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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the period ended September 30, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act for
the transition period from _____ to _____
Commission file number: 000-21383
APPALACHIAN BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
Georgia 58-2242407
(State of Incorporation) (I.R.S. Employer Identification No.)
315 Industrial Blvd.
Ellijay, Georgia 30540
(Address of principal executive offices)
(706) 276-8000
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding at November 12, 1997
----- --------------------------------
Common Stock, $5.00 par value 577,287
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
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APPALACHIAN BANCSHARES, INC.
September 30, 1997 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis or Plan of Operation. . . 7
PART II. OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . .12
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1997 December 31,
(Unaudited) 1996
------------------ ------------
<S> <C> <C>
ASSETS
Cash $ 1,143,625 $ 866,211
Due from banks 1,385,021 1,658,182
Federal funds sold 1,090,000 1,150,000
Securities available for sale 16,627,526 20,131,443
Securities held to maturity 4,032,153 2,247,479
Loans 79,283,970 64,961,742
Allowance for loan losses (856,147) (655,296)
------------ -----------
Net Loans 78,427,823 64,306,446
Premises and equipment, net 1,614,095 1,673,203
Accrued interest 1,006,076 806,811
Other assets 870,387 314,116
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TOTAL ASSETS $106,196,706 $93,153,891
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 3,255,838 $ 3,464,810
Interest-bearing 88,596,263 77,683,071
------------ -----------
TOTAL DEPOSITS 91,852,101 81,147,881
Securities sold under agreements to repurchase 6,039,279 5,283,972
Accrued interest 192,247 154,461
Long-term debt 1,000,000 700,000
Other liabilities 460,340 62,641
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TOTAL LIABILITIES 99,543,967 87,348,955
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SHAREHOLDERS' EQUITY:
Common stock ($5 par value; 20,000,000 shares authorized,
577,287 shares issued and outstanding as of September 30, 1997,
568,000 shares issued and outstanding as of December 31, 1996) 2,961,435 2,840,000
Capital surplus 3,096,485 2,829,314
Treasury stock (at cost) (274,000) 0
Accumulated earnings 871,682 168,593
Unrealized losses on investment securities available for sale,
net of deferred tax or tax benefit (2,863) (32,971)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 6,652,739 5,804,936
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $106,196,706 $93,153,891
============ ===========
See notes to financial statements.
</TABLE>
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $1,934,133 $1,441,078 $5,516,722 $3,630,804
Interest on investment securities:
Taxable securities 279,530 252,017 902,183 697,344
Nontaxable securities 49,129 0 117,326 0
Interest on federal funds sold 35,392 25,678 107,554 63,614
---------- ---------- ---------- ----------
TOTAL REVENUE FROM EARNING ASSETS 2,298,184 1,718,773 6,643,785 4,391,762
INTEREST EXPENSE:
Interest on deposits 1,254,801 947,058 3,606,407 2,359,712
Interest on federal funds purchased and
securities sold under agreements to
repurchase 0 52,721 0 159,210
Interest expense - other 92,098 0 228,860 0
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 1,346,899 999,779 3,835,267 2,518,922
NET INTEREST INCOME: 951,285 718,994 2,808,518 1,872,840
Provision for loan losses 85,000 96,000 300,000 293,000
---------- ---------- ---------- ----------
AFTER PROVISION FOR LOAN LOSSES 866,285 622,994 2,508,518 1,579,840
NONINTEREST INCOME:
Service charges on deposits 48,811 33,744 143,498 94,676
Insurance commissions 4,110 8,796 16,255 18,346
Other operating income 47,372 24,209 124,715 59,860
Investment securities gains 838 0 203 9,719
---------- ---------- ---------- ----------
TOTAL NONINTEREST INCOME 99,131 66,749 284,671 182,601
NONINTEREST EXPENSES:
Salaries and employee benefits 288,884 227,016 836,171 641,263
Occupancy expense 27,228 24,205 73,554 69,843
Furniture and equipment expense 35,392 32,026 114,263 90,365
Other operating expenses 254,947 154,272 731,113 390,101
---------- ---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 606,451 437,519 1,755,101 1,191,572
Income before income taxes 358,964 252,224 1,038,088 570,869
Income tax provision (120,000) (48,584) (335,000) (156,924)
---------- ---------- ---------- ----------
NET INCOME $ 238,964 $ 203,640 $ 703,088 $ 413,945
========== ========== ========== ==========
EARNINGS PER COMMON SHARE - PRIMARY AND
FULLY DILUTED
Net income per common share .41 .36 1.22 .73
Weighted average common shares outstanding 578,189 568,000 574,941 568,000
See notes to financial statements.
