<PAGE>   1
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                           ---------------------------

                                   FORM 10-KSB
                                  ANNUAL REPORT
                           ---------------------------

     PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000        COMMISSION FILE NO. 000-21383

                          APPALACHIAN BANCSHARES, INC.
                 (Name of Small Business Issuer in Its Charter)

          GEORGIA                                  58-2242407
  ---------------------               -----------------------------------
 (State of Incorporation)           (I.R.S. Employer Identification Number)


      829 INDUSTRIAL BOULEVARD
          ELLIJAY, GEORGIA                                 30540
---------------------------------                   -----------------
(Address of Principal Executive Offices)                (Zip Code)

                                 (706) 276-8000
                ------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

                           ---------------------------


         SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:

<TABLE>
<CAPTION>
         TITLE OF EACH CLASS         NAME OF EXCHANGE ON WHICH REGISTERED
         -------------------         ------------------------------------
<S>                                   <C>

               None                                   N/A
</TABLE>

         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:

                     Common Stock, $0.01 par value per share

         Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]

         Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]


         The issuer's revenues for its most recent fiscal year were $23,128,888.

         There is no established trading market for the registrant's capital
stock. The aggregate market value of the stock held by non-affiliates of the
registrant at March 26, 2001 was $31,444,740, based on a per share price of
$15.00, which is the price of the last trade of which management is aware as of
such date. Although directors and executive officers of the registrant were
assumed to be "affiliates" of the registrant for purposes of this calculation,
the classification is not to be interpreted as an admission of such status.

         At March 26, 2001, there were 2,857,2488 shares of the registrant's
Common Stock outstanding.

         Transitional Small Business Disclosure Format (check one):   Yes [ ]
No [X]

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive Proxy Statement for the 2001
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Report.

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                          APPALACHIAN BANCSHARES, INC.

                         2000 FORM 10-KSB ANNUAL REPORT


                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
    ITEM NUMBER                                                                                          PAGE OR
   IN FORM 10-KSB                                      DESCRIPTION                                       LOCATION
   --------------                                      -----------                                       --------
<S>                       <C>                                                                            <C>


      Item 1.             Business...............................................................           1

      Item 2.             Properties.............................................................           22

      Item 3.             Legal Proceedings......................................................           23

      Item 4.             Submission of Matters to a Vote of Security Holders....................           23

      Item 5.             Market for the Registrant's Common Equity and Related Shareholder
                          Matters................................................................           24

      Item 6.             Management's Discussion and Analysis of Financial
                          Condition and Results of Operations....................................           25

      Item 7.             Financial Statements...................................................          F-1

      Item 8.             Changes in and Disagreements with Accountants on Accounting and
                          Financial Disclosure...................................................           36

      Item 9.             Directors, Executive Officers, Promoters and Control
                          Persons; Compliance with Section 16(a) of the
                          Exchange Act...........................................................           37

      Item 10.            Executive Compensation.................................................           37

      Item 11.            Security Ownership of Certain Beneficial Owners
                          and Management.........................................................           37

      Item 12.            Certain Relationships and Related Transactions.........................           37

      Item 13.            Exhibits and Reports on Form 8-K.......................................           37
</TABLE>


<PAGE>   3


                                     PART I

             CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

         Certain of the statements made in this Report and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as oral statements made by the Company or its officers,
directors or employees, may constitute forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements are based on Management's
beliefs, current expectations, estimates and projections about the financial
services industry, the economy and about the Company and the Banks in general.
The words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate" and similar expressions are intended to identify such forward-looking
statements; however, this Report also contains other forward-looking statements
in addition to historical information. Such forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to differ materially from historical results or from any results
expressed or implied by such forward-looking statements. Such factors include,
without limitation, (i) increased competition with other financial institutions,
(ii) lack of sustained growth in the economy in Gilmer County and in Union
County (iii) rapid fluctuations in interest rates, (iv) the inability of the
Banks (as defined herein) to maintain regulatory capital standards, and (v)
changes in the legislative and regulatory environment. Many of such factors are
beyond the Company's ability to control or predict, and readers are cautioned
not to put undue reliance on such forward-looking statements. The Company
cautions that the foregoing list of important factors is not exclusive.


ITEM 1.  BUSINESS

HISTORY AND DEVELOPMENT OF THE COMPANY

         Appalachian Bancshares, Inc. (the "Company" or "Registrant") is a bank
holding company which engages in providing a full range of banking services
through its two commercial bank subsidiaries: Gilmer County Bank and Appalachian
Community Bank (the Company's two bank subsidiaries are collectively referred to
as the "Banks"). The Company was incorporated as a business corporation in May
1996 under the laws of the State of Georgia for the purpose of acquiring 100% of
the issued and outstanding shares of common stock of Gilmer County Bank. In July
1996, the Company received approval from the Federal Reserve Bank of Atlanta
(the "Federal Reserve") and the Georgia Department of Banking and Finance
("DBF") to become a bank holding company. In August 1996, the Company and Gilmer
County Bank entered into a reorganization (the "Reorganization") pursuant to
which the Company acquired 100% of the outstanding shares of Gilmer County Bank,
and the shareholders of Gilmer County Bank became the shareholders of the
capital stock of the Company.

         On November 30, 1998, the Company completed an acquisition of First
National Bank of Union County ("First National") from Century South Banks, Inc.
("Century South"). First National, renamed to Appalachian Community Bank during
1999, is a state chartered bank organized in 1981 with its main banking office
located in Blairsville, Georgia. Pursuant to the terms of the acquisition
agreement, the Company acquired First National, in a cash transaction, for a
purchase price of $6.1 million, with the assumption of certain existing
liabilities and assets of First National by Century South or certain of its
affiliates. The Company funded a portion of the purchase price with the proceeds
of a private placement of 132,500 shares of the Company's Common Stock to
certain accredited investors. The aggregate gross proceeds of the private
placement were $2.65 million. Purchasers of shares of the Company's Common Stock
in the private placement are entitled to certain registration rights with
respect to such shares and are subject to certain call rights of the Company.
The Company funded the remainder of the purchase price through a new $3.6
million loan with The Bankers Bank.

         At December 31, 2000, the assets of the Company consisted primarily of
its ownership of the capital stock of the Banks. Unless otherwise indicated, the
information presented herein relating to the Company refers to the Company and
the Banks on a consolidated basis.

         The Company's executive office is located at 829 Industrial Boulevard,
Ellijay, Georgia, and its telephone number at such location is (706) 276-8000.


                                       1
<PAGE>   4

         BUSINESS OF THE COMPANY

         The Company is authorized to engage in any activity permitted by law to
a corporation, subject to applicable federal and state regulatory restrictions
on the activities of bank holding companies. The Company's holding company
structure provides it with greater flexibility than the respective Banks would
otherwise have to expand and diversify their business activities through newly
formed subsidiaries, or through acquisitions. While management of the Company
has no present plans to engage in any other business activities, management may
from time to time study the feasibility of establishing or acquiring
subsidiaries to engage in other business activities to the extent permitted by
law.

         GILMER COUNTY BANK

         Gilmer County Bank was organized in 1994 under the laws of the State of
Georgia to conduct a commercial banking business in Gilmer County, Georgia, with
its deposits insured by the Federal Deposit Insurance Corporation ("FDIC").
Gilmer County Bank was formed to meet the banking needs of individuals, small to
medium-sized businesses, and farmers, especially those engaged in apple and
poultry production.

         Gilmer County Bank was organized by a group of individuals from Gilmer
County and the surrounding area and commenced business from its main office
location at 829 Industrial Boulevard, Ellijay, Georgia on March 3, 1995. Gilmer
County Bank operated in development stage prior to that time.

         Gilmer County Bank has a correspondent relationship with several banks,
including The Bankers Bank, Federal Home Loan Bank and SouthTrust Bank.

APPALACHIAN COMMUNITY BANK

         Appalachian Community Bank ("Appalachian") (formerly First National
Bank of Union County) was organized in 1981 as an insured national bank
chartered under the federal banking laws of the United States of America. During
1999, the Bank converted from a national bank to a state-chartered bank under
the laws of the State of Georgia. Appalachian's deposits are insured by the
FDIC.

         Appalachian conducts business from its main banking office located in
Blairsville, Georgia. Appalachian has a correspondent relationship with several
banks, including The Bankers Bank, Federal Home Loan Bank and SouthTrust Bank.

BANKING SERVICES AND OPERATIONS

         The Banks perform banking services customary for full service banks of
similar size and character. Such services include the receipt of demand and time
deposit accounts, the extension of personal and commercial loans and the
furnishing of personal and commercial checking accounts. Gilmer County Bank
draws most of its customer deposits and conducts most of its lending
transactions from and within a primary service area encompassing Gilmer County,
southwestern Fannin County, northern Pickens County, western Dawson County and
southeastern Murray County, Georgia. 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 (1) demand, time, savings, and
other deposits (including negotiable order of withdrawal ("NOW") accounts), (2)
amortization and prepayment of loans granted, (3) sales to other lenders or
institutions of loans or participation in loans, (4) fees paid by other lenders
or institutions for servicing loans sold by the Banks to such lenders or
institutions and (5) borrowings. The principal sources of income for the Banks
are interest and fees collected on loans, including fees received for servicing
loans sold to other lenders or institutions and, to a lesser extent, interest
and dividends collected on other investments. The principal expenses of the
Banks are (1) interest paid on savings and other deposits (including NOW
accounts), (2) interest paid on borrowings by the Banks, (3) employee
compensation, (4) office expenses and (5) other overhead expenses.


                                       2
<PAGE>   5

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, 2000, Gilmer
County Bank had a total of 62 employees, 51 of which were full-time employees,
and Appalachian Community Bank had a total of 23 employees, 20 of which were
full-time employees. The Company and the Banks are not parties to any collective
bargaining agreements with employees, and management believes that employee
relations are generally good.

LENDING ACTIVITIES

         General. The Banks are authorized to make both secured and unsecured
commercial and consumer loans to individuals, partnerships, corporations and
other entities. The Banks' lending business consists principally of making
secured real estate loans, including residential and commercial construction
loans, and primary and secondary mortgage loans for the acquisition or
improvement of personal residences. In addition, the Banks make consumer loans
to individuals and commercial loans to small and medium-sized businesses and
professional concerns. Loans to the poultry industry constituted approximately
11.7% of the Banks' total loans at December 31, 2000.

         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 its interest income. No
mortgage loans are held by the Banks for resale nor are any loans held for
mortgage servicing.

         Real Estate Loans. Loans secured by real estate are the primary
component of the Banks' loan portfolio, constituting approximately $159 million,
or 74%, of the Banks' total loans at December 31, 2000. These loans consist of
commercial real estate loans, construction and development loans and residential
real estate loans but exclude home equity loans, which are classified as
consumer loans.

         Commercial Loans. The Banks make loans for commercial purposes in
various lines of businesses. At December 31, 2000, the Banks held approximately
$36 million, or 17% 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, 2000, the Banks held approximately $17
million in consumer loans, representing 8% of the Banks' total loans.

         Loan Approval and Review. The Banks' loan approval policies provide for
various levels of officer lending authority. When the aggregate outstanding
loans to a single borrower exceeds that individual officer's lending authority,
the loan request must be considered and approved by an officer with a higher
lending limit or the officers' loan committee. Individual officers' lending
limits range from $15,000 to $150,000, depending on seniority and type of loan.
The officers' loan committee, which consists of the president, executive vice
president and senior lending officer, has a lending limit of $200,000 for
secured loans. Loans between $200,000 and $500,000 must be approved by a
directors' loan committee, which is made up of the president, the senior lending
officer and three outside directors. Loans above $500,000 require approval by
the majority of the full board of directors.

         Each of the Banks has a continuous loan review procedure involving
multiple officers of each of the respective Banks that is designed to promote
early identification of credit quality problems. All loan officers are charged
with the responsibility of rating their loans and reviewing those loans on a
periodic basis, the frequency of which increases as the quality of the loan
decreases. The Banks have employed an in-house specialist to review all loans in
excess of $100,000 and to periodically sample those of $100,000 and less.


                                       3
<PAGE>   6

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, 2000.

                                   DEPOSIT MIX

<TABLE>
<CAPTION>
                                                                    DECEMBER 31, 2000
                                                                    -----------------
         <S>                                                        <C>
         Non-interest bearing demand.........................                4.2%
         Interest-bearing demand.............................               17.3%
         Savings.............................................               17.4%
         Time Deposits.......................................               42.6%
         Certificates of Deposit of $100,000 or more.........               18.5%
            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 throughout Georgia and in other states. Gilmer
County Bank's charter provides that Gilmer County Bank has trust powers but only
upon application to the DBF. To date, Gilmer County Bank has not submitted and
has no plans to submit such an application. 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
and Blairsville, Union County, Georgia and elsewhere. Some banks with which the
Banks compete have significantly greater resources and higher lending limits (by
virtue of their greater capitalization). Credit unions and money market mutual
funds with which the Banks compete may have competitive advantages as a result
of being subject to different, and possibly less stringent, regulatory
requirements.

         Gilmer County Bank serves the areas of Gilmer County, southwestern
Fannin County, northern Pickens County, western Dawson County and southeastern
Murray County, Georgia. Appalachian Community Bank serves the areas of Union
County, Towns County and Fannin County, Georgia.

         As of December 31, 2000, three non-locally owned banks had offices in
Gilmer County and two locally owned banks had offices in Blairsville. The Bank
of Ellijay, which is owned by Century South Banks, Inc., a bank holding company
headquartered in Alpharetta, Georgia, operates a main office and one branch
office in Gilmer County. Regions Bank, an Alabama bank holding company, operates
two offices in Gilmer County. United Community Bank, a branch of Peoples Bank in
Fannin County, maintains a branch office in Gilmer County. Bank of Blairsville,
a branch of Bank of Hiawassee, operates an office in Blairsville. Union County
Bank, headquartered in Blairsville, operates an office in Blairsville. In
addition, many local businesses and individuals have deposits outside the
primary service areas of Gilmer County Bank and Appalachian Community Bank.

         Recent legislation enacted by the Georgia General Assembly allows banks
in Georgia to establish de novo branch banks in areas in which the Banks serve,
which branches, if established, would also compete with the Banks. See
"Supervision and Regulation--Regulation and Legislative Changes."


                                       4
<PAGE>   7

MONETARY POLICIES

         The results of operations of the Company and the Banks are
significantly affected by the credit policies of monetary authorities,
particularly the Board of Governors of the Federal Reserve System. The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in discount rates on
member bank borrowings, and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve System, it is difficult to predict
how possible future changes in interest rates, deposit levels, or loan demand
would affect the business and earnings of the Banks.


                           SUPERVISION AND REGULATION

         The Company and the Banks are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous
additional regulatory requirements have been placed on the banking industry in
the past ten years, and additional changes have been proposed. For example, the
banking industry has changed significantly as a result of the passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the
Financial Services Modernization Act of 1999. The operations of the Company and
the Banks may be affected by legislative changes and the policies of various
regulatory authorities and the Company is unable to predict the nature or the
extent of the effect on its business and earnings that fiscal or monetary
policies, economic control or new federal or state legislation may have in the
future.

THE COMPANY

         The Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is registered
with and subject to the regulation of the Federal Reserve under the BHC Act. As
a bank holding company, the Company is required to file with the Federal Reserve
annual reports and such other reports and information as may be required under
the BHC Act. The Federal Reserve may conduct examinations of the Company and the
Banks to determine whether such institutions are in compliance with the
regulations promulgated under the BHC Act.

         The BHC Act requires a bank holding company to obtain prior approval of
the Federal Reserve (i) before it may acquire directly or indirectly the
ownership or control of more than 5% of any class of voting stock of any bank
not already controlled by it, (ii) before it or any subsidiary (other than a
bank) may acquire all or substantially all of the assets of a bank, and (iii)
before it may merge or consolidate with any other bank holding company. The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") facilitates branching and permits the establishment of
agency relationships across state lines and permits bank holding companies to
acquire banks in any state without regard to whether the transaction is
prohibited under the laws of such state, subject to certain state provisions,
including minimum age requirements of banks that are the target of the
acquisition. The minimum age of local banks subject to interstate acquisition is
limited to a maximum of five years. See "--Other Applicable Regulation Changes."

         Bank holding companies are also generally prohibited under the BHC Act
from engaging in non-banking activities or acquiring direct or indirect control
of any company engaged in non-banking activities. However, the Federal Reserve
may permit bank holding companies to engage in certain non-banking activities
found by the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Such activities determined
by the Federal Reserve to fall under this category include, but are not limited
to, making or servicing loans and certain leases, providing certain data
processing services, acting as a fiduciary or investment or financial advisor,
providing discount brokerage services, underwriting bank eligible securities,
and making investments designed to promote community welfare.


                                       5
<PAGE>   8

         Federal Law imposes certain limitations on extensions of credit and
other transactions by and between banks that are members of the Federal Reserve
System and other affiliates (which includes any holding company of which such
bank is a subsidiary and any other non-bank subsidiary of such holding company).
Banks that are not members of the Federal Reserve System are also subject to
these limitations. Further, federal law prohibits a bank holding company and its
subsidiaries from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or the furnishing of services.
For example, the Banks may not generally require a customer to obtain other
services from it or its company, and may not require that a customer promise not
to obtain other services from a competitor as a condition to an extension of
credit to its customer.

         Under Federal Reserve policy, a bank holding company is expected to act
as a source of financial strength to its bank subsidiaries and to commit
resources to support such subsidiaries. This support may be required at times
when, absent such policy, the bank holding company might not otherwise provide
such support. Under these provisions, a bank holding company may be required to
loan money to its subsidiary banks in the form of capital notes or other
instruments, which qualify for capital under regulatory rules. Any loans by the
bank holding company to such subsidiary banks are likely to be unsecured and
subordinate to such bank's depositors and possibly to other creditors of such
bank.

         The Gramm-Leach-Bliley Act of 1999, known as the Financial Services
Modernization Act of 1999 ("GLBA"), became law on November 12, 1999 and became
effective March 11, 2000. The GLBA enables bank holding companies to acquire
insurance companies and securities firms and effectively repeals depression-era
laws, which prohibited the affiliation of banks and these other financial
services entities under a single holding company. Bank holding companies, and
other types of financial services entities, may elect to become financial
holding companies under the new law, which will enable them to offer virtually
any type of financial service, or services incident to financial services,
including banking, securities underwriting, merchant banking and insurance (both
underwriting and agency services). The new financial services authorized by the
GLBA also may be engaged in by a "financial subsidiary" of a national or state
bank, with the exception of insurance or annuity underwriting, insurance company
portfolio investments, real estate investment and development, and merchant
banking, all of which must be conducted under the financial holding company.

         To become a financial holding company, a bank holding company must
provide notice to the Federal Reserve Board of its desire to become a financial
holding company, and certify to the Federal Reserve Board that each of its bank
subsidiaries is "well-capitalized," "well-managed" and has at least a
"satisfactory" rating under the CRA.

         The GLBA establishes a system of functional regulation, under which the
Federal Reserve Board will regulate the banking activities of financial holding
companies and other federal banking regulators will regulate banks' financial
subsidiaries. The SEC will regulate securities activities of financial holding
companies and state insurance regulators will regulate their insurance
activities. The GLBA also provides new protections against the transfer and use
by financial institutions of consumers' non-public, personal information.

         The implementation of the act will only serve to increase competition
in the financial services sector by allowing many different entities, including
banks and bank holding companies, to affiliate and/or to merge with other
financial services entities and cross-sell their financial products in order to
better serve their current and prospective customers. At this time, the company
does not intend to seek qualifications to enter into these additional financial
services areas.

         The Company is also subject to regulation as a bank holding company
under the Georgia Financial Institutions Code (the "Code"), which requires
registration and filing of periodic information with the DBF. Registration with
the DBF includes information relating to the financial condition, operations,
management and inter-company relationships of the Company and the Banks. The DBF
may also require such other information or make examinations as is necessary to
keep itself informed as to whether the Company is in compliance with the
provisions of Georgia law and the regulations and orders promulgated or issued
thereunder.

         Under the provisions of the Code, it is unlawful without the prior
approval of the DBF (i) for any bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting shares of the Banks;
(ii) for any bank holding company or a subsidiary thereof (other than a bank) to
acquire all or substantially all of the assets of a


                                       6
<PAGE>   9

bank; or (iii) for any bank holding company to merge or consolidate with any
other bank holding company. It is also unlawful under the Code for any bank
holding company to acquire direct or indirect ownership or control of more than
5% of the voting shares of any presently operating bank unless such bank has
been in existence and continuously operating or incorporated as a bank for a
period of five years or more prior to the date of application to the DBF for
approval of such acquisition. In addition, in any such acquisition by an
existing bank holding company, the initial banking subsidiary of such bank
holding company must have been incorporated for not less than two years before
the holding company can acquire another bank.

THE BANKS

         Gilmer County Bank is a banking institution incorporated under the laws
of the State of Georgia and subject to examination by the DBF. The DBF regulates
all areas of Gilmer County Bank's commercial banking operations, including
reserves, loans, mergers, consolidations, reorganizations, issuance of
securities, payment of dividends, interest rates, establishment of branches, and
other aspects of its operations.

         Appalachian Community Bank is a state-chartered bank under the laws of
the State of Georgia. Appalachian is subject to the same regulatory oversight as
Gilmer County Bank.

         Additionally, each of the Banks is insured and regulated by the FDIC.
The major functions of the FDIC with respect to insured banks include paying off
depositors to the extent provided by law in the event a bank is closed without
adequate provisions having been made to pay the claims of depositors, acting as
the receiver of state banks placed in receivership when appointed receiver by
state authorities, and preventing the continuance or development of unsound and
unsafe banking practices. In addition, the FDIC is authorized to examine insured
banks, which are not members of the Federal Reserve System, such as Gilmer
County Bank and Appalachian Community Bank, to determine the condition of such
banks for insurance purposes. The FDIC is also authorized to approve mergers,
consolidations and assumption of deposit liability transactions between insured
banks and non-insured banks or institutions, and to prevent capital or surplus
diminution in such transactions where the resulting, continued, or assumed bank
is an insured non-member state bank. The FDIC closely examines non-member banks
for compliance with certain federal statutes such as the Community Reinvestment
Act of 1977 (the "CRA") and the Truth-in-Lending Act.

