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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 March 31,
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.)
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:
<TABLE>
<CAPTION>
Class Outstanding at May 12, 1998
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<S> <C>
Common Stock, $5.00 par value 1,149,220
</TABLE>
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
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APPALACHIAN BANCSHARES, INC.
March 31, 1998 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
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 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998 December 31,
ASSETS (Unaudited) 1997
-------------- -------------
<S> <C> <C>
Cash $ 1,098,703 $ 1,040,359
Due from banks 1,303,130 2,343,174
Federal funds sold 5,120,000 1,828,000
Securities available for sale 17,124,684 15,144,585
Securities held to maturity (fair market value of $4,316,880 at
March 31, 1998 and $4,308,947 at December 31, 1997) 4,179,533 4,181,021
Loans 88,703,670 84,583,853
Allowance for loan losses (1,026,514) (929,590)
------------- -------------
Net Loans 87,677,156 83,654,263
Premises and equipment, net 1,819,719 1,653,043
Cash surrender value on life insurance 592,986 585,615
Accrued interest 1,046,134 971,550
Other assets 409,031 779,180
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TOTAL ASSETS $ 120,371,076 $ 112,180,790
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 4,063,737 $ 3,800,911
Interest-bearing 98,516,820 91,547,035
------------- -------------
TOTAL DEPOSITS 102,580,557 95,347,946
Securities sold under agreements to repurchase 4,112,508 4,228,129
Accrued interest 230,265 188,230
Long-term debt 5,820,000 5,320,000
Other liabilities 411,752 116,432
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TOTAL LIABILITIES 113,155,082 105,200,737
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SHAREHOLDERS' EQUITY:
Common stock ($5.00 par value; 20,000,000 shares authorized,
596,610 shares issued at March 31, 1998;
592,287 shares issued at December 31, 1997) 2,983,050 2,961,435
Treasury Stock (22,000 shares at cost at March 31, 1998; 15,000
shares at cost at December 31, 1997) (428,000) (274,000)
Capital surplus 3,172,139 3,096,486
Retained earnings 1,424,866 1,186,359
Accumulated comprehensive income: unrealized gains on investment
securities available for sale, net of tax 63,939 9,773
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TOTAL SHAREHOLDERS' EQUITY 7,215,994 6,980,053
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 120,371,076 $ 112,180,790
============= =============
</TABLE>
See notes to financial statements.
3
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
---------------------------
1998 1997
---- ----
<S> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $ 2,159,094 $ 1,784,545
Interest on investment securities:
Taxable securities 257,281 319,421
Non-Taxable securities 53,846 31,978
Interest on federal funds sold 44,152 34,438
----------- -----------
TOTAL REVENUE FROM EARNING ASSETS 2,514,373 2,170,382
INTEREST EXPENSE:
Interest on deposits 1,320,817 1,142,388
Interest on securities sold under agreements to repurchase 47,095 51,320
Interest expense - other 96,327 17,392
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TOTAL INTEREST EXPENSE 1,464,239 1,211,100
NET INTEREST INCOME 1,050,134 959,282
Provision for loan losses 110,000 140,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 940,134 819,282
NONINTEREST INCOME:
Service charges on deposits 54,857 43,822
Insurance commissions 5,121 6,103
Other operating income 48,550 31,239
Investment securities gains 0 4,503
----------- -----------
TOTAL NONINTEREST INCOME 108,528 85,667
NONINTEREST EXPENSES:
Salaries and employee benefits 318,807 266,969
Occupancy expense 26,899 22,733
Furniture and equipment expense 35,983 39,090
Investment losses 416 0
Other operating expenses 278,050 220,187
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TOTAL NONINTEREST EXPENSES 660,155 548,979
Income before income taxes 388,507 355,970
Income tax provision (150,000) (115,000)
----------- -----------
NET INCOME $ 238,507 $ 240,970
=========== ===========
EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .42 $ .42
Basic weighted average shares outstanding 576,841 568,000
Diluted earnings per common share $ .39 $ .42
Diluted weighted average shares outstanding 613,422 568,000
</TABLE>
See notes to financial statements.