</TABLE>
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 703,088 $ 413,945
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 293,000
Provision for depreciation and amortization 124,785 89,438
Amortization of investment security premiums
and accretion of discounts 6,195 (4,591)
Deferred tax (1,475) 54,624
Realized investment security loss (gains) (203) (9,719)
Increase in accrued interest receivable (199,265) (389,978)
Increase in accrued interest payable 37,786 39,033
Purchase of key man life insurance (570,871) 0
Other 382,554 178,382
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NET CASH PROVIDED IN OPERATING ACTIVITIES 782,595 664,134
INVESTING ACTIVITIES:
Proceeds from sales and maturities of securities available for sale 6,040,735 5,948,617
Purchase of securities available for sale (2,996,019) (9,140,486)
Purchase of securities held to maturity (1,285,848) (671,226)
Net increase in loans to customers (14,421,377) (28,691,040)
Capital expenditures (49,966) (94,434)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (12,712,475) (32,648,569)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 8,657,633 12,048,983
Net increase in certificates of deposit 2,046,587 19,435,084
Net increase in securities sold under agreement to repurchase 755,307 242,014
Proceeds from sale of stock 388,608 0
Purchase of treasury stock (274,000) 0
Proceeds from notes payable 300,000 0
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,874,133 31,726,081
----------- -----------
Net decrease in cash and cash equivalents (55,747) (258,354)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,674,393 3,760,098
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,618,646 $ 3,501,744
----------- ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 3,643,020 2,479,889
Income taxes 62,278 0
</TABLE>
See notes to financial statements.
5
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APPALACHIAN BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
September 30, 1997
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Appalachian
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary, Gilmer County
Bank (the "Bank"). The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the financial
statements for Appalachian Bancshares, Inc. for the year ended December 31,
1996, and footnotes thereto included in Form 10-KSB, filed with the Securities
and Exchange Commission on March 26, 1997.
The Company was formed in May 1996 for the purpose of acquiring all the
outstanding stock of Gilmer County Bank, a Georgia banking corporation located
in Ellijay, Georgia, and operating as a bank holding company. On August 8, 1996,
Gilmer County Bank became a wholly-owned subsidiary of the Company. Unless
otherwise indicated herein, the financial results and projections of the Company
refer to the Company and the Bank on a consolidated basis, except that all
financial data prior to August 8, 1996, is for the Bank only.
NOTE B - INCOME TAXES
The effective tax rate of approximately 32 percent for the nine months
ended September 30, 1997 approximates the statutory rate less an adjustment for
the effect of tax exempt securities.
NOTE C - INVESTMENT SECURITIES
Effective May 26, 1994, the Company applied the accounting and reporting
requirements of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). This
pronouncement requires that all investments in debt securities be classified as
either "held-to-maturity" securities, which are reported at amortized cost;
trading securities, which are reported at fair value, with unrealized gains and
losses included in earnings; or "available-for-sale" securities, which are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of Shareholder's equity (net of deferred
tax effect).
At September 30, 1997, the Company had net unrealized losses of $4,338 in
available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in Shareholder's equity of $2,863, net of deferred tax
liability. There were no trading securities. The net decrease in Shareholder's
equity as a result of the SFAS 115 adjustment from December 31, 1996 to
September 30, 1997 was $30,108.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion is intended to assist in an understanding of the Company's
financial condition and results of operations. This analysis should be read in
conjunction with the financial statements and related notes appearing elsewhere
herein and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended December 31, 1996 appearing in the
Company's Form 10-KSB filed with the Securities and Exchange Commission on March
26, 1997.
