
<CAPTION>
Fixed Options 1998 1997
- -------------- --------------------------------- ------------------------------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................. 286,000 $ 8.00 -0- $ -0-
Granted.......................................... -0- 0.00 286,000 8.00
Exercised........................................ 30,800 8.00 -0- -0-
Forfeited........................................ -0- 0.00 -0- 8.00
------------- --------------- ------------ ------------
Outstanding at end of year....................... 255,200 $ 8.00 286,000 $ 8.00
============ =============== ============ ============
Exercisable at end of year....................... 26,400 $ 8.00 -0- $ -0-
============ =============== ============ ============
</TABLE>
F-25
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15 - STOCK OPTION PLAN - CONTINUED
<TABLE>
<CAPTION>
Expiration Options
Number Date Exercisable
-------- ---------- -----------
<S> <C> <C> <C>
Options with Exercise Price of $8.00.......................... 255,200 06-01-07 26,400
</TABLE>
In October 1995, the FASB issued Financial Accounting Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation ("SFAS 123") SFAS 123 is
effective for years beginning after December 15, 1995, and allows for the option
of continuing to follow Accounting Principles Board Opinion No. 25, Accounting
for Stocks Issued to Employees, and the related Interpretations or selecting the
minimum value method of expense recognition as described in SFAS 123. The
Company has elected to apply APB Opinion No. 25 in accounting for its incentive
stock options, accordingly, no compensation cost has been recognized by the
Company. The Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below had compensation cost for the Company's
stock option plan been determined based on the fair value method at the grant
date for options under the plan.
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Net Income
As reported.................................................................. $ 1,208,231 $ 1,017,766
Pro forma.................................................................... 1,125,073 870,834
Basic Earnings Per Share
As reported.................................................................. $ 1.04 $ 0.88
Pro forma.................................................................... 0.96 0.75
Diluted Earnings Per Share
As reported.................................................................. $ 0.99 $ 0.88
Pro forma.................................................................... 0.92 0.75
</TABLE>
These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent number of shares outstanding
on a diluted basis to be 54,551 greater than that used to calculate basic
earnings per share for 1998 and 7,216 greater than that used to calculate basic
earnings per share for 1997. The dilutive effects on earnings per share for the
years ended December 31, 1998 and 1997 were $.05 and $.01, respectively.
The Company's options outstanding have a weighted average contractual life of
nine years. The weighted average fair value of options granted was $1.89 in
1997. The fair value of each grant is estimated using a fair value method with
the following assumptions used for grants in 1997: expected option life of 10
years; no expected volatility; expected dividend yield of 2.05%; and a risk free
interest rate of 7.00%.
The effects of applying FAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board.
F-26
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16 - SHAREHOLDERS' EQUITY
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 December 31, 1998, the Banks could declare dividends of approximately
$707,000 without regulatory consent, subject to the Banks' compliance with
regulatory capital restrictions. It is anticipated that any such dividends will
be used for the payment of long term debt service.
In May 1998, the Company issued a 2-for-1 stock split. All per share amounts
included in these financial statements have been retroactively adjusted to give
effect to this split.
In 1998, the Company sold 19,314 shares of stock to its ESOP plan for $310,628.
Of this amount $96,570 was allocated to common stock and $214,058 to capital
surplus. The Company also purchased 14,000 shares of common stock for $154,000,
which is reflected as treasury stock, at cost, in shareholder's equity. During
1998, the Company sold 132,500 shares of stock in a private placement sale for
$2,650,000, of which $662,500 was allocated to common stock and $1,987,500 to
capital surplus. In addition, 30,800 options were exercised for an amount
equaling $394,240, including tax benefit of $147,840, allocated among common
stock, $154,000 and capital surplus, $240,240.
In 1997, the Company sold 24,287 shares of stock to its ESOP plan for $388,607.
Of this amount, $242,870 was allocated to common stock and $145,737 to capital
surplus. The Company also purchased 30,000 shares of common stock for $274,000,
which is reflected as treasury stock, at cost, in shareholder's equity.
The Company is also required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. The Company's
ratios as of December 31, 1998 and December 31, 1997 are disclosed in note 16
following.
NOTE 17 - REGULATORY MATTERS
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company and its subsidiary banks and the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework from prompt corrective action, the Company and its
subsidiary banks must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-27
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17 - REGULATORY MATTERS - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks 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 I Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Banks meet all capital adequacy requirements to which they are
subject.
As of December 31, 1998, the most recent notification from the appropriate
regulatory agencies categorized the subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action. To remain well
capitalized the Company and its subsidiary banks will have to maintain minimum
Total Capital, Tier I Capital, and Tier I Leverage ratios as set forth in the
table below. There are no conditions or events since that notification or events
since the most recent notification that management believes have changed the
Banks' prompt corrective action category.
The Company's and Banks actual capital amounts and ratios are also presented in
the table.
<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, 1998:
TOTAL CAPITAL
CONSOLIDATED $ 10,721 7.88% $ 10,890 8.0% $ 13,612 10.0%
GILMER COUNTY BANK 10,248 9.92 8,266 8.0 10,332 10.0
FIRST NATIONAL BANK OF UNION CO. 4,147 12.70 2,612 8.0 3,265 10.0
TIER 1 CAPITAL
CONSOLIDATED 9,035 6.64 5,445 4.0 8,167 6.0
GILMER COUNTY BANK 9,120 8.83 4,133 4.0 6,199 6.0
FIRST NATIONAL BANK OF UNION CO. 3,737 11.44 1,306 4.0 1,959 6.0
TIER 1 LEVERAGE
CONSOLIDATED 9,035 4.99 7,242 4.0 9,053 5.0
GILMER COUNTY BANK 9,120 6.70 5,445 4.0 6,806 5.0
FIRST NATIONAL BANK OF UNION CO. 3,737 8.32 1,798 4.0 2,247 5.0
As of December 31, 1997:
Total Capital
Consolidated $ 7,846 9.33% $ 6,726 8.0% $ 8,407 10.0%
Gilmer County Bank 9,103 10.83 6,726 8.0 8,407 10.0
Tier 1 Capital
Consolidated 6,916 8.23 3,363 4.0 5,044 6.0
Gilmer County Bank 8,173 9.72 3,363 4.0 5,044 6.0
Tier 1 Leverage
Consolidated 6,916 6.40 4,321 4.0 5,402 5.0
Gilmer County Bank 8,173 7.56 4,322 4.0 5,403 5.0
</TABLE>
F-28
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18 - 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 contributions to the plan of
approximately $145,000 in 1998, $102,000 in 1997, and $28,000 in 1996.
NOTE 19 - LEASES
The Company has a number of operating lease agreements, involving land,
buildings, and equipment. These leases are noncancellable and expire on various
dates through the year 2028. The leases provide for renewal options and
generally require the Company to pay maintenance, insurance, and property taxes.
For the year ended December 31, 1998, rental expense for operating leases was
approximately $3,000. Rental expense for the years ended December 31, 1997 and
1996 was negligible.
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1999................................................................................ $ 32,988
2000................................................................................ 32,890
2001................................................................................ 31,800
2002................................................................................ 32,400
2003................................................................................ 33,024
Thereafter.......................................................................... 1,023,716
---------------
Total minimum lease payments........................................................ $ 1,186,818
===============
</TABLE>
NOTE 20 - RELATED PARTY TRANSACTIONS
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Company during 1998 and 1997. 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. A summary of activity and
amounts outstanding are as follows:
<TABLE>
<S> <C>
Balance at December 31, 1997....................................................................... $ 4,133,302
New loans.......................................................................................... 2,757,808
Repayments......................................................................................... (2,122,202)
Adjustments/changes in structure................................................................... 694,122
---------------
Balance at December 31, 1998....................................................................... $ 5,463,030
===============
</TABLE>
Deposits: Deposits held from related parties were $1,208,198 and $918,848 at
December 31, 1998 and 1997, respectively.
F-29
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 20 - RELATED PARTY TRANSACTIONS - CONTINUED
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 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities: For securities and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Accrued Interest Receivable: The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposit of similar remaining maturities.
Accrued Interest Payable: The carrying amount of accrued interest payable
approximates its fair value.
Short-term Borrowings: The fair value of short-term borrowings, including
securities sold under agreements to repurchase, is estimated to be approximately
the same as the carrying amount.
Long-Term Debt: Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written: The fair value of commitments and letters of credit is
estimated to be approximately the same as the notional amount of the related
commitment.
F-30
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Company's financial instruments as of December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------ ------------ ------------ ------------
(IN THOUSANDS) (in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments.................. $ 24,281 $ 24,281 $ 5,211 $ 5,211
Securities....................................... 28,159 28,398 19,726 19,854
Loans............................................ 129,831 129,685 84,584 84,683
Accrued interest receivable...................... 1,320 1,320 972 972
------------ ------------ ------------ ------------
TOTAL FINANCIAL ASSETS........................ $ 183,591 $ 183,684 $ 110,493 $ 110,720
============ ============ ============ ============
FINANCIAL LIABILITIES
Deposits......................................... $ 163,861 $ 164,921 $ 95,348 $ 95,479
Securities sold under agreements to repurchase... 2,478 2,478 4,228 4,228
Accrued interest payable......................... 666 666 188 188
Long-term debt................................... 11,007 11,192 5,320 5,376
------------ ------------ ------------ ------------
TOTAL FINANCIAL LIABILITIES................... $ 178,012 $ 179,257 $ 105,084 $ 105,271
============ ============ ============ ============
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit..................... $ 16,290 $ 16,290 $ 11,049 $ 11,049
Standby letters of credit........................ 643 643 385 385
------------ ------------ ------------ ------------
TOTAL UNRECOGNIZED FINANCIAL
INSTRUMENTS................................. $ 16,933 $ 16,933 $ 11,434 $ 11,434
============ ============ ============ ============
</TABLE>
NOTE 22 - YEAR 2000 ISSUES
The Year 2000 issue is the result of shortcomings in many electronic data
processing systems and other electronic equipment that may adversely affect the
Company's operations as early as fiscal year 1999.
The Company has completed an inventory of computer systems and other electronic
equipment that may be affected by the Year 2000 issue and that are necessary to
conducting the Company's operations. Based on this inventory, the Company has
upgraded or replaced various software and hardware items. Testing and validation
of the system for the Year 2000 compliance is currently being performed.
Because of the unprecedented nature of the Year 2000 issue, its effects and the
success of related remediation efforts will not be fully determinable until the
Year 2000 and thereafter.
F-31
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 23 - CONDENSED PARENT INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks...................................................... $ 28,222 $ 63,487
Investment in Subsidiaries (equity method) eliminated upon consolidation..... 15,301,472 8,215,672
Intangibles, net............................................................. -0- 20,894
Other assets................................................................. -0- -0-
--------------- ---------------
TOTAL ASSETS............................................................... $ 15,329,694 $ 8,300,053
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable................................................................. $ 3,600,000 $ 1,320,000
Other liabilities............................................................ 250,000 -0-
--------------- ---------------
Total Liabilities.......................................................... 3,850,000 1,320,000
Total Shareholders' Equity................................................. 11,479,694 6,980,053
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 15,329,694 $ 8,300,053
=============== ===============
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries - eliminated upon consolidation $ 500,000 $ -0- 30,000
EXPENSES
Interest................................................... 93,406 78,517 4,667
Other expenses............................................. 135,701 15,525 2,430
------------- ------------ ------------
229,107 94,042 7,097
------------- ------------ ------------
Income before income taxes and equity in undistributed
earnings of subsidiaries................................... 270,893 (94,042) 22,903
Income tax benefits........................................... (42,101) (30,913) (2,413)
------------- ------------ ------------
Income before equity in undistributed earnings of subsidiaries 312,994 (63,129) 25,316
Equity in undistributed earnings of subsidiaries.............. 895,237 1,080,895 491,420
------------- ------------ ------------
Net Income............................................... $ 1,208,231 $ 1,017,766 $ 516,736
============= ============ ============
</TABLE>
F-32
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 23 - CONDENSED PARENT INFORMATION - CONTINUED
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
---------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................. $ 1,208,231 $ 1,017,766 $ 516,736
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiaries........... (895,237) (1,080,895) (491,420)
Provision for amortization............................... -0- 5,832 2,430
Other.................................................... 270,873 (4,667) (26,902)
---------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.... 583,867 (61,964) 844
---------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of bank........................................ (6,100,000) -0- -0-
Capital injection in subsidiaries.......................... -0- (610,000) (700,000)
---------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES.................. (6,100,000) (610,000) (700,000)
---------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt................... 3,600,000 620,000 700,000
Repayment of long-term debt................................ (1,320,000) -0- -0-
Proceeds from issuance of common stock..................... 3,354,868 388,607 -0-
Purchases of treasury stock................................ (154,000) (274,000) -0-
---------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 5,480,868 734,607 700,000
---------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..................... (35,265) 62,643 844
---------------- -------------- --------------
Cash and cash equivalents at beginning of year................ 63,487 844 -0-
---------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 28,222 $ 63,487 $ 844
================ ============== ==============
Cash paid during the year for:
Interest................................................... $ 93,406 $ 83,184 $ -0-
</TABLE>
F-33
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
DECEMBER 31, 1998, 1997 AND 1996
NOTE 24 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly results of operations for the four quarters ended December 31
are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ---------- ------- ---------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
1998:
TOTAL INTEREST INCOME....................... $ 2,514 $ 2,677 $ 2,761 $ 3,318
TOTAL INTEREST EXPENSE...................... 1,464 1,581 1,620 1,832
PROVISION FOR LOAN LOSSES................... 110 70 60 60
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES................ 940 1,026 1,081 1,426
SECURITIES GAINS (LOSSES)................... -0- 14 1 -0-
TOTAL NONINTEREST INCOME.................... 109 125 128 152
TOTAL NONINTEREST EXPENSE................... 660 742 783 1,036
INCOME TAX EXPENSE.......................... 150 130 120 172
NET INCOME.................................. 239 293 307 370
PER COMMON SHARE:
BASIC EARNINGS........................... 0.21 0.25 0.27 0.31
DILUTED EARNINGS......................... 0.20 0.24 0.25 0.30
1997:
Total interest income....................... $ 2,170 $ 2,175 $ 2,298 $ 2,499
Total interest expense...................... 1,211 1,277 1,347 1,427
Provision for loan losses................... 140 75 85 180
Net interest income after
provision for loan losses................ 819 823 866 892
Securities gains (losses)................... 5 (5) 1 -0-
Total noninterest income.................... 81 105 98 94
Total noninterest expense................... 549 600 606 624
Income tax expense.......................... 115 100 120 48
Net income.................................. 241 223 239 314
Per Common Share:
Basic earnings........................... 0.21 0.20 0.21 0.26
Diluted earnings......................... 0.21 0.20 0.20 0.26
</TABLE>
F-34
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<S> <C>
2.1 Purchase Sale and Assumption Agreement, dated July 10, 1998, by and
between Century South Banks, Inc. and the Company (included as Exhibit
2.1 to the Current Report on Form 8-K of the Company dated November 30,
1998 (File No. 000-21383) 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 (File No. 000-21383), previously filed with the Commission and
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 (File
No. 000-21383), previously filed with the Commission and
incorporated herein by reference).
4.1 Registration Rights Agreement, dated November 30, 1998, by and among
the Company and Community Financial Services, Inc.
4.2 Registration Rights Agreement, dated November 30, 1998, by and among
the Company and Ellijay Telephone Company, Inc.
4.3 Registration Rights Agreement, dated November 30, 1998, by and among
the Company and JBC Bancshares, Inc.
10.1 1997 Directors' Non-Qualified Stock Option Plan (included as Exhibit
10.1 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996 (File No. 000-21383) and incorporated herein by
reference).*
10.2 1997 Employee Incentive Stock Incentive Plan (included as Exhibit 10.2
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996 (File No. 000-21383) and incorporated herein by
reference).*
10.3 Adoption Agreement for the Appalachian Bancshares, Inc. Section 401(k)
Profit Sharing Plan (filed as Exhibit 4.3(a) to the Company's
Registration Statement on Form S-8 (No. 333-27127) and incorporated
herein by reference).
10.4 Georgia Bankers Association Master 401(k) Profit Sharing Plan (filed as
Exhibit 4.3(b) to the Company's Registration Statement on Form S-8 (No.
333-27127) and incorporated herein by reference).
10.5 First Amendment to the Georgia Bankers Association Master Section
401(k) Profit Sharing Plan (filed as Exhibit 4.3(c) to the Company's
Registration Statement on Form S-8 (No. 333-27127) and incorporated
herein by reference).
</TABLE>
<PAGE> 81
<TABLE>
<S> <C>
10.6 Form of Deferred Fee Agreement between Gilmer County Bank and certain
directors and executive officers, with addendum (filed as Exhibit 10.6
to the Company's Quarterly Report on Form 10-QSB for the period ended
June 30, 1997 (File No. 000-21383) and incorporated herein by
reference).
10.7 Loan and Stock Pledge Agreement, dated as of November 30, 1998, between
the Company and The Bankers Bank.
10.8 Promissory Note, dated November 30, 1998, issued by the Company to The
Bankers Bank.
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule (for SEC use only)
99 Information required by Form 11-K with respect to the Appalachian
Bancshares, Inc. Section 401(k) Profit Sharing Plan will be filed as an
amendment to this Form 10-KSB within 180 days after the end of the
fiscal year of the plan as permitted by Rule 15d-21 under the
Securities Exchange Act of 1934.
</TABLE>
* The referenced exhibit is a compensatory contract, plan or arrangement.
<PAGE> 1
EXHIBIT 4.1
REGISTRATION RIGHTS AGREEMENT
This Agreement is made and entered into this 30th day of November,
1998, by and among APPALACHIAN BANCSHARES, INC., a Georgia corporation
(hereinafter called the "Company"), and the undersigned shareholders of the
Company (hereinafter called the "Shareholders"), for themselves and their
successors and assigns.
WHEREAS, concurrently with the execution of this Agreement, the Company
has issued to Shareholders an aggregate of 50,000 shares of the Common Stock of
the Company in connection with those certain subscription agreements, each dated
as of November 30, 1998, between the Company and each of the Shareholders
(hereinafter called the "Issued Shares"); and
WHEREAS, said Issued Shares have been issued to Shareholders without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and the Company and Shareholders desire to provide hereunder for
compliance therewith and for the registration of certain of the Issued Shares;
and
WHEREAS, the Board of Directors of the Company has approved this
Registration Rights Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
. Certain Other Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Registrable Securities" shall mean the Issued Shares, or any portion
thereof, which have not been sold pursuant to a registration statement under the
Securities Act or pursuant to the Commission's Rule 144 (or pursuant to any
other exemption from registration which has effected a removal of restrictions
on the transfer of the Issues Shares).
