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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000
REGISTRATION NO. 333-92753
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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APPALACHIAN BANCSHARES, INC.
(Name of Small Business Issuer in Its Charter)
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<TABLE>
<S> <C> <C>
GEORGIA 58-2242407 6022
(State or Jurisdiction (I.R.S. Employer (Primary Standard Industrial
of Incorporation or Organization) Identification Number) Classification Code Number)
</TABLE>
829 INDUSTRIAL BOULEVARD
ELLIJAY, GEORGIA 30540
(Address and Telephone Number of Registrant's Principal Executive Offices)
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TRACY R. NEWTON
PRESIDENT
APPALACHIAN BANCSHARES, INC.
829 INDUSTRIAL BOULEVARD
ELLIJAY, GEORGIA 30540
(706) 276-8000
(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
WALTER E. JOSPIN, ESQ.
ELIZABETH HARDY NOE, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP
600 PEACHTREE STREET, N.E., SUITE 2400
ATLANTA, GEORGIA 30308
(404) 815-2400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED TO BE REGISTERED PER SHARE(1) PRICE(1) FEES(2)
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share................................ 400,000 $15.00 $6,000,000 $1,584
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) A registration fee of $3,036.00 was paid in connection with the initial
filing of this Registration Statement on December 14, 1999.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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(APPALACHIAN BANCSHARES LOGO)
Purchase Price $15.00 Per Share
APPALACHIAN BANCSHARES, INC.
Common Stock
200,000 SHARES (MINIMUM) 400,000 SHARES (MAXIMUM)
Appalachian Bancshares, Inc. is offering a minimum of 200,000 shares and a
maximum of 400,000 shares of its common stock. The officers and directors of
Appalachian will offer and sell the shares without the assistance of an
underwriter and for no additional compensation.
The common stock trades sporadically over the counter under the trading
symbol "APAB." As of May 9, 2000 the last reported sale price for the common
stock was $15.00.
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INVESTING IN THE COMMON STOCK INVOLVES RISKS. SOME OF THESE RISKS ARE
DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 5.
<TABLE>
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PER SHARE TOTAL MINIMUM TOTAL MAXIMUM
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<S> <C> <C> <C>
Public Offering Price.................... $15.00 $3,000,000 $6,000,000
Proceeds to Appalachian Bancshares, Inc.,
before expenses........................ $15.00 $3,000,000 $6,000,000
</TABLE>
These Securities are not deposits, accounts or other obligations of a bank
and are not insured or guaranteed by the Federal Deposit Insurance Corporation
or any other governmental agency.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined whether
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
May 12, 2000
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider. We
encourage you to read the entire prospectus carefully before investing,
including the section entitled "Risk Factors" and the financial statements and
notes to those financial statements. When we refer to "the Company" in this
prospectus, we mean Appalachian Bancshares, Inc. excluding its bank
subsidiaries.
THE COMPANY AND THE BANKS
Appalachian Bancshares, Inc. is a bank holding company engaged in providing
a full range of banking services through two commercial bank subsidiaries. The
bank subsidiaries are Gilmer County Bank and Appalachian Community Bank. 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. We acquired Gilmer
County Bank in August 1996 and Appalachian Community Bank in November 1998.
The Banks operate as community banks, emphasizing prompt, personalized
customer service to the individuals and businesses located in their markets. The
Banks perform banking services customary for full service banks of similar size
and character. These services include:
- the furnishing of personal and commercial checking accounts and other
demand and time deposit accounts; and
- the extension of personal and commercial loans and lines of credit.
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. Appalachian Community
Bank draws 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.
At December 31, 1999, we had total assets of $223,314,541, deposits of
$186,729,656 and total shareholders' equity of $12,420,774.
Our principal executive office is located at 829 Industrial Boulevard,
Ellijay, Georgia. Our telephone number is (706) 276-8000.
THE OFFERING
Common Stock Offered............ Minimum of 200,000 shares and maximum of
400,000 shares.
Common Stock Outstanding After
the Offering.................... Minimum offering sold -- 2,726,910 shares;
maximum offering sold -- 2,926,910 shares,
in each case excluding 293,800 shares
reserved for issuance upon exercise of
outstanding options at an average exercise
price of $8.59.
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Use of Proceeds................. If the minimum amount is sold, we will use
approximately $2.775 million of the net proceeds of the sale of the common stock
to make capital contributions to the Banks.
If the maximum amount is sold, will use
approximately $2.775 million of the net
proceeds to make capital contributions to
the Banks; the remaining net proceeds will
be used for general corporate purposes of
Appalachian Bancshares, Inc. If the maximum
amount is sold, a portion of the proceeds
may be used to reduce our existing long-
term debt.
Trading Symbol.................. "APAB."
Risk Factors.................... We urge you to read carefully the "Risk
Factors" section of this prospectus,
beginning on page 5, and the rest of this
prospectus before you make your investment
decision.
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SUMMARY FINANCIAL DATA
The income statement, balance sheet and per share data contained in the
following summary financial data as of and for the four years ended December,
31, 1999, are derived from our financial statements which have been audited on
an annual basis by Schauer, Taylor, Cox & Vise, P.C.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1999 1998 1997 1996
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(AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA AND RATIOS)
<S> <C> <C> <C> <C>
END OF PERIOD BALANCES:
Assets................................... $223,315 $189,745 $112,181 $93,154
Loans, net of unearned income............ 169,106 129,831 84,584 64,962
Earning assets........................... 207,501 176,789 106,137 88,491
Deposits................................. 186,730 163,861 95,348 81,148
Shareholders' equity..................... 12,421 11,480 6,980 5,805
AVERAGE BALANCES:
Assets................................... $203,703 $131,079 $103,261 $72,346
Loans, net of unearned income............ 150,691 95,353 74,753 51,008
Earning assets........................... 191,540 123,663 98,403 68,755
Deposits................................. 175,025 110,745 89,808 61,660
Shareholders' equity..................... 11,950 8,925 6,392 5,503
PER SHARE DATA(1):
Net Income-basic......................... $ .48 $ .52 $ .44 $ .23
Net Income-diluted....................... .45 .50 .44 .23
Cash dividends........................... -0- -0- -0- -0-
Shareholders equity (book value) at
period end............................. 4.62 4.34 3.03 2.56
RATIOS:
Return on average assets................. .62% .92% .98% .71%
Return on average equity................. 10.59% 13.50% 15.90% 9.40%
Net interest margin...................... 3.81% 4.04% 4.06% 3.90%
Efficiency ratio......................... 69.37% 60.35% 55.70% 59.06%
Ratio of earnings to fixed charges
(including interest on deposits)....... 1.15% 1.27% 1.27% 1.22%
Ratio of earnings to fixed charges
(excluding interest on deposits)....... 2.58% 3.94% 4.99% 4.67%
Allowance for loan losses to period end
(total loans).......................... 1.09% 1.30% 1.10% 1.01%
Dividend payment ratio................... 0% 0% 0% 0%
Average equity to average assets......... 5.87% 6.80% 6.19% 7.61%
Total capital............................ 7.41% 7.88% 9.33% 10.30%
Tier 1 capital........................... 6.34% 6.64% 8.23% 9.40%
Leverage ratio........................... 5.22% 4.99% 6.40% 5.90%
</TABLE>
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(1) As adjusted for the two-for-one split of Company shares effective April 12,
2000.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements made in this prospectus, including matters
discussed under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations," may constitute forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934. These
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 forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors that may cause our actual
results, performance or achievements to differ materially from historical
results or from any results expressed or implied by the forward-looking
statements. Factors that may cause our actual results to vary include those
listed in the section captioned "Risk Factors" as well as elsewhere in this
prospectus. Many of these factors are beyond our ability to control or predict,
and readers are cautioned not to put undue reliance on any forward-looking
statement.
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RISK FACTORS
An investment in the common stock involves a number of risks. You should
carefully review the following information about these risks, together with
other information contained in this Prospectus, before deciding whether this
investment is suitable for you.
FUTURE CHANGES IN INTEREST RATES MAY REDUCE OUR PROFITS.
Our ability to make a profit largely depends on our net interest income,
which could be affected negatively by changes in interest rates. Net interest
income is the difference between:
- the interest income we earn on our interest-earning assets, such as loans
and investment securities; and
- the interest expense we pay on our interest-bearing liabilities, such as
deposits and amounts we borrow.
If interest rates were to increase for a sustained period of time, the
higher rates could reduce our net earnings because the amount of our
interest-bearing liabilities repricing or maturing within one to three years
exceed our interest-earning assets with similar characteristics. If market
interest rates increase, we would be very limited in our ability to restructure
our fixed rate loan portfolio to offset the increase in market rates of interest
we pay on our certificates of deposit. Additionally, if market interest rates
increase, we would be limited in our ability to reprice our variable rate loans
because the terms of the loan agreements contain limitations on the maximum
rates allowed and the timing and frequency of rate adjustments. Further, we have
a high concentration of short-term deposits such as passbook savings accounts.
This concentration could create further difficulty as market rates increase and
we are forced to increase the rates paid on these accounts to compete
effectively.
OUR ALLOWANCE FOR LOAN LOSSES MAY NOT BE ADEQUATE TO COVER ACTUAL LOSSES.
Like all financial institutions, we maintain an allowance for loan losses
to provide for loan defaults and non-performance. Our allowance for loan losses
may not be adequate to cover actual loan losses, and future provisions for loan
losses could materially and adversely affect our operating results. Our
allowance for loan losses is based on prior experience, as well as an evaluation
of the risks in the current portfolio, and is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future losses
is susceptible to changes in economic, operating and other conditions, including
changes in interest rates that may be beyond our control, and these losses may
exceed current estimates. State and federal regulatory agencies, as an integral
part of their examination process, review our loans and allowances for loan
losses. We believe that our allowance for loan losses is adequate to cover
anticipated losses. There can be no assurance, however, that we will not further
increase the allowance for loan losses or that the regulators will not require
us to increase this allowance. Either of these occurrences could adversely
affect our earnings.
DECLINES IN REAL ESTATE VALUE COULD ADVERSELY AFFECT OUR PERFORMANCE.
Approximately 68% of our loans are secured by real estate. The properties
securing these loans are primarily located in North Georgia. Real estate values
are typically affected
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by general economic and other conditions in the area where the real estate is
located, fluctuations in interest rates and changes in tax and other laws. Any
decline in real estate values could significantly reduce the value of the real
estate collateral securing our real estate loans and could increase the
likelihood of losses from defaults under our real estate loans. This, in turn,
would adversely affect our results of operations and our financial position.
AN ECONOMIC DOWNTURN, ESPECIALLY ONE AFFECTING GILMER COUNTY, UNION COUNTY AND
SURROUNDING COUNTIES, COULD ADVERSELY AFFECT OUR PERFORMANCE.
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. Appalachian Community Bank draws
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. If the economic conditions of our primary service areas decline,
then our financial position and results of operations will be materially
adversely affected.
A DECLINE IN THE AGRICULTURAL SECTOR OF THE ECONOMY, ESPECIALLY ONE AFFECTING
GILMER COUNTY AND SURROUNDING COUNTIES, COULD ADVERSELY AFFECT OUR PERFORMANCE.
Gilmer County Bank services a substantial number of businesses in the
agricultural industry. In particular, Gilmer County Bank services a large
percentage of the poultry industry located within Gilmer County and surrounding
counties. If the agricultural sector of the economy, especially the poultry
industry, declines, our financial condition and results of operation could be
materially adversely affected.
CHANGES IN GENERAL ECONOMIC CONDITIONS AND MONETARY POLICIES THAT AFFECT
FINANCIAL INSTITUTIONS GENERALLY WILL DIRECTLY IMPACT OUR FINANCIAL CONDITION.
General economic conditions beyond our control may have a significant
impact on our financial condition and results of operations, including:
- the strength of credit demand by customers;
- fiscal and debt management policies of the federal government;
- the monetary policy of the Federal Reserve Board;
- the introduction and growth of the investment instruments by non-bank
financial competitors; and
- changes in rules and regulations governing the payment of interest on
deposit accounts.
THE AMOUNT OF COMMON STOCK HELD BY OUR EXECUTIVE OFFICERS AND DIRECTORS GIVES
THEM INFLUENCE OVER THE ELECTION OF OUR BOARD OF DIRECTORS AND OTHER MATTERS
THAT REQUIRE SHAREHOLDER APPROVAL.
A total of 480,134 shares of our common stock, or 33.7% of the common stock
outstanding at January 15, 2000, including shares held by our 401(k) plan and
voted by our executive officers, is beneficially owned by our directors and
executive officers.
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Therefore, if they vote together, our directors and executive officers have the
ability to exert significant influence over the election of our Board of
Directors and other corporate actions requiring shareholder approval, including
the adoption of proposals made by shareholders.
FUTURE LAWS OR REGULATIONS COULD HURT OUR PROFITABILITY.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY. We are regulated by the Federal
Reserve Board, and our Banks are regulated by the FDIC and the Georgia
Department of Banking and Finance. Federal and state banking laws and
regulations govern matters ranging from the regulation of certain debt
obligations, changes in the control of bank holding companies, and the
maintenance of adequate capital to the regulation of general business operations
and financial conditions of our Banks, including permissible types, amounts and
terms of loans and investments, the amount of reserves maintained against
deposits, restrictions on dividends, establishment of branch offices and the
maximum rate of interest that may be charged by law. These and other
restrictions limit the manner in which we can conduct our business and obtain
financing, and could reduce our profitability.
WE MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL.
Our plans for growth or our inability to maintain regulator-required
capital levels through the ordinary course of operations may cause us to seek to
raise additional capital. Should we need additional capital in the future, we
may not be able to raise additional funds through the issuance of additional
securities. Even if we are able to obtain additional capital through the
issuance of additional securities, we may not be able to issue the securities at
prices or on terms favorable to us. Our failure to raise additional capital on
acceptable terms in a timely manner could have an adverse effect on our business
and our financial position. Further, our failure to raise additional capital to
satisfy regulator-required capital levels could result in additional
restrictions being applied to our business.
AT DECEMBER 31, 1999, WE DID NOT MEET THE MINIMUM REQUIRED TOTAL CAPITAL RATIO
ON A CONSOLIDATED BASIS. CONTINUED FAILURE TO MEET THIS RATIO COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL POSITION.
At December 31, 1999, on a consolidated basis, we did not meet the
regulator-required Total Capital ratio as a result of our acquisition of
Appalachian Community Bank. Our failure to meet the Total Capital ratio or any
other regulator-required capital ratios in the future could result in, among
other things, increased scrutiny from applicable regulatory authorities, a
reduction of permissible activities or a default under our existing credit
facilities. Any of these events could have a material adverse effect on our
business, financial condition and results of operations.
OUR COMPETITION MAY INCREASE DUE TO THE GRAMM-LEACH-BLILEY ACT, WHICH WAS SIGNED
INTO LAW BY THE PRESIDENT OF THE UNITED STATES ON NOVEMBER 12, 1999.
The Gramm-Leach-Bliley Act, signed into law by President Clinton on
November 12, 1999, repealed most of the barriers set up by the 1933
Glass-Steagall Act which separated the banking, insurance and securities
industries. The legislative intent of the Gramm-Leach-Bliley Act is to increase
competition among the various financial service industries. This act will
provide financial organizations with the flexibility to structure new
affiliations through a holding company structure or a financial subsidiary. As a
result of this new
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legislation, the number and type of entities competing with us in our markets
could increase. It is too early to determine what effect, if any, this new law
will have on us.
IF WE DO NOT COMPETE SUCCESSFULLY AGAINST OTHER FINANCIAL INSTITUTIONS IN OUR
MARKET AREA, OUR PROFITABILITY WILL BE HURT.
WE OPERATE IN A COMPETITIVE ENVIRONMENT. In the market areas in which we
compete, other savings banks, commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies and
brokerage and investment banking firms and other financial intermediaries offer
similar services. Many of these competitors have substantially greater resources
and lending limits and may offer certain services that we currently do not
provide. In addition, some of the non-bank competitors are not subject to the
same extensive regulations that govern our business. Due to this competition and
regulation, we may have to pay higher rates of interest to attract deposits and
offer lower rates on loans to attract borrowers. Our profitability depends on
our ability to compete successfully in our market area.
WE CANNOT PREDICT HOW CHANGES IN TECHNOLOGY WILL AFFECT OUR BUSINESS.
The financial services market, including banking services, is increasingly
affected by advances in technology, including developments in:
- telecommunications;
- data processing;
- automation;
- Internet-based banking;
- telebanking; and
- debit cards and so called "smart-cards."
Our ability to compete successfully in the future will depend on whether we
can anticipate and respond to technological changes. To develop these and other
new technologies we likely will have to make additional capital investments.
Although we continually invest in new technology, we cannot assure you that we
will have sufficient resources or access to the necessary proprietary technology
to remain competitive in the future.
BECAUSE MANY OF OUR LOANS ARE SHORT-TERM AND NEED TO BE CONSTANTLY REPLACED, OUR
TOTAL ASSETS MAY DECLINE.
At December 31, 1999, 94% of our loans were due to mature three years or
less. In addition, due to prepayments, the average life of the loans typically
is less than their average contractual maturities. Our asset growth depends upon
our ability to continue to originate and purchase an increasing amount of loans.
OUR CONTINUED SUCCESS DEPENDS, IN LARGE PART, ON THE CONTINUED SERVICE OF KEY
EMPLOYEES.
Our success is dependent, in large part, on the continued service of key
employees, including our President and Chief Executive Officer, Tracy R. Newton,
our Executive Vice
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President, Kent W. Sanford, and our Chief Financial Officer, Alan R. May. These
officers are not subject to employment agreements with us, nor have they entered
into agreements not to compete with the Banks if they are no longer employed by
us. The loss of any of these officers, or one or more of our other key
personnel, could have an material adverse effect on our business. In the event
of the loss of any of these employees, there can be no assurance that we would
be able to find acceptable replacements in a timely manner.
THE OFFERING PRICE WAS ARBITRARILY DETERMINED AND THEREFORE MAY NOT BE
INDICATIVE OF RESALE VALUE.
OUR COMMON STOCK TRADES ONLY SPORADICALLY. In addition, we recently
effected a two-for-one stock split. Therefore, the offering price of $15.00 per
share could not be set with reference to prices generated by a reliable, active
trading market. We did not retain an independent investment banking firm to
assist in determining the offering price. You may not be able to resell the
common stock for the offering price.
YOU MAY HAVE DIFFICULTY SELLING YOUR COMMON STOCK IF AN ACTIVE TRADING MARKET
DOES NOT DEVELOP.
There currently is only a sporadic public market for our common stock.
Although our common stock trades over the counter, trades do not occur on a
regular basis. We can give no assurance that a more active trading market will
develop for the common stock. If an active trading market does not develop, you
may not be able to sell your common stock when desired at a price that would be
acceptable to you.
THE OFFERING
MINIMUM/MAXIMUM
We are offering a minimum of 200,000 shares and a maximum of 400,000 shares
of our common stock for a price of $15.00 per share, for a total minimum price
of $3,000,000 and a total maximum price of $6,000,000. The minimum purchase for
any investor is 100 shares of common stock, unless we, in our sole discretion,
accept a subscription for a lesser number of shares.
OFFERING PERIOD
The offering period for the shares will end when all of the shares of the
common stock are sold or 5:00 p.m., Georgia time, on August 30, 2000, whichever
occurs first. We may extend this date at our discretion for additional periods
not exceeding a total of 90 days (until November 28, 2000). We will notify
promptly subscribers of any extensions. The date on which this offering ends
plus any extension is referred to in this prospectus as the "expiration date."
We also reserve the right to end the offering at any time after 200,000
shares have been subscribed if we determine that the total amount of
subscriptions will provide adequate capitalization for our needs after payment
of expenses.
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HOW TO SUBSCRIBE
To subscribe, complete the attached subscription agreement and return it to
Appalachian Bancshares. The subscription agreement must be accompanied by a
check in the amount of $15.00 multiplied by the number of shares subscribed. All
checks should be payable to "Crescent Bank and Trust Company -- Escrow Account
for Appalachian Bancshares." ALL SUBSCRIPTIONS WILL BE IRREVOCABLE UNTIL THE
CLOSE OF THE OFFERING.