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
LOANS
Loans comprised the largest single category of the Company's earning assets
on September 30, 1997. Loans, net of unearned income and reserve for loan
losses, were 73.9 percent of total assets at September 30, 1997. Total net loans
were $78,427,823 at September 30, 1997, representing a 22 percent increase from
the December 31, 1996 total of $64,306,446. This increase reflects the continued
increase in loan demand for the Bank's market area coupled with an increase in
the Bank's market share for this area.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
Investment securities and federal funds sold decreased $1,779,243 or 7.6
percent from December 31, 1996 to September 30, 1997. Investment securities at
September 30, 1997 were $20,659,679 compared with $22,378,922 at December 31,
1996, reflecting a 7.7 percent decrease of $1,719,243. Federal funds sold were
$1,090,000 at September 30, 1997 compared to the December 31, 1996 total of
$1,150,000, a 5.2 percent decrease. The investment securities portfolio is used
to make various term investments, to provide a source of liquidity and to serve
as collateral to secure certain government deposits. Federal funds sold are
maintained as a tool in managing the daily cash needs of the Company. The
decrease in federal funds sold is the result of the Company's ability to meet
the cash needs of the Company through the use of Federal Home Loan Bank funds.
ASSET QUALITY
Asset quality is measured by three key ratios. The ratio of loan loss
allowance to total nonperforming assets (defined as nonaccrual loans, loans past
due 90 days or greater, restructured loans, nonaccruing securities, and other
real estate) increased from 9.94 to 12.4. The ratio of total nonperforming
assets to total assets remained at 0.001 and the ratio on nonperforming loans to
total loans also remained constant at 0.001 as compared to December 31, 1996.
All of these ratios remain favorable as compared with industry averages, and
management is aware of no factors which would suggest that they are prone to
erosion in future periods.
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DEPOSITS
Total deposits of $91,852,101 at September 30, 1997 increased $10,704,220
(13.2%) over total deposits of $81,147,881 at year-end 1996. Deposits are the
Company's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits decreased $208,972 or 6 percent from year-end 1996
to September 30, 1997, while interest-bearing deposits increased $10,913,192 or
14% during the same period. Time deposits of $100,000 or more increased
$1,857,000 (15.4%).
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $6,039,279 at
September 30, 1997, a $755,307 increase from the December 31, 1996 total of
$5,283,972. 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. The increased balances reflects the accumulation of
cash by the largest participant to fund an expansion program. Currently, the
trend is for these balances to decrease.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $847,803 from December 31, 1996 to September
30, 1997, due in part to net earnings of $703,088 and the decrease in unrealized
losses on securities available for sale totaling $30,108, net of deferred tax
liability. The increase was also a result of the issuance of 24,287 shares of
the Company's common stock to the Company's 401(k) plan at a price of $16.00 per
share (total purchase price $388,592). The decrease in Shareholder's equity
resulting from the purchase of Company stock by the Company on June 30, 1997
from a shareholder of the Company for a total purchase price of $252,000 (14,000
shares at $18.00 per share) was also a significant component of the change.
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 Bank's ability 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 Bank would not be able to perform the primary function of a
financial intermediary 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 Bank to meet the needs of its
customer base, but 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.
Outstanding loans that mature or re-price in one year or less, excluding
outstanding credit card debt equaled approximately $55.9 million at
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September 30, 1997. Investment securities maturing in one year or less equaled
$946,699. Other sources of liquidity include short-term investments such as
federal funds sold and maturing interest-bearing deposits with other banks.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of second quarter 1997, funds were also available through the purchase
of federal funds from correspondent commercial banks. Purchases can be made from
available lines of up to an aggregate of $2,000,000. Liquidity management
involves the daily monitoring of the sources and uses of funds to maintain an
acceptable cash position.