4
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
NET INCOME $238,507 $240,970
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 81,654 (167,428)
Less: reclassification adjustments for gains (losses) included
in net income 416 (4,503)
-------- --------
82,070 (171,931)
Income tax expense related to items of other comprehensive income (27,904) 58,458
-------- --------
Other comprehensive income (loss) 54,166 (133,473)
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COMPREHENSIVE INCOME $292,673 $127,497
======== ========
</TABLE>
5
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 238,507 $ 240,970
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 110,000 140,000
Provision for depreciation and amortization 41,842 38,905
Amortization of investment security premiums
and accretion of discounts 2,677 1,645
Deferred tax 0 0
Realized investment security (gains) losses 416 (4,503)
Increase in accrued interest receivable (74,584) (114,555)
Increase in accrued interest payable 42,035 36,767
Increase in cash surrender value on life insurance (7,371) 0
Other 232,314 157,615
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NET CASH PROVIDED IN OPERATING ACTIVITIES 585,836 496,844
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 3,398,149 3,155,390
Proceeds from maturity of securities available for sale 397,217 589,925
Purchase of securities available for sale (5,295,000) (3,508,075)
Purchase of securities held to maturity 0 (503,162)
Net increase in loans to customers (4,132,893) (5,559,318)
Capital expenditures (203,267) (18,232)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (5,835,794) (5,843,472)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 4,248,912 5,223,759
Net increase in certificates of deposits 2,983,699 1,469,788
Net decrease in securities sold under agreement to repurchase (115,621) (1,082,528)
Purchase of treasury stock (154,000) 0
Issuance of common stock 97,268 0
Net proceeds from notes payable 500,000 300,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,560,258 5,911,019
----------- -----------
Net increase in cash and cash equivalents 2,310,300 564,391
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,211,533 3,674,393
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,521,833 $ 4,238,784
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,422,204 $ 1,174,333
Income taxes 0 0
</TABLE>
See notes to financial statements.
6
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APPALACHIAN BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
March 31, 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 three month period ended March 31, 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.
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 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 38 percent for the three months
ended March 31, 1998 approximates the federal and state statutory rates 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).
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At March 31, 1998, the Company had net unrealized gains of $96,877 in
available-for-sale securities which are reflected in the presented assets and
resulted in an increase in Shareholder's equity of $27,904, net of deferred tax
liability. There were no trading securities. The net increase in Shareholder's
Equity as a result of the SFAS 115 adjustment from December 31, 1997 to March
31, 1998 was $54,166.
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, and (v) changes in the legislative and
regulatory environment.
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 March 31, 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.
FINANCIAL CONDITION
MARCH 31, 1998 COMPARED TO DECEMBER 31, 1997
LOANS
Loans comprised the largest single category of the Company's earning
assets on March 31, 1998. Loans, net of unearned income and reserve for loan
losses, were 72.8 percent of total assets at March 31, 1998. Total net loans
were $87,677,156 at March 31, 1998, representing a 4.8 percent 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 $5,270,611 or
24.9 percent from December 31, 1997 to March 31, 1998. Investment securities at
March 31, 1998 were $21,304,217 compared with $19,325,606 at December 31, 1997,
reflecting a 10.2 percent increase of $1,978,611. Federal funds sold were
$5,120,000 at March 31, 1998 compared to the
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<PAGE> 9
December 31, 1997 total of $1,828,000, a 180.1 percent 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 6.96. Total nonperforming assets at March
31, 1998 were $147,500, which included two collateralized real estate loans
aggregating $131,000. Nonperforming assets at December 31, 1997 were $28,000.
The ratio of total nonperforming assets to total assets remained at 0.0012 and
the ratio on nonperforming loans to total loans decreased slightly from 0.003 to
0.002 as compared to December 31, 1997. 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.
DEPOSITS
Total deposits of $102,580,557 at March 31, 1998 increased $7,232,611
(7.6%) 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 $262,826 or 6.9 percent from year-end
1997 to March 31, 1998, and interest-bearing deposits increased $6,969,785 or
7.6% during the same period. Time deposits of $100,000 or more increased
$2,188,433 (14.9%).
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $4,112,508 at
March 31, 1998, a $115,621 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 our 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 $235,941 from December 31, 1997 to March
31, 1998, due to net earnings of $238,507 and the decrease in the measurement
for unrealized gains or losses on securities available for sale totaling $2,566,
net of deferred tax liability.
On February 26, 1998, the Company repurchased 7,000 shares of its
Common Stock from one of the Company's directors at a price of $22.00 per share
(total purchase price of
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$154,000). On March 16, 1998 the Company issued 4,323 shares of its Common Stock
to the Company's 401(k) plan at a price of $22.50 per share (total purchase
price of $97,267.50).