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers and
responsibility for administering the Securities Act.
"Common Stock" shall mean common stock of the Company, $5.00 par value.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended (or any similar successor statute) and the rules and regulations
thereunder, all as the same shall be in effect at the time.
"Initiating Holders" shall mean any holder or holders who, in the
aggregate, own a majority of the Registrable Securities.
<PAGE> 2
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and this Agreement, and the declaration or
ordering of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company
in complying with Section 3 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company (including any fees incurred by Company counsel for
advice rendered to Shareholders), blue sky fees and expenses, fees of the
National Association of Securities Dealers, Inc. and accountants' expenses,
including without limitation, any special audits or "comfort" letters incident
to, or required by, any such registration, and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting discounts and commissions.
. Restrictions on Transfer. Each of the Shareholders represents to
the Company that it is acquiring the Issued Shares for its own investment
account and without a view to the subsequent public distribution of the Issued
Shares, otherwise than pursuant to an effective registration statement under the
Securities Act or an exemption therefrom. Each certificate for Issued Shares,
issued to Shareholders and to any subsequent holder, which have not been sold
pursuant to an effective registration statement under the Securities Act or
pursuant to the Commission's Rule 144, or as to which the restrictions on
transfer have not been, otherwise, removed, as hereinafter provided, shall bear
a restrictive legend reciting that the same have not been registered pursuant to
the Securities Act and may not be transferred in the absence of an effective
registration statement as to such shares or an exemption from the registration
requirements thereof. Prior to any proposed transfer of any Issued Shares
containing such restrictive legends, except pursuant to an effective
registration statement under the Securities Act, the holder thereof shall give
written notice to the Company of its intention to effect such transfer. Each
such notice shall describe the manner of the proposed transfer and shall be
accompanied by an opinion of counsel, experienced in securities laws matters and
reasonably acceptable to the Company and its counsel, to the effect that the
proposed transfer may be effected without registration under the Securities Act,
whereupon the holder of such Issued Shares shall be entitled to transfer such
securities in accordance with the terms of its notice and such opinion.
Restrictions imposed under this Section 2 upon the transferability of the Issued
Shares shall cease when
() a registration statement covering such Issued Shares becomes
effective under the Securities Act, or
() the Company receives from the holder thereof an opinion of
counsel experienced in securities laws matters, which counsel shall be
reasonably acceptable to the Company, that such restrictions are no longer
required in order to insure compliance with the Securities Act.
<PAGE> 3
When such restrictions terminate, the Company shall, or shall instruct its
Transfer Agent to, issue new securities in the name of the holder not bearing
the restrictive legends required by this Section 2.
. Registration under Securities Act.
. Registration on Request.
() Request. Upon the written request of Initiating Holders,
requesting that the Company effect the registration under the Securities Act of
all or part of such Initiating Holders' Registrable Securities and specifying
the intended method or methods of disposition thereof, the Company will
promptly, but in any event within ten business days, give written notice of such
requested registration to all holders of Registrable Securities and, thereupon,
will use its best efforts to effect the registration under the Securities Act
of:
() the Registrable Securities which the Company has been so
requested to register by such Initiating Holders, for disposition in
accordance with the intended method or methods of disposition stated in
such request,
() all other Registrable Securities which the Company has been
requested to register by the holders thereof by written request
delivered to the Company within ten business days after the giving of
such written notice by the Company (which request shall specify the
intended method or methods of disposition of such Registrable
Securities), and
() all shares of Common Stock which the Company may elect to
register for its own account in connection with the offering of
Registrable Securities pursuant to this Section 3.1 and Section 3.4,
all to the extent requisite to permit the disposition of the Registrable
Securities in accordance with the intended methods thereof, as specified by the
holders of a majority of the Registrable Securities so to be registered;
provided that:
(1) no registration shall be required to be effected pursuant to
this Section 3.1 from the date hereof through the first anniversary of
the date of this Agreement, and
(2) the Company shall not be required to effect more than one
registration pursuant to this Section 3.1 subsequent to the first
anniversary of the date of this Agreement, and
(3) the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.1, unless
the Initiating Holders make a request prior to the second anniversary
of the date of this Agreement, and
(4) the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.1, if the Initiating
Holders can, at the time of the request or
<PAGE> 4
within one hundred twenty-five (125) days thereafter, sell the Registrable
Securities pursuant to the Commission's Rule 144 or another exemption from
registration.
If, at the date of receipt of a registration request by Initiating
Holders, the Company has previously filed a registration statement pursuant to
the Securities Act or given notice of its intention to file a registration
statement pursuant to Section 3.2 hereof (other than on Form S-8 or S-4 or any
similar form for the registration of securities pursuant to an employee benefit
plan or business combination or reorganization), the Company may defer the
filing of any such requested registration statement to a date not later than (i)
one hundred twenty (120) days after the effective date of such prior
registration statement, or (ii) ninety days after the filing of such prior
registration statement, if such registration statement is not declared effective
within such time period, or (iii) sixty days after giving of the notice pursuant
to Section 3.2 if a registration statement is not filed by the Company within
that time period. In any such event, the Initiating Holders will be entitled to
withdraw such request and, if such request is withdrawn, such request shall not
count as a requested registration under this Section 3.1.
() Registration Statement Form. Each registration requested
pursuant to this Section 3.1 shall be effected by the filing of a registration
statement on any form which the Company is eligible to use, such form to be
selected by the Company, after consultation with counsel and after notice of the
selection of such form is delivered to the holders of all Registrable Securities
electing to participate in such registration; provided, however, that if the
holders of a majority of the Registrable Securities as to which registration has
been requested pursuant to this Section 3.1 shall so request, the Company shall
file such registration statement pursuant to the Commission's Rule 415, or any
successor rule or regulation thereto, so as to permit the continuous or delayed
offering of the Registrable Securities in accordance with the intended method of
disposition specified in the Initiating Holders' notice pursuant to subsection
(a) of this Section 3.1, but in no event shall the Company be required to
maintain the effectiveness of such registration beyond the period specified in
Section 3.3(c).
() Expenses. Except as otherwise prohibited by applicable law,
the Company will pay all Registration Expenses in connection with the
registration of Registrable Securities requested pursuant to this Section 3.1.
() Effective Registration Statement. A registration requested
pursuant to this Section 3.1 shall not be deemed to be effected unless it has
been declared effective by the Commission or otherwise becomes effective,
provided that (i) a registration which does not become effective after the
Company has substantially prepared and has filed or is in a position to file a
registration statement with respect thereto solely by reason of the refusal to
proceed of the holders of a majority of the Registrable Securities so to be
registered (other than any refusal to proceed based upon the advice of their
counsel that the registration statement, or the prospectus contained therein,
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing) shall be deemed
to have been effected by the Company pursuant to this Section 3.1, (ii) if,
after a registration has become effective and before the closing of all sales of
Issued Shares pursuant thereto, such registration is interfered with by a stop
<PAGE> 5
order, injunction or other order or requirement of the Commission or federal,
state or other governmental agency or court for any reason, such registration
shall not be deemed effective by the Company pursuant to this Section 3.1 with
respect to the Issued Shares remaining unsold and covered by such registration
statement.
() Priority of Shares. With respect to a registration requested
by the Initiating Holders pursuant to this Section 3.1, if such Initiating
Holders shall determine that the number of shares of Registrable Securities and
any other securities to be sold in any such offering should be limited due to
market conditions or otherwise, the Company will include in such registration to
the extent of the number which the Company is so advised can be sold in such
offering (i) first, Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities, on the
basis of the number of shares of such securities requested to be included by
such holders, and after all Registrable Securities requested to be registered
have been included, (ii) other securities of the Company proposed to be included
in such registration, in accordance with the priorities, if any, then existing
among the Company and the holders of such securities.
. Incidental Registration.
() Right to Include Registrable Securities. If, at any time prior
to the date which marks the second anniversary of the date of this Agreement,
the Company proposes to register any of its equity securities under the
Securities Act (other than on Form S-8 or S-4, or any similar form for the
registration of securities pursuant to an employee benefit plan or business
combination or reorganization, and as otherwise provided herein), whether for
sale for its own account or for the account of any other person, on a form and
in a manner which would permit registration of Registrable Securities for sale
to the public under the Securities Act, it will, each such time, give prompt
written notice to all holders of Registrable Securities of its intention to do
so, describing such securities and specifying the form and manner and the other
relevant facts involved in such proposed registration, and, upon the written
request of any such holder delivered to the Company within ten business days
after the giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such holder and the intended method or
methods of disposition thereof), the Company will use its best efforts to effect
the registration under the Securities Act of all Registrable Securities which
the Company has been so requested to register by the holders of Registrable
Securities (hereinafter "Requesting Holder"), to the extent requisite to permit
the disposition of the Registrable Securities in accordance with the intended
methods thereof as specified by the holders of a majority of the Registrable
Securities so to be registered, provided that:
() if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to
register such securities, the Company may, at its election, give
written notice of such determination to each Requesting Holder and
thereupon shall be relieved of its obligation to register any
Registrable Securities in connection with such registration (but not
from its obligation to pay the Registration Expenses in connection
therewith as provided in subdivision (b) of this
<PAGE> 6
Section 3.2), without prejudice, however, to the rights of any
Initiating Holders of Registrable Securities to request that such
registration be effected as a registration under Section 3.1;
() if (A) the registration so proposed by the Company involves
an underwritten offering of the securities so being registered, whether
or not for sale for the account of the Company, to be distributed by or
through one or more underwriters of recognized standing under
underwriting terms appropriate for such a transaction, (B) the Company
proposes that the securities to be registered in such underwritten
offering will not include all of the Registrable Securities requested
to be so included, and (C) the managing underwriter of such
underwritten offering shall advise the Company and the Requesting
Holders in writing that, in its judgment, the distribution of all or a
specified portion of such Registrable Securities concurrently with the
securities being distributed by such underwriters will adversely affect
the distribution of such securities by such underwriters, then the
Company may require, by written notice to each such holder, that the
distribution of all or a specified portion of such Registrable
Securities be excluded from such distribution (in case of an exclusion
of a portion of such Registrable Securities, such portion to be
allocated among such holders in proportion to the respective numbers of
shares of Registrable Securities owned by such holders) provided that,
the number of shares of Registrable Securities included shall be
reduced pro rata with any securities being offered for the account of
any Person other than the Company (other than pursuant to the "demand"
registration rights of such person);
() the Company shall not be obligated to effect any registration
of Registrable Securities under this Section 3.2 incidental to the
registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, stock
option plans or other employee benefit plans, or incidental to the
registration of any non-equity securities not convertible into equity
securities;
() the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.2 if the
Initiating Holders can at the time of the request or within one hundred
twenty-five (125) days thereafter sell the Registrable Securities
pursuant to the Commission's Rule 144 or another exemption from
registration; and
() the Company may, but shall not be obligated to, effect any
registrations pursuant to this Section 3.2.
No registrations of Registrable Securities effected under this Section 3.2 shall
relieve the Company of its obligation to effect registrations of Registrable
Securities pursuant to Section 3.1.
() Expenses. Except as otherwise prohibited by applicable law,
the Company will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Section 3.2.
<PAGE> 7
. Registration Procedures. If, and whenever, the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act, as provided in Sections 3.1 and 3.2, the
Company will promptly:
() cooperate with any underwriters for, and the holders
of, such Registrable Securities, and will enter into a usual and
customary underwriting agreement with respect thereto and take all such
other reasonable actions as are necessary or advisable to permit,
expedite and facilitate the disposition of such Registrable Securities
in the manner contemplated by the related registration statement, and
the Company will provide to the holders of such Registrable Securities,
any underwriter participating in any distribution thereof pursuant to a
registration statement, and any attorney, accountant or other agent
retained by any holder of Registrable Securities or underwriter,
reasonable access to appropriate Company officers and employees to
answer questions and to supply financial and other information
reasonably requested by any such holders of Registrable Securities,
underwriter, attorney, accountant or agent in connection with such
registration statement;
() prepare and file (within sixty days of the last date
on which the holders of Registrable Securities may notify the Company
of their request to include their Registrable Securities in such
registration in accordance herewith) with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective,
provided that, in the case of a registration of any Registrable
Securities pursuant to Section 3.2, such preparation and filing may be
delayed in the reasonable judgment of the Company, without prejudice,
however, to the rights of the Initiating Holders of Registrable
Securities to request that such registration be effected as a
registration under Section 3.1;
() prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Securities and
other securities covered by such registration statement, until the
earlier of such time as all of such Registrable Securities and such
other securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement or the expiration of ninety days after such
registration statement becomes effective; and will furnish, upon
request, to each such seller and each Requesting Holder prior to the
filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any such
amendment or supplement to which any such seller or holder shall have
reasonably objected on the grounds that such amendment or supplement
does not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder;
() furnish to each seller of such Registrable Securities
and the underwriters (if any) such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus included in such registration statement (including each
preliminary
<PAGE> 8
prospectus and any summary prospectus), in conformity with the
requirements of the Securities Act, such documents, if any,
incorporated by reference in such registration statement or prospectus,
and such other documents, as such seller may reasonably request;
() promptly, upon written request, deliver to each
seller of Registrable Securities and the underwriters (if any), copies
of all correspondence between the Commission and (i) the Company, (ii)
its counsel, or (iii) its auditors, with respect to the registration
statement;
() use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities, or "blue sky," laws
of the states of the United States as each seller shall reasonably
request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect, and do any and
all other acts and things which may be necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Registrable Securities covered by such registration statement, except
that the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this Subsection (f) be
obligated to be so qualified, or to subject itself to taxation in any
such jurisdiction, or to consent to general service of process in any
such jurisdiction;
() immediately notify each seller of Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, which untrue statement or
omission requires amendment of the registration statement or
supplementation of the prospectus, and at the request of any such
seller, prepare and furnish to such seller a reasonable number of
copies of a supplement to, or an amendment of, such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; provided,
however, that each holder of Registrable Securities registered pursuant
to such registration statement agrees that he will not sell any
Registrable Securities pursuant to such registration statement during
the time that the Company is preparing and filing with the Commission a
supplement to or an amendment of such prospectus or registration
statement;
() if such offering is underwritten, furnish to each
seller of Registrable Securities participating in the offering and to
the underwriters (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (or, if such registration
includes an underwritten public offering, an opinion dated the date of
the closing under the underwriting agreement) and (ii) a "cold comfort"
letter dated the effective date of such registration statement (or, if
such registration includes an underwritten public offering, a
<PAGE> 9
letter dated the date of the closing under the underwriting agreement)
signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration
statement, in each case covering substantially the same matters with
respect to such registrations (and the prospectus included therein) and
in the case of such accountant's letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters
delivered to underwriters in underwritten public offerings of
securities;
() in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Registrable Securities for sale in any
jurisdiction, use its best efforts to obtain its withdrawal;
() otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its securities holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but
not more than eighteen months, beginning with the first month of the
first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
() provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement; and
() use its best efforts to list all Common Stock covered
by such registration statement on each securities exchange or
securities quotation system on which any of the Common Stock is then
listed.
The Company may require each seller of Registrable Securities, as to which any
registration is being effected, to furnish the Company such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request or as shall be required by law or by the
Commission in connection therewith.
. Underwritten Offerings.
() Underwriting Agreement. If requested by the
underwriters for any underwritten offering of Registrable Securities on behalf
of the Initiating Holders of Registrable Securities, pursuant to a registration
requested under Section 3.1, the Company will enter into an underwriting
agreement, reasonably acceptable to the Company, with such underwriters for such
offering, such agreement to contain such representations and warranties by the
Company and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities to the effect and to the extent provided in
Section 3.6. The holders of Registrable Securities on whose behalf Registrable
Securities are to be distributed by such underwriters shall be parties to any
such underwriting agreement and may, at their option, require that any or all of
the representations,
<PAGE> 10
warranties and covenants of the Company to, or for the benefit of, such
underwriters shall also be made to and for the benefit of such holders. Such
holders of Registrable Securities shall not be required by the Company to make
any representations or warranties to, or agreements with, the Company or the
underwriters, other than reasonable representations, warranties or agreements
(including indemnity agreements customary in secondary offerings) regarding such
holder, such holder's Registrable Securities and such holder's intended method
or methods of disposition and any other representation required by law.
() Incidental Underwritten Offerings. If the Company, at
any time, proposes to register any of its securities under the Securities Act,
as contemplated by Section 3.2, and such securities are to be distributed by or
through one or more underwriters, the Company will use its best efforts, if
requested by any holder or holders of Registrable Securities who requests
incidental registration of Registrable Securities in connection therewith
pursuant to Section 3.2, to arrange for such underwriters to include the
Registrable Securities to be offered and sold by such holder among the
securities to be distributed by or through such underwriters, provided that, for
purposes of this sentence, best efforts shall not require the Company to reduce
the amount or sale price of such securities proposed to be distributed by or
through such underwriters. The holders of Registrable Securities to be
distributed by such underwriters shall be parties to the underwriting agreement
between the Company and such underwriters, and may, at such holders' option,
require that any or all of the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to, and
for the benefit of, such holders, and the Company will cooperate with such
holders of Registrable Securities to the end that the conditions precedent to
the obligations of the underwriters to purchase the securities of such holders
of Registrable Securities under such underwriting agreement shall not include
conditions that are not customary in underwriting agreements with respect to
combined primary and secondary distributions and shall be otherwise reasonably
satisfactory to such holders. Such holders of Registrable Securities shall not
be required by the Company to make any representations or warranties to, or
agreements with, the Company or the underwriters, other than reasonable
representations, warranties or agreements (including indemnity agreements
customary in secondary offerings) regarding such holder, such holder's
Registrable Securities and such holder's intended method or methods of
distribution and any other representation required by law.
() Allocation of Over-Allotment Option. Whenever the
Company shall effect an underwritten offering of Registrable Securities pursuant
to a registration subject to Section 3.2 hereof, the securities to be sold
pursuant to the underwriter's exercise of an over-allotment option (the
"Over-Allotment Shares"), if any, shall be allocated as follows: (i) in any such
registration in which the number of Registrable Securities requested to be
registered has not been reduced based on the advice of the managing underwriter
of such offering, then the sellers of Registrable Securities shall not be
entitled to sell any Registrable Securities as part of the Over-Allotment
Shares, and (ii) in any such registration in which the number of Registrable
Securities requested to be registered has been reduced, pursuant to the
provisions hereof based on the advice of the managing underwriter of such
offering, then the sellers of Registrable Securities participating in such
offering may sell that number of Over-Allotment Shares equal to the total number
of Over-Allotment Shares multiplied by a fraction, the numerator of which is the
number of total
<PAGE> 11
principal offering shares that constitute Registrable Securities and the
denominator of which is the total number of principal offering shares, which
shares shall be allocated on a pro rata basis among the sellers of Registrable
Securities participating in such registration, based upon the number of
Registrable Securities originally requested to be registered; provided, however,
that the number of Registrable Securities that constitute Over-Allotment Shares
shall not exceed the number of Registrable Securities requested to be
registered, but which were not registered based on the advice of the managing
underwriter.