COMPANY DISCRETION
We reserve the right, in our sole discretion, to accept or reject any
subscription in whole or in part on or before the expiration date. If the
offering is over subscribed, we reserve the right to accept subscriptions on a
first-come, first-served basis or on a prorated basis. We will notify all
subscribers within ten business days after the expiration date whether their
subscriptions have been accepted. If we do not accept all or a portion of a
subscription, we also will return the unaccepted portion of the subscription
funds, without interest.
ESCROW
We will deposit promptly all subscription proceeds in an escrow account
with our escrow agent, Crescent Bank and Trust Company in Jasper, Georgia. The
escrow agent will invest the subscription proceeds in short-term United States
Government securities, or interest-bearing accounts offered by the escrow agent,
or in other short-term investments as we may agree upon with the escrow agent.
The escrow agent has not investigated the desirability or advisability of an
investment in Appalachian Bancshares, and has not approved, endorsed, or passed
upon the merits of the common stock.
RELEASE FROM ESCROW
The escrow agent will release the subscription proceeds to us when we have
received subscriptions and subscription proceeds for a total of at least 200,000
shares of common stock. If we receive subscriptions for at least 200,000 shares,
we may instruct the escrow agent to release to us the subscription proceeds. We
will not deposit in the escrow account any subscription proceeds we receive
after the above conditions are met but before this offering ends. Instead, those
funds will be available for our immediate use.
If we do not meet the conditions to release the funds from the escrow
account by the expiration date then the escrow agent will return the
subscription agreements and the full amount of all subscription funds, without
interest, to subscribers within ten business days after the expiration date.
PLAN OF DISTRIBUTION
Our directors and officers will offer and sell the common stock on a
best-efforts basis without compensation. We may find it desirable to utilize the
services of brokers and/or dealers to sell the common stock. We have no present
arrangement with any brokers or dealers relating to this offering. If we use
brokers or dealers, they would sell the common stock on a best-efforts basis,
and we would pay them a commission based on the shares
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sold by them. We do not expect that sales of common stock through brokers or
dealers will comprise a major part of this offering.
USE OF PROCEEDS
The Company will pay all offering expenses from the proceeds of our sale of
common stock. We estimate that, as a result, we will receive net proceeds of
approximately $2.775 million if the minimum offering is completed and $5.775
million if the maximum offering is completed, in each case after deducting
estimated offering expenses. We intend to use these net proceeds:
- capital contributions to the Banks to support growth.
- general corporate purposes of the Company.
The capital contributions to be made to the Banks will be used by the Banks
to support growth and improve their financial conditions and results of
operations. We presently intend to contribute approximately $775,000 to Gilmer
County Bank and approximately $2 million to Appalachian Community Bank. However,
the amounts of capital contributions may be adjusted as a result of our selling
more than the minimum offering, a change in the financial condition of either
Bank or a change in any federal or state regulatory restrictions regarding the
flow of funds between a bank holding company and its subsidiary banks.
A portion of the proceeds retained by the Company for general corporate
purposes may be used to reduce the outstanding balance on our term loan with
Crescent Bank and Trust Company.
MARKET FOR OUR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
There is no established trading market for our 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, Wachovia Securities, Inc. became a market maker for
our common stock.
In May 1998, we effected a two-for-one share split of our common stock in
the form of a common stock dividend to shareholders of record as of the close of
business on May 1, 1998. In April 2000, we effected a second two-for-one split
of our common stock in the form of a common stock dividend to shareholders of
record as of the close of business on April 12, 2000.
11
<PAGE> 14
Management has reviewed the limited information available as to the ranges
at which our 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
three fiscal years and the first two quarters of fiscal 2000. 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.
This information has been adjusted to reflect a 2 for 1 stock split on April 12,
2000.
<TABLE>
<CAPTION>
ESTIMATED PRICE RANGE
PER SHARE
----------------------
HIGH LOW
-------- --------
<S> <C> <C>
1997:
First Quarter.............................................. $ 4.00 $ 4.00
Second Quarter............................................. 4.63 4.50
Third Quarter.............................................. 5.50 4.00
Fourth Quarter............................................. 5.25 4.63
1998:
First Quarter.............................................. $ 5.88 $ 5.88
Second Quarter............................................. 7.50 7.50
Third Quarter.............................................. 10.00 7.50
Fourth Quarter............................................. 10.00 10.00
1999:
First Quarter.............................................. $11.50 $10.00
Second Quarter............................................. 11.00 8.75
Third Quarter.............................................. 11.00 8.75
Fourth Quarter............................................. 10.50 9.00
2000:
First Quarter.............................................. $12.50 $ 9.00
Second Quarter............................................. 15.00 15.00
</TABLE>
At May 10, 2000 the Company had 2,526,910 shares of Common Stock
outstanding held by approximately 790 shareholders of record.
DIVIDENDS
The Banks are subject to restrictions on the payment of dividends under
Georgia law and the regulations of the Georgia Department of Banking and
Finance. In April 2000, Gilmer County Bank paid a $700,000 dividend to the
Company, which was used by the Company for repayment of debt and other expenses.
We are 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 we
will declare any dividends in the future, or if declared, what amounts would be
declared or whether such dividends would continue. We have not paid any
dividends to our shareholders to date.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
December 31, 1999, both historical and as adjusted to give effect to the sale of
the common stock at the minimum and at the maximum offered, including the
application of the net proceeds as proposed. We urge you to read the following
data, together with the consolidated financial statements and related notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
ACTUAL AS ADJUSTED(4) AS ADJUSTED(4)
-------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits.................................. $186,730 $186,730 $186,730
======== ======== ========
Borrowings:
Federal Home Loan Bank advances......... $ 13,364 $ 13,364 $ 13,364
Notes payable to a commercial bank...... 3,600 3,600 3,600
-------- -------- --------
Total borrowings................ $ 16,964 $ 16,964 $ 16,964
======== ======== ========
Shareholders' equity:
Shares of common stock, $5.00 par value,
($.01 as adjusted) 20,000,000 shares
authorized; 1,389,122 (2,778,244 as
adjusted) shares issued(1)........... $ 6,946 $ 30 $ 32
Capital surplus......................... 3,030 12,721 15,719
Retained earnings....................... 3,660 3,660 3,660
Treasury stock.......................... (428) (428) (428)
Accumulated other comprehensive income
(loss)............................... (787) (787) (787)
-------- -------- --------
Total shareholders' equity...... $ 12,421 $ 15,196 $ 18,196
======== ======== ========
Appalachian capital ratios(2):
Total capital to risk-weighted
assets(3)............................ 7.41% 8.87% 10.39%
Tier 1 capital to average assets........ 6.34% 7.82% 9.36%
Tier 1 capital to risk weighted
assets(3)............................ 5.22% 6.45% 7.75%
</TABLE>
- -------------------------
(1) The par value of the Company's common stock was changed from $5.00 per share
to $.01 per share in May, 2000. The outstanding shares are adjusted to
reflect the two-for-one split of the Company's common stock effective April
12, 2000.
(2) We computed the adjusted capital ratios based on the estimated net proceeds
from the sale of the common stock, in a manner consistent with Federal
Reserve Board guidelines.
(3) We assumed the proceeds from the offering are invested in assets which have
a risk-weighting of 100%.
(4) Net of estimated offering costs of $225,000.
13
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA AND STATISTICAL INFORMATION
The income statement, balance sheet and per share data contained in the
following selected financial information as of and for each of the years ended
December 31, 1999, 1998, 1997 and 1996 are derived from our financial statements
which have been audited on an annual basis by Schauer, Taylor, Cox & Vise, P.C.
The selected statistical data following this selected financial information is
derived from the financial statements referenced above.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997 1996
------- ------- ------ ------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Interest income............................... $16,139 $11,271 $9,143 $6,311
Interest expense.............................. 9,139 6,498 5,262 3,660
Net interest income........................... 7,001 4,773 3,881 2,651
Provision for loan losses..................... 880 300 480 368
Non-interest income........................... 845 529 385 253
Non-interest expense.......................... 5,561 3,221 2,385 1,715
Net income.................................... 1,266 1,208 1,018 517
PER SHARE DATA(1):
Net income -- basic........................... .48 .52 .44 .23
Net income -- diluted......................... .45 .50 .44 .23
Cash dividends................................ -0- -0- -0- -0-
Shareholders' equity (book value) at period
end......................................... 4.62 4.34 3.03 2.56
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Loans..................................... $169,106 $129,831 $84,584 $64,962
Allowance for Loan Losses................. 1,849 1,686 930 655
Deposits.................................. 186,730 163,861 95,348 81,148
Average equity............................ 11,950 8,925 6,392 5,503
Average assets............................ 203,703 131,079 103,261 72,346
Total assets.................... 223,315 189,745 112,181 93,154
Weighted average shares
outstanding-basic(1).................... 2,652 2,332 2,310 2,272
Weighted average shares
outstanding-diluted(1).................. 2,848 2,442 2,324 2,272
</TABLE>
- -------------------------
(1) As adjusted for the two-for-one split of Company shares effective April 12,
2000.
14
<PAGE> 17
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
RATIOS:
Return on average assets.......................... .62% .92% .98% .71%
Return on average equity.......................... 10.59 13.50 15.90 9.40
Net interest margin............................... 3.81 4.04 4.06 3.90
Efficiency ratio.................................. 69.37 60.35 55.70 59.06
Allowance for loan losses to period end total
loans.......................................... 1.09 1.30 1.10 1.01
Dividend payout ratio............................. 0 0 0 0
Average equity to average assets.................. 5.87 6.80 6.19 7.61
Total capital..................................... 7.41 7.88 9.33 10.30
Tier 1 capital.................................... 6.34 6.64 8.23 9.40
Leverage ratio.................................... 5.22 4.99 6.40 5.90
</TABLE>
15
<PAGE> 18
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. These 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, 1999 YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- -------- ------- --------- -------- ------- --------- -------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
EARNING ASSETS:
Loans, net of unearned
income(1)................... $150,691 $13,827 9.18% $ 95,353 $ 9,645 10.12% $ 74,753 $7,675 10.27%
Securities:
Taxable..................... 22,500 1,389 6.17 15,919 1,009 6.34 17,498 1,160 6.63
Tax-exempt.................. 10,692 802 7.50 7,943 570 7.18 3,257 258 7.92
-------- ------- -------- ------- -------- ------
Total securities.......... 33,192 2,191 6.60 23,862 1,579 6.62 20,755 1,418 6.83
Interest bearing deposits with
other banks................. 258 16 6.20 34 2 5.88 0 0 0
Federal funds sold............ 7,399 399 5.39 4,414 269 6.09 2,895 160 5.53
-------- ------- -------- ------- -------- ------
Total interest-earning
assets.................. 191,540 16,433 8.58 123,663 11,495 9.30 98,403 9,253 9.40
NON INTEREST-EARNING ASSETS:
Cash and due from banks....... 4,644 3,587 2,170
Premises and equipment........ 3,835 2,419 1,644
Accrued interest and other
assets...................... 5,467 2,551 1,818
Allowance for loan losses..... (1,783) (1,141) (774)
-------- -------- --------
Total assets.............. $203,703 $131,079 $103,261
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand deposits............... $ 46,222 1,857 4.02 $ 30,238 1,444 4.78 22,681 1,116 4.92
Savings deposits.............. 31,017 1,256 4.05 24,463 1,210 4.95 17,984 933 5.19
Time deposits................. 88,228 5,137 5.82 52,104 3,237 6.21 45,616 2,862 6.27
-------- ------- -------- ------- -------- ------
165,467 8,250 4.99 106,805 5,891 5.52 86,281 4,911 5.69
Other short-term borrowings... 2,498 112 4.48 4,106 178 4.34 4,471 201 4.50
Long-term debt................ 12,798 777 6.07 6,649 428 6.44 2,090 150 7.18
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities............. 180,763 9,139 5.06 117,560 6,497 5.54 92,842 5,262 5.67
-------- ------- -------- ------- -------- ------
NONINTEREST-BEARING
LIABILITIES:
Demand deposits............... 9,558 3,940 3,527
Accrued interest and other
liabilities................. 1,432 654 500
Shareholders' equity.......... 11,950 8,925 6,392
-------- -------- --------
Total liabilities and
shareholders' equity.... $203,703 $131,079 $103,261
======== ======== ========
Net interest income/net
interest spread............. 7,294 3.52% 4,998 3.76% 3,991 3.73%
==== ===== =====
Net yield on earning assets... 3.81% 4.04% 4.06%
==== ===== =====
TAXABLE EQUIVALENT ADJUSTMENT:
Loans......................... 19 31 22
Investment securities......... 274 194 88
------- ------- ------
Total taxable equivalent
adjustment.................. 293 225 110
------- ------- ------
Net interest income....... $ 7,001 $ 4,773 $3,881
======= ======= ======
</TABLE>
- -------------------------
(1) Average loans include nonaccrual loans. All loans and deposits are domestic.
16
<PAGE> 19
The following tables contain a summary of the changes in interest income
and interest expense resulting from changes in interest rates and changes in the
volume of earning assets and interest-bearing liabilities for the years ended
December 31, 1999, 1998 and 1997, 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
TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
CHANGE IN VOLUME
AVERAGE VOLUME --------------------- AVERAGE RATE
----------------------------- 1999- 1998- --------------------
1999 1998 1997 1998 1997 1999 1998 1997
-------- -------- ------- --------- --------- ---- ----- -----
EARNING ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income(1)..... $150,691 $ 95,353 $74,753 $55,338 $20,600 9.18% 10.12% 10.27%
-------- -------- ------- ------- -------
Investment Securities:
Taxable............................ 22,500 15,919 17,498 6,581 (1,579) 6.17 6.34 6.63
Tax-exempt......................... 10,692 7,943 3,257 2,749 4,686 7.50 7.18 7.92
-------- -------- ------- ------- -------
Total investment
securities................. 33,192 23,862 20,755 9,330 3,107 6.60 6.62 6.83
-------- -------- ------- ------- -------
Interest-bearing deposits with other
banks.............................. 258 34 -- 224 -- 6.20 5.88 0.00
Federal funds sold................... 7,399 4,414 2,895 2,985 1,553 5.39 6.09 5.53
-------- -------- ------- ------- -------
Total earning assets......... $191,540 $123,663 $98,403 $67,876 $25,260 8.58 9.30 9.40
======== ======== ======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Demand............................. $ 46,222 $ 30,238 $22,681 $15,984 $ 7,557 4.02 4.78 4.92
Savings............................ 31,017 24,463 17,984 6,554 6,479 4.05 4.95 5.19
Time............................... 88,228 52,104 45,616 36,124 6,488 5.82 6.21 6.27
-------- -------- ------- ------- -------
Total deposits............... 165,467 106,805 86,281 58,662 20,524 4.99 5.52 5.69
Other short-term borrowings.......... 2,498 4,106 4,471 (1,608) (365) 4.48 4.34 4.50
Long-term debt....................... 12,798 6,649 2,090 6,149 4,559 6.07 6.44 7.18
-------- -------- ------- ------- -------
Total interest-bearing
liabilities................ $180,763 $117,560 $92,842 $63,203 $24,718 5.06 5.53 5.67
======== ======== ======= ======= =======
Net interest income/net interest
spread............................. 3.52 3.77 3.73
Net yield on earning assets.......... 3.81 4.04 4.06
Net cost of funds.................... 4.77 5.26 5.34
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
INTEREST
INCOME/EXPENSE VARIANCE VARIANCE ATTRIBUTED TO(1)
--------------------------- --------------------- ---------------------------------
1999 1998 1997 1999-1998 1998-1997 1999 1998
------- -------- ------ --------- --------- ---------------- --------------
VOLUME RATE VOLUME RATE
(DOLLARS IN THOUSANDS)------ ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans, net of unearned
income(1)................. $13,827 $9,645 $7,675 $4,182 $1,970 $5,150 $ (968) $2,084 $(114)
Investment Securities:
Taxable................... 1,389 1,009 1,160 380 (151) 408 (28) (102) (49)
Tax-exempt................ 802 570 258 232 312 206 26 338 (26)
------- ------ ------ ------ ------ ------ ------- ------ -----
Total investment
securities........ 2,191 1,579 1,418 612 161 614 (2) 236 (75)
------- ------ ------ ------ ------ ------ ------- ------ -----
Interest-bearing deposits
with other banks.......... 16 2 -- 14 2 15 (1) 2 --
Federal funds sold.......... 399 269 160 130 109 164 (34) 91 18
------- ------ ------ ------ ------ ------ ------- ------ -----
Total earning
assets............ 16,433 11,495 9,253 4,938 2,242 5,943 (1,005) 2,413 (171)
------- ------ ------ ------ ------ ------ ------- ------ -----
INTEREST-BEARING
LIABILITIES:
Deposits:
Demand.................... 1,857 1,444 1,116 413 328 671 (258) 361 (33)
Savings................... 1,256 1,210 933 46 277 290 (244) 322 (45)
Time...................... 5,137 3,237 2,862 1,900 375 2,115 (215) 403 (28)
------- ------ ------ ------ ------ ------ ------- ------ -----
Total deposits...... 8,250 5,891 4,911 2,359 980 3,076 (717) 1,086 (106)
Other short-term
borrowings................ 112 178 201 (66) (23) (72) 6 (16) (17)
Long-term debt.............. 777 428 150 351 278 375 (26) 295 (7)
------- ------ ------ ------ ------ ------ ------- ------ -----
Total
interest-bearing
liabilities....... 9,139 6,497 5,262 2,644 1,235 3,379 (737) 1,365 (130)
------- ------ ------ ------ ------ ------ ------- ------ -----
Net interest income/net
interest spread........... $ 7,294 $4,998 $3,991 $2,296 $1,007 $2,564 $ (268) $1,048 $ (41)
======= ====== ====== ====== ====== ====== ======= ====== =====
</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.
18
<PAGE> 21
SECURITIES PORTFOLIO
The following table contains the carrying amount of securities at December
31, 1999, 1998 and 1997:
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury and U.S. Government agencies........... $16,843 $13,642 $13,980
Mortgage-backed securities........................... 6,248 1,908 1,165
State and municipal securities....................... 4,717 5,776 -0-
Equity securities.................................... 728 614 400
------- ------- -------
Total...................................... $28,536 $21,940 $15,545
======= ======= =======
SECURITIES HELD-TO-MATURITY:
State and municipal securities....................... $ 5,800 $ 6,218 $ 4,181
======= ======= =======
</TABLE>
Average taxable securities were 67.8% of the portfolio for the year ended
December 31, 1999, 66.7% of the portfolio for the year ended December 31, 1998
and 84.3% of the portfolio for the year ended December 31, 1997. The increase of
tax-exempt securities in 1998 reflects the Banks' intent to reduce the effect of
federal income taxation.
The maturities and weighted average yields of the securities portfolio as
of December 31, 1999 are presented below. The average maturity of the securities
portfolio is 10.16 years with an average yield of 6.68%. Taxable equivalent
adjustments, using a 34% tax rate, have been made in calculating yields on
tax-exempt obligations. Equity securities have been excluded since these
instruments have no maturity date.
SECURITIES PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
MATURING
------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN WITHIN FIVE WITHIN TEN AFTER
ONE YEAR YEARS YEARS TEN YEARS
-------------- -------------- --------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------- ----- ------ -----
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury................. $-0- -0-% $ -0- -0-% $ -0- -0-% $ -0- -0-%
U.S. Government agencies...... -0- -0- 2,627 6.09 14,557 5.52 -0- -0-
Mortgaged-backed.............. -0- -0- 952 7.32 -0- -0- 4,955 5.38
State and municipal........... 100 9.27 100 7.14 1,572 6.92 2,945 7.47
Equity Securities............. -0- -0- -0- -0- -0- -0- 728 7.50
---- ------ ------- ------
$100 9.27 $3,679 6.43 $16,129 5.65 $8,628 6.27
==== ====== ======= ======
SECURITIES HELD-TO-MATURITY:
State and municipal........... $-0- -0-% $ 904 7.18% $ 1,422 7.45% $3,474 7.69%
==== ==== ====== ==== ======= ==== ====== ====
</TABLE>
19
<PAGE> 22
With the exception of securities of the U.S. Government and U.S. Government
agencies, the Banks held no securities as to which the aggregate value on
December 31, 1999 or 1998 exceeded 10% of shareholders' equity at each 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.