DIVIDENDS

         The Company is a legal entity separate and distinct from the Banks. The
principal sources of cash flow for the Company are dividends from the Banks.
There are various statutory and regulatory limitations on the payment of
dividends by the Banks, as well as dividends paid by the Company to its
shareholders.

         The payment of dividends by the Company and the Banks may be affected
or limited by regulatory requirements and policies, such as the maintenance of
adequate capital. If, in the opinion of the applicable regulatory authority, a
bank under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which could include the payment of dividends depending on the
institution's financial condition), such authority may require, after notice and
hearing, that the bank cease and desist from such practice. The FDIC issued a
policy statement that provides that insured banks should generally only pay
dividends out of current operating earnings. The Federal Reserve has issued a
policy statement to the same effect for bank holding companies. In addition, all
insured depository institutions are subject to the capital-based limitations
required by FDICIA. See "--Capital Adequacy--FDICIA."

         The Subsidiary Banks. Under Georgia law, Gilmer County Bank and
Appalachian Community Bank must obtain approval of the DBF before they may pay
cash dividends out of retained earnings if (1) the total classified assets at
the most recent examination of such bank exceed 80% of the equity capital, (2)
the aggregate amount of dividends declared or anticipated to be declared in the
calendar year exceeds 50% of the net profits, after taxes but before dividends,
for the previous calendar year, or (3) the ratio of equity capital to adjusted
assets is less than 6%. As discussed below, additional capital requirements
imposed by the DBF may limit the Banks' ability to pay dividends to the Company.
See "--Capital Adequacy."

CAPITAL ADEQUACY


                                       7
<PAGE>   10

         Federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums.

         FDICIA established a capital-based regulatory plan designed to promote
early intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The capital-based regulatory framework
contains five categories of compliance with regulatory capital requirements,
including "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." To qualify
as a "well capitalized" institution, a bank must have a leverage ratio of no
less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total
risk-based capital ratio of no less than 10%, and the bank must not be under any
order or directive from the appropriate regulatory agency to meet and maintain a
specific capital level.

         The current guidelines require all bank holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier 1 capital. Under the FDICIA regulations,
the applicable agency can treat an institution as if it were in the next lower
category if the agency determines (after notice and an opportunity for hearing)
that the institution is in an unsafe or unsound condition or is engaging in an
unsafe or unsound practice. The degree of regulatory scrutiny of a financial
institution will increase, and the permissible activities of the institution
will decrease, as it moves downward through the capital categories. Institutions
that fall into one of the three undercapitalized categories may be required to
(i) submit a capital restoration plan; (ii) raise additional capital; (iii)
restrict their growth, deposit interest rates, and other activities; (iv)
improve their management; (v) eliminate management fees; or (vi) divest
themselves of all or a part of their operations. Bank holding companies
controlling financial institutions can be called upon to boost the institutions'
capital and to partially guarantee the institutions' performance under their
capital restoration plans. Tier 1 capital includes stockholders' equity,
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangible
assets and excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated debt
and intermediate-term preferred stock and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.

         Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.

         Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "--FDICIA."

         The Federal Reserve has also implemented a leverage ratio, which is
Tier 1 capital as a percentage of average total assets less intangible assets,
to be used as a supplement to the risk-based guidelines. The principal objective
of the leverage ratio is to place a constraint on the maximum degree to which a
bank holding company may leverage its equity capital base. The Federal Reserve
has established a minimum 3% leverage ratio of Tier 1 capital to total assets
for the most highly rated bank holding companies and insured banks,
respectively. All other bank holding companies and insured banks will be
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the regulatory agencies will continue
to consider a tangible Tier 1 leverage ratio and other indicia of capital
strength in evaluating proposals for expansion or new activities. The tangible
Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 capital,
less


                                       8
<PAGE>   11

all intangibles, to total assets, less all intangibles. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."

         Federal banking agencies recently adopted final regulations mandating
that regulators take into consideration concentrations of interest rate and
credit risk and risks from nontraditional activities, as well as the
institution's ability to manage such risks, when determining the adequacy of an
institution's capital position. Under these rules, regulators must explicitly
include an institution's exposure to declines in the economic value of its
capital due to interest rates in evaluating an institution's capital adequacy.
The final rules do not codify a framework for assessing an institution's
exposure to interest rate risk; rather, such exposure would be considered as one
quantitative factor used in evaluating capital adequacy. Other quantitative
factors would include the institution's historical financial performance and its
earnings exposure to interest rate movements. Examiners will also consider
certain qualitative factors, including the institution's internal interest rate
risk management.

         DBF Capital Requirements. Notwithstanding the uniform risk-based
capital guidelines and leverage ratios discussed above, regulatory authorities
have the discretion to set individual minimum capital requirements for the
specific institutions at rates significantly exceeding the above minimum
guidelines and ratios. In addition to the capital standards imposed by federal
banking regulators, the DBF imposed an 8% primary capital ratio as a condition
to the approval of Gilmer County Bank's charter. This standard, which exceeds
the FDIC capital standards, is calculated as the ratio of total equity to total
assets, each as adjusted for unrealized gains and losses on securities and
allowance for loan losses. This heightened requirement was imposed during the
first three years of Gilmer County Bank's operation, after which time Gilmer
County Bank became subject to a 6% primary capital ratio. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources."

         FDICIA. FDICIA was enacted on December 19, 1991 in large measure to
improve the supervision and examination of insured depository institutions in an
effort to reduce the number of bank failures and the resulting demands on the
deposit insurance system. Among other matters, the FDICIA requires that all
depository institutions with assets in excess of $150 million, or such larger
threshold as may be established by the FDIC (currently $500 million), prepare
and submit to the FDIC and appropriate federal and state banking regulators
annual financial statements that have been audited by independent public
accountants, file reports prepared by the depository institutions containing a
statement by management of its responsibilities and by the depository
institutions' independent public accountant attesting to the accuracy of
management's annual assessment of its financial reporting, internal controls and
regulatory compliance, and establish an audit committee composed of members of
the board of directors who are independent of management. The FDIC has provided
by regulation that these provisions of the FDICIA do not apply to depository
institutions with assets less than $500 million. An enactment of the FDICIA has
also resulted in the promulgation of regulations by regulatory agencies that
will tend to restrict to some degree the real estate lending practices of
financial institutions. The FDICIA otherwise provides for additional supervision
and regulation of financial institutions.

         Under the FDICIA, regulators must take prompt corrective action against
depository institutions that do not meet minimum capital requirements. FDICIA
and the regulations thereunder establish five capital categories as shown in the
following table:

<TABLE>
<CAPTION>
                                                        TOTAL RISK-           TIER 1 RISK-              TIER 1
               CLASSIFICATION                          BASED CAPITAL          BASED CAPITAL            LEVERAGE
               --------------                          -------------          -------------            --------
         <S>                                           <C>                    <C>                      <C>

         Well Capitalized (1)                                 10%                    6%                    5%
         Adequately Capitalized (1)                            8%                    4%                    4%(2)
         Undercapitalized (3)                                 <8%                   <4%                   <4%
         Significantly Undercapitalized                       <6%                   <3%                   <3%
         Critically Undercapitalized                          -                     -                     <2%
</TABLE>

----------------
         (1)      An institution must meet all three minimums.
         (2)      3% for composite 1-rated institutions, subject to appropriate
                  federal banking agency guidelines.
         (3)      An institution is classified as "undercapitalized" if it is
                  below the specified capital level for any of the three capital
                  measures.


                                       9
<PAGE>   12

         A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives a less than satisfactory examination rating in any one of four
categories. As a depository institution moves downward through the
capitalization categories, the degree of regulatory scrutiny will increase and
the permitted activities of the institution will decrease. Action may be taken
by a depository institution's primary federal regulator against an institution
that falls into one of the three "undercapitalized" categories, including the
requirement of filing a capital plan with the institution's primary federal
regulator, prohibition on the payment of dividends and management fees,
restrictions on executive compensation, and increased supervisory monitoring.
Other restrictions may be imposed on the institution either by its primary
federal regulator or by the FDIC, including requirements to raise additional
capital, to sell assets, or to sell the institution.

         The foregoing capital guidelines may have an effect on the Company in a
variety of ways. Rapid growth, poor loan portfolio performance or poor earnings
performance, or a combination of these factors, could change the Company's
capital position in a short period of time, making an additional capital
infusion necessary. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Resources."

SAFETY AND SOUNDNESS

         FDICIA imposes certain restrictions on transactions and required
federal banking agencies to prescribe overall safety and soundness standards
relating to internal controls, loan underwriting and documentation and asset
growth. If an insured depository institution or its holding company fails to
meet any of the regulatory standards promulgated by the regulation, then such
institution or company must submit a plan within 30 days to the FDIC describing
the steps it will take to correct the deficiency. If an institution or company
fails to submit a plan or implement the plan within the time period allowed by
the agency, the FDIC must order the institution or company to correct the
deficiency and may take such additional steps as restricting asset growth,
requiring an increase in the institution's ratio of tangible equity to assets,
restricting rates of interest that the institution may pay or take any further
corrective action the agency deems necessary.

FEDERAL DEPOSIT INSURANCE PREMIUMS AND ASSESSMENTS

         The deposits of the Banks are currently insured to a maximum of
$100,000 per depositor, subject to certain aggregation rules. The FDIC
establishes rates for the payment of premiums by federally insured banks and
thrifts for deposit insurance. Separate insurance funds, the Bank Insurance Fund
("BIF") and the Savings Association Insurance Fund ("SAIF"), are maintained for
commercial banks and thrifts, with insurance premiums from the banking industry
used to offset losses from insurance payouts when banks and thrifts fail. Since
1993, insured depository institutions like the Banks have paid for deposit
insurance under a risk-based premium system. Under this system, until mid-1995
depository institutions paid to the BIF or the SAIF from $0.23 to $0.31 per $100
of insured deposits depending on their capital levels and risk profile, as
determined by their primary federal regulator on a semi-annual basis.

         Once the designated ratio for the BIF was reached in May 1995, the FDIC
was authorized to reduce the minimum assessment rate below the 23 basis points
and to set future assessment rates at such levels that would maintain the fund's
reserve ratio at the designated level. In August 1995, the FDIC adopted
regulations reducing the assessment rates for BIF-member banks. Subsequently, on
November 14, 1995, the FDIC announced that, beginning in 1997, it would further
reduce the deposit insurance premiums for 92% of all BIF members that are in the
highest capital and supervisory categories to $2,000 per year, regardless of
deposit size. At the same time, the FDIC elected to retain the existing
assessment rate range for SAIF members for the foreseeable future given the
undercapitalized nature of that insurance fund. Thrift industry representatives
argued that this significant premium disparity resulted in savings associations
having to operate at a competitive disadvantage to their BIF insured bank
counterparts.

         On September 30, 1996, the President signed the Deposit Insurance Fund
Act of 1996 ("DIFA"). DIFA mandated that the FDIC impose a one-time special
assessment on the SAIF-assessable deposits of each insured depository
institution at a rate applicable to all such institutions that the FDIC
determined would cause the SAIF to achieve its designated reserve ratio of 1.25%
as of October 1, 1996. The assessment was based on the amount of SAIF-insured
deposits owned by each institution as of March 31, 1995. DIFA provides that the
FDIC may not set semi-annual assessments with respect to SAIF or BIF in excess
of the amount needed to maintain the 1.25% designated reserve ratio or, if the
reserve ratio is less than the designated reserve ratio, to increase the reserve
ratio to the


                                       10
<PAGE>   13

designated reserve ratio. On October 10, 1996, the FDIC adopted a final rule
governing the payment of the SAIF special assessment to recapitalize the fund in
the amount of 65.7 basis points for SAIF members.

         In addition, DIFA mandates the merger of the SAIF and BIF, effective
January 1, 1999, but only if no insured depository institution is a savings
association on that date. The combined deposit insurance fund would be called
the "deposit insurance fund" or "DIF."

         Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.

OTHER APPLICABLE REGULATIONS

         Georgia Interstate Banking Act. The Company and the Banks are also
subject to other state and federal governmental regulations. On March 16, 1994,
the Georgia General Assembly adopted the Georgia Interstate Banking Act (the
"Georgia Act"). The Georgia Act revised the existing regional interstate banking
law to expand the scope nationwide. The Georgia Act, as amended by the 1996
Georgia Interstate Banking Act, permits bank holding companies located in any
state outside of Georgia to acquire Georgia banks, or to acquire bank holding
companies owning Georgia banks. However, the Georgia Act retains the existing
prohibition, subject to certain limitations, on acquiring banks in operation
less than five years. Further, the board of directors of a Georgia bank or bank
holding company may adopt a resolution to exempt its bank or bank holding
company from acquisition under the Georgia Act. Finally, any future acquisition
of Gilmer County Bank must receive prior approval from the Federal Reserve and
the DBF.

         Georgia Intrastate Banking Act. The Georgia General Assembly enacted
legislation (the "Georgia Intrastate Banking Act") altering the public policy of
the State regarding intrastate branch banking. Essentially, the legislation
allows a bank to establish de novo branch banks on a limited basis beginning
July 1, 1996. Between July 1, 1996 and June 30, 1998, any Georgia bank or group
of affiliated banks under a single holding company were permitted, subject to
certain restrictions, to establish new or additional branch banks in any three
counties in the State of Georgia in which the bank or group of banks were not
currently operating. Effective July 1, 1998, the restrictions on the number of
de novo branch banks that could be established lapsed.

         Several federal statutes impact the ways in which the Banks conduct
business, include FDICIA, the Riegle Community Development and Regulatory
Improvement Act of 1994 ("RCDRIA"), and the Interstate Banking Act.

         RCDRIA. RCDRIA was enacted September 23, 1994, to promote economic
revitalization and community development to "investment areas." RCDRIA
establishes a Community Development Financial Institutions Fund to achieve these
objectives. The fund is authorized to provide financial assistance through a
variety of mechanisms, including equity investments, grants, loans, credit union
shares and deposits. The amount of assistance any community development
financial institution and its subsidiaries and affiliates may receive is
generally limited to $5 million. A qualifying institution may receive an
additional $3.75 million for the purpose of serving an investment area in
another state.

         RCDRIA provides certain regulatory relief, requiring each federal
agency to streamline and modify its regulations and policies, remove
inconsistencies and eliminate outmoded and duplicative requirements. RCDRIA
directs the federal agencies to coordinate examinations among affiliate banks,
coordinate examinations with other federal banking agencies, and work to
coordinate with state banking agencies. The federal banking agencies are also
directed to work jointly in developing a system for banks and savings
associations to file reports and statements electronically and to adopt a single
form for filing core information in reports and statements.

         Interstate Banking Act. The Interstate Banking Act, enacted September
29, 1994, permits, among other things, bank holding companies to merge their
multi-state bank subsidiaries into a single bank by June 1, 1997 (unless state
legislators act to "opt-out" of this provision), to acquire banks in any state
one year after the effective date of the Interstate Banking Act, and to
establish de novo branches across state lines if the individual states into
which a potential de novo entrant proposes to branch specifically pass
legislation to "opt-in."


                                       11
<PAGE>   14

         Under the Interstate Banking Act, a bank could merge, beginning on June
1, 1997, with a bank in another state if the transaction did not involve a bank
in a home state which had enacted a law after the date of enactment of the
Interstate Banking Act and before June 1, 1997, that applied equally to all out
of state banks and expressly prohibited such interstate merger transactions.
Such a law would have no effect on merger transactions approved before the
effective date of such state law. States were also allowed to permit merger
transactions before June 1, 1997. Georgia elected to allow such mergers
beginning June 1, 1997. The Interstate Banking Act authorizes interstate mergers
involving the acquisition of a branch of a bank without the acquisition of the
bank only as state law permits an out of state bank to acquire a branch without
acquiring the bank; Georgia has not authorized such transactions. State minimum
age laws for banks to be acquired will be preserved unless state law provides
for a minimum age period of more than five years. After consummation of any
interstate merger transaction, a resulting bank may establish or operate
additional branches at any location where any bank involved in the transaction
could have established or operated a branch under applicable federal or state
law.

         Beginning September 29, 1995, the Board of Governors of the Federal
Reserve System was authorized to approve the acquisition by a well capitalized
and adequately managed bank holding company of a bank that is located in another
state without regard to whether the acquisition is prohibited under the laws of
any state. Again, state minimum age laws for banks to be acquired will be
preserved unless the state law provides for a minimum age period of more than
five years. The Federal Reserve may not approve an interstate acquisition which
would result in the acquirer's controlling more than 10% of the total amount of
deposits of insured depository institutions in the United States with 30% or
more of the deposits in the home state of the target bank. A state may waive the
30% limit based on criteria that do not discriminate against out of state
institutions. The limitations do not apply to the initial entry into a state by
a bank holding company unless the state has a deposit concentration cap that
applies on a nondiscriminatory basis to in state or out of state bank holding
companies making an initial acquisition. Notwithstanding the foregoing,
anti-trust laws are not affected by the Interstate Banking Act.

         The Interstate Banking Act now provides that banks may establish
branches across state lines upon approval of the appropriate federal regulator
if the state "opts-in" by enacting legislation that expressly permits de novo
interstate branching. The establishment of the initial branch in a host state
that permits de novo interstate branching is subject to the same requirements
that apply to the initial acquisition of a bank in a host state, other than the
deposit concentration limits, since the bank would not control any deposits in
the host state at the time of entry. Once a branch has been established by de
novo branching, the bank may establish and acquire additional branches at any
location in the host state in the same manner as any bank in the host state
could have established or acquired additional branches under applicable federal
or state law.

         Other Regulatory Initiatives. On April 19, 1995, the four federal bank
regulatory agencies adopted revisions to the regulations promulgated pursuant to
the CRA which are intended to set distinct assessment standards for financial
institutions. The revised regulations contain three evaluation tests: (i) a
lending test which will compare the institution's market share of loans in low
and moderate income areas to its market share of loans in its entire service
area and the percentage of a bank's outstanding loans to low and moderate income
areas or individuals, (ii) a services test which will evaluate the provisions of
services that promote the availability of credit to low and moderate income
areas, and (iii) an investment test, which will evaluate an institution's record
of investments in organizations designed to foster community development, small
and minority-owned businesses and affordable housing lending, including state
and local government housing or revenue bonds. The regulations are designed to
reduce some paperwork requirements of the current regulations and provide
regulators, institutions and community groups with a more objective and
predictable manner with which to evaluate the CRA performance of financial
institutions. The rule became effective on January 1, 1996, at which time
evaluation under streamlined procedures began for institutions with assets of
less than $250 million that are owned by a holding company with total assets of
less than $1 billion. Gilmer County Bank was examined for CRA compliance in May
1996 and received a CRA rating of 1. Prior to its acquisition by the company,
First National was examined for CRA compliance in April 1996 and received a
rating of "satisfactory".

         Congress and various federal agencies (including, in addition to the
bank regulatory agencies, the Housing and Urban Development Agency, the Federal
Trade Commission and the Department of Justice) (collectively the "Federal
Agencies") responsible for implementing the nation's fair lending laws have been
increasingly concerned that prospective home buyers and other borrowers are
experiencing discrimination in their efforts to obtain loans. In recent years,
the Department of Justice has filed suit against financial institutions, which
it determined had discriminated,


                                       12
<PAGE>   15

seeking fines and restitution for borrowers who allegedly suffered from
discriminatory practices. Most, if not all, of these suits have been settled
(some for substantial sums) without a full adjudication on the merits.

         On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified: (1)
overt evidence of discrimination, when a lender blatantly discriminates on a
prohibited basis, (2) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where this is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person, and (3) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, where such practices are neutral on their face and are
applied equally, unless the practice can be justified on the basis of business
necessity.

         On July 3, 1997, President Clinton signed legislation to clarify that
branches of state-chartered banks operating in host states are covered by the
laws of their home chartering state. The Riegle-Neal Amendment Act of 1997 is
intended to preserve the dual banking system by subjecting state banks only to
the rules of their chartering states.


                        SELECTED STATISTICAL INFORMATION

         The following tables set forth certain statistical information and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in this Report and the
Company's consolidated financial statements and notes thereto beginning at page
F-1 of this Report. The average statistical data presented in this report are
generally based on daily average balances.




                  (Remainder of Page Intentionally Left Blank)


                                       13
<PAGE>   16


DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL

         The table below shows, for the periods indicated, the daily average
balances outstanding for the major categories of interest-bearing assets and
interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities.

           AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
                            Taxable Equivalent Basis

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                        -----------------------------  -----------------------------    ---------------------------
                                                     2000                          1999                            1998
                                        -----------------------------  -----------------------------    ---------------------------
                                                   Interest   Average             Interest   Average               Interest  Average
                                        Average    Income/    Yields/  Average    Income/    Yields/    Average    Income/   Yields/
                                        Balance    Expense     Rates   Balance    Expense     Rates     Balance    Expense    Rates
                                        -------    -------     -----   -------    -------     -----     -------    -------    -----
                                                                                (Dollars in thousands)
<S>                                     <C>        <C>        <C>      <C>        <C>        <C>        <C>        <C>       <C>
ASSETS
   Earning assets:
     Loans, net of unearned
       income (1) ..................    $ 204,436  $  19,633    9.60%  $150,691    $13,827     9.18%    $ 95,353   $ 9,645   10.12%
     Securities:
       Taxable .....................       26,632      1,703    6.39     22,500      1,389     6.17       15,919     1,009    6.34
       Tax-exempt ..................        7,761        649    8.36     10,692        802     7.50        7,943       570    7.18
                                        ---------  ---------           --------    -------              --------   -------
     Total securities ..............       34,393      2,352    6.84     33,192      2,191     6.60       23,862     1,579    6.62

     Interest-bearing deposits .....          515         30    5.83        258         16     6.20           34         2    5.88
     Federal funds sold ............        3,694        208    5.63      7,399        399     5.39        4,414       269    6.09
                                        ---------  ---------           --------    -------              --------   -------
       Total interest-
        earning assets (2) .........      243,038     22,223    9.14    191,540     16,433     8.58      123,663    11,495    9.30

   Non interest-earning assets:
     Cash and due from banks .......        3,849                         4,644                            3,587
     Premises and equipment ........        5,783                         3,835                            2,419
     Accrued interest and
       other assets ................        9,274                         5,467                            2,551
     Allowance for loan losses .....       (2,145                        (1,783)                          (1,141)
                                        ---------                      --------                         --------

Total assets .......................    $ 259,799                      $203,703                         $131,079
                                        =========                      ========                         ========

LIABILITIES AND
   SHAREHOLDERS' EQUITY
   Interest-bearing liabilities:
     Demand deposits ...............    $  47,011      1,983    4.22%  $ 46,222      1,857     4.02%    $ 30,238     1,444    4.78%
     Savings deposits ..............       28,628      1,227    4.29     31,017      1,256     4.05       24,463     1,210    4.95
     Time deposits .................      120,433      7,710    6.40     88,228      5,137     5.82       52,104     3,237    6.21
                                        ---------  ---------           --------    -------              --------   -------
       Total deposits ..............      196,072     10,920    5.57    165,467      8,250     4.99      106,805     5,891    5.52

   Other short-term borrowings .....        6,860        389    5.67      2,498        112     4.48        4,106     178      4.34
   Long-term debt ..................       29,024      2,017    6.95     12,798        777     6.07        6,649       428    6.44
                                        ---------  ---------           --------    -------              --------   -------
       Total interest-
         bearing liabilities .......      231,956     13,326    5.75    180,763      9,139     5.06      117,560     6,497    5.54
                                        ---------                      --------    -------              --------   -------

   Noninterest-bearing liabilities:
     Demand deposits ...............       10,715                         9,558                            3,940
     Accrued interest and
       other liabilities ...........        2,083                         1,432                              654
     Shareholders' equity ..........       15,045                        11,950                            8,925
                                        ---------                      --------                         --------

Total liabilities and
   shareholders' equity ............    $ 259,799                      $203,703                         $131,079
                                        =========                      ========                         ========

Net interest income/net
   interest spread .................                   8,897    3.39%                7,294     3.52%                 4,998     3.76%
                                                                ====                           ====                            ====

Net yield on earning assets ........                            3.67%                          3.81%                           4.04%
                                                                ====                           ====                            ====
Taxable equivalent adjustment:
   Loans ...........................                      30                            19                              31
   Investment securities ...........                     222                           274                             194
                                                   ---------                       -------                          ------
     Total taxable
       equivalent adjustment .......                     252                           293                             225
                                                   ---------                       -------                          ------

Net interest income ................               $   8,645                       $ 7,001                          $4,773
                                                   =========                       =======                          ======
</TABLE>

----------------------
(1)  Average loans include nonaccrual loans. All loans and deposits are
     domestic.
(2)  Tax equivalent adjustments have been based on an assumed tax rate of 34
     percent, and do not give effect to the disallowance for federal income tax
     purpose of interest expense related to certain tax-exempt earning assets.


                                       14
<PAGE>   17


         The following tables set forth, for the years ended December 31, 2000,
1999 and 1998 a summary of the changes in interest income and interest expense
resulting from changes in interest rates and in changes in the volume of earning
assets and interest-bearing liabilities, segregated by category. The change due
to volume is calculated by multiplying the change in volume by the prior year's
rate. The change due to rate is calculated by multiplying the change in rate by
the prior year's volume. The change attributable to both volume and rate is
calculated by multiplying the change in volume by the change in rate. Figures
are presented on a taxable equivalent basis.

                          RATE/VOLUME VARIANCE ANALYSIS
                            Taxable Equivalent Basis

<TABLE>
<CAPTION>
                                                    Average Volume                 Change in Volume               Average Rate
                                           ---------------------------------    ---------------------       -----------------------
                                             2000        1999        1998       2000-1999   1999-1998       2000     1999     1998
                                             ----        ----        ----       ---------   ---------       ----     ----     ----
EARNING ASSETS:                                                                (Dollars in thousands)

<S>                                        <C>         <C>         <C>           <C>          <C>           <C>      <C>     <C>
Loans, net of unearned income (1) ........ $204,436    $150,691    $  95,353     $ 53,745     $ 55,338      9.60%    9.18%   10.12%
                                           --------    --------    ---------     --------     --------

Investment Securities:
   Taxable ...............................   26,632      22,500       15,919        4,132        6,581      6.39     6.17     6.34
   Tax exempt ............................    7,761      10,692        7,943       (2,931)       2,749      8.36     7.50     7.18
                                           --------    --------    ---------     --------     --------
     Total investment securities .........   34,393      33,192       23,862        1,201        9,330      6.84     6.60     6.62
                                           --------    --------    ---------     --------     --------
Interest-bearing deposits with other
banks Federal funds sold .................      515         258           34          257          224      5.83     6.20     5.88
                                           --------    --------    ---------     --------     --------
                                              3,694       7,399        4,414       (3,705)       2,985      5.63     5.39     6.09
                                           --------    --------    ---------     --------     --------
     Total earning assets ................ $243,038    $191,540    $ 123,663     $ 51,498     $ 67,876      9.16     8.58     9.30
                                           ========    ========    =========     ========     ========

INTEREST-BEARING LIABILITIES:
Deposits:
   Demand ................................ $ 47,011    $ 46,222    $  30,238     $    789     $ 15,984      4.22     4.02     4.78
   Savings
                                             28,628      31,017       24,463       (2,389)       6,554      4.29     4.05     4.95
   Time ..................................  120,433      88,228       52,104       32,205       36,124      6.40     5.82     6.21
                                           --------    --------    ---------     --------     --------
     Total deposits ......................  196,072     165,467      106,805       30,605       58,662      5.57     4.99     5.52

Other short-term borrowings
                                              6,860       2,498        4,106        4,362       (1,608)     5.67     4.48     4.34
Long-term debt ...........................   29,024      12,798        6,649       16,226        6,149      6.95     6.07     6.44
                                           --------    --------    ---------     --------     --------
     Total interest-bearing liabilities .. $231,956    $180,763    $ 117,560     $ 51,193     $ 63,203      5.75     5.06     5.54
                                           ========    ========    =========     ========     ========

Net interest income/net interest spread ..                                                                  3.39     3.52     3.76


Net yield on earning assets ..............                                                                  3.67     3.81     4.04

Net cost of funds ........................                                                                  5.48     4.77     5.26
</TABLE>

<TABLE>
<CAPTION>
                                                                                               Variance Attributed to (1)
                                              Interest                                  --------------------------------------
                                           Income/Expense               Variance             2000                 1999
                                    ---------------------------  --------------------   ----------------    ------------------
                                      2000      1999      1998   2000-1999  1999-1998   Volume     Rate     Volume      Rate
                                    -------   -------   -------  ---------  ---------   -------    -----    -------    -------
                                                                     (Dollars in thousands)
<S>                                 <C>       <C>       <C>       <C>        <C>        <C>        <C>      <C>        <C>
EARNING ASSETS:
  Loans, net of
   unearned income ..............   $19,633   $13,827   $ 9,645   $ 5,806    $ 4,182    $ 5,146    $ 660    $ 5,150    $  (968)

Investment Securities:
  Taxable .......................     1,703     1,389     1,009       314        380        263       51        408        (28)
  Tax exempt ....................       649       802       570      (153)       232       (238)      85        206         26
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------
   Total investment securities ..     2,352     2,191     1,579       161        612         25      136        614         (2)
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------

Interest-bearing deposits
  with other banks ..............        30        16         2        14         14         15       (1)        15         (1)
Federal funds sold ..............       208       399       269      (191)       130       (208)      17        164        (34)
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------
   Total earning assets .........    22,223    16,433    11,495     5,790      4,938      4,945      845      5,943     (1,005)
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------

Interest-bearing liabilities:
Deposits:
  Demand ........................     1,983     1,857     1,444       126        413         32       94        671       (258)
  Savings .......................     1,227     1,256     1,210       (29)        46       (101)      72        290       (244)
  Time ..........................     7,710     5,137     3,237     2,573      1,900      2,021      552      2,115       (215)
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------
   Total deposits ...............    10,920     8,250     5,891     2,670      2,359      1,952      718      3,076       (717)

Other short-term borrowings .....       389       112       178       277        (66)       240       37        (72)         6
Long-term debt ..................     2,017       777       428     1,240        351      1,113      127        375        (26)
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------
   Total interest-
     bearing liabilities ........    13,326     9,139     6,497     4,187      2,644      3,305      882      3,379       (737)
                                    -------   -------   -------   -------    -------    -------    -----    -------    -------

Net interest income/net
  interest spread ...............   $ 8,897   $ 7,294   $ 4,998   $ 1,603    $ 2,296    $ 1,640    $ (37)   $ 2,564    $  (268)
                                    =======   =======   =======   =======    =======    =======    =====    =======    =======
</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.


                                       15
<PAGE>   18


SECURITIES PORTFOLIO

         The carrying amount of securities at the end of each of the years
presented is set forth in the following table:

                              SECURITIES PORTFOLIO

<TABLE>
<CAPTION>
                                                                    December 31,
                                                        -------------------------------------
                                                          2000           1999           1998
                                                        -------        -------        -------
                                                                    (In thousands)
<S>                                                     <C>            <C>            <C>

SECURITIES AVAILABLE-FOR-SALE:
   U.S. Treasury and U.S. Government agencies ..        $16,558        $16,843        $13,642
   Mortgage-backed securities ..................          6,149          6,248          1,908
   State and municipal securities ..............          8,276          4,717          5,776
   Equity securities ...........................          1,558            728            614
                                                        -------        -------        -------

     Total .....................................        $32,541        $28,536        $21,940
                                                        =======        =======        =======

SECURITIES HELD-TO-MATURITY:
   State and municipal securities ..............        $    --        $ 5,800        $ 6,218
                                                        =======        =======        =======
</TABLE>

         Average taxable securities were 77.4% of the portfolio in 2000 compared
to the prior year levels of 67.8% in 1999 and 66.7% in 1998. 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 investments in the
2000 portfolio of securities are presented below. The average maturity of the
securities portfolio is 9.2 years with an average yield of 6.64%. Taxable
equivalent adjustments (using a 34 percent tax rate) have been made in
calculating yields on tax-exempt obligations. Equity securities have been
excluded since these instruments have no maturity date.

                      SECURITY PORTFOLIO MATURITY SCHEDULE

<TABLE>
<CAPTION>
                                                                           Maturing
                                      ------------------------------------------------------------------------------------------
                                           Within              After One But        After Five But               After
                                          One Year           Within Five Years      Within Ten Years             Ten Years
                                          --------           -----------------      ----------------             ---------
                                      Amount      Yield      Amount    Yield       Amount       Yield        Amount        Yield
                                      ------      -----      ------    -----       ------       -----        ------        -----
                                                            (Amounts in thousands, except percentages)
<S>                                   <C>          <C>       <C>       <C>        <C>           <C>        <C>             <C>
SECURITIES AVAILABLE-FOR-SALE:

     U.S. Government agencies ...     $  697       6.50%     $2,489      6.02%    $   13,372      6.28%    $       --      0.00%
     Mortgage-backed ............         60       7.63       2,694      6.88            289      6.00          3,106      6.29
     State and municipal ........         --       0.00          --      0.00          2,251      6.81          6,025      7.68
     Equity securities ..........         --       0.00          --      0.00             --      0.00          1,558      6.92
                                      ------                 ------               ----------               ----------      ----
                                      $  757       6.59      $5,183      6.47     $   15,912      6.35     $   10,689      7.17
                                      ======                 ======               ==========               ==========      ====
</TABLE>

         There were no securities held by the Banks of which the aggregate value
on December 31, 2000, exceeded ten percent of shareholders' equity at that date.
(Securities which are payable from and secured by the same source of revenue or
taxing authority are considered to be securities of a single issuer. Securities
of the U.S. Government and U.S. Government agencies and corporations are not
included.)


                                       16
<PAGE>   19

LOAN PORTFOLIO

         The following table shows the classification of loans by major category
at December 31, 2000, and for each of the preceding four years.

<TABLE>
<CAPTION>
                                                                         TYPES OF LOANS

                                                                            December 31,
                                ---------------------------------------------------------------------------------------------------
                                      2000                 1999                1998                1997               1996
                                ------------------   -----------------  -----------------   ------------------  -------------------
                                           Percent             Percent            Percent              Percent             Percent
                                 Amount   of Total    Amount  of Total   Amount  of Total   Amount    of Total   Amount   of Totals
                                --------  --------   -------  --------  -------- --------   -------   --------   ------   --------
                                              (Dollars in thousands)
<S>                             <C>       <C>       <C>       <C>       <C>      <C>         <C>      <C>        <C>      <C>
Commercial, financial
 and agricultural ...........   $ 36,320    17.0%     35,375    20.9%   $ 26,883    20.7%    $16,536     19.5%   $13,911     21.4%
Real estate - construction ..     22,057    10.3      13,941     8.2       8,543     6.6       5,119      6.1      4,811      7.4
Real estate - other (1) .....    136,718    63.8     103,413    61.2      78,965    60.8      50,928     60.2     35,289     54.3
Consumer ....................     17,254     8.1      15,026     8.9      13,743    10.6      10,835     12.8      8,628     13.3
Other loans .................      1,775     0.8       1,351     0.8       1,697     1.3       1,166      1.4      2,323      3.6
                                --------   -----    --------   -----    --------   -----     -------    -----    -------    -----
                                 214,124   100.0%    169,106   100.0%    129,831   100.0%     84,584    100.0%    64,962    100.0%
                                           =====               ======              =====                =====               =====
Less:
Allowance for loan losses ...      2,211               1,849               1,686                 930                 656
                                --------            --------            --------             -------             -------

Net loans ...................   $211,913            $167,257            $128,145             $83,654             $64,306
                                ========            ========            ========             =======             =======
</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, 2000, and an analysis of these loans maturing in
over one year.

<TABLE>
<CAPTION>
                               SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY

                                                                                           Rate Structure for Loans
                                                     Maturity                               Maturing Over One Year
                               ------------------------------------------------------    ----------------------------
                                             Over One
                                  One           Year           Over                      Predetermined    Floating or
                                Year or       Through          Five                         Interest       Adjustable
                                  Less       Five Years        Years         Total            Rate           Rate
                               ----------    ------------    ----------    ----------    -------------    -----------
                                                              (Amounts in thousands)
<S>                            <C>           <C>             <C>           <C>           <C>              <C>
Commercial, financial
   and agricultural.........   $  24,431     $  10,361       $   1,528     $  36,320     $      11,889    $       --
Real estate - construction..      20,627         1,430               --       22,057             1,430            --
                               ---------     ---------       ----------    ---------     -------------    ----------

     Total..................   $  45,058     $  11,791       $   1,528     $  58,377     $      13,319    $       --
                               =========     =========       =========     =========     =============    ==========
</TABLE>


                                       17
<PAGE>   20

         The following table presents information concerning outstanding
balances of non-performing assets at December 31, 2000, and for each of the
preceding four years.

                              NON-PERFORMING ASSETS

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                      -----------------------------------------------------------
                                                                       2000       1999         1998           1997         1996
                                                                      ------     ------      --------      --------      --------
                                                                                 (Amounts in thousands, except ratios)
<S>                                                                   <C>        <C>         <C>           <C>           <C>
Nonaccruing loans ...............................................     $  385     $  344      $      4      $     15      $     57
Loans past due 90 days or more ..................................         24         24            23            13             9
Restructured loans ..............................................         --         --            --            --            --
                                                                      ------     ------      --------      --------      --------
   Total nonperforming loans ....................................        409        368            27            28            66
Nonaccruing securities ..........................................         --         --            --            --            --
Other real estate ...............................................        147         --            --            --            --
                                                                      ------     ------      --------      --------      --------

   Total nonperforming assets ...................................     $  556     $  368      $     27      $     28      $     66
                                                                      ======     ======      ========      ========      ========

Ratios:
   Loan loss allowance to total nonperforming assets ............       3.98       5.02         62.44         33.21          9.94
                                                                      ======     ======      ========      ========      ========

   Total nonperforming loans to total loans
     (net of unearned interest) .................................       0.26       0.22%         0.02%         0.03%          0.1%
                                                                      ======     ======      ========      ========      ========

   Total nonperforming assets to total assets ...................       0.21       0.16%         0.01%         0.02%          0.1%
                                                                      ======     ======      ========      ========      ========
</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 ninety days delinquent. When a loan is placed on
a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest.

         There has been no significant impact on the Company's consolidated
financial statements as a result of the provisions of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan,
or Statement of Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures.

SUMMARY OF LOAN LOSS EXPERIENCE

         The provision for loan losses, which is charged to operating results,
is based on the growth of the loan portfolio, the amount of net loan losses
incurred and management's estimation of potential future losses based on an
evaluation of the risk in the loan portfolio. Management believes that the
$2,210,603 in the allowance for loan losses at December 31, 2000 (1.03% 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 portfolio.

              [The remainder of this page intentionally left blank]


                                       18
<PAGE>   21

         The following table sets forth certain information with respect to the
Company's loans, net of unearned income, and the allowance for loan losses for
each of the last five years:

                        ANALYSIS OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                     ----------------------------------------------------------
                                                                       2000         1999         1998         1997        1996
                                                                     --------     --------     --------     -------     -------
                                                                                (Amounts in thousands, except ratios)
<S>                                                                  <C>          <C>          <C>          <C>         <C>
Allowance for loan losses at beginning of year ..................    $  1,849     $  1,686     $    930     $   655     $   325
Adjustment of business acquisition ..............................          --           --          557          --          --
Loans charged off:
   Commercial, financial, and agricultural ......................         404          461           32          95          --
   Real estate-construction .....................................          --           --           --          45          --
   Real estate - other ..........................................          49           22           --           2           6
   Consumer .....................................................         138          278          104          85          32
                                                                     --------     --------     --------     -------     -------
     Total loans charged off ....................................         591          761          136         227          38
                                                                     --------     --------     --------     -------     -------

Recoveries on loans previously charged off:
   Commercial, financial, and agricultural ......................           9           15            6           2          --
   Real estate-construction .....................................          --           --           --           8          --
   Real estate-other ............................................          --           --           --           1          --
   Consumer .....................................................          22           29           29          11          --
                                                                     --------     --------     --------     -------     -------
     Total recoveries on loans previously charged off ...........          31           44           35          22          --
                                                                     --------     --------     --------     -------     -------

Net loans charged off ...........................................         560          717          101         205          38
                                                                     --------     --------     --------     -------     -------

Provisions for loan losses ......................................         922          880          300         480         368
                                                                     --------     --------     --------     -------     -------

Allowance for loan losses at end of period ......................    $  2,211     $  1,849     $  1,686     $   930     $   655
                                                                     ========     ========     ========     =======     =======

Loans, net of unearned income, at end of period .................    $214,124     $169,106     $129,831     $84,584     $64,962
                                                                     ========     ========     ========     =======     =======

Average loans, net of unearned income,
outstanding for the period ......................................    $204,436     $150,691     $ 95,353     $74,753     $51,008
                                                                     ========     ========     ========     =======     =======

Ratios:
Allowance at end of period to loans, net of
   unearned income ..............................................        1.03%        1.09%        1.30%       1.10%       1.01%
Allowance at end of period to average loans,
   net of unearned income .......................................        1.08         1.23         1.77        1.24        1.28
Net charge-offs to average loans, net of
   unearned income ..............................................        0.27         0.48         0.11        0.27        0.07
Net charge-offs to allowance at end of period ...................       25.33        38.78         5.99       22.04        5.80
Recoveries to prior year charge-offs ............................        4.07        32.35        15.42       57.89        0.00
</TABLE>

         In assessing adequacy, management relies predominantly on its ongoing
review of the loan portfolio, which is undertaken both to ascertain whether
there are probable losses that 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.


                                       19
<PAGE>   22

         Management allocated the reserve for loan losses to specific loan
classes as follows:

                     ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                                              December 31,
                                      ---------------------------------------------------------------------------------------------
                                            2000                1999                1998               1997              1996
                                      ----------------    ----------------    ----------------   ---------------   ----------------
                                               Percent             Percent             Percent          Percent            Percent
                                      Amount  of Total    Amount  of Total    Amount  of Total   Amount of Total   Amount of Totals
                                      ------  --------    ------  --------    ------  --------   ------ --------   ------ ---------
                                                    (Dollars in thousands)
<S>                                   <C>     <C>         <C>     <C>         <C>     <C>        <C>    <C>        <C>    <C>
DOMESTIC LOANS (1)
  Commercial, financial
    and agricultural ............     $  387      18%     $  349      19%     $  421      25%     $186     20% $     144      22%
  Real estate -
    construction ................        199       9         152       8         118       7        55       6        52       8
  Real estate - other ...........      1,381      62       1,120      61         894      53       567      61       354      54
  Consumer ......................        244      11         228      12         253      15       122      13       105      16
                                      ------     ---      ------     ---      ------     ---      ----     ---      ----     ---

   Total ........................     $2,211     100%     $1,849     100%     $1,686     100%     $930     100%     $655     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, 2000, 1999 and
1998 are as follows:

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                           ---------------------------------------------------------------------
                                                                   2000                   1999                      1998
                                                           -------------------      -------------------      -------------------
                                                             Amount       Rate        Amount       Rate        Amount       Rate
                                                           ----------     ----      ----------     ----      ----------     ----
                                                                                   (Dollars in thousands)
<S>                                                        <C>            <C>       <C>            <C>       <C>            <C>
Noninterest-bearing demand deposits ..................     $   10,715     0.00%     $    9,558     0.00%     $    3,940     0.00%

Demand ...............................................         47,011     4.22          46,222     4.02          30,238     4.78
Savings ..............................................         28,628     4.29          31,017     4.05          24,463     4.95
Time deposits ........................................        120,433     6.40          88,228     5.82          52,104     6.21
                                                           ----------               ----------               ----------
   Total interest-bearing deposits ...................        196,072     5.57         165,467     4.99         106,805     5.54
                                                           ----------               ----------               ----------

   Total average deposits ............................     $  206,787     5.28      $  175,025     4.71      $  110,745     5.32
                                                           ==========               ==========               ==========
</TABLE>

              [The remainder of this page intentionally left blank]


                                       20
<PAGE>   23

         The two categories of lowest cost deposits comprised the following
percentages of average total deposits during 2000: average noninterest-bearing
demand deposits, 5.18 percent; and average savings deposits, 13.84 percent. Of
average time deposits, approximately 33.72 percent were large denomination
certificates of deposit. The maturities of the time certificates of deposit of
$100,000 or more issued by the Banks at December 31, 2000 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 ..............................................          $  10,261
         Over three through six months .....................................              8,095
         Over six through twelve months ....................................              9,712
         Over twelve months ................................................             11,474
                                                                                      ---------

              Total ........................................................          $  39,542
                                                                                      =========
</TABLE>

RETURN ON EQUITY AND ASSETS

         The following table summarizes certain financial ratios for the Company
for the years ended December 31, 2000, 1999 and 1998.