LIQUIDITY MANAGEMENT
The Bank utilizes and is dependent upon data processing systems and
software to conduct its business. Management has initiated a Year 2000 project
to prepare the Company's computer systems and applications for the Year 2000.
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. Any of the Company's 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 believes
that, since a majority of our equipment is less than three years old, the Year
2000 problem will not pose significant operational problems. The Company is not
purchasing any new software products or engaging in any new contracts unless the
products and counterparties are 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. The failure of the Bank's computer system or applications or those
operated by third parties could have a material adverse effect on the Company's
results of operations and financial condition.
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 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 $64.3
million or 72.5% of the total loan portfolio at March 31, 1998 and investment
securities maturing in one year or less equaled $2.20 million or 10.6% of the
portfolio. Other sources of liquidity include short-term investments such as
federal funds sold and maturing interest-bearing deposits with other banks.
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The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
March 31, 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.
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 in 1997. (As a member of the Federal Home Loan Bank, the 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 the Bank received an initial credit line of up
to $8,000,000. This credit line was increased to $12,000,000 in March 1998. The
balance on the line of credit at December 31, 1997 was $4,000,000. with the
Federal Home Loan Bank. A principal reduction payment of $50,000 was made on
January 15, 1998. The Bank made a $1,000,000 draw on the line of credit on
January 15, 1998. The balance at March 31, 1998 was $4,950,000.
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 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 and for working capital needs. The Company
made a draw of $300,000 on June 30, 1997. 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. All other terms and
conditions of the original agreement remain in full force and effect.
Subsequently, the Company made an additional draw on the line of credit in the
amount of $320,000. At December 31, 1997, the balance on the line of credit was
$1,320,000. A principal payment was made on March 23, 1998 of $450,000 leaving a
balance at March 31, 1998 of $870,000. 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 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,
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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 $7.9 million
at March 31, 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 $9.0 million at March 31, 1998. The
percentage ratios as calculated under FDICIA guidelines were 9.0 percent and
10.2 percent for Tier 1 and Total Risk-based capital, respectively, at March 31,
1998. Both levels exceeded the minimum ratios of four percent and eight percent,
respectively. At March 31, 1998, the Bank's leverage ratio was 6.7 percent and
its tangible leverage ratio was 6.6 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 March 31, 1998 the capital
ratio as calculated under the DBF standard was 7.48%.
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.
The Bank started several expansion projects on the Bank's offices and a
community center in the fourth quarter of 1997 and continuing into the first
quarter of 1998. These expansion projects are being funded through current
operations cash flow.
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New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income, as
defined therein, and its components in financial statements issued for the
fiscal years beginning after December 15, 1997. Statement No. 130 requires the
inclusion in comprehensive income of the change in certain previously
recognized components of shareholders' 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 March 31,
1998 and 1997. For the Company, this required the inclusion of unrealized gains
(losses) on available for sale securities, net of taxes, arising during the
respective periods. For the three months ended March 31, 1998, the change in
unrealized gains (losses) on securities represented an increase in net income,
as reported, of $54,166 (22.7%), net of tax. For the three months ended March
31, 1997, the change in unrealized gains (losses) on securities represented a
decrease in net income, as reported, of $113,473 (47.1%), net of tax.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
SUMMARY
Net earnings for the three months ended March 31, 1998 were $238,507
compared to net earnings of $240,970 for the same period in 1997. The decrease
in net earnings is partially attributable to an increase of the Company's tax
burden due to the absence of loss carryforwards from prior years. Net interest
income increased $120,852 (14.8%) during the first three months of 1998, as
compared to the same period in 1997; noninterest expenses increased $111,176
(20.2%) during same period, while noninterest income increased by $22,861
(26.7%).
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
three months ended March 31, 1998 increased $343,991 (15.9%) from the same
period in 1997. This increase was due to the continued growth of earning assets
which averaged $109.8 million for the three months ended March 31, 1998.
Interest expense for the three months ended March 31, 1998 increased $253,139 or
(20.9%) compared to the same period of 1997. Interest expense paid on deposit
accounts increased $178,218. The remaining increase is attributed to interest
expense on advances from the Federal Home Loan Bank.
