<PAGE> 1
As Filed with the Securities and Exchange Commission on May 10, 2000
Registration No. 333-92753
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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)
Georgia
(State or Jurisdiction
of Incorporation or Organization)
58-2242407
(I.R.S. Employer
Identification Number)
6022
(Primary Standard Industrial
Classification Code Number)
829 Industrial Boulevard
Ellijay, Georgia 30540
(Address and Telephone Number of Registrant's Principal Executive Offices)
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)
---------------------------
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.
---------------------------
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
<TABLE>
<CAPTION>
PROPOSED PROPOSED
NUMBER OF SHARES MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO TO BE OFFERING PRICE AGGREGATE REGISTRATION FEES
BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) (2)
- ------------------------------------ ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share............................... 400,000 $15.00 $6,000,000 $1,584
</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.
<PAGE> 3
[APPALACHIAN BANCSHARES LOGO]
Common Stock
Purchase Price $15.00 Per Share
APPALACHIAN BANCSHARES, INC.
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.
--------------------------------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SOME OF THESE RISKS ARE
DESCRIBED UNDER THE HEADING "RISK FACTORS" BEGINNING ON PAGE 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL MINIMUM TOTAL MAXIMUM
--------- ------------- -------------
<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.
, 2000
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[MAP]
2
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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
<TABLE>
<S> <C>
Common Stock Offered............................. Minimum of 200,000 shares and maximum of 400,000 shares.
Common Stock Outstanding After Minimum offering sold - 2,726,910 shares; maximum offering sold -
the Offering..................................... 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.
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."
</TABLE>
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<TABLE>
<S> <C>
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.
</TABLE>
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,
---------------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(amounts in thousands except per share data and ratios)
END OF PERIOD BALANCES
<S> <C> <C> <C> <C>
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>
______________________
(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.
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.
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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 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. 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
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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 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;
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- 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 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.
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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.
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 & 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.
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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 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.
10
<PAGE> 13
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.
11
<PAGE> 14
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 l00%.
(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
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
AVERAGE VOLUME CHANGE IN VOLUME AVERAGE RATE
------------------------------ ----------------------- ----------------------
1999 1998 1997 1999-1998 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
-------- -------- ------- --------- --------- ------------------ -----------------
EARNING ASSETS: (DOLLARS IN THOUSANDS) VOLUME RATE VOLUME RATE
------- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
------- ------- -------
SECURITIES AVAILABLE-FOR-SALE: (AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
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
----------------------------------------------------------------------------
WITHIN AFTER ONE BUT AFTER FIVE BUT AFTER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS TEN YEARS
-------------- ----------------- ---------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------- ----- ------- -----
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
<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>
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.
19
<PAGE> 22
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>
22
<PAGE> 25
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 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.
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
26
<PAGE> 29
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.
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.
27
<PAGE> 30
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.
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>
28
<PAGE> 31
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 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%.
29
<PAGE> 32
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%.
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
30
<PAGE> 33
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 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.
31
<PAGE> 34
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 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> 35
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 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
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<PAGE> 36
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>
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.
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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> 38
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 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
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<PAGE> 39
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.
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,
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<PAGE> 40
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 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.
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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> 42
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 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
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<PAGE> 43
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.
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;
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- 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 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.
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<PAGE> 45
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.
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.
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<PAGE> 46
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 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 fiscal or
monetary policies, economic control or new federal or state legislation may
have in the future.
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<PAGE> 47
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 (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
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<PAGE> 48
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 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;
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<PAGE> 49
- 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 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.
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<PAGE> 50
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 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
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<PAGE> 51
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.
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) <8% <4% <4%
Significantly Undercapitalized(3) <6% <3% <3%
Critically Undercapitalized(3) - - <2%
</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 Community Bank in improving its status for future FDIC review
purposes and in resolving the outstanding matters with the FDIC.
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<PAGE> 52
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. 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
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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.
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
51
<PAGE> 54
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.
52
<PAGE> 55
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
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<PAGE> 56
also is owner of A.S. 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.
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<PAGE> 57
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 $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
ANNUAL COMPENSATION(1) AWARDS
----------------------- ------
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.
(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.
55
<PAGE> 58
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL YEAR-END(#) OPTIONS AT FISCAL YEAR-END(2)
(1)
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."
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
56
<PAGE> 59
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> 60
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 PERCENT OF CLASS
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) (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.
(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
58
<PAGE> 61
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 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;
59
<PAGE> 62
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.
60
<PAGE> 63
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.
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.
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<PAGE> 64
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> 65
***
***
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> 66
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.
- --------------------------------- -------------------------------------------
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
<PAGE> 67
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ..................................
Cautionary Notice Regarding Forward-Looking
Statements........................................
Risk Factors.........................................
The Offering.........................................
Plan of Distribution.................................
Use of Proceeds .....................................
Market for Our Common Equity and Related
Shareholder Matters...............................
Capitalization.......................................
Selected Consolidated Financial Data and
Statistical Information ..........................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...............
Our Business.........................................
Supervision and Regulation...........................
Management...........................................
Compensation of Executive Officers...................
Certain Transactions.................................
Security Ownership of Certain Beneficial Owners
Management........................................