                           RETURN ON EQUITY AND ASSETS

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                           --------------------------------------
                                                                            2000             1999            1998
                                                                           ------          ------          ------
<S>                                                                        <C>             <C>             <C>
Return on average assets........................................            0.63%           0.62%           0.92%
Return on average equity........................................           10.83           10.59           13.50
Dividend payout ratio...........................................            0.00            0.00            0.00
Average equity to average assets ratio..........................            5.79            5.87            6.80
</TABLE>

              [The remainder of this page intentionally left blank]


                                       21
<PAGE>   24

                      SELECTED CONSOLIDATED FINANCIAL DATA

         The following table sets forth selected consolidated financial data of
the Company for the years ended December 31, 2000, and the previous four years.
All averages are daily averages.

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                       ------------------------------------------------------------
                                                          2000          1999        1998        1997        1996
                                                       ----------    ---------   ---------   ----------  ----------
                                                          (Dollars in thousands except per share data and ratios)
<S>                                                    <C>           <C>         <C>         <C>         <C>
EARNINGS SUMMARY
   Interest income..................................   $   21,970    $  16,139   $  11,271   $    9,143   $   6,331
   Interest expense.................................       13,325        9,139       6,498        5,262       3,660
   Net interest income..............................        8,645        7,001       4,773        3,881       2,651
   Provision for loan losses........................          922          880         300          480         368
   Non-interest income..............................        1,159          845         529          385         253
   Non-interest expense.............................        6,380        5,561       3,221        2,385       1,715
   Applicable income taxes..........................          872          139         572          383         304
   Net income.......................................        1,629        1,266       1,208        1,018         517

PER SHARE DATA
(Retroactively adjusted to give effect to stock split)
   Net income - basic...............................         0.59          0.48       0.52         0.44        0.23
   Net income - diluted.............................         0.55          0.44       0.49         0.44        0.23
   Cash dividends...................................         0.00          0.00       0.00         0.00        0.00
   Shareholders' equity (book value) at period end .         6.18          4.62       4.34         3.03        2.56

CONSOLIDATED BALANCE SHEET DATA
   Loans............................................   $  214,124    $ 169,106   $ 129,831   $   84,584      64,962
   Deposits.........................................      214,169      186,730     163,861       95,348      81,148
   Average equity...................................       15,045       11,950       8,925        6,392       5,503
   Average assets...................................      259,799      203,703     131,079      103,261      72,346
   Total assets.....................................      270,943      223,315     189,745      112,181      93,154

RATIOS
   Return on average assets.........................         0.63%         0.62%      0.92%        0.98%       0.71%
   Return on average equity.........................        10.83         10.59      13.50        15.90        9.40
   Dividend payout ratio............................         0.00          0.00       0.00         0.00        0.00
   Average equity to average assets.................         5.79          5.87       6.80         6.19        7.61
   Total capital....................................         8.25          7.41       7.88         9.33       10.30
   Tier 1 capital...................................         7.22          6.34       6.64         8.23        9.40
   Leverage ratio...................................         5.72          5.22       4.99         6.40        5.90
</TABLE>

ITEM 2.  PROPERTIES

         The Company's offices are located in the Gilmer County Bank's main
office at 829 Industrial Boulevard, Ellijay, Georgia, between the business
districts of Ellijay and East Ellijay. The office building, which contains 9,780
square feet, and the land on which it is located, which is approximately 1.22
acres, are owned by Gilmer County Bank. The building houses offices, operations,
storage, and a lobby. The main banking office of 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, Gilmer County Bank entered into a lease for a
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 has built
a full-services branch office known as Gilmer County Bank Express.


                                       22
<PAGE>   25

         Management believes that the physical facilities maintained by the
Banks are suitable for its current operations.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not aware of any material pending legal proceedings to
which the Company or the Banks are a party or to which any of their property is
subject, other than ordinary routine legal proceedings incidental to the
business of the Banks.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of shareholders of the Company
during the fourth quarter of the fiscal year covered by this Report.

              [The remainder of this page intentionally left blank]


                                       23
<PAGE>   26

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
         MATTERS

MARKET INFORMATION

         There is no established trading market for the Company's Common Stock,
$0.01 par value (the "Common Stock"), which has been traded inactively in
private transactions. Therefore, no reliable information is available as to
trades of the Common Stock or as to the prices at which Common Stock has traded.
In 1998, Wachovia Securities, Inc. was approved as a market maker for the
Company's Common Stock.

         In April 2000, the Company effected a two-for-one share split of its
Common Stock (the "Stock Split") in the form of a common stock dividend, payable
on or about April 30, 2000, to shareholders of record as of the close of
business on April 12, 2000. All amounts presented in this Report and in the
financial statements are adjusted to reflect the Stock Split. The net effect of
the Stock Split did not change total shareholders' equity.

         Management has reviewed the limited information available as to the
ranges at which the Common Stock has been sold. The following table sets forth
the estimated price range for sales of Common Stock for each quarter of the last
two fiscal years, as adjusted for the Stock Split on April 30, 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.

<TABLE>
<CAPTION>
                                                                                   Estimated Price Range
                                                                                         Per Share
                                                                                  ----------------------
                                                                                    High          Low
                                                                                  --------     ---------
         <S>                                                                      <C>          <C>
         2000:
         First Quarter.......................................................     $  12.50     $    9.00
         Second Quarter......................................................        15.00         12.50
         Third Quarter.......................................................        15.00         15.00
         Fourth Quarter......................................................        15.00         13.00

         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
</TABLE>

         At March 26, 2001, the Company had 2,857,248 shares of Common Stock
outstanding held by approximately 1,395 shareholders of record.

RECENT SALES OF UNREGISTERED SECURITIES

         In November 30, 1998, the Company sold 265,000 (split adjusted) shares
of the Company's Common Stock in a private placement pursuant to exemption from
registration under section 4(2) of the Securities Act, to three institutional
accredited investors at a split adjusted price of $10.00 per share. The
aggregate gross proceeds of the private placement were $2.65 million. The
Company used all of the proceeds to fund a portion of the purchase price of its
acquisition of Appalachian Community Bank. Under the terms of the private
placement, each of the purchasers is entitled to certain registration rights
with respect to the shares of Common Stock purchased by such purchaser.

         On November 30, 1998, the Company issued 21,336 shares (split adjusted)
of its Common Stock to the Company's 401(k) plan at a split-adjusted price of
$10.00 (total purchase price of $213,360). On March 16, 1998, the Company issued
17,292 shares (split adjusted) of its Common Stock to the Company's 401(k) plan
at a split adjusted price of $5.63 per share (total purchase price of
$97,267.50). On February 26, 1998, the Company repurchased 28,000 shares (split
adjusted) of its Common Stock from one of the Company's directors at a split
adjusted price of $5.50 per share (total purchase price of $154,000).


                                       24
<PAGE>   27

DIVIDENDS

         Gilmer County Bank and Appalachian Community Bank are subject to
restrictions on the payment of dividends under Georgia law and the regulations
of the DBF. For the years ended December 31, 2000 and 1999, Gilmer County Bank
paid dividends to the Company of $700,000 and $350,000, respectively, which were
used by the Company for repayment of debt and other expenses. Subsequently, the
Company, through proceeds received from a public stock offering, injected
$2,400,000 of capital into Gilmer County Bank and $2,000,000 of capital into
Appalachian Community Bank.

         The Company is also subject to limits on payment of dividends by the
rules, regulations and policies of federal banking authorities. See "Supervision
and Regulation--Dividends." The primary source of funds available for the
payment of cash dividends by the Company are dividends from the Banks. There are
various statutory and regulatory limitations on the payment of dividends by the
Banks, as well as by the Company to its shareholders. No assurance can be given
that any dividends will be declared by the Company in the future, or if
declared, what amounts would be declared or whether such dividends would
continue. The Company has not paid any dividends to date.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The purpose of the following discussion is to address information
relating to the financial condition and results of operations of the Company
that may not be readily apparent from a review of the consolidated financial
statements and notes thereto, which begin on page F-1 of this Report. This
discussion should be read in conjunction with information provided in the
Company's consolidated financial statements and accompanying footnotes, and with
the statistical information appearing elsewhere in this Report under the caption
"Selected Statistical Information." Unless otherwise noted, the discussion of
net interest income in this financial review is presented on a taxable
equivalent basis to facilitate performance comparisons among various taxable and
tax-exempt assets.

RESULTS OF OPERATIONS

EARNINGS SUMMARY

         The Company's net income of $1,629,431 for the year ended December 31,
2000, represents an increase of $363,657 or 28.7%. The Company's net income of
$1,265,774 for the year ended December 31, 1999, represents an increase of
$57,543 or 4.8%. The Company's net income of $1,208,231 for the year ended
December 31, 1998 represents an increase of $190,425 or 18.7% 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 and Appalachian
Community Bank's deposit and loan base.

         Earnings per share increased to $0.59 ($0.55 on a fully diluted basis)
in 2000 compared to the prior year and decreased to $0.48 ($0.44 on a fully
diluted basis) in 1999 compared to a $0.52 ($0.49 on a fully diluted basis) per
share net income in 1998. Return on average assets, which reflects the Banks'
abilities to utilize their assets, was 0.63% in 2000, compared with 0.62% in
1999 and 0.92% in 1998. Return on average shareholders' equity increased to
10.83% in 2000 compared with 10.59% in 1999 and 13.50% in 1998. The dip and then
subsequent rise in this ratio is due in large part to the acquisition of
Appalachian Community Bank.


                                       25
<PAGE>   28

COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999

NET INTEREST INCOME

         Net interest income is the principal source of the Banks' earnings
stream and represents the difference or spread between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities materially impact net
interest income. Net interest income increased $1,603,116 or 22.0% to $8,896,642
at December 31, 2000, compared to $7,293,526 in 1999. This increase was caused
by the growth of the Banks' loan portfolio offset by the growth of deposits and
use of FHLB advances.

         Interest and fees earned on loans increased 42.0% to $19,633,417 in
2000 from $13,826,512 in 1999. The increase was primarily from the increase in
volume of average loans to approximately $204,436,000 in 2000 from approximately
$150,691,000 in 1999.

         Interest earned on taxable securities increased 22.6% to $1,702,529 in
2000 from $1,388,750 in 1999, while interest earned on non-taxable securities
decreased from $801,741 to $648,461 during the same period. The variance in the
income figures reflects a decrease in the municipal portfolio during the year.

         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 2000 was 3.67% compared to a net interest rate margin of
3.81% in 1999.

         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
3.39% in 2000 compared to 3.52% in 1999.

         During 2000, interest on federal funds sold decreased $191,847, 48.1%
from 1999. This decrease in income is the result of maintaining smaller average
federal funds balances with correspondent banks of approximately $3,694,000 and
$7,399,000 in 2000 and 1999, respectively. The average yield for such years was
5.63% and 5.39%, respectively. Interest on deposits with other banks increased
to $30,363 in 2000 from $16,322 in 1999.

INTEREST EXPENSE

         Total interest expense increased $4,186,482, 45.8% from $9,138,771 in
1999 to $13,325,253 in 2000. This increase was the combined effect of an
increase in the average balance of interest-bearing deposits to approximately
$196,072,000 in 2000 from approximately $165,467,000 in 1999 and the increased
usage of FHLB advances as a source of funds. The average rate paid on deposits
in 2000 and 1999, respectively was 5.57% and 4.99%. The effect of these changes
increased the interest expense on interest-bearing deposits to $10,919,158 in
2000 from $8,249,918 in 1999, an increase of $2,669,240, 32.4%.

NONINTEREST INCOME

         Noninterest income for 2000 and 1999 totaled $1,158,834 and $844,913,
respectively. These amounts are primarily from service charges on deposit
accounts, insurance commissions and fees on services to customers. Noninterest
income increased primarily due to the continued growth in the Banks' deposit
base. Other operating income increased from $379,477 in 1999 to $619,911 in
2000, primarily due to an increase in credit card fees earned by the Banks.


                                       26
<PAGE>   29

NONINTEREST EXPENSES

         Noninterest expenses totaled $6,380,486 in 2000, $5,560,969 in 1999,
and $3,221,213 in 1998. Salaries and benefits increased $315,312, 12.2% to
$2,890,930 in 2000, due to the Banks' increased staffing to accommodate the
growth in the Banks' loans and deposits. Furniture and equipment expenses
increased $37,523, 11.1% in 2000 due to increased data processing costs and the
cost associated with remodeled facilities. Other operating expenses increased
$459,374, 19.8% to 2,782,551 in 2000 due mainly to increases in advertising and
other expenses.

         The table below sets forth the Company's noninterest expenses for the
periods indicated.

<TABLE>
<CAPTION>
                                                                                            Years ended December 31,
                                                                                          ---------------------------
                                                                                            2000               1999
                                                                                          --------           --------
                                                                                              (Amounts in thousands)
<S>                                                                                       <C>                <C>
Salaries and employee benefits.....................................................       $  2,890           $  2,576
Professional and regulatory fees...................................................            427                412
Advertising........................................................................            418                309
Director and committee fees........................................................            380                227
Furniture and equipment expense....................................................            376                338
Occupancy expense..................................................................            331                324
Supplies...........................................................................            262                253
Data processing....................................................................            219                375
Postage............................................................................            132                131
Insurance..........................................................................            124                 81
Amortization expense...............................................................            118                118
Checking account expense...........................................................             67                 63
Correspondent bank charges.........................................................             59                 45
Taxes and licenses.................................................................             50                 64
Other..............................................................................            527                245
                                                                                          --------           --------
  Total............................................................................       $  6,380           $  5,561
                                                                                          ========           ========
</TABLE>

INCOME TAXES

         The Company's net operating income of $2,501,209 in 2000 resulted in
$871,778, 34.9% of income tax expense. Net operating income for 1999 was
$1,404,476 with a related income tax expense of $138,702.

COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

NET INTEREST INCOME

         Net interest income is the principal source of the Banks' earnings
stream and represents the difference or spread between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities materially impact net
interest income. Net interest income income increased $2,294,605 or 45.9% to
$7,293,526 at December 31, 1999, compared to $4,998,921 in 1998. This increase
was caused by the growth of the Banks' deposit base and loan portfolio.

         Interest and fees earned on loans increased 43.4% to $13,826,512 in
1999 from $9,644,711 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 $571,759 to $801,741 during the same period. The variance
in the income figures reflects management's strategy to decrease income taxes by
investing in tax-free municipal bonds.


                                       27
<PAGE>   30

         The trend in net interest income is also evaluated in terms of average
rates using the net interest margin and the interest rate spread. The net
interest margin, or the net yield on earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield returned on average
earning assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The net
interest margin for 1999 was 3.81% compared to a net interest rate margin of
4.04% in 1998.

         The interest rate spread measures the difference between the average
yield on earning assets and the average rate paid on interest-bearing sources of
funds. The interest rate spread calculation provides a more direct perspective
on the effect of market interest rate movements. The net interest spread was
3.52% in 1999 compared to 3.76% in 1998.

         During 1999, interest on federal funds sold increased $129,860, 48.3%
from 1998. This increase in income is the result of maintaining larger average
federal funds balances with correspondent banks of approximately $7,399,000 and
$4,414,000 in 1999 and 1998, respectively. The average yield for such years was
5.39% and 6.09%, respectively. Interest on deposits with other banks increased
to $16,322 in 1999 from $1,963 in 1998.

INTEREST EXPENSE

         Total interest expense increased $2,640,552, 40.6% from $6,498,219 in
1998 to $9,138,771 in 1999. This increase was the combined effect of an increase
in the average balance of interest-bearing deposits to approximately
$165,467,000 in 1999 from approximately $106,805,000 in 1998. The average rate
paid on deposits in 1999 and 1998, respectively was 4.99% and 5.52%. The effect
of these changes increased the interest expense on interest-bearing deposits to
$8,249,918 in 1999 from $5,891,798 in 1998, an increase of $2,358,120, 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
base. 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 and $3,221,213 in 1998.
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 a full year of expenses relative to
Appalachian Community Bank.


                                       28
<PAGE>   31

         The table below sets forth the Company's noninterest expenses for the
periods indicated.

<TABLE>
<CAPTION>
                                                                                            Years ended December 31,
                                                                                          ---------------------------
                                                                                            2000               1999
                                                                                          --------           --------
                                                                                              (Amounts in thousands)

<S>                                                                                       <C>                <C>
Salaries and employee benefits.....................................................       $  2,576           $  1,497
Professional and regulatory fees...................................................            412                221
Data processing....................................................................            375                136
Furniture and equipment expense....................................................            338                253
Occupancy expense..................................................................            324                173
Advertising........................................................................            309                203
Supplies...........................................................................            253                166
Director and committee fees........................................................            227                126
Postage............................................................................            131                 89
Amortization expense...............................................................            118                 21
Insurance..........................................................................             81                 54
Taxes and licenses.................................................................             64                 47
Checking account expense...........................................................             63                 41
Correspondent bank charges.........................................................             45                 35
Other..............................................................................            245                159
                                                                                          --------           --------
  Total............................................................................       $  5,561           $  3,221
                                                                                          ========           ========
</TABLE>

INCOME TAXES

         The Company's net operating income of $1,404,476 in 1999 resulted in
$138,702 (9.9%) of income tax expense. Net operating income for 1998 was
$1,780,481 with a related income tax expense of $572,250.

FINANCIAL CONDITION

EARNING ASSETS

         The Banks' earning assets, which include deposits in other banks,
federal funds sold, securities and loans, averaged $243,038,000 in 2000 or 93.5%
of average total assets compared to $191,540,000 or 94.0% of average total
assets in 1999. The mix of average earning assets comprised the following
percentages:

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                           ----------------------------------------
                                                                            2000            1999              1998
                                                                           ------          ------            ------
<S>                                                                        <C>             <C>               <C>
Deposits in other banks.........................................            0.21%           0.14%             0.03%
Federal funds sold..............................................            1.52            3.86              3.56
Investment securities...........................................           14.15           17.33             19.30
Loans...........................................................           84.12           78.67             77.20
</TABLE>

         The mix of average earning assets reflects management's attempt to
maximize interest income while maintaining acceptable levels of risk.

         The Banks have intentionally avoided the growing national market in
loans to finance leveraged buy-outs, participating in no nationally syndicated
leveraged buy-out loans. Concurrently, it has avoided exposure to lesser
developed country ("LDC") debt, having no LDC loans in its portfolio.


                                       29
<PAGE>   32

LOANS

         Loans made up the largest component of the Banks' earning assets. At
December 31, 2000, the Banks' total loans were $214,123,876 compared to total
loans of $169,105,872 at the end of 1999. In 2000, average net loans represented
84.1% of average earning assets and 78.7% of total average assets, while in
1999, average net loans represented 78.7% of average earning assets and 74.0% of
total average assets. This was the result of an increase in loan demand in the
Banks' market area, combined with an increase in the Banks' market share of
loans in such area. The ratio of total loans to total deposits was 100.0% in
2000 and 90.6% in 1999.

SECURITIES AND FEDERAL FUNDS SOLD

         In the past the Banks have classified their securities as either
available-for-sale or held-to-maturity. However, during 2000 the Banks
reclassified all their held-to-maturity securities to the available-for-sale
portfolio. At December 31, 2000, $32,540,634 was classified as
available-for-sale, while at December 31, 1999, $28,536,246 of the Banks'
securities were classified as available-for-sale. Securities classified as
held-to-maturity were $5,799,963 at year-end 1999.

         The composition of the Banks' securities portfolio reflects the
Company's investment strategy of maximizing portfolio yields subject to risk and
liquidity considerations. The primary objectives of the Company's investment
strategy are to maintain an appropriate level of liquidity and to provide a tool
to assist in controlling the Banks' interest rate position while at the same
time producing adequate levels of interest income. Management of the maturity of
the portfolio is necessary to provide liquidity and to control interest rate
risk. During 2000, gross securities sales were $10,282,289 and maturities were
$1,151,386 representing 29.9% and 3.3%, respectively, of the average portfolio
for the year. Net losses associated with sales and maturities totaled $10,774 in
2000. Gross unrealized gains in the portfolio amounted to $196,811 at year-end
2000 and unrealized losses amounted to $199,952. During 1999, gross sales
amounted to $4,406,657 and maturities amounted to $9,502,031, representing 13.3%
and 28.6% of the average portfolio, respectively. 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.

         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 2000 and 1999 did not include securities with these
characteristics. The recoverability of the Banks' investments in mortgage-backed
securities is reviewed periodically, and the Company intends to make appropriate
adjustments to income for impaired values.

         Management maintains federal funds sold as a tool in managing its daily
cash needs. Federal funds sold at December 31, 2000, was $6,573,000 and
$3,842,157 in 1999. Average federal funds sold for 2000 was approximately
$3,694,000 or 1.5% of average earning assets, and for 1999 was $7,399,000 or
3.9% of average earning assets. The large increase in year-end federal funds
resulted from an increase in long-term debt and funds available from a public
stock offering.