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 $110,000 for the three months ended March 31, 1998 compared
to $140,000 for the same period of 1997. Charge-offs exceeded recoveries by
$17,484 for the three months ended March 31, 1998. The reserve for loan losses
as a percent of outstanding loans, net of unearned income, was 1.16 percent at
March 31, 1998 compared to 1.10 percent at year-end 1997.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1998 was
$108,528 compared to $85,677 for the same period of 1997. This increase was
primarily due to an increase in service charges on deposit accounts of $11,035
in 1998 as compared to the same period of 1997, and increases in other operating
income of $17,311. Significant components of noninterest income changed as
follows: Service charges on deposits increased $11,035 (25.2%), insurance
commissions decreased $982 (16.1%), and other operating income increased $17,311
(55.4%) to $48,550.
13
<PAGE> 14
Earnings on cash surrender value of life insurance policies provided $8,410 of
the increase to other operating income.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended March 31, 1998 were
$660,155, reflecting a 20.2 percent increase over the same period of 1997. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $318,807 for the three months ended March 31, 1998, 19.4
percent higher than in the same period of 1997. The increase in salaries and
employee benefits are due to increased staffing for the unusually high level of
growth which has been experienced since the Bank's opening on March 3, 1995.
Occupancy costs increased $4,166 (18.3%), and furniture and equipment expenses
decreased by $3,107. Other operating expenses rose by 26.3 percent to $278,050.
The increase in other operating expenses are largely the result of an increase
in data processing fees of $20,800 and an expense of $8,500 due to the addition
of the Bank's second ATM machine.
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 $150,000 for the three
months ended March 31, 1998 increased $35,000 compared to the same period of
1997. This increase is primarily due to Georgia state taxes now applicable after
all loss carryforwards were used in 1997.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 26, 1998, the Company repurchased 7,000 shares of its
Common Stock from one of the Company's directors at a price of $22.00 per share
(total purchase price of $154,000). On March 16, 1998 the Company issued 4,323
shares of its Common Stock to the Company's 401(k) plan at a price of $22.50 per
share (total purchase price of $97,267.50).
In April 1998, the Company announced that its Board of Directors had
authorized a two-for-one share split of its Common Stock to be effected 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.
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.
15
<PAGE> 16
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: May 14, 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)
16
<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 three month period ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Basic net income $238,507 $240,970
Basic earnings on common shares $238,507 $240,970
======== ========
Weighted average common shares outstanding - basic 576,841 568,000
======== ========
Basic earnings per common share $ .42 $ .42
======== ========
Basic net income per common share $ .42 $ .42
======== ========
Diluted net income $238,507 $240,970
Diluted earnings on common shares $238,507 $240,970
======== ========
Weighted average common shares outstanding - diluted 613,422 568,000
======== ========
Diluted earnings per common share $ .39 $ .42
======== ========
Diluted net income per common share $ .39 $ .42
======== ========
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,401,833
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,120,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,124,684
<INVESTMENTS-CARRYING> 4,179,533
<INVESTMENTS-MARKET> 4,316,880
<LOANS> 88,703,670
<ALLOWANCE> (1,026,514)
<TOTAL-ASSETS> 120,371,076
<DEPOSITS> 102,580,557
<SHORT-TERM> 4,112,508
<LIABILITIES-OTHER> 642,017
<LONG-TERM> 5,820,000
0
0
<COMMON> 2,983,050
<OTHER-SE> 4,232,944
<TOTAL-LIABILITIES-AND-EQUITY> 120,371,076
<INTEREST-LOAN> 2,159,094
<INTEREST-INVEST> 311,127
<INTEREST-OTHER> 44,152
<INTEREST-TOTAL> 2,514,373
<INTEREST-DEPOSIT> 1,320,817
<INTEREST-EXPENSE> 1,464,239
<INTEREST-INCOME-NET> 1,050,134
<LOAN-LOSSES> 110,000
<SECURITIES-GAINS> (416)
<EXPENSE-OTHER> 659,739
<INCOME-PRETAX> 388,507
<INCOME-PRE-EXTRAORDINARY> 388,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238,057
<EPS-PRIMARY> .42
<EPS-DILUTED> .39
<YIELD-ACTUAL> 10.08
<LOANS-NON> 147,500
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 609,021
<ALLOWANCE-OPEN> 929,590
<CHARGE-OFFS> 19,281
<RECOVERIES> 6,205
<ALLOWANCE-CLOSE> 1,026,514
<ALLOWANCE-DOMESTIC> 1,026,514
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
