<PAGE>
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,
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:
<TABLE>
<CAPTION>
Class Outstanding at August 13, 1999
----- ------------------------------
<S> <C>
Common Stock, $5.00 par value 1,323,188
</TABLE>
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE>
APPALACHIAN BANCSHARES, INC.
June 30, 1999 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets ............................. 1
Consolidated Statement of Income ........................ 2
Consolidated Statement of Comprehensive Income........... 3
Consolidated Statement of Cash Flows .................... 4
Notes to Consolidated Financial Statements .............. 5
Item 2. Management's Discussion and Analysis or Plan of Operation 6
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..... 14
Item 5. Other Information ....................................... 15
Item 6. Exhibits and Reports on Form 8-K ........................ 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31,
ASSETS (Unaudited) 1998
------------- -------------
<S> <C> <C>
Cash and due from banks 5,118,853 5,481,853
Interest bearing deposits with other banks 207,297 407,229
Federal funds sold 7,516,986 18,392,213
Securities available for sale 26,918,605 21,940,281
Securities held to maturity (fair market value $6,469,830) 6,403,823 6,218,354
Loans 152,770,436 129,831,095
Allowance for loan losses (1,848,579) (1,686,395)
------------- -------------
Net Loans 150,921,857 128,144,700
Premises and equipment, net 3,773,315 3,940,032
Cash surrender value on life insurance 630,058 615,438
Accrued interest 1,612,247 1,319,601
Intangibles, net 2,286,259 2,345,055
Other assets 989,622 940,194
------------- -------------
TOTAL ASSETS $ 206,378,922 $ 189,744,950
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS'EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 9,439,164 $ 9,287,933
Interest-bearing 165,750,476 154,573,545
------------- -------------
TOTAL DEPOSITS 175,189,640 163,861,478
Securities sold under agreements to repurchase/Federal funds
purchased 4,884,696 2,478,344
Accrued interest 784,084 665,883
Long-term debt 13,535,714 11,007,143
Other liabilities 392,408 252,408
------------- -------------
TOTAL LIABILITIES 194,786,542 178,265,256
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($5.00 par value; 20,000,000 shares authorized,
1,367,188 shares issued at June 30, 1999; 6,835,940 6,835,940
1,367,188 shares issued at December 31, 1998)
Treasury Stock (44,000 shares at cost at June 30, 1999; 30,000 (428,000) (428,000)
shares at cost at December 31, 1998)
Capital surplus 2,576,849 2,576,849
Retained earnings 2,898,806 2,394,590
Accumulated comprehensive income: unrealized gains on investment
securities available for sale, net of tax (291,215) 100,315
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 11,592,380 11,479,694
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 206,378,922 $ 189,744,950
------------- -------------
------------- -------------
</TABLE>
1
See Notes to Financial Statements
<PAGE>
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------- -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $ 3,431,600 $ 2,265,318 $ 6,517,837 $ 4,424,412
Interest on investment securities:
Taxable securities 336,841 302,291 585,061 559,572
Nontaxable securities 144,609 55,382 339,325 109,228
Interest on federal funds sold 62,267 54,077 230,822 98,229
----------- ----------- ----------- -----------
TOTAL REVENUE FROM EARNING ASSETS 3,975,317 2,677,068 7,673,045 5,191,441
INTEREST EXPENSE:
Interest on deposits 1,917,815 1,442,869 3,897,684 2,763,686
Interest on federal funds purchased and
securities sold under agreements to repurchase 23,824 42,223 45,212 89,318
Interest expense - long term debt 258,554 96,358 366,101 192,685
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 2,200,193 1,581,450 4,308,997 3,045,689
NET INTEREST INCOME: 1,775,124 1,095,618 3,364,048 2,145,752
Provision for loan losses 205,000 70,000 355,000 180,000
----------- ----------- ----------- -----------
AFTER PROVISION FOR LOAN LOSSES 1,570,124 1,025,618 3,009,048 1,965,752
NONINTEREST INCOME:
Service charges on deposits 101,321 56,088 197,942 110,945
Insurance commissions 26,598 4,380 37,626 9,501
Other operating income 57,222 64,377 175,757 112,927
Investment securities gains (losses) 10,456 14,475 10,456 14,475
----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME 195,597 139,320 421,781 247,848
NONINTEREST EXPENSES:
Salaries and employee benefits 600,814 347,778 1,144,813 666,585
Occupancy expense 80,041 38,216 163,068 65,115
Furniture and equipment expense 95,035 51,240 87,223 171,640
Other operating expenses 579,048 304,596 1,126,488 583,062