() Selection of Underwriters. Whenever a registration
requested pursuant to Section 3.1 is for an underwritten offering, the holders
of a majority of the Registrable Securities included in such registration shall
have the right to select the managing underwriter(s) to administer the offering,
after consulting with the Company as to such selection and subject to the
approval of the Company, which approval will not be unreasonably withheld.
However, if the Company, at any time, proposes to register any of its securities
under the Securities Act for sale for its own account and such securities are to
be distributed by or through one or more underwriters, the selection of the
managing underwriter(s) shall be made by the Company and notice of the selection
thereof delivered to the holders of all Registrable Securities eligible to
participate in such registration.
() Holdback Agreements. (i) If any registration pursuant
to Section 3.1 or 3.2 shall be in connection with an underwritten public
offering, each holder of Registrable Securities agrees by acquisition of such
Registrable Securities, if so required by the managing underwriter, not to
effect any public sale or distribution of Registrable Securities (other than as
part of such underwritten public offering) for such period as the officers and
directors of the Company are required by the underwriter to cease sales or
distributions.
(ii) The Company agrees not to effect any public sale or
distribution of any of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the seven days
prior to, and during the ninety day period beginning on, the date on which any
underwritten registration pursuant to Section 3.1 or 3.2 has become effective,
except as part of such underwritten registration and except pursuant to
registrations on Form S-8 or Form S-4 or any successor thereto.
. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Registrable
Securities under the Securities Act, the Company will give the holders of
Registrable Securities, on whose behalf such Registrable Securities are to be so
registered, the opportunity to review such registration statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto, and, in the event such offering of Registrable
Securities is underwritten, will give each of them and the underwriters and
their counsel such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements, as shall be reasonably
necessary in the opinion of such holders and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act. To minimize disruption and expense to the Company during the
course of the registration process, sellers of Registrable
<PAGE> 12
Securities to be covered by any such registration statement shall coordinate
their investigation and due diligence efforts hereunder and, to the extent
practicable, will act through a single set of counsel and a single set of
accountants.
. Indemnification.
() Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will, and hereby does, indemnify and hold harmless, in the case of any
registration statement filed pursuant to Section 3.1 or 3.2, the seller of any
Registrable Securities covered by such registration statement, and if such
seller is a corporation, its directors, trustees and officers, employees and
agents, each other person who participates as an underwriter in the offering or
sale of such securities, and each other person, if any, who controls such seller
or any such underwriter (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such seller or any such director, trustee, officer, employee or agent,
participating or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions or proceedings in respect thereof) arise out of or are based upon
(x) any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any document incorporated by reference therein, (y) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(z) any violation by the Company of any rule or regulation promulgated under the
Securities Act or the Exchange Act, or other federal or state securities law
applicable to the Company and relating to any action or inaction required of the
Company in connection with such registration, and the Company will reimburse
such seller, and each such director, trustee, officer, employee or agent,
participating person and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding, provided that the Company
shall not be liable in any such case if and to the extent that any such loss,
claim, damage, liability or expense (or action or proceeding in respect thereof)
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by such seller or any such director, trustee, officer, employee
or agent, participating person or controlling person specifically for use in the
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or any such
director, trustee, officer, employee or agent, participating person or
controlling person and shall survive the transfer of such securities by such
seller.
() Indemnification by the Sellers. As a condition to including
any Registrable Securities in any registration statement filed pursuant to
Section 3.1 or 3.2, each seller of Registrable Securities shall, severally and
not jointly, indemnify and hold harmless the Company, its directors and
officers, employees and agents, and each other person, if any, who controls the
<PAGE> 13
Company, against any losses, claims, damages or liabilities, joint or several,
to which the Company or any such director or officer or any such person may
become subject under the Securities Act or any other statute or at common law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which Registrable Securities were registered under the
Securities Act, or in any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or (ii) any alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent that such alleged untrue statement or alleged omission was contained
in written information furnished to the Company by such holder specifically for
use therein, and shall reimburse the Company or such director, officer or other
person for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such loss, claim, damage, liability or
action.
() Notice of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subsections of this Section 3.6,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action, provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subsections of this Section 3.6, except and to the extent
that the indemnifying party is prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless, in such
indemnified party's reasonable judgment, a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified, to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected, provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party, and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party, or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select one
separate law firm as counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as the same shall be incurred. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement which does not include, as
an unconditional term thereof, the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
<PAGE> 14
() Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any seller of Registrable Securities exercising rights under this
Agreement, or any controlling person of any such seller, makes a claim for
indemnification pursuant to this Section 3.6, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 3.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
seller or any such controlling person in circumstances for which indemnification
is provided under this Section 3.6, then, and in each such case, the Company and
such seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) (A) in
such proportion so that such seller is responsible for the portion represented
by the percentage that the public offering price of its Registrable Securities
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative proceeds but also
the relative fault of each of the contributing parties, on the one hand, and the
party receiving contribution, on the other hand, in connection with statements
or omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable consideration; provided,
however, that in any such case, (1) no such seller will be required to
contribute any amount in excess of the aggregate public offering price of all
such Registrable Securities offered by such seller pursuant to such registration
statement; and (2) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by such seller, and the relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, expenses or liabilities (or actions
in respect thereof) referred to above in this Subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by a party entitled to
contribution in connection with investigating or defending such action or claim.
Any party entitled to contribution will promptly, after receipt of notice of
commencement of any action or proceeding against such party in respect of which
a claim for contribution may be made against another party or parties under this
Subsection (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this Subsection (d), to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any party may have at common law or otherwise.
() Other Indemnification. Indemnification similar to that
specified in the preceding subsections of this Section 3.6 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities, with respect to any required registration or other
<PAGE> 15
qualification of such Registrable Securities under any federal or state law or
regulation of governmental authority, other than the Securities Act.
() Indemnification Payments. The indemnification required by this
Section 3.6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
. Rule 144. For so long as the Company shall have any class of
its equity securities registered under Section 12(b) or Section 12(g) of the
Exchange Act, the Company shall take such action as any holder of Registrable
Securities may reasonably request, all to the extent required from time to time
to enable such holder to sell shares of Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission including, without limitation,
() filing with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
() furnishing to any holder of Registrable Securities, upon
request, (i) a written statement by the Company that it has complied with the
reporting requirements of Rule 144 and the Exchange Act; (ii) a copy of the most
recent annual or quarterly report of the Company; and (iii) such other
information as may be reasonably required to permit sales of Registrable
Securities under Rule 144.
. Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of a majority of the Registrable Securities. Each holder of any
Registrable Securities at the time shall be bound by any consent authorized by
this Section 5.
. Notices. Notices and other communications under this Agreement
shall be in writing and shall be deemed given when personally delivered, or, if
by U.S. mail, three days after mailing, by Certified First Class Mail, postage
prepaid, return receipt requested, addressed
() if to any holder of Issued Shares, at the address
shown on the stock transfer books of the Company, unless such holder
has advised the Company in writing of a different address as to which
notices shall be sent under this Agreement, and
() if to the Company, at P.O. Box G, Ellijay, Georgia
30540, to the attention of Kent Sanford, or to such other address or to
the attention of such other officer, as the Company shall have
furnished to each holder of Issued Shares at the time outstanding.
. Miscellaneous. 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. This Agreement
<PAGE> 16
may not be assigned without the approval of a majority of the holders of the
Registrable Securities. This Agreement embodies the entire agreement and
understanding between the Company and the other parties hereto and supersedes
all prior agreements and understandings relating to the subject matter hereof.
This Agreement shall be construed and enforced in accordance with and governed
by the laws of the State of Georgia. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered, as of the date first above written.
"COMPANY"
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
-----------------------------------
Title: President and CEO
--------------------------------
[CORPORATE SEAL]
Attest:
By: /s/ Kent Sanford
-----------------------------------
Title: Executive Vice President
--------------------------------
"SHAREHOLDER"
Community Financial Services, Inc.
/s/ Ken Vassey, SVP (L.S.)
---------------------------
<PAGE> 1
EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
This Agreement is made and entered into this 30th day of November,
1998, by and among APPALACHIAN BANCSHARES, INC., a Georgia corporation
(hereinafter called the "Company"), and the undersigned shareholders of the
Company (hereinafter called the "Shareholders"), for themselves and their
successors and assigns.
WHEREAS, concurrently with the execution of this Agreement, the Company
has issued to Shareholders an aggregate of 50,000 shares of the Common Stock of
the Company in connection with those certain subscription agreements, each dated
as of November 30, 1998, between the Company and each of the Shareholders
(hereinafter called the "Issued Shares"); and
WHEREAS, said Issued Shares have been issued to Shareholders without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and the Company and Shareholders desire to provide hereunder for
compliance therewith and for the registration of certain of the Issued Shares;
and
WHEREAS, the Board of Directors of the Company has approved this
Registration Rights Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
. Certain Other Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Registrable Securities" shall mean the Issued Shares, or any portion
thereof, which have not been sold pursuant to a registration statement under the
Securities Act or pursuant to the Commission's Rule 144 (or pursuant to any
other exemption from registration which has effected a removal of restrictions
on the transfer of the Issues Shares).
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers and
responsibility for administering the Securities Act.
"Common Stock" shall mean common stock of the Company, $5.00 par value.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended (or any similar successor statute) and the rules and regulations
thereunder, all as the same shall be in effect at the time.
"Initiating Holders" shall mean any holder or holders who, in the
aggregate, own a majority of the Registrable Securities.
<PAGE> 2
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and this Agreement, and the declaration or
ordering of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company
in complying with Section 3 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company (including any fees incurred by Company counsel for
advice rendered to Shareholders), blue sky fees and expenses, fees of the
National Association of Securities Dealers, Inc. and accountants' expenses,
including without limitation, any special audits or "comfort" letters incident
to, or required by, any such registration, and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting discounts and commissions.
. Restrictions on Transfer. Each of the Shareholders represents
to the Company that it is acquiring the Issued Shares for its own investment
account and without a view to the subsequent public distribution of the Issued
Shares, otherwise than pursuant to an effective registration statement under the
Securities Act or an exemption therefrom. Each certificate for Issued Shares,
issued to Shareholders and to any subsequent holder, which have not been sold
pursuant to an effective registration statement under the Securities Act or
pursuant to the Commission's Rule 144, or as to which the restrictions on
transfer have not been, otherwise, removed, as hereinafter provided, shall bear
a restrictive legend reciting that the same have not been registered pursuant to
the Securities Act and may not be transferred in the absence of an effective
registration statement as to such shares or an exemption from the registration
requirements thereof. Prior to any proposed transfer of any Issued Shares
containing such restrictive legends, except pursuant to an effective
registration statement under the Securities Act, the holder thereof shall give
written notice to the Company of its intention to effect such transfer. Each
such notice shall describe the manner of the proposed transfer and shall be
accompanied by an opinion of counsel, experienced in securities laws matters and
reasonably acceptable to the Company and its counsel, to the effect that the
proposed transfer may be effected without registration under the Securities Act,
whereupon the holder of such Issued Shares shall be entitled to transfer such
securities in accordance with the terms of its notice and such opinion.
Restrictions imposed under this Section 2 upon the transferability of the Issued
Shares shall cease when
() a registration statement covering such Issued Shares
becomes effective under the Securities Act, or
() the Company receives from the holder thereof an
opinion of counsel experienced in securities laws matters, which
counsel shall be reasonably acceptable to the Company, that such
restrictions are no longer required in order to insure compliance with
the Securities Act.
<PAGE> 3
When such restrictions terminate, the Company shall, or shall instruct its
Transfer Agent to, issue new securities in the name of the holder not bearing
the restrictive legends required by this Section 2.
. Registration under Securities Act.
. Registration on Request.
() Request. Upon the written request of Initiating Holders,
requesting that the Company effect the registration under the Securities Act of
all or part of such Initiating Holders' Registrable Securities and specifying
the intended method or methods of disposition thereof, the Company will
promptly, but in any event within ten business days, give written notice of such
requested registration to all holders of Registrable Securities and, thereupon,
will use its best efforts to effect the registration under the Securities Act
of:
() the Registrable Securities which the Company has been
so requested to register by such Initiating Holders, for disposition in
accordance with the intended method or methods of disposition stated in
such request,
() all other Registrable Securities which the Company
has been requested to register by the holders thereof by written
request delivered to the Company within ten business days after the
giving of such written notice by the Company (which request shall
specify the intended method or methods of disposition of such
Registrable Securities), and
() all shares of Common Stock which the Company may
elect to register for its own account in connection with the offering
of Registrable Securities pursuant to this Section 3.1 and Section 3.4,
all to the extent requisite to permit the disposition of the Registrable
Securities in accordance with the intended methods thereof, as specified by the
holders of a majority of the Registrable Securities so to be registered;
provided that:
(1) no registration shall be required to be effected pursuant to
this Section 3.1 from the date hereof through the first anniversary of
the date of this Agreement, and
(2) the Company shall not be required to effect more than one
registration pursuant to this Section 3.1 subsequent to the first
anniversary of the date of this Agreement, and
(3) the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.1, unless the
Initiating Holders make a request prior to the second anniversary of the
date of this Agreement, and
(4) the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.1, if the Initiating
Holders can, at the time of the request or
<PAGE> 4
within one hundred twenty-five (125) days thereafter, sell the Registrable
Securities pursuant to the Commission's Rule 144 or another exemption from
registration.
If, at the date of receipt of a registration request by Initiating
Holders, the Company has previously filed a registration statement pursuant to
the Securities Act or given notice of its intention to file a registration
statement pursuant to Section 3.2 hereof (other than on Form S-8 or S-4 or any
similar form for the registration of securities pursuant to an employee benefit
plan or business combination or reorganization), the Company may defer the
filing of any such requested registration statement to a date not later than (i)
one hundred twenty (120) days after the effective date of such prior
registration statement, or (ii) ninety days after the filing of such prior
registration statement, if such registration statement is not declared effective
within such time period, or (iii) sixty days after giving of the notice pursuant
to Section 3.2 if a registration statement is not filed by the Company within
that time period. In any such event, the Initiating Holders will be entitled to
withdraw such request and, if such request is withdrawn, such request shall not
count as a requested registration under this Section 3.1.
() Registration Statement Form. Each registration requested
pursuant to this Section 3.1 shall be effected by the filing of a registration
statement on any form which the Company is eligible to use, such form to be
selected by the Company, after consultation with counsel and after notice of the
selection of such form is delivered to the holders of all Registrable Securities
electing to participate in such registration; provided, however, that if the
holders of a majority of the Registrable Securities as to which registration has
been requested pursuant to this Section 3.1 shall so request, the Company shall
file such registration statement pursuant to the Commission's Rule 415, or any
successor rule or regulation thereto, so as to permit the continuous or delayed
offering of the Registrable Securities in accordance with the intended method of
disposition specified in the Initiating Holders' notice pursuant to subsection
(a) of this Section 3.1, but in no event shall the Company be required to
maintain the effectiveness of such registration beyond the period specified in
Section 3.3(c).
() Expenses. Except as otherwise prohibited by applicable law,
the Company will pay all Registration Expenses in connection with the
registration of Registrable Securities requested pursuant to this Section 3.1.
() Effective Registration Statement. A registration requested
pursuant to this Section 3.1 shall not be deemed to be effected unless it has
been declared effective by the Commission or otherwise becomes effective,
provided that (i) a registration which does not become effective after the
Company has substantially prepared and has filed or is in a position to file a
registration statement with respect thereto solely by reason of the refusal to
proceed of the holders of a majority of the Registrable Securities so to be
registered (other than any refusal to proceed based upon the advice of their
counsel that the registration statement, or the prospectus contained therein,
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing) shall be deemed
to have been effected by the Company pursuant to this Section 3.1, (ii) if,
after a registration has become effective and before the closing of all sales of
Issued Shares pursuant thereto, such registration is interfered with by a stop
<PAGE> 5
order, injunction or other order or requirement of the Commission or federal,
state or other governmental agency or court for any reason, such registration
shall not be deemed effective by the Company pursuant to this Section 3.1 with
respect to the Issued Shares remaining unsold and covered by such registration
statement.
() Priority of Shares. With respect to a registration requested
by the Initiating Holders pursuant to this Section 3.1, if such Initiating
Holders shall determine that the number of shares of Registrable Securities and
any other securities to be sold in any such offering should be limited due to
market conditions or otherwise, the Company will include in such registration to
the extent of the number which the Company is so advised can be sold in such
offering (i) first, Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities, on the
basis of the number of shares of such securities requested to be included by
such holders, and after all Registrable Securities requested to be registered
have been included, (ii) other securities of the Company proposed to be included
in such registration, in accordance with the priorities, if any, then existing
among the Company and the holders of such securities.
. Incidental Registration.
