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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 June 30,
1998
[ ] 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.)
829 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 August 10, 1998
----- ------------------------------
Common Stock, $5.00 par value 1,149,220
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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APPALACHIAN BANCSHARES, INC.
June 30, 1998 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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 Comprehensive Income ......... 5
Consolidated Statement of Cash Flows ................... 6
Notes to Consolidated Financial Statements ............. 7
Item 2. Management's Discussion and Analysis or Plan
of Operation............................................ 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .... 16
Item 5. Other Information ...................................... 16
Item 6. Exhibits and Reports on Form 8-K ....................... 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31,
ASSETS (Unaudited) 1997
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<S> <C> <C>
Cash $ 1,238,239 $ 1,040,359
Due from banks 3,276,456 2,343,174
Federal funds sold 5,192,354 1,828,000
Securities available for sale 14,759,721 15,144,585
Securities held to maturity (fair market
value $6,701,958 at June 30, 1998 and
$4,308,947 at December 31, 1997) 6,574,723 4,181,021
Loans 92,150,477 84,583,853
Allowance for loan losses (1,053,440) (929,590)
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Net Loans 91,097,037 83,654,263
Premises and equipment, net 1,984,680 1,653,043
Cash surrender value on life insurance 600,586 585,615
Accrued interest 1,032,965 971,550
Other assets 579,437 779,180
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TOTAL ASSETS $ 126,336,198 $ 112,180,790
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,453,638 $ 3,800,911
Interest-bearing 104,847,495 91,547,035
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TOTAL DEPOSITS 109,301,133 95,347,946
Securities sold under agreements
to repurchase 3,442,130 4,228,129
Accrued interest 201,326 188,230
Long-term debt 5,698,571 5,320,000
Other liabilities 268,910 116,432
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TOTAL LIABILITIES 118,912,070 105,200,737
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SHAREHOLDERS' EQUITY:
Common stock ($5.00 par value; 20,000,000 shares
authorized, 1,193,220 and 1,184,574 shares
issued at June 30, 1998 and December 31, 1997,
respectively) 5,966,100 5,922,870
Treasury Stock (44,000 shares at cost at
June 30, 1998; 30,000 shares at cost at
December 31, 1997) (428,000) (274,000)
Capital surplus 189,089 135,051
Retained earnings 1,717,975 1,186,359
Accumulated comprehensive income:
unrealized gains on investment
securities available for sale, net of tax (21,036) 9,773
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TOTAL SHAREHOLDERS' EQUITY 7,424,128 6,980,053
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 126,336,198 $ 112,180,790
============= =============
</TABLE>
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $ 2,265,318 $ 1,798,044 $ 4,424,412 $ 3,582,589
Interest on investment securities:
Taxable securities 302,291 303,232 559,572 622,653
Nontaxable securities 55,382 36,219 109,228 68,197
Interest on federal funds sold 54,077 37,724 98,229 72,162
----------- ----------- ----------- -----------
TOTAL REVENUE FROM EARNING ASSETS 2,677,068 2,175,219 5,191,441 4,345,601
INTEREST EXPENSE:
Interest on deposits 1,442,869 1,209,218 2,763,686 2,351,606
Interest on federal funds purchased and
securities sold under agreements to repurchase 42,223 49,535 89,318 100,855
Interest expense - long term debt 96,358 18,515 192,685 35,907
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 1,581,450 1,277,268 3,045,689 2,488,368
NET INTEREST INCOME: 1,095,618 897,951 2,145,752 1,857,233
Provision for loan losses 70,000 75,000 180,000 215,000
----------- ----------- ----------- -----------
AFTER PROVISION FOR LOAN LOSSES 1,025,618 822,951 1,965,752 1,642,233
NONINTEREST INCOME:
Service charges on deposits 56,088 50,865 110,945 94,687
Insurance commissions 4,380 6,042 9,501 12,145
Other operating income 64,377 48,105 112,927 79,343
Investment securities gains (losses) 14,475 (5,138) 14,475 (636)
----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME 139,320 99,874 247,848 185,539
NONINTEREST EXPENSES:
Salaries and employee benefits 347,778 280,318 666,585 547,287
Occupancy expense 38,216 23,593 65,115 46,326
Furniture and equipment expense 51,240 39,781 87,223 78,871
Other operating expenses 304,596 255,979 583,062 476,165
----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSES 741,830 599,671 1,401,985 1,148,649
Income before income taxes 423,108 323,154 811,615 679,123
Income tax provision (130,000) (100,000) (280,000) (215,000)
----------- ----------- ----------- -----------
NET INCOME $ 293,108 $ 223,154 $ 531,615 $ 464,123
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .25 $ .20 $ .46 $ .41
Basic weighted average shares outstanding 1,150,284 1,136,000 1,150,384 1,136,000
Diluted earnings per common share $ .24 $ .20 $ .43 $ .41
Diluted weighted average shares outstanding 1,223,446 1,136,000 1,223,446 1,136,000
See notes to financial statements
</TABLE>
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $293,108 $223,153 $ 531,615 $ 464,123
Other comprehensive, net of tax:
Unrealized gains on securities:
Unrealized holding gains
(losses) arising during the period (113,859) 110,031 (32,205) (57,397)
Less: reclassification adjustments for
gains (losses) included in net income (14,891) 5,139 (14,475) 636
-------- -------- --------- ---------
(128,750) 115,170 (46,680) 56,761
Income tax benefit related to items
of other comprehensive income 43,775 (39,158) 15,871 19,300
--------- ---------
Other comprehensive income (loss) (84,975) 76,012 (30,809) (37,461)
--------- ---------
Comprehensive income $208,133 $299,165 $ 500,806 $ 426,662
======== ======== ========= =========
</TABLE>
See notes to financial statements.
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 531,615 $ 464,123
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180,000 215,000
Provision for depreciation and amortization 88,193 80,242
Amortization of investment security premiums
and accretion of discounts 2,184 3,091
Deferred tax 0 47,023
Realized investment security loss (gains) (14,475) 635
Increase in accrued interest receivable (61,415) (81,380)
Increase in accrued interest payable 13,096 24,433
Increase in cash surrender value on life insurance (14,971) 0
Purchase of key man life insurance 0 (570,871)
Other (42,381) 199,836
------------ ------------
NET CASH PROVIDED IN OPERATING ACTIVITIES 681,846 382,132
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 10,303,542 4,702,566
Purchase of securities available for sale (10,811,667) (3,294,098)
Purchase of securities held to maturity (1,135,102) (753,163)
Net increase in loans to customers (7,622,774) (9,211,963)
Capital expenditures (409,356) (28,134)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (9,675,357) (8,584,792)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 9,600,858 6,933,869
Net increase in certificates of deposit 4,352,329 2,282,888
Net decrease in securities sold under agreement to repurchase (785,999) (2,097,667)
Proceeds from issuance of common stock 97,268 388,608
Purchase of treasury stock (154,000) (252,000)
Proceeds from notes payable 378,571 300,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,489,027 7,555,698
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,495,516 (646,962)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,211,533 3,674,393
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,707,049 $ 3,027,431
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,058,785 $ 2,463,935
Income taxes 315,000 86,765
</TABLE>
See notes to financial statements.
6
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APPALACHIAN BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
June 30, 1998
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 six month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements for Appalachian Bancshares, Inc. for the year ended December 31,
1997, and footnotes thereto included in Form 10-KSB, filed with the Securities
and Exchange Commission on March 31, 1998.
NOTE B - INCOME TAXES
The effective tax rate of approximately 35 percent for the three months
ended June 30, 1998 approximates the federal and state statutory rates less an
adjustment for the effect of tax exempt securities.
NOTE C - INVESTMENT SECURITIES
The Company applies 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 June 30, 1998, the Company had net unrealized losses of $31,873 in
available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in Shareholder's equity of $21,306, 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, 1997 to June 30,
1998 was $30,809.