----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSES 1,354,938 741,830 2,606,009 1,401,985
Income before income taxes 410,783 423,108 824,820 811,615
Income tax provision (180,603) (130,000) (320,603) (280,000)
----------- ----------- ----------- -----------
NET INCOME $ 230,180 $ 293,108 $ 504,217 $ 531,615
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .17 $ .25 $ .38 $ .46
Basic weighted average shares outstanding 1,323,188 1,150,284 1,323,188 1,150,284
Diluted earnings per common share $ .16 $ .24 $ .36 $ .43
Diluted weighted average shares outstanding 1,415,967 1,223,446 1,415,517 1,223,446
</TABLE>
2
See Notes to Financial Statements
<PAGE>
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income $ 230,180 $ 293,108 $ 504,217 $ 531,615
Other comprehensive, net of tax:
Unrealized gains on securities: Unrealized
holding gains (losses) arising during the period (337,634) (113,859) (594,297) (32,205)
Less: reclassification adjustments for gains
(losses) Included in net income (10,456) (14,891) (10,456) (14,475)
--------- --------- --------- ---------
(348,090) (128,750) (604,753) (46,680)
Income tax benefit related to items of other
Comprehensive income 123,377 43,775 213,222 15,871
--------- --------- --------- ---------
Other comprehensive income (loss) (224,713) 42,223 (391,531) 89,318
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 5,467 $ 208,133 $ 112,686 $ 500,806
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
3
See Notes to Financial Statements
<PAGE>
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 504,217 $ 531,615
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 355,000 180,000
Net depreciation, amortization, and accretion 242,740 90,377
Realized investment security loss (gains) (10,456) (14,475)
Increase in accrued interest receivable (292,646) (61,415)
Increase in accrued interest payable 118,201 13,096
Other 309,783 (57,352)
------------ ------------
NET CASH PROVIDED IN OPERATING ACTIVITIES 1,226,839 681,846
INVESTING ACTIVITIES:
Net increase in securities available for sale (5,297,812) (508,125)
Net increase in securities held to maturity (487,994) (1,135,102)
Net increase in loans to customers (23,132,157) (7,622,774)
Capital (expenditures) sales, net 10,491 (409,356)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (28,907,472) (9,675,357)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 852,834 9,600,858
Net increase in certificates of deposit 10,475,328 4,352,329
Net (decrease) increase in short term borrowings 2,385,741 (785,999)
Proceeds from issuance of common stock 0 97,268
Purchase of treasury stock 0 (154,000)
Proceeds from long term debt 2,528,571 378,571
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,242,474 13,489,027
------------ ------------
Net increase (decrease) in cash and cash equivalents (11,438,159) 4,495,516
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,281,295 5,211,533
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,843,136 $ 9,707,049
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 4,190,796 $ 3,058,785
Income taxes 145,603 315,000
</TABLE>
4
See Notes to Financial Statements
<PAGE>
APPALACHIAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
June 30, 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) (collectively, 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 six month period ended June 30, 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 was 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. Subsequently, the Company completed the conversion of First National
into a state-chartered bank and changed First National's name to Appalachian
Community Bank.
5
<PAGE>
NOTE B - INCOME TAXES
The effective tax rate of approximately 39 percent for the six months
ended June 30, 1999 approximates the federal and state statutory rates.
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, 1999, the Company had net unrealized losses of $450,816
in securities available-for-sale which are reflected in the presented assets.
These losses resulted in a decrease in Shareholders' equity of $291,216, net
of deferred tax liability. There were no trading securities. The net decrease
in Shareholders' Equity as a result of the SFAS 115 adjustment from December
31, 1998 to June 30, 1999 was $391,531.
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, primarily in the local poultry industry,
and Union County, (iii) rapid fluctuations in interest rates, (iv) the inability
of the Banks to maintain regulatory capital standards, (v) changes in the
legislative and regulatory environment, and (vi) potential adverse effects on
the economy and the Banks 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 this Report on Form 10-QSB 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.
