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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, 1999
[ ] 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 MAY 14, 1999
----- ---------------------------
Common Stock, $5.00 par value 1,323,188
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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APPALACHIAN BANCSHARES, INC.
March 31, 1999 Form 10-QSB
TABLE OF CONTENTS
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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 ..................................................... 16
Item 6. Exhibits and Reports on Form 8-K ...................................... 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
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MARCH 31, 1999 DECEMBER 31,
(UNAUDITED) 1998
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ASSETS
Cash and due from banks 4,509,885 5,481,853
Interest bearing deposits with other banks 311,288 407,229
Federal funds sold 4,589,032 18,392,213
Securities available for sale 30,514,155 21,940,281
Securities held to maturity (fair market value $6,277,201) 6,066,867 6,218,354
Loans 140,979,060 129,831,095
Allowance for loan losses (1,816,348) (1,686,395)
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Net Loans 139,162,712 128,144,700
Premises and equipment, net 3,793,761 3,940,032
Cash surrender value on life insurance 622,507 615,438
Accrued interest 1,537,587 1,319,601
Intangibles, net 2,315,696 2,345,055
Other assets 680,571 940,194
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TOTAL ASSETS $194,104,061 $189,744,950
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LIABILITIES AND SHAREHOLDERS'EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 9,621,107 $ 9,287,933
Interest-bearing 158,038,081 154,573,545
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TOTAL DEPOSITS 167,659,188 163,861,478
Securities sold under agreements to repurchase 1,977,467 2,478,344
Accrued interest 674,059 665,883
Long-term debt 11,907,143 11,007,143
Other liabilities 299,292 252,408
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TOTAL LIABILITIES 182,517,149 178,265,256
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SHAREHOLDERS' EQUITY:
Common stock ($5.00 par value; 20,000,000 shares authorized,
1,367,188 shares issued at March 31, 1999; 6,835,940 6,835,940
1,367,188 shares issued at December 31, 1998)
Treasury Stock (22,000 shares at cost at March 31, 1998; 15,000 (428,000) (428,000)
shares at cost at December 31, 1997)
Capital surplus 2,576,849 2,576,849
Retained earnings 2,668,626 2,394,590
Accumulated comprehensive income: unrealized gains on investment
securities available for sale, net of tax (66,503) 100,315
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TOTAL SHAREHOLDERS' EQUITY 11,586,912 11,479,694
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $194,104,061 $189,744,950
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</TABLE>
3
See notes to financial statements.
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
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THREE MONTHS ENDED MARCH 31
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1999 1998
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REVENUE FROM EARNING ASSETS:
Interest and fees on loans $3,086,237 $2,159,094
Interest on investment securities:
Taxable securities 248,220 257,281
Non-Taxable securities 194,716 53,846
Interest on federal funds sold 168,555 44,152
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TOTAL REVENUE FROM EARNING ASSETS 3,697,728 2,514,373
INTEREST EXPENSE:
Interest on deposits 1,979,869 1,320,817
Interest on securities sold under agreements to repurchase 21,388 47,095
Interest expense - other 107,547 96,327
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TOTAL INTEREST EXPENSE 2,108,804 1,464,239
NET INTEREST INCOME 1,588,924 1,050,134
Provision for loan losses 150,000 110,000
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,438,924 940,134
NONINTEREST INCOME:
Service charges on deposits 96,621 54,857
Insurance commissions 11,028 5,121
Other operating income 118,535 48,550
Investment securities gains 0 0
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TOTAL NONINTEREST INCOME 226,184 108,528
NONINTEREST EXPENSES:
Salaries and employee benefits 543,999 318,807
Occupancy expense 83,027 26,899
Furniture and equipment expense 76,605 35,983
Investment losses 0 416
Other operating expenses 547,440 278,050
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TOTAL NONINTEREST EXPENSES 1,251,071 660,155
Income before income taxes 414,037 388,507
Income tax provision (140,000) (150,000)
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NET INCOME $ 274,037 $ 238,507
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EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .20 $ .21
Basic weighted average shares outstanding 1,367,188 1,153,682
Diluted earnings per common share $ .19 $ .20
Diluted weighted average shares outstanding 1,459,060 1,226,844
</TABLE>
See notes to financial statements.
