<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the period ended September
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 October 29, 1999
----- -------------------------------
<S> <C>
Common Stock, $5.00 par value 1,333,224
</TABLE>
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
APPALACHIAN BANCSHARES, INC.
September 30, 1999 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 ........................................................ 1
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1999 and 1998 ........................................ 2
Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 1999 and 1998 ............................ 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 .................................. 4
Notes to Consolidated Financial Statements .................................... 5
Item 2. Management's Discussion and Analysis or Plan of Operation...................... 6
Part II. Other Information
Item 5. Other Information.............................................................. 15
Item 6. Exhibit and Reports on Form 8-K................................................ 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31,
ASSETS (Unaudited) 1998
------------------ --------------
<S> <C> <C>
Cash and due from banks $ 4,976,922 $ 5,481,853
Interest bearing deposits with other banks 207,730 407,229
Federal funds sold 1,493,557 18,392,213
Securities available for sale 27,814,766 21,940,281
Securities held to maturity (fair market value $5,687,828 and 6,457,522) 5,800,810 6,218,354
Loans 159,746,144 129,831,095
Allowance for loan losses (1,933,510) (1,686,395)
------------- -------------
Net Loans 157,812,634 128,144,700
Premises and equipment, net 3,774,309 3,940,032
Cash surrender value on life insurance 637,639 615,438
Accrued interest 1,617,361 1,319,601
Intangibles, net 2,256,822 2,345,055
Other assets 845,362 940,194
------------- -------------
TOTAL ASSETS $ 207,237,912 $ 189,744,950
============= =============
LIABILITIES AND
SHAREHOLDERS'EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 10,473,734 $ 9,287,933
Interest-bearing 169,415,763 154,573,545
------------- -------------
TOTAL DEPOSITS 179,889,497 163,861,478
Securities sold under agreements to repurchase/Federal funds
purchased 1,026,030 2,478,344
Accrued interest 876,616 665,883
Long-term debt 13,335,714 11,007,143
Other liabilities 239,664 252,408
------------- -------------
TOTAL LIABILITIES 195,367,522 178,265,256
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($5.00 par value; 20,000,000 shares authorized,
1,377,224 shares issued at September 30, 1999; 6,886,120 6,835,940
1,367,188 shares issued at December 31, 1998)
Treasury Stock (44,000 shares at cost) (428,000) (428,000)
Capital surplus 2,727,388 2,576,849
Retained earnings 3,245,919 2,394,590
Accumulated comprehensive income (loss): unrealized gains
(losses) on investment securities available for sale, net of tax (561,036) 100,315
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 11,870,390 11,479,694
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 207,237,912 $ 189,744,950
============= =============
</TABLE>
1
See Notes to Financial Statements
<PAGE> 4
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $ 3,582,238 $ 2,339,850 $ 10,090,189 $ 6,764,262
Interest on investment securities:
Taxable securities 432,308 163,808 1,017,369 723,380
Nontaxable securities 59,239 204,610 398,564 313,838
Interest on deposit in other banks 3,399 0 13,285 0
Interest on federal funds sold 85,832 53,019 316,654 151,248
----------- ----------- ------------ -----------
TOTAL REVENUE FROM EARNING ASSETS 4,163,016 2,761,287 11,836,061 7,952,728
----------- ----------- ------------ -----------
INTEREST EXPENSE:
Interest on deposits 2,091,422 1,477,048 5,989,106 4,240,734
Interest on federal funds purchased and securities
sold under agreements to repurchase 49,471 47,610 94,683 136,928
Interest expense - long term debt 205,164 95,449 571,265 288,134
----------- ----------- ------------ -----------
TOTAL INTEREST EXPENSE 2,346,057 1,620,107 6,655,054 4,665,796
----------- ----------- ------------ -----------
NET INTEREST INCOME: 1,816,959 1,141,180 5,181,007 3,286,932
Provision for loan losses 285,000 60,000 640,000 240,000
----------- ----------- ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,531,959 1,081,180 4,541,007 3,046,932