() Right to Include Registrable Securities. If, at any time prior
to the date which marks the second anniversary of the date of this Agreement,
the Company proposes to register any of its equity securities under the
Securities Act (other than on Form S-8 or S-4, or any similar form for the
registration of securities pursuant to an employee benefit plan or business
combination or reorganization, and as otherwise provided herein), whether for
sale for its own account or for the account of any other person, on a form and
in a manner which would permit registration of Registrable Securities for sale
to the public under the Securities Act, it will, each such time, give prompt
written notice to all holders of Registrable Securities of its intention to do
so, describing such securities and specifying the form and manner and the other
relevant facts involved in such proposed registration, and, upon the written
request of any such holder delivered to the Company within ten business days
after the giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such holder and the intended method or
methods of disposition thereof), the Company will use its best efforts to effect
the registration under the Securities Act of all Registrable Securities which
the Company has been so requested to register by the holders of Registrable
Securities (hereinafter "Requesting Holder"), to the extent requisite to permit
the disposition of the Registrable Securities in accordance with the intended
methods thereof as specified by the holders of a majority of the Registrable
Securities so to be registered, provided that:
() if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register
such securities, the Company may, at its election, give written notice of
such determination to each Requesting Holder and thereupon shall be
relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith as provided in subdivision
(b) of this
<PAGE> 6
Section 3.2), without prejudice, however, to the rights of any Initiating
Holders of Registrable Securities to request that such registration be
effected as a registration under Section 3.1;
() if (A) the registration so proposed by the Company involves
an underwritten offering of the securities so being registered, whether
or not for sale for the account of the Company, to be distributed by or
through one or more underwriters of recognized standing under
underwriting terms appropriate for such a transaction, (B) the Company
proposes that the securities to be registered in such underwritten
offering will not include all of the Registrable Securities requested to
be so included, and (C) the managing underwriter of such underwritten
offering shall advise the Company and the Requesting Holders in writing
that, in its judgment, the distribution of all or a specified portion of
such Registrable Securities concurrently with the securities being
distributed by such underwriters will adversely affect the distribution
of such securities by such underwriters, then the Company may require, by
written notice to each such holder, that the distribution of all or a
specified portion of such Registrable Securities be excluded from such
distribution (in case of an exclusion of a portion of such Registrable
Securities, such portion to be allocated among such holders in proportion
to the respective numbers of shares of Registrable Securities owned by
such holders) provided that, the number of shares of Registrable
Securities included shall be reduced pro rata with any securities being
offered for the account of any Person other than the Company (other than
pursuant to the "demand" registration rights of such person);
() the Company shall not be obligated to effect any
registration of Registrable Securities under this Section 3.2 incidental
to the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, stock option
plans or other employee benefit plans, or incidental to the registration
of any non-equity securities not convertible into equity securities;
() the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.2 if the
Initiating Holders can at the time of the request or within one hundred
twenty-five (125) days thereafter sell the Registrable Securities
pursuant to the Commission's Rule 144 or another exemption from
registration; and
() the Company may, but shall not be obligated to, effect any
registrations pursuant to this Section 3.2.
No registrations of Registrable Securities effected under this Section 3.2 shall
relieve the Company of its obligation to effect registrations of Registrable
Securities pursuant to Section 3.1.
() Expenses. Except as otherwise prohibited by applicable law,
the Company will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this Section 3.2.
<PAGE> 7
. Registration Procedures. If, and whenever, the
Company is required to use its best efforts to effect the registration of any
Registrable Securities under the Securities Act, as provided in Sections 3.1 and
3.2, the Company will promptly:
() cooperate with any underwriters for, and the holders
of, such Registrable Securities, and will enter into a usual and
customary underwriting agreement with respect thereto and take all such
other reasonable actions as are necessary or advisable to permit,
expedite and facilitate the disposition of such Registrable Securities
in the manner contemplated by the related registration statement, and
the Company will provide to the holders of such Registrable Securities,
any underwriter participating in any distribution thereof pursuant to a
registration statement, and any attorney, accountant or other agent
retained by any holder of Registrable Securities or underwriter,
reasonable access to appropriate Company officers and employees to
answer questions and to supply financial and other information
reasonably requested by any such holders of Registrable Securities,
underwriter, attorney, accountant or agent in connection with such
registration statement;
() prepare and file (within sixty days of the last date
on which the holders of Registrable Securities may notify the Company
of their request to include their Registrable Securities in such
registration in accordance herewith) with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective,
provided that, in the case of a registration of any Registrable
Securities pursuant to Section 3.2, such preparation and filing may be
delayed in the reasonable judgment of the Company, without prejudice,
however, to the rights of the Initiating Holders of Registrable
Securities to request that such registration be effected as a
registration under Section 3.1;
() prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Securities and
other securities covered by such registration statement, until the
earlier of such time as all of such Registrable Securities and such
other securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement or the expiration of ninety days after such
registration statement becomes effective; and will furnish, upon
request, to each such seller and each Requesting Holder prior to the
filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any such
amendment or supplement to which any such seller or holder shall have
reasonably objected on the grounds that such amendment or supplement
does not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder;
() furnish to each seller of such Registrable Securities
and the underwriters (if any) such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus included in such registration statement (including each
preliminary
<PAGE> 8
prospectus and any summary prospectus), in conformity with the
requirements of the Securities Act, such documents, if any,
incorporated by reference in such registration statement or prospectus,
and such other documents, as such seller may reasonably request;
() promptly, upon written request, deliver to each
seller of Registrable Securities and the underwriters (if any), copies
of all correspondence between the Commission and (i) the Company, (ii)
its counsel, or (iii) its auditors, with respect to the registration
statement;
() use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities, or "blue sky," laws
of the states of the United States as each seller shall reasonably
request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect, and do any and
all other acts and things which may be necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Registrable Securities covered by such registration statement, except
that the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this Subsection (f) be
obligated to be so qualified, or to subject itself to taxation in any
such jurisdiction, or to consent to general service of process in any
such jurisdiction;
() immediately notify each seller of Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, which untrue statement or
omission requires amendment of the registration statement or
supplementation of the prospectus, and at the request of any such
seller, prepare and furnish to such seller a reasonable number of
copies of a supplement to, or an amendment of, such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; provided,
however, that each holder of Registrable Securities registered pursuant
to such registration statement agrees that he will not sell any
Registrable Securities pursuant to such registration statement during
the time that the Company is preparing and filing with the Commission a
supplement to or an amendment of such prospectus or registration
statement;
() if such offering is underwritten, furnish to each
seller of Registrable Securities participating in the offering and to
the underwriters (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (or, if such registration
includes an underwritten public offering, an opinion dated the date of
the closing under the underwriting agreement) and (ii) a "cold comfort"
letter dated the effective date of such registration statement (or, if
such registration includes an underwritten public offering, a
<PAGE> 9
letter dated the date of the closing under the underwriting agreement)
signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration
statement, in each case covering substantially the same matters with
respect to such registrations (and the prospectus included therein) and
in the case of such accountant's letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters
delivered to underwriters in underwritten public offerings of
securities;
() in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Registrable Securities for sale in any
jurisdiction, use its best efforts to obtain its withdrawal;
() otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its securities holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but
not more than eighteen months, beginning with the first month of the
first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
() provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement; and
() use its best efforts to list all Common Stock covered
by such registration statement on each securities exchange or
securities quotation system on which any of the Common Stock is then
listed.
The Company may require each seller of Registrable Securities, as to which any
registration is being effected, to furnish the Company such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request or as shall be required by law or by the
Commission in connection therewith.
. Underwritten Offerings.
() Underwriting Agreement. If requested by the
underwriters for any underwritten offering of Registrable Securities on behalf
of the Initiating Holders of Registrable Securities, pursuant to a registration
requested under Section 3.1, the Company will enter into an underwriting
agreement, reasonably acceptable to the Company, with such underwriters for such
offering, such agreement to contain such representations and warranties by the
Company and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities to the effect and to the extent provided in
Section 3.6. The holders of Registrable Securities on whose behalf Registrable
Securities are to be distributed by such underwriters shall be parties to any
such underwriting agreement and may, at their option, require that any or all of
the representations,
<PAGE> 10
warranties and covenants of the Company to, or for the benefit of, such
underwriters shall also be made to and for the benefit of such holders. Such
holders of Registrable Securities shall not be required by the Company to make
any representations or warranties to, or agreements with, the Company or the
underwriters, other than reasonable representations, warranties or agreements
(including indemnity agreements customary in secondary offerings) regarding such
holder, such holder's Registrable Securities and such holder's intended method
or methods of disposition and any other representation required by law.
() Incidental Underwritten Offerings. If the Company, at
any time, proposes to register any of its securities under the Securities Act,
as contemplated by Section 3.2, and such securities are to be distributed by or
through one or more underwriters, the Company will use its best efforts, if
requested by any holder or holders of Registrable Securities who requests
incidental registration of Registrable Securities in connection therewith
pursuant to Section 3.2, to arrange for such underwriters to include the
Registrable Securities to be offered and sold by such holder among the
securities to be distributed by or through such underwriters, provided that, for
purposes of this sentence, best efforts shall not require the Company to reduce
the amount or sale price of such securities proposed to be distributed by or
through such underwriters. The holders of Registrable Securities to be
distributed by such underwriters shall be parties to the underwriting agreement
between the Company and such underwriters, and may, at such holders' option,
require that any or all of the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to, and
for the benefit of, such holders, and the Company will cooperate with such
holders of Registrable Securities to the end that the conditions precedent to
the obligations of the underwriters to purchase the securities of such holders
of Registrable Securities under such underwriting agreement shall not include
conditions that are not customary in underwriting agreements with respect to
combined primary and secondary distributions and shall be otherwise reasonably
satisfactory to such holders. Such holders of Registrable Securities shall not
be required by the Company to make any representations or warranties to, or
agreements with, the Company or the underwriters, other than reasonable
representations, warranties or agreements (including indemnity agreements
customary in secondary offerings) regarding such holder, such holder's
Registrable Securities and such holder's intended method or methods of
distribution and any other representation required by law.
() Allocation of Over-Allotment Option. Whenever the
Company shall effect an underwritten offering of Registrable Securities pursuant
to a registration subject to Section 3.2 hereof, the securities to be sold
pursuant to the underwriter's exercise of an over-allotment option (the
"Over-Allotment Shares"), if any, shall be allocated as follows: (i) in any such
registration in which the number of Registrable Securities requested to be
registered has not been reduced based on the advice of the managing underwriter
of such offering, then the sellers of Registrable Securities shall not be
entitled to sell any Registrable Securities as part of the Over-Allotment
Shares, and (ii) in any such registration in which the number of Registrable
Securities requested to be registered has been reduced, pursuant to the
provisions hereof based on the advice of the managing underwriter of such
offering, then the sellers of Registrable Securities participating in such
offering may sell that number of Over-Allotment Shares equal to the total number
of Over-Allotment Shares multiplied by a fraction, the numerator of which is the
number of total
<PAGE> 11
principal offering shares that constitute Registrable Securities and the
denominator of which is the total number of principal offering shares, which
shares shall be allocated on a pro rata basis among the sellers of Registrable
Securities participating in such registration, based upon the number of
Registrable Securities originally requested to be registered; provided, however,
that the number of Registrable Securities that constitute Over-Allotment Shares
shall not exceed the number of Registrable Securities requested to be
registered, but which were not registered based on the advice of the managing
underwriter.
() Selection of Underwriters. Whenever a registration
requested pursuant to Section 3.1 is for an underwritten offering, the holders
of a majority of the Registrable Securities included in such registration shall
have the right to select the managing underwriter(s) to administer the offering,
after consulting with the Company as to such selection and subject to the
approval of the Company, which approval will not be unreasonably withheld.
However, if the Company, at any time, proposes to register any of its securities
under the Securities Act for sale for its own account and such securities are to
be distributed by or through one or more underwriters, the selection of the
managing underwriter(s) shall be made by the Company and notice of the selection
thereof delivered to the holders of all Registrable Securities eligible to
participate in such registration.
() Holdback Agreements. (i) If any registration pursuant
to Section 3.1 or 3.2 shall be in connection with an underwritten public
offering, each holder of Registrable Securities agrees by acquisition of such
Registrable Securities, if so required by the managing underwriter, not to
effect any public sale or distribution of Registrable Securities (other than as
part of such underwritten public offering) for such period as the officers and
directors of the Company are required by the underwriter to cease sales or
distributions.
(ii) The Company agrees not to effect any public sale or
distribution of any of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the seven days
prior to, and during the ninety day period beginning on, the date on which any
underwritten registration pursuant to Section 3.1 or 3.2 has become effective,
except as part of such underwritten registration and except pursuant to
registrations on Form S-8 or Form S-4 or any successor thereto.
. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Registrable
Securities under the Securities Act, the Company will give the holders of
Registrable Securities, on whose behalf such Registrable Securities are to be so
registered, the opportunity to review such registration statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto, and, in the event such offering of Registrable
Securities is underwritten, will give each of them and the underwriters and
their counsel such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements, as shall be reasonably
necessary in the opinion of such holders and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act. To minimize disruption and expense to the Company during the
course of the registration process, sellers of Registrable
<PAGE> 12
Securities to be covered by any such registration statement shall coordinate
their investigation and due diligence efforts hereunder and, to the extent
practicable, will act through a single set of counsel and a single set of
accountants.
. Indemnification.
() Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will, and hereby does, indemnify and hold harmless, in the case of any
registration statement filed pursuant to Section 3.1 or 3.2, the seller of any
Registrable Securities covered by such registration statement, and if such
seller is a corporation, its directors, trustees and officers, employees and
agents, each other person who participates as an underwriter in the offering or
sale of such securities, and each other person, if any, who controls such seller
or any such underwriter (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such seller or any such director, trustee, officer, employee or agent,
participating or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions or proceedings in respect thereof) arise out of or are based upon
(x) any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any document incorporated by reference therein, (y) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(z) any violation by the Company of any rule or regulation promulgated under the
Securities Act or the Exchange Act, or other federal or state securities law
applicable to the Company and relating to any action or inaction required of the
Company in connection with such registration, and the Company will reimburse
such seller, and each such director, trustee, officer, employee or agent,
participating person and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding, provided that the Company
shall not be liable in any such case if and to the extent that any such loss,
claim, damage, liability or expense (or action or proceeding in respect thereof)
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by such seller or any such director, trustee, officer, employee
or agent, participating person or controlling person specifically for use in the
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or any such
director, trustee, officer, employee or agent, participating person or
controlling person and shall survive the transfer of such securities by such
seller.
() Indemnification by the Sellers. As a condition to including
any Registrable Securities in any registration statement filed pursuant to
Section 3.1 or 3.2, each seller of Registrable Securities shall, severally and
not jointly, indemnify and hold harmless the Company, its directors and
officers, employees and agents, and each other person, if any, who controls the
<PAGE> 13
Company, against any losses, claims, damages or liabilities, joint or several,
to which the Company or any such director or officer or any such person may
become subject under the Securities Act or any other statute or at common law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which Registrable Securities were registered under the
Securities Act, or in any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or (ii) any alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent that such alleged untrue statement or alleged omission was contained
in written information furnished to the Company by such holder specifically for
use therein, and shall reimburse the Company or such director, officer or other
person for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such loss, claim, damage, liability or
action.
() Notice of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subsections of this Section 3.6,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action, provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subsections of this Section 3.6, except and to the extent
that the indemnifying party is prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless, in such
indemnified party's reasonable judgment, a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified, to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected, provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party, and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party, or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select one
separate law firm as counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as the same shall be incurred. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement which does not include, as
an unconditional term thereof, the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
<PAGE> 14
() Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any seller of Registrable Securities exercising rights under this
Agreement, or any controlling person of any such seller, makes a claim for
indemnification pursuant to this Section 3.6, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 3.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
seller or any such controlling person in circumstances for which indemnification
is provided under this Section 3.6, then, and in each such case, the Company and
such seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) (A) in
such proportion so that such seller is responsible for the portion represented
by the percentage that the public offering price of its Registrable Securities
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative proceeds but also
the relative fault of each of the contributing parties, on the one hand, and the
party receiving contribution, on the other hand, in connection with statements
or omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable consideration; provided,
however, that in any such case, (1) no such seller will be required to
contribute any amount in excess of the aggregate public offering price of all
such Registrable Securities offered by such seller pursuant to such registration
statement; and (2) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by such seller, and the relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, expenses or liabilities (or actions
in respect thereof) referred to above in this Subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by a party entitled to
contribution in connection with investigating or defending such action or claim.
Any party entitled to contribution will promptly, after receipt of notice of
commencement of any action or proceeding against such party in respect of which
a claim for contribution may be made against another party or parties under this
Subsection (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this Subsection (d), to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any party may have at common law or otherwise.
() Other Indemnification. Indemnification similar to that
specified in the preceding subsections of this Section 3.6 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities, with respect to any required registration or other
<PAGE> 15
qualification of such Registrable Securities under any federal or state law or
regulation of governmental authority, other than the Securities Act.
() Indemnification Payments. The indemnification required by this
Section 3.6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
. Rule 144. For so long as the Company shall have any class of
its equity securities registered under Section 12(b) or Section 12(g) of the
Exchange Act, the Company shall take such action as any holder of Registrable
Securities may reasonably request, all to the extent required from time to time
to enable such holder to sell shares of Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission including, without limitation,
() filing with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
() furnishing to any holder of Registrable Securities, upon
request, (i) a written statement by the Company that it has complied with the
reporting requirements of Rule 144 and the Exchange Act; (ii) a copy of the most
recent annual or quarterly report of the Company; and (iii) such other
information as may be reasonably required to permit sales of Registrable
Securities under Rule 144.
. Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of a majority of the Registrable Securities. Each holder of any
Registrable Securities at the time shall be bound by any consent authorized by
this Section 5.
. Notices. Notices and other communications under this Agreement
shall be in writing and shall be deemed given when personally delivered, or, if
by U.S. mail, three days after mailing, by Certified First Class Mail, postage
prepaid, return receipt requested, addressed
() if to any holder of Issued Shares, at the address
shown on the stock transfer books of the Company, unless such holder
has advised the Company in writing of a different address as to which
notices shall be sent under this Agreement, and
() if to the Company, at P.O. Box G, Ellijay, Georgia
30540, to the attention of Kent Sanford, or to such other address or to
the attention of such other officer, as the Company shall have
furnished to each holder of Issued Shares at the time outstanding.
. Miscellaneous. 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. This Agreement
<PAGE> 16
may not be assigned without the approval of a majority of the holders of the
Registrable Securities. This Agreement embodies the entire agreement and
understanding between the Company and the other parties hereto and supersedes
all prior agreements and understandings relating to the subject matter hereof.
This Agreement shall be construed and enforced in accordance with and governed
by the laws of the State of Georgia. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered, as of the date first above written.
"COMPANY"
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
-----------------------------------
Title: President and CEO
--------------------------------
[CORPORATE SEAL]
Attest:
By: /s/ Kent Sanford
-----------------------------------
Title: Executive Vice President
--------------------------------
"SHAREHOLDER"
Ellijay Telephone Company
/s/ John M. Harrison (L.S.)
-----------------------------
<PAGE> 1
EXHIBIT 4.3
REGISTRATION RIGHTS AGREEMENT
This Agreement is made and entered into this 30th day of November,
1998, by and among APPALACHIAN BANCSHARES, INC., a Georgia corporation
(hereinafter called the "Company"), and the undersigned shareholders of the
Company (hereinafter called the "Shareholders"), for themselves and their
successors and assigns.