In an effort to maintain and improve the liquidity position of the Bank,
management made application for membership with the Federal Home Loan Bank of
Atlanta. As a member of the Federal Home Loan Bank, the Bank would improve its
ability to manage liquidity and reduce interest rate risk by having a funding
source to match longer term loans. The application received approval on April
17, 1997. The Bank received an approval to borrow up to $8,000,000. The Bank has
made three $1,000,000 draws from the available credit with the Federal Home Loan
Bank. The first draw was made on June 24, 1997, the second draw was made on
September 18, 1997 and the third draw was made on October 6, 1997.
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 and Bank's capital requirements has been provided from the proceeds
from the Bank's initial stock offering in 1994, through draws by the Company on
a line of credit with Hardwick Bank and Trust Company (described below),
through the retention of earnings and the sale of Company stock to the
Company's 401(k) plan.
Line of Credit. In November 1996, the Company obtained a $1 million
unsecured line of credit ("the Credit Agreement") with Hardwick Bank & Trust
Company (Hardwick). At December 31, 1996 the balance on the line of credit was
$700,000. The Company subsequently drew down the remaining amount in January
1997. On May 22, 1997 the Company used a portion of the proceeds from the sale
of Company stock to the Company's 401(k) plan to make a $300,000 principal
payment on the line of credit. Subsequently, on May 30, 1997 the Company made a
$300,000 draw from the line of credit to fund the repurchase of Company stock
from a shareholder of the Company (described below) and for working capital
needs. On October 29, 1997 the Company and Hardwick agreed to a modification of
the Credit Agreement. The modification increases the amount of credit available
to the Company to $1.5 million. All other terms and conditions of the original
agreement remain in full force and effect. Interest on the outstanding amounts
under the line of credit is payable on a quarterly basis at the prime rate (as
defined in the Credit Agreement with Hardwick) less 3/4 of a percentage point.
The Company began making interest payments on April 1, 1997. Principal is due in
five equal annual installments beginning January 1, 1999 with the last payment
due January 1, 2003. The Credit Agreement contains certain restrictive
covenants, including but not limited to certain restrictions on (i) additional
indebtedness; (ii) creating or allowing liens on the capital stock of the Bank;
(iii) guaranteeing certain obligations of other persons; (iv) merging,
consolidating or exchanging shares with, or acquiring the stock or assets of,
any Person (as defined in the Credit Agreement); (v) payment of dividends; and
(vi) disposing of the stock of the Bank. The Company also covenanted to cause
its depository institution subsidiaries (presently only the Bank ) at all times
to be classified as "well capitalized" under FDICIA capital ratios, maintain
nonperforming assets below a specified level, and maintain a minimum ratio of
consolidated loan loss reserves to total loans. The Credit Agreement also
contains certain customary affirmative covenants.
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Federal Capital Standards. Regulatory authorities in the banking industry
are placing increased emphasis on the maintenance of adequate capital. In 1990,
new risk-based capital requirements became effective. The guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off the balance sheet. Under the guidelines,
capital strength is measured in two tiers which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. Tier 1 capital,
which consists of common equity less goodwill, amounted to 6.65 million at
September 30, 1997. 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 Risk-Based capital and was $7.51 million at September 30, 1997. The
percentage ratios as calculated under FDICIA guidelines were 8.52 percent and
9.61 percent for Tier 1 and Total Risk-Based capital, respectively, for the nine
months ended September 30, 1997. Both levels exceeded the minimum ratios of four
percent and eight percent, respectively. The Company is also subject to a
leverage capital requirement which calls for a minimum ratio of leverage
capital, as defined by regulation, to quarterly total assets of 3-5%. As of
September 30, 1997 the leverage capital ratio was 6.26%.
The Company's current capital positions exceed the new guidelines.
Management has reviewed and will continue to monitor the Bank's asset mix and
product pricing, and the loan loss allowance, which are the areas determined to
be most affected by these new requirements.