LOAN PORTFOLIO
The following table shows the classification of loans by major category at
December 31, 1999, 1998 and 1997.
TYPES OF LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural..................... $ 35,375 20.9% $ 26,883 20.7% $16,536 19.5%
Real estate -- construction........ 13,941 8.2% 8,543 6.6% 5,119 6.1%
Real estate -- other(1)............ 103,413 61.2% 78,965 60.8% 50,928 60.2%
Consumer........................... 15,026 8.9% 13,743 10.6% 10,835 12.8%
Other loans........................ 1,351 0.8% 1,697 1.3% 1,166 1.4%
-------- ----- -------- ----- ------- -----
$169,106 100.0% $129,831 100.0% $84,584 100.0%
======== ===== ======== ===== ======= =====
Less:
Allowance for loan losses........ 1,849 1,686 930
-------- -------- -------
Net loans................. $167,257 $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, 1999 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................ $19,837 $14,214 $1,324 $35,375 $15,538 $-0-
Real estate -- construction... 13,566 375 -0- 13,941 375 -0-
------- ------- ------ ------- ------- ----
Total................ $33,403 $14,589 $1,324 $49,316 $15,913 $-0-
======= ======= ====== ======= ======= ====
</TABLE>
20
<PAGE> 23
The following table contains information concerning outstanding balances of
nonperforming assets at December 31, 1999, 1998 and 1997.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Nonaccruing loans......................... $344 $ 4 $ 15
Loans past due 90 days or more............ 24 23 13
Restructured loans........................ -0- -0- -0-
---- ------ ------
Total nonperforming loans....... 368 27 28
Nonaccruing securities.................... -0- -0- -0-
Other real estate......................... -0- -0- -0-
---- ------ ------
Total nonperforming assets...... $368 $ 27 $ 28
==== ====== ======
RATIOS:
Loan loss allowance to total
nonperforming assets................. 5.02 62.44 33.21
==== ====== ======
Total nonperforming loans to
total loans (net of unearned
interest).................... .22% .02% .03%
==== ====== ======
Total nonperforming assets to
total assets................. .16% .01% .02%
==== ====== ======
</TABLE>
It is the general policy of the Banks 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 90 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 Financial
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
$1,849,290 in the allowance for loan losses at December 31, 1999, or 1.1% of
total net outstanding loans at that date, was adequate to absorb known risks in
the portfolio based upon the Banks' 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 Banks' loan portfolios.
21
<PAGE> 24
The following table contains information with respect to the Company's
loans, net of unearned income, and the allowance for loan losses for each of the
last four fiscal years:
ANALYSIS OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997 1996
-------- -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
Allowance for loan losses at beginning of
year.................................... $ 1,686 $ 930 $ 655 $ 325
Adjustment of business acquisition........ -0- 557 -0- -0-
Loans charged off:
Commercial, financial and
agricultural......................... 461 32 95 -0-
Real estate -- construction............. -0- -0- 45 -0-
Real estate -- other.................... 22 -0- 2 6
Consumer................................ 278 104 85 32
-------- -------- ------- -------
Total loans charged off......... 761 136 227 38
-------- -------- ------- -------
Recoveries on loans previously charged
off:
Commercial, financial, and
agricultural......................... 15 6 2 -0-
Real estate -- construction............. -0- -0- 8 -0-
Real estate -- other.................... -0- -0- 1 -0-
Consumer................................ 29 29 11 -0-
-------- -------- ------- -------
Total recoveries on loans
previously charged off....... 44 35 22 -0-
-------- -------- ------- -------
Net loans charged off........... 717 101 205 38
-------- -------- ------- -------
Provisions for loan losses................ 880 300 480 368
-------- -------- ------- -------
Allowance for loan losses at end of
period.................................. $ 1,849 $ 1,686 $ 930 $ 655
======== ======== ======= =======
Loans, net of unearned income, at end of
period.................................. $169,106 $129,831 $84,584 $64,962
======== ======== ======= =======
Average loans, net of unearned income,
outstanding for the period.............. $150,691 $ 95,353 $74,753 $51,008
======== ======== ======= =======
Ratios:
Allowance at end of period to loans, net
of unearned income................... 1.09% 1.30% 1.10% 1.01%
Allowance at end of period to average
loans, net of unearned income........ 1.23% 1.77% 1.24% 1.28%
Net charge-offs to average loans, net of
unearned income...................... .48% .11% .27% .07%
Net charge-offs to allowance at end of
period............................... 38.78% 5.99% 22.04% 5.80%
Recoveries to prior year charge-offs.... 32.35% 15.42% 57.89% -0-%
</TABLE>
In assessing adequacy, management relies predominantly on its ongoing
review of the loan portfolio, which is undertaken both to determine 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 Banks, the
amount of past due
22
<PAGE> 25
and nonperforming loans, current and anticipated economic conditions, lender
requirements and other appropriate information.
Management allocated the reserve for loan losses to specific loan classes
as follows:
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Domestic Loans(1):
Commercial, financial
and
agricultural...... $ 349 19% $ 421 25% $186 20%
Real estate --
construction...... 152 8 118 7 55 6
Real
estate -- other... 1,120 61 894 53 567 61
Consumer............. 228 12 253 15 122 13
------ --- ------ --- ---- ---
Total........ $1,849 100% $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, 1999, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- ------- ----
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits................ $ 9,558 -0-% $ 3,940 -0-% $ 3,527 -0-%
Demand.................... 46,222 4.02% 30,238 4.78% 22,681 4.92%
Savings................... 31,017 4.05% 24,463 4.95% 17,984 5.19%
Time Deposits............. 88,228 5.82% 52,104 6.21% 45,616 6.27%
-------- -------- -------
Total interest-
bearing
deposits..... 165,467 4.99% 106,805 5.52% 86,281 5.69%
-------- -------- -------
Total average
deposits..... $175,025 4.71% $110,745 5.32% $89,808 5.47%
======== ======== =======
</TABLE>
23
<PAGE> 26
The two categories of lowest cost deposits comprised the following
percentages of average total deposits during the year ended December 31, 1999:
average noninterest-bearing demand deposits, 5.5%; and average savings deposits,
17.7%. Of average time deposits, approximately 35.8% 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, 1999 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...................................... $12,005
Over three through six months............................. 9,073
Over six through twelve months............................ 9,485
Over twelve months........................................ 7,718
-------
Total........................................... $38,281
=======
</TABLE>
LONG-TERM DEBT AND FEDERAL HOME LOAN BANK ADVANCES
As of December 31, 1999, the Company had long-term borrowings totaling
$16,964,286. Of this amount, $13,364,286 represents borrowings from the Federal
Home Loan Bank against available credit lines of $18,000,000. These borrowings
have varying maturities with interest rates ranging from 5.27% to 6.77% and are
secured by residential mortgages. The remaining long-term debt consists of a
$3,600,000 term loan with The Bankers Bank, secured by stock of Gilmer County
Bank and Appalachian Community Bank bearing interest at prime less 3/4 of a
percentage point.
Maturities of long-term debt for the years ending December 31, 2000 and
thereafter, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000................................................. $ 3,592,857
2001................................................. 1,592,857
2002................................................. 1,592,857
2003................................................. 1,392,857
2004................................................. 1,292,857
Thereafter........................................... 3,500,000
-----------
$12,964,285
===========
</TABLE>
24
<PAGE> 27
RETURN ON EQUITY AND ASSETS
The following table summarizes specified financial ratios for the Company
for the years ended December 31, 1999, 1998 and 1997.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Return on average assets (September 30, 1999,
annualized).......................................... .62% .92% .98%
Return on average equity (September 30, 1999,
annualized).......................................... 10.59 13.50 15.90
Dividend payout ratio.................................. 0 0 0
Average equity to average assets ratio................. 5.87 6.80 6.19
</TABLE>
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of the following discussion is to address information relating
to our financial condition and results of operations 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 prospectus. You should read this
discussion in conjunction with information provided in our consolidated
financial statements and accompanying footnotes, and with the statistical
information appearing elsewhere in this prospectus under the caption "Selected
Consolidated Financial Data and Statistical Information." Unless we specifically
state otherwise, the discussion of net interest income in this financial review
is presented on a taxable equivalent basis to facilitate performance comparisons
among our various taxable and tax-exempt assets.
ACQUISITION OF APPALACHIAN COMMUNITY BANK
In November 1998, we acquired First National Bank of Union County. This
bank, located in the North Georgia town of Blairsville, Union County, was then
converted to a state-chartered bank and renamed Appalachian Community Bank. At
the time of our purchase, Appalachian Community Bank's asset quality had
declined, and it had problems in a number of areas, including depth of
management and earnings performance. Even though the bank had problems, the
acquisition was pursued by us for the following reasons:
- The Appalachian acquisition offered us an opportunity to diversify our
loan portfolio by providing entry into a complimentary market;
- Entry into the Union County market through acquisition instead of through
the formation of a new bank produced time and cost savings;
- The acquisition, coupled with the bank's conversion and name change,
provided us with a platform for branching under a name suitable for use
throughout North Georgia and allowing us to avoid a name change for
Gilmer County Bank which has an established identity in the Gilmer County
market; and
- We were able to negotiate the acquisition on favorable terms, allowing us
to transfer the lower quality assets and some of the bank's liabilities
to the seller, giving us an opportunity for a clean bank with a stable
deposit base.
In light of these perceived benefits, and based on our belief that, with
our management and our commitment of resources, the existing problems at
Appalachian Community Bank can be resolved, the acquisition was deemed to be in
our best long-term interest.
The integration of Appalachian Community Bank has had the effect of
temporarily reducing our earnings and increasing our expenses. We incurred
during 1999 a number of non-recurring expenses as a result of the acquisition.
The most significant resulting expenses incurred have been advertising and
marketing related, as we worked to improve Appalachian Community Bank's market
penetration. For the year ended December 31, 1999, advertising and marketing
expenses were approximately $309,000, compared to approximately $203,000 for the
same period of 1998. Further, Appalachian Community Bank's computer systems
required substantial upgrades, increasing our computer-related expenses to
approximately $375,000 for the year ended December 31, 1999, compared to
approximately $136,000 for the same period of 1998.
26
<PAGE> 29
We transferred to the Seller at the time of acquisition a substantial
number of lower quality loans which were also a substantial portion of the
bank's highest yielding earning assets. In an effort to replace these loans and
the resulting interest income, we allowed Appalachian Community Bank to
participate in approximately $4,000,000 of loans generated at Gilmer County
Bank, net of the loans Appalachian generated for Gilmer County Bank's
participation. Although resulting in an increase in expenses relating to these
loans, this strategy was beneficial in that it allowed Appalachian Community
Bank to build its asset base and focus on increasing deposits to support future
activity. As a result of increased local loan volume during the third quarter of
1999, we were able to reduce these participations and Appalachian Community Bank
began to operate on a basis independent from Gilmer County Bank.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Our net income of $1,265,774 for the year ended December 31, 1999,
represents an increase of $57,543 or 4.8%, compared to the prior fiscal year.
Our net income of $1,208,231 for the year ended December 31, 1998 represents an
increase of $190,425, or 4.8%, from the net income of $1,017,766 for the year
ended December 31, 1997. The increase in net income for these periods relates to
the growth in Gilmer County Bank's and Appalachian Community Bank's deposit and
loan base.
After restatement for the two-for-one stock split in 1998, earnings per
share decreased to $0.95 ($0.89 on a fully diluted basis) in 1999 compared to
$1.04 ($0.99 on a fully diluted basis) for 1998 and $0.88 per share for 1997.
Return on average assets, which reflects the Banks' abilities to utilize their
assets, was 0.62% in 1999, compared with 0.92% in 1998 and 0.98% in 1997. Return
on average shareholders' equity decreased to 10.59% in 1999 compared with 13.5%
in 1998 and 15.9% in 1997, due in part to the acquisition of Appalachian
Community Bank.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
NET INTEREST INCOME
Net interest income, the difference between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds, is the largest component of our net income. 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 increased $2,227,759 or 46.7% to $7,000,532 at December 31, 1999,
compared to $4,772,773 in 1998. This increase was caused by the growth of the
Banks' deposit base and loan portfolio.
Interest and fees earned on loans increased 43.6% to $13,807,798 in 1999
from $9,614,165 in 1998. The increase was primarily from the increase in volume
of average loans to approximately $150,691,000 in 1999 from approximately
$95,353,000 in 1998.
Interest earned on taxable securities increased 37.6% to $1,388,750 in 1999
from $1,009,595 in 1998, while interest earned on non-taxable securities
increased 40.2% from $376,157 to $527,461 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.
27
<PAGE> 30
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 1999 was 3.81% compared to a net interest margin of 4.04% in
1998.
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
3.52% in 1999 compared to 3.76% in 1998.
During 1999, interest on federal funds sold increased $129,860, 48.3%, from
1998. This increase in income is the result of maintaining larger average
federal funds balances with correspondent banks of approximately $7,399,000 and
$4,414,000 in 1999 and 1998, respectively. The average yield for such years was
5.39% and 6.09%, respectively. Interest on deposits with other banks increased
to $16,322 in 1999 from $1,963 in 1998.
INTEREST EXPENSE
Total interest expense increased $2,640,552, 40.6%, from $6,498,219 in 1998
to $9,138,771 in 1999. This increase was the combined effect of an increase in
the average balance of interest-bearing deposits to approximately $165,467,000
in 1999 from approximately $106,805,000 in 1998 and the average rate paid on
deposits. The average rate paid on deposits in 1999 and 1998, respectively, was
4.99% and 5.33%. The effect of these changes increased the interest expense on
interest-bearing deposits to $8,249,918 in 1999 from $5,891,778 in 1998, an
increase of $2,358,140, 40.0%.
NONINTEREST INCOME
Noninterest income for 1999 and 1998 totaled $844,913 and $528,921,
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
bases. Other operating income increased from $251,717 in 1998 to $379,477 in
1999, primarily due to an increase in credit card fees earned by the Banks.
NONINTEREST EXPENSES
Noninterest expenses totaled $5,560,969 in 1999, $3,221,213 in 1998 and
$2,379,358 in 1997. Salaries and benefits increased $1,078,875, 72.1%, to
$2,575,618 in 1999, due to the Banks' increased staffing to accommodate the
growth in the Banks' loans and deposits. Furniture and equipment expenses
increased $85,344, 33.8%, in 1999 due to increased data processing costs and the
cost associated with remodeled facilities. Other operating expenses increased
$1,024,547, 78.9%, to $2,323,177 in 1999 due mainly to substantial increases in
professional fees, data processing, advertising and supplies. All of the above
expenses increased significantly in 1999 as compared to prior years due to
inclusion of a full year of expenses incurred by Appalachian Community Bank,
which was acquired in late 1998.
28
<PAGE> 31
The table below sets forth the Company's noninterest expenses for the
periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits.......................... $2,576 $1,497 $1,154
Professional and regulatory fees........................ 412 221 195
Data processing......................................... 375 136 87
Furniture and equipment expense......................... 338 253 150
Occupancy expense....................................... 324 173 97
Advertising............................................. 309 203 122
Supplies................................................ 253 166 117
Director and committee fees............................. 227 126 119
Postage................................................. 131 89 70
Amortization expense.................................... 118 21 6
Insurance............................................... 81 54 56
Taxes and licenses...................................... 64 47 26
Checking account expense................................ 63 41 33
Correspondent bank charges.............................. 45 35 35
Other................................................... 245 159 112
------ ------ ------
Total......................................... $5,561 $3,221 $2,379
====== ====== ======
</TABLE>
INCOME TAXES
The Company's net operating income of $1,404,476 in 1999 resulted in income
tax expense of $138,702. Net operating income for 1998 was $1,780,481 with a
related income tax expense of $572,250.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
NET INTEREST INCOME
Net interest income was $4,772,773 in 1998, compared to $3,880,715 in 1997,
representing an increase of $892,058, 23.0%. This increase was caused by the
growth of Gilmer County 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 120.9% from $170,274 to $376,157 during the same period. The increase
in interest earned on non-taxable securities in 1998 is a result of an increase
of approximately $4,686,000, 143.9%, in the average investment portfolio for
such securities from 1997, reflecting 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
29
<PAGE> 32
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. This increase was due primarily
to the growth of the Banks 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 was
3.76% in 1998 compared to 3.73% in 1997.
During 1998, interest on federal funds sold increased $109,396, or 68.5%,
from 1997. The increase in income from federal funds sold is a result of an
increase in the average amount of federal funds sold from approximately
$2,895,000 in 1997 to approximately $4,414,000 in 1998, and an increase in the
average yield for such funds from 5.53% in 1997 to 6.90% in 1998.
Total interest expense increased $1,235,966, or 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
$106,805,000 in 1998 from approximately $86,281,000 in 1997. The average rate
paid on deposits in 1998 was 5.52% and in 1997 was 5.69%. The effect of the
significant increase in the average balance of interest-bearing deposits
increased the interest expense on interest-bearing deposits to $5,891,798 in
1998 from $4,911,266 in 1997, an increase of $980,532, or 20.0%.
NONINTEREST INCOME
Noninterest income was $528,921 for 1998 and $378,996 for 1997. 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 operating income increased 56.3% from $161,086 in 1997 to $251,717 in
1998, primarily due to the addition of Appalachian Community Bank and an
increase in credit card fees earned by the Gilmer County Bank.
NONINTEREST EXPENSES
Noninterest expenses totaled $3,221,213 in 1998 and $2,379,358 in 1997.
Salaries and benefits increased $342,287, or 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 Appalachian Community Bank in
November 1998. Furniture and equipment expenses increased $102,448, or 68.1%, in
1998 due to increased data processing costs and the costs associated with
expanded facilities. Other operating expenses increased $321,353, or 32.9%, to
$1,298,630 in 1998 due mainly to an increase in advertising and supplies.
INCOME TAXES
Our net operating income of $1,780,481 in 1998 resulted in $572,250, or
32.1%, of income tax expense. Net operating income for 1997 was $1,400,353 with
a related income tax expense of $382,587, or 27.3%.
30
<PAGE> 33
FINANCIAL CONDITION
EARNING ASSETS
The Banks' earning assets, which include deposits in other banks, federal
funds sold, securities and loans, averaged $191,540,000 in 1999, or 94.0% of
average total assets and $123,663,000 during 1998, or 94.3% of average total
assets. The mix of average earning assets comprised the following percentages:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Deposits in other banks........................... .14% .03% 0%
Federal funds sold................................ 3.86% 3.57% 2.94%
Investment securities............................. 17.33% 19.30% 21.10%
Loans............................................. 78.67% 77.20% 75.96%
</TABLE>
The mix of average earning assets reflects management's attempt to maximize
interest income after tax while maintaining acceptable levels of risk. The Banks
do not participate in the national market of loans to finance leveraged buy-outs
or lesser developed country debt.
LOANS
Loans made up the largest component of the Banks' earning assets for the
year ended December 31, 1999. At December 31, 1999, the Banks' total loans were
$169,105,872 compared to total loans of $129,831,095 at the end of 1998. In
1999, average net loans represented 78.7% of average earning assets and 74.0% of
total average assets, while in 1998, average net loans represented 77.1% of
average earning assets and 72.7% 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 areas. The ratio of total loans to
total deposits was 90.6% in 1999 and 79.2% in 1998.
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, 1999, $28,536,246 was
classified as available-for-sale, while at December 31, 1998, $21,940,281 of the
Banks' securities were classified as available-for-sale. Securities classified
as held-to-maturity were $5,799,963 at year end 1999, and $6,218,354 at year end
1998.
The composition of the Banks' securities portfolio reflects our investment
strategy of maximizing portfolio yields subject to risk and liquidity
considerations. The primary objectives of our 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 our intention 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 1999, gross sales
amounted to $4,406,657 representing 13.3% of the average portfolio and
maturities amounted to $9,502,031 representing 28.6% of the
31
<PAGE> 34
average portfolio. Net gains associated with these transactions were $9,430.
Gross unrealized gains at year-end 1999 amounted to $28,550 and unrealized
losses amounted to $1,419,149. During 1998, gross securities sales were
$9,515,761 representing 40.0% of the average portfolio for the year and
maturities were $11,597,617 representing 48.6% of the average portfolio for the
year. Net gains associated with sales and maturities totaled $15,950 in 1998.