Legal Matters........................................
Description of Capital Stock.........................
Experts..............................................
Where You Can Find Additional Information............
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities....
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, INC.
PROSPECTUS
, 2000
<PAGE> 68
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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<PAGE> 69
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>
II-2
<PAGE> 70
<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
II-3
<PAGE> 71
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.
II-4
<PAGE> 72
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 on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned on May 9, 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 9, 2000
- -----------------------------------------------
Tracy R. Newton, President, Chief Executive
Officer and Director (Principal
Executive Officer)
/s/ Kent W. Sanford Date: May 9, 2000
- -----------------------------------------------
Kent W. Sanford, Executive Vice President,
Chief Operating Officer and Director
/s/ Alan R. May Date: May 9, 2000
- -----------------------------------------------
Alan R. May, Chief Financial Officer (Principal
Financial Officer)
/s/ P. Joe Sisson Date: May 9, 2000
- -----------------------------------------------
P. Joe Sisson, Director
/s/ Joseph C. Hensley Date: May 9, 2000
- -----------------------------------------------
Joseph C. Hensley, Director
/s/ Alan S. Dover Date: May 9, 2000
- -----------------------------------------------
Alan S. Dover, Director
/s/ Charles A. Edmondson Date: May 9, 2000
- -----------------------------------------------
Charles A. Edmondson, Director
/s/ Roger E. Futch Date: May 9, 2000
- -----------------------------------------------
Roger E. Futch, Director
</TABLE>
II-5
<PAGE> 73
<TABLE>
<S> <C>
/s/ J. RONALD KNIGHT Date: May 9, 2000
- -----------------------------------------------
J. Ronald Knight, Director
/s/ KENNETH D. WARREN Date: May 9, 2000
- -----------------------------------------------
Kenneth D. Warren, Director
/s/ FRANK E. JONES Date: May 9, 2000
- -----------------------------------------------
Frank E. Jones, Director
</TABLE>
II-6
<PAGE> 74
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.
<PAGE> 1
EXHIBIT 3.3
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
APPALACHIAN BANCSHARES, INC.
Pursuant to Section 14-2-1006 of the Georgia Business Corporation Code
(the "GBCC"), Appalachian Bancshares, Inc., a Georgia corporation (the
"CORPORATION"), hereby adopts the following Amendment to its Articles of
Incorporation, as amended (the "AMENDMENT"):
1. The name of the Corporation is Appalachian Bancshares, Inc.
2. The Amendment set forth below was duly adopted on May 10, 2000 by
the Board of Directors at a special meeting in accordance with Sections
14-2-1002 and 14-2-820 of the GBCC.
3. This Amendment to the Corporation's Articles of Incorporation shall
be effected by deleting Article II. in its entirety and substituting in
its place the following:
"II.
The Corporation is authorized to issue 20,000,000 shares of common
stock, $.01 par value per share."
4. All other terms and provisions of the Articles of Incorporation
shall remain unchanged.
IN WITNESS WHEREOF, the Corporation has cause the foregoing Articles
of Amendment to the Articles of Incorporation to be signed by the undersigned
this 20th day of May, 2000.
APPALACHIAN BANCSHARES, INC.
By: /s/ Kent Sanford
--------------------------------
Name: Kent Sanford
Title: Executive Vice President
<PAGE> 1
EXHIBIT 5.1
PAUL, HASTINGS, JANOFSKY & WALKER LLP
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308-2222
May 10, 2000
Appalachian Bancshares, Inc.
315 Industrial Boulevard
Ellijay, Georgia 30540
Ladies and Gentlemen:
We have acted as counsel for Appalachian Bancshares, Inc., a Georgia
corporation (the "Company"), in connection with the registration, pursuant to a
Registration Statement on Form SB-2 (No. 333-92753) filed with the Securities
and Exchange Commission (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Act"), of up to 400,000 shares of the Company's common
stock (the "Shares"), to be offered and sold by the Company.
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion. In all such
examinations, we have assumed the genuineness of all signatures on all originals
and copies of documents we have examined, the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
certified, conformed or photostatic copies. As to questions of fact material and
relevant to our opinion, we have relied upon certificates or representations of
Company officials.
Based upon the foregoing, we are of the opinion that the Shares to be
offered and sold in accordance with the Registration Statement are duly
authorized, validly issued, fully paid, and non-assessable under the Georgia
Business Corporation Code.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and consent to
the use of our name in the Prospectus forming a part of the Registration
Statement under the caption "Legal Matters." In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act and the rules and regulations promulgated
thereunder.
Sincerely,
/s/ Paul, Hastings, Janofsky & Walker LLP
PAUL, HASTINGS, JANOFSKY & WALKER LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form SB-2 being filed
by Appalachian Bancshares, Inc. of our report dated February 4, 2000, on the
consolidated financial statements of Appalachian Bancshares, Inc. and
subsidiaries as of December 31, 1999 and 1998 and for each of the three years
in the period ended December 31, 1999. We also consent to the reference to our
firm under the caption "Experts" in the Prospectus of the Registration
Statement.
SCHAUER, TAYLOR, COX & VISE, P.C.
Birmingham, Alabama
May 10, 2000