         There has been no significant impact on the Company's financial
statements as a result of the provisions of Statement of Financial Accounting
Standards No. 119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments.

DEPOSITS AND REPURCHASES

         The Company's primary source of funds is derived from deposits of the
Banks' customers. Average deposits increased 18.1% from approximately
$175,025,000 in 1999 to approximately $206,787,000 in 2000. At December 31, 2000
total deposits were $214,168,823 of which $205,268,008 (95.8%) were interest
bearing. At December 31, 1999 total deposits were $186,729,656 of which
$176,366,521 (94.5%) were interest bearing. Better customer service by the
opening of the East Ellijay branch fueled the growth in the deposit base. The
Company intends to emphasize internal deposit growth in order to expand the
consumer bases of the Banks and to continue to fund asset growth.


                                       30
<PAGE>   33

         Securities sold under agreements to repurchase amounted to $2,845,355
at December 31, 2000 compared to $3,204,007 at December 31, 1999. The weighted
average rates were 3.94% and 3.96% for 2000 and 1999, respectively. Securities
sold under agreements to repurchase averaged $2,522,820 during 2000 and
$2,071,713 during 1999. The maximum amount outstanding at any month end during
2000 was $3,117,584 and $3,679,074 during 1999. 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 $-0- at year-end 2000
compared to $2,930,000 at year-end 1999.

SHAREHOLDERS' EQUITY

         Shareholders' equity increased $5,248,713 from December 31, 1999 to
December 31, 2000, due in part to net earnings of $1,629,431 and the increase in
unrealized gains on securities available-for-sale totaling $784,302, net of
deferred tax liability. The increase was also a result of the issuance of 24,192
shares of the Company's common stock to the Company's ESOP plan (total purchase
price $292,838), the purchase of 165,000 shares of treasury stock (total
purchase price $1,827,205) and the sale of 306,612 shares of stock in a public
offering for $4,362,147, net of issuance costs.

         All amounts presented in this Report and in the financial statements
are adjusted to reflect the Stock Split in April 2000 and May 1998.

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 the Company
can also meet the investment requirements of its shareholders. Daily monitoring
of the sources and uses of funds is necessary to maintain an acceptable cash
position that meets both requirements. In the banking environment, both assets
and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis.

         The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments or sales of investment and trading account
securities. Real estate construction and commercial, financial and agricultural
loans that mature in one year or less equaled approximately $45 million or 21.0%
of the total loan portfolio at December 31, 2000 and investment securities
maturing in one year or less equaled $0.8 million or 2.3% of the portfolio.
Other sources of liquidity include short-term investments such as federal funds
sold.

         The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal 2000, 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 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 $23,858,507 as of December 31, 2000. At December 31,
2000, the outstanding balance of Gilmer County Bank's credit line was
$21,738,095. See Note 10 to the Notes to Consolidated Financial Statements
herein.


                                       31
<PAGE>   34

Appalachian Community Bank also has a credit line with the Federal Home Loan
Bank, which provides for a credit line of up to $11,000,000.00. At December 31,
2000, Appalachian Community Bank had an outstanding balance on its credit line
of $8,200,000.

         CAPITAL RESOURCES

         A strong capital position is vital to the continued profitability of
the Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. A majority of the
Company's capital requirements have been provided from the proceeds from Gilmer
County Bank's initial stock offering in 1994, proceeds of $2.65 million from a
private placement of the Common Stock in November 1998, proceeds of $4.4 million
from a public offering in 2000, and through the retention of earnings and the
sale of Company stock to the Company's 401(k) plan.

         Term Loan. In November 1998, the Company obtained a $3.6 million term
loan under a Loan and Stock Pledge Agreement and a Promissory Note
(collectively, the "Term Loan") with The Bankers Bank. The Company used $3.45 of
the proceeds of the Term Loan to fund a portion of its acquisition of First
National. The Company used the remaining $150,000 of the proceeds of the Term
Loan to repay a portion of principal amounts outstanding under its former line
of credit with Hardwick Bank & Trust Company ("Hardwick"). On April 3, 2000 the
company paid off the term loan with Bankers Bank and obtained a $4.6 million
term loan under a Loan and Stock Pledge Agreement and a Promissory Note
(collectively, the "Term Loan") with Crescent Bank and Trust Company. At
September 30, 2000, the balance on the Term Loan was $4.6 million. Interest on
the outstanding amounts under the Term Loan is payable quarterly, commencing
July 1, 2000, at the prime rate (as defined in the Promissory Note) less 1/2 of
a percentage point. The Company began making interest payments on July 1, 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 March 31, 2002.
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 non-performing assets below a
specified level, and maintain a minimum ratio of consolidated loan loss reserves
to total loans.

         Federal Capital Standards. Regulatory authorities are placing increased
emphasis on the maintenance of adequate capital. In 1990, new risk-based capital
requirements became effective under FDICIA. The guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off the balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier 1 capital, which consists of common equity, paid-in capital and retained
earnings (less intangible assets), amounted to $15.6 million at December 31,
2000. 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 $17.8 million at year-end 2000. The Company's percentage ratios as
calculated under regulatory guidelines were 7.22% and 8.25% for Tier 1 and Total
Capital, respectively, at year-end 2000. The Company's Tier 1 Capital and Total
Capital exceeded the minimum ratios of 4% and 8%, respectively.

         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, 2000, the Company's leverage ratio was 5.72% exceeding the
regulatory minimum requirement of 4%.


                                       32
<PAGE>   35

         The table below illustrates the Company's regulatory capital ratios
under federal guidelines at December 31, 2000, 1999 and 1998:

                             CAPITAL ADEQUACY RATIOS

<TABLE>
<CAPTION>
                                                                          Years ended December 31,
                                                             Statutory    -----------------------------------------
                                                              Minimum         2000           1999          1998
                                                             ---------    ------------    ----------     ----------
                                                                          (Amounts in thousands, except percentages)
<S>                                                           <C>         <C>             <C>            <C>
  Tier 1 Capital..........................................                  $   15,563    $   10,981     $    9,035

  Tier 2 Capital..........................................                       2,211         1,849          1,686
                                                                            ----------    ----------     ----------

  Total Qualifying Capital................................                  $   17,774    $   12,830     $   10,721
                                                                            ==========    ==========     ==========

  Risk Adjusted Total Assets (including
  off-balance-sheet exposures)............................                  $  215,521    $  173,214     $  136,122

  Tier 1 Risk-Based Capital Ratio.........................       4.0%             7.22          6.34%          6.64%

  Total Risk-Basked Capital Ratio.........................       8.0              8.25          7.41           7.88

  Leverage Ratio..........................................       4.0              5.72          5.22           4.99
</TABLE>

         Gilmer County Bank; DBF Capital Requirement. In addition to the capital
standards imposed by federal banking regulators, the DBF imposes a 6% primary
capital ratio on Gilmer County Bank. The DBF's standard is calculated as the
ratio of total equity to total assets, each as adjusted for unrealized gains and
losses on securities and allowances for loan losses. At December 31, 2000,
Gilmer County Bank's capital ratio as calculated under the DBF standard was
7.75%.

         In 2000 and 1999, Gilmer County Bank paid dividends to the Company of
$700,000 and $350,000, which were used by the Company for the repayment of debt
and other expenses.

         Appalachian Community Bank. In addition to the capital standards
imposed by federal banking regulators, the DBF imposes a 6% primary capital
ratio on Appalachian Community Bank. The DBF's standard is calculated as the
ratio of total equity to total assets, each as adjusted for unrealized gains and
losses on securities and allowances for loan losses. At December 31, 2000,
Appalachian Community Bank's capital ratio as calculated under the DBF standard
was 11.86%. Appalachian Community Bank received a $2.0 million capital injection
from the Company.

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
Banks' current portfolio that is subject to repricing in future time periods.
The differences are known as interest sensitivity gaps and are usually
calculated separately for segments of time ranging from zero to thirty days,
thirty-one to ninety days, ninety-one days to one year, one to five years, over
five years and on a cumulative basis.


                                       33
<PAGE>   36

         The following tables show interest sensitivity gaps for these different
intervals as of December 31, 2000.

                       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 ...................................     $ 21,982      $  40,084      $  53,770      $  94,462     $  3,441     $ 213,739
  Securities:
    Taxable ...............................           --          2,198            739          8,261       13,067        24,265
    Tax-exempt ............................           --             --             --             --        8,276         8,276
  Time deposits in other banks ............           25             --             --             --           --            25
  Federal funds sold ......................        6,573             --             --             --           --         6,573
                                                --------      ---------      ---------      ---------     --------     ---------
                                                  28,580         42,282         54,509        102,723       24,784       252,878
                                                --------      ---------      ---------      ---------     --------     ---------
Interest-bearing liabilities (2)
  Demand deposits (3) .....................       11,746         11,747         11,747             --           --        35,240
  Savings deposits (3) ....................       13,087         13,088         13,088             --           --        39,263
  Time deposits ...........................        5,520         25,164         59,054         41,027           --       130,765
  Other short-term borrowings (3) .........        2,845             --             --             --           --         2,845
  Long-term debt ..........................          142            433          8,509         23,904        1,550        34,538
                                                --------      ---------      ---------      ---------     --------     ---------
                                                  33,340         50,432         92,398         64,931        1,550       242,651
                                                --------      ---------      ---------      ---------     --------     ---------

Interest sensitivity gap ..................     $ (4,760)     $  (8,150)     $ (37,889)     $  37,792     $ 23,234     $  10,227
                                                ========      =========      =========      =========     ========     =========

Cumulative interest sensitivity gap.......      $ (4,760)     $ (12,910)     $ (50,799)     $ (13,007)    $ 10,227
                                                ========      =========      =========      =========     ========

Ratio of interest-earning assets to
  interest-bearing liabilities............          0.86           0.84           0.59           1.58        15.99
                                                ========      =========      =========      =========     ========

Cumulative ratio..........................          0.86           0.85           0.71           0.95         1.04
                                                ========      =========      =========      =========     ========
Ratio of cumulative gap to total
  interest-earning assets.................         (0.02)         (0.05)         (0.20)         (0.05)        0.04
                                                ========      =========      =========      =========     ========
</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 and other short term borrowings are assumed
         to be subject to movement into other deposit instruments in equal
         amounts during the 0-30 day period, the 31-90 day period, and the
         91-365 day period.

         The above table indicates that in a rising interest rate environment,
the Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table, for
the first 30 days of repricing opportunity there is an excess of
interest-bearing liabilities over earning assets of approximately 4.8 million.
For the first 365 days, interest-bearing liabilities exceed earning assets by
approximately $50.8 million. During this one-year time frame, 72.6% of all
interest-bearing liabilities will reprice compared to 49.6% of all
interest-earning assets. Changes in the mix of earning assets or supporting
liabilities can either increase or decrease the net interest margin without
affecting interest rate sensitivity. In addition, the interest rate spread
between an asset and its supporting liability can vary significantly while the
timing of repricing for both the asset and the liability remain the same, thus
impacting net interest income. Due to management's continued emphasis on
profitability, many of the higher yielding securities presented in the table
above have call features, which may result in such securities having a shorter
effective life. This in turn may reduce the interest rate sensitivity gap
presented above. It should be noted, therefore, that a matched
interest-sensitive position by itself would not ensure maximum net interest
income.


                                       34
<PAGE>   37

         Management continually evaluates the condition of the economy, the
pattern of market interest rates and other economic data to determine the types
of investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.

IMPACT OF INFLATION AND CHANGING PRICES

         A bank's asset and liability structure is substantially different from
that of an industrial company in that virtually all assets and liabilities of a
bank are monetary in nature. Management believes the impact of inflation on
financial results depends upon the ability of the Banks to react to changes in
interest rates and by such reaction to reduce the inflationary impact on
performance. Interest rates do not necessarily move in the same direction, or at
the same magnitude, as the prices of other goods and services. As discussed
previously, management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.

         Various information shown elsewhere in this Report will assist the
Company in the understanding of how well the Banks are positioned to react to
changing interest rates and inflationary trends. In particular, the summary of
net interest income, the maturity distributions, the composition of the loan and
security portfolios and the data on the interest sensitivity of loans and
deposits should be considered.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board 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,
amended as to effective date by SFAS No. 137, is effective for financial
statements for periods beginning after June 15, 2000. In June 2000, the
Financial Accounting Standards Board also issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not
have a material impact on the Company's consolidated financial statements.

         In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of
the provisions of SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, it provides new standards
for reporting financial assets transferred as collateral and new standards for
the derecognition of financial assets, in particular transactions involving the
use of special purpose entities. SFAS No. 140 also prescribes additional
disclosures for collateral transactions and for securitization transactions
accounted for as sales. The new collateral standards and disclosure requirements
are effective for fiscal years ending after December 15, 2000, while the new
standards for the de-recognition of financial assets are effective for transfers
made after March 31, 2001. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.


                                       35
<PAGE>   38

CONCLUSION

         The Company, principally through Gilmer County Bank, has experienced
continued growth since it acquired Gilmer County Bank in July 1996 and
Appalachian Community Bank in 1998. While management remains optimistic about
the prospects for continued growth and profitability of the Company and the
Banks, management does not anticipate that such growth will be at the level
experienced during its initial years of operation. No assurance can be given
that the Company or the Banks will continue to grow and be profitable.

         The foregoing is a forward-looking statement that reflects significant
assumptions and subjective judgments believed by management to be reasonable as
of the date of this Report. It does not constitute a forecast or prediction of
actual results, and actual performance and financial results may differ
materially from those anticipated due to a variety of factors, including but not
limited to those discussed in the section entitled "Cautionary Notice Regarding
Forward-Looking Information" appearing at the beginning of this Report.

ITEM 7.  FINANCIAL STATEMENTS

         The consolidated financial statements of the Company, including notes
thereto, and the report of independent auditors are included in this Report
beginning at page F-1 and are incorporated herein by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         During the Company's two most recent fiscal years, there has been no
change in the Company's independent accountants or any disagreement with its
accountants on any matter of accounting principles or practices or financial
statement disclosure.


                                       36
<PAGE>   39
                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

         The information appearing under the heading "Election of Directors" and
the subheadings "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement (the "2001 Proxy Statement")
relating to the annual meeting of shareholders of the Company, scheduled to be
held on May 22, 2001, is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

         The information appearing under the heading "Compensation of Executive
Officers and Directors" in the 2001 Proxy Statement is incorporated herein by
reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information appearing under the heading "Outstanding Voting
Securities of the Company and Principal Holders Thereof" in the 2001 Proxy
Statement is incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information appearing under the caption "Certain Relationships and
Transactions" in the 2001 Proxy Statement is incorporated herein by reference.


                                     PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      The following exhibits are filed with this Report:

<TABLE>
<CAPTION>
         EXHIBIT NUMBER               DESCRIPTION OF EXHIBIT                             PAGE
         --------------    ----------------------------------------------------          ----
              <S>          <C>                                                           <C>
              2.1          Purchase Sale and Assumption Agreement, dated July
                           10, 1998, by and between Century South Banks, Inc.
                           and the Company (included as Exhibit 2.1 to the
                           Current Report on Form 8-K of the Company, dated
                           November 30, 1998 (File No. 000-21383), previously
                           filed with the Commission and incorporated herein by
                           reference).

              3.1          Articles of Incorporation of the Company (included as
                           Exhibit 3.1 to the Company's Registration Statement
                           on Form 8-A, dated September 16, 1996 (File No.
                           000-21383), previously filed with the Commission and
                           incorporated herein by reference).

              3.2          Bylaws of the Company (included as Exhibit 3.2 to the
                           Company's Registration Statement on Form 8-A, dated
                           September 16, 1996 (File No. 000-21383), previously
                           filed with the Commission and incorporated herein by
                           reference).

              4.1          Registration Rights Agreement, dated November 30,
                           1998, by and among the Company and Community
                           Financial Services, Inc. (included as exhibit 4.1 to
                           the Company's Annual Report on Form 10-KSB for the
                           fiscal year ended December 31, 1998 (File
                           No.-000-21383) and incorporated herein by reference).
                           *
</TABLE>


                                       37
<PAGE>   40

<TABLE>
<CAPTION>
         EXHIBIT NUMBER               DESCRIPTION OF EXHIBIT                             PAGE
         --------------    --------------------------------------------------------      ----

         <S>               <C>                                                           <C>
              4.2          Registration Rights Agreement, dated November 30,
                           1998, by and among the Company and Ellijay Telephone
                           Company, Inc. (included as exhibit 4.2 to the
                           Company's Annual Report on Form 10-KSB for the fiscal
                           year ended December 31, 1998 (File No.-000-21383) and
                           incorporated herein by reference). *

              4.3          Registration Rights Agreement, dated November 30,
                           1998, by and among the Company and JBC Bancshares,
                           Inc. (included as exhibit 4.3 to the Company's Annual
                           Report on Form 10-KSB for the fiscal year ended
                           December 31, 1998 (File No.-000-21383) and
                           incorporated herein by reference). *

              10.1         1997 Directors' Non-Qualified Stock Option Plan
                           (included as Exhibit 10.1 to the Company's Annual
                           Report on Form 10-KSB for the fiscal year ended
                           December 31, 1996 (File No. 000-21383) and
                           incorporated herein by reference).*

              10.2         1997 Employee Incentive Stock Incentive Plan
                           (included as Exhibit 10.2 to the Company's Annual
                           Report on Form 10-KSB for the fiscal year ended
                           December 31, 1996 (File No. 000-21383) and
                           incorporated herein by reference).*

              10.3         Adoption Agreement for the Appalachian Bancshares,
                           Inc. Section 401(k) Profit Sharing Plan (filed as
                           Exhibit 4.3(a) to the Company's Registration
                           Statement on Form S-8 (No. 333-27127) and
                           incorporated herein by reference).

              10.4         Georgia Bankers Association Master 401(k) Profit
                           Sharing Plan (filed as Exhibit 4.3(b) to the
                           Company's Registration Statement on Form S-8 (No.
                           333-27127) and incorporated herein by reference).

              10.5         First Amendment to the Georgia Bankers Association
                           Master Section 401(k) Profit Sharing Plan (filed as
                           Exhibit 4.3(c) to the Company's Registration
                           Statement on Form S-8 (No. 333-27127) and
                           incorporated herein by reference).

              10.6         Form of Deferred Fee Agreement between Gilmer County
                           Bank and certain directors and executive officers,
                           with addendum (filed as Exhibit 10.6 to the Company's
                           Quarterly Report on Form 10-QSB for the period ended
                           June 30, 1997 (File No. 000-21383) and incorporated
                           herein by reference).

              10.7         Loan and Stock Pledge Agreement, dated as of November
                           30, 1998, between the Company and The Bankers Bank.
                           (Included as exhibit 10.7 to the Company's Annual
                           Report on Form 10-KSB for the fiscal year ended
                           December 31, 1998 (File No.-000-21383) and
                           incorporated herein by reference).

              10.8         Promissory Note, dated November 30, 1998, issued by
                           the Company to The Bankers Bank. (Included as exhibit
                           10.8 to the Company's Annual Report on Form 10-KSB
                           for the fiscal year ended December 31, 1998 (File
                           No.-000-21383) and incorporated herein by reference).

              11           Statement re: Computation of Per Share Earnings

              21           Subsidiaries of the Registrant
</TABLE>


                                       38
<PAGE>   41

<TABLE>
<CAPTION>
         EXHIBIT NUMBER               DESCRIPTION OF EXHIBIT                                       PAGE
         --------------    ----------------------------------------------------------              ----

              <S>          <C>                                                                     <C>
              99           Information required by Form 11-K with respect to the
                           Appalachian Bancshares, Inc. Section 401(k) profit
                           Sharing Plan will be filed as an amendment to this
                           Form 10-KSB within 180 days after the end of the
                           fiscal year of the plan as permitted by Rule 15d-21
                           under the Securities Exchange Act of 1934.
</TABLE>

* The referenced exhibit is a compensatory contract, plan or arrangement.

(b) There were no reports on Form 8-K filed by the Company during the fourth
    quarter of 2000.


             [The remainder of this page intentionally left blank]


                                       39
<PAGE>   42
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                             APPALACHIAN BANCSHARES, INC.


                             By: /s/ Tracy R. Newton
                                ------------------------------------
                                Tracy R. Newton, President

                              Date: March 26, 2001

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<S>                                                               <C>
   /s/ Tracy R. Newton                                            Date:  March 26, 2001
--------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director
[Principal Executive Officer]

   /s/ Kent W. Sanford                                            Date:  March 26, 2001
--------------------------------------------
Kent W. Sanford, Executive Vice President,
Chief Operating Officer and Director
[Principal Financial and Accounting Officer]

   /s/ Alan S. Dover                                              Date:  March 26, 2001
--------------------------------------------
Alan S. Dover, Director

   /s/ Charles A. Edmondson                                       Date:  March 26, 2001
--------------------------------------------
Charles A. Edmondson, Director

   /s/ Roger E. Futch                                             Date:  March 26, 2001
--------------------------------------------
Roger E. Futch, Director

   /s/ Joseph C. Hensley                                          Date:  March 26, 2001
--------------------------------------------
Joseph C. Hensley, Director

   /s/ Frank E. Jones                                             Date:  March 26, 2001
--------------------------------------------
Frank E. Jones, Director

   /s/ J. Ronald Knight                                           Date:  March 26, 2001
--------------------------------------------
J. Ronald Knight, Director

   /s/ P. Joe Sisson                                              Date:  March 26, 2001
--------------------------------------------
P. Joe Sisson, Director

   /s/ Kenneth D. Warren                                          Date:  March 26, 2001
--------------------------------------------
Kenneth D. Warren, Director
</TABLE>


                                       40
<PAGE>   43


                    MANAGEMENT'S STATEMENT OF RESPONSIBILITY
                            FOR FINANCIAL INFORMATION

                  Appalachian Bancshares, Inc. and Subsidiaries

The management of Appalachian Bancshares, Inc. and Subsidiaries (the "Company")
is responsible for the preparation, integrity, and objectivity of the financial
statements, related financial data, and other information in this annual report.
The financial statements are prepared in accordance with generally accepted
accounting principles and include amounts based on management's best estimates
and judgment where appropriate. Financial information appearing throughout this
annual report is consistent with the financial statements.