Gross unrealized gains in the portfolio amounted to $423,178 at year-end 1998
and unrealized losses amounted to $30,074.
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 1999 and 1998 did not include securities with these
characteristics. The recoverability of the Banks' investments in mortgage-backed
securities is reviewed periodically, and we intend 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, 1999, was $3,842,157 and
$18,392,213 in 1998. Average federal funds sold for 1999 was approximately
$7,399,000, or 3.9% of average earning assets, and for 1998 was $4,414,000, or
3.6% of average earning assets. The large decrease in year-end federal funds
resulted from the effective management of interest yield.
There has been no significant impact on our 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
Our strategy to attract deposits has been based upon the relative level of
interest rates. When interest rates are relatively high, we attempt to attract
core deposits because they have lower relative interest rates. When interest
rates are relatively low, we reduce core deposit rates and as a result some of
our customers shift their deposits to longer term and higher rate certificates
of deposits. During the past 24 months, we have been reducing the rates on core
deposits. The resulting shift has resulted in a greater dependency upon
certificate of deposits in $100,000 and larger denominations, it has also
lengthened the period in which there is an opportunity to reprice these funding
sources. This lengthening of deposit repricing opportunities helps to reduce our
overall rate sensitivity.
Our primary source of funds is derived from deposits of the Banks'
customers. Average deposits increase 58.0% from approximately $110,745,000 in
1998 to approximately 175,025,000 in 1999. At December 31, 1999, total deposits
were $186,729,656 of which $176,366,521, 94.5%, were interest bearing. At
December 31, 1998, total deposits were $163,861,478, of which $154,573,545,
94.3%, was interest bearing. The continued enhancement of existing products and
emphasis upon better customer service fueled the growth in the deposit base. We
intend to emphasize attracting customer deposits in order to expand the customer
basis of the Banks and to continue to fund asset growth.
Securities sold under agreements to repurchase amounted to $3,204,007 at
December 31, 1999, compared to $2,478,344 at December 31, 1998. The weighted
average rates were 3.96% for 1999 and 4.26% for 1998. Securities sold under
agreements to
32
<PAGE> 35
repurchase averaged $2,071,713 during 1999 and $4,095,716 during 1998. The
maximum outstanding at any month end during 1999 was $3,679,074 and during 1998
was $4,468,355. 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. In addition, the Company had federal funds purchased
that amounted to $2,930,000 at year-end 1999 compared to no federal funds
purchased at year-end 1998.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $941,080, or 8.2%, from December 31, 1998 to
December 31, 1999, due in part to net earnings of $1,265,774, and the decrease
in unrealized gains on securities available-for-sale totaling $887,711, net of
deferred tax liability. The increase was also a result of the issuance of 21,934
shares of the Company's common stock to the Company's 401(k) plan at a total
purchase price of $385,880, and the issuance of 43,000 shares in connection with
the exercise of options by certain of our directors with aggregate compensation
recognized of $157,094 and the exercise of 4,400 options with a tax benefit
received of $20,043.
All amounts presented in this prospectus and in the financial statements
are adjusted to reflect the two-for-one stock split effected in May 1998. See
"Market for Our Common Stock and Related Shareholder Matters." The net effect of
the stock split did not change total shareholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY MANAGEMENT
Liquidity is defined as the ability of a company to convert assets into
cash or cash equivalents without significant loss. Liquidity management involves
maintaining the 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 we 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, therefor,
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 $33.0 million or 19.8% of the
total loan portfolio at December 31, 1999 and investment securities maturing in
one year or less equaled $1.1 million or 3.2% of the portfolio. Other sources of
liquidity include short-term investments such as federal funds sold.
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<PAGE> 36
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal 1999, funds were also available through the purchase of
federal funds from correspondent commercial banks from available lines of up to
an aggregate of $5,800,000.
In an effort to maintain and improve the liquidity position of Gilmer
County Bank, management made an 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 has
since been increased to $17,506,170 as of December 31, 1999. At December 31,
1999, the outstanding balance of Gilmer County Bank's credit line was
$11,464,286. See Note 9 to the Notes to Consolidated Financial Statements
herein. Appalachian Community Bank 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,
1999, Appalachian Community Bank had an outstanding balance on its credit line
of $1,900,000.
CAPITAL RESOURCES
A strong capital position is vital to our continued profitability because
it promotes depositor and investor confidence and provides a solid foundation
for future growth of the organization. A majority of our capital requirements
have been provided from the proceeds from Gilmer County Bank's initial stock
offering in 1994, from the proceeds of the $2.65 million private placement of
our common stock in November 1998, and through the retention of earnings and the
sale of stock to our 401(k) plan.
TERM LOAN. In November 1998, we 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 million of the proceeds of
the Term Loan to fund a portion of its acquisition of Appalachian. 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, 1999, the balance on the Term
Loan was $3.6 million. Interest on the outstanding amounts under the Term Loan
is payable quarterly 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. This loan was refinanced
subsequent to the end of the fiscal year. See "-- Subsequent Events."
FEDERAL CAPITAL STANDARDS. Regulatory authorities are placing increased
emphasis on the maintenance of adequate capital. In 1990, new risk-based capital
requirements became effective. 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
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<PAGE> 37
guidelines, capital strength is measured in two tiers which are used in
conjunction with risk-adjusted assets to determine the risk-based capital
ratios. Our Tier 1 capital, which consists of common equity, paid-in capital and
retained earnings (less intangible assets), amounted to $11.0 million at
December 31, 1999. 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 $12.8 million at year-end 1999. The Company's
percentage ratios as calculated under regulatory guidelines were 6.34% for Tier
1 and 7.41% for Total Capital at year-end 1999. The Company's Tier 1 Capital
exceeded the minimum ratios of 4% whereas the Company's Total Capital was
slightly under the minimum ratio of 8%.
Our failure to meet the minimum Total Capital ratio at December 31, 1999
was primarily attributable to the amount of goodwill resulting from our
acquisition of Appalachian Community Bank. Over future periods the effects of
the goodwill on our 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 capital ratios. These additional steps may include limiting
the payment of dividends by the Company and 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, 1999, the Company's leverage ratio was 5.22% exceeding the
regulatory minimum requirement of 4%.
The table below illustrates our regulatory capital ratios under federal
guidelines at December 31, 1999, 1998 and 1997:
CAPITAL ADEQUACY RATIOS
<TABLE>
<CAPTION>
STATUTORY DECEMBER 31, DECEMBER 31, DECEMBER 31,
MINIMUM 1999 1998 1997
--------- ------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Tier 1 Capital................... $ 10,981 $ 9,035 $ 6,916
Tier 2 Capital................... 1,849 1,686 930
-------- -------- -------
Total Qualifying
Capital............. $ 12,830 $ 10,721 $ 7,846
======== ======== =======
Risk Adjusted Total Assets
(including off-balance-sheet
exposures)..................... $212,785 $136,122 $84,074
======== ======== =======
Tier 1 Risk-Based Capital
Ratio.......................... 4.0% 6.34% 6.64% 8.23%
Total Risk-Based
Capital Ratio....... 8.0% 7.41% 7.88% 9.33%
Leverage ratio................... 4.0% 5.22% 4.99% 6.40%
</TABLE>
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<PAGE> 38
GEORGIA DEPARTMENT OF BANKING AND FINANCE CAPITAL REQUIREMENT. In addition
to the capital standards imposed by federal banking regulators, the Georgia
Commission also imposes a 6% primary capital ratio on Gilmer County Bank. The
Georgia Commission'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, 1999, Gilmer County Bank's capital
ratio as calculated under the Georgia Commission standard was 7.20%.
In 1999, Gilmer County Bank paid dividends totaling $350,000 to the
Company, which were used for the repayment of debt and other expenses.
APPALACHIAN COMMUNITY BANK. In addition to the capital standards opposed
by federal banking regulators, the Georgia Commission imposes a 6% primary
capital ratio on Appalachian Community Bank. At December 31, 1999, Appalachian
Community Bank's capital ratio as calculated under the Georgia Commission
standard was 11.8%. Appalachian Community Bank transferred $1,745,761 from
retained earnings to surplus as required by the Georgia Department of Banking
and Finance as part of Appalachian Community Bank's state charter application.
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 usually are 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.
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<PAGE> 39
The following table shows interest sensitivity gaps for these different
intervals as of December 31, 1999.
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
0-30 31-90 91-365 1-5 OVER 5
DAYS DAYS DAYS YEARS YEARS TOTAL
-------- -------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans......................... $ 15,347 $ 32,068 $ 36,397 $ 82,659 $ 2,635 $169,106
Securities:
Taxable....................... -0- -0- -0- 3,579 20,240 23,819
Tax-exempt.................... -0- 100 -0- 1,004 9,413 10,517
Time deposits in other
banks....................... 19 99 99 -0- -0- 217
Federal funds sold............ 3,842 -0- -0- -0- -0- 3,842
-------- -------- -------- -------- ------- --------
19,208 32,267 36,496 87,242 32,288 207,501
======== ======== ======== ======== ======= ========
Interest-bearing
liabilities(2):
Demand deposits(3)............ 14,122 14,122 14,121 -0- -0- 42,365
Savings deposits(3)........... 9,669 9,669 9,668 -0- -0- 29,006
Time deposits................. 5,506 31,830 46,639 21,021 -0- 104,996
Other short-term
borrowings(3)............... 2,045 2,045 2,044 -0- -0- 6,134
Long-term debt................ 1,000 1,000 4,000 4,014 6,950 16,964
-------- -------- -------- -------- ------- --------
32,342 58,666 76,472 25,035 6,950 199,465
-------- -------- -------- -------- ------- --------
Interest sensitivity gap...... $(13,134) $(26,399) $(39,976) $ 62,207 $25,338 $ 8,036
======== ======== ======== ======== ======= ========
Cumulative interest
sensitivity gap............. $(13,134) $(39,533) $(79,509) $(17,302) $ 8,036
======== ======== ======== ======== =======
Ratio of interest-earning
assets to interest-earning
liabilities................. .59 .55 .48 3.48 4.65
======== ======== ======== ======== =======
Cumulative ratio.............. .59 .57 .53 .91 1.04
======== ======== ======== ======== =======
Ratio of cumulative gap to
total interest-earning
assets...................... (.06) (.19) (.38) (.08) .04
======== ======== ======== ======== =======
</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 are assumed to be subject to immediate repricing
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, our
earnings may be adversely affected in the 0-365 day periods where liabilities
will reprice faster than assets. As seen in this table, for the first 30 days of
repricing opportunity, there is an excess of interest-bearing liabilities over
earning assets of approximately $13.1 million. For the first 365 days,
interest-bearing liabilities exceed earning assets by approximately $79.5
million. During this one-year time frame, 84% of all interest-bearing
liabilities will reprice compared to 42.4% of all interest-earning assets.
Changes in the mix of earning assets or supporting liabilities either can
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
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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 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 prospectus is used by the
Company to understand 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.
YEAR 2000
Until recently, many computer software programs and processing systems,
including some of those used by the Banks in their operations, were not designed
to accommodate entries beyond the year 1999 in the date fields. Failure to
address the anticipated consequences of this design deficiency could have had
material adverse effects on the business and operations of any business,
including the Banks, that relies on computers and associated technologies.
The Banks aggressively addressed the challenges that Year 2000 presented to
its operations. The transition into Year 2000 went according to plan. We have
not experienced any systems failures or material disruption to critical business
activities in connection with the transition to Year 2000, nor are we aware of
any third parties with which we have material relationships who have experienced
material Year 2000 disruptions or failures. Year 2000 validation, however, has
many elements and potential consequences, some of which may not be forseeable or
realized until future periods. Consequently, no assurances can be given that
unforeseen failures might not be identified in the future, or that we may not
identify information systems, computers or other equipment which may not be Year
2000 compliant.
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<PAGE> 41
The Banks incurred approximately $154,000 in expenditures on the Year 2000
project, $86,000 during 1999, and $68,000 in 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
We have 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, we have included,
as an additional financial statement, Consolidated Statements of Comprehensive
Income for the years ended December 31, 1999, 1998, and 1997. For us, 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, 1999, the change in unrealized gains on securities
represented a decrease in net income, as reported, of $887,711, or 70.1%, net of
tax. For the year ended December 31, 1998, the change in unrealized gains on
securities represented an increase in net income, as reported, of $90,842, or
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, or 4.2%, 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 governing how 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 our 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 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 No. 132,
Employers' Disclosures about Pensions and Other Post-retirement Benefits was
issued by FASB which standardizes the disclosure requirements for pensions and
other post-retirement 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 No. 132 will have a material impact on our 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
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<PAGE> 42
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.
SUBSEQUENT EVENTS
Subsequent to December 31, 1999, we entered into a Loan and Stock Pledge
Agreement with Crescent Bank and Trust Company pursuant to which the Company
borrowed $4.6 million. The proceeds of this loan were used in part to repay the
Term Loan of $3.6 million described above under "-- Capital Resources." The
remainder of the proceeds from this new loan was used to redeem certain
outstanding shares of common stock as to which the Company had redemption
rights. The new loan bears interest at a rate equal to the prime rate as
published in the Wall Street Journal, less 25 basis points.
Subsequent to December 31, 1999, we received a written report from the
FDIC's first examination of Appalachian Community Bank since its acquisition by
the Company. The FDIC indicated that it feels it is necessary to continue
Appalachian Community Bank's status of being considered in a "troubled
condition" as a result of certain destabilizing factors affecting the Bank's
operating performance, including unsatisfactory earnings and declining capital.
The FDIC and the Board of Directors of Appalachian Community Bank have entered
into a Memorandum of Understanding prepared jointly between the FDIC and the
Georgia Department of Banking and Finance (the "Memorandum of Understanding").
In the Memorandum of Understanding Appalachian Community Bank agreed to
implement a program of corrective action to remedy the weaknesses identified by
the FDIC.
In April 2000, we repurchased a total of 82,500 shares of common stock from
two institutional investors for an aggregate purchase price of $1,827,205. This
transaction closed prior to the recent two-for-one stock split by Appalachian
Bancshares, Inc.
In addition, during the term of the Memorandum of Understanding,
Appalachian Community Bank has agreed to maintain a Tier 1 Leverage Capital
ratio of at least 8%.
CONCLUSION
We, principally through Gilmer County Bank, have experienced continued
growth since we acquired Gilmer County Bank in July 1996. Additionally, we
recently acquired Appalachian Community Bank. While management remains
optimistic about the prospects for our continued growth and profitability,
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 we will
continue to grow and be profitable.
The foregoing is a forward-looking statement that reflects significant
assumptions and subjective judgments believed by management to be reasonable as
of the date of this prospectus. 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 Statements" appearing at the beginning of this prospectus.
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<PAGE> 43
OUR BUSINESS
OUR HISTORY AND DEVELOPMENT
We are a bank holding company engaged in providing a full range of banking
services through our two commercial bank subsidiaries: Gilmer County Bank and
Appalachian Community Bank. 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 and the Georgia Commission to become a bank holding
company. In August 1996, we acquired 100% of the outstanding shares of Gilmer
County Bank, and the shareholders of Gilmer County Bank became the shareholders
of the Company.
On November 30, 1998, we completed an acquisition of First National Bank of
Union County, which we subsequently renamed Appalachian Community Bank, from
Century South Banks, Inc. First National was a nationally-chartered bank
organized in 1981 with its main banking office located in Blairsville, Georgia.
We acquired First National in a cash transaction for a purchase price of $6.1
million. Century South also assumed some of the existing liabilities and assets
of First National. We funded a portion of the purchase price with the proceeds
of a private placement of 132,500 shares of our common stock to three accredited
investors. The aggregate gross proceeds of the private placement were $2.65
million. We funded the remainder of the purchase price through a $3.6 million
loan with The Bankers Bank, which we recently refinanced with a $4.6 million
loan with Crescent Bank and Trust Company.
In April 2000 we repurchased 82,500 of the 132,500 shares sold, paying an
aggregate of $1,827,205 to the holders thereof. The remaining purchaser of
common stock in the private placement is entitled to registration rights under
specific circumstances and is subject to call rights of the Company. This
purchaser has waived its registration right in this offering.
As of the date of this prospectus, the assets of the Company consisted
primarily of its ownership of the capital stock of the Banks.
OUR BUSINESS
We are 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. Our holding company structure provides
us with greater flexibility than our Banks would otherwise have to expand and
diversify their business activities through newly-formed subsidiaries, or
through acquisitions. While our management 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 FDIC. Gilmer County Bank was formed to meet the
banking needs of
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<PAGE> 44
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 a development stage prior to that time.
Gilmer County Bank has received approval to open a branch in East Ellijay,
Georgia. The Bank has leased land and begun construction of the facility with
completion anticipated in May 2000.
Gilmer County Bank has a correspondent relationship with several banks,
including The Bankers Bank, Federal Home Loan Bank and SouthTrust Bank. Gilmer
County Bank received approval from the Georgia Commission in December 1999 to
establish a data processing subsidiary. Gilmer County Bank has formed a
subsidiary named Appalachian Information Management, Inc. to operate the data
processing facility. Management believes the subsidiary will be fully
operational in June 2000.
APPALACHIAN COMMUNITY BANK
First National was organized in 1981 as an insured national bank chartered
under the federal banking laws of the United States of America. During 1999, we
converted First National into a state-chartered bank under the laws of the State
of Georgia and changed its name to Appalachian Community Bank. Appalachian
Community Bank's deposits are insured by the FDIC.
Appalachian Community Bank conducts business from its main banking office
located in Blairsville, Georgia. Appalachian Community Bank intends to file an
application with the Georgia Commission to open a branch in Blue Ridge, Georgia.
No assurance can be given that approval will be received. Appalachian Community
Bank has a correspondent relationship with several banks, including The Bankers
Bank, Federal Home Loan Bank and SouthTrust Bank.
BANKING SERVICES AND OPERATIONS
The Banks operate as community banks performing banking services customary
for full service banks of similar size and character. These services include:
- the furnishing of personal and commercial checking accounts and other
demand and time deposit accounts; and
- the extension of personal and commercial loans and lines of credit.
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. Appalachian Community Bank draws
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.
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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:
- demand, time, savings, and other deposits, including negotiable order of
withdrawal or NOW accounts;
- installment payments and prepayments on loans granted;
- sales to other lenders or institutions of loans or participation in
loans;
- fees paid by other lenders or institutions for servicing loans sold by
the Banks to them; and
- 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:
- interest paid on savings and other deposits, including NOW accounts;
- interest paid on borrowings by the Banks;
- employee compensation;
- office expenses; and
- 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, 1999, Gilmer County
Bank had a total of 46 employees, 39 of whom were full-time employees, and
Appalachian Community Bank had a total of 25 employees, 20 of whom were
full-time employees. We are not parties to any collective bargaining agreements
with employees, and management believes that employee relations generally are
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
15% of the Banks' total loans at December 31, 1999.
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
generate fee income to
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supplement their 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 portfolios, constituting approximately $117 million, or 69%,
of the Banks' total loans at December 31, 1999. 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 business. At December 31, 1999, the Banks held approximately $35
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.
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, 1999, the Banks held approximately $15
million in consumer loans, representing 9% 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 by the officers' loan committee. Individual officers' lending
limits range from $15,000 to $150,000, depending on seniority and the type of
loan. The officers' loan committee, which consists of the president, executive
vice president and senior lending officer, has a lending limit of $200,000 for
secured loans. Loans between $200,000 and $500,000 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 $500,000 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 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 deteriorates.
The Banks' have employed an in-house specialist to review all loans in excess of
$100,000 and to periodically sample those of $100,000 or less.
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.
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<PAGE> 47
The following table sets forth the mix of depository accounts at the Banks
as a percentage of total deposits at December 31, 1999.
DEPOSIT MIX
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Non-interest bearing demand................................. 5.5%
Interest-bearing demand..................................... 22.7%
Savings..................................................... 15.6%
Time Deposits............................................... 35.7%
Certificates of Deposit of $100,000 or more................. 20.5%
-----
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 in Georgia and throughout the country. Gilmer County Bank's
charter provides that Gilmer County Bank has trust powers but only upon
application to the Georgia Commission. To date, Gilmer County Bank has not
submitted, and has no plans to submit, an application for such trust powers.
Appalachian Community Bank does not have trust powers.