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NOTE D - STOCK SPLIT
In May 1998, the Company effected two-for-one share split of its Common
Stock in the form of a common stock dividend, payable on or about May 15, 1998
to shareholders of record as of the close of business on May 1, 1998. All
amounts presented in the financial statements are adjusted to reflect this share
split. The common stock was increased by $2,983,050 and $2,961,435 for June 30,
1998 and December 31, 1997, respectively. The capital surplus was decreased by
$2,983,050 and $2,961,435 for June 30, 1998 and December 31, 1997, respectively.
The net effect did not change total stockholders' equity.
NOTE E - SUBSEQUENT EVENTS
On July 10, 1998, the Company executed a definitive agreement with
Century South Banks, Inc. ("Century South") for the acquisition by the Company
of First National Bank of Union County ("First National"), a wholly-owned
subsidiary of Century South. The agreement provides that, subject to regualtory
approval, the Company will acquire First National from Century South, in a cash
transaction, for $6.1 million, with the asumption of certain existing
liabilities and assets of First National by Century South or certain of its
affiliates. First National will operate as a wholly-owned subsidiary of the
Company and will continue its business and operations in Union County, Georgia.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report, including the Management's Discussion and Analysis which
follows, contains forward-looking statements in addition to historical
information, including but not limited to statements regarding Management's
beliefs, current expectations, estimates and projections about the financial
services industry, the economy, and about the Company and the Bank in general.
Such forward-looking statements are subject to certain factors that could cause
actual results to differ materially from historical results or anticipated
events, trends or results. These factors include, but are not limited to, (i)
increased competition with other financial institutions, (ii) lack of sustained
growth in the economy in Gilmer County, primarily in the local poultry industry,
(iii) rapid fluctuations in interest rates, (iv) the inability of the Bank to
maintain regulatory capital standards, (v) changes in the legislative and
regulatory environment, and (vi) potential adverse effects on the economy and
the Bank of the Year 2000 computer problem.
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 in
Item 1 of the June 30, 1998 Form 10-QSB and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the year ended December 31,
1997 appearing in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on March 31, 1998.
8
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FINANCIAL CONDITION
JUNE 30, 1998 COMPARED TO DECEMBER 31, 1997
LOANS
Loans comprised the largest single category of the Company's earning
assets on June 30, 1998. Loans, net of unearned income and reserve for loan
losses, were 72.1% of total assets at June 30, 1998. Total net loans were
$91,097,037 at June 30, 1998, representing a 8.9% increase from the December 31,
1997 total of $83,654,263. 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 increased $5,373,192, or
25.4%, from December 31, 1997 to June 30, 1998. Investment securities at June
30, 1998 were $21,334,444 compared with $19,325,606 at December 31, 1997,
reflecting a 10.4% increase of $2,008,838. Federal funds sold were $5,192,354 at
June 30, 1998 compared to the December 31, 1997 total of $1,828,000, a 184.0%
increase. 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 increases are the result of
Management's plan to improve the Company's liquidity position relative to the
current size of the Company.
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) decreased from 33.21 to 9.47. Total nonperforming assets at June
30, 1998 were $111,210, which consisted of a collateralized residential real
estate loan. Nonperforming assets at December 31, 1997 were $28,000. The ratio
of total nonperforming assets to total assets was 0.0009 and the ratio of
nonperforming loans to total loans increased slightly from 0.0003 to 0.001 as
compared to December 31, 1997. All of these ratios remain favorable as compared
with industry averages.
DEPOSITS
Total deposits of $109,301,133 at June 30, 1998 increased $13,953,187
(14.6%) over total deposits of $95,347,946 at year-end 1997. Deposits are the
Company's primary source of funds with which to support its earning assets.
Noninterest-bearing deposits increased $652,727 or 17.2% from year-end 1997 to
June 30, 1998, and interest-bearing deposits increased $13,300,460 or 14.5%
during the same period. Time deposits of $100,000 or more increased $2,788,321
(18.9%).