NONINTEREST INCOME:
Service charges on deposits 106,285 54,638 304,227 165,583
Insurance commissions 9,682 7,321 47,308 16,822
Other operating income 115,011 65,550 290,768 178,477
Investment securities gains (losses) (2,400) 1,475 8,056 15,950
----------- ----------- ------------ -----------
TOTAL NONINTEREST INCOME 228,578 128,984 650,359 376,832
----------- ----------- ------------ -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 604,836 371,016 1,749,649 1,037,601
Occupancy expense 78,177 35,604 241,245 100,719
Furniture and equipment expense 81,803 45,991 253,443 133,214
Other operating expenses 565,608 330,563 1,692,096 913,625
----------- ----------- ------------ -----------
TOTAL NONINTEREST EXPENSES 1,330,424 783,174 3,936,433 2,185,159
----------- ----------- ------------ -----------
Income before income taxes 430,113 426,990 1,254,933 1,238,605
Income tax provision (83,000) (120,000) (403,603) (400,000)
----------- ----------- ------------ -----------
NET INCOME $ 347,113 $ 306,990 $ 851,330 $ 838,605
=========== =========== ============ ===========
EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .26 $ .27 $ .64 $ .73
Basic weighted average shares outstanding 1,323,624 1,150,321 1,323,335 1,150,050
Diluted earnings per common share $ .24 $ .25 $ .60 $ .70
Diluted weighted average shares outstanding 1,425,816 1,237,276 1,419,025 1,194,275
</TABLE>
2
See Notes to Financial Statements
<PAGE> 5
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net Income Interest and fees on loans $ 347,113 $ 306,990 $ 851,329 $ 838,605
Other comprehensive, net of tax:
Unrealized gains on securities: Unrealized holding
gains (losses) arising during the period (415,426) 215,389 (1,009,723) 183,184
Less: reclassification adjustments for (gains) losses
included in net income 2,400 (1,475) (8,056) (15,950)
--------- ----------- ----------- ---------
(413,026) 213,914 (1,017,779) 167,234
Income tax benefit related to items of other
comprehensive income 143,205 (72,731) 356,427 (56,860)
--------- ----------- ----------- ---------
Other comprehensive income (loss) (269,821) 141,183 (661,352) 110,374
--------- ----------- ----------- ---------
COMPREHENSIVE INCOME $ 77,292 $ 448,173 $ 189,977 $ 948,979
========= =========== =========== =========
</TABLE>
3
See Notes to Financial Statements
<PAGE> 6
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 851,329 $ 838,605
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 640,000 240,000
Depreciation, amortization, and accretion 322,075 143,598
Realized investment security (gains) (8,056) (15,950)
Increase in accrued interest receivable (297,761) (79,479)
Increase in accrued interest payable 210,733 12,175
Other 443,744 250,944
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,162,064 1,389,893
INVESTING ACTIVITIES:
Net increase in securities available for sale (6,884,207) (2,641,545)
Net decrease (increase) in securities held to maturity 417,544 (1,629,570)
Net increase in loans to customers (30,307,934) (9,998,434)
Capital (expenditures) sales, net (68,118) (436,401)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (36,842,715) (14,705,950)
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts (554,044) 13,592,968
Net increase in certificates of deposit 16,582,064 4,945,941
Net (decrease) increase in short term borrowing (1,479,746) (419,078)
Proceeds from issuance of common stock 200,720 132,469
Purchase of treasury stock -- (154,000)
Proceeds from notes payable -- 1,278,571
------------
Proceeds from long term debt 2,328,571
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,077,565 19,376,871
------------ ------------
Net increase (decrease) in cash and cash equivalents (17,603,086) 6,060,814
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,281,295 9,707,049
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,678,209 $ 15,767,863
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 6,444,321 $ 4,653,621
Income taxes 270,603 452,000
</TABLE>
4
See Notes to Financial Statements
<PAGE> 7
APPALACHIAN BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
September 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) (the "Banks"). The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 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 the Company 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.