WHEREAS, concurrently with the execution of this Agreement, the Company
has issued to Shareholders an aggregate of 32,500 shares of the Common Stock of
the Company in connection with those certain subscription agreements, each dated
as of November 30, 1998, between the Company and each of the Shareholders
(hereinafter called the "Issued Shares"); and
WHEREAS, said Issued Shares have been issued to Shareholders without
registration under the Securities Act of 1933, as amended (the "Securities
Act"), and the Company and Shareholders desire to provide hereunder for
compliance therewith and for the registration of certain of the Issued Shares;
and
WHEREAS, the Board of Directors of the Company has approved this
Registration Rights Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
. Certain Other Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Registrable Securities" shall mean the Issued Shares, or any portion
thereof, which have not been sold pursuant to a registration statement under the
Securities Act or pursuant to the Commission's Rule 144 (or pursuant to any
other exemption from registration which has effected a removal of restrictions
on the transfer of the Issues Shares).
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers and
responsibility for administering the Securities Act.
"Common Stock" shall mean common stock of the Company, $5.00 par value.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended (or any similar successor statute) and the rules and regulations
thereunder, all as the same shall be in effect at the time.
"Initiating Holders" shall mean any holder or holders who, in the
aggregate, own a majority of the Registrable Securities.
<PAGE> 2
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and this Agreement, and the declaration or
ordering of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company
in complying with Section 3 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company (including any fees incurred by Company counsel for
advice rendered to Shareholders), blue sky fees and expenses, fees of the
National Association of Securities Dealers, Inc. and accountants' expenses,
including without limitation, any special audits or "comfort" letters incident
to, or required by, any such registration, and any fees and disbursements of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting discounts and commissions.
. Restrictions on Transfer. Each of the Shareholders represents
to the Company that it is acquiring the Issued Shares for its own investment
account and without a view to the subsequent public distribution of the Issued
Shares, otherwise than pursuant to an effective registration statement under the
Securities Act or an exemption therefrom. Each certificate for Issued Shares,
issued to Shareholders and to any subsequent holder, which have not been sold
pursuant to an effective registration statement under the Securities Act or
pursuant to the Commission's Rule 144, or as to which the restrictions on
transfer have not been, otherwise, removed, as hereinafter provided, shall bear
a restrictive legend reciting that the same have not been registered pursuant to
the Securities Act and may not be transferred in the absence of an effective
registration statement as to such shares or an exemption from the registration
requirements thereof. Prior to any proposed transfer of any Issued Shares
containing such restrictive legends, except pursuant to an effective
registration statement under the Securities Act, the holder thereof shall give
written notice to the Company of its intention to effect such transfer. Each
such notice shall describe the manner of the proposed transfer and shall be
accompanied by an opinion of counsel, experienced in securities laws matters and
reasonably acceptable to the Company and its counsel, to the effect that the
proposed transfer may be effected without registration under the Securities Act,
whereupon the holder of such Issued Shares shall be entitled to transfer such
securities in accordance with the terms of its notice and such opinion.
Restrictions imposed under this Section 2 upon the transferability of the Issued
Shares shall cease when
() a registration statement covering such Issued Shares
becomes effective under the Securities Act, or
() the Company receives from the holder thereof an
opinion of counsel experienced in securities laws matters, which
counsel shall be reasonably acceptable to the Company, that such
restrictions are no longer required in order to insure compliance with
the Securities Act.
<PAGE> 3
When such restrictions terminate, the Company shall, or shall instruct its
Transfer Agent to, issue new securities in the name of the holder not bearing
the restrictive legends required by this Section 2.
. Registration under Securities Act.
. Registration on Request.
() Request. Upon the written request of Initiating
Holders, requesting that the Company effect the registration under the
Securities Act of all or part of such Initiating Holders' Registrable Securities
and specifying the intended method or methods of disposition thereof, the
Company will promptly, but in any event within ten business days, give written
notice of such requested registration to all holders of Registrable Securities
and, thereupon, will use its best efforts to effect the registration under the
Securities Act of:
() the Registrable Securities which the Company
has been so requested to register by such Initiating Holders, for
disposition in accordance with the intended method or methods of
disposition stated in such request,
() all other Registrable Securities which the
Company has been requested to register by the holders thereof by
written request delivered to the Company within ten business days
after the giving of such written notice by the Company (which
request shall specify the intended method or methods of disposition
of such Registrable Securities), and
() all shares of Common Stock which the Company
may elect to register for its own account in connection with the
offering of Registrable Securities pursuant to this Section 3.1 and
Section 3.4,
all to the extent requisite to permit the disposition of the Registrable
Securities in accordance with the intended methods thereof, as specified by the
holders of a majority of the Registrable Securities so to be registered;
provided that:
(1) no registration shall be required to be effected pursuant
to this Section 3.1 from the date hereof through the first anniversary
of the date of this Agreement, and
(2) the Company shall not be required to effect more than one
registration pursuant to this Section 3.1 subsequent to the first
anniversary of the date of this Agreement, and
(3) the Company shall not be required to file any
registration statement to effect registration pursuant to this Section
3.1, unless the Initiating Holders make a request prior to the second
anniversary of the date of this Agreement, and
(4) the Company shall not be required to file any
registration statement to effect registration pursuant to this Section 3.1, if
the Initiating Holders can, at the time of the request or
<PAGE> 4
within one hundred twenty-five (125) days thereafter, sell the Registrable
Securities pursuant to the Commission's Rule 144 or another exemption from
registration.
If, at the date of receipt of a registration request by Initiating
Holders, the Company has previously filed a registration statement pursuant to
the Securities Act or given notice of its intention to file a registration
statement pursuant to Section 3.2 hereof (other than on Form S-8 or S-4 or any
similar form for the registration of securities pursuant to an employee benefit
plan or business combination or reorganization), the Company may defer the
filing of any such requested registration statement to a date not later than (i)
one hundred twenty (120) days after the effective date of such prior
registration statement, or (ii) ninety days after the filing of such prior
registration statement, if such registration statement is not declared effective
within such time period, or (iii) sixty days after giving of the notice pursuant
to Section 3.2 if a registration statement is not filed by the Company within
that time period. In any such event, the Initiating Holders will be entitled to
withdraw such request and, if such request is withdrawn, such request shall not
count as a requested registration under this Section 3.1.
() Registration Statement Form. Each registration
requested pursuant to this Section 3.1 shall be effected by the filing of a
registration statement on any form which the Company is eligible to use, such
form to be selected by the Company, after consultation with counsel and after
notice of the selection of such form is delivered to the holders of all
Registrable Securities electing to participate in such registration; provided,
however, that if the holders of a majority of the Registrable Securities as to
which registration has been requested pursuant to this Section 3.1 shall so
request, the Company shall file such registration statement pursuant to the
Commission's Rule 415, or any successor rule or regulation thereto, so as to
permit the continuous or delayed offering of the Registrable Securities in
accordance with the intended method of disposition specified in the Initiating
Holders' notice pursuant to subsection (a) of this Section 3.1, but in no event
shall the Company be required to maintain the effectiveness of such registration
beyond the period specified in Section 3.3(c).
() Expenses. Except as otherwise prohibited by
applicable law, the Company will pay all Registration Expenses in connection
with the registration of Registrable Securities requested pursuant to this
Section 3.1.
() Effective Registration Statement. A registration
requested pursuant to this Section 3.1 shall not be deemed to be effected unless
it has been declared effective by the Commission or otherwise becomes effective,
provided that (i) a registration which does not become effective after the
Company has substantially prepared and has filed or is in a position to file a
registration statement with respect thereto solely by reason of the refusal to
proceed of the holders of a majority of the Registrable Securities so to be
registered (other than any refusal to proceed based upon the advice of their
counsel that the registration statement, or the prospectus contained therein,
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing) shall be deemed
to have been effected by the Company pursuant to this Section 3.1, (ii) if,
after a registration has become effective and before the closing of all sales of
Issued Shares pursuant thereto, such registration is interfered with by a stop
<PAGE> 5
order, injunction or other order or requirement of the Commission or federal,
state or other governmental agency or court for any reason, such registration
shall not be deemed effective by the Company pursuant to this Section 3.1 with
respect to the Issued Shares remaining unsold and covered by such registration
statement.
() Priority of Shares. With respect to a registration
requested by the Initiating Holders pursuant to this Section 3.1, if such
Initiating Holders shall determine that the number of shares of Registrable
Securities and any other securities to be sold in any such offering should be
limited due to market conditions or otherwise, the Company will include in such
registration to the extent of the number which the Company is so advised can be
sold in such offering (i) first, Registrable Securities requested to be included
in such registration, pro rata among the holders of such Registrable Securities,
on the basis of the number of shares of such securities requested to be included
by such holders, and after all Registrable Securities requested to be registered
have been included, (ii) other securities of the Company proposed to be included
in such registration, in accordance with the priorities, if any, then existing
among the Company and the holders of such securities.
. Incidental Registration.
() Right to Include Registrable Securities. If, at any
time prior to the date which marks the second anniversary of the date of this
Agreement, the Company proposes to register any of its equity securities under
the Securities Act (other than on Form S-8 or S-4, or any similar form for the
registration of securities pursuant to an employee benefit plan or business
combination or reorganization, and as otherwise provided herein), whether for
sale for its own account or for the account of any other person, on a form and
in a manner which would permit registration of Registrable Securities for sale
to the public under the Securities Act, it will, each such time, give prompt
written notice to all holders of Registrable Securities of its intention to do
so, describing such securities and specifying the form and manner and the other
relevant facts involved in such proposed registration, and, upon the written
request of any such holder delivered to the Company within ten business days
after the giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such holder and the intended method or
methods of disposition thereof), the Company will use its best efforts to effect
the registration under the Securities Act of all Registrable Securities which
the Company has been so requested to register by the holders of Registrable
Securities (hereinafter "Requesting Holder"), to the extent requisite to permit
the disposition of the Registrable Securities in accordance with the intended
methods thereof as specified by the holders of a majority of the Registrable
Securities so to be registered, provided that:
() if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective
date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register
such securities, the Company may, at its election, give written notice of
such determination to each Requesting Holder and thereupon shall be
relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith as provided in subdivision
(b) of this
<PAGE> 6
Section 3.2), without prejudice, however, to the rights of any Initiating
Holders of Registrable Securities to request that such registration be
effected as a registration under Section 3.1;
() if (A) the registration so proposed by the Company involves
an underwritten offering of the securities so being registered, whether
or not for sale for the account of the Company, to be distributed by or
through one or more underwriters of recognized standing under
underwriting terms appropriate for such a transaction, (B) the Company
proposes that the securities to be registered in such underwritten
offering will not include all of the Registrable Securities requested to
be so included, and (C) the managing underwriter of such underwritten
offering shall advise the Company and the Requesting Holders in writing
that, in its judgment, the distribution of all or a specified portion of
such Registrable Securities concurrently with the securities being
distributed by such underwriters will adversely affect the distribution
of such securities by such underwriters, then the Company may require, by
written notice to each such holder, that the distribution of all or a
specified portion of such Registrable Securities be excluded from such
distribution (in case of an exclusion of a portion of such Registrable
Securities, such portion to be allocated among such holders in proportion
to the respective numbers of shares of Registrable Securities owned by
such holders) provided that, the number of shares of Registrable
Securities included shall be reduced pro rata with any securities being
offered for the account of any Person other than the Company (other than
pursuant to the "demand" registration rights of such person);
() the Company shall not be obligated to effect any
registration of Registrable Securities under this Section 3.2 incidental
to the registration of any of its securities in connection with mergers,
acquisitions, exchange offers, dividend reinvestment plans, stock option
plans or other employee benefit plans, or incidental to the registration
of any non-equity securities not convertible into equity securities;
() the Company shall not be required to file any registration
statement to effect registration pursuant to this Section 3.2 if the
Initiating Holders can at the time of the request or within one hundred
twenty-five (125) days thereafter sell the Registrable Securities
pursuant to the Commission's Rule 144 or another exemption from
registration; and
() the Company may, but shall not be obligated to, effect any
registrations pursuant to this Section 3.2.
No registrations of Registrable Securities effected under this Section
3.2 shall relieve the Company of its obligation to effect registrations
of Registrable Securities pursuant to Section 3.1.
() Expenses. Except as otherwise prohibited by applicable law,
the Company will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this
Section 3.2.
<PAGE> 7
. Registration Procedures. If, and whenever, the
Company is required to use its best efforts to effect the registration of any
Registrable Securities under the Securities Act, as provided in Sections 3.1 and
3.2, the Company will promptly:
() cooperate with any underwriters for, and the holders
of, such Registrable Securities, and will enter into a usual and
customary underwriting agreement with respect thereto and take all such
other reasonable actions as are necessary or advisable to permit,
expedite and facilitate the disposition of such Registrable Securities
in the manner contemplated by the related registration statement, and
the Company will provide to the holders of such Registrable Securities,
any underwriter participating in any distribution thereof pursuant to a
registration statement, and any attorney, accountant or other agent
retained by any holder of Registrable Securities or underwriter,
reasonable access to appropriate Company officers and employees to
answer questions and to supply financial and other information
reasonably requested by any such holders of Registrable Securities,
underwriter, attorney, accountant or agent in connection with such
registration statement;
() prepare and file (within sixty days of the last date
on which the holders of Registrable Securities may notify the Company
of their request to include their Registrable Securities in such
registration in accordance herewith) with the Commission a registration
statement with respect to such Registrable Securities and use its best
efforts to cause such registration statement to become effective,
provided that, in the case of a registration of any Registrable
Securities pursuant to Section 3.2, such preparation and filing may be
delayed in the reasonable judgment of the Company, without prejudice,
however, to the rights of the Initiating Holders of Registrable
Securities to request that such registration be effected as a
registration under Section 3.1;
() prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all Registrable Securities and
other securities covered by such registration statement, until the
earlier of such time as all of such Registrable Securities and such
other securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement or the expiration of ninety days after such
registration statement becomes effective; and will furnish, upon
request, to each such seller and each Requesting Holder prior to the
filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and shall not file any such
amendment or supplement to which any such seller or holder shall have
reasonably objected on the grounds that such amendment or supplement
does not comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder;
() furnish to each seller of such Registrable Securities
and the underwriters (if any) such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies of
the prospectus included in such registration statement (including each
preliminary
<PAGE> 8
prospectus and any summary prospectus), in conformity with the
requirements of the Securities Act, such documents, if any,
incorporated by reference in such registration statement or prospectus,
and such other documents, as such seller may reasonably request;
() promptly, upon written request, deliver to each
seller of Registrable Securities and the underwriters (if any), copies
of all correspondence between the Commission and (i) the Company, (ii)
its counsel, or (iii) its auditors, with respect to the registration
statement;
() use its best efforts to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such other securities, or "blue sky," laws
of the states of the United States as each seller shall reasonably
request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect, and do any and
all other acts and things which may be necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions of the
Registrable Securities covered by such registration statement, except
that the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this Subsection (f) be
obligated to be so qualified, or to subject itself to taxation in any
such jurisdiction, or to consent to general service of process in any
such jurisdiction;
() immediately notify each seller of Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, which untrue statement or
omission requires amendment of the registration statement or
supplementation of the prospectus, and at the request of any such
seller, prepare and furnish to such seller a reasonable number of
copies of a supplement to, or an amendment of, such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing; provided,
however, that each holder of Registrable Securities registered pursuant
to such registration statement agrees that he will not sell any
Registrable Securities pursuant to such registration statement during
the time that the Company is preparing and filing with the Commission a
supplement to or an amendment of such prospectus or registration
statement;
() if such offering is underwritten, furnish to each
seller of Registrable Securities participating in the offering and to
the underwriters (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (or, if such registration
includes an underwritten public offering, an opinion dated the date of
the closing under the underwriting agreement) and (ii) a "cold comfort"
letter dated the effective date of such registration statement (or, if
such registration includes an underwritten public offering, a
<PAGE> 9
letter dated the date of the closing under the underwriting agreement)
signed by the independent public accountants who have issued a report
on the Company's financial statements included in such registration
statement, in each case covering substantially the same matters with
respect to such registrations (and the prospectus included therein) and
in the case of such accountant's letter, with respect to events
subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters
delivered to underwriters in underwritten public offerings of
securities;
() in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any
order suspending or preventing the use of any prospectus or suspending
the qualification of any Registrable Securities for sale in any
jurisdiction, use its best efforts to obtain its withdrawal;
() otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its securities holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but
not more than eighteen months, beginning with the first month of the
first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
() provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement; and
() use its best efforts to list all Common Stock
covered by such registration statement on each securities exchange or
securities quotation system on which any of the Common Stock is then
listed.
The Company may require each seller of Registrable Securities, as to which any
registration is being effected, to furnish the Company such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request or as shall be required by law or by the
Commission in connection therewith.
. Underwritten Offerings.
() Underwriting Agreement. If requested by the
underwriters for any underwritten offering of Registrable Securities on behalf
of the Initiating Holders of Registrable Securities, pursuant to a registration
requested under Section 3.1, the Company will enter into an underwriting
agreement, reasonably acceptable to the Company, with such underwriters for such
offering, such agreement to contain such representations and warranties by the
Company and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities to the effect and to the extent provided in
Section 3.6. The holders of Registrable Securities on whose behalf Registrable
Securities are to be distributed by such underwriters shall be parties to any
such underwriting agreement and may, at their option, require that any or all of
the representations,
<PAGE> 10
warranties and covenants of the Company to, or for the benefit of, such
underwriters shall also be made to and for the benefit of such holders. Such
holders of Registrable Securities shall not be required by the Company to make
any representations or warranties to, or agreements with, the Company or the
underwriters, other than reasonable representations, warranties or agreements
(including indemnity agreements customary in secondary offerings) regarding such
holder, such holder's Registrable Securities and such holder's intended method
or methods of disposition and any other representation required by law.
() Incidental Underwritten Offerings. If the Company, at
any time, proposes to register any of its securities under the Securities Act,
as contemplated by Section 3.2, and such securities are to be distributed by or
through one or more underwriters, the Company will use its best efforts, if
requested by any holder or holders of Registrable Securities who requests
incidental registration of Registrable Securities in connection therewith
pursuant to Section 3.2, to arrange for such underwriters to include the
Registrable Securities to be offered and sold by such holder among the
securities to be distributed by or through such underwriters, provided that, for
purposes of this sentence, best efforts shall not require the Company to reduce
the amount or sale price of such securities proposed to be distributed by or
through such underwriters. The holders of Registrable Securities to be
distributed by such underwriters shall be parties to the underwriting agreement
between the Company and such underwriters, and may, at such holders' option,
require that any or all of the representations, warranties and covenants of the
Company to or for the benefit of such underwriters shall also be made to, and
for the benefit of, such holders, and the Company will cooperate with such
holders of Registrable Securities to the end that the conditions precedent to
the obligations of the underwriters to purchase the securities of such holders
of Registrable Securities under such underwriting agreement shall not include
conditions that are not customary in underwriting agreements with respect to
combined primary and secondary distributions and shall be otherwise reasonably
satisfactory to such holders. Such holders of Registrable Securities shall not
be required by the Company to make any representations or warranties to, or
agreements with, the Company or the underwriters, other than reasonable
representations, warranties or agreements (including indemnity agreements
customary in secondary offerings) regarding such holder, such holder's
Registrable Securities and such holder's intended method or methods of
distribution and any other representation required by law.