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
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THREE MONTHS ENDED MARCH 31
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1999 1998
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OPERATING ACTIVITIES:
Net income $274,037 $238,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 150,000 110,000
Provision for depreciation, accretion and amortization 118,952 44,519
Deferred tax 0 0
Realized investment security (gains) losses 0 416
Increase in accrued interest receivable (217,986) (74,584)
Increase in accrued interest payable 8,176 42,035
Increase in cash surrender value on life insurance (7,069) (7,371)
Other 396,350 232,314
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NET CASH PROVIDED IN OPERATING ACTIVITIES 722,460 585,836
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 0 3,398,149
Proceeds from maturity of securities available for sale 3,265,920 397,217
Purchase of securities available for sale (11,956,872) (5,295,000)
Proceeds from sale of premises and equipment 154,196 0
Net increase in loans to customers (11,168,012) (4,132,893)
Capital expenditures (85,615) (203,267)
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NET CASH USED IN INVESTING ACTIVITIES (19,790,383) (5,835,794)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, 2,798,569 4,248,912
and savings accounts
Net increase in certificates of deposits 999,141 2,983,699
Net decrease in securities sold under agreement to repurchase (500,877) (115,621)
Purchase of treasury stock 0 (154,000)
Issuance of common stock 0 97,268
Net increase in FHLB borrowings 900,000 500,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,196,833 7,560,258
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Net increase in cash and cash equivalents (14,871,090) 2,310,300
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,281,295 5,211,533
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $9,410,205 $7,521,833
------------ ------------
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest $2,100,628 $1,422,204
Income taxes 0 0
</TABLE>
See notes to financial statements.
5
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NOTES TO FINANCIAL STATEMENTS
(unaudited)
March 31, 1999
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Appalachian Bancshares, Inc. (the "Company") and its two subsidiaries, Gilmer
County Bank and Appalachian Community Bank (formerly First National Bank of
Union County) (the "Banks"). 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, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. For
further information, refer to the financial statements for Appalachian
Bancshares, Inc. for the year ended December 31, 1998, and footnotes thereto
included in Form 10-KSB, filed with the Securities and Exchange Commission on
March 31, 1999.
Appalachian Bancshares, Inc. is a bank holding company which
engages in providing a full range of banking services through its two
commercial bank subsidiaries: Gilmer County Bank and Appalachian Community
Bank. The Company was incorporated as a business corporation in May 1996
under the laws of the State of Georgia for the purpose of acquiring 100% of
the issued and outstanding shares of common stock of Gilmer County Bank. In
July 1996, the Company received approval from the Federal Reserve Bank of
Atlanta (the "Federal Reserve") and the Georgia Department of Banking and
Finance ("DBF") to become a bank holding company. In August 1996, the Company
and Gilmer County Bank entered into a reorganization pursuant to which the
Company acquired 100% of the outstanding shares of Gilmer County Bank, and
the shareholders of Gilmer County Bank became the shareholders of the capital
stock of the Company.
On November 30, 1998, the Company completed an acquisition of First
National Bank of Union County ("First National") from Century South Banks,
Inc. ("Century South"). First National is a nationally-chartered bank
organized in 1981 with its main banking office located in Blairsville,
Georgia. Pursuant to the terms of the acquisition agreement, the Company
acquired First National, in a cash transaction, for a purchase price of $6.1
million, and with the assumption of certain existing liabilities and assets
of First National by Century South or certain of its affiliates. The Company
funded a portion of the purchase price with the proceeds of a private
placement of 132,500 shares of the Company's Common Stock. The aggregate
gross proceeds of the private placement were $2.65 million. Purchasers of
shares of the Company's Common Stock in the private placement are entitled to
certain registration rights with respect to such shares and are subject to
certain call rights of the Company. The Company funded the remainder of the
purchase price through a $3.6 million loan with The Bankers Bank. On March
12, 1999, the Company received approval from the DBF to convert First
National into a state-chartered bank under the laws of the State of Georgia.
The Company completed the conversion
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of First National into a state-chartered bank in March 1999. Concurrently,
with the conversion of First National, the Company changed First National's
name to Appalachian Community Bank.
NOTE B - INCOME TAXES
The effective tax rates of approximately 34 percent and 38 percent
for the three months ended March 31, 1999 and March 31, 1998 approximate 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).