9
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SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $3,442,130 at
June 30, 1998, a $785,999 decrease from the December 31, 1997 total of
$4,228,129. The total of securities sold under agreements to repurchase is
associated with the cash flow needs of the Bank's corporate customers that
participate in repurchase agreements. The decreased balances reflect the needs
of these customers to increase their cash balances on hand.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $444,075 from December 31, 1997 to June
30, 1998, due to net earnings of $531,615, the purchase of treasury stock for
$154,000, the issuance of common stock to the Company's 401(k) Profit Sharing
Plan for an aggregate price of $97,269, and the decrease in the measurement for
unrealized gains or losses on securities available for sale totaling $30,809,
net of deferred tax liability.
LIQUIDITY MANAGEMENT
Year 2000. The Bank utilizes and is dependent upon data processing systems
and software to conduct its business. The approach of the Year 2000 presents a
problem in that many computer programs have been written using two digits rather
than four to define the applicable year. Computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in internal system failure or
miscalculation, and also creates risk for the Company from third parties with
whom the Company deals on financial transactions. The Company is conducting a
comprehensive review of its computer systems to identify the systems that could
be affected by the Year 2000, and has developed an implementation plan to
resolve the issue.
The Company plans to complete any programming changes to critical systems
and commence testing of the new programming in the fourth quarter of 1998.
Testing of internal mission-critical systems is scheduled to take place during
the first quarter of 1999. The testing of mission-critical systems should be
complete and implementation is scheduled to be complete by June 30, 1999. In
addition, contingency and business plans are being developed to address actions
the Company may take in the event of system failure.
The Company believes that, since a majority of its equipment is less than
three years old, the Year 2000 problem will not pose significant
internal operational problems. The Company is monitoring software products for
Year 2000 compliance and is encouraging its counterparties and customers to
conduct their own Year 2000 assessment and take appropriate steps to become
Year 2000 compliant. Maintenance, testing, and modification costs will be
expensed as incurred, while the costs of new software or hardware will be
capitalized and amortized over their useful lives. The Company does not expect
the amounts required to be expensed to resolve Year 2000 issues to have a
material effect on its financial position or results of operations. However,
there can be no assurance that the systems of third parties upon which the
Bank's business relies will be Year 2000 compliant on a timely basis.
Furthermore, the business of many of the Company's customers may be negatively
affected by the Year 2000 issue, and any financial difficulties incurred by the
Company's customers in connection with the century change could negatively
affect such customers' ability to repay loans to the Company. The failure of
the Bank's computer system or applications or those operated by customers or
third parties could have a material adverse effect on the Company's results of
operations and financial condition.
The foregoing are forward-looking statements reflecting management's
current assessment and estimates with respect to the Company's Year 2000
compliance efforts. Various factors could cause actual plans and results to
differ materially from those contemplated by such assessments, estimates and
forward-looking statements, many of which are beyond the control of the
Company. Some of these factors include, but are not limited to, representations
by the Company's vendors and counterparties, technological advances, economic
considerations, and consumer perceptions. The Company's Year 2000 compliance
program is an ongoing process involving continual evaluation and may be subject
to change in response to new developments.
Liquidity 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
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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 Bank 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. Loans that mature in one year or less equaled approximately $64.8
million or 70.3% of the total loan portfolio at June 30, 1998 and investment
securities maturing in one year or less equaled $1.0 million or 5.2% of the
portfolio. 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
June 30, 1998, funds were also available through the purchase of federal funds
from correspondent commercial banks from available lines of up to an aggregate
of $1,000,000. Liquidity management involves the daily monitoring of the sources
and uses of funds to maintain an acceptable cash position.
The Bank was approved as a member of the Federal Home Loan Bank in
April 1997, with an initial line of credit of $8 million. The line of credit was
increased to $12 million in March 1998. At June 30, 1998, the outstanding
balance of the line of credit was $4,728,571.
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"). On October 29, 1997 the Company and Hardwick agreed to a
modification of the Credit Agreement increasing the amount of credit available
to the Company to $1.5 million. At June 30, 1998, the balance on the line of
credit was $970,000. 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
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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.