() Allocation of Over-Allotment Option. Whenever the
Company shall effect an underwritten offering of Registrable Securities pursuant
to a registration subject to Section 3.2 hereof, the securities to be sold
pursuant to the underwriter's exercise of an over-allotment option (the
"Over-Allotment Shares"), if any, shall be allocated as follows: (i) in any such
registration in which the number of Registrable Securities requested to be
registered has not been reduced based on the advice of the managing underwriter
of such offering, then the sellers of Registrable Securities shall not be
entitled to sell any Registrable Securities as part of the Over-Allotment
Shares, and (ii) in any such registration in which the number of Registrable
Securities requested to be registered has been reduced, pursuant to the
provisions hereof based on the advice of the managing underwriter of such
offering, then the sellers of Registrable Securities participating in such
offering may sell that number of Over-Allotment Shares equal to the total number
of Over-Allotment Shares multiplied by a fraction, the numerator of which is the
number of total
<PAGE> 11
principal offering shares that constitute Registrable Securities and the
denominator of which is the total number of principal offering shares, which
shares shall be allocated on a pro rata basis among the sellers of Registrable
Securities participating in such registration, based upon the number of
Registrable Securities originally requested to be registered; provided, however,
that the number of Registrable Securities that constitute Over-Allotment Shares
shall not exceed the number of Registrable Securities requested to be
registered, but which were not registered based on the advice of the managing
underwriter.
() Selection of Underwriters. Whenever a registration
requested pursuant to Section 3.1 is for an underwritten offering, the holders
of a majority of the Registrable Securities included in such registration shall
have the right to select the managing underwriter(s) to administer the offering,
after consulting with the Company as to such selection and subject to the
approval of the Company, which approval will not be unreasonably withheld.
However, if the Company, at any time, proposes to register any of its securities
under the Securities Act for sale for its own account and such securities are to
be distributed by or through one or more underwriters, the selection of the
managing underwriter(s) shall be made by the Company and notice of the selection
thereof delivered to the holders of all Registrable Securities eligible to
participate in such registration.
() Holdback Agreements. (i) If any registration pursuant
to Section 3.1 or 3.2 shall be in connection with an underwritten public
offering, each holder of Registrable Securities agrees by acquisition of such
Registrable Securities, if so required by the managing underwriter, not to
effect any public sale or distribution of Registrable Securities (other than as
part of such underwritten public offering) for such period as the officers and
directors of the Company are required by the underwriter to cease sales or
distributions.
(ii) The Company agrees not to effect any public sale or
distribution of any of its equity securities or securities convertible into or
exchangeable or exercisable for any of such securities during the seven days
prior to, and during the ninety day period beginning on, the date on which any
underwritten registration pursuant to Section 3.1 or 3.2 has become effective,
except as part of such underwritten registration and except pursuant to
registrations on Form S-8 or Form S-4 or any successor thereto.
. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Registrable
Securities under the Securities Act, the Company will give the holders of
Registrable Securities, on whose behalf such Registrable Securities are to be so
registered, the opportunity to review such registration statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto, and, in the event such offering of Registrable
Securities is underwritten, will give each of them and the underwriters and
their counsel such access to its books and records and such opportunities to
discuss the business of the Company with its officers and the independent public
accountants who have certified its financial statements, as shall be reasonably
necessary in the opinion of such holders and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act. To minimize disruption and expense to the Company during the
course of the registration process, sellers of Registrable
<PAGE> 12
Securities to be covered by any such registration statement shall coordinate
their investigation and due diligence efforts hereunder and, to the extent
practicable, will act through a single set of counsel and a single set of
accountants.
. Indemnification.
() Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will, and hereby does, indemnify and hold harmless, in the case of any
registration statement filed pursuant to Section 3.1 or 3.2, the seller of any
Registrable Securities covered by such registration statement, and if such
seller is a corporation, its directors, trustees and officers, employees and
agents, each other person who participates as an underwriter in the offering or
sale of such securities, and each other person, if any, who controls such seller
or any such underwriter (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities or expenses, joint or several, to which
such seller or any such director, trustee, officer, employee or agent,
participating or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages, liabilities or expenses
(or actions or proceedings in respect thereof) arise out of or are based upon
(x) any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Securities Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any document incorporated by reference therein, (y) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(z) any violation by the Company of any rule or regulation promulgated under the
Securities Act or the Exchange Act, or other federal or state securities law
applicable to the Company and relating to any action or inaction required of the
Company in connection with such registration, and the Company will reimburse
such seller, and each such director, trustee, officer, employee or agent,
participating person and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, liability, action or proceeding, provided that the Company
shall not be liable in any such case if and to the extent that any such loss,
claim, damage, liability or expense (or action or proceeding in respect thereof)
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company by such seller or any such director, trustee, officer, employee
or agent, participating person or controlling person specifically for use in the
preparation thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or any such
director, trustee, officer, employee or agent, participating person or
controlling person and shall survive the transfer of such securities by such
seller.
() Indemnification by the Sellers. As a condition to including
any Registrable Securities in any registration statement filed pursuant to
Section 3.1 or 3.2, each seller of Registrable Securities shall, severally and
not jointly, indemnify and hold harmless the Company, its directors and
officers, employees and agents, and each other person, if any, who controls the
<PAGE> 13
Company, against any losses, claims, damages or liabilities, joint or several,
to which the Company or any such director or officer or any such person may
become subject under the Securities Act or any other statute or at common law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which Registrable Securities were registered under the
Securities Act, or in any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or (ii) any alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent that such alleged untrue statement or alleged omission was contained
in written information furnished to the Company by such holder specifically for
use therein, and shall reimburse the Company or such director, officer or other
person for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such loss, claim, damage, liability or
action.
() Notice of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subsections of this Section 3.6,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action, provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subsections of this Section 3.6, except and to the extent
that the indemnifying party is prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless, in such
indemnified party's reasonable judgment, a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified, to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation and of liaison with
counsel so selected, provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party, and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party, or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select one
separate law firm as counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as the same shall be incurred. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement which does not include, as
an unconditional term thereof, the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
<PAGE> 14
() Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any seller of Registrable Securities exercising rights under this
Agreement, or any controlling person of any such seller, makes a claim for
indemnification pursuant to this Section 3.6, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 3.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any such
seller or any such controlling person in circumstances for which indemnification
is provided under this Section 3.6, then, and in each such case, the Company and
such seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) (A) in
such proportion so that such seller is responsible for the portion represented
by the percentage that the public offering price of its Registrable Securities
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, or (B) if the allocation
provided by clause (A) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative proceeds but also
the relative fault of each of the contributing parties, on the one hand, and the
party receiving contribution, on the other hand, in connection with statements
or omissions that resulted in such losses, claims, damages, expenses or
liabilities, as well as any other relevant equitable consideration; provided,
however, that in any such case, (1) no such seller will be required to
contribute any amount in excess of the aggregate public offering price of all
such Registrable Securities offered by such seller pursuant to such registration
statement; and (2) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, or by such seller, and the relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, expenses or liabilities (or actions
in respect thereof) referred to above in this Subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by a party entitled to
contribution in connection with investigating or defending such action or claim.
Any party entitled to contribution will promptly, after receipt of notice of
commencement of any action or proceeding against such party in respect of which
a claim for contribution may be made against another party or parties under this
Subsection (d), notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have hereunder or otherwise than under this Subsection (d), to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any party may have at common law or otherwise.
() Other Indemnification. Indemnification similar to that
specified in the preceding subsections of this Section 3.6 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities, with respect to any required registration or other
<PAGE> 15
qualification of such Registrable Securities under any federal or state law or
regulation of governmental authority, other than the Securities Act.
() Indemnification Payments. The indemnification required by this
Section 3.6 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
. Rule 144. For so long as the Company shall have any class of
its equity securities registered under Section 12(b) or Section 12(g) of the
Exchange Act, the Company shall take such action as any holder of Registrable
Securities may reasonably request, all to the extent required from time to time
to enable such holder to sell shares of Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 under the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission including, without limitation,
() filing with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
() furnishing to any holder of Registrable Securities, upon
request, (i) a written statement by the Company that it has complied with the
reporting requirements of Rule 144 and the Exchange Act; (ii) a copy of the most
recent annual or quarterly report of the Company; and (iii) such other
information as may be reasonably required to permit sales of Registrable
Securities under Rule 144.
. Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of a majority of the Registrable Securities. Each holder of any
Registrable Securities at the time shall be bound by any consent authorized by
this Section 5.
. Notices. Notices and other communications under this Agreement
shall be in writing and shall be deemed given when personally delivered, or, if
by U.S. mail, three days after mailing, by Certified First Class Mail, postage
prepaid, return receipt requested, addressed
() if to any holder of Issued Shares, at the address
shown on the stock transfer books of the Company, unless such holder
has advised the Company in writing of a different address as to which
notices shall be sent under this Agreement, and
() if to the Company, at P.O. Box G, Ellijay, Georgia
30540, to the attention of Kent Sanford, or to such other address or to
the attention of such other officer, as the Company shall have
furnished to each holder of Issued Shares at the time outstanding.
. Miscellaneous. 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. This Agreement
<PAGE> 16
may not be assigned without the approval of a majority of the holders of the
Registrable Securities. This Agreement embodies the entire agreement and
understanding between the Company and the other parties hereto and supersedes
all prior agreements and understandings relating to the subject matter hereof.
This Agreement shall be construed and enforced in accordance with and governed
by the laws of the State of Georgia. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered, as of the date first above written.
"COMPANY"
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
-----------------------------------
Title: President and CEO
--------------------------------
[CORPORATE SEAL]
Attest:
By: /s/ Kent Sanford
-----------------------------------
Title: Executive Vice President
--------------------------------
"SHAREHOLDER"
JBC Bancshares, Inc.
/s/ Mark Whitfield, Pres. (L.S.)
-----------------------------
<PAGE> 1
EXHIBIT 10.7
LOAN AND STOCK PLEDGE AGREEMENT
THIS LOAN AND STOCK PLEDGE AGREEMENT (the "Agreement"), entered into as
of November 30, 1998, between APPALACHIAN BANCSHARES, INC., a Georgia
corporation (the "Borrower"), and THE BANKERS BANK, a Georgia banking
corporation (the "Lender").
On the date hereof the Borrower is borrowing the principal amount of
Three Million Six Hundred Thousand and No/100 Dollars ($3,600,000.00) from the
Lender (the "Loan"), which will be evidenced by the Note. The Lender is willing
to make the Loan to the Borrower on the terms and conditions described below.
The Borrower and Lender agree that the payment and performance of all
obligations relating to the Loan will be secured through the pledge to the
Lender of all the issued and outstanding shares of capital stock owned or
hereafter acquired by the Borrower (the "Stock") in GILMER COUNTY BANK, having
its main office at 829 Industrial Boulevard, Ellijay, Georgia 30540 ("Gilmer")
and FIRST NATIONAL BANK OF UNION COUNTY, having its main office at 236 Highway
515, Blairsville, Georgia 30512 ("First National") (collectively, the "Banks").
Also on the date hereof, Community Financial Services, Inc. ("CFSI"), the parent
company of the Lender, is purchasing $1,000,000 of the common stock of Borrower
(the "Borrower Common Stock") pursuant to that certain Subscription Agreement,
dated as of the date hereof, between CFSI and Borrower and the related Call
Option Agreement and Registration Rights Agreement. Certain capitalized terms
used in this Agreement are defined in Section 22 of this Agreement.
In consideration of the premises and the mutual agreements and
representations in this Agreement, the Lender and the Borrower agree as follows:
1. SECURITY INTEREST.
(a) The Borrower hereby unconditionally grants and assigns to the
Lender and its successors and assigns a continuing security interest in and
security title to the Stock. The Borrower hereby delivers to the Lender all of
its right, title and interest in and to the Stock, together with certificates
representing the Stock and stock powers endorsed in blank, as security for (i)
all obligations of the Borrower to the Lender hereunder, and (ii) payment and
performance of all obligations of the Borrower to the Lender under the Note,
whether direct or indirect, absolute or contingent, now or hereafter existing,
or due or to become due. If the Borrower receives, for any reason whatsoever,
any additional shares of the capital stock of the Banks, such shares shall
thereupon constitute Stock to be held by the Lender under the terms of this
Agreement and the Borrower shall immediately deliver such shares to the Lender,
together with stock powers endorsed in blank by the Borrower. Beneficial
ownership of the Stock, including all voting, consensual and dividend rights,
shall remain in the Borrower until the occurrence of a Default.
(b) If, prior to repayment in full of the Loan, the aggregate book
value of the Stock becomes less than Seven Million Two Hundred Thousand and
No/100 Dollars ($7,200,000.00), the Borrower shall promptly deliver to the
Lender on written demand additional collateral of a
<PAGE> 2
type and value acceptable to the Lender (and the Lender's judgment in valuing
same shall be conclusive) so that the sum of the value of such additional
collateral plus the aggregate book value of the Stock is not less than of Seven
Million Two Hundred Thousand and No/100 Dollars ($7,200,000.00). The Borrower
shall also execute any security documents the Lender may reasonably request to
evidence and perfect the Lender's rights in such additional collateral. If at
any time such additional collateral is no longer required pursuant to this
Section 1(b), the Lender shall release its security interest in such additional
collateral upon the request of the Borrower.
2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants to the Lender as follows:
(a) The Borrower is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Georgia and is
qualified to do business in all jurisdictions where such qualification is
necessary. The Borrower is registered as a bank holding company with the Board
of Governors of the Federal Reserve System and the Georgia Department of Banking
and Finance. The chief executive office of the Borrower and the principal place
of business of the Borrower where the records of the Borrower are kept are
located at 829 Industrial Boulevard, Ellijay, Georgia 30540, and the Borrower's
U.S. employer identification number is 58-2242407.
(b) Gilmer is a banking corporation duly organized,
validly existing, and in good standing under the laws of the State of Georgia.
First National is a national bank duly organized, validly existing and in good
standing under the laws of the United States. Subject, in the case of First
National, to the closing of its acquisition by the Borrower from Century South
Banks, Inc. simultaneously with the funding of the Loan, the Borrower owns all
the Stock (consisting of 568,000 shares of Gilmer and 75,000 shares of First
National) and there are no other outstanding shares of capital stock and no
outstanding options, warrants or other rights which can be converted into shares
of capital stock of the Banks. The Banks have all requisite corporate power and
authority and possesses all licenses, permits and authorizations necessary for
them to own their properties and conduct their business as presently conducted.
(c) Each financial statement of the Borrower or any
Subsidiary which has been delivered to the Lender presents fairly in all
material respects the financial condition of the Borrower or such Subsidiary as
of the date indicated therein and the results of its operations for the periods
shown therein. There has been no material adverse change, either existing or
threatened, in the financial condition or operations of the Borrower or any
Subsidiary since the date of such financial statement.
(d) The Borrower has full power and authority to execute
and perform the Financing Documents. The execution, delivery, and performance by
the Borrower of the Financing Documents (i) have been duly authorized by all
requisite action by the Borrower, (ii) do not violate any provision of law, and
(iii) do not result in a breach of or constitute a default under any agreement
or other instrument to which the Borrower or any Subsidiary is a party or which
the Borrower or any Subsidiary is bound. Each of the Financing Documents
constitutes the legal, valid, and binding obligation of the Borrower enforceable
in accordance with its terms except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors' rights generally.
(e) Except for the security interest created by this
Agreement, and subject, in the case of First National, to the closing of its
acquisition by the Borrower from Century South
<PAGE> 3
Banks, Inc. simultaneously with the funding of the Loan, the Borrower owns the
Stock free and clear of all liens, charges, and encumbrances. The Stock is duly
issued, fully paid and non-assessable, and the Borrower has the unencumbered
right to pledge the Stock.
(f) There is no action, arbitration, or other proceeding
at law or in equity, or by or before any court, agency, or arbitrator, nor is
there any judgment, order, or other decree pending or threatened in writing
against the Borrower or any Subsidiary or against any of their properties or
assets which might have a material adverse effect on the Borrower, any
Subsidiary, or their respective properties or assets, taken as a whole, or which
might call into question the validity or enforceability of the Financing
Documents, or which might involve the alleged violation by the Borrower or any
Subsidiary of any law, rule or regulation if such violation could have a
material adverse effect on the Borrower, and Subsidiary, or their respective
property or assets.
(g) No consent or other authorization or filing with or
of any governmental authority or other public body on the part of the Borrower
or any Subsidiary is required in connection with the Borrower's execution,
delivery, or performance of the Financing Documents; or if required, all such
prerequisites have been fully satisfied.
(h) None of the transactions contemplated in this
Agreement (including, without limitation, the use of the proceeds of the Loan)
will violate or result in a violation of Section 7 of the Securities Exchange
Act of 1934, or any regulations issued pursuant thereto.
(i) The following are attached as exhibits hereto: true,
correct and complete copies of (i) the Borrower's and Gilmer's articles of
incorporation as in effect as of the date here; (ii) First National's Articles
of Association and Charter; (iii) the bylaws of the Borrower in effect
immediately prior to the adoption of the resolutions referred to below (and such
bylaws have not been further altered or amended and have been in full force and
effect at all times since the adoption of such resolutions through the date
hereof); (iv) the bylaws of Gilmer and the bylaws of First National as of the
date hereof; (v) resolutions (the "Resolutions") of the Board of Directors of
the Borrower duly adopted at a meeting duly called and held on November 30,
1998. A quorum for the transaction of business was present and acting throughout
the meeting at which the Resolutions were adopted, and the Resolutions have been
since adoption and are now in full force and effect and have not been modified
in any respect. There have been no further amendments or other documents
affecting or altering the Borrower's or Gilmer's articles of incorporation or
First National's Articles of Association and Charter since the date of such
copies above through the date hereof, and the Borrower and Gilmer have remained
in valid existence under the laws of Georgia and First National has remained in
valid existence under the laws of the United States, respectively, since such
dates. Borrower shall provide within sixty (60) days of the date hereof (x)
copies of the documents in item (i) certified by the Georgia Secretary of State
as of a recent date, (y) copies of the documents in item (ii) certified by the
Office of Comptroller of the Currency as of a recent date and (z) certificates
of existence for the Borrower and Gilmer issued by the Georgia Secretary of
State as of a recent date, and for First National issued by the Office of
Comptroller of the Currency as of a recent date.