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 Blairsville,
Union County and elsewhere. Many of the Banks' competitors 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 their being subject
to different, and possibly less stringent, regulatory requirements.
As of the date of this prospectus, 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, a bank holding company
headquartered in Gainesville, Georgia, operates a main office and one branch
office in Gilmer County. Regions Bank, 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 Appalachian Community Bank.
Recent legislation enacted by the Georgia General Assembly allows banks in
Georgia to establish newly-formed branch banks in areas in which the Banks
serve, which branches, if established, also would compete with the Banks. See
"Supervision and Regulation."
MONETARY POLICIES
Our results of operations are significantly affected by the credit policies
of monetary authorities, particularly the Board of Governors of the Federal
Reserve System. The
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<PAGE> 48
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.
PROPERTIES
Our principal executive 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 Appalachian Community Bank 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 Appalachian Community Bank.
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 is using the land to
build a branch office of Gilmer County Bank, and anticipates completing
construction in May 2000.
Management believes that our physical facilities are suitable for our
current operations.
LEGAL PROCEEDINGS
We are 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.
SUPERVISION AND REGULATION
We are subject to state and federal banking laws and regulations which
impose specific requirements or restrictions and provide for general regulatory
oversight over virtually all aspects of operations. These laws and regulations
generally are intended to protect depositors, not shareholders. This discussion
is only a summary of various statutory and regulatory provisions. This summary
is qualified by reference to the particular statutory and regulatory provisions.
Any change in applicable laws or regulations may have a material effect on our
business and prospects. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, numerous additional
regulatory requirements have been placed on the banking industry in the past ten
years. On November 12, 1999, the President signed into law a financial services
modernization act which effectively repealed the anti-affiliation provisions of
the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act. Our
operations may be affected by legislative changes and the policies of various
regulatory authorities. We are unable to predict the nature or the extent of the
effect on our business and earnings that
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<PAGE> 49
fiscal or monetary policies, economic control or new federal or state
legislation may have in the future.
THE COMPANY
The Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956 and is registered with and subject to the
regulation of the Federal Reserve. As a bank holding company, the Company is
required to file with the Federal Reserve annual reports and other reports and
information as may be required under the Bank Holding Company Act. The Federal
Reserve may conduct examinations of the Company and the Banks to determine
whether we are in compliance with the regulations promulgated under the Bank
Holding Company Act.
The Bank Holding Company Act requires a bank holding company to obtain
prior approval of the Federal Reserve:
- to acquire the ownership or control of more than 5% of any class of
voting stock of any bank not already controlled by it;
- for it or any subsidiary (other than a bank) to acquire all or
substantially all of the assets of a bank; and
- to merge or consolidate with any other bank holding company.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
facilitates branching and permits the establishment of agency relationships
across state lines. The Interstate Banking Act also 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 generally also are prohibited under the Bank Holding
Company Act of 1956 from engaging in non-banking activities or from 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 types of non-banking activities determined by the Federal Reserve to be
closely related to banking or managing or controlling banks. Activities
determined by the Federal Reserve to fall under this category include:
- 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.
Federal law imposes certain limitations on extensions of credit and other
transactions between banks that are members of the Federal Reserve System and
other affiliates
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<PAGE> 50
(which includes any holding company of which a bank is a subsidiary and any
other non-bank subsidiary of that holding company). Banks that are not members
of the Federal Reserve System also are 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 these 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 subsidiary banks are likely to be unsecured and subordinate to the
bank's depositors and will be senior to the securities offered in this
prospectus.
On November 12, 1999, the President signed into law legislation which
breaks down many of the barriers to affiliations among banks and securities
firms, insurance companies and other financial service providers. These barriers
were established by the 1933 Glass-Steagall Act. This Act prohibited bank
holding companies from owning subsidiaries that were engaged principally in the
issue, flotation, underwriting, public sale or distribution of securities. The
Glass-Steagall Act also prohibited securities firms from engaging in the
activities historically engaged in by banks and prohibited certain affiliations
between insurance companies, banks and securities firms. The new law will
provide financial organizations with the flexibility to structure new
affiliations through a holding company structure or a financial subsidiary. As a
result of this new law, the number and type of entities competing with us in our
markets could increase. It is too early to determine what effect, if any, this
new law will have on us.
The Company also is subject to regulation as a bank holding company under
the Georgia Financial Institutions Code, which requires registration and filing
of periodic information with the Georgia Commission. Registration with the
Georgia Commission includes information relating to the financial condition,
operations, management and inter-company relationships of the Company and the
Banks. The Georgia Commission also may require other information or make
examinations as is necessary to keep itself informed as to whether we are in
compliance with the provisions of Georgia law and related regulations and
orders.
Under the provisions of the Georgia Financial Institutions Code, it is
unlawful without the prior approval of the Georgia Commission:
- for any bank holding company to acquire ownership or control of more than
5% of the voting shares of a bank;
- 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
- for any bank holding company to merge or consolidate with any other bank
holding company.
It is also unlawful under the Georgia Financial Institutions Code for any
bank holding company to acquire direct or indirect ownership or control of more
than 5% of the voting
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<PAGE> 51
shares of any presently operating bank unless the 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 Georgia Commission for approval of
such acquisition. In addition, in any acquisition by an existing bank holding
company, the initial banking subsidiary of the bank holding company must have
been incorporated for not less than two years before the holding company can
acquire another bank.
THE BANKS
Both Banks are incorporated under the laws of the State of Georgia and
subject to examination by the Georgia Commission. The Georgia Commission
regulates all areas of the Banks' 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.
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 if a bank is closed
without making adequate provisions 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 that are not
members of the Federal Reserve System, such as our Banks, to determine their
condition for insurance purposes. The FDIC also is 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 these 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 federal statutes such as the Community
Reinvestment Act of 1977 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 is 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. Presently, the Company does not pay dividends. 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 the bank
cease and desist from such practice. The FDIC issued a policy statement that
provides that insured banks generally should 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
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the capital-based limitations required by the Federal Deposit Insurance
Corporation Improvement Act of 1991. See "-- Capital Adequacy."
Under Georgia law, the Banks must obtain approval of the Georgia Commission
before they may pay cash dividends out of retained earnings if:
- the total classified assets at the most recent examination of such bank
exceed 80% of the equity capital;
- 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
- the ratio of equity capital to adjusted assets is less than 6%.
As discussed below, additional capital requirements imposed by the Georgia
Commission may limit the Banks' ability to pay dividends to the Company. See
"-- Capital Adequacy."
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 profiles 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.
The Federal Deposit Insurance Corporation Improvement Act of 1991
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 I risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%. The bank also 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 I capital.
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. 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 I capital includes stockholders' equity, qualifying
perpetual
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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.
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.
The Federal Reserve also has implemented a Leverage ratio, which is Tier I
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 I capital to total assets
for the most highly rated bank holding companies and insured banks. 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
tangible Tier I Leverage ratio is the ratio of a banking organization's Tier I
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."
GEORGIA COMMISSION CAPITAL REQUIREMENTS. In addition to the capital
standards imposed by federal banking regulators, the Georgia Commission 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. The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted in large measure to improve the supervision and
examination of insured depository institutions in an effort to reduce the number
of bank failures and the resulting demands on the deposit insurance system.
Among other matters, FDICIA requires that all depository institutions with
assets in excess of $150 million prepare and submit to the FDIC and appropriate
federal and state banking regulators audited annual financial statements. The
FDIC has provided by regulation that these provisions of the FDICIA do not apply
to depository institutions with assets of less than $500 million. These
institutions must file reports containing a statement by management of its
responsibilities and by the depository institution's independent public
accountant attesting to the accuracy of management's annual assessment of its
financial reporting, internal controls and regulatory compliance. The
institution also must establish an audit committee composed of members of the
board of directors who are independent of management. An enactment of the FDICIA
also has 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.
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<PAGE> 54
Under FDICIA, regulators must take prompt corrective action against
depository institutions that do not meet minimum capital requirements. FDICIA
and the related regulations establish five capital categories as shown in the
following table:
<TABLE>
<CAPTION>
TOTAL RISK- TIER I RISK- TIER I
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).......................... G8 G4 G4
Significantly Undercapitalized(3)............ G6 G3 G3
Critically Undercapitalized(3)............... -- -- G2
</TABLE>
- -------------------------
(1) An institution must meet all three minimums.
(2) 3% for composite I-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, sell assets, or sell
the institution.
As of the date of this prospectus, the Company is considered to be "under
capitalized" according to the total risk-based regulatory capital requirement,
Gilmer County Bank is considered to be "adequately capitalized." While currently
within the total and Tier I risk-based ratio requirement to be considered
"adequately capitalized," Appalachian Community Bank has received notice from
the FDIC indicating that it will continue in a "troubled condition" status in
light of certain weaknesses not yet reconciled since the Bank's acquisition by
the Company and the Bank and the FDIC have entered into a Memorandum of
Understanding designed to correct the perceived weaknesses. In connection with
this designation, among other things, the FDIC has indicated that it will
require that the Tier I leverage capital ratio be maintained at not less than 8%
for some period of time. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Acquisition of Appalachian Community Bank
and -- Subsequent Events." We intend to use a portion of the net proceeds of
this offering to make capital contributions to the Banks. Therefore, we believe
that the Company, on a consolidated basis, post offering, could be considered
"adequately capitalized." We further believe that, post offering, each of Gilmer
County Bank and Appalachian Community Bank, as separate entities, could be
considered "well capitalized" according to one or more of the regulatory capital
requirements. This additional capital infusion also will assist Appalachian
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<PAGE> 55
Community Bank in improving its status for future FDIC review purposes and in
resolving the outstanding matters with the FDIC.
These capital guidelines may affect us in a variety of ways. Rapid growth,
poor loan portfolio performance or poor earnings performance, or a combination
of these factors, could change our 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."
FEDERAL DEPOSIT INSURANCE PREMIUMS AND ASSESSMENTS
The deposits of the Banks currently are insured to a maximum of $100,000
per depositor, subject to aggregation rules. The FDIC establishes rates for the
payment of premiums by federally insured banks and thrifts for deposit
insurance. Since 1993, insured depository institutions like the Banks have paid
for deposit insurance under a risk-based premium system. 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.
OTHER APPLICABLE REGULATIONS
RCDRIA. The Riegle Community Development and Regulatory Improvement Act of
1994 promotes economic revitalization and community development to "investment
areas." It established 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.
The Act provides certain regulatory relief, requiring each federal agency
to streamline and modify its regulations and policies, remove inconsistencies
and eliminate outmoded and duplicative requirements. The Act 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 also are 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 federal Interstate Banking Act permits, among
other things, bank holding companies to acquire banks in any state. It also
permits bank holding companies to establish new branches across state lines if
the individual states into which a potential 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 interstate merger transactions.
States also were allowed to permit merger transactions before June 1, 1997.
Georgia elected to allow merger transactions beginning June 1, 1997.
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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 these 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.
The Board of Governors of the Federal Reserve System is authorized to
approve the acquisition by a well capitalized and adequately managed bank
holding company of a bank that is located in another state without regard to
whether the acquisition is prohibited under the laws of any state. Again, state
minimum age laws for banks to be acquired will be preserved unless the state law
provides for a minimum age period of more than five years. The Federal Reserve
may not approve an interstate acquisition which would result in the acquiror'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. 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 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 new branch has been established, 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.
GEORGIA INTERSTATE BANKING ACT. In 1994, the Georgia General Assembly
adopted the Georgia Interstate Banking Act. The 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. 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 this act.
GEORGIA INTRASTATE BANKING ACT. The Georgia General Assembly also has
enacted the Georgia Intrastate Banking Act altering the public policy of the
State regarding intrastate branch banking. The act 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.
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<PAGE> 57
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act ("CRA")
requires that, in connection with examinations of financial institutions within
their respective jurisdictions, the Federal Reserve, the FDIC or any other
appropriate federal agency, shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors also are considered in
evaluating mergers, acquisitions and applications to open a branch or facility.
Failure to adequately meet these criteria could pose additional requirements and
limitations on the bank. Gilmer County Bank was examined for CRA compliance in
June 1999 and received a CRA rating of "outstanding." Prior to the conversion to
a state bank, Appalachian Community Bank 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.
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Some of these
proposals, if adopted, could change significantly the regulation of banks and
the financial services industry. We cannot predict whether any of these
proposals will be adopted or, if adopted, what effect these proposals would
have.
Our earnings are affected by domestic economic conditions and the monetary
and fiscal policies of the United States government and its agencies. The
Federal Reserve's monetary policies have had, and are likely to continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order to curb inflation or
combat a recession. The monetary policies of the Federal Reserve have major
effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its
regulation of the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the
nature or impact of future changes in monetary and fiscal policies.
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<PAGE> 58
MANAGEMENT
The following table and text gives certain information about officers and
directors, including their ages and principal employment for the past five
years.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Tracy R. Newton..................... 44 President, Chief Executive Officer,
Treasurer, Director
Kent W. Sanford..................... 38 Executive Vice President, Chief
Operating Officer and Director
Alan R. May......................... 39 Chief Financial Officer
Alan S. Dover....................... 43 Director
Charles A. Edmondson................ 52 Director
Roger E. Futch...................... 54 Director
Joseph C. Hensley................... 42 Director, Assistant Secretary
Frank E. Jones...................... 47 Director, Chairman of the Board
J. Ronald Knight.................... 58 Director
P. Joe Sisson....................... 65 Director, Secretary
Kenneth D. Warren................... 50 Director
</TABLE>
Tracy R. Newton has served as President, Chief Executive Officer and a
director of the Company since 1996 and President, Chief Executive Officer and a
director of Gilmer County Bank since its inception in 1994. Prior to Mr.
Newton's employment with the Bank, he served as executive vice president of the
Bank of Ellijay, until he resigned in September 1993 to pursue the formation of
the Bank. His responsibilities at the Bank of Ellijay included the development
and implementation of bank policy and lending. He has had 22 years experience in
community banking, particularly in commercial, agricultural, and consumer
lending and in bank operations.
Kent W. Sanford has served as Executive Vice President, Chief Financial
Officer and Chief Operating Officer of the Company and Gilmer County Bank since
1996 and 1994, respectively, and has served as a director of Gilmer County Bank
since February 1999. Mr. Sanford also serves as Chief Executive Officer and a
director of Appalachian Community Bank, and has served in such capacities since
the acquisition of Appalachian Community Bank by the Company in November 1998.
Prior to Mr. Sanford's employment with Gilmer County Bank in August 1994, be
served for ten years as vice president for the Bank of Ellijay where he
supervised all operations areas and acted as a loan officer and branch manager.
Alan R. May has served as Chief Financial Officer of the Company and Gilmer
County Bank since June 1999. Prior to Mr. May's employment with Gilmer County
Bank in March 1998, he served as a vice president for Cooke & Andrews
Investments where he supervised all operations areas of the investment company.
Alan S. Dover has been a director of the Company since 1996 and a director
of Gilmer County Bank since 1994. Mr. Dover is the chief executive officer and
owner of A.S. Dover Concrete, Inc., a curbing and excavating business. He also
is owner of A.S.
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<PAGE> 59
Dover Properties, Inc., a commercial real estate development firm, and A.S.
Dover Construction Company.
Charles A. Edmondson has been a director of the Company since 1996, a
director of Gilmer County Bank since 1994 and a director of Appalachian
Community Bank since March 1999. Mr. Edmondson has been with State Farm
Insurance as an agent and agency manager in Ellijay since 1978 and is currently
an agent in Blue Ridge, Georgia. He served as agency manager with State Farm
from 1983 to 1995.
Roger E. Futch has been a director of the Company since 1996 and a director
of Gilmer County Bank since 1994. Mr. Futch has been employed by the Ellijay
Telephone Company since 1968 and currently serves as an operations manager. He
also owns a wholesale and retail apple orchard with his wife and son.
Joseph C. Hensley has served as Assistant Secretary and a director of the
Company since 1996 and as Assistant Secretary and a director of Gilmer County
Bank since 1994. Mr. Hensley is a senior partner in Hensley, Land & Associates,
P.C., a certified public accounting firm in Ellijay.
Frank E. Jones has been Chairman of the Board of the Company since 1996 and
Chairman of the Board of Gilmer County Bank since 1994. Mr. Jones is the
minister of the Ellijay Church of Christ, where he has served for 18 years. Mr.
Jones also serves on the board of directors of Limestone Valley Resource
Conservation District and is a member of the Georgia Policy Council for Children
and Families and the Welfare Reform Policy Council for the State of Georgia.
J. Ronald Knight has been a director of the Company since 1996 and a
director of Gilmer County Bank since 1994. Mr. Knight is president and part
owner of Twin City Motors, Inc., an automobile dealership in Ellijay. He also is
secretary and part owner of Ellijay Mini Storage, Inc.
P. Joe Sisson has served as Secretary and a director of the Company since
1996 and as Secretary and a director of Gilmer County Bank since 1994. Mr.
Sisson is president and chief executive officer of the Sisson Corporation, a
real estate development firm, and he serves as president of Blue Ridge Mountain
Properties. He also owns interests in Cashes Valley Properties, Sisson, Dupont
and Carder, Inc., Sisson Co., Sisson Brothers, Sisson Properties, and Sisson
Company Contractors. He is a former advisory director of NationsBank, N.A.
Kenneth D. Warren has been a director of the Company since 1996 and a
director of Gilmer County Bank since 1994. Mr. Warren is the president and part
owner of Warren's Auto Sales, Inc., a used car dealership.
COMPENSATION OF EXECUTIVE OFFICERS
The following table contains information regarding all compensation,
including bonuses, stock option awards and other payments, paid or accrued for
each of the last three fiscal years for Tracy R. Newton, the Company's President
and Chief Executive Officer, and Kent W. Sanford, the Company's Executive Vice
President and Chief Operating Officer (these individuals are referred to in this
prospectus as the "named executive officers"). No other executive officer of the
Company or either Bank was paid
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<PAGE> 60
$100,000 or more in salary, bonus and directors' fees during the fiscal year
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) ------------
----------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(2) BONUS COMPENSATION OPTIONS(#) COMPENSATION
- --------------------------- ------ --------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Tracy R. Newton................... 1999 $101,240 $51,877 $13,400(3) 0 $25,890(4)
President, Chief Executive 1998 97,195 45,851 7,200(3) 0 24,893(4)
Officer and Treasurer 1997 90,942 34,852 7,200(3) 66,000 18,855(4)
Kent W. Sanford................... 1999 84,355 35,844 15,600(7) 0 20,919(6)
Executive Vice President 1998 80,331(5) 31,827 0 0 19,652(6)
and Chief Operating 1997 77,081(5) 24,494 0 44,000 15,370(6)
Officer
</TABLE>
- -------------------------
(1) Information regarding certain perquisites and other personal benefits has
been omitted because the aggregate value of such items do not meet the
minimum amount required for disclosure under the rules and regulations of
the Commission.
(2) Includes deferred contributions made at the individual's election pursuant
to the Company's 401(k) Plan.
(3) Directors' fees paid for service on the Board of Directors of the Company
and Gilmer County Bank.
(4) Includes (i) contributions by Gilmer County Bank of $12,321 in 1997, $17,416
in 1998 and $16,090 in 1999 under the 401(k) Plan, (ii) matching
contributions by Gilmer County Bank of $3,774 in 1997, $4,441 in 1998 and
$4,544 in 1999 pursuant to the 401(k) Plan, and (iii) health insurance
premiums paid by Gilmer County Bank in the amount of $2,760 in 1997, $3,036
in 1998 and $5,256 in 1999.
(5) Includes $3,600 for services as secretary to the Board of Directors of the
Company and Gilmer County Bank.
(6) Includes (i) contributions by Gilmer County Bank of $9,671 in 1997, $13,359
in 1998 and $12,214 in 1999 under the 401(k) Plan, (ii) matching
contributions by Gilmer County Bank of $2,939 in 1997, $3,257 in 1998 and
$3,449 in 1999 pursuant to the 401(k) Plan, and (iii) health insurance
premiums paid by Gilmer County Bank in the amount of $2,760 in 1997, $3,036
in 1998 and $5,256 in 1999.
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<PAGE> 61
(7) Directors' fee paid for service on the Board of Directors of the Company,
Gilmer County Bank, and Appalachian Community Bank.