At March 31, 1999, the Company had net unrealized losses of $102,726
in available-for-sale securities which are reflected in the presented assets
and resulted in a decrease in Shareholder's equity of $66,503, net of
deferred tax liability. The net decrease in Shareholder's Equity as a result
of the SFAS 115 adjustment from December 31, 1998 to March 31, 1999 was
$166,818.
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 Banks' 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 and Union County,
primarily in the local poultry industry, (iii) rapid fluctuations in interest
rates, (iv) the inability of the Banks' 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 this report and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1998 appearing in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on March 31, 1999.
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FINANCIAL CONDITION
MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998
- --------------------------------------------
LOANS
Loans comprised the largest single category of the Company's earning
assets on March 31, 1999. Loans, net of unearned income and reserve for loan
losses, were 71.7 percent of total assets at March 31, 1999. Total net loans
were $139,162,712 at March 31, 1999, representing a 7.2 percent increase from
the December 31, 1998 total of $129,831,095. This increase reflects the
continued increase in loan demand for the Banks' market area coupled with an
increase in the Banks' market share for this area.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
Investment securities and federal funds sold decreased $5,380,794 or
24.9 percent from December 31, 1998 to March 31, 1998. Investment securities
at March 31, 1999 were $36,581,022 compared with $28,158,635 at December 31,
1998, reflecting a 29.9 percent increase of $8,422,387. Federal funds sold
were $4,589,032 at March 31, 1999 compared to the December 31, 1998 total of
$18,392,213, a 75.0 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 resulted from reinvesting the
funds in loans and securities.
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 62.44 to 15.79. Total
nonperforming assets at March 31, 1999 were $115,000, which included two
collateralized commercial loans aggregating $86,000. Nonperforming assets at
December 31, 1998 were $27,000. The ratio of total nonperforming assets to
total assets increased slightly from .0001 to .0006 as compared to December
31, 1998. The ratio of nonperforming loans to total loans increased slightly
from 0.0002 to 0.0008 as compared to December 31, 1998. 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 $167,659,188 at March 31, 1999 increased
$3,797,710 (2.3%) over total deposits of $163,861,478 at year-end 1998.
Deposits are the Company's primary source of funds with which to support its
earning assets. Noninterest-bearing deposits increased $333,174 or 3.6
percent from year-end 1998 to March 31, 1999, and interest-bearing deposits
increased $3,464,536 or 2.2% during the same period. Time deposits of
$100,000 or more increased $977,008 (3.8%).
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SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $1,977,467 at
March 31, 1999, a $500,877 decrease from the December 31, 1998 total of
$2,478,344. 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 $107,218 from December 31, 1998 to
March 31, 1999, due to net earnings of $274,037 and the decrease in the
measurement for unrealized gains or losses on securities available for sale
totaling $166,818, net of deferred tax benefits of $89,845.
YEAR 2000
The Company 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. For example, computer systems may compute payment,
interest, delinquency or other figures important to the operations of the
Company based on the wrong date. 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 FDIC has issued guidelines for insured financial institutions
with respect to Year 2000 compliance. The Company has developed a Year 2000
action plan based in part on the guidelines and timetables issued by the
FDIC. The Company's action plan focuses on four primary areas: (1)
information systems, (2) embedded systems located at the Banks' offices and
within its off-site ATM machines, (3) third party and customer relationships,
and (4) contingency planning. The Company has designated a Year 2000
compliance team, headed by its Chief Financial Officer and Chief Operating
Officer, who reports to the board of directors. In addition, the Company has
engaged outside consultants for purposes of conducting Year 2000 readiness
assessments and remediation where necessary.
INFORMATION SYSTEMS. The Company has identified all mission critical
information ("IT") systems and has developed a schedule for testing and
remediation of such systems. Testing of key computer hardware has been
completed, and the Company has completed modification and replacement of its
mission critical hardware that was not Year 2000 compliant. The Company has
completed its inventory of mission critical software and is in the process of
contacting software vendors for certification of Year 2000 compliance, which
the Company has completed in the second quarter of 1999. The Company plans to
complete any programming changes to critical systems and commence testing of
the new programming in the second quarter of 1999. Testing of internal
mission-critical systems commenced during the first quarter of 1999 and
implementation is scheduled to be completed by June 30, 1999.