3. AFFIRMATIVE COVENANTS. The Borrower agrees that so long as the
Note is outstanding or this Agreement is in effect:
(a) The Borrower shall promptly furnish to the Lender:
(i) not later than 120 days after the end of each fiscal year, audited
consolidated financial statements of the Borrower prepared in accordance with
generally accepted accounting principles ("GAAP") and certified by
<PAGE> 4
an independent accounting firm reasonably acceptable to the Lender; (ii) not
later than 45 days after each of the first three quarters of each fiscal year,
unaudited consolidated financial statements of the Borrower, prepared in
accordance with GAAP (subject to changes resulting from normal year-end
adjustments) and certified by the chief financial officer of the Borrower; (iii)
not later than 30 days after the end of each of the first three quarters of each
year, copies of the Report of Condition and the Report of Income and Dividends
of each of the Bank Subsidiaries; (iv) immediately after the occurrence of a
material adverse change in the business, properties, condition, management, or
prospects (financial or otherwise) of the Borrower or any Subsidiary taken as a
whole, including, without limitation, imposition of any letter agreement,
memorandum of understanding, cease and desist order, or other similar regulatory
action involving the Borrower or any Subsidiary, a statement of the Borrower's
chief executive officer or chief financial officer setting forth in reasonable
detail such change and the action which the Borrower or any Subsidiary proposes
to take with respect thereto; and (v) from time to time upon request of the
Lender, such other information relating to the operations, business, condition,
management, properties, or prospects of the Borrower or any Subsidiary as the
Lender may reasonably request (including meetings with the Borrower's or
Subsidiary's executive officers).
(b) The Borrower and each Subsidiary shall punctually pay
and discharge all taxes, assessments and other governmental charges or levies
imposed upon it or upon its income or upon any of its property, except to the
extent such taxes, assessments, charges or taxes are being appealed or contented
in good faith.
(c) The Borrower and each Subsidiary shall comply in all
material respects with all requirements of constitutions, statutes, rules,
regulations, and orders and all orders and decrees of courts and arbitrators
applicable to it or its properties.
(d) The Borrower shall promptly notify the Lender of any
significant change in executive management of Borrower or material change in the
beneficial ownership of the Borrower's stock by any officer, director or 25% or
greater shareholder of the Borrower.
4. NEGATIVE COVENANTS. The Borrower agrees that so long as the
Note is outstanding or this Agreement is in effect:
(a) The Borrower shall not permit its Capital during the
term of this Agreement to be less than $10,000,000.
(b) The Borrower shall not permit the ratio of Tier 1
Capital to average total assets (the Tier 1 Leverage Ratio) of any of the Bank
Subsidiaries as of the end of any fiscal year to be less than 5.0%.
(c) The Borrower shall not permit the Total Risk - Based
Capital Ratio of any of the Bank Subsidiaries as of the end of any fiscal
quarter during the term of this Agreement to be less than 10.0%.
(d) The Borrower shall not, and shall not permit any of
the Bank Subsidiaries to, fail to comply with any minimum capital requirement
imposed by any of their federal or state regulators.
<PAGE> 5
(e) The Borrower shall not permit its Weighted Average
Return on Assets for each fiscal year to be less than 0.85%, and shall not
permit the Weighted Average Return on Assets of any of the Bank Subsidiaries for
each fiscal year to be less than 0.85%.
(f) The Borrower shall not permit the allowance for loan
and lease losses of any of the Bank Subsidiaries to be less than 1.00% of its
gross loans for each fiscal quarter.
(g) The Borrower shall not permit any of the Bank
Subsidiaries to maintain an Assessment Risk Classification other than either (i)
Group 1, Subgroup A; (ii) Group 1, Subgroup B; or (iii) Group 2, Subgroup A.
(h) The Borrower shall not receive a composite BOPEC
rating, and shall not permit any of the Bank Subsidiaries to receive a composite
CAMEL rating, from any of their respective regulators, other than two or better;
provided that First National shall be required only to maintain a composite
CAMEL rating of three or better until two years after the date of this
Agreement.
(i) The Borrower shall not incur or permit to exist any
indebtedness or liability for borrowed money in an aggregate excess of
$100,000.00 other than to the Lender or a wholly-owned Subsidiary of the
Borrower without prior Lender approval, except that this covenant shall not
apply to deposits, repurchase agreements, federal funds borrowings, overdrafts,
and other banking transactions entered into by a Subsidiary in the ordinary
course of its business.
(j) The Borrower shall not, directly or indirectly,
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 a Subsidiary) except in connection with the depositing of
checks in the normal and ordinary course of business.
(k) The Borrower shall not, nor permit any Subsidiary to,
transfer all or substantially all of its assets to or consolidate or merge with
any other Person, or acquire all or substantially all of the properties or
capital stock of any other Person, or create any Subsidiary or enter into any
partnership or joint venture.
(l) The Borrower shall not permit any Subsidiary to
issue, sell or otherwise dispose or part with control of any shares of any class
of its stock (other than directors' qualifying shares) except to the Borrower or
a wholly-owned Subsidiary of the Borrower.
(m) The Borrower shall not sell or otherwise dispose or
part with control of any of the Stock or any other securities or indebtedness of
any Subsidiary, and the Borrower shall not pledge or otherwise transfer or grant
a security interest in any of the capital stock or other securities of any of
its Subsidiaries.
5. ADVANCES UNDER THE LOAN. The Lender shall make advances under
the Loan to Borrower if, but shall not be obligated to make any advance of the
Loan to the Borrower unless:
(a) All representations and warranties of the Borrower
contained in this Agreement or the Note shall be true in all respects on and as
of the date of each advance of the Loan.
<PAGE> 6
(b) The Borrower and each Subsidiary shall have performed
in all material respects all their agreements and obligations required by the
Financing Documents.
(c) No adverse change shall have occurred in the
Borrower's or any Subsidiary's condition (financial or otherwise), or in the
business, properties, assets, liabilities, prospects, or management of the
Borrower or any Subsidiary since the date of this Agreement.
(d) No Default or event which, with the giving of notice
or passage of time (or both), would constitute a Default under the terms of this
Agreement shall have occurred.
(e) All other matters incidental to the Loan shall be
satisfactory to the Lender.
6. DEFAULT. A "Default" shall exist if any of the following
occurs:
(a) Failure of the Borrower punctually to make any
payment of any amount payable, whether principal or interest or other amount, on
any of the Liabilities, whether at maturity, or at a date fixed for any
prepayment or partial prepayment, or by acceleration, or otherwise if such
failure is not remedied within five (5) days after notice of the default is sent
from the Lender to the Borrower.
(b) Any statement, representation, or warranty of the
Borrower made in any of the Financing Documents or at any time furnished by or
on behalf of the Borrower to the Lender in writing shall be false or misleading
in any material respect as of the date made.
(c) Failure of the Borrower punctually and fully to
comply with (i) any of the covenants in Section 4 of this Agreement, or (ii) any
of the other covenants set forth in this Agreement if such failure under this
clause (ii) is not remedied within fifteen (15) days after notice of the default
is sent from the Lender to the Borrower.
(d) The occurrence of a default under the Note, the Call
Agreement and the Registration Rights Agreement to which the Borrower and the
Lender are parties.
(e) If the Borrower or any Subsidiary becomes insolvent
as defined in the Georgia Uniform Commercial Code or makes an assignment for the
benefit of creditors; or if any action is brought by the Borrower or any
Subsidiary seeking dissolution of the Borrower or such Subsidiary or liquidation
of its assets or seeking the appointment of a trustee, interim trustee,
receiver, or other custodian for any of its property; or if the Borrower or any
Subsidiary commences a voluntary case under the Federal Bankruptcy Code; or if
any reorganization or arrangement proceeding is instituted by the Borrower or
any Subsidiary for the settlement, readjustment, composition or extension of any
of its debts upon any terms; or if any action or petition is otherwise brought
by the Borrower or any Subsidiary seeking similar relief or alleging that it is
insolvent or unable to pay its debts as they mature.
(f) Any action is brought against the Borrower or any
Subsidiary seeking dissolution of the Borrower or such Subsidiary or liquidation
of any of its assets or seeking the appointment of a trustee, interim trustee,
receiver, or other custodian for any of its property, and such action is
consented to or acquiesced in by the Borrower or such Subsidiary or is not
dismissed within 30 days of the date upon which it was instituted; or any
proceeding under the Federal Bankruptcy Code is instituted against the Borrower
or any Subsidiary and (i) an order for relief is entered in such proceeding or
(ii) such proceeding is consented to or acquiesced in by the
<PAGE> 7
Borrower or such Subsidiary or is not dismissed within 30 days of the date upon
which it was instituted; or any reorganization or arrangement proceeding is
instituted against the Borrower or any Subsidiary for the settlement,
readjustment, composition, or extension of any of its debts upon any terms, and
such proceeding is consented to or acquiesced in by the Borrower or such
Subsidiary or is not dismissed within 30 days of the date upon which it was
instituted; or any action or petition is otherwise brought against the Borrower
or any Subsidiary seeking similar relief or alleging that it is insolvent,
unable to pay its debts as they mature, or generally not paying its debts as
they become due, and such action or petition is consented to or acquiesced in by
the Borrower or such Subsidiary or is not dismissed within 30 days of the date
upon which it was brought.
(g) The Borrower or any Subsidiary is in default (or an
event has occurred which, with the giving of notice or passage of time, or both,
will cause the Borrower or any Subsidiary to be in default) on indebtedness to
another Person, and the amount of such indebtedness exceeds $100,000 or the
acceleration of the maturity of such indebtedness would have a material adverse
effect upon the Borrower or such Subsidiary.
(h) Any other material adverse change occurs in the
Borrower's financial condition or means or ability to pay the Liabilities.
(i) Any cease and desist or other order has been noticed,
or entered against the Borrower or any Subsidiary by any bank or bank holding
company regulatory agency or body, other than the Securities and Exchange
Commission, or the Borrower or any Subsidiary enters into any form of memorandum
of understanding, plan of corrective action, or letter agreement with any such
regulatory agency or body, or any other regulatory enforcement action is taken
against the Borrower or any Subsidiary relating to the capitalization,
management, or operation of the Borrower or any Subsidiary.
(j) The Borrower or any Subsidiary is convicted or pleads
guilty or nolo contendere to any charge that the Borrower or such Subsidiary has
violated any drug, controlled substances, money laundering, currency reporting,
racketeering, or racketeering-influenced-and-corrupt-organization statute or
regulations other forfeiture statute.
(k) The Borrower ceases to own 100% of the issued and
outstanding capital stock of the Banks or ceases to control any of the other
Bank Subsidiaries.
7. REMEDIES UPON DEFAULT. Upon the occurrence of a Default, the
Lender shall be entitled, without limitation, to exercise the following rights
at any time and from time to time, which the Borrower hereby agrees to be
commercially reasonable:
(a) declare any of the Liabilities due and payable,
whereupon they immediately will become due and payable (notwithstanding any
provisions to the contrary, and without presentment, demand, notice or protest
of any kind (all of which are expressly waived by the Borrower));
(b) (i) receive all amounts payable in respect of the
Collateral otherwise payable to the Borrower; (ii) settle all accounts, claims,
and controversies relating to the Collateral; (iii) transfer all or any part of
the Collateral into the Lender's or any nominee's name; and (iv) execute all
agreements and other instruments; bring, defend and abandon all actions and
<PAGE> 8
other proceedings; and take all actions in relation to the Collateral as the
Lender in its sole discretion may determine;
(c) enforce the payment of the Stock and exercise all of
the rights, powers and remedies of the Borrower thereunder, including the
exercise of all voting rights and other ownership or consensual rights of the
Stock (but the Lender is not hereby obligated to exercise such rights), and in
connection therewith the Borrower hereby appoints the Lender to be the
Borrower's true and lawful attorney-in-fact and IRREVOCABLE PROXY to vote the
Stock in any manner the Lender deems advisable for or against all matters
submitted to a vote of shareholders, and such power-of-attorney is coupled with
an interest and irrevocable;
(d) sell, assign and deliver, or grant options to
purchase, all or any part of or interest in the Collateral in one or more
parcels, at any public or private sale at any exchange, any of the Lender's
offices, or elsewhere, without demand of performance, advertisement, or notice
of intention to sell or of the time or place of sale or adjournment thereof or
to redeem or otherwise (all of which are hereby expressly and irrevocably waived
by the Borrower), for cash, on credit, or for other property, for immediate or
future delivery without any assumption of credit risk, and for such price and on
such terms as the Lender in its sole discretion may determine; the Borrower
agrees that to the extent that notice of sale shall be required by law that at
least five business days' notice to the Borrower of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification; the Lender shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given; the
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and any such sale may, without further
notice, be made at the time and place to which it was so adjourned; the Borrower
hereby waives and releases to the fullest extent permitted by law any right or
equity of redemption with respect to the Collateral, whether before or after
sale hereunder, and all rights, if any, of marshaling the Collateral and any
other security for the Loan or otherwise; at any such sale, unless prohibited by
applicable law, the Lender may bid for and purchase all or any part of the
Collateral so sold free from any such right or equity of redemption; and the
Lender shall not be liable for failure to collect or realize upon any or all of
the Collateral or for any delay in so doing nor shall any of them be under any
obligation to take any action whatsoever with regard thereto;
(e) appoint and dismiss managers or other agents for any
of the purposes mentioned in the foregoing provisions of this Section 7, all as
the Lender in its sole discretion may determine; and
(f) generally, take all such other action as the Lender
in its sole discretion may determine as incidental or conducive to any of the
matters or powers mentioned in this Section 7 and which the Lender may or can do
lawfully and use the name of the Borrower for such purposes and in any
proceedings arising therefrom.
8. APPLICATION OF PROCEEDS. The proceeds of the public or private
sale or other disposition of any Collateral hereunder shall be applied to (i)
the costs incurred in connection with the sale, expressly including, without
limitation, any costs under Section 11(a) hereof; (ii) any unpaid interest which
may have accrued on any obligations secured hereby; (iii) any unpaid principal
on any obligations secured hereby; and (iv) costs of collection and reasonable
attorney's fees, in such order as the Lender may determine, and any remaining
proceeds shall be paid over to the Borrower or others as by law provided. If the
proceeds of the sale or other
<PAGE> 9
disposition of the Stock are insufficient to pay all such amounts, the Borrower
shall remain liable to the Lender for the deficiency.
9. ADDITIONAL RIGHTS OF SECURED PARTIES. In addition to its other
rights and privileges under this Agreement, the Lender may exercise from time to
time any and all other rights and remedies available to a secured party when a
debtor is in default under a security agreement as provided in the Uniform
Commercial Code of Georgia, or available to the Lender under any other
applicable law or in equity, including without limitation the right to any
deficiency remaining after disposition of the Collateral. The Borrower shall pay
all of the reasonable costs and expenses (including reasonable attorneys' fees)
incurred by the Lender in enforcing its rights under this Agreement.
10. RETURN OF STOCK TO BORROWER. Upon payment in full of all
principal, interest and other amounts owed by the Borrower under the Note and
this Agreement, the Lender shall return to the Borrower (i) all of the then
remaining Stock and (ii) all rights received by the Lender as agent for the
Borrower as a result of its possessory interest in the Stock.
11. DISPOSITION OF STOCK BY AGENT. The Stock is not registered
under the various federal or state securities laws and disposition thereof after
default may be subject to prior regulatory approval and may be restricted to one
or more private (instead of public) sales in view of the lack of such
registration. The Borrower acknowledges that upon such disposition, the Lender
may approach only a restricted number of potential purchasers and that a sale
under such circumstances may yield a lower price for the Stock than if the Stock
were registered pursuant to federal and state securities laws and sold on the
open market. The Borrower, therefore, agrees that:
(a) if the Lender shall, pursuant to the terms of this
Agreement, sell or cause any of the Stock to be sold at a private sale, the
Lender shall have the right to rely upon the advice and opinion of any national
brokerage or investment firm having recognized expertise and experience in
connection with shares of companies in the banking industry (but shall not be
obligated to seek such advice and the failure to do so shall not be considered
in determining the commercial reasonableness of the Lender's action) as to the
best manner in which to expose the Stock for sale and as to the best price
reasonably obtainable at the private sale thereof; and
(b) such reliance shall be conclusive evidence that the
Lender has handled such disposition in a commercially reasonable manner.
12. BORROWER'S OBLIGATIONS ABSOLUTE. The obligations of the
Borrower under this Agreement shall be direct and immediate and not conditional
or contingent upon the pursuit of any other remedies against the Borrower or any
other Person, nor against other security or liens available to the Lender or its
successors, assigns or agents. The Borrower hereby waives any right to require
that an action be brought against any other Person or require that resort be had
to any security or to any balance of any deposit account or credit on the books
of the Lender in favor of any other Person prior to any exercise of rights or
remedies hereunder, or to require resort to rights or remedies of the Lender in
connection with the Loan.
13. NOTICES. Except as provided otherwise in this Agreement, all
notices and other communications under this Agreement are to be in writing and
are to be deemed to have been duly given and to be effective upon delivery to
the party to whom they are directed. If sent by U.S. mail, first class,
certified, return receipt requested, postage prepaid, and addressed to the
<PAGE> 10
Lender or to the Borrower at their respective addressees set forth below, such
communications are deemed to have been delivered when received.
If to the Lender: The Bankers Bank
2410 Paces Ferry Road
600 Paces Summit
Atlanta, Georgia 30339
Attn: Ken Vassey, Senior Vice President
If to the Borrower: Appalachian Bancshares, Inc.
P.O. Box G
829 Industrial Boulevard
Ellijay, Georgia 30540
Attn: Kent Sanford, Executive Vice President
With a copy to: Troutman Sanders LLP
600 Peachtree Street, N.E.
Suite 5200
Atlanta, Georgia 30308
Attn: Walter E. Jospin
Either the Lender or the Borrower may, by written notice to the other,
designate a different address for receiving notices under this Agreement;
provided, however, that no such change of address will be effective until
written notice thereof is actually received by the party to whom such change of
address is sent.
14. BINDING AGREEMENT. The provisions of this Agreement shall be
construed and interpreted, and all rights and obligations of the parties hereto
determined, in accordance with the laws of the State of Georgia. This Agreement,
together with all documents referred to herein, constitutes the entire Agreement
between the Borrower and the Lender with respect to the matters addressed herein
and may not be modified except by a writing executed by the Lender and delivered
by the Lender to the Borrower. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which, taken
together, shall constitute one and the same instrument.