6
<PAGE>
FINANCIAL CONDITION
JUNE 30, 1999 COMPARED TO DECEMBER 31, 1998
LOANS
Loans comprised the largest single category of the Company's earning
assets on June 30, 1999. Loans, net of unearned income and reserve for loan
losses, were 73.1% of total assets at June 30, 1999. Total net loans were
$150,921,857 at June 30, 1999, representing a 17.8% increase from the December
31, 1998 total of $128,144,700. This increase reflects the continued increase in
loan demand for the Banks' respective market areas coupled with an increase in
the Banks' market share for their respective areas.
INVESTMENT SECURITIES AND OTHER EARNING ASSETS
Investment securities and federal funds sold decreased $5,711,434 or
14.0 percent from December 31, 1998 to June 30, 1999. Investment securities at
June 30, 1999 were $33,322,428 compared with $28,158,635 at December 31, 1998,
reflecting a 18.3 percent increase of $5,163,793. Federal funds sold were
$7,516,986 at June 30, 1999 compared to the December 31, 1998 total of
$18,392,213, a 59.1 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 2.17. Total nonperforming assets at June
30, 1999 were $850,000, which mainly consisted of one loan to a local medical
facility that is no longer in business. The Company is in process of converting
collateral from this loan to cash. Nonperforming assets at December 31, 1998
were $27,000. The ratio of total nonperforming assets to total assets increased
from .0001 to .0041 and the ratio of nonperforming loans to total loans
increased from 0.0002 to 0.0056 as compared to December 31, 1998. Management
believes that all of these ratios remain favorable as compared with industry
averages, and management is not aware of any factors which would suggest that
these ratios are prone to erosion in future periods.
DEPOSITS
Total deposits of $175,189,640 at June 30, 1999 increased $11,328,162
or 6.9% 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 $151,231 or 1.6% from year-end 1998 to
June 30, 1999, and interest-bearing deposits increased $11,176,931 or 7.2%
during the same period. Time deposits of $100,000 or more increased $6,383,039
(24.6%).
7
<PAGE>
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $1,884,696 at
June 30, 1999, a $593,648 decrease from the December 31, 1998 total of
$2,478,344. Federal funds purchased totaled $3,000,000 at June 30, 1999. There
were no fed funds purchased at year-end 1998. The total of securities sold under
agreements to repurchase is associated with the cash flow needs of the Banks'
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 $112,686 from December 31, 1998 to June
30, 1999, due to net earnings of $504,217 less a $391,531 decrease in the
measurement for unrealized gains or losses on securities available for sale.
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
completed its inventory of mission critical software and contacted software
vendors for certification of Year 2000 compliance in the second quarter of 1999.
The Company has completed all programming changes to critical systems and
finished testing the new programming during the second quarter of 1999. Testing
of internal mission-critical systems commenced during the first quarter of 1999
and implementation was completed by June 30, 1999.
EMBEDDED SYSTEMS. The Company has performed a comprehensive inventory
of its embedded ("non-IT") systems, such as microcontrollers used to operate
security systems and elevators, and has completed its inventory of mission
critical non-IT systems. The Company has contacted manufacturers and vendors of
those components utilized in operations to determine whether such components are
Year 2000 compliant. The Company completed the remediation or
8
<PAGE>
replacement, as applicable, of all known non-compliant components for its
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. The Company
plans to have a third party independent consultant review its Year 2000 plan
and testing during the third quarter of 1999.
THIRD PARTY AND CUSTOMER RELATIONSHIPS. The Company continues to
monitor 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 has encouraged 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 has
completed a detailed Year 2000 contingency plan, which assesses several possible
scenarios to which the Company may be required to react. The Company's formal
Year 2000 contingency plan was completed during the second quarter of 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 six months of 1999 the Company incurred costs
of approximately $60,000. 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 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
9
<PAGE>
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 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 Banks would not be able to perform their primary function of
financial intermediaries and would, therefore, not be able to meet the
production and growth needs of the communities they serve.
The primary function of assets and liabilities management is not only
to assure adequate liquidity in order for the Banks to meet the needs of their
customer base, but to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that the Banks can also meet the
investment requirements of the Company's 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 $73.4
million or 48.1% of the total loan portfolio at June 30, 1999 and investment
securities maturing in one year or less equaled $100,000 or .003% of the
portfolio. Other sources of liquidity include short-term investments such as
federal funds sold.
10
<PAGE>
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
June 30, 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 June 30, 1999,
the outstanding balance of Gilmer County Bank's credit line was $8,935,714.