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EMBEDDED SYSTEMS. The Company has performed a comprehensive
inventory of its embedded systems, such as microcontrollers used to operate
security systems and elevators, and has completed its inventory of mission
critical non-IT systems. The Company is in the process of contacting
manufacturers and vendors of those components utilized in operations to
determine whether such components are Year 2000 compliant. The Company
intends to remediate or replace, as applicable, any non-compliant components
and expects to complete this process for mission critical systems by June 30,
1999. The quality of the responses from manufacturers and vendors, the
estimated impact of the individual system or component on the Banks'
operations, and the ability of the Company to perform meaningful and
verifiable tests will influence its decision regarding whether to have
independent tests conducted on its embedded systems.
THIRD PARTY AND CUSTOMER RELATIONSHIPS. The Company is in the
process of initiating communications with all suppliers and vendors to
determine the potential impact of such third parties' failure to remediate
their own Year 2000 issues. These third parties include other financial
institutions, office supply vendors and telephone, electric and other utility
companies. The Company is encouraging its counterparties and customers to
conduct their own Year 2000 assessment and take appropriate steps to become
Year 2000 compliant.
The Company outsources its principal data processing activities to
another financial institution, and the Company is actively communicating with
and monitoring the progress of such institution to assess the impact of Year
2000 issues on such institution and its ability to provide such data
processing services. The Company will consider new business relationships
with alternate providers of products and services if necessary. Additionally,
the Company has initiated communications with its larger and commercial
borrowers to assess the potential impact of Year 2000 on them and their
ability to remain current on loan repayments.
CONTINGENCY PLANS. As part of the Company's normal business
practice, it maintains contingency plans to follow in the event of emergency
situations, some of which could arise from Year 2000-related problems. The
Company is in the process of formulating a detailed Year 2000 contingency
plan, which will assess several possible scenarios to which the Company may
be required to react. The Company's formal Year 2000 contingency plan is
expected to be completed by the end of second quarter 1999.
FINANCIAL IMPLICATIONS. The Company believes that, since a majority
of its equipment is relatively new, the Year 2000 problem will not pose
significant internal operational problems or generate material additional
expenditures. 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. Management currently 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. In
connection with its assessment, testing and remediation of Year 2000 issues,
the Company incurred costs of approximately $10,000 in 1998. The Company
currently estimates that the costs of assessing, testing and remediation of
Year 2000 issues will total approximately $80,000 in 1999. During the first
three months of 1999 the Company incurred costs of approximately $45,000. The
anticipated costs associated with the Company's Year 2000 compliance program
do not include time and costs that may be incurred as a result of any
potential failure of third parties to become Year 2000 compliant or costs to
implement the Company's contingency plans. The Company is funding its costs
associated with the Year 2000 issue through its regular operating income.
While the Company does not expect the cost of these
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efforts to be material to its financial position or its operating results,
there can be no assurance to this effect.
POTENTIAL RISKS. The Year 2000 issue presents a number of risks to
the business and financial condition of the Company and the Banks. External
factors, which include but are not limited to electric and telephone service,
are beyond the control of the Company and the failure of such systems could
have a material adverse effect on the Company, its customers and third
parties on whom the Company relies for its day-to-day operations. 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 Banks'
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.
In light of its compliance efforts, the Company does not believe
that the Year 2000 issue will materially adversely effect operations or
results of operations, and does not expect implementation to have a material
impact on its business, financial condition or operating results. However,
there can be no assurance that the Company's and the Banks' systems will be
Year 2000 ready prior to December 31, 1999, or that the failure of any such
system will not have a material adverse effect on the Company's business,
financial condition or operating results. In addition, to the extent the Year
2000 issue has a material adverse effect on the business, financial condition
or operating results of third parties which whom the Company has material
relationships, such as other financial institutions, the Year 2000 issue
could have a material adverse effect on the Company's business, financial
condition or operating results.