In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting systems and
related internal accounting controls that are designed to provide reasonable
assurances that (i) transactions are authorized and recorded in accordance with
established procedures, (ii) assets are safeguarded, and (iii) proper and
reliable records are maintained.

The concept of reasonable assurance is based on the recognition that the cost of
internal control systems should not exceed the related benefits. As an integral
part of internal control systems, the Company maintains a professional staff of
internal auditors who monitor compliance and assess the effectiveness of
internal control systems and coordinate audit coverage with independent
certified public accountants.

The responsibility of the Company's independent certified public accountants is
limited to an expression of their opinion as to the fairness of the financial
statements presented. Their opinion is based on an audit conducted in accordance
with generally accepted auditing standards as described in their report.

The board of directors is responsible for insuring that both management and the
independent certified public accountants fulfill their respective
responsibilities with regard to the financial statements. The Audit Committee
meets periodically with both management and the independent certified public
accountants to assure that each is carrying out its responsibilities. The
independent certified public accountants have full and free access to the Audit
Committee and board of directors and may meet with them, with and without
management being present, to discuss auditing and financial reporting matters.


<PAGE>   44


                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                            Page(s)
                                                                                                            -------
<S>                                                                                                         <C>
Independent Auditors' Report................................................................................    F-2

Consolidated Statements of Financial Condition as of December 31, 2000 and 1999.............................    F-3

Consolidated Statements of Income for the Years Ended
  December 31, 2000, 1999 and 1998..........................................................................    F-4

Consolidated Statements of Shareholders' Equity for the Years Ended
  December 31, 2000, 1999 and 1998..........................................................................    F-5

Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2000, 1999 and 1998..........................................................................    F-6

Notes to Consolidated Financial Statements..................................................................    F-7
</TABLE>


                   SCHAUER, TAYLOR, COX, VISE,& MORGAN, P.C,

                                       F-1
<PAGE>   45


                    SCHAUER, TAYLOR, COX, VISE & MORGAN, P.C.
                  CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
                               150 OLDE TOWNE ROAD
                            BIRMINGHAM, ALABAMA 35216


                            TELEPHONE - 205.822.3488
                               WATS - 800.466.3488
                       FAX - 205.822.3541 OR 205.822.0645
                         EMAIL - FIRM@SCHAUERTAYLOR.COM


DOUGLAS B. SCHAUER, CPA                                 STEVEN W. BROWN, CPA
EDWARD R. TAYLOR, CPA                                   M. BRYANT KING, CPA
W. ERNEST COX, CPA                                      RAYMOND A. PATTON, CPA
DONALD G. VISE, CPA                                     RUSSELL D. PAYNE, CPA
PHILLIP D. MORGAN, CPA                                  STEVEN D. MILLER, CPA




                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
of Appalachian Bancshares, Inc. and Subsidiaries
Ellijay, Georgia

We have audited the accompanying consolidated statements of financial condition
of Appalachian Bancshares, Inc. (a Georgia corporation) and Subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Appalachian Bancshares, Inc. and Subsidiaries as of December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.


Birmingham, Alabama
February 1, 2001

                                       SCHAUER, TAYLOR, COX, VISE & MORGAN, P.C.


         MEMBER OF AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,
    SEC PRACTICE SECTION AND ALABAMA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS


                                      F-2
<PAGE>   46

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                           DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                          2000              1999
                                                                                    ---------------    ---------------
<S>                                                                                 <C>                <C>
ASSETS
   Cash and due from banks......................................................    $     5,119,438    $     5,739,252
   Interest-bearing deposits with other banks...................................             24,528            217,115
   Federal funds sold...........................................................          6,573,000          3,842,157

   Securities available-for-sale................................................         32,540,634         28,536,246
   Securities held-to-maturity, estimated fair value of $5,622,297 for 1999.....                 --          5,799,963

   Loans, net of unearned income................................................        214,123,876        169,105,872
   Allowance for loan losses....................................................         (2,210,603)        (1,849,290)
                                                                                    ---------------    ---------------
       Net Loans................................................................        211,913,273        167,256,582

   Premises and equipment, net..................................................          6,615,352          3,877,419
   Accrued interest.............................................................          2,454,079          1,741,986
   Cash surrender value on life insurance.......................................          2,255,356          2,145,294
   Intangible, net..............................................................          2,109,638          2,227,386
   Other assets.................................................................          1,337,362          1,931,141
                                                                                    ---------------    ---------------
       TOTAL ASSETS.............................................................    $   270,942,660    $   223,314,541
                                                                                    ===============    ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
   Deposits:
     Noninterest-bearing........................................................    $     8,900,815    $    10,363,135
     Interest-bearing...........................................................        205,268,008        176,366,521
                                                                                    ---------------    ---------------
       TOTAL DEPOSITS...........................................................        214,168,823        186,729,656
   Short-term borrowings........................................................          2,845,355          6,134,007
   Accrued interest.............................................................          1,361,896            815,988
   Long-term debt...............................................................         34,538,095         16,964,286
   Other liabilities............................................................            359,004            249,830
                                                                                    ---------------    ---------------
       TOTAL LIABILITIES........................................................        253,273,173        210,893,767
                                                                                    ---------------    ---------------
SHAREHOLDERS' EQUITY
   Common stock, par value $0.01 in 2000 and $5.00 per share in 1999, 20,000,000
     shares authorized, 3,110,248 shares issued in 2000 and
     1,389,122 shares issued in 1999............................................             31,102          6,945,610
   Treasury stock, 253,000 and 44,000 shares, respectively, at cost.............         (2,255,205)          (428,000)
   Capital surplus..............................................................         14,606,889          3,030,196
   Retained earnings............................................................          5,289,795          3,660,364
   Accumulated comprehensive income: net unrealized holding gains
     (losses) on securities available-for-sale, net of deferred income tax......             (3,094)          (787,396)
                                                                                    ---------------    ---------------
       TOTAL SHAREHOLDERS' EQUITY...............................................         17,669,487         12,420,774
                                                                                    ---------------    ---------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................................    $   270,942,660    $   223,314,541
                                                                                    ===============    ===============
</TABLE>


                 See notes to consolidated financial statements

                                       F-3
<PAGE>   47




                        CONSOLIDATED STATEMENTS OF INCOME

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                       2000               1999              1998
                                                                 ----------------   ---------------    ---------------
<S>                                                              <C>                <C>                <C>
INTEREST INCOME
   Interest and fees on loans.................................   $     19,603,418   $    13,807,798    $     9,614,165
   Interest on investment securities:
     Taxable securities.......................................          1,702,529         1,388,750          1,009,595
     Nontaxable securities....................................            426,619           527,461            376,157
   Interest on deposits in other banks........................             30,363            16,322              1,963
   Interest on federal funds sold.............................            207,125           398,972            269,112
                                                                 ----------------   ---------------    ---------------
       TOTAL INTEREST INCOME..................................         21,970,054        16,139,303         11,270,992
                                                                 ----------------   ---------------    ---------------

INTEREST EXPENSE
   Interest on deposits.......................................         10,919,158         8,249,918          5,891,798
   Interest on federal funds purchased and securities sold
     under agreements to repurchase...........................            389,080           112,368            178,437
   Interest on long-term debt.................................          2,017,015           776,485            427,984
                                                                 ----------------   ---------------    ---------------
       TOTAL INTEREST EXPENSE.................................         13,325,253         9,138,771          6,498,219
                                                                 ----------------   ---------------    ---------------

NET INTEREST INCOME...........................................          8,644,801         7,000,532          4,772,773
   Provision for loan losses..................................            921,940           880,000            300,000
                                                                 ----------------   ---------------    ---------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...........          7,722,861         6,120,532          4,472,773

NONINTEREST INCOME
   Service charges on deposits................................            504,131           401,808            238,921
   Insurance commissions......................................             45,566            54,198             22,333
   Other operating income.....................................            619,911           379,477            251,717
   Investment securities gains (losses).......................            (10,774)            9,430             15,950
                                                                 ----------------   ---------------    ---------------
       TOTAL NONINTEREST INCOME...............................          1,158,834           844,913            528,921
                                                                 ----------------   ---------------    ---------------

NONINTEREST EXPENSES
   Salaries and employee benefits.............................          2,890,930         2,575,618          1,496,743
   Occupancy expense..........................................            331,332           324,024            173,034
   Furniture and equipment expense............................            375,673           338,150            252,806
   Other operating expenses...................................          2,782,551         2,323,177          1,298,630
                                                                 ----------------   ---------------    ---------------
       TOTAL NONINTEREST EXPENSES.............................          6,380,486         5,560,969          3,221,213
                                                                 ----------------   ---------------    ---------------

Income before income taxes....................................          2,501,209         1,404,476          1,780,481
Income tax expense............................................            871,778           138,702            572,250
                                                                 ----------------   ---------------    ---------------

NET INCOME....................................................   $      1,629,431   $     1,265,774    $     1,208,231
                                                                 ================   ===============    ===============

EARNINGS PER COMMON SHARE
   Basic.....................................................    $           0.59   $          0.48    $          0.52
   Diluted...................................................                0.55              0.44               0.49

WEIGHTED AVERAGE SHARES OUTSTANDING
   Basic.....................................................           2,755,255         2,652,392          2,332,850
   Diluted...................................................           2,968,926         2,847,050          2,441,952

</TABLE>


                 See notes to consolidated financial statements

                                       F-4
<PAGE>   48



                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>

                                                                                             Accumulated
                                                                                                Other
                                                                                               Compre-
                                          Common       Treasury     Capital      Retained       hensive
                                           Stock         Stock      Surplus      Earnings       Income        Total
                                        -----------  -----------  -----------   ----------   -----------  ------------

<S>                                     <C>          <C>          <C>           <C>          <C>          <C>
Balance at January 1, 1998..........    $ 5,922,870  $  (274,000) $   135,051   $1,186,359   $     9,773  $  6,980,053
Net income 1998.....................             --           --           --    1,208,231            --     1,208,231
Unrealized gains on available-
   for-sale securities, net of
   reclassification adjustment,
   net of tax of $48,588............             --           --           --           --        90,542        90,542
                                                                                                          ------------
Comprehensive income................             --           --           --           --            --     1,298,773
                                                                                                          ------------
Proceeds from sale of common
   stock to 401(k) plan.............         96,570           --      214,058           --            --       310,628
Purchase of Treasury Stock..........             --     (154,000)          --           --            --      (154,000)
Proceeds from exercise of options...        154,000           --      240,240           --            --       394,240
Private placement sale of stock.....        662,500           --    1,987,500           --            --     2,650,000
                                        -----------  -----------  -----------   ----------   -----------  ------------

Balance at December 31, 1998........      6,835,940     (428,000)   2,576,849    2,394,590       100,315    11,479,694
Net income 1999.....................             --           --           --    1,265,774            --     1,265,774
Unrealized losses on available-
   for-sale securities, net of
   reclassification adjustment,
   net of tax of $479,159...........             --           --           --           --      (887,711)     (887,711)
                                                                                                          ------------
Comprehensive income................             --           --           --           --            --       378,063
                                                                                                          ------------
Proceeds from sale of common
   stock to 401(k) plan.............         87,670           --      263,010           --            --       350,680
Proceeds from exercise of options...         22,000           --       33,243           --            --        55,243
Compensation on options granted.....             --           --      157,094           --            --       157,094
                                        -----------  -----------  -----------   ----------   -----------  ------------

BALANCE AT DECEMBER 31, 1999........      6,945,610     (428,000)   3,030,196    3,660,364      (787,396)   12,420,774
NET INCOME 2000.....................             --           --           --    1,629,431            --     1,629,431
UNREALIZED GAINS ON AVAILABLE-
   FOR-SALE SECURITIES, NET OF
   RECLASSIFICATION ADJUSTMENT,
   NET OF TAX OF $425,490...........             --           --           --           --       784,302       784,302
                                                                                                          ------------
COMPREHENSIVE INCOME................             --           --           --           --            --     2,413,733
                                                                                                          ------------
PURCHASE OF TREASURY STOCK..........             --   (1,827,205)          --           --            --    (1,827,205)
CHANGE OF PAR VALUE FROM $5.00
   TO $0.01.........................     (6,917,828)          --    6,917,828           --            --            --
PUBLIC OFFERING SALE OF STOCK, NET
   OF ISSUANCE COSTS................          3,066           --    4,359,081           --            --     4,362,147
PROCEEDS FROM SALE OF COMMON
   STOCK TO 401(K) PLAN.............            242           --      292,596           --            --       292,838
PROCEEDS FROM EXERCISE OF OPTIONS...             12           --        7,188           --            --         7,200
                                        -----------  -----------  -----------   ----------   -----------  ------------

BALANCE AT DECEMBER 31, 2000........    $    31,102  $ 2,255,205  $14,606,889   $5,289,795   $    (3,094) $ 17,669,487
                                        ===========  ===========  ===========   ==========   ===========  ============
</TABLE>


                 See notes to consolidated financial statements

                                       F-5
<PAGE>   49


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                       2000               1999              1998
                                                                 ----------------   ---------------    --------------
<S>                                                              <C>                <C>                <C>
OPERATING ACTIVITIES
   Net income.................................................   $      1,629,431   $     1,265,774    $    1,208,231
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation, amortization, and accretion, net...........            556,373           473,259           188,653
     Provision for loan losses................................            921,940           880,000           300,000
     Deferred tax (benefit)...................................            110,343          (117,947)          (63,000)
     Realized security (gains) losses, net....................             10,774            (9,430)          (15,950)
     Increase in cash surrender value on life insurance.......           (110,062)          (29,856)          (29,823)
     Increase in accrued interest receivable..................           (712,093)         (422,385)         (122,861)
     Increase in accrued interest payable.....................            545,908           150,105            46,854
     Other....................................................            334,278          (348,944)         (238,959)
                                                                 ----------------   ---------------    --------------
       NET CASH PROVIDED BY OPERATING ACTIVITIES..............          3,286,892         1,840,576         1,273,145
                                                                 ----------------   ---------------    --------------

INVESTING ACTIVITIES
   Proceeds from sales of securities available-for-sale.......         10,282,289         3,572,134         9,515,761
   Proceeds from sales of securities held-to-maturity.........                 --           834,523                --
   Proceeds from maturity, calls and paydown of
     securities available-for-sale............................          1,151,386         9,251,517        11,597,023
   Proceeds from maturity, calls and paydown of
     securities held-to-maturity..............................                 --           250,514               594
   Purchase of securities available-for-sale..................         (8,405,098)      (20,815,665)      (23,834,942)
   Purchase of securities held-to-maturity....................                 --          (670,762)       (1,091,138)
   Net increase in loans to customers.........................        (45,726,054)      (39,991,882)      (21,786,395)
   Capital expenditures, net..................................         (3,230,277)         (250,252)         (548,857)
   Proceeds from disposition of foreclosed real estate........                 --                --           113,500
   Purchase of life insurance plan............................                 --        (1,500,000)               --
   Cash received in bank acquisition, net.....................                 --                --        10,721,749
                                                                 ----------------   ---------------    --------------
       NET CASH USED IN INVESTING ACTIVITIES..................        (45,927,754)      (49,319,873)      (15,312,705)
                                                                 ----------------   ---------------    --------------

FINANCING ACTIVITIES
   Net increase (decrease) in demand deposits, NOW
     accounts, and savings accounts...........................          1,670,288        (4,602,526)       19,557,448
   Net increase in certificates of deposit....................         25,768,879        27,470,704         6,413,648
   Net increase (decrease) in short-term borrowings...........         (3,288,652)        3,628,231        (1,749,785)
   Issuance of long-term debt.................................         38,600,000         9,000,000         7,007,143
   Repayment of long-term debt................................        (21,026,191)       (3,042,857)       (1,320,000)
   Issuance of common stock...................................          4,662,185           542,974         3,354,868
   Purchase of treasury stock.................................         (1,827,205)               --          (154,000)
                                                                 ----------------   ---------------    --------------
       NET CASH PROVIDED BY FINANCING ACTIVITIES..............         44,559,304        32,996,526        33,109,322
                                                                 ----------------   ---------------    --------------

Net increase (decrease) in cash and cash equivalents..........          1,918,442       (14,482,771)       19,069,762

Cash and cash equivalents at beginning of year................          9,798,524        24,281,295         5,211,533
                                                                 ----------------   ---------------    --------------

CASH AND CASH EQUIVALENTS AT END OF YEAR......................   $     11,716,966   $     9,798,524    $   24,281,295
                                                                 ================   ===============    ==============
</TABLE>


                 See notes to consolidated financial statements

                                       F-6
<PAGE>   50


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of
Appalachian Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries:
Gilmer County Bank ("GCB") and Appalachian Community Bank ("ACB") (formerly
known as First National Bank of Union County) (referred to herein collectively
as the "Banks"). In January 2000, Appalachian Information Management, Inc.
("AIM") was formed as a wholly-owned subsidiary of GCB. AIM provides in-house
data services to the Banks and offers data processing services to other
institutions. Prior to November 1998, Appalachian Community Bank operated as a
wholly-owned subsidiary bank of Century South Banks, Inc. The Company was formed
in May 1996 for the purpose of acquiring all the outstanding stock of Gilmer
County Bank, and operating as a bank holding company. The acquisition of GCB was
accounted for as a pooling of interests. The acquisition of ACB was accounted
for as a purchase. All significant intercompany transactions and balances have
been eliminated in consolidation. Unless otherwise indicated herein, the
financial results of the Company refer to the Company and the Banks on a
consolidated basis. The Banks provide a full range of banking services to
individual and corporate customers in North Georgia and the surrounding areas.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Securities

Securities are classified as either held-to-maturity, available-for-sale or
trading.

Held-to-maturity securities are securities for which management has the ability
and intent to hold on a long-term basis or until maturity. These securities are
carried at amortized cost, adjusted for amortization of premiums and accretion
of discount, to the earlier of the maturity or call date.

Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.

Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.

Realized and unrealized gains and losses are based on the specific
identification method.

Declines in the fair value of individual held-to maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.

The Company has no trading securities.


                                      F-7
<PAGE>   51

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Loans

Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and unearned discounts.

Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.

Loan origination and commitment fees, as well as certain origination costs, when
material, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method.

Allowance for Possible Loan Losses

A loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans which consist of residential mortgages and consumer loans are
evaluated collectively and reserves are established based on historical loss
experience.

The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is determined
to be uncollectable, the portion deemed uncollectable is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.

Management's periodic evaluation of the adequacy of the allowance is based on
the Banks' past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and an analysis of current economic
conditions. While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken into
account the views of its regulators and the current economic environment; there
can be no assurance that in the future the Banks' regulators or its economic
environment will not require further increases in the allowance.


                                      F-8
<PAGE>   52

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Income Recognition on Impaired and Nonaccrual Loans

Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well collateralized and in the process
of collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.

Loans may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.

While a loan is classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 2000, 1999 and 1998.

Premises and Equipment

Land is carried at cost. Other premises and equipment are carried at cost net of
accumulated depreciation. Depreciation is computed using the straight-line and
the declining balance methods based principally on the estimated useful lives of
the assets. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized. Gains and losses on dispositions are
included in current operations.

Foreclosed Real Estate

Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.

At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
these assets are carried at the lower of their new cost basis or fair value less
cost to sell.

Costs incurred in maintaining foreclosed real estate and subsequent adjustments
to the carrying amount of the property are included in income (loss) on
foreclosed real estate.


                                      F-9
<PAGE>   53

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Income Taxes

Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of the allowance for loan
losses and accumulated depreciation. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets and liabilities are reflected at income tax rates
applicable to the period in which the deferred tax assets or liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes. The Company files consolidated income tax returns with its
subsidiaries.

Stock-Based Compensation

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation; which defines a fair value based method of accounting for an
employee stock option plan. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and stock-based
non-employee compensation. These transactions must be accounted for based on the
fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Under the fair value
based method, compensation is measured at the grant date based on the value of
the award and is recognized over the service period, which is usually the
vesting period. However, SFAS No. 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No, 25, Accounting for Stock Issued to
Employees. The Company has elected to continue its reporting of stock-based
compensation in accordance with the provisions of APB Opinion No. 25. The
adoption of this statement did not have a material effect on the Company's
consolidated financial statements.

Employee Benefit Plan

The Company has a 401(k) profit-sharing plan covering substantially all of its
employees. Eligible participating employees may elect to contribute tax-deferred
contributions. Company contributions to the plan are determined by the board of
directors.

Intangibles

Intangibles consist primarily of legal, organizational costs and goodwill.
Organizational costs are generally amortized over 5 years using the
straight-line method. The goodwill intangible represents a premium paid on the
purchase of assets and deposit liabilities. The asset is stated at cost, net of
accumulated amortization, which is provided using the straight-line method over
the estimated useful life of 20 years.

Off Balance Sheet Financial Instruments

In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.

The Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from an available line of up to
$5.8 million and a line of credit with the Federal Home Loan Bank of up to
$34,094,216 of which $4,156,121 is available and unused.


                                      F-10
<PAGE>   54

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Segment Information

All of the Company's offices offer similar products and services, are located in
the same geographic region, and serve the same customer segments of the market.
As a result, management considers all units as one operating segment and
therefore feels that the basic consolidated financial statements and related
footnotes provide details related to segment reporting.

Reclassifications

Certain amounts in 1999 and 1998 have been reclassified to conform with the 2000
presentation.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board 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, amended as to effective date by SFAS
No. 137, is effective for financial statements for periods beginning after June
15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of SFAS No. 133. The adoption of SFAS No. 133, as
amended by SFAS No. 138 did not have a material impact on the Company's
consolidated financial statements.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - a replacement
of FASB Statement No. 125. While SFAS No. 140 carries over most of the
provisions of SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, it provides new standards for
reporting financial assets transferred as collateral and new standards for the
derecognition of financial assets, in particular transactions involving the use
of special purpose entities. SFAS No. 140 also prescribes additional disclosures
for collateral transactions and for securitization transactions accounted for as
sales. The new collateral standards and disclosure requirements are effective
for fiscal years ending after December 15, 2000, while the new standards for the
derecognition of financial assets are effective for transfers made after March
31, 2001. The adoption of this statement did not have a material effect on the
Company's consolidated financial statements.