DBF Capital Requirement. In addition to the capital standards imposed by
federal banking regulators, the DBF imposed an 8% primary capital ratio on the
Bank as a condition to the approval of the 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 will continue through
the first three years of the Bank's operation, at which time the Bank will be
subject to a 6% capital ratio. The Bank reports its capital ratio to the DBF on
a monthly basis and has been in compliance for each month end during the third
quarter, however the capital ratio has fallen below the 8% level from time to
time as calculated on a daily basis. At September 30, 1996, the capital ratio as
calculated under the DBF standard was 8.0%. At October 30, 1997 the capital
ratio as calculated under the DBF standard was 8.0%.
Management closely monitors the Bank's capital ratios for day-to-day
fluctuations, which may be affected by increases in deposits or other assets. To
offset daily fluctuations in assets (primarily deposits), which may cause the
capital ratio to fall below the 8% level imposed by the DBF, the Company's
401(k) plan was amended to allow for the purchase of Company stock by the plan.
This amendment allows for additional capital to be injected into the Bank to
further the ability of the Company to maintain an adequate capital ratio. On May
22, 1997 the Company's 401(k) plan purchased 24,287 shares of the Company's
stock for $16.00 per share. Other such plans proposed, but not yet implemented
include (1) the issuance of subordinated debt securities and (2) the
implementation of a controlled growth plan to enhance profitability relative to
the Bank's asset growth.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
SUMMARY
Net earnings for the nine months ended September 30, 1997 were $703,088
compared to net earnings of $413,945 for the same period in 1996. The Company
has reported net income for each quarter since the fourth quarter of 1995. Net
interest income increased $935,678 (50%) during the first nine months of 1997,
as compared to the same period in 1996; noninterest expenses increased $563,529
(47.3%) during same period, while noninterest income increased by $102,070
(55.9%).
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NET INTEREST INCOME
Net interest income, the difference between interest earned on assets and
the cost of interest-bearing liabilities, is the largest component of the
Company's net income. Revenue from earning assets of the Company during the nine
months ended September 30, 1997 increased $2,252,023 (51.3%) from the same
period in 1996. This increase was due to the continued growth of earning assets
which averaged $95.7 million for the nine months ended September 30, 1997.
Interest expense for the nine months ended September 30, 1997 increased
$1,316,345 (52.3%) compared to the same period of 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge against current
earnings necessary to maintain the reserve for loan losses at a level which
management considers appropriate. This level is determined based upon
management's assessment of current economic condition, the composition of the
loan portfolio and the levels of nonaccruing and past due loans. The provision
for loan losses was $300,000 for the nine months ended September 30, 1997
compared to $293,000 for the same period of 1996. Charge-offs exceeded
recoveries by $99,148 for the nine months ended September 30, 1997. The reserve
for loan losses as a percent of outstanding loans, net of unearned income, was
1.08 percent at September 30, 1997 compared to 1.01 percent at year-end 1996.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1997 was
$284,671 compared to $182,601 for the same period of 1996. This increase was
primarily due to an increase in service charges on deposit accounts of $48,822
in 1997 as compared to the same period of 1996, and increases in other operating
income of $64,855. Significant components of noninterest income changed as
follows: Service charges on deposit increased $48,822 (51.2%), insurance
commissions decreased $2,091 (11.4%), gains on investment securities decreased
$9,516 (97.9%), and other operating income increased $64,855 (108.3%) to
$124,715. Increased credit card fees provided $37,088 of the increase in other
operating income, rising from $35,628 for the nine months ended September 30,
1996 to $72,716 for the same period of 1997. Earnings on the cash surrender
value of the Director's life insurance contributed $11,185 to the increase in
other operating income.