STOCK OPTION GRANTS AND RELATED INFORMATION
There were no stock option grants during the fiscal year ended December 31,
1999 to any of the named executive officers. The following table contains
information concerning unexercised options held by the named executive officers
as of the end of the fiscal year. No options were exercised by the named
executive officers in 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
FISCAL YEAR-END(#)(1) OPTIONS AT FISCAL YEAR-END(2)
--------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Tracy R. Newton............... 52,800 79,200 $316,800 $475,200
Kent W. Sanford............... 35,200 52,800 $211,200 $316,800
</TABLE>
- -------------------------
(1) The options vest and become exercisable in five equal annual installments
beginning on the first anniversary of the date of grant. Upon the occurrence
of certain events resulting in a change of control of the Company or certain
major corporate transactions, the options become fully vested and
exercisable, subject to certain exceptions and limitations. See "Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
(2) The options have an exercise price of $4.00 per share and the fair market
value of the common stock at the close of business on December 31, 1999, was
$10.00 per share based on the price of the last trade of which management is
aware as of such date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Pursuant to the terms of the 1997 Employee Stock Incentive Plan, the Board
of Directors may provide in any option agreement that outstanding options
covered by such agreement will become fully vested and exercisable, subject to
specified exceptions and limitations, in the event of a change in control or
other corporate transactions. "Change in control" and "corporate transactions"
are defined in the plan to include, among other things, the acquisition by
another person of more than fifty percent of the total combined voting power of
the Company's outstanding common stock; a change in the composition of a
majority of the Board of Directors within a specified period of time; a merger
or consolidation in which the Company is not the surviving entity; the sale,
transfer or other disposition of substantially all of the Company's assets in
connection with a liquidation of the Company; and specified other transactions.
The option agreements under which Messrs. Newton and Sanford were granted
options contain these acceleration provisions. See "Stock Option Grants and
Related Information."
59
<PAGE> 62
DIRECTOR COMPENSATION
The same individuals who served as directors of the Company also served as
directors of Gilmer County Bank during the fiscal year ended December 31, 1999.
In 1999, the Chairman of the Company's Board of Directors was paid an aggregate
of $21,538, Mr. Newton was paid an aggregate of $13,400, Mr. Sanford was paid an
aggregate of $15,600, which includes fees received from the Company, Gilmer
County Bank and Appalachian Community Bank. Each of the other members of the
Board of Directors was paid an aggregate of $18,538 for their service on the
Board with the exception of Charlie Edmondson who was paid an aggregate of
$23,538. Mr. Edmondson serves on the Board of the Company, Gilmer County Bank
and Appalachian Community Bank. In addition, the Company reimbursed directors
for travel and expenses incurred by them in connection with their service on the
Board.
CERTAIN TRANSACTIONS
Several of the directors and executive officers of the Company, members of
their families and companies or firms with which they are associated, were
customers of and had banking transactions with Gilmer County Bank and
Appalachian Community Bank in the ordinary course of business during fiscal
years 1999 and 1998, and these transactions are expected to continue in the
future. All loans and commitments to loan included in these transactions were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
and, in the opinion of management, did not involve more than a nominal risk of
collectibility or present other unfavorable features. None of the loans
outstanding to directors or officers of the Company, members of their families
or companies or firms with which they are associated were non-performing as of
December 31, 1999 or 1998. Total loans outstanding to all directors and
executive officers of the Company and the Banks, or affiliates of such persons
(including members of the immediate families of such persons or companies in
which such persons had a 10% or more beneficial interest), amounted to an
aggregate of $5,277,702 at December 31, 1999.
The Company employs the accounting firm of Hensley, Land & Associates, P.C.
to provide accounting and internal auditing services to the Company and the
Banks. Mr. Hensley, a director and officer of the Company and Gilmer County
Bank, was a senior partner in the accounting firm. The Company believes that the
services obtained from the accounting firm have been on terms as favorable to
the Company as could have been obtained from unaffiliated parties.
On March 29, 1999, we sold a 1,250 square foot brick building near Gilmer
County Bank's existing facility to J. Ronald Knight, a director of the Company,
and his partner for $150,000. We had purchased the building in May 1998 for
$150,000 in an effort to alleviate drive-in traffic problems experienced at
Gilmer County Bank. After we purchased the property, the adjacent road was
widened leaving the property unusable for our intended purpose. Mr. Knight and
his partner own the only other property adjacent to the building and purchased
the property to use with their existing business.
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<PAGE> 63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership, as of April 14, 2000, of shares of Common Stock by (a)
each person known by the Company to be the beneficial owner of more than five
percent of the Company's outstanding Common Stock, (b) each of the Company's
directors, (c) the Company's named executive officers, and (d) all directors and
executive officers of the Company as a group, and the percentage of the
outstanding shares of Common Stock represented thereby. Except as noted below,
the Company believes that each of the persons listed has sole investment and
voting power with respect to the shares included in the table.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) PERCENT OF CLASS(1)
- ------------------------ --------------- -------------------
<S> <C> <C>
Appalachian Bancshares, Inc. Section 401(k)
Profit Sharing Plan (Messrs. Hensley, Newton
and Sanford as Trustees)..................... 172,510(3) 6.4%
Alan S. Dover.................................. 71,300 2.6%
Charles A. Edmondson........................... 91,300 3.4%
Roger E. Futch................................. 80,300 3.0%
Joseph C. Hensley.............................. 80,400 3.0%
Frank E. Jones................................. 51,300 1.9%
J. Ronald Knight............................... 112,060 4.2%
Alan R. May.................................... 9,100 *
Tracy R. Newton................................ 121,872 4.5%
Kent W. Sanford................................ 91,092 3.4%
P. Joe Sisson.................................. 85,164 3.2%
Kenneth D. Warren.............................. 114,300 4.3%
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A
GROUP (11 PERSONS)........................ 908,188 33.8%
</TABLE>
- -------------------------
* Less than 1%
(1) The information contained in this table with respect to common stock
ownership reflects "beneficial ownership" as determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(2) The aggregate number of shares reported includes shares of common stock that
the individual has the right to acquire on or before June 13, 2000 (60 days
from April 14, 2000), through the exercise of options granted under the
Directors' Non-Qualified Stock Option Plan and the Employee Stock Incentive
Plan. See "Stock Option Grants and Related Information." The number of
shares underlying options that may be exercised as of June 13, 2000 is as
follows: (i) Mr. Newton -- 79,200 shares; (ii) Mr. Sanford -- 52,800 shares;
(iii) Mr. Hensley -- 26,400 shares; (iv) Mr. Sisson -- 8,800 shares; (v)
each of the Company's directors (with the exception of Messrs. Newton,
Sanford, Hensley and Sisson) -- 17,600 shares; and (v) all directors and
executive officers as a group (eleven persons) -- 158,400 shares.
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<PAGE> 64
(3) The address of the Appalachian Bancshares, Inc. Section 401(k) Profit
Sharing Plan (the "401(k) Plan") is Box G, 829 Industrial Boulevard,
Ellijay, Georgia 30540. Pursuant to the Georgia Bankers' Association Master
Section 401(k) Profit Sharing Plan, which governs the 401(k) Plan, shares of
Common Stock owned by the 401(k) Plan are voted by the Company as Company
Stock Trustee in accordance with the directions of the 401(k) Plan's
administrative committee. Accordingly, the power to vote or direct the vote
of shares owned by the 401(k) Plan resides with the administrative
committee, which consists of Messrs. Hensley, Newton and Sanford. The
Company Stock Trustee has sole power to dispose of the shares owned by the
401(k) Plan. As a result Messrs. Hensley, Newton and Sanford may be
considered beneficial owners of these securities.
(4) Includes 7,400 shares held by Mr. Futch's spouse, as to which Mr. Futch
disclaims beneficial ownership, and 4,000 shares held by Mr. Futch and his
spouse as custodians for a minor granddaughter, as to which Mr. Futch
disclaims beneficial ownership.
(5) Includes 5,660 shares held by Mr. Knight's spouse, as to which Mr. Knight
disclaims beneficial ownership.
(6) Includes 4,840 shares held by Mr. Sanford's spouse, as to which Mr. Sanford
disclaims beneficial ownership, and 144 shares held by Mr. Sanford as
custodian for his minor children.
(7) Includes 11,014 shares held by Mr. Sisson's spouse as to which Mr. Sisson
disclaims beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized by its Articles of Incorporation to issue
20,000,000 shares of common stock. As of the date of this prospectus, the
Company has 2,526,910 shares of common stock issued and outstanding.
All shares of common stock are entitled to share equally in dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company, and upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in the assets of the Company
available for distribution to shareholders. Each holder of common stock is
entitled to one vote for each share on all matters submitted to the
shareholders.
There is no cumulative voting, redemption right, sinking fund provision, or
right of conversion in existence with respect to the common stock. The Company's
Articles of Incorporation do not provide for preemptive rights to acquire
additional shares of Common Stock when issued. All of the outstanding shares of
common stock are, upon payment therefor, fully paid and non-assessable.
The Bylaws of the Company provide that, except as provided below, no offer
or solicitation to purchase the common stock by any owner of 10% or more of the
outstanding common stock of the Company or any proposal for the merger or
consolidation of the Company with any other financial institution or financial
institution holding company can be brought before the shareholders unless the
proposal is first approved by at least two-thirds of the directors of the
Company. Proposals which have not been approved by two-thirds of the directors
may be brought before the shareholders upon petition to the Board
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<PAGE> 65
of Directors signed by at least 33% of the outstanding shares of common stock of
the Company provided that such petition must be received by the Board of
Directors of the Company at least 30 days prior to the regulatory scheduled date
of the shareholders meeting at which the proposed transaction will be
considered. A vote of the holders of 75% of the common stock is required to
approve a proposed transaction to be considered by petition.
For any acquisition, merger or consolidation which is presented to the
shareholders other than by petition, a vote of at least two-thirds of the
outstanding shares of common stock is required to approve such transaction. In
considering any proposed merger or combination, in addition to considering the
effects of any transaction on the Company and its shareholders, the Board of
Directors may consider the interests of the employees, customers, suppliers and
creditors of the Company, the communities in which offices, branches or other
establishments of the Company are located and all other factors the directors
consider pertinent, including the per share value of any offer, the financial
structure of the offer, the character and reputation of the offeror and the
financial stability of the offeror. The foregoing Bylaw provisions may be
changed only by a vote of the holders of at least two-thirds of the outstanding
shares of common stock of the company.
The Bylaws provide that the Board of Directors shall consist of no less
than four nor more than 25 persons, with the exact number to be fixed by
resolution of the Board of Directors or by resolution of the shareholders;
provided however, that the Board of Directors may not increase or decrease the
number of directors to serve on the Board by more than two in any one year.
LEGAL MATTERS
Paul, Hastings, Janofsky & Walker LLP, counsel to Appalachian Bancshares,
Inc., will pass upon the validity of the common stock offered under this
prospectus.
EXPERTS
The consolidated financial statements of Appalachian Bancshares, Inc. at
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, appearing in this prospectus and registration statement have
been audited by Schauer, Taylor, Cox & Vise, P.C., independent auditors, and are
included in reliance upon such reports given upon the authority of this firm as
experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form SB-2 that relates to the offering of common
stock. This prospectus is only part of the registration statement. It does not
contain all of the information in the registration statement. The rules and
regulations of the Securities and Exchange Commission permit us to omit certain
portions of the registration statement from the prospectus. For more information
regarding the Company, you should refer to the registration statement, including
the exhibits.
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<PAGE> 66
This prospectus contains a description of all the material terms and
features of all material contracts, reports or exhibits to the registration
statement required to be disclosed. The descriptions of such documents are brief
and are not necessarily complete. As a result, we urge you to refer to the copy
of each material contract, report and exhibit attached to the registration
statement for a more complete description of such document. Each statement in
this prospectus is qualified in its entirety by reference to the complete
document. You can examine and obtain copies of the registration statement at the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington D.C. 20549. You may obtain information on the
operations of the Public Reference Section by calling the Commission at
1-800-SEC-0330. The Securities and Exchange Commission also maintains an
internet worldwide website that contains registration statements and other
information about issuers like us who file electronically with the securities
and exchange commission. The address of this site is http://www.sec.gov. We also
file periodic reports on Forms 10-KSB and 10-QSB, current reports on Form 8-K
and our proxy materials with the Securities and Exchange Commission pursuant to
the requirements of the Securities and Exchange Act of 1934. These reports may
be obtained from the Securities and Exchange Commission in the manner described
above.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Sections 14-2-850 through 14-2-859 of the Georgia Business Corporation Code
provide for the indemnification of officers and directors against liability and
expenses that may be incurred by them in the event of an action against them as
a result of their service for us or on our behalf. The Company's Bylaws contain
specific provisions with regard to indemnification of our directors and
officers, in compliance with the general provisions of this statute. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
If a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by a director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act. We will be governed by the final
adjudication of such issue.
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<PAGE> 67
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998................................ F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-6
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997.............. F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE> 68
>INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Appalachian Bancshares, Inc. and Subsidiaries
Ellijay, Georgia
We have audited the accompanying consolidated statements of financial
condition of Appalachian Bancshares, Inc. and Subsidiaries as of December 31,
1999 and 1998, 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, 1999. 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, 1999 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
Birmingham, Alabama
February 4, 2000
SCHAUER, TAYLOR, COX & VISE, P.C.
F-2
<PAGE> 69
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 5,739,252 $ 5,481,853
Interest-bearing deposits with other banks.................. 217,115 407,229
Federal funds sold.......................................... 3,842,157 18,392,213
Securities available-for-sale............................... 28,536,246 21,940,281
Securities held-to-maturity, estimated fair value of
$5,622,297 and $6,457,522, respectively................... 5,799,963 6,218,354
Loans, net of unearned income............................... 169,105,872 129,831,095
Allowance for loan losses................................... (1,849,290) (1,686,395)
------------ ------------
Net Loans................................................. 167,256,582 128,144,700
Premises and equipment, net................................. 3,877,419 3,940,032
Accrued interest............................................ 1,741,986 1,319,601
Cash surrender value on life insurance...................... 2,145,294 615,438
Intangible, net............................................. 2,227,386 2,345,055
Other assets................................................ 1,931,141 940,194
------------ ------------
Total Assets............................................ $223,314,541 $189,744,950
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing....................................... $ 10,363,135 $ 9,287,933
Interest-bearing.......................................... 176,366,521 154,573,545
------------ ------------
Total deposits.......................................... 186,729,656 163,861,478
Short-term borrowings..................................... 6,134,007 2,478,344
Accrued interest.......................................... 815,988 665,883
Long-term debt............................................ 16,964,286 11,007,143
Other liabilities......................................... 249,830 252,408
------------ ------------
Total Liabilities....................................... 210,893,767 178,265,256
SHAREHOLDERS' EQUITY
Common stock, par value $5 per share, 20,000,000 shares
authorized, 1,389,122 and 1,367,188 shares issued,
respectively.............................................. 6,945,610 6,835,940
Treasury stock, 44,000 shares at cost....................... (428,000) (428,000)
Capital surplus............................................. 3,030,196 2,576,849
Retained earnings........................................... 3,660,364 2,394,590
Accumulated comprehensive income: net unrealized holding
gains (losses) on securities available-for-sale, net of
deferred income tax....................................... (787,396) 100,315
------------ ------------
Total shareholders' equity.............................. 12,420,774 11,479,694
------------ ------------
Total liabilities and shareholders' equity.................. $223,314,541 $189,744,950
============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 70
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......................... $13,807,798 $ 9,614,165 $7,652,481
Interest on investment securities:
Taxable securities................................ 1,388,750 1,009,595 1,160,497
Nontaxable securities............................. 527,461 376,157 170,274
Interest on deposits in other banks................. 16,322 1,963 --
Interest on federal funds sold...................... 398,972 269,112 159,716
----------- ----------- ----------
Total interest income........................... 16,139,303 11,270,992 9,142,968
----------- ----------- ----------
INTEREST EXPENSE
Interest on deposits................................ 8,249,918 5,891,798 4,911,266
Interest on federal funds purchased and securities
sold under agreements to repurchase............... 112,368 178,437 201,407
Interest on long-term debt.......................... 776,485 427,984 149,580
----------- ----------- ----------
Total interest expense.......................... 9,138,771 6,498,219 5,262,253
----------- ----------- ----------
Net Interest Income................................. 7,000,532 4,772,773 3,880,715
Provision for loan losses......................... 880,000 300,000 480,000
----------- ----------- ----------
Net interest income after provision for loan
losses............................................ 6,120,532 4,472,773 3,400,715
NONINTEREST INCOME
Service charges on deposits......................... 401,808 238,921 197,333
Insurance commissions............................... 54,198 22,333 20,655
Other operating income.............................. 379,477 251,717 161,086
Investment securities gains (losses)................ 9,430 15,950 (78)
----------- ----------- ----------
Total noninterest income........................ 844,913 528,921 378,996
----------- ----------- ----------
NONINTEREST EXPENSES
Salaries and employee benefits...................... 2,575,618 1,496,743 1,154,456
Occupancy expense................................... 324,024 173,034 97,267
Furniture and equipment expense..................... 338,150 252,806 150,358
Other operating expenses............................ 2,323,177 1,298,630 977,277
----------- ----------- ----------
Total noninterest expenses...................... 5,560,969 3,221,213 2,379,358
----------- ----------- ----------
Income before income taxes.......................... 1,404,476 1,780,481 1,400,353
Income tax expense.................................. 138,702 572,250 382,587
----------- ----------- ----------
Net income.......................................... $ 1,265,774 $ 1,208,231 $1,017,766
=========== =========== ==========
EARNINGS (LOSS) PER COMMON SHARE -- BASIC AND
DILUTIVE
Net income (loss) per common share --
Basic earnings per share.......................... $ 0.95 $ 1.04 $ .88
Basic weighted average shares outstanding......... 1,326,196 1,166,425 1,154,990
Diluted earnings per share........................ $ 0.89 $ 0.99 $ .88
Diluted weighted average shares outstanding....... 1,423,525 1,220,976 1,162,206
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 71
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMPRE-
COMMON TREASURY CAPITAL RETAINED HENSIVE
STOCK STOCK SURPLUS EARNINGS INCOME TOTAL
---------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996...... $5,680,000 $ -- $ (10,686) $ 168,593 $ (32,971) $ 5,804,936
Proceeds from sale of common stock
to 401(k) plan.................. 242,870 -- 145,737 -- -- 388,607
Purchase of Treasury Stock........ -- (274,000) -- -- -- (274,000)
Net change in unrealized gains on
securities...................... -- -- -- -- 42,744 42,744
Net income 1997................... -- -- -- 1,017,766 -- 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 -- -- 310,628
Purchase of Treasury Stock........ -- (154,000) -- -- -- (154,000)
Net change in unrealized gains on
securities...................... -- -- -- -- 71,614 71,614
Proceeds from exercise of
options......................... 154,000 -- 240,240 -- -- 394,240
Private placement sale of stock... 662,500 -- 1,987,500 -- -- 2,650,000
Effect of business combination.... -- -- -- -- 18,928 18,928
Net income 1998................... -- -- -- 1,208,231 -- 1,208,231
---------- --------- ---------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1998...... 6,835,940 (428,000) 2,576,849 2,394,590 100,315 11,479,694
Proceeds from sale of common stock
to 401(k) plan.................. 87,670 -- 263,010 -- -- 350,680
Net change in unrealized gains
(losses) on securities.......... -- -- -- -- (887,711) (887,711)
Proceeds from exercise of
options......................... 22,000 -- 33,243 -- -- 55,243
Compensation on options granted... -- -- 157,094 -- -- 157,094
Net income 1999................... -- -- -- 1,265,774 1,265,774
---------- --------- ---------- ---------- --------- -----------
BALANCE AT DECEMBER 31, 1999...... $6,945,610 $(428,000) $3,030,196 $3,660,364 $(787,396) $12,420,774
========== ========= ========== ========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 72
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 1,265,774 $ 1,208,231 $ 1,017,766
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, amortization, and
accretion, net.................... 473,259 188,653 165,242
Provision for loan losses............ 880,000 300,000 480,000
Deferred tax (benefit)............... (117,947) (63,000) (73,426)
Realized security (gains) losses,
net............................... (9,430) (15,950) 78
Losses on disposition of foreclosed
real estate....................... -- -- 3,927
Increase in cash surrender value on
life insurance.................... (29,856) (29,823) (17,215)
Increase in accrued interest
receivable........................ (422,385) (122,861) (164,739)
Increase in accrued interest
payable........................... 150,105 46,854 33,769
Other................................ (348,944) (238,959) 19,186
------------ ------------ ------------
Net cash provided by operating
activities...................... 1,840,576 1,273,145 1,464,588
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of securities
available-for-sale................... 3,572,134 9,515,761 9,982,814
Proceeds from sales of securities
held-to-maturity..................... 834,523 -- --
Proceeds from maturity, calls and
paydown of securities
available-for-sale................... 9,251,517 11,597,023 8,513,974
Proceeds from maturity, calls and
paydown of securities
held-to-maturity..................... 250,514 594 145,000
Purchase of securities
available-for-sale................... (20,815,665) (23,834,942) (13,991,323)
Purchase of securities
held-to-maturity..................... (670,762) (1,091,138) (1,939,327)
Net increase in loans to customers..... (39,991,882) (21,786,395) (19,827,817)
Capital expenditures, net.............. (250,252) (548,857) (121,199)
Proceeds from disposition of foreclosed
real estate.......................... -- 113,500 --
Purchase of life insurance plan........ (1,500,000) -- (568,400)
Cash received in bank acquisition,
net.................................. -- 10,721,749 --
------------ ------------ ------------
Net cash used in investing
activities...................... (49,319,873) (15,312,705) (17,806,278)
------------ ------------ ------------
</TABLE>
F-6
<PAGE> 73
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in demand
deposits, NOW accounts, and savings
accounts............................. (4,602,526) 19,557,448 11,384,300
Net increase in certificates of
deposit.............................. 27,470,704 6,413,648 2,815,766
Net increase (decrease) in securities
sold under agreement to repurchase... 3,628,231 (1,749,785) (1,055,843)
Issuance of long-term debt............. 9,000,000 7,007,143 4,620,000
Repayment of long-term debt............ (3,042,857) (1,320,000) --
Issuance of stock options.............. 157,094 -- --
Issuance of common stock............... 385,880 3,354,868 388,607
Purchase of treasury stock............. -- (154,000) (274,000)
------------ ------------ ------------
Net cash provided by financing
activities...................... 32,996,526 33,109,322 17,878,830
------------ ------------ ------------
Net increase in cash and cash
equivalents.......................... (14,482,771) 19,069,762 1,537,140
Cash and cash equivalents at beginning
of year.............................. 24,281,295 5,211,533 3,674,393
------------ ------------ ------------
Cash and cash equivalents at end of
year................................. $ 9,798,524 $ 24,281,295 $ 5,211,533
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash Paid during the year for:
Interest............................. $ 8,988,666 $ 6,451,365 $ 5,228,484
Income taxes......................... 369,400 632,799 435,511
Loans transferred to foreclose real
estate............................... -- 223,056 109,209
Net increase (decrease) in unrealized
gains and losses on securities
available-for-sale................... (1,366,870) 108,620 64,762
Proceeds from sales of foreclosed real
estate financed through loans........ -- 109,556 105,282
Assets acquired in business
combination.......................... -- 29,977,439 --
Liabilities assumed in business
combination.......................... -- 43,035,046 --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 74
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net income.............................. $ 1,265,774 $1,208,231 $1,017,766
Other comprehensive income, net of tax:
Unrealized gains on securities
Unrealized holding gains (losses)
arising during period............ (1,357,440) 155,080 64,684
Reclassified adjustments for
(gains) losses included in net
income........................... (9,430) (15,950) 78
----------- ---------- ----------
Net unrealized gains (losses)...... (1,366,870) 139,130 64,762
Income tax related to items of other
comprehensive income............... 479,159 (48,588) (22,018)
----------- ---------- ----------
Other comprehensive income (loss)....... (887,711) 90,542 42,744
----------- ---------- ----------
Comprehensive income.................... $ 378,063 $1,298,773 $1,060,510
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE> 75
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Appalachian Bancshares, Inc. (the "Company") and its wholly owned subsidiaries:
Gilmer County Bank ("GCB") and Appalachian Community Bank ("ACB") (formerly
known as First National Bank of Union County) (referred to herein collectively
as the "Banks"). Prior to August 1996, Gilmer County Bank operated as an
independent bank. Prior to November 1998, Appalachian Community Bank 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 ACB was
accounted for as a purchase. 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
F-9
<PAGE> 76
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-10
<PAGE> 77
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 uncollectable, the portion
deemed uncollectable 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.