Federal Capital Standards. Bank 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 Bank's Tier 1 capital, which consists of common equity, paid-in
capital and retained earnings (less intangible assets), amounted to $8.3 million
at June 30, 1998. Tier 2 capital components include supplemental capital
components such as qualifying allowance for loan losses and qualifying
subordinated debt. Tier 1 capital plus the Tier 2 capital components is referred
to as Total Risk-based capital and was $9.3 million at June 30, 1998. The
percentage ratios as calculated under FDICIA guidelines were 8.6 percent and 9.7
percent for Tier 1 and Total Risk-based capital, respectively, at June 30, 1998.
Both levels exceeded the minimum ratios of four percent and eight percent,
respectively. At June 30, 1998, the Bank's leverage ratio was 6.6 percent and
its tangible leverage ratio was 6.5 percent, exceeding the regulatory minimum
requirements which are generally 3% plus an additional cushion of at least
100-200 basis points depending on risk profiles and other factors.
DBF Capital Requirement. 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 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 was imposed during the
first three years of the Bank's operation. Accordingly, on March 3, 1998 the
Bank became subject to a 6% primary capital ratio. At June 30, 1998 the capital
ratio as calculated under the DBF standard was 7.39%.
In March 1998, the Bank paid a $500,000 dividend to the Company, which
will be used by the Company for repayment of debt and other expenses.
In the first quarter of 1998 the Bank completed several expansion and
renovation projects on its offices and grounds, including construction of a
community center. Total expenditures on these projects aggregated $243,138 and
were funded through current operations cash flow.
NEW ACCOUNTING STANDARDS
The Company has adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes
standards for reporting and
12
<PAGE> 13
displaying comprehensive income, as defined therein, and its components in
financial statements issued for the fiscal years beginning after December 15,
1997. Statement No. 130 requires the inclusion in comprehensive income of the
change in certain previously recognized components of shareholders's equity. In
compliance with Statement No. 130, the Company has included, as an additional
financial statement, Consolidated Statements of Comprehensive Income for the
periods ended June 30, 1998 and 1997. For the Company, this required the
inclusion of unrealized gains (losses) on investment and available for sale
securities, net of taxes, arising during the respective periods. For the six
months ended June 30, 1998, the change in unrealized gains on securities
represented a decrease in net income, as reported, by $30,809 (5.8%), net of
tax. For the six months ended June 30, 1997, the change in unrealized gains on
securities represented a decrease in net income, as reported, of $37,461 (8.1%),
net of tax.
Effective for years beginning after December 15, 1998, Statement of
Position (SOP) 98-5 requires costs of start up activities and organization costs
to be expensed as incurred. Initial application of the SOP is to reported as the
cumulative effect of a change in accounting principle. Management does not
believe that the adoption of SFAS will have a material impact on the Company's
financial statements.
Effective for years ending after December 15, 1998, SFAS 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits" was
issued by FASB which standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain other
disclosures previously required. Management does not believe that the adoption
of SFAS 132 will have a material impact on the Company's consolidated financial
statements.
RESULTS OF OPERATIONS
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1998
SUMMARY
Net earnings for the six months ended June 30, 1998 were $531,615
compared to net earnings of $464,123 for the same period in 1997. The increase
in net earnings is partially attributable to an increase of the Company's
revenue from earning assets of 19.5% over the same period in 1997. Net interest
income increased $288,519 (15.5%) during the first six months of 1998 as
compared to the same period in 1997; noninterest expenses increased $253,336
(22.1%) during same period, while noninterest income increased by $62,309
(33.6%).
Net earnings for the quarter ended June 30, 1998 were $293,108 compared
to net earnings of $223,154 for the second quarter of 1997. This represents a
31.3% increase as compared to the same period in 1997. This increase is
primarily attributable to an increase in total revenue from earnings assets of
$501,849 or 23.1% as compared to the same period in 1997. Net interest income
increased $197,667 during the three months ended June 30, 1998 as compared to
the same period in 1997; noninterest expenses increased $142,159 during the same
period, while noninterest income increased by $39,446.