15. PARTICIPATIONS. The Lender may at any time grant
participations in or sell, assign, transfer or otherwise dispose of all or any
portion of the indebtedness of the Borrower outstanding pursuant to the
Financing Documents. The Borrower hereby agrees that any holder of a
participation in, and any assignee or transferee of, all or any portion of any
amount owed by the Borrower under the Financing Documents (i) shall be entitled
to the benefits of the provisions of this Agreement as the Lender hereunder and
(ii) may exercise any and all rights of the banker's lien, set-off or
counterclaim with respect to any and all amounts owed by the Borrower to such
assignee, transferee or holder as fully as if such assignee, transferee or
holder had made the Loan in the amount of the obligation in which it holds a
participation or which is assigned or transferred to it.
16. EXPENSES. All reports and other documents or information
furnished to the Lender under this Agreement shall be supplied by the Borrower
without cost to the Lender. Further, the Borrower shall reimburse the Lender on
demand for all out-of-pocket costs and expenses (including reasonable legal fees
not to exceed $7,500 with respect to the preparation of the Loan Documents)
incurred by the Lender in connection with the preparation and enforcement
<PAGE> 11
of the Financing Documents or the protection or preservation of any right or
claim of the Lender with respect to such agreements. The Borrower will pay all
taxes (if any) in connection with the Financing Documents. The obligations of
the Borrower under this section shall survive the payment of the Liabilities and
the termination of this Agreement.
17. INDEMNIFICATION. In addition to any other amounts payable by
the Borrower under this Agreement, the Borrower shall pay and indemnify the
Lender from and against all claims, liabilities, losses, costs, and expenses
(including, without limitation, reasonable attorneys' fees and expenses) which
the Lender may (other than as a result of the gross negligence or willful
misconduct of the Lender) incur or be subject to as a consequence, directly or
indirectly, of (i) any breach by the Borrower of any warranty, term or condition
in, or the occurrence of any default under, any of the Financing Documents,
including all fees or expenses resulting from the settlement or defense of any
claims or liabilities arising as a result of any such breach or default, (ii)
the Lender's making, holding, or administering the Loan or the Collateral, (iii)
allegations of participation or interference by the Lender in the management,
contractual relations or other affairs of the Borrower or any Subsidiary, (iv)
allegations that the Lender has joint liability with the Borrower or any
Subsidiary for any reason, and (v) any suit, investigation, or proceeding as to
which the Lender or such participant is involved as a consequence, directly or
indirectly, of its execution of any of the Financing Documents, or any other
event or transaction contemplated by any of the foregoing. The obligations of
Borrower under this Section 17 shall survive the termination of this Agreement.
18. RIGHT TO SET-OFF. Upon the occurrence of a Default hereunder,
the Lender, without notice or demand of any kind, may hold and set off against
such of the Liabilities (whether matured or unmatured) as the Lender may elect
any balance or amount to the credit of the Borrower in any deposit, agency,
reserve, holdback or other account of any nature whatsoever maintained by or on
behalf of the Borrower with the Lender at any of its offices, regardless of
whether such accounts are general or special and regardless of whether such
accounts are individual or joint. Any Person purchasing an interest in debt
obligations under this Agreement held by the Lender may exercise all rights of
offset with respect to such interest as fully as if such Person were a holder of
debt obligations hereunder in the amount of such interest.
19. FURTHER ASSURANCES. If at any time the Lender upon advice of
its counsel shall determine that any further document shall be reasonably
required to effect this Agreement and the transactions and other agreements
contemplated thereby, the Borrower shall, and shall cause its Subsidiaries to,
execute and deliver such document and otherwise carry out the purposes of this
Agreement.
20. SEVERABILITY. If any paragraph or part thereof shall for any
reason be held or adjudged to be invalid, illegal, or unenforceable by any court
of competent jurisdiction, such paragraph or part thereof shall be deemed
separate, distinct, and independent, and the remainder of this Agreement shall
remain in full force and effect and shall not be affected by such holding or
adjudication.
21. BINDING EFFECT. All rights of the Lender under the Financing
Documents shall inure to the benefit of its transferees, successors and assigns.
All obligations of the Borrower under the Financing Documents shall bind its
heirs, legal representatives, successors, and assigns.
22. DEFINITIONS.
<PAGE> 12
(a) "Assessment Risk Classification" means the assessment
risk classification assigned to each of the Bank Subsidiaries for purposes of
assessment of premiums by the Federal Deposit Insurance Corporation for deposit
insurance pursuant to 12 C.F.R. ss. 327.3(d) or the corresponding assessment
risk classification, as determined by the Lender, pursuant to any successor
assessment risk classification system.
(b) "Bank Subsidiaries" means each banking Subsidiary of
Borrower, now or hereafter in existence, including but not limited to the Banks.
(c) "Capital" means all capital or all components of
capital, other than any allowance for loan and lease losses and net of any
intangible assets, as defined from time to time by the primary federal regulator
of the Borrower, the Banks, or each of the other Bank Subsidiaries (as the case
may be).
(d) "Collateral" means and includes all property assigned
or pledged to the Lender or in which the Lender has been granted security
interest or to which the Lender has been granted security title, whether under
any of the Financing Documents or any other agreement, instrument, or document,
and the proceeds thereof.
(e) "Financing Documents" means and includes this
Agreement, the Note, the Pledge Agreement, and all other associated loan and
collateral documents including, without limitation, all guaranties, suretyship
agreements, stock powers, security agreements, security deeds, subordination
agreements, exhibits, schedules, attachments, financing statements, notices,
consents, waivers, opinions, letters, reports, records, assignments, documents,
instruments, information and other writings related thereto, or furnished by the
Borrower to the Lender in connection therewith or in connection with any of the
Collateral, and any amendments, extensions, renewals, modifications or
substitutions thereof or therefor.
(f) "Liabilities" means all indebtedness, liabilities,
and obligations of the Borrower of any nature whatsoever which the Lender may
now or hereafter have, own or hold, and which are now or hereafter owing to the
Lender arising out of this Agreement, the Note, the Call Agreement or the
Registration Rights Agreement, and any amendments, extensions, renewals,
modifications or substitutions thereof or therefor.
(g) "Note" shall mean the promissory note dated the date
hereof in the principal amount of Three Million Six Hundred Thousand and No/100
Dollars ($3,600,000.00) and any amendments, extensions, renewals, modifications,
or substitutions thereof or therefor in effect at any particular time.
(h) "Person" means any individual, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
(i) "Subsidiary" means each of the Bank Subsidiaries and
each other corporation for which the Borrower has the power, directly or
indirectly, to direct its management or policies or to vote 25% or more of any
class of its voting securities.
<PAGE> 13
(j) "Tier 1 Capital" means Tier 1 capital as defined by
the capital maintenance regulations of the primary federal bank regulatory
agency of the relevant Bank Subsidiary.
(k) "Total Risk Based Capital Ratio" means the Total risk
based capital ratio as defined by the Capital Maintenance Regulations of the
primary federal bank regulatory agency of the Borrower.
(l) "Weighted Average Return on Assets" means (i) with
respect to the Borrower, its net income for the previous calendar year plus the
amount of any interest payments by it on the Loan during the previous calendar
year, divided by its average assets during the previous calendar year, and (ii)
with respect to each Bank Subsidiary, its net income for the previous calendar
year divided by its average assets during the previous calendar year.
(m) All accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally accepted
accounting principles in effect from time to time.
<PAGE> 14
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and
affixed their seals by and through their duly authorized officers, as of the day
and year first above written.
BORROWER:
APPALACHIAN BANCSHARES, inc.
By: /s/ Kent Sanford
-------------------------------------
Kent Sanford
Executive Vice President
Attest: /s/ Tracy R. Newton
---------------------------------
Name: Tracy R. Newton
--------------------------
Title: President and CEO
-------------------------
[CORPORATE SEAL]
LENDER:
THE BANKERS BANK
By: /s/ Kenneth T. Vassey SVP
-------------------------------------
Kenneth T. Vassey
Senior Vice President
[BANK SEAL]
<PAGE> 1
EXHIBIT 10.8
PROMISSORY NOTE
$3,600,000 November 30, 1998
FOR VALUE RECEIVED, the undersigned, Appalachian Bancshares, Inc. a
Georgia corporation (the "Borrower"), promises to pay to the order of THE
BANKERS BANK (the "Lender" and, together with any holder hereof, called the
"Holder"), at 2410 Paces Ferry Road, 600 Paces Summit, Atlanta, Georgia
30339-4098 (or at such other place as the Holder may designate in writing to the
Borrower), in lawful money of the United States of America, the principal sum of
Three Million Six Hundred Thousand No/100 Dollars ($3,600,000), plus interest as
hereinafter provided.
This Note is the Note made and given as described in that certain Loan
and Stock Pledge Agreement dated as of November 30, 1998, between the Borrower
and the Lender (the "Loan Agreement"). In the event of any inconsistency between
this Note and the Loan Agreement, this Note shall control. All capitalized terms
used herein shall have the meanings ascribed to such terms in the Loan
Agreement, except to the extent such capitalized terms are otherwise defined or
limited herein.
The Borrower shall be entitled to borrow funds hereunder pursuant to
the terms and conditions of the Loan Agreement.
The Borrower promises to pay interest on the unpaid principal amount
outstanding hereunder (the "Loan"), at a simple interest rate per annum equal to
the Prime Rate Basis. "Prime Rate Basis" shall mean, on any day, a simple
interest rate per annum equal to the Prime Rate less seventy-five (75) basis
points.
"Prime Rate" shall mean, on any day, the rate of interest published as
the "Prime Rate" as of such day appearing in the "Money Rates" section of the
Wall Street Journal, Eastern Edition, or any successor to such section. If more
than one such rate shall be published, then the Prime Rate shall be the higher
or highest of such rates. The Prime Rate in effect as of the close of business
of each day shall be the applicable Prime Rate for the day and each succeeding
non-business day in determining the applicable Prime Rate Basis.
Interest shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
Interest under this Note shall be due and payable quarterly in arrears
on the first day of each calendar quarter, commencing January 1, 1999, and
continuing to be due on the first day of each calendar quarter thereafter until
this Note is paid in full. Interest shall also be due and payable when this Note
shall become due (whether at maturity, by reason of acceleration or
<PAGE> 2
otherwise). After default, interest shall also be due and payable upon demand
from time to time by the Holder as provided below.
Commencing November 30, 2000, and continuing on November 30 of each
succeeding calendar year, the indebtedness evidenced by this Note shall be due
and payable in seven (7) consecutive annual installments of principal, each in
the amount of $450,000, plus all accrued and unpaid interest as hereinabove
provided. The entire outstanding balance of the indebtedness evidenced by this
Note, together with all accrued and unpaid interest, shall be due and payable in
a final installment on November 30, 2008.
Borrower shall have the right to prepay the Loan in whole or in part
without prepayment penalty or premium, subject to the restrictions below.
Notwithstanding the foregoing, if, prior to the date on which Borrower has
repurchased all of the shares of callable common stock of Borrower (the
"Lender's Equity Stake") purchased by Community Financial Services, Inc., the
parent company of Lender ("CFSI"), pursuant to that certain Subscription
Agreement dated as of the date hereof by and between CFSI and Borrower, and the
related Call Option Agreement and Registration Rights Agreement, to the extent
such shares are then still owned by CFSI, Lender or any affiliate of Lender, any
principal payment by Borrower against the Loan which would reduce the
outstanding principal balance of the Loan below $1,000,000 (each such payment
being hereinafter called a "Lender Directed Payment") may be allocated, at
Lender's option, subject to the approval of the Borrower's bank regulators, as a
payment to Lender for the repurchase (at the share price determined under the
call option agreement relating to Lender's Equity Stake) of such portion of the
Lender's Equity Stake purchasable by the amount of such payment. If any Lender
Directed Payment is allocated to the repurchase of Lender's Equity Stake (or a
portion thereof), then the principal amount of the Loan shall not be reduced by
the amount of any Lender Directed Payment so allocated.
Overdue principal shall bear interest for each day from the date it
became so due until paid in full, payable on demand, at a rate per annum
(computed on the basis of a 360-day year for the actual number of days elapsed)
equal to the Prime Rate Basis plus 3%.
In no event shall the amount of interest due or payable hereunder
exceed the maximum rate of interest allowed by applicable law, and in the event
any such payment is inadvertently paid by the Borrower or inadvertently received
by the Holder, then such excess sum shall be credited as a payment of principal,
unless the Borrower shall notify the Holder, in writing, that the Borrower
elects to have such excess sum returned to it forthwith. It is the express
intent hereof that the Borrower not pay and the Holder not receive, directly or
indirectly, in any manner whatsoever, interest in excess of that which may be
lawfully paid by the Borrower under applicable law.
All parties now or hereafter liable with respect to this Note, whether
the Borrower, any guarantor, endorser, or any other person or entity, hereby
waive presentment for payment, demand, notice of non-payment or dishonor,
protest and notice of protest, or any other notice of any kind with respect
thereto.
Time is of the essence of this Note.
<PAGE> 3
No delay or omission on the part of the Holder in the exercise of any
right or remedy hereunder or any Financing Document, or at law or in equity,
shall operate as a waiver thereof, and no single or partial exercise by the
Holder of any right or remedy hereunder, under the Loan Agreement or any
Financing Document, or at law or in equity, shall preclude or estop another or
further exercise thereof or the exercise of any other right or remedy.
Should this Note, or any part of the indebtedness evidenced hereby, be
collected by law or through an attorney-at-law or under advice therefrom, the
Holder shall be entitled to collect reasonable attorneys' fees and all costs of
collection.
This Note is entitled to the benefits of the Loan Agreement, which
contains provisions with respect to the acceleration of the maturity of this
Note upon the happening of certain stated events, and for prepayment of the
Loan. Prepayment of the Loan may be made by the Borrower only as provided in the
Loan Agreement.
The Holder shall be under no duty to exercise any or all of the rights
and remedies given by this Note and the Loan Agreement or under any of the other
Financing Documents and no party to this instrument shall be discharged from the
obligations or undertakings hereunder (a) should the Holder release or agree not
to sue any person against whom the party has, to the knowledge of the Holder, a
right to recourse, or (b) should the Holder agree to suspend the right to
enforce this Note or Holder's interest in any collateral pledged or any
guarantee given to secure this Note against such person or otherwise discharge
such person.
This Note shall be deemed to be made pursuant to the laws of the State
of Georgia.
IN WITNESS WHEREOF, the duly authorized officers of the Borrower have
executed, sealed, and delivered this Note, as of the day and year first above
written.
APPALACHIAN BANCSHARES, INC.
By: /s/ Kent Sanford
----------------------------------
Kent Sanford
Executive Vice President
Attest: /s/ Tracy R. Newton
------------------------------
Name: Tracy R. Newton
-------------------------
Title: President and CEO
------------------------
[CORPORATE SEAL]
<PAGE> 1
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
APPALACHIAN BANCSHARES, INC. AND ITS SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
The following tabulation presents the calculation of basic and fully
diluted earnings per common share for the years ended December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
BASIC:
Reported net income (loss).......................... $ 1,208,231 $ 1,017,766 $ 516,736
============ =========== ============
Earnings (loss) on common shares.................... $ 1,208,231 $ 1,017,766 $ 516,736
============ =========== ============
Weighted average common shares
outstanding - basic............................... 1,166,425 1,154,990 1,136,000
============ =========== ============
Earnings (loss) per common share from
continuing operations - basic..................... $ 1.04 $ .88 $ .45
============ =========== ============
Net income (loss)................................... $ 1.04 $ .88 $ .45
============ =========== ============
DILUTED:
Reported net income (loss).......................... $ 1,208,231 $ 1,017,766 $ 516,736
============ =========== ============
Earnings (loss) on common shares.................... $ 1,208,231 $ 1,017,766 $ 516,736
============ =========== ============
Weighted average common shares
outstanding - diluted............................. 1,220,976 1,162,206 1,136,000
============ =========== ============
Earnings (loss) per common share from
continuing operations - diluted................... $ .99 $ .88 $ .45
============ =========== ============
Net income (loss)................................... $ .99 $ .88 $ .45
============ =========== ============
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Gilmer County Bank, a Georgia banking corporation, is 100% owned by the
Company.
First National Bank of Union County, a national bank, is 100% owned by
the Company.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on
Form 10-KSB of Appalachian Bancshares, Inc. of our report dated February 5,
1999, included in the 1998 Annual Report to Shareholders of Appalachian
Bancshares, Inc.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-27127) pertaining to the Appalachian Bancshares,
Inc. 1997 Directors' Non-Qualified Stock Option Plan, 1997 Employee Stock
Incentive Plan and Section 401(k) Profit Sharing Plan, of our report dated
February 5, 1999, with respect to the consolidated financial statements and
schedules of Appalachian Bancshares, Inc. included in the Annual Report on Form
10-KSB for the year ended December 31, 1998.
/s/ Schauer, Taylor Cox & Vise, P.C.
SCHAUER, TAYLOR, COX & VISE, P.C.
Birmingham, Alabama
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF APPALACHIAN BANCSHARES, INC. FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,481,853
<INT-BEARING-DEPOSITS> 407,229
<FED-FUNDS-SOLD> 18,392,213
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,940,281
<INVESTMENTS-CARRYING> 6,218,354
<INVESTMENTS-MARKET> 6,457,522
<LOANS> 129,831,095
<ALLOWANCE> (1,686,395)
<TOTAL-ASSETS> 189,744,950
<DEPOSITS> 163,861,478
<SHORT-TERM> 2,478,344
<LIABILITIES-OTHER> 918,291
<LONG-TERM> 11,007,143
0
0
<COMMON> 6,835,940
<OTHER-SE> 4,643,754
<TOTAL-LIABILITIES-AND-EQUITY> 189,744,950
<INTEREST-LOAN> 9,614,165
<INTEREST-INVEST> 1,385,752
<INTEREST-OTHER> 271,075
<INTEREST-TOTAL> 11,270,992
<INTEREST-DEPOSIT> 5,891,798
<INTEREST-EXPENSE> 6,498,219
<INTEREST-INCOME-NET> 4,772,773
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> 15,950
<EXPENSE-OTHER> 3,221,213
<INCOME-PRETAX> 1,780,481
<INCOME-PRE-EXTRAORDINARY> 1,780,481
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,208,231
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 0.99
<YIELD-ACTUAL> 9.30
<LOANS-NON> 4,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,498,149
<ALLOWANCE-OPEN> 929,590
<CHARGE-OFFS> 136,222
<RECOVERIES> 34,947
<ALLOWANCE-CLOSE> 1,686,395
<ALLOWANCE-DOMESTIC> 1,686,395
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