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, 1999, 1998 and 1997.
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
F-11
<PAGE> 78
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-12
<PAGE> 79
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Weighted average of common shares
outstanding............................... 1,326,196 1,166,425 1,154,990
Effect of dilutive options.................. 97,329 54,551 7,216
---------- -------- --------
Weighted average of common shares
outstanding effected for dilution......... 1,423,525 1,220,976 1,162,206
========== ======== ========
</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 Company has elected to continue its reporting of stock-based
compensation in accordance with the provisions of APB Opinion No. 25. The
adoption of this statement did not have a material effect on the Company's
consolidated financial statements.
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
F-13
<PAGE> 80
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5.8 million and a line of credit with the Federal Home Loan Bank of up to
$23,506,170 of which $10,141,884 is available and unused.
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 1998 and 1997 have been reclassified to conform with the
1999 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.
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
F-14
<PAGE> 81
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, amended as to effective date by SFAS No. 137, is effective for
financial statements for periods beginning after June 15, 2000. 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 and 1997.
<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> 82
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
</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, 1999 and
1998, the average amount of the required reserves was $1,163,000 and $1,155,000,
respectively.
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, 1999 and 1998 are presented below.
F-16
<PAGE> 83
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE
DECEMBER 31, 1999
U.S. government and agency
securities..................... $17,628,263 $ -- $ 785,736 $16,842,527
State and municipal securities... 4,985,020 7,538 275,004 4,717,554
Mortgage-backed securities....... 6,407,795 2,013 161,743 6,248,065
Equity securities................ 728,100 -- -- 728,100
----------- -------- ---------- -----------
$29,749,178 $ 9,551 $1,222,483 $28,536,246
=========== ======== ========== ===========
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 -- -- 614,000
----------- -------- ---------- -----------
$21,786,345 $180,979 $ 27,043 $21,940,281
=========== ======== ========== ===========
SECURITIES HELD-TO-MATURITY
DECEMBER 31, 1999
State and municipal securities... $ 5,799,963 $ 18,999 $ 196,665 $ 5,622,297
=========== ======== ========== ===========
DECEMBER 31, 1998
State and municipal securities... $ 6,218,354 $242,199 $ 3,031 $ 6,457,522
=========== ======== ========== ===========
</TABLE>
At December 31, 1999, the Company's available-for-sale securities reflected
net unrealized losses of $1,212,932 which resulted in a decrease in
stockholders' equity of $787,396, net of deferred tax benefit. 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.
The contractual maturities of securities available-for-sale at December 31,
1999, 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> 84
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
AS OF DECEMBER 31, 1999:
Securities Available-for-Sale:
Due in one year or less................... $ 99,940 $ 100,144
Due after one year through five years..... 3,753,689 3,679,674
Due after five years through ten years.... 16,912,662 16,128,547
Due after ten years....................... 8,254,787 7,899,781
Equity securities......................... 728,100 728,100
----------- -----------
$29,749,178 $28,536,246
=========== ===========
Securities Held-to-Maturity:
Due in one year or less................... $ -- $ --
Due after one year through five years..... 904,477 908,074
Due after five through ten years.......... 1,422,103 1,391,034
Due after ten years....................... 3,473,383 3,323,189
----------- -----------
$ 5,799,963 $ 5,622,297
=========== ===========
</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,
1999, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Gross realized gains...................... $11,829 $15,956 $5,757
Gross realized losses..................... 2,399 6 5,835
</TABLE>
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 $728,100 and $554,000 at December
31, 1999 and 1998, 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 $19,114,000 and
$12,552,000 at December 31, 1999 and 1998.
F-18
<PAGE> 85
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural.... $ 35,374,820 $ 26,883,464
Real estate -- construction............... 13,941,428 8,542,640
Real estate -- mortgage................... 103,413,224 78,965,161
Consumer.................................. 15,025,954 13,742,818
Other loans............................... 1,350,446 1,697,012
------------ ------------
169,105,872 129,831,095
Allowance for loan losses................. (1,849,290) (1,686,395)
------------ ------------
Net loans................................. $167,256,582 $128,144,700
============ ============
</TABLE>
Total loans which the Company considered to be impaired at December 31,
1999 and 1998, were $344,000 and $4,000, respectively. All of these loans were
on nonaccrual status and had related allowances of $51,600 and $1,000,
respectively. Impaired loans consisted primarily of commercial loans as of
December 31, 1999, and unsecured consumer loans as of December 31, 1998. The
average recorded investment in impaired loans for the years ended December 31,
1999 and 1998 was approximately $174,000 and $10,000, respectively. No material
amount of interest income was recognized on impaired loans for the years ended
December 31, 1999 and 1998. For the years ended December 31, 1999 and 1998, 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.
F-19
<PAGE> 86
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of year.............. $1,686,395 $ 929,590 $ 655,296
Charge-offs............................... (760,827) (136,222) (228,087)
Recoveries................................ 43,722 34,947 22,381
---------- ---------- ---------
Net charge-offs......................... (717,105) (101,275) (205,706)
Addition due to acquisition............... -- 558,080 --
Provision for loan losses................. 880,000 300,000 480,000
---------- ---------- ---------
Balance at end of year.................... $1,849,290 $1,686,395 $ 929,590
========== ========== =========
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land.......................................... $ 770,932 $ 851,546
Buildings and improvements.................... 2,539,187 2,396,161
Furniture and equipment....................... 1,933,862 1,766,961
---------- ----------
5,243,981 5,014,668
Less allowance for depreciation............... 1,366,562 1,074,636
---------- ----------
$3,877,419 $3,940,032
========== ==========
</TABLE>
The provisions for depreciation charged to occupancy and furniture and
equipment expense for the years ended December 31, 1999, 1998 and 1997, were
$312,865, $177,407 and $137,432, respectively.
F-20
<PAGE> 87
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- DEPOSITS
The major classifications of deposits as of December 31, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Noninterest-bearing demand................ $ 10,363,135 $ 9,287,933
Interest-bearing demand................... 42,364,520 48,039,917
Savings................................... 29,006,307 29,008,638
Time...................................... 66,715,014 51,576,805
Certificates of deposit of $100,000 or
more.................................... 38,280,680 25,948,185
------------ ------------
$186,729,656 $163,861,478
============ ============
</TABLE>
The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 1999 and 1998 were
$38,280,680 and $25,948,185, respectively.
The maturities of time certificates of deposit and other time deposits
issued by the Company at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
TIME
CERTIFICATES
OF DEPOSIT
------------
<S> <C>
Years ending December 31,
2000........................................... $ 83,974,333
2001........................................... 16,555,363
2002........................................... 2,824,080
2003........................................... 1,578,614
2004........................................... 63,304
------------
$104,995,694
============
</TABLE>
NOTE 9 -- LONG-TERM DEBT
At December 31, 1999 and 1998, the Company had notes payable totaling
$16,964,286 and $11,007,143, respectively.
F-21
<PAGE> 88
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Notes payable on line of credit at FHLB, with
varying maturities; from October 2002 through
October 2008, interest rate varies from 5.27% to
6.77%, secured by residential mortgages........... $13,364,286 $ 7,407,143
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 Appalachian
Community Bank.................................... 3,600,000 3,600,000
----------- -----------
$16,964,286 $11,007,143
=========== ===========
</TABLE>
Maturities of long-term debt following December 31, 1999, are as follows:
<TABLE>
<S> <C>
Years ending December 31,
2000............................................ $ 6,000,000
2001............................................ 450,000
2002............................................ 1,050,000
2003............................................ 450,000
2004............................................ 2,064,286
Thereafter...................................... 6,950,000
-----------
$16,964,286
===========
</TABLE>
NOTE 10 -- SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased and securities
sold under agreements 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>
1999 1998
---------- ----------
<S> <C> <C>
Average balance during the year............... $2,071,713 $4,095,716
Average interest rate during the year......... 3.96% 4.26%
Maximum month-end balance during the year..... $3,679,074 $4,468,355
</TABLE>
F-22
<PAGE> 89
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
Professional fees.......................... $ 412,218 $ 220,515 $194,513
Data processing............................ 375,061 136,256 87,095
Advertising................................ 308,819 203,021 122,358
Stationery and supplies.................... 252,688 166,137 116,537
Director and committee fees................ 226,983 125,686 119,322
Postage.................................... 131,342 89,354 69,806
Amortization............................... 117,668 20,894 5,832
Insurance.................................. 80,860 53,554 55,524
Taxes and licenses......................... 63,715 46,788 25,608
Checking account expense................... 62,932 40,921 32,830
Correspondent bank charges................. 45,368 35,458 34,648
Education.................................. 22,642 15,848 9,374
Dues and subscriptions..................... 19,368 15,241 8,179
Other...................................... 203,513 128,957 95,651
---------- ---------- --------
Total other operating expenses........ $2,323,177 $1,298,630 $977,277
========== ========== ========
</TABLE>
NOTE 12 -- INCOME TAXES
Federal and state income taxes receivable (payable) as of December 31, 1999
and 1998 included in other assets and other liabilities, respectively, were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Current
Federal......................................... $189,285 $95,605
State........................................... 39,114 --
</TABLE>
F-23
<PAGE> 90
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred income tax asset included in other
assets are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Deferred tax asset:
Federal....................................... $ 968,552 $448,671
State......................................... 106,299 --
---------- --------
Total deferred income tax asset............ 1,074,851 448,671
---------- --------
Deferred tax liability:
Federal....................................... (75,991) (53,622)
State......................................... (6,705) --
---------- --------
Total deferred income tax liability........ (82,696) (53,622)
---------- --------
Net deferred tax asset.......................... $ 992,155 $395,049
========== ========
</TABLE>
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net unrealized gains on securities
available-for-sale............................. $425,537 $(53,622)
Depreciation..................................... (82,696) (54,514)
Allowance for loan losses........................ 534,178 497,302
Deferred compensation............................ 91,064 --
Other............................................ 24,072 5,883
-------- --------
$992,155 $395,049
======== ========
</TABLE>
The components of income tax expense for the years 1999, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal............................. $292,595 $597,500 $456,013
State............................... (35,946) 37,750 --
Deferred
Federal............................. (54,741) (63,000) (73,426)
State............................... (63,206) -- --
-------- -------- --------
$138,702 $572,250 $382,587
======== ======== ========
</TABLE>
F-24
<PAGE> 91
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax effects of securities transactions resulted in an increase (decrease)
in income taxes for 1999, 1998 and 1997 of $3,206, $5,423 and ($27),
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, 1999,
1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities.................................. (12.8) (7.2) (4.1)
Tax-exempt loans....................................... (0.9) (1.1) (1.0)
Interest expense disallowance.......................... 2.3 1.7 1.0
State income tax, net of federal tax................... (6.2) 1.4 --
Other.................................................. (6.5) 3.3 (2.6)
----- ---- ----
Effective income tax rate................................ 9.9% 32.1% 27.3%
===== ==== ====
</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, 1999 and 1998, the Company has issued standby letters of credit of
approximately $891,000 and $643,000.
LOAN COMMITMENTS: As of December 31, 1999 and 1998, the Company had
commitments outstanding to extend credit totaling approximately $24,260,000 and
$16,290,000 respectively. These commitments generally require the customers to
maintain
F-25
<PAGE> 92
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.
LITIGATION: The Company is party to litigation and claims arising in the
normal course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation and claims
are not material to the financial statements.
In December 1999, Gilmer County Bank entered into a contract to purchase
data processing equipment and license rights for software in the amount of
$2,049,635. The expenditures will enable the Company to process in house and
offer data processing services to other institutions.
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 5. 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 $285,727 and
$31,000 at December 31, 1999 and 1998, respectively.
NOTE 15 -- STOCK OPTION PLAN
On June 22, 1999, the Company issued 43,000 options on its shares of common
stock to staff members at an exercise price of $12.00 per share. The options
vest over a period of five years.
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 Executive Vice
President 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, 1999.
F-26
<PAGE> 93
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIXED OPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 255,200 $ 8.00 286,000 $8.00 -- $0.00
Granted..................... 43,000 12.00 -- 0.00 286,000 8.00
Exercised................... (4,400) 8.00 (30,800) 8.00 -- 0.00
Forfeited................... -- 0.00 -- 0.00 -- 8.00
------- ------ ------- ----- ------- -----
Outstanding at end of
year...................... 293,800 $ 8.59 255,200 $8.00 286,000 $8.00
======= ====== ======= ===== ======= =====
Exercisable at end of
year...................... 79,200 $ 8.00 26,400 $8.00 -- $0.00
======= ====== ======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION OPTIONS
NUMBER DATE EXERCISABLE
------- ---------- -----------
<S> <C> <C> <C>
Options with Exercise Price of $8.00... 250,800 06-01-07 79,200
Options with Exercise Price of
$12.00............................... 43,000 06-22-09 --
</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.
F-27
<PAGE> 94
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net Income
As reported.................... $1,265,774 $1,208,231 $1,017,766
Pro forma...................... 1,195,378 1,125,073 870,834
Basic Earnings Per Share
As reported.................... $ 0.95 $ 1.04 $ 0.88
Pro forma...................... 0.90 0.96 0.75
Diluted Earnings Per Share
As reported.................... $ 0.89 $ 0.99 $ 0.88
Pro forma...................... 0.84 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 greater than that used to calculate basic
earnings per share for 1999, 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, 1999, 1998 and 1997 were $.06, $.05 and $.00,
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.
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, 1999, the Banks could declare dividends of approximately
$790,000 without regulatory consent, subject to the Banks' compliance with
regulatory
F-28
<PAGE> 95
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1999, the Company sold 17,534 shares of stock to its ESOP plan for
$350,680. Of this amount, $87,670 was allocated to common stock and $263,010 to
capital surplus. The Company also recorded an increase of $157,094 in capital
surplus related to the issuance of compensatory options. This capital increase
was reflected as compensation in the consolidated statement of income for the
current year. In addition, 4,400 options were exercised for an amount equaling
$55,243, including tax benefit of $20,043, allocated among common stock, $22,000
and capital surplus, $33,243.
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.
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, 1999 and 1998 are disclosed in note 17
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.
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 I 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,
1999, that the Banks meet all capital adequacy requirements to which they are
subject.
F-29
<PAGE> 96
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, the most recent notification from the appropriate
regulatory agencies categorized Appalachian Community Bank, a subsidiary bank,
as well capitalized and Gilmer County Bank, the other subsidiary bank, as
adequately 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, 1999:
Total Capital
Consolidated.......... $12,830 7.41% $13,857 8.00% $17,321 10.00%
Gilmer County Bank.... 11,623 9.29 10,009 8.00 12,512 10.00
Appalachian Community
Bank............... 4,430 9.21 3,848 8.00 4,810 10.00
Tier 1 Capital
Consolidated.......... 10,981 6.34 6,929 4.00 10,393 6.00
Gilmer County Bank.... 10,295 8.23 5,005 4.00 7,507 6.00
Appalachian Community
Bank............... 3,909 8.13 1,924 4.00 2,886 6.00
Tier 1 Leverage
Consolidated.......... 10,981 5.22 8,422 4.00 10,528 5.00
Gilmer County Bank.... 10,295 6.74 6,114 4.00 7,642 5.00
Appalachian Community
Bank............... 3,909 6.77 2,308 4.00 2,886 5.00
</TABLE>
F-30
<PAGE> 97
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
---------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- -------- ------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital
Consolidated.......... $10,721 7.88% $10,890 8.00% $13,612 10.00%
Gilmer County Bank.... 10,248 9.92 8,266 8.00 10,332 10.00
Appalachian Community
Bank............... 4,147 12.70 2,612 8.00 3,265 10.00
Tier 1 Capital
Consolidated.......... 9,035 6.64 5,445 4.00 8,167 6.00
Gilmer County Bank.... 9,120 8.83 4,133 4.00 6,199 6.00
Appalachian Community
Bank............... 3,737 11.44 1,306 4.00 1,959 6.00
Tier 1 Leverage
Consolidated.......... 9,035 4.99 7,242 4.00 9,053 5.00
Gilmer County Bank.... 9,120 6.70 5,445 4.00 6,806 5.00
Appalachian Community
Bank............... 3,737 8.32 1,798 4.00 2,247 5.00
</TABLE>
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 discretionary cash contributions to the plan of
approximately $170,000 in 1999, $145,000 in 1998, and $102,000 in 1997.