NONINTEREST EXPENSES
Noninterest expenses for the nine months ended September 30, 1997 were
$1,755,101, reflecting a 47.3 percent increase over the same period of 1996. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $836,171 for the nine months ended September 30, 1997, 30.4
percent higher than in the same period of 1996. The increase in salaries and
employee benefits are due to increased staffing for the unusually high level of
growth which has been experienced
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<PAGE> 12
since the Bank's opening on March 3, 1995. Occupancy costs increased $3,711
(5.3%), and furniture and equipment expenses rose by $23,898 (26.4%). Other
operating expenses rose by 87.4 percent to $731,113. Significant components of
other operating expenses changed as follows: professional and regulatory fees
increased $100,286 (135.1%), directors' compensation constituted an expense of
$81,478, office supply, postage and data processing fees increased $63,906
(49.2%) and insurance premiums increased $25,623 (139.2%). The continued growth
of the Bank and the Company continues to necessitate increased expenditures for
data processing and other support activities and personnel.
INCOME TAXES
The Company attempts to maximize its net income through active tax
planning. Management is attempting to reduce its tax burden by purchasing tax
exempt securities. The provision for income taxes of $335,000 for the nine
months ended September 30, 1997 increased $178,076 compared to the same period
of 1996. This increase is primarily due to lack of additional loss carryforwards
which were used in the year ended December 31, 1996.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 22, 1997, the Company purchased 1,000 shares of the
Company's common stock from two shareholders of the Company (500
shares from each shareholder). The purchase price was $22.00 per
share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
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,
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, previously filed with
the Commission and incorporated herein by
reference).
10 First Modification of Credit Agreement, dated
October 29, 1997, between the Company and Hardwick
Bank & Trust Company.
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) No reports on Form 8-K were filed by the Company during the period
covered by this Report.
12
<PAGE> 13
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: November 13, 1997
APPALACHIAN BANCSHARES, INC.
/s/ Tracy R. Newton
----------------------------------
Tracy R. Newton
President and CEO
(Duly authorized officer)
/s/ Kent W. Sanford
----------------------------------
Kent W. Sanford
Executive Vice President
(Principal financial officer)
13
<PAGE> 1
EXHIBIT 10
FIRST MODIFICATION OF CREDIT AGREEMENT
THIS MODIFICATION is made as of this 29th day of October, 1997, by and
between APPALACHIAN BANCSHARES INC., a Georgia corporation (the "Borrower"), and
HARDWICK BANK & TRUST COMPANY (the "Bank").
STATEMENT OF FACTS
Bank and Borrower are parties to that certain Credit Agreement dated
as of November 25, 1996 (the "Credit Agreement"), pursuant to which Bank has
agreed to make one or more loans from time to time to the Borrower in
accordance with the terms and conditions thereof. Bank and Borrower desire to
modify the Credit Agreement in order to increase the loan facility from
$1,000,000 to $1,500,000 in accordance with the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, Borrower and Bank do
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Credit Agreement (except as otherwise expressly defined
or limited herein) and do hereby further agree as follows:
STATEMENT OF TERMS
1. AMENDMENTS OF CREDIT AGREEMENT. Subject to the fulfillment
of the conditions precedent to the effectiveness of this Modification which are
set forth below, the Credit Agreement shall be amended from and after this date
as follows:
(a) Section 1.01 of the Credit Agreement shall be
amended by deleting the definition of "Loan Commitment" and by
substituting in lieu thereof the following new definition of such
term:
"Loan Commitment" shall mean $1,500,000.
(b) Exhibit A of the Credit Agreement shall be deleted
in its entirety and shall be replaced by the Exhibit A attached hereto
and incorporated herein and therein by reference.
2. NO OTHER AMENDMENTS. Except for the amendments expressly set
forth and referred to in Section 1 above, the Credit Agreement shall remain
unchanged and in full force and effect. Nothing in this Modification is
intended, or shall be construed, to constitute a novation or an accord and
satisfaction of any of the Borrower's indebtedness or other indebtedness to the
Bank under or in connection with the Credit Agreement (collectively, the
"Obligations") or to modify, affect or impair the perfection or continuity of
Bank's security interests in, security titles to or other liens on any
collateral for the Obligations.