The foregoing are forward-looking statements reflecting management's
current assessment and estimates with respect to the Company's Year 2000
compliance efforts and the impact of Year 2000 issues on the Company's
business and operations. 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 MANAGEMENT
Liquidity is defined as the ability of a company to convert assets into
cash or cash equivalents without significant loss. Liquidity management
involves maintaining the Banks' 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 Banks' 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 Banks' 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
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sources and uses of funds is necessary to maintain an acceptable cash
position that meets both requirements. In the banking environment, both
assets and liabilities are considered sources of liquidity funding and both
are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments or sales of investment and trading account
securities. Real estate construction and commercial, financial and
agricultural loans that mature in one year or less equaled approximately
$23.3 million or 16.5% of the total loan portfolio at March 31, 1999 and
investment securities maturing in one year or less equaled $900,000 or 2.5%
of the portfolio. Other sources of liquidity include short-term investments
such as federal funds sold.
The liability portion of the balance sheet provides liquidity
through various customers' interest-bearing and noninterest-bearing deposit
accounts. As of March 31, 1999, funds were also available through the
purchase of federal funds from correspondent commercial banks from available
lines of up to an aggregate of $4,000,000. 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
Gilmer County Bank, management made application for membership for Gilmer
County Bank with the Federal Home Loan Bank of Atlanta in 1997. As a member
of the Federal Home Loan Bank, Gilmer County Bank is able to improve its
ability to manage liquidity and reduce interest rate risk by having a funding
source to match longer term loans. The application was approved on April 17,
1997, and Gilmer County Bank received an initial credit line of up to
$8,000,000. Gilmer County Bank's credit line was increased to $12,000,000 in
March 1998. At March 31, 1999, the outstanding balance of Gilmer County
Bank's credit line was $7,307,143. Appalachian Community Bank also has a
credit line with the Federal Home Loan Bank, which provides for a credit line
of up to $6,000,000. At March 31, 1999, Appalachian Community Bank's
outstanding credit line balance was $1,000,000.
CAPITAL RESOURCES
A strong capital position is vital to the continued profitability of
the Company because it promotes depositor and investor confidence and
provides a solid foundation for future growth of the organization. A majority
of the Company's capital requirements have been provided from the proceeds
from Gilmer County Bank's initial stock offering in 1994, through draws by
Gilmer County Bank on the credit line with the Federal Home Loan Bank,
through draws on a line of credit with Hardwick Bank and Trust Company
(described below), through a $3.6 million loan from The Bankers Bank
(described below), from the proceeds of the $2.65 private placement of the
Common Stock in November 1998, and through the retention of earnings and the
sale of Company stock to the Company's 401(k) plan.
TERM LOAN. In November 1998, the Company obtained a $3.6 million
term loan under a Loan and Stock Pledge Agreement and a Promissory Note
(collectively, the "Term Loan") with The Bankers Bank. The Company used $3.45
of the proceeds of the Term Loan to fund a portion of its acquisition of
First National. The Company used $150,000 of the proceeds of the Term Loan to
payoff its former line of credit with Hardwick Bank & Trust Company. At March
31, 1999, the balance on the Term Loan was $3.6 million. Interest on the
outstanding amounts under the Term Loan is payable quarterly, commencing
January 1, 1999, at the prime rate (as defined
12
<PAGE>
in the Promissory Note) less 3/4 of a percentage point. The Company began
making interest payments on January 1, 1999. Principal is due in seven equal
annual installments, each in the amount of $450,000, plus accrued and unpaid
interest, beginning on November 30, 2000. The entire outstanding balance of
the Term Loan, together with all accrued and unpaid interest, is due and
payable in a final installment on November 30, 2008. The Term Loan contains
certain affirmative and negative covenants, including, but not limited to,
requiring the Company to cause the Banks at all times to maintain certain
minimum capital ratios, maintain nonperforming assets below a specified
level, and maintain a minimum ratio of consolidated loan loss reserves to
total loans.
FEDERAL CAPITAL STANDARDS. Regulatory authorities are placing
increased emphasis on the maintenance of adequate capital. In 1990, new
risk-based capital requirements became effective under FDICIA. The guidelines
take into consideration risk factors, as defined by regulators, associated
with various categories of assets, both on and off the balance sheet. Under
the guidelines, capital strength is measured in two tiers which are used in
conjunction with risk-adjusted assets to determine the risk-based capital
ratios. The Company's Tier 1 capital, which consists of common equity,
paid-in capital and retained earnings (less intangible assets), amounted to
$9.3 million at March 31, 1999. Tier 2 capital components include
supplemental capital components such as qualifying allowance for loan losses
and qualifying subordinated debt. Tier 1 capital plus the Tier 2 capital
components is referred to as Total Capital and was $11.2 million at March 31,
1999. The Company's percentage ratios as calculated under regulatory
guidelines were 6.52% and 7.77% for Tier 1 and Total Capital, respectively,
at March 31, 1999. The Company's Tier 1 Capital exceeded the minimum ratio of
4% whereas the Company's Total Capital was slightly under the minimum ratio
of 8%.