The Company 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, plus 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> 8
NOTE B - INCOME TAXES
The effective tax rate of approximately 32 percent for the nine
months ended September 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 September 30, 1999, the Company had net unrealized losses of
$863,842 in available-for-sale securities which are reflected in the presented
assets and resulted in a decrease in Shareholder's Equity of $561,037, net of
deferred tax liability. There were no trading of securities. The net decrease in
Shareholder's Equity as a result of the SFAS 115 adjustment from December 31,
1998 to September 30, 1999 was $661,352.
NOTE D - STOCK OPTIONS
On June 22, 1999 the Company issued 43,000 options on its shares
of common stock to staff members at an exercise price of $12.00 per share. These
options vest over a period of five years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 in general or the Banks of the Year 2000 computer problem.
This discussion is intended to assist in an understanding of the
Company's consolidated 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> 9
FINANCIAL CONDITION
SEPTEMBER 30, 1999 COMPARED TO DECEMBER 31, 1998
LOANS
Loans comprised the largest single category of the Company's
earning assets on September 30, 1999. Loans, net of unearned income and reserve
for loan losses, were 76.2% of total assets at September 30, 1999. Total net
loans were $157,812,634 at September 30, 1999, representing a 23.2% 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
$11,441,715 or 24.6 percent from December 31, 1998 to September 30, 1999.
Investment securities at September 30, 1999 were $33,615,576 compared with
$28,158,635 at December 31, 1998, reflecting a 19.4 percent increase of
$5,456,941. Federal funds sold were $1,493,557 at September 30, 1999 compared to
the December 31, 1998 total of $18,392,213, a 91.9 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 the reinvestment of 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 at December 31, 1998 to 3.23 at
September 30, 1999. Total nonperforming assets at September 30, 1999 were
$598,345, which mainly consisted of one loan to a local medical facility that is
no longer in business. The Company is in process of attempting to convert
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 .0029 and the ratio of nonperforming loans to total loans
increased from 0.0002 to 0.0037 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 $179,889,497 at September 30, 1999 increased
$16,028,019 or 9.8% 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 $1,185,801 or 12.8% from
year-end 1998 to September 30, 1999, and interest-bearing deposits increased
$14,842,218 or 9.6% during the same period. Time deposits of $100,000 or more
increased $8,571,271 (33.0%).
7
<PAGE> 10
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $1,026,030
at September 30, 1999, a $1,452,314 decrease from the December 31, 1998 total of
$2,478,344. Federal funds purchased totaled $557 at September 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 $390,696 from December 31, 1998 to
September 30, 1999, due to net earnings of $851,330, proceeds from the issuance
of common stock to the 401(k) Plan of $200,720 less a $661,354 decrease as a
result of 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. 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
8
<PAGE> 11
whether such components are Year 2000 compliant. The Company completed the
remediation or replacement, as applicable, of all non-compliant components for
mission critical systems by June 30, 1999. The Company had a third party
independent consultant review its Year 2000 plan and validate 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. The Company tested its contingency plan in October 1999 and is
having an independent third party validate the test results.
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 nine months of 1999 the
Company incurred costs of approximately $70,000. 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. The Company does not expect the
cost of these efforts to be material to its financial position or its operating
results.
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
9
<PAGE> 12
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, 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 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
$76.2 million or 47.8% of the total loan portfolio at September 30, 1999 and
investment securities maturing in one year or less equaled $955,000 or 2.8% 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. At September 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.
10
<PAGE> 13
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
September 30, 1999, the outstanding balance of Gilmer County Bank's credit line
was $7,835,714. 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
September 30, 1999, Appalachian Community Bank's outstanding credit line balance
was $1,900,000.
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
Company's 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
million 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
September 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. 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 $10.2
million at September 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 Tier 2 capital is referred to as Total
Capital and was $12.1 million at September 30, 1999. The Company's percentage
ratios as calculated under regulatory guidelines were 6.14% and 7.30% for Tier 1
and Total Capital, respectively, at
11
<PAGE> 14
September 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
September 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 September 30, 1999, the Company's leverage ratio was 4.99% 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 September 30, 1999 the capital ratio as calculated under the
DBF standard for Gilmer County Bank was 7.51%. At September 30, 1999 the capital
ratio as calculated under the DBF standard for Appalachian Community Bank was
11.12%.