3. REPRESENTATIONS AND WARRANTIES. To induce Bank to enter into
this Modification, the Borrower does hereby warrant, represent and covenant to
Bank that: (a) each
<PAGE> 2
representation or warranty of the Borrower set forth in the Credit Agreement is
hereby restated and reaffirmed as true and correct on and as of the date hereof
as if such representation or warranty were made on and as of the date hereof
(except to the extent that any such representation or warranty expressly relates
to a prior specific date or period), and no Default or Event of Default has
occurred and is continuing as of this date under the Credit Agreement as amended
by this Modification; and (b) Borrower has the power and is duly authorized to
enter into, deliver and perform this Modification and this Modification is the
legal, valid and binding obligation of Borrower enforceable against it in
accordance with its terms.
4. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS MODIFICATION.
The effectiveness of this Modification and the amendments provided in Section 1
above are subject to (a) the truth and accuracy in all material respects of the
representations and warranties of the Borrower contained in Section 3 above and
(b) the Bank's receipt of one or more counterparts of this Modification, the
enclosed $1,500,000 Promissory Note and the enclosed officer's certificate, each
duly executed and delivered by Borrower.
5. COUNTERPARTS. This Modification may be executed in multiple
counterparts, each of which shall be deemed to be an original and all of which
when taken together shall constitute one and the same instrument.
6. GOVERNING LAW. This Modification shall be governed by, and
construed in accordance with, the internal laws of the State of Georgia
applicable to contracts made and performed in such state.
IN WITNESS WHEREOF, the parties hereto have caused this Modification
to be duly executed and delivered as of the day and year specified at the
beginning hereof.
BORROWER:
APPALACHIAN BANCSHARES INC.
BY: /s/ Kent W. Sanford
-------------------
TITLE: Exec. Vice President
--------------------
BANK:
HARDWICK BANK & TRUST COMPANY
BY: /s/ Stanley A. Crawford
-----------------------
TITLE: EVP
---
<PAGE> 1
EXHIBIT 11
APPALACHIAN BANCSHARES, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The following tabulation presents the calculation of primary and fully diluted
earnings per common share for the nine month period ended September 30, 1997 and
1996.
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
------------ --------
<S> <C> <C>
Reported net income $ 703,088 $413,945
Earnings on common shares $ 703,088 $413,945
============ ========
Weighted average common shares outstanding 574,941 568,000
============ ========
Earnings per common share - primary and fully diluted
Income form continuing operations $ 1.22 $ .73
============ ========
Net income $ 1.22 $ .73
============ ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,528,646
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,090,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,627,526
<INVESTMENTS-CARRYING> 4,032,153
<INVESTMENTS-MARKET> 4,128,314
<LOANS> 79,283,970
<ALLOWANCE> (856,147)
<TOTAL-ASSETS> 106,196,706
<DEPOSITS> 91,852,101
<SHORT-TERM> 6,039,279
<LIABILITIES-OTHER> 652,587
<LONG-TERM> 1,000,000
0
0
<COMMON> 2,961,435
<OTHER-SE> 3,691,304
<TOTAL-LIABILITIES-AND-EQUITY> 106,196,706
<INTEREST-LOAN> 5,516,722
<INTEREST-INVEST> 1,019,509
<INTEREST-OTHER> 107,554
<INTEREST-TOTAL> 6,643,785
<INTEREST-DEPOSIT> 3,606,407
<INTEREST-EXPENSE> 3,835,267
<INTEREST-INCOME-NET> 2,808,518
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> 203
<EXPENSE-OTHER> 731,113
<INCOME-PRETAX> 1,038,088
<INCOME-PRE-EXTRAORDINARY> 1,038,088
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703,088
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
<YIELD-ACTUAL> 8.68
<LOANS-NON> 100,000
<LOANS-PAST> 6,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 655,296
<CHARGE-OFFS> 115,118
<RECOVERIES> 15,969
<ALLOWANCE-CLOSE> 856,147
<ALLOWANCE-DOMESTIC> 856,147
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