                                      F-11
<PAGE>   55

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Earnings per Common Share

The Company adopted SFAS No. 128, Earnings Per Share, on December 31, 1997. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation.

<TABLE>
<CAPTION>
                                                                                   2000          1999          1998
                                                                                -----------   -----------   -----------

<S>                                                                               <C>           <C>           <C>
Weighted average of common shares outstanding...............................      2,755,255     2,652,392     2,332,850
Effect of dilutive options..................................................        213,671       194,658       109,102
                                                                                ------------  -----------   -----------
Weighted average of common shares outstanding effected for dilution.........      2,968,926     2,847,050     2,441,952
                                                                                ============  ===========   ===========
</TABLE>

In April 2000 and May 1998, the Company issued 2-for-1 stock split's. All per
share amounts included in these consolidated financial statements have been
retroactively adjusted to give effect to these split's.

Comprehensive Income

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The statement
requires that an enterprise classify items of other comprehensive income by
their nature in the financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of a statement of financial condition.
Comprehensive income is generally defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.

Comprehensive income is the total of net income and all other non-owner changes
in equity. Items that are to be recognized under accounting standards as
components of comprehensive income are displayed in statements of shareholders'
equity.

In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid double counting items that are displayed as part of net income
for a period that also had been displayed as part of other comprehensive income
in that period or earlier periods. The disclosure of the reclassification
amounts and other details of other comprehensive income are as follows:


                                      F-12
<PAGE>   56


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                     -----------------------------------------------------
                                                         2000                  1999                 1998
                                                     -----------           -----------           ---------
<S>                                                  <C>                   <C>                   <C>
Unrealized holding gains (losses)
  arising during period ...................          $ 1,199,018           $(1,357,440)          $ 155,080
Reclassification adjustments for (gains)
  losses included in net income ...........               10,774                (9,430)            (15,950)
                                                     -----------           -----------           ---------
Net unrealized gains (losses) .............            1,209,792            (1,366,870)            139,130
Income tax related to items of other
  comprehensive income ....................             (425,490)              479,159             (48,588)
                                                     -----------           -----------           ---------

Other comprehensive income (loss) .........          $   784,302           $  (887,711)          $  90,542
                                                     ===========           ===========           =========
</TABLE>

Statements of Cash Flows

The Company includes cash, due from banks, and certain cash equivalents in
preparing the consolidated statements of cash flows. The following is
supplemental disclosure to the statements of cash flows for the three years
ended December 31, 2000.

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                            -------------------------------------------------------
                                                               2000                  1999                  1998
                                                            -----------          -----------           ------------
   <S>                                                      <C>                  <C>                   <C>
   Cash paid during the year for interest ...........       $12,779,345          $ 8,988,666           $ 6,451,365

   Cash paid during the year for income taxes .......           603,000              369,400               632,799

   Non-cash Disclosures:

   Loans transferred to foreclose real estate .......           147,423                   --               223,056

   Net increase (decrease) in unrealized gains and
     losses on securities available-for-sale ........         1,209,792           (1,366,870)              139,130

   Proceeds from sales of foreclosed real estate
     financed through loans .........................                --                   --               109,556

   Assets acquired in business combination ..........                --                   --            29,977,439

   Liabilities assumed in business combination ......                --                   --            43,035,046

   Securities transferred from held-to-maturity
     portfolio to available-for-sale portfolio ......         5,799,682                   --                    --

   Change in par value from $5.00 per
     share to $0.01 per share .......................         6,917,828                   --                    --

   Transfer of stock to 401(k) ......................             4,165                   --                    --
</TABLE>


                                      F-13
<PAGE>   57

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 2 - BUSINESS COMBINATION

On December 1, 1998 the Company purchased First National Bank of Union County, a
wholly-owned subsidiary of Century South Banks, Inc., for $6,100,000. Assets of
approximately $46,789,991 were acquired with approximately $43,035,046 in
liabilities, resulting in a goodwill intangible of approximately $2,345,055.
Amortization of this goodwill is provided on the straight-line basis over a
period of twenty years.

The following is summary operating information for Appalachian Bancshares, Inc.
showing the effect of the business combination described in the preceding
paragraph for the year ended December 31, 1998.

<TABLE>
<CAPTION>
                                                                 As               Effect of             Pro Forma
                                                              Reported            Purchase               Results
                                                            -----------          -----------           -----------
<S>                                                         <C>                  <C>                   <C>
As of December 31, 1998:
   Interest income ...............................          $11,270,992          $ 3,430,926           $14,701,918
   Interest expense ..............................            6,498,219            1,800,728             8,298,947
   Net interest income ...........................            4,772,773            1,630,198             6,402,971
   Provision for loan losses .....................              300,000               31,331               331,331
   Noninterest income ............................              528,921              309,282               838,203
   Noninterest expense ...........................            3,221,213            1,628,913             4,850,126
   Provision (benefit) for income taxes ..........              572,250               69,000               641,250
   Net income (loss) .............................            1,208,231              210,236             1,418,467
</TABLE>

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS

The Company is required to maintain average reserve balances either in vault
cash or on deposit with the Federal Reserve Bank. At December 31, 2000 and 1999,
the average amount of the required reserves was $1,390,000 and $1,163,000,
respectively.

NOTE 4 - SECURITIES

The carrying amounts of securities as shown in the consolidated statement of
financial condition of the Company and their approximate fair values at December
31, 2000 and 1999 are presented below.

<TABLE>
<CAPTION>
                                                                      Gross             Gross           Estimated
                                                  Amortized        Unrealized        Unrealized            Fair
                                                     Cost             Gains            Losses              Value
                                                 -----------       ----------       -----------        -----------
<S>                                              <C>                <C>             <C>                <C>
SECURITIES AVAILABLE-FOR-SALE

DECEMBER 31, 2000:
   U.S. GOVERNMENT AND AGENCY SECURITIES ...     $16,622,308        $ 67,276        $   131,256        $16,558,328
   STATE AND MUNICIPAL SECURITIES ..........       8,203,109          98,184             25,479          8,275,814
   MORTGAGE-BACKED SECURITIES ..............       6,160,758          31,351             43,217          6,148,892
   EQUITY SECURITIES .......................       1,557,600              --                 --          1,557,600
                                                 -----------        --------        -----------        -----------
                                                 $32,543,775        $196,811        $   199,952        $32,540,634
                                                 ===========        ========        ===========        ===========
</TABLE>


                                      F-14
<PAGE>   58

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 4 - SECURITIES - CONTINUED

<TABLE>
<S>                                             <C>                <C>               <C>                <C>
December 31, 1999:
   U.S. government and agency securities...     $17,628,263        $       --        $   785,736        $16,842,527
   State and municipal securities .........       4,985,020             7,538            275,004          4,717,554
   Mortgage-backed securities .............       6,407,795             2,013            161,743          6,248,065
   Equity securities ......................         728,100                --                 --            728,100
                                                -----------        ----------        -----------        -----------
                                                $29,749,178        $    9,551        $ 1,222,483        $28,536,246
                                                ===========        ==========        ===========        ===========
</TABLE>

SECURITIES HELD-TO-MATURITY

<TABLE>
<S>                                             <C>                <C>               <C>                <C>
December 31, 1999:
   State and municipal securities..........     $ 5,799,963        $   18,999        $   196,665        $ 5,622,297
                                                ===========        ==========        ===========        ===========
</TABLE>

At December 31, 2000, the Company's available-for-sale securities reflected net
unrealized losses of $3,141, which resulted in a decrease in stockholders'
equity of $3,094, net of deferred tax liability. At December 31, 1999, the
Company's available-for-sale securities reflected net unrealized losses of
$1,212,932 which resulted in a decrease in stockholders' equity of $787,396, net
of deferred tax benefit.

During the first quarter of 2000, the Company transferred at fair market value
all held-to-maturity securities into the available-for-sale category. The
carrying value at the date of transfer was $5,799,963 with an approximate fair
market value of $5,622,297.

The contractual maturities of securities available-for-sale at December 31,
2000, are shown as follows. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                    Amortized            Estimated
                                                       Cost              Fair Value
                                                   ------------         ------------
<S>                                                <C>                  <C>
As of December 31, 2000:

Securities Available-for-Sale:
   Due in one year or less ..................      $    753,349         $    756,408
   Due after one year through five years ....         3,269,525            3,255,450
   Due after five years through ten years ...        17,870,862           17,870,457
   Due after ten years ......................         9,092,439            9,130,719
   Equity securities ........................         1,557,600            1,557,600
                                                   ------------         ------------
                                                   $ 32,543,775         $ 32,540,634
                                                   ============         ============
</TABLE>

Mortgage-backed securities have been included in the maturity tables based upon
guaranteed payoff date of each security.


                                      F-15
<PAGE>   59

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 4 - SECURITIES - CONTINUED

Gross realized gains and losses on the sale of securities available-for-sale for
each of the three years in the period ended December 31, 2000, were as follows:

<TABLE>
<CAPTION>
                                                                   2000       1999        1998
                                                                 --------   --------    --------
<S>                                                              <C>        <C>         <C>
Gross realized gains..........................................   $ 10,519   $ 11,829    $ 15,956
Gross realized losses.........................................     21,293      2,399           6
</TABLE>

Other securities include a restricted investment in Federal Home Loan Bank
stock, which must be maintained to secure the available lines of credit. The
amount of investment in this stock amounted to $1,557,600 and $728,100 at
December 31, 2000 and 1999, respectively.

The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $19,076,000 and $19,114,000 at
December 31, 2000 and 1999.

NOTE 5 - LOANS

The Company grants loans to customers primarily in the North Georgia area. The
major classifications of loans as of December 31 were as follows:

<TABLE>
<CAPTION>
                                                      2000                    1999
                                                --------------          --------------
<S>                                             <C>                     <C>
Commercial, financial and agricultural          $   36,320,462          $   35,374,820
Real estate - construction                          22,056,849              13,941,428
Real estate - mortgage                             136,717,781             103,413,224
Consumer                                            17,254,354              15,025,954
Other loans                                          1,774,430               1,350,446
                                                --------------          --------------
                                                   214,123,876             169,105,872
Allowance for loan losses                           (2,210,603)             (1,849,290)
                                                --------------          --------------

Net loans                                       $  211,913,273          $  167,256,582
                                                ==============          ==============
</TABLE>

Total loans which the Company considered to be impaired at December 31, 2000 and
1999, were $385,000 and $344,000, respectively. All of these loans were on
nonaccrual status and had related allowances of $57,750 and $51,600,
respectively. Impaired loans consisted primarily of commercial loans as of
December 31, 2000 and 1999. The average recorded investment in impaired loans
for the years ended December 31, 2000 and 1999 was approximately $365,000 and
$174,000, respectively. No material amount of interest income was recognized on
impaired loans for the years ended December 31, 2000 and 1999. For the years
ended December 31, 2000 and 1999, the difference between gross interest income
that would have been recorded in such period if the nonaccruing loans had been
current in accordance with their original terms and the amount of interest
income on those loans that was included in such period's net income was
negligible.

The Company has no commitments to loan additional funds to the borrowers of
nonaccrual loans.


                                      F-16
<PAGE>   60

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 6 - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for each of the three years ended
December 31 were as follows:

<TABLE>
<CAPTION>
                                          2000                  1999                  1998
                                      ------------          ------------          ------------
<S>                                   <C>                   <C>                   <C>
Balance at beginning of year          $  1,849,290          $  1,686,395          $    929,590

Charge-offs                               (591,410)             (760,827)             (136,222)
Recoveries                                  30,783                43,722                34,947
                                      ------------          ------------          ------------
   Net charge-offs                        (560,627)             (717,105)             (101,275)

Addition due to acquisition                     --                    --               558,080

Provision for loan losses                  921,940               880,000               300,000
                                      ------------          ------------          ------------

Balance at end of year                $  2,210,603          $  1,849,290          $  1,686,395
                                      ============          ============          ============
</TABLE>

NOTE 7 - PREMISES AND EQUIPMENT

Premises and equipment were as follows:

<TABLE>
<CAPTION>
                                            2000                1999
                                         ----------          ----------
<S>                                      <C>                 <C>
Land                                     $  846,558          $  770,932
Buildings and improvements                3,818,523           2,539,187
Furniture and equipment                   3,766,248           1,933,862
                                         ----------          ----------
                                          8,431,329           5,243,981
Less allowance for depreciation           1,815,977           1,366,562
                                         ----------          ----------

                                         $6,615,352          $3,877,419
                                         ==========          ==========
</TABLE>

The provisions for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 2000, 1999 and 1998, were $472,609,
$312,865 and $177,407, respectively.

NOTE 8 - DEPOSITS

The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 2000 and 1999 were
$39,542,067 and $38,280,680, respectively. Time deposits of less than $100,000
totaled $91,222,506 and $66,715,014 at December 31, 2000 and 1999, respectively.


                                      F-17
<PAGE>   61

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 8 - DEPOSITS - CONTINUED

The maturities of time certificates of deposit and other time deposits issued by
the Company at December 31, 2000, are as follows:

<TABLE>
<CAPTION>

                                                                                                           Time
                                                                                                        Certificates
           Years ending December 31,                                                                     of Deposit
           -------------------------                                                                   ------------
           <S>                                                                                         <C>
                      2001.........................................................................    $ 89,737,422
                      2002.........................................................................      34,698,045
                      2003.........................................................................       5,408,965
                      2004.........................................................................         779,354
                      2005.........................................................................         140,787
                                                                                                       ------------

                                                                                                       $130,764,573
                                                                                                       ============
</TABLE>

NOTE 9 - SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased and securities sold
under agreements to repurchase. Securities sold under agreements to repurchase
are reflected at the amount of cash received in connection with the transaction.

Information concerning securities sold under agreements to repurchase is
summarized as follows:

<TABLE>
<CAPTION>
                                                                                      2000                 1999
                                                                                   ----------           ----------
<S>                                                                                <C>                  <C>
Average balance during the year                                                    $2,522,820           $2,071,713
Average interest rate during the year                                                    3.94%                3.96%
Maximum month-end balance during the year                                          $3,117,584           $3,679,074


U.S. Government and agency securities and municipal securities underlying
     the agreements at year end:

Carrying value                                                                     $3,180,498           $3,316,406
Estimated fair value                                                                3,180,498            3,316,406
</TABLE>


                                      F-18
<PAGE>   62

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 10 - LONG-TERM DEBT

At December 31, 2000 and 1999, the Company had notes payable totaling
$34,538,095 and $16,964,286, respectively.

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                                                2000            1999
                                                                                            ------------    ------------
<S>                                                                                         <C>             <C>
Notes payable on line of credit at FHLB, with varying maturities; from October
   2002 through  October  2008,  interest rate varies from 5.27% to 7.65%, secured
   by residential mortgages.............................................................    $ 29,938,095    $ 13,364,286

Note payable to another  financial  institution,  interest at prime less 0.75%;
   secured by stock of Gilmer  County Bank and Appalachian Community Bank...............              --       3,600,000

Note payable to another financial institution, interest at prime less 0.25%;
   interest paid quarterly with principal paid at maturity, secured by 568,000
   shares of Gilmer County Bank and 75,000 shares of Appalachian Community
   Bank.................................................................................       4,600,000              --
                                                                                            ------------    ------------

                                                                                            $ 34,538,095    $ 16,964,286
                                                                                            ============    ============
</TABLE>

Maturities of long-term debt following December 31, 2000, are as follows:

<TABLE>
           <S>                                                                                              <C>
           Years ending December 31,
                      2001.........................................................................         $  8,884,524
                      2002.........................................................................           11,442,857
                      2003.........................................................................            5,542,857
                      2004.........................................................................            3,342,857
                      2005.........................................................................            3,775,000
                      Thereafter...................................................................            1,550,000
                                                                                                            ------------
                                                                                                            $ 34,538,095
                                                                                                            ============
</TABLE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 11 - SHAREHOLDERS' EQUITY

The board of directors of any state-chartered bank in Georgia may declare and
pay cash dividends on its outstanding capital stock without any request for
approval of the Bank's regulatory agency if the following conditions are met:

1. Total classified assets at the most recent examination of the Bank do not
exceed 80% of equity capital.

2. The aggregate amount of dividends declared in the calendar year does not
exceed 50% of the prior year's net income.

3. The ratio of equity capital to adjusted assets shall not be less than 6%.

As of December 31, 2000, the Banks could declare dividends of approximately
$1,098,000 without regulatory consent, subject to the Banks' compliance with
regulatory capital restrictions. It is anticipated that any such dividends will
be used for the payment of long-term debt service.


                                      F-19
<PAGE>   63

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 11 - SHAREHOLDERS' EQUITY - CONTINUED

In April 2000 and May 1998, the Company issued 2-for-1 stock split's. All per
share amounts included in these consolidated financial statements have been
retroactively adjusted to give effect to these split's.

In 2000, the Company issued 24,192 shares of stock to its ESOP plan for
$292,838. Of this amount $242 was allocated to common stock and $292,596 to
capital surplus. The Company also purchased 165,000 shares of common stock for
$1,827,705, which is reflected as treasury stock, at cost, in shareholder's
equity. During 2000, the Company sold 306,612 shares of stock in a public
offering for $4,599,190, net of issuance costs, of which $3,066 was allocated to
common stock and $4,596,124 to capital surplus. In addition, 1,200 options were
exercised for an amount equaling $7,200, including tax benefit, of which $12 was
allocated to common stock and $7,188 to capital surplus.

In 1999, the Company sold 17,534 shares of stock to its ESOP plan for $350,680.
Of this amount, $87,670 was allocated to common stock and $263,010 to capital
surplus. The Company also recorded an increase of $157,094 in capital surplus
related to the issuance of compensatory options. This capital increase was
reflected as compensation in the consolidated statement of income for the year
ended December 31, 1999. In addition, 4,400 options were exercised for an amount
equaling $55,243, including tax benefit, of which $22,000 was allocated to
common stock and $33,243 to capital surplus,.

The Company is also required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. The Company's
ratios as of December 31, 2000 and 1999 are disclosed in note 17 following.

NOTE 12 - OTHER OPERATING EXPENSES

Other operating expenses consist of the following:

<TABLE>
<CAPTION>
                                              2000                1999                1998
                                           ----------          ----------          ----------
<S>                                        <C>                 <C>                 <C>
Professional fees                          $  426,710          $  412,218          $  220,515
Advertising                                   418,125             308,819             203,021
Director and committee fees                   379,542             226,983             125,686
Stationery and supplies                       262,175             252,688             166,137
Data processing                               218,669             375,061             136,256
Postage                                       132,150             131,342              89,354
Insurance                                     123,827              80,860              53,554
Amortization                                  117,747             117,668              20,894
Checking account expense                       66,769              62,932              40,921
Correspondent bank charges                     58,592              45,368              35,458
Taxes and licenses                             50,080              63,715              46,788
Dues and subscriptions                         29,374              19,368              15,241
Education                                      24,760              22,642              15,848
Other                                         474,031             203,513             128,957
                                           ----------          ----------          ----------

   Total other operating expenses          $2,782,551          $2,323,177          $1,298,630
                                           ==========          ==========          ==========
</TABLE>


                                      F-20
<PAGE>   64

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - INCOME TAXES

Federal and state income taxes receivable as of December 31, 2000 and 1999
included in other assets were as follows:

<TABLE>
<CAPTION>
                                                                         2000                 1999
                                                                      ----------           ----------
<S>                                                                   <C>                  <C>
Current
   Federal .................................................          $   50,375           $  189,285
   State ...................................................              19,589               39,114

</TABLE>

The components of the net deferred income tax asset included in other assets are
as follows:

<TABLE>
<CAPTION>
                                                                         2000                 1999
                                                                      ----------           ----------
<S>                                                                   <C>                  <C>
Deferred tax asset:
   Federal .................................................          $  611,127           $  968,552
   State ...................................................              69,158              106,299
                                                                      ----------           ----------
     Total deferred income tax asset .......................             680,285            1,074,851
                                                                      ----------           ----------
Deferred tax liability:
   Federal .................................................            (204,810)             (75,991)
   State ...................................................             (19,153)              (6,705)
                                                                      ----------           ----------
     Total deferred income tax liability ...................            (223,963)             (82,696)
                                                                      ----------           ----------
Net deferred tax asset .....................................          $  456,322           $  992,155
                                                                      ==========           ==========
</TABLE>

The tax effects of each type of income and expense item that gave rise to
deferred taxes are:

<TABLE>
<CAPTION>
                                                                         2000                 1999
                                                                      ----------           ----------
<S>                                                                   <C>                  <C>
Net unrealized gains on securities available-for-sale ......          $       47           $  425,537
Depreciation ...............................................            (132,061)             (82,696)
Allowance for loan losses ..................................             628,103              534,178
Deferred compensation ......................................              52,135               91,064
Officers life insurance ....................................             (90,380)                  --
Other ......................................................              (1,522)              24,072
                                                                      ----------           ----------

                                                                      $  456,322           $  992,155
                                                                      ==========           ==========
</TABLE>

The components of income tax expense for the years 2000, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                                        2000               1999                1998
                                                                      --------          ---------           ---------
<S>                                                                   <C>               <C>                 <C>
Current
   Federal .................................................          $741,910          $ 292,595           $ 597,500
   State ...................................................            19,525            (35,946)             37,750
Deferred
   Federal .................................................            97,137            (54,741)            (63,000)
   State ...................................................            13,206            (63,206)                 --
                                                                      --------          ---------           ---------

                                                                      $871,778          $ 138,702           $ 572,250
                                                                      ========          =========           =========
</TABLE>


                                      F-21
<PAGE>   65

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 13 - INCOME TAXES - CONTINUED

Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 2000, 1999 and 1998 of approximately $(3,663), $3,206 and
$5,423, respectively.