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 six
months ended June 30, 1998 increased $845,840 (19.5%) from the same period in
1997. This increase was due to the continued growth of earning assets which
averaged $114.6 million for the six months ended June 30, 1998. Interest expense
for the six months ended June 30, 1998 increased $557,321 or (22.4%)
13
<PAGE> 14
compared to the same period of 1997. This increase was primarily due to an
increase of $412,060 in interest expense accrued on deposit accounts. The
remaining increase is attributed to interest expense on advances from the
Federal Home Loan Bank.
Net interest income increased $197,667 or 22.0% during the quarter
ended June 30, 1998 as compared to the same period in 1997. An increase of
$197,667 or 23.1% in revenue from earning assets is the primary reason for the
increase in net interest income for the quarter.
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 $180,000 for the six months ended June 30, 1998 compared to
$215,000 for the same period of 1997. Charge-offs exceeded recoveries by $56,150
for the six months ended June 30, 1998. The reserve for loan losses as a percent
of outstanding loans, net of unearned income, was 1.14 percent at June 30, 1998
compared to 1.10 percent at year-end 1997.
The provision for loan losses was $70,000 for the three months ended
June 30, 1998 compared to $75,000 for the same period in 1997.
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 1998 was $247,848
compared to $185,539 for the same period of 1997. This increase was primarily
due to an increase in service charges on deposit accounts of $16,258 in the
first six months of 1998 as compared to the same period of 1997, and increases
in other operating income of $33,584. Significant components of noninterest
income changed as follows: Service charges on deposits increased $16,258
(17.2%), insurance commissions decreased $2,644 (21.8%), and other operating
income increased $33,584 (42.3%) to $112,927. Earnings on cash surrender value
of life insurance policies provided $17,090 of the increase to other operating
income. There was a $2,274 increase to other operating income in safe deposit
box rental fees due to the recent addition of approximately 400 new boxes. There
was also an increase of $6,332 to other operating income due to the roll-out of
a business enhancement program offered to the Bank's small business customers.
Noninterest income increased by $39,446 or 39.5% in the second quarter
of 1998 as compared to the same period in 1997. The primary component of this
increase was investment securities gains of $14,475 during the second quarter
of 1998 compared to investment securities losses of $5,138 for the same period
in 1997.
NONINTEREST EXPENSES
Noninterest expenses for the six months ended June 30, 1998 were
$1,401,985, reflecting a 22.1% increase over the same period of 1997. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $666,585 for the six months ended June 30, 1998, 21.8% higher
than in the same period of 1997. The increase in salaries and employee benefits
is due to increased staffing to meet the growth level of the Bank. Occupancy
costs increased $18,789 (40.6%), and furniture and equipment expenses increased
by $8,352. Other operating expenses rose by 22.4% to $583,062. The increase in
other operating expenses is largely the result of an increase in data processing
fees of $27,125 and an expense of $14,840 due to the addition of the Bank's
second ATM machine.
Noninterest expenses increased by $142,159 for the quarter ended June
30, 1998 as compared to the same period in 1997. The primary components of
noninterest expense are salaries and employee benefits, which increased by
$67,460 for the three months ended June 30, 1998, 24.1% higher than the same
period of 1997. Occupancy costs increased by $14,623 and other operating
expenses increased by $48,617 for the second quarter of 1998 as compared with
the same period in 1997. The increase in other operating expenses for such
period is largely due to an increase in data processing fees.
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
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<PAGE> 15
provision for income taxes of $280,000 for the six months ended June 30, 1998
increased $65,000 compared to the same period of 1997 due to increased profit
levels.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the shareholders of the Company was held on May
27, 1998 for the purpose of electing the Board of Directors of the Company and
ratification of the appointment of the Company's independent auditors. The
appointment of Schauer, Taylor, Cox and Edwards, P.C. as the Company's
independent auditors was ratified with 450,316 votes for and 40 against, with
800 abstentions. In addition, the director nominees listed in the following
table, each of whom served as a director of the Company prior to the annual
meeting, were elected to constitute the entire Board of Directors of the Company
for a term of one year.