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 June 30, 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 pay off
its former line of credit with Hardwick Bank & Trust Company. At June 30, 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 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-
11
<PAGE>
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 $9.6 million at June 30, 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 $11.4
million at June 30, 1999. The Company's percentage ratios as calculated under
regulatory guidelines were 6.04% and 7.20% for Tier 1 and Total Capital,
respectively, at June 30, 1999. The Company's Tier 1 Capital exceeded the
minimum ratio of 4% whereas the Company's Total Capital was under the minimum
ratio of 8%.
The Company's failure to meet the minimum Total Capital ratio at June
30, 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 June 30, 1999, the Company's leverage ratio was 4.89% 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 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 June
30, 1999 the capital ratio as calculated under the DBF standard for Gilmer
County Bank was 7.24%. At June 30, 1999 the capital ratio as calculated under
the DBF standard for Appalachian Community Bank was 11.18%. Both of these
capital ratios met the DBF requirements.
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
SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 1999
SUMMARY
Net earnings for the six months ended June 30, 1999 were $504,217
compared to net earnings of $531,615 for the same period in 1998. This 5.4%
decrease in net earnings is partially
12
<PAGE>
attributable to an increase in the interest expense related to the loan from
The Bankers Bank that the Company received in November 1998. Net interest
income increased $1,218,296 (56.7%) during the first six months of 1999 as
compared to the same period in 1998; noninterest expenses increased
$1,204,024 (85.9%) during same period, while noninterest income increased by
$173,933 (70.2%). Total interest expense increased $1,263,308 (41.5%) during
the first six months of 1999 as compared to the same period in 1998. The
amounts for the first six months of 1999 reflected the effects of the
addition of Appalachian Community Bank, which the Company acquired in
November 1998. Prior to the acquisition -- and during the first six months in
1998 -- the Company had only one subsidiary, Gilmer County Bank.
Net earnings for the quarter ended June 30, 1999 were $230,180 compared
to net earnings of $293,108 for the second quarter of 1998. This represents a
21.5% decrease as compared to the same period in 1998. This decrease is
primarily attributable to an increase in interest expense associated with the
loan with Bankers Bank. Total interest expense increased by $618,743 as compared
to the same period in 1998. Net interest income increased $679,506 during the
three months ended June 30, 1999 as compared to the same period in 1998;
noninterest expenses increased $613,108 during the same period, while
noninterest income increased by $56,277. The amounts for the three months ended
June 30,1998 reflected the Company holding only one subsidiary, Gilmer County
Bank while the amounts for three months ended June 30,1999 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 six
months ended June 30, 1999 increased $1,218,296 (56.7%) from the same period in
1998. This increase is attributable to the acquisition of Appalachian Community
Bank. Interest expense for the six months ended June 30, 1999 increased
$1,263,308 or (41.5%) compared to the same period of 1998. This increase was
primarily due to an increase of $1,133,998 in interest expense accrued on
deposit accounts. The remaining increase is attributed to interest expense on
loans from the Federal Home Loan Bank and The Bankers Bank.
Net interest income increased $679,506 or 62.0% during the quarter
ended June 30, 1999 as compared to the same period in 1998. An increase of
$1,298,249 or 48.5% 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 $355,000 for the six months ended June 30, 1999 compared to
$180,000 for the same period of 1998. Charge-offs exceeded recoveries by
$192,383 for the six months ended June 30, 1999. The reserve for loan losses as
a percent of outstanding loans, net of unearned income, was 2.32 percent at June
30, 1999 compared to 1.3 percent at year-end 1998.
The provision for loan losses was $205,000 for the three months ended
June 30, 1999 compared to $70,000 for the same period in 1998.
13
<PAGE>
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 1999 was $421,781
compared to $247,848 for the same period of 1998. This increase was primarily
due to an increase in service charges on deposit accounts of $86,997 in the
first six months of 1999 as compared to the same period of 1998, and increases
in other operating income of $62,830. Significant components of noninterest
income changed as follows: Service charges on deposits increased $86,997
(78.4%), insurance commissions increased $28,125 (296.0%), and other operating
income increased $62,830 (55.6%) to $175,757. Earnings on cash surrender value
of life insurance policies provided $17,385 of the increase to other operating
income. These increases are primarily attributable to the addition of
Appalachian Community Bank.
Noninterest income increased by $56,277 or 40.4% in the second quarter
of 1999 as compared to the same period in 1998. Service charges on deposits
increased by $45,233 or 80.6%. These increases are attributable to the addition
of Appalachian Community Bank.