The Company's failure to meet the minimum Total Capital ratio at
March 31, 1999 was primarily attributable to the amount of goodwill resulting
from the Company's acquisition of First National. Over future periods the
effects of the goodwill on the Company's Total Capital ratio will decrease as
the goodwill is amortized on a straight-line basis over a period of twenty
years. Additionally, management intends to closely monitor the asset mix of
the Banks and to take such additional steps as are necessary in order to
avoid a future failure to meet the applicable capital ratios. These
additional steps may include limiting the payment of dividends by the Company
and raising additional capital. There can be no assurances, however, that
such steps will be successful or that the Company will be able to meet its
minimum capital ratios. The failure of the Company to meet its minimum
capital ratios could result in, among other things, increased scrutiny from
applicable regulatory authorities, a reduction in the permissible activities
of the Company or a default under the Company's credit facilities. Any of
these events could have a material adverse effect on the Company's business,
financial condition and results of operations.
Another important indicator of capital adequacy in the banking
industry is the leverage ratio. The leverage ratio is defined as the ratio
which shareholders' equity, minus intangibles bears to total assets minus
intangibles. At March 31, 1999, the Company's leverage ratio was 4.93%
exceeding the regulatory minimum requirement of 4%.
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 Gilmer County Bank's charter. This
standard, which exceeds the FDIC capital standards, is calculated as
13
<PAGE>
the ratio of total equity to total assets, each as adjusted for unrealized
gains and losses on securities and allowance for loan losses. This heightened
requirement was imposed during the first three years of Gilmer County Bank's
operation. Accordingly, on March 3, 1998 Gilmer County Bank became subject to
a 6% primary capital ratio. At March 31, 1999 the capital ratio as calculated
under the DBF standard for Gilmer County Bank was 7.48%. At March 31, 1999
the capital ratio as calculated under the DBF standard for Appalachian
Community Bank was 12.54%.
In March 1999, the Banks' paid a $350,000 dividend to the
Company, which will be used by the Company for repayment of debt and other
expenses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
- ---------------------------------
SUMMARY
Net earnings for the three months ended March 31, 1999 were $274,037
compared to net earnings of $238,507 for the same period in 1998. Net
interest income increased $120,852 (14.8%) during the first three months of
1999, as compared to the same period in 1998; noninterest expenses increased
$111,176 (20.2%) during same period, while noninterest income increased by
$22,861 (26.7%). The changes from first quarter 1999 compared to the same
period in 1998,discussed further below, are largely due to the purchase of
Appalachian Community Bank in December 1998. The amounts for first quarter
1998 reflected the Company holding only one subsidiary, Gilmer County Bank
while the first quarter 1999 reflects amounts for both Gilmer County Bank and
Appalachian Community Bank combined.
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, 1999 increased $1,183,355 (47.1%)
from the same period in 1998. This increase was due to the purchase of
Appalachian Community Bank. Interest expense for the three months ended March
31, 1999 increased $644,565 or (44.0%) compared to the same period of 1998.
Interest expense paid on deposit accounts increased $659,052. 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 conditions, the composition of
the loan portfolio and the levels of nonaccruing and past due loans. The
provision for loan losses was $150,000 for the three months ended March 31,
1999 compared to $110,000 for the same period of 1998. Charge-offs exceeded
recoveries by $18,493 for the three
14
<PAGE>
months ended March 31, 1999. The reserve for loan losses as a percent of
outstanding loans, net of unearned income, was 1.3 percent at March 31, 1999
compared to 1.2 percent at year-end 1998.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1999 was
$226,184 compared to $108,528 for the same period of 1998. This increase was
primarily due to an increase in service charges on deposit accounts of
$41,764 in the first quarter of 1999 as compared to the same period of 1998,
and increases in other operating income of $69,985. Significant components of
noninterest income changed as follows: Service charges on deposits increased
$41,764 (76.1%), insurance commissions increased $5,907 (115.4%), and other
operating income increased $69,985 (144.2%) to $118,535. These increases were
attributable to the addition of Appalachian Community Bank.