The principal reasons for the difference in the effective tax rate and the
federal statutory rate are as follows for the years ended December 31, 2000,
1999 and 1998.

<TABLE>
<CAPTION>
                                                  2000              1999              1998
                                                 ------            ------            ------
<S>                                              <C>               <C>               <C>
Statutory federal income tax rate                  34.0%             34.0%             34.0%

Effect on rate of:
   Tax-exempt securities                           (5.8)            (12.8)             (7.2)
   Tax-exempt loans                                (0.8)             (0.9)             (1.1)
   Interest expense disallowance                    1.1               2.3               1.7
   State income tax, net of federal tax             1.0              (6.2)              1.4
   Other                                            5.4              (6.5)              3.3
                                                 ------            ------            ------

Effective income tax rate                          34.9%              9.9%             32.1%
                                                 ======            ======            ======
</TABLE>

NOTE 14 - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit, and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extension of credit that are recorded on the statement of
financial condition. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Company. Management conducts
regular reviews of these instruments on an individual customer basis, and the
results are considered in assessing the adequacy of the Company's allowance for
loan losses. Management does not anticipate any material losses as a result of
these commitments.

Following is a discussion of these commitments:

Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. As of December
31, 2000 and 1999, the Company has issued standby letters of credit of
approximately $1,946,000 and $891,000.

Loan Commitments: As of December 31, 2000 and 1999, the Company had commitments
outstanding to extend credit totaling approximately $20,578,000 and $24,260,000
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.


                                      F-22
<PAGE>   66

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 14 - COMMITMENTS AND CONTINGENCIES - CONTINUED

Litigation: The Company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims are not
material to the financial statements.

NOTE 15 - CONCENTRATIONS OF CREDIT

All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. The concentrations of credit by type of
loan are set forth in Note 5. The commitments to extend credit relate primarily
to unused real estate draw lines. Commercial and standby letters of credit were
granted primarily to commercial borrowers.

The Company maintains its cash accounts at various commercial banks in Georgia.
The total cash balances are insured by the FDIC up to $100,000. Total uninsured
balances held at other commercial banks amounted to $146,456 and $285,727 at
December 31, 2000 and 1999, respectively.

NOTE 16 - STOCK OPTION PLAN

On June 30, 2000, the Company issued 13,000 options on its shares of common
stock to staff members at an exercise price of $15.00 per share. The options
vest over a period of 5 years with a 10 year exercise period. On June 22, 1999,
the Company issued 86,000 options on its shares of common stock to staff members
at an exercise price of $6.00 per share. The options vest over a period of five
years with a 10 year exercise period.

On June 1, 1997 the Company issued a total of 572,000 options, restated for both
of the 2-for-1 stock split's, to purchase its common shares to its directors and
executive officers. Each director received 44,000 shares, the Executive Vice
President received 88,000 shares and the President received 132,000 shares. Each
of the stock option agreements contained an option price of $4.00 per share, the
market value of the shares at the time of issuance as adjusted for the stock
splits. The options vest on an equal incremental basis over a period of five
years beginning June 1, 1998.



              [The remainder of this page intentionally left blank]


                                      F-23
<PAGE>   67

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 16 - STOCK OPTION PLAN - CONTINUED

The following sets forth certain information regarding stock options for the
years ended December 31, 2000, 1999, and 1998.

Fixed Options

<TABLE>
<CAPTION>
                                                    2000                       1999                      1998
                                           ----------------------    ------------------------  -----------------------
                                                         WEIGHTED    Weighted                  Weighted
                                                         AVERAGE     Average                   Average
                                                         EXERCISE    Exercise                  Exercise
                                            SHARES        PRICE       Shares           Price    Shares           Price
                                           --------      --------    --------          ------  --------         ------
<S>                                         <C>           <C>         <C>              <C>      <C>             <C>
Outstanding at beginning of year ...        587,600       $ 4.29      510,400          $ 4.00   572,000         $ 4.00
Granted ............................         13,000        15.00       86,000            6.00        --           0.00
Exercised ..........................         (1,200)        6.00       (8,800)           4.00   (61,600)          4.00
Forfeited ..........................             --         0.00           --            0.00        --           0.00
                                           --------       ------     --------          ------  --------         ------

Outstanding at end of year .........        599,400       $ 4.52      587,600          $ 4.29   510,400         $ 4.00
                                           ========       ======     ========          ======  ========         ======

Exercisable at end of year .........        306,000       $ 4.22      158,400          $ 4.00    52,800         $ 4.00
                                           ========       ======     ========          ======  ========         ======

Weighted average fair value
   of options granted ..............       $   4.88           xx     $   6.59              xx        --             xx
                                           ========       ======     ========          ======  ========         ======
</TABLE>

Information pertaining to options outstanding at December 31, 2000, is as
follows:

<TABLE>
<CAPTION>
                                                                        Outstanding       Expiration           Options
                                                                          Number             Date            Exercisable
                                                                        -----------       ----------         -----------
<S>                                                                     <C>               <C>                <C>
Options with Exercise Price of $4.00..........................            501,600          06-01-07            272,800
Options with Exercise Price of $6.00..........................             84,800          06-22-09             33,200
Options with Exercise Price of $15.00.........................             13,000          06-30-10                 --
</TABLE>

The Company's options outstanding have a weighted average contractual life of
seven years.

If the Company had elected to recognize compensation cost for options granted in
2000, 1999, and 1998, based on the fair value of the options as permitted by
SFAS No. 123, net income and earnings per share would have reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                  2000                   1999                   1998
                                              ------------           ------------           ------------
<S>                                           <C>                    <C>                    <C>
Net Income
   As reported .....................          $  1,629,431           $  1,265,774           $  1,208,231
   Pro forma .......................             1,556,490              1,195,378              1,125,073

Basic Earnings Per Share
   As reported .....................          $       0.59           $       0.48           $       0.52
   Pro forma .......................                  0.56                   0.45                   0.48

Diluted Earnings Per Share
   As reported .....................          $       0.55           $       0.44           $       0.49
   Pro forma .......................                  0.52                   0.42                   0.46
</TABLE>


                                      F-24
<PAGE>   68

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 16 - STOCK OPTION PLAN - CONTINUED

These options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent number of shares outstanding
on a diluted basis to be greater than that used to calculate basic earnings per
share for 2000 by 213,671, 194,658 greater than that used to calculate basic
earnings per share for 1999 and 109,102 greater than that used to calculate
basic earnings per share for 1998. The dilutive effects on earnings per share
for the years ended December 31, 2000, 1999 and 1998 were $.04, $.04 and $.03,
respectively.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                                           2000               1999          1998
                                                                         -------            -------         ----
<S>                                                                      <C>                <C>             <C>
Expected dividend yield.......................................              1.90%              1.90%         --
Expected stock price volatility...............................             25.70              26.30          --
Risk-free interest rate.......................................              6.00               6.00          --
Expected life of options......................................           7 YEARS            7 years          --
</TABLE>

The effects of applying FAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board.

NOTE 17 - REGULATORY MATTERS

The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company and its subsidiary banks and the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework from prompt corrective action, the Company and its
subsidiary banks must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 Capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2000, that the Banks meet all capital adequacy requirements to which they are
subject.

As of December 31, 2000, the most recent notification from the applicable
regulatory agencies categorized Appalachian Community Bank, a subsidiary bank,
as well capitalized and Gilmer County Bank, the other subsidiary bank, as
adequately capitalized under the regulatory framework for prompt corrective
action. To remain well capitalized the Company and its subsidiary banks will
have to maintain minimum Total Capital, Tier I Capital and Tier I Leverage
ratios as set forth in the table below. There are no conditions or events since
the most recent notification that management believes have changed the Banks'
prompt corrective action categories.


                                      F-25
<PAGE>   69

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 17 - REGULATORY MATTERS - CONTINUED

The Company's and Banks actual capital amounts and ratios are also presented in
the table.

<TABLE>
<CAPTION>
                                                                                                        To Be Well Capitalized
                                                                                                            Under Prompt
                                                                              For Capital                 Corrective Action
                                               Actual                      Adequacy Purposes                  Provisions
                                       ----------------------           ----------------------          ----------------------
                                        Amount          Ratio            Amount          Ratio          Amount           Ratio
                                       -------          -----           -------          -----          -------          -----
                                                                            (in Thousands)
<S>                                    <C>               <C>            <C>               <C>           <C>              <C>
AS OF DECEMBER 31, 2000:

TOTAL CAPITAL
   CONSOLIDATED                        $17,774           8.25%          $17,242           8.00%         $21,552          10.00%
   GILMER COUNTY BANK                   15,234           9.97            12,221           8.00           15,276          10.00
   APPALACHIAN COMMUNITY BANK            7,193          11.46             5,021           8.00            6,276          10.00
TIER 1 CAPITAL
   CONSOLIDATED                         15,563           7.22             8,621           4.00           12,931           6.00
   GILMER COUNTY BANK                   13,676           8.95             6,110           4.00            9,166           6.00
   APPALACHIAN COMMUNITY BANK            6,541          10.42             2,510           4.00            3,766           6.00
TIER 1 LEVERAGE
   CONSOLIDATED                         15,563           5.72            10,887           4.00           13,608           5.00
   GILMER COUNTY BANK                   13,676           6.99             7,822           4.00            9,778           5.00
   APPALACHIAN COMMUNITY BANK            6,541           8.56             3,057           4.00            3,822           5.00

As of December 31, 1999:

Total Capital
   Consolidated                        $12,830           7.41%          $13,857           8.00%         $17,321          10.00%
   Gilmer County Bank                   11,623           9.29            10,009           8.00           12,512          10.00
   Appalachian Community Bank            4,430           9.21             3,848           8.00            4,810          10.00
Tier 1 Capital
   Consolidated                         10,981           6.34             6,929           4.00           10,393           6.00
   Gilmer County Bank                   10,295           8.23             5,005           4.00            7,507           6.00
   Appalachian Community Bank            3,909           8.13             1,924           4.00            2,886           6.00
Tier 1 Leverage
   Consolidated                         10,981           5.22             8,422           4.00           10,528           5.00
   Gilmer County Bank                   10,295           6.74             6,114           4.00            7,642           5.00
   Appalachian Community Bank            3,909           6.77             2,308           4.00            2,886           5.00
</TABLE>

NOTE 18 - EMPLOYEE BENEFIT PLAN

The Company adopted a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. The Company's contribution to the plan is
determined by the board of directors. In 1996, the plan was amended to allow
employer and employee contributions to be made in the form of cash or Company
stock. The Company made discretionary cash contributions to the plan of
approximately $219,940 in 2000, $170,000 in 1999, and $145,000 in 1998.


                                      F-26
<PAGE>   70

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 19 - LEASES

The Company has a number of operating lease agreements, involving land,
buildings and equipment. These leases are noncancellable and expire on various
dates through the year 2028. The leases provide for renewal options and
generally require the Company to pay maintenance, insurance and property taxes.
For the years ended December 31, 2000, 1999 and 1998, rental expense for
operating leases was approximately $28,891, $32,919 and $3,000, respectively.

<TABLE>
         <S>                                                                                           <C>
         Years Ending December 31,
                    2001...........................................................................    $    33,672
                    2002...........................................................................         32,530
                    2003...........................................................................         33,154
                    2004...........................................................................         33,781
                    2005...........................................................................         32,620
                    Thereafter.....................................................................        905,080
                                                                                                       -----------

                    Total minimum lease payments...................................................    $ 1,070,837
                                                                                                       ===========
</TABLE>

NOTE 20 - RELATED PARTY TRANSACTIONS

Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Company during 2000 and 1999. Such loans are made in the ordinary course of
business at normal credit terms, including interest rates and collateral and do
not represent more than a normal risk of collection. A summary of activity and
amounts outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                    2000                  1999
                                                                                 -----------           -----------
<S>                                                                              <C>                   <C>
Balance at Beginning of Year ..........................................          $ 7,748,555           $ 5,463,030
New loans .............................................................            4,228,322             2,675,721
Repayments ............................................................           (5,330,161)             (390,196)
Adjustments/changes in structure ......................................                   --                    --
                                                                                 -----------           -----------

Balance at End of Year ................................................          $ 6,646,716           $ 7,748,555
                                                                                 ===========           ===========
</TABLE>

Deposits: Deposits held from related parties were $918,285 and $2,161,315 at
December 31, 2000 and 1999, respectively.

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.


                                      F-27
<PAGE>   71

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

Securities: For securities and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.

Loans: For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.

Accrued Interest Receivable: The carrying amount of accrued interest receivable
approximates its fair value.

Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposit of similar remaining maturities.

Accrued Interest Payable: The carrying amount of accrued interest payable
approximates its fair value.

Short-term Borrowings: The fair value of short-term borrowings, including
securities sold under agreements to repurchase, is estimated to be approximately
the same as the carrying amount.

Long-Term Debt: Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Standby Letters of Credit, and Financial
Guarantees Written: The fair value of commitments and letters of credit is
estimated to be approximately the same as the notional amount of the related
commitment.



              [The remainder of this page intentionally left blank]


                                      F-28
<PAGE>   72

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The estimated fair values of the Company's financial instruments as of December
31 are as follows:

<TABLE>
<CAPTION>
                                                       2000                               1999
                                            --------------------------          --------------------------
                                            CARRYING           FAIR             Carrying            Fair
                                             AMOUNT            VALUE             Amount             Value
                                            --------          --------          --------          --------
<S>                                         <C>               <C>               <C>               <C>
                                                  (IN THOUSANDS)                      (in thousands)
FINANCIAL ASSETS
Cash and short-term investments             $ 11,717          $ 11,717          $  9,799          $  9,799
Securities                                    32,540            32,540            34,336            34,159
Loans                                        214,124           213,615           169,106           168,942
Accrued interest receivable                    2,454             2,454             1,742             1,742
                                            --------          --------          --------          --------
   TOTAL FINANCIAL ASSETS                   $260,835          $260,326          $214,983          $214,642
                                            ========          ========          ========          ========

FINANCIAL LIABILITIES
Deposits                                    $214,169          $215,358          $186,730          $187,383
Short-term borrowings                          2,845             2,848             6,134             6,134
Accrued interest payable                       1,362             1,362               816               816
Long-term debt                                34,538            34,421            16,964            16,810
                                            --------          --------          --------          --------
   TOTAL FINANCIAL LIABILITIES              $252,914          $253,989          $210,644          $211,143
                                            ========          ========          ========          ========

UNRECOGNIZED FINANCIAL INSTRUMENTS
Commitments to extend credit                $ 20,578          $ 20,578          $ 24,260          $ 24,260
Standby letters of credit                      1,946             1,946               891               891
                                            --------          --------          --------          --------
   TOTAL UNRECOGNIZED FINANCIAL
     INSTRUMENTS                            $ 22,524          $ 22,524          $ 25,151          $ 25,151
                                            ========          ========          ========          ========
</TABLE>



              [The remainder of this page intentionally left blank]


                                      F-29
<PAGE>   73

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 22 - CONDENSED PARENT INFORMATION

STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                                                          DECEMBER 31,
                                                                                                   2000                  1999
                                                                                               ------------          ------------
<S>                                                                                            <C>                   <C>
ASSETS
   Cash and due from banks ..........................................................          $     12,938          $     79,386
   Investment in Subsidiaries (equity method) eliminated upon consolidation .........            22,323,891            15,643,380
   Other assets .....................................................................                84,186               298,008
                                                                                               ------------          ------------

     TOTAL ASSETS ...................................................................          $ 22,421,015          $ 16,020,774
                                                                                               ============          ============

LIABILITIES AND SHAREHOLDERS' EQUITY
   Note payable .....................................................................          $  4,600,000          $  3,600,000
   Other liabilities ................................................................               151,528                    --
                                                                                               ------------          ------------
     Total Liabilities ..............................................................             4,751,528             3,600,000

     Total Shareholders' Equity .....................................................            17,669,487            12,420,774
                                                                                               ------------          ------------

     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .....................................          $ 22,421,015          $ 16,020,774
                                                                                               ============          ============
</TABLE>

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED DECEMBER 31,
                                                                        ----------------------------------------------------------
                                                                            2000                   1999                   1998
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
INCOME
   Interest ......................................................      $      4,496           $         --           $         --
   Dividends from subsidiaries - eliminated upon consolidation ...           700,000                350,000                500,000
                                                                        ------------           ------------           ------------
                                                                             704,496                350,000                500,000

EXPENSES
   Interest ......................................................           397,866                264,475                 93,406
   Other expenses ................................................           417,772                338,315                135,701
                                                                        ------------           ------------           ------------
                                                                             815,638                602,790                229,107
                                                                        ------------           ------------           ------------

Income before income taxes and equity in undistributed
   earnings of subsidiaries ......................................          (111,142)              (252,790)               270,893
Income tax benefits ..............................................           244,364                288,943                 42,101
                                                                        ------------           ------------           ------------

Income before equity in undistributed earnings of subsidiaries ...           133,222                 36,153                312,994

Equity in undistributed earnings of subsidiaries .................         1,496,209              1,229,621                895,237
                                                                        ------------           ------------           ------------

     NET INCOME ..................................................      $  1,629,431           $  1,265,774           $  1,208,231
                                                                        ============           ============           ============
</TABLE>


                                      F-30
<PAGE>   74

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 22 - CONDENSED PARENT INFORMATION - CONTINUED

STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                    --------------------------------------------------------
                                                                        2000                  1999                  1998
                                                                    ------------          ------------          ------------
<S>                                                                 <C>                   <C>                   <C>
OPERATING ACTIVITIES
   Net Income ............................................          $  1,629,431          $  1,265,774          $  1,208,231
   Adjustments to reconcile net income to net cash
     provided by operating activities
     Equity in undistributed income of subsidiaries ......            (1,496,209)           (1,229,621)             (895,237)
     Provision for amortization ..........................                    --                    --                20,894
     Deferred tax expense (benefit) ......................                76,618               (76,618)                   --
     Increase in accrued interest payable ................               108,739                    --                    --
     Other ...............................................               179,993              (451,345)              249,979
                                                                    ------------          ------------          ------------
       NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES               498,572              (491,810)              583,867
                                                                    ------------          ------------          ------------

INVESTING ACTIVITIES
   Acquisition of bank ...................................                    --                    --            (6,100,000)
   Capital injection in subsidiaries .....................            (4,400,000)                   --                    --
                                                                    ------------          ------------          ------------
       NET CASH USED IN INVESTING ACTIVITIES .............            (4,400,000)                   --            (6,100,000)
                                                                    ------------          ------------          ------------

FINANCING ACTIVITIES
   Proceeds from issuance of long-term debt ..............             4,600,000                    --             3,600,000
   Repayment of long-term debt ...........................            (3,600,000)                   --            (1,320,000)
   Proceeds from issuance of common stock ................             4,662,185               542,974             3,354,868
   Purchases of treasury stock ...........................            (1,827,205)                   --              (154,000)
                                                                    ------------          ------------          ------------
       NET CASH PROVIDED BY FINANCING ACTIVITIES .........             3,834,980               542,974             5,480,868
                                                                    ------------          ------------          ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .....               (66,448)               51,164               (35,265)

Cash and cash equivalents at beginning of year ...........                79,386                28,222                63,487
                                                                    ------------          ------------          ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR .................          $     12,938          $     79,386          $     28,222
                                                                    ============          ============          ============



Cash paid during the year for:
   Interest ..............................................          $    289,127          $    264,475          $     93,406
</TABLE>


                                      F-31
<PAGE>   75

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES

                        DECEMBER 31, 2000, 1999 AND 1998

NOTE 23 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Selected quarterly results of operations for the four quarters ended December 31
are as follows:

<TABLE>
<CAPTION>
                                        First            Second           Third            Fourth
                                       Quarter           Quarter         Quarter           Quarter
                                      --------          --------        --------          --------
                                                  (In Thousands Except Per Share Data)
<S>                                   <C>               <C>             <C>               <C>
2000:
TOTAL INTEREST INCOME                 $  4,742          $  5,266        $  6,087          $  5,875
TOTAL INTEREST EXPENSE                   2,835             3,214           3,689             3,587
PROVISION FOR LOAN LOSSES                  300               350             160               112
NET INTEREST INCOME AFTER
   PROVISION FOR LOAN LOSSES             1,607             1,702           2,238             2,176
SECURITIES GAINS (LOSSES)                   (7)               --               1                (5)
TOTAL NONINTEREST INCOME                   245               245             368               312
TOTAL NONINTEREST EXPENSE                1,386             1,519           1,805             1,670
INCOME TAX EXPENSE                         148                45             218               461
NET INCOME                                 311               383             584               351

PER COMMON SHARE:
   BASIC EARNINGS                         0.12              0.14            0.21              0.12
   DILUTED EARNINGS                       0.11              0.13            0.19              0.12

1999:
Total interest income                 $  3,698          $  3,975        $  4,163          $  4,303
Total interest expense                   2,109             2,200           2,346             2,484
Provision for loan losses                  150               205             285                24
Net interest income after
   provision for loan losses             1,439             1,570           1,532             1,579
Securities gains (losses)                   --                10              (2)                1
Total noninterest income                   226               186             231               193
Total noninterest expense                1,251             1,355           1,330             1,625
Income tax expense                         140               181              83              (265)
Net income                                 274               230             348               413

Per Common Share:
   Basic earnings                         0.10              0.09            0.13              0.16
   Diluted earnings                       0.09              0.08            0.12              0.15

1998:
Total interest income                 $  2,514          $  2,677        $  2,761          $  3,318
Total interest expense                   1,464             1,581           1,620             1,832
Provision for loan losses                  110                70              60                60
Net interest income after
   provision for loan losses               940             1,026           1,081             1,426
Securities gains (losses)                   --                14               1                --
Total noninterest income                   109               125             128               152
Total noninterest expense                  660               742             783             1,036
Income tax expense                         150               130             120               172
Net income                                 239               293             307               370

Per Common Share:
   Basic earnings                         0.11              0.12            0.14              0.15
         Diluted earnings .               0.10              0.12            0.12              0.15
</TABLE>


                                      F-32