NONINTEREST EXPENSES
Noninterest expenses for the six months ended June 30, 1999 were
$2,606,009, reflecting a 85.9% increase over the same period of 1998. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $1,144,813 for the six months ended June 30, 1999, 71.7%
higher than in the same period of 1998. These increases are attributable to the
addition of Appalachian Community Bank. Occupancy costs increased $97,953
(150.4%), and furniture and equipment expenses increased by $84,417. Other
operating expenses rose by 93.2% to $1,126,488.
Noninterest expenses increased by $613,108 for the quarter ended June
30, 1999 as compared to the same period in 1998. The primary components of
noninterest expense are salaries and employee benefits, which increased by
$253,036 for the three months ended June 30, 1999, 72.7% higher than the same
period of 1998. Occupancy costs increased by $41,825 and other operating
expenses increased by $274,452 for the second quarter of 1999 as compared with
the same period in 1998. These increases are attributable to 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 $320,603 for the six months
ended June 30, 1999 increased $40,603 compared to the same period of 1998 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
25, 1999 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 Vise, P.C. as the Company's independent
auditors was ratified with 97,901 votes for and 14,400 against. In addition, the
director nominees listed in the following table, each of whom served as a
director of
14
<PAGE>
the Company prior to the annual meeting with the exception of Kent Sanford, 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>
FOR VOTE WITHHELD
<S> <C> <C>
Alan S. Dover 996814 0
Charles A. Edmondson 996814 0
Roger E. Futch 996774 40
Joseph C. Hensley 996814 0
Frank E. Jones 996794 20
J. Ronald Knight 996814 0
Tracy R. Newton 996814 0
P. Joe Sisson 996774 40
Kenneth D. Warren 996814 0
Kent W. Sanford 996814 0
</TABLE>
ITEM 5. OTHER INFORMATION
None.
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.
15
<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: August 13, 1999
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>
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 and six month period ended June 30, 1999
and 1998. Average shares outstanding have been retroactively adjusted on an
equivalent share basis for the effects of the business combination and the stock
dividends as discussed in the notes to financial statements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net Income $ 230,180 $ 293,108 $ 504,217 $ 531,615
Earnings on common shares 230,180 293,108 504,217 531,615
Taxable securities
Weighted average common shares 1,323,188 1,150,284 3,897,684 1,150284
Outstanding - basic
Basic earnings per common shares $ .17 $ .25 $ .38 $ .46
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE:
Net Income $ 230,180 $ 293,108 $ 504,217 $ 531,615
Weighted average common shares 1,415,967 1,223,446 1,415,517 1,223,446
outstanding - diluted
Diluted earnings per common shares $ .16 $ .24 $ .36 $ .43
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,118,853
<INT-BEARING-DEPOSITS> 207,297
<FED-FUNDS-SOLD> 7,516,986
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,918,605
<INVESTMENTS-CARRYING> 6,403,823
<INVESTMENTS-MARKET> 6,469,830
<LOANS> 152,770,436
<ALLOWANCE> 1,848,579
<TOTAL-ASSETS> 206,378,922
<DEPOSITS> 175,189,640
<SHORT-TERM> 4,884,696
<LIABILITIES-OTHER> 1,176,492
<LONG-TERM> 13,535,714
0
0
<COMMON> 6,835,940
<OTHER-SE> 4,756,440
<TOTAL-LIABILITIES-AND-EQUITY> 206,378,922
<INTEREST-LOAN> 6,517,837
<INTEREST-INVEST> 924,386
<INTEREST-OTHER> 230,822
<INTEREST-TOTAL> 7,673,045
<INTEREST-DEPOSIT> 3,897,684
<INTEREST-EXPENSE> 4,308,997
<INTEREST-INCOME-NET> 3,364,048
<LOAN-LOSSES> 355,000
<SECURITIES-GAINS> 10,456
<EXPENSE-OTHER> 2,606,009
<INCOME-PRETAX> 824,820
<INCOME-PRE-EXTRAORDINARY> 824,820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504,217
<EPS-BASIC> .38
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.66
<LOANS-NON> 730,000
<LOANS-PAST> 120,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 726,043
<ALLOWANCE-OPEN> 1,816,348
<CHARGE-OFFS> 215,085
<RECOVERIES> 22,703
<ALLOWANCE-CLOSE> 1,848,579
<ALLOWANCE-DOMESTIC> 1,848,579
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