NONINTEREST EXPENSES
Noninterest expenses for the three months ended March 31, 1999 were
$1,251,071, reflecting a 89.5 percent increase over the same period of 1998.
The primary components of noninterest expenses are salaries and employee
benefits, which increased to $543,999 for the three months ended March 31,
1999, 70.6 percent higher than in the same period of 1998. The increase in
salaries and employee benefits are due to the additional staff members at
Appalachian Community Bank. Occupancy costs increased $56,128 (208.7%), and
furniture and equipment expenses increased by $40,622. Other operating
expenses rose by 96.9 percent to $547,440. The increase in other operating
expenses and occupancy expense are largely the result of the addition of
Appalachian Community Bank.
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 $140,000 for the three
months ended March 31, 1999 decreased $10,000 compared to the same period of
1998.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
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 was sold in February 1999 for $155,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net Income Per Share
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
period covered by this Report.
16
<PAGE>
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.
-------------------------------
Tracy R. Newton
President and CEO
(Duly authorized officer)
-------------------------------
Kent W. Sanford
Executive Vice President
(Principal financial officer)
17
<PAGE>
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, 1999 and
1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Basic net income $ 274,037 $ 238,507
Basic earnings on common shares $ 274,037 $ 238,507
---------- ----------
---------- ----------
Weighted average common shares outstanding - basic 1,367,188 1,153,682
---------- ----------
---------- ----------
Basic earnings per common share $ .20 $ .21
---------- ----------
---------- ----------
Basic net income per common share $ .20 $ .21
---------- ----------
---------- ----------
Diluted net income $ 274,037 $ 238,507
Diluted earnings on common shares $ 274,037 $ 238,507
---------- ----------
---------- ----------
Weighted average common shares outstanding - diluted 1,459,060 1,226,844
---------- ----------
---------- ----------
Diluted earnings per common share $ .19 $ .20
---------- ----------
---------- ----------
Diluted net income per common share $ .19 $ .20
---------- ----------
---------- ----------
</TABLE>
<PAGE>
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 274,037 $ 238,507
Other comprehensive, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period (256,663) 81,654
Less: reclassification adjustments for gains (losses) included in net income 0 416
--------- ---------
Net unrealized gains (losses) (256,663) 82,070
Income tax expense related to items of other comprehensive income 89,845 (27,904)
--------- ---------
Other comprehensive income (loss) (166,818) 54,166
--------- ---------
Comprehensive income $ 107,219 $ 292,673
--------- ---------
--------- ---------
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,509,885
<INT-BEARING-DEPOSITS> 311,288
<FED-FUNDS-SOLD> 4,589,032
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,514,155
<INVESTMENTS-CARRYING> 6,066,867
<INVESTMENTS-MARKET> 6,277,201
<LOANS> 140,979,060
<ALLOWANCE> 1,816,348
<TOTAL-ASSETS> 194,104,061
<DEPOSITS> 167,659,188
<SHORT-TERM> 1,977,467
<LIABILITIES-OTHER> 973,351
<LONG-TERM> 11,907,143
0
0
<COMMON> 6,835,940
<OTHER-SE> 4,750,972
<TOTAL-LIABILITIES-AND-EQUITY> 194,104,061
<INTEREST-LOAN> 3,086,237
<INTEREST-INVEST> 442,936
<INTEREST-OTHER> 168,555
<INTEREST-TOTAL> 3,697,728
<INTEREST-DEPOSIT> 1,979,869
<INTEREST-EXPENSE> 2,108,804
<INTEREST-INCOME-NET> 1,588,924
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,251,071
<INCOME-PRETAX> 414,037
<INCOME-PRE-EXTRAORDINARY> 414,037
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 274,037
<EPS-PRIMARY> 20
<EPS-DILUTED> 19
<YIELD-ACTUAL> 3.53
<LOANS-NON> 7,000
<LOANS-PAST> 108,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 251,000
<ALLOWANCE-OPEN> 1,686,395
<CHARGE-OFFS> 36,434
<RECOVERIES> 16,749
<ALLOWANCE-CLOSE> 1,816,348
<ALLOWANCE-DOMESTIC> 1,816,348
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