Directors Elected at Annual Meeting of Shareholders
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Alan S. Dover 451,116 40
Charles A. Edmondson 448,616 2,540
Roger E. Futch 451,116 40
Joseph C. Hensley 451,116 40
Frank E. Jones 448,416 2,740
J. Ronald Knight 451,116 40
Tracy R. Newton 451,116 40
P. Joe Sisson 451,116 40
Kenneth D. Warren 451,116 40
</TABLE>
ITEM 5. OTHER INFORMATION
In May 1998, the Company effected two-for-one share split of its Common
Stock in the form of a common stock dividend, payable on or about May 15, 1998
to shareholders of record as of the close of business on May 1, 1998.
In May 1998, the Company purchased a 1,250 sq. ft brick building near
the Bank's existing facility for a purchase price of $155,000. The building is
located on seven tenths of an acre and is currently leased by a local physician.
The current use of the new property will provide additional parking for staff of
the Company and the Bank. Future use of the building has not been determined at
this time.
On July 10, 1998, the Company executed a definitive agreement with
Century South Banks, Inc. ("Century South") for the acquisition by the Company
of First National Bank of
15
<PAGE> 16
Union County ("First National"), a wholly-owned subsidiary of Century South. The
agreement provides that, subject to regulatory approval, the Company will
acquire First National from Century South, in a cash transaction, for $6.1
million, with the assumption of certain existing liabilities and assets of First
National by Century South or certain of its affiliates. First National will
operate as a wholly-owned subsidiary of the Company and will continue its
business and operations in Union County, Georgia.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net Income Per Share
27 Financial Data Schedule (for SEC use only).
(b) No reports on Form 8-K were filed by the Company during the
period covered by this Report.
16
<PAGE> 17
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: August 10, 1998
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)
17
<PAGE> 1
EXHIBIT 11
APPALACHIAN BANCSHARES, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the six month period ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Basic net income $ 531,615 $ 464,123
Basic earnings on common shares $ 531,615 $ 464,123
========== ==========
Weighted average common shares outstanding - basic 1,150,284 1,136,000
========== ==========
Basic earnings per common share $ .46 $ .41
========== ==========
Basic net income per common share $ .43 $ .41
========== ==========
Diluted net income $ 531,615 $ 464,123
Diluted earnings on common shares $ 531,615 $ 464,123
========== ==========
Weighted average common shares outstanding - diluted 1,223,446 1,136,000
========== ==========
Diluted earnings per common share $ .43 $ .41
========== ==========
Diluted net income per common share $ .43 $ .41
========== ==========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPALACHIAN BANCSHARES, INC. FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,514,695
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,192,354
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,759,721
<INVESTMENTS-CARRYING> 6,574,723
<INVESTMENTS-MARKET> 6,701,958
<LOANS> 92,150,477
<ALLOWANCE> (1,053,440)
<TOTAL-ASSETS> 126,336,198
<DEPOSITS> 109,301,133
<SHORT-TERM> 4,453,638
<LIABILITIES-OTHER> 470,236
<LONG-TERM> 5,698,571
0
0
<COMMON> 2,983,050
<OTHER-SE> 4,441,078
<TOTAL-LIABILITIES-AND-EQUITY> 126,336,198
<INTEREST-LOAN> 4,424,412
<INTEREST-INVEST> 668,800
<INTEREST-OTHER> 98,229
<INTEREST-TOTAL> 5,191,441
<INTEREST-DEPOSIT> 2,763,686
<INTEREST-EXPENSE> 3,045,689
<INTEREST-INCOME-NET> 2,145,752
<LOAN-LOSSES> 180,000
<SECURITIES-GAINS> 14,475
<EXPENSE-OTHER> 1,401,985
<INCOME-PRETAX> 811,615
<INCOME-PRE-EXTRAORDINARY> 811,615
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531,615
<EPS-PRIMARY> .46
<EPS-DILUTED> .43
<YIELD-ACTUAL> 9.96
<LOANS-NON> 111,210
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 583,309
<ALLOWANCE-OPEN> 929,500
<CHARGE-OFFS> 79,157
<RECOVERIES> 23,097
<ALLOWANCE-CLOSE> 1,053,440
<ALLOWANCE-DOMESTIC> 1,053,440
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