In March 1999, the Banks' paid a $350,000 dividend to the
Company, which was used by the Company for repayment of debt and other expenses.
RESULTS OF OPERATIONS
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 1999
SUMMARY
Net earnings for the nine months ended September 30, 1999 were
$851,330 compared to net earnings of $838,605 for the same period in 1998. This
represents a 1.5% increase in net earnings. Net interest income increased
$1,894,075 (57.6%) during the first nine months of 1999 as compared to the same
period in 1998; noninterest expenses increased $1,751,274 (80.1%) during same
period, while noninterest income increased by $273,527 (72.6%). Total interest
expense increased $1,989,258 (42.6%) during the first nine months of 1999 as
compared to the same period in 1998. The amounts for the first nine 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 nine months in 1998 - the Company had only one
12
<PAGE> 15
subsidiary, Gilmer County Bank.
Net earnings for the quarter ended September 30, 1999 were
$347,113 compared to net earnings of $306,990 for the third quarter of 1998.
This represents a 13.1% increase as compared to the same period in 1998. Total
interest expense increased by $725,950 as compared to the same period in 1998.
Net interest income increased $675,779 during the three months ended September
30, 1999 as compared to the same period in 1998; noninterest expenses increased
$547,250 during the same period, while noninterest income increased by $99,594.
The amounts for the three months ended September 30,1998 reflected the Company
holding only one subsidiary, Gilmer County Bank while the amounts for three
months ended September 30,1999 reflects increases as a result of the addition of
Appalachian Community Bank.
NET INTEREST INCOME
Net interest income, the difference between interest earned on
assets and the cost of interest-bearing liabilities, is the largest component of
the Company's net income. Revenue from earning assets of the Company during the
nine months ended September 30, 1999 increased $1,894,075 (57.6%) from the same
period in 1998. This increase is attributable to the acquisition of Appalachian
Community Bank. Interest expense for the nine months ended September 30, 1999
increased $1,989,258 or (42.6%) compared to the same period of 1998. This
increase was primarily due to an increase of $1,748,372 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 $675,779 or 59.2% during the
quarter ended September 30, 1999 as compared to the same period in 1998. An
increase of $1,401,729 or 50.8% 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 $640,000 for the nine months ended September 30, 1999
compared to $240,000 for the same period of 1998. Charge-offs exceeded
recoveries by $393,448 for the nine months ended September 30, 1999. The reserve
for loan losses as a percent of outstanding loans, net of unearned income, was
1.2 percent at September 30, 1999 compared to 1.3 percent at year-end 1998. The
reserve for loan losses as a percent of outstanding loans, net of unearned
income, was 1.2 percent at September 30, 1998. The increase in the loan loss
reserve is due to a loan to a medical facility that is no longer in business.
The Company is in the process of attempting to convert collateral from this loan
to cash.
The provision for loan losses was $285,000 for the three months
ended September 30, 1999 compared to $60,000 for the same period in 1998.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1999
was $650,359 compared to $376,832 for the same period of 1998. This increase was
primarily due to an
13
<PAGE> 16
increase in service charges on deposit accounts of $138,644 in the first nine
months of 1999 as compared to the same period of 1998, and increases in other
operating income of $112,291. Significant components of noninterest income
changed as follows: Service charges on deposits increased $138,644 (83.7%),
insurance commissions increased $30,486 (181.0%), and other operating income
increased $112,291 (62.9%). Earnings on cash surrender value of life insurance
policies provided $26,144 of the increase to other operating income. These
increases are primarily attributable to the addition of Appalachian Community
Bank.
Noninterest income increased by $99,594 or 77.2% in the third
quarter of 1999 as compared to the same period in 1998. Service charges on
deposits increased by $51,647 or 94.5%. These increases are attributable to the
addition of Appalachian Community Bank.