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 years ended December 31, 1999 and 1998, rental expense for operating
leases was approximately $32,919 and $3,000, respectively. Rental expense for
operating leases for the year ended December 31, 1997 was negligible.
F-31
<PAGE> 98
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Years Ending December 31,
2000............................................. $ 32,944
2001............................................. 32,025
2002............................................. 32,530
2003............................................. 33,154
2004............................................. 33,781
Thereafter....................................... 937,700
----------
Total minimum lease payments..................... $1,102,134
==========
</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 1999 and 1998. 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>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance at Beginning of Year.................. $5,463,030 $4,133,302
New loans..................................... 2,675,721 2,757,808
Repayments.................................... (390,196) (2,122,202)
Adjustments/changes in structure.............. -- 694,122
---------- ----------
Balance at End of Year........................ $7,748,555 $5,463,030
========== ==========
</TABLE>
DEPOSITS: Deposits held from related parties were $2,161,315 and
$1,208,198 at December 31, 1999 and 1998, respectively.
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 rates 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
F-32
<PAGE> 99
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-33
<PAGE> 100
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values of the Company's financial instruments as of
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments... $ 9,799 $ 9,799 $ 24,281 $ 24,281
Securities........................ 34,336 34,159 28,159 28,398
Loans............................. 169,106 168,942 129,831 129,685
Accrued interest receivable....... 1,742 1,742 1,320 1,320
-------- -------- -------- --------
Total financial assets....... $214,983 $214,642 $183,591 $183,684
======== ======== ======== ========
FINANCIAL LIABILITIES
Deposits.......................... $186,730 $187,383 $163,861 $164,921
Short-term borrowings............. 6,134 6,134 2,478 2,478
Accrued interest payable.......... 816 816 666 666
Long-term debt.................... 16,964 16,810 11,007 11,192
-------- -------- -------- --------
Total financial
liabilities................ $210,644 $211,143 $178,012 $179,257
======== ======== ======== ========
UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit...... $ 24,260 $ 24,260 $ 16,290 $ 16,290
Standby letters of credit......... 891 891 643 643
-------- -------- -------- --------
Total unrecognized financial
instruments................ $ 25,151 $ 25,151 $ 16,933 $ 16,933
======== ======== ======== ========
</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 could have adversely
affected 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 has been performed.
The Company's management does not believe the effects of year 2000 will
have any material impact on the Company's consolidated financial position or
results of operations.
F-34
<PAGE> 101
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 23 -- CONDENSED PARENT INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks............................. $ 79,386 $ 28,222
Investment in Subsidiaries (equity method)
eliminated upon consolidation..................... 15,643,380 15,301,472
Other assets........................................ 298,008 --
----------- -----------
Total assets................................... $16,020,774 $15,329,694
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable........................................ $ 3,600,000 $ 3,600,000
Other liabilities................................... -- 250,000
----------- -----------
Total Liabilities.............................. 3,600,000 3,850,000
Total Shareholders' Equity..................... 12,420,774 11,479,694
----------- -----------
Total Liabilities and Shareholders' Equity..... $16,020,774 $15,329,694
=========== ===========
</TABLE>
F-35
<PAGE> 102
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries -- eliminated
upon consolidation..................... $ 350,000 $ 500,000 $ --
EXPENSES
Interest................................. 264,475 93,406 78,517
Other expenses........................... 338,315 135,701 15,525
---------- ---------- ----------
602,790 229,107 94,042
---------- ---------- ----------
Income before income taxes and equity in
undistributed earnings of
subsidiaries........................... (252,790) 270,893 (94,042)
Income tax benefits...................... 288,943 42,101 30,913
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiaries............... 36,153 312,994 (63,129)
Equity in undistributed earnings of
subsidiaries........................... 1,229,621 895,237 1,080,895
---------- ---------- ----------
Net Income............................. $1,265,774 $1,208,231 $1,017,766
========== ========== ==========
</TABLE>
F-36
<PAGE> 103
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................ $ 1,265,774 $ 1,208,231 $ 1,017,766
Adjustments to reconcile net income to
net cash provided by operating
activities
Equity in undistributed income of
subsidiaries..................... (1,229,621) (895,237) (1,080,895)
Provision for amortization.......... -- 20,894 5,832
Deferred tax benefit................ (76,618) -- --
Other............................... (451,346) 249,979 (4,667)
----------- ----------- -----------
Net cash provided by (used in)
operating activities........... (491,811) 583,867 (61,964)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of bank................... -- (6,100,000) --
Capital injection in subsidiaries..... -- -- (610,000)
----------- ----------- -----------
Net cash used in investing
activities..................... -- (6,100,000) (610,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term
debt................................ -- 3,600,000 620,000
Repayment of long-term debt........... -- (1,320,000) --
Proceeds from issuance of common
stock............................... 385,880 3,354,868 388,607
Issuance of stock options............. 157,094 -- --
Purchases of treasury stock........... -- (154,000) (274,000)
----------- ----------- -----------
Net cash provided by financing
activities..................... 542,974 5,480,868 734,607
----------- ----------- -----------
Net increase in cash and cash
equivalents......................... 51,163 (35,265) 62,643
Cash and cash equivalents at beginning
of year............................. 28,222 63,487 844
----------- ----------- -----------
Cash and cash equivalents at end of
year................................ $ 79,385 $ 28,222 $ 63,487
=========== =========== ===========
Cash paid during the year for:
Interest............................ $ 264,475 $ 93,406 $ 83,184
</TABLE>
F-37
<PAGE> 104
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999:
Total interest income..................... $3,698 $3,975 $4,163 $4,303
Total interest expense.................... 2,109 2,200 2,346 2,484
Provision for loan losses................. 150 205 285 24
Net interest income after provision for
loan losses............................. 1,439 1,570 1,532 1,579
Securities gains (losses)................. -- 10 (2) 1
Total noninterest income.................. 226 186 231 193
Total noninterest expense................. 1,251 1,355 1,330 1,625
Income tax expense........................ 140 181 83 (265)
Net income................................ 274 230 348 413
Per Common Share:
Basic earnings.......................... 0.20 0.17 0.26 0.32
Diluted earnings........................ 0.19 0.16 0.24 0.30
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)................. -- 14 1 --
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
</TABLE>
F-38
<PAGE> 105
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSCRIPTION AGREEMENT
To the Board of Directors of
APPALACHIAN BANCSHARES, INC.
829 Industrial Boulevard
Ellijay, Georgia 30540
Gentlemen:
I hereby subscribe to purchase the number of shares of Appalachian
Bancshares' common stock indicated below. Accompanying this Agreement is a check
in the amount of $15.00 multiplied by the number of shares I wish to buy. My
check is made payable to "Crescent Bank and Trust Company Escrow Account for
Appalachian Bancshares."
WHEN APPALACHIAN BANCSHARES ACCEPTS THIS SUBSCRIPTION AGREEMENT, THIS
SUBSCRIPTION WILL BECOME FINAL AND BINDING AND WILL BE IRREVOCABLE UNTIL THE
OFFERING IS CLOSED.
Number of Shares (Minimum 100 shares):
Total Subscription Price (at $15.00 per share): $
Name:
----------------------------------
(Please print or type exact
name(s) in which the shares
should be registered)
Accepted as of , 2000, as to shares
APPALACHIAN BANCSHARES, INC.
By:
- ----------------------------------
Name:
Title:
<PAGE> 106
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSTITUTE W-9
Under the penalties of perjury, I certify that: (1) the Social Security
number or Taxpayer Identification number given below is correct; and (2) I am
not subject to backup withholding. INSTRUCTION: YOU MUST CROSS OUT #2 ABOVE IF
YOU HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO
BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX
RETURN.
<TABLE>
<S> <C>
- ----------------------------------------------------- -----------------------------------------------------
Date Signature(s)*
- ----------------------------------------------------- -----------------------------------------------------
Area Code and Telephone No. Please indicate the form of ownership desired for the
shares (individual, joint tenants with right of
survivorship, tenants in common, trust, corporation,
partnership, custodian, etc.)
- -----------------------------------------------------
Social Security Number or Federal Taxpayer
Identification Number
</TABLE>
<PAGE> 107
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------------------------------------------------
- ------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Cautionary Notice Regarding Forward-
Looking Statements................ 4
Risk Factors........................ 5
The Offering........................ 9
Use of Proceeds..................... 11
Market for Our Common Equity and
Related Shareholder Matters....... 11
Capitalization...................... 13
Selected Consolidated Financial Data
and Statistical Information....... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 26
Our Business........................ 41
Supervision and Regulation.......... 46
Management.......................... 56
Compensation of Executive
Officers.......................... 57
Certain Transactions................ 60
Security Ownership of Certain
Beneficial Owners Management...... 61
Description of Capital Stock........ 62
Legal Matters....................... 63
Experts............................. 63
Where You Can Find Additional
Information....................... 63
Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities....................... 64
Index to Financial Statements....... F-1
</TABLE>
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT A SOLICITATION OF AN OFFER
TO BUY THE SECURITIES IN ANY STATE WHERE OUR OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF THE DATE ON THE
COVER BUT THE INFORMATION MAY CHANGE IN THE FUTURE.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(APPALACHIAN BANCSHARES LOGO)
Purchase Price $15.00 Per Share
APPALACHIAN
BANCSHARES, INC.
Common Stock
-----------------------
PROSPECTUS
------------------------
May 12, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 108
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers.
In accordance with the Georgia Business Corporation Code of the State
of Georgia, Article VI of Appalachian Bancshares, Inc. (the "Corporation")
Articles of Incorporation provide as follows:
Article VI
To the fullest extent permitted by the Georgia Business Corporation
Code as the same exists or may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of duty of care or other duty as a
director, provided that this provision shall not eliminate or limit the
liability of a director:
(A) For any appropriation, in violation of his duties, of any
business opportunity of the Corporation;
(B) For acts or omissions which involve intentional misconduct or
a knowing violation of law;
(C) For the types of liability set forth in Section 14-2-832 of
the Georgia Business Corporation Code; or
(D) For any transaction from which the director received an
improper personal benefit.
Any repeal, amendment, or modification of this Article VI by the
shareholders of the Corporation shall not adversely affect any right, benefit,
or protection of a director of the Corporation existing at the time of such
repeal, amendment, or modification.
Article Nine of the Corporation's Bylaws provides as follows:
Article IX
Indemnification and Interested Parties
9.1 Indemnification. Any person, his heirs, executors, or
administrators, may be indemnified or reimbursed by the Corporation for any
reasonable expense actually incurred in connection with any threatened, pending
or completed action, suit or proceeding (including settlements thereof and
appeals therefrom), whether civil, criminal, administrative or investigative,
to which he shall be made a party or prospective party by reason of the fact
that he is or was a director, trustee, officer, employee, or agent of the
Corporation, or that he is or was serving, at the request of the Corporation,
as a director, trustee, officer, employee, or agent of another firm,
corporation, trust or other organization or enterprise. Provided, however, that
(a) such person shall be entitled to indemnification only upon a resolution
of the Board of Directors then holding office, excluding the votes of any
directors who are parties to the same or substantially the same action, suit,
or proceeding, finding that such person acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the best interests
of the Corporation and, in addition, with respect to any criminal action, suit
or proceeding, that such person did not have reasonable cause to believe that
his conduct was unlawful; (b) no person shall be so indemnified or reimbursed
in relation to any matter in such action, suit or proceeding as to which he
shall finally be adjudged to have been guilty of or liable for gross
negligence, willful misconduct or criminal acts in the performance of his
duties to the Corporation, or to such other firm, corporation, trust,
organization or enterprise; and (c) no person shall be so indemnified or
reimbursed in relation to any matter in such action, suit, or proceeding which
has been the subject of a compromise settlement, except with the approval of
(i) a court of competent jurisdiction, (ii) the holders of record of a majority
of the outstanding shares of capital stock of the Corporation, or (iii) a
majority of the members of the Board of
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Directors then holding office, excluding the votes of any directors who are
parties to the same or substantially the same action, suit or proceeding.
9.2 Payment of Expenses in Advance. Expenses incurred in defending
any action, suit, or proceeding referred to above may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the specific case upon
receipt of an undertaking by or on behalf of the director, trustee, officer,
employee or agent to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation as provided above.
9.3 Insurance. The Corporation, upon the affirmative vote of a
majority of its Board of Directors, may purchase and maintain insurance on
behalf of any person who is or was a director, trustee, officer, employee or
agent of the Corporation, or is or was serving, at the request of the
Corporation, as a director, trustee, officer, employee or agent of another
firm, corporation, trust or other organization or enterprise, against liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the foregoing provisions of these
By-Laws.
9.4 Rights Not Exclusive. The foregoing rights of indemnification
or reimbursement shall not be exclusive of other rights to which the persons
referred to above, or their heirs, executors, or administrators, may be
entitled as a matter of law, and the Corporation may indemnify such persons to
the extent permitted by the Georgia Business Corporation Code, as such laws may
be amended from time to time, and any other applicable laws.
Item 25. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
SEC registration fee ........................................ $ 3,036
Legal fees .................................................. 125,000
Accounting fees and expenses ................................ 50,000*
Printing expenses ........................................... 35,000*
Blue Sky expenses ........................................... 10,000*
Miscellaneous expenses ...................................... 19,064
---------
Total .................................................... $225,000*
</TABLE>
- ---------------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
On November 30, 1998, the Corporation sold 132,500 shares of common stock
for an aggregate price of $2,650,000 in a private placement made in reliance on
Section 4(2) of the Securities Act of 1933. No underwriting discounts or
commissions were paid in connection with such offering.
Item 27. Exhibits.
The exhibits filed as part of this registration statement are as follows:
<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 (1)
3.1 Articles of Incorporation of the Company (2)
3.2 Bylaws of the Company (2)
3.3 Amendment to Articles of Incorporation of the Company
</TABLE>
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<PAGE> 110
<TABLE>
<S> <C>
4.1 Registration Rights Agreement, dated November 30, 1998, by
and among the Company and Community Financial Services, Inc.
(3)
4.2 Registration Rights Agreement, dated November 30, 1998, by
and among the Company and Ellijay Telephone Company, Inc. (3)
4.3 Registration Rights Agreement, dated November 30, 1998, by
and among the Company and JBC Bancshares, Inc. (3)
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP
10.1 1997 Directors' Non-Qualified Stock Option Plan ** (4)
10.2 1997 Employee Incentive Stock Incentive Plan ** (4)
10.3 Adoption Agreement for the Appalachian Bancshares, Inc.
Section 401(k) Profit Sharing Plan. (5)
10.4 Georgia Bankers Association Master 401(k) Profit Sharing
Plan (5)
10.5 First Amendment to the Georgia Bankers Association Master
Section 401(k) Profit Sharing Plan (5)
10.6 Form of Deferred Fee Agreement between Gilmer County Bank
and certain directors and executive officers, with addendum
(6)
10.7 Loan and Stock Pledge Agreement, dated as of April 3, 2000
between the Company and Crescent Bank and Trust Company (7)
10.8 Promissory Note, dated April 3, 2000, issued by the Company
to Crescent Bank and Trust Company (7)
11 Statement re: Computation of Per Share Earnings(3)
21 Subsidiaries of the Registrant(3)
23.1 Consent of Independent Auditors
23.2 Consent of Paul, Hastings, Janofsky & Walker LLP (included
in Exhibit 5.1)
</TABLE>
** The referenced exhibit is a compensatory contract, plan or arrangement.
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed November 30, 1998.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A filed September 16, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form
10-KSB filed March 31, 1999.
(4) Incorporated by reference to the Company's Annual Report on Form
10-KSB filed March 26, 1997.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-8 filed May 14, 1997.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB filed August 14, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed April 14, 1999.
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Corporation, or otherwise, the Corporation has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Corporation of expenses incurred or paid by a
director, officer or controlling person of the Corporation in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Corporation will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Corporation will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Corporation
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<PAGE> 111
under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for the securities offered in the registration statement, and that offering of
the securities at that time as the initial bona fide offering of those
securities.
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<PAGE> 112
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this post-effective Amendment No. 1 to its
registration statement on Form SB-2 and authorized this post-effective Amendment
No. 1 to its registration statement to be signed on its behalf by the
undersigned on May 17, 2000.
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
--------------------------------------------
Tracy R. Newton
President and Chief Executive Officer
Duly Authorized Representative
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of the date indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Tracy R. Newton and Kent W.
Sanford, and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Registration Statement.
<TABLE>
<S> <C>
/s/ Tracy R. Newton Date: May 17, 2000
- -----------------------------------------------
Tracy R. Newton, President, Chief Executive
Officer and Director (Principal
Executive Officer)
* Date: May 17, 2000
- -----------------------------------------------
Kent W. Sanford, Executive Vice President,
Chief Operating Officer and Director
* Date: May 17, 2000
- -----------------------------------------------
Alan R. May, Chief Financial Officer (Principal
Financial Officer)
* Date: May 17, 2000
- -----------------------------------------------
P. Joe Sisson, Director
* Date: May 17, 2000
- -----------------------------------------------
Joseph C. Hensley, Director
* Date: May 17, 2000
- -----------------------------------------------
Alan S. Dover, Director
* Date: May 17, 2000
- -----------------------------------------------
Charles A. Edmondson, Director
* Date: May 17, 2000
- -----------------------------------------------
Roger E. Futch, Director
</TABLE>
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<PAGE> 113
<TABLE>
<S> <C>
* Date: May 17, 2000
- -----------------------------------------------
J. Ronald Knight, Director
* Date: May 17, 2000
- -----------------------------------------------
Kenneth D. Warren, Director
* Date: May 17, 2000
- -----------------------------------------------
Frank E. Jones, Director
</TABLE>
By: /s/ Tracy R. Newton Date: May 17, 2000
-------------------
Attorney-in-Fact
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<PAGE> 114
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 (1)
3.1 Articles of Incorporation of the Company (2)
3.2 Bylaws of the Company (2)
3.3 Amendment to Articles of Incorporation of the Company
4.1 Registration Rights Agreement, dated November 30, 1998, by
and among the Company and Community Financial Services,
Inc. (3)
4.2 Registration Rights Agreement, dated November 30, 1998, by
and among the Company and Ellijay Telephone Company, Inc.
(3)
4.3 Registration Rights Agreement, dated November 30, 1998, by
and among the Company and JBC Bancshares, Inc. (3)
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP
10.1 1997 Directors' Non-Qualified Stock Option Plan ** (4)
10.2 1997 Employee Incentive Stock Incentive Plan ** (4)
10.3 Adoption Agreement for the Appalachian Bancshares, Inc.
Section 401(k) Profit Sharing Plan.(5)
10.4 Georgia Bankers Association Master 401(k) Profit Sharing
Plan (5)
10.5 First Amendment to the Georgia Bankers Association Master
Section 401(k) Profit Sharing Plan (5)
10.6 Form of Deferred Fee Agreement between Gilmer County Bank
and certain directors and executive officers, with addendum
(6)
10.7 Loan and Stock Pledge Agreement, dated as of April 3, 2000
between the Company and Crescent Bank and Trust Company (7)
10.8 Promissory Note, dated April 3, 2000, issued by the Company
to Crescent Bank and Trust Company (7)
11 Statement re: Computation of Per Share Earnings(3)
21 Subsidiaries of the Registrant(3)
23.1 Consent of Independent Auditors
23.2 Consent of Paul, Hastings, Janofsky & Walker LLP (included
in Exhibit 5.1)
27 Financial Data Schedule(3)
</TABLE>
** The referenced exhibit is a compensatory contract, plan or arrangement.
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed November 30, 1998.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A filed September 16, 1996.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed March 31, 1999.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed March 26, 1997.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-8 filed May 14, 1997.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB filed August 14, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed April 14, 1999.