NONINTEREST EXPENSES
Noninterest expenses for the nine months ended September 30, 1999
were $3,936,433, reflecting a 80.1% increase over the same period of 1998. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $1,749,649 for the nine months ended September 30, 1999,
68.6% higher than in the same period of 1998. Occupancy costs increased $140,526
(139.5%), and furniture and equipment expenses increased by $120,229. Other
operating expenses rose by 85.2% to $1,692,096. These increases are attributable
to the addition of Appalachian Community Bank.
Noninterest expenses increased by $547,250 for the quarter ended
September 30, 1999 as compared to the same period in 1998. The primary
components of noninterest expense are salaries and employee benefits, which
increased by $233,820 for the three months ended September 30, 1999, 63.0%
higher than the same period of 1998. Occupancy costs increased by $42,573 and
other operating expenses increased by $235,045 for the third 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 $403,603 for the nine
months ended September 30, 1999 increased $3,603 compared to the same period of
1998 due to increased profit levels.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Gilmer County Bank has received approval from the Georgia
Department of Banking and the FDIC to construct a branch bank to be located in
East Ellijay, GA. The construction of the new facility has begun and is planned
to be completed by the end of the year.
Appalachian Community Bank has made application to the Georgia
Department of Banking and Finance and the FDIC to construct a branch bank to be
located in Blue Ridge, GA. The approval of the applications is pending.
14
<PAGE> 17
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> 18
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the
Company has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 30, 1999
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
-------------------------------------
Tracy R. Newton
President and CEO
(Duly authorized officer)
By: /s/ Kent W. Sanford
--------------------------------------
Kent W. Sanford
Executive Vice President
(Principal financial officer)
16
<PAGE> 1
EXHIBIT 11
APPALACHIAN BANCSHARES, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the three-month and nine month period ended September 30,
1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net Income $ 347,113 $ 306,990 $ 851,330 $ 838,605
Earnings on common shares 347,113 306,990 851,330 838,605
Weighted average common shares 1,323,624 1,150,321 1,323,335 1,150,050
outstanding - basic
Basic earnings per common shares $ .26 $ .27 $ .64 $ .73
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE:
Net Income $ 347,113 $ 306,990 $ 851,330 $ 838,605
Weighted average common shares 1,425,816 1,237,276 1,419,025 1,194,275
outstanding - diluted
Diluted earnings per common shares $ .24 $ .25 $ .60 $ .70
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF APPALACHIAN BANCSHARES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 4,976,922
<INT-BEARING-DEPOSITS> 207,730
<FED-FUNDS-SOLD> 1,493,557
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,814,766
<INVESTMENTS-CARRYING> 5,800,810
<INVESTMENTS-MARKET> 5,687,828
<LOANS> 159,746,144
<ALLOWANCE> 1,933,510
<TOTAL-ASSETS> 207,237,912
<DEPOSITS> 179,889,497
<SHORT-TERM> 1,026,030
<LIABILITIES-OTHER> 1,116,280
<LONG-TERM> 13,335,714
0
0
<COMMON> 6,886,120
<OTHER-SE> 4,984,270
<TOTAL-LIABILITIES-AND-EQUITY> 207,237,912
<INTEREST-LOAN> 10,090,189
<INTEREST-INVEST> 1,415,933
<INTEREST-OTHER> 329,939
<INTEREST-TOTAL> 11,836,061
<INTEREST-DEPOSIT> 5,989,106
<INTEREST-EXPENSE> 6,655,054
<INTEREST-INCOME-NET> 5,181,007
<LOAN-LOSSES> 640,000
<SECURITIES-GAINS> 8,056
<EXPENSE-OTHER> 3,936,433
<INCOME-PRETAX> 1,254,933
<INCOME-PRE-EXTRAORDINARY> 1,254,933
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 851,330
<EPS-BASIC> .64
<EPS-DILUTED> .60
<YIELD-ACTUAL> 3.69
<LOANS-NON> 640,000
<LOANS-PAST> 14,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,200,762
<ALLOWANCE-OPEN> 1,848,579
<CHARGE-OFFS> 429,000
<RECOVERIES> 36,000
<ALLOWANCE-CLOSE> 1,933,510
<ALLOWANCE-DOMESTIC> 1,933,510
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
