<PAGE> 1
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 September
30, 2000
[ ] 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 November 14, 2000
----- --------------------------------
<S> <C>
Common Stock, $0.01 par value 2,857,248
</TABLE>
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE> 2
APPALACHIAN BANCSHARES, INC.
September 30, 2000 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, 2000 and
December 31, 1999 ............................................ 1
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2000 and 1999 ............................ 2
Consolidated Statements of Comprehensive Income for the Three and
Nine Months Ended September 30, 2000 and 1999 ................ 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 ..................... 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 ................................................... 13
Item 6. Exhibits and Reports on Form 8-K .................................... 13
Signatures ................................................................... 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31,
ASSETS (Unaudited) 1999
----------------- -------------
<S> <C> <C>
Cash and due from banks $ 4,824,334 $ 5,739,252
Interest bearing deposits with other banks 67,823 217,115
Federal funds sold 5,493,000 3,842,157
Securities available for sale 34,902,851 28,536,246
Securities held to maturity 0 5,799,963
Loans 219,628,056 169,105,872
Allowance for loan losses (2,225,670) (1,849,290)
------------- -------------
Net Loans 217,402,386 167,256,582
Premises and equipment, net 6,474,889 3,877,419
Cash surrender value on life insurance 2,228,063 2,145,294
Accrued interest 2,357,520 1,741,986
Intangibles, net 2,139,075 2,227,386
Other assets 1,767,764 1,931,141
------------- -------------
TOTAL ASSETS $ 277,657,705 $ 223,314,541
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 11,710,245 $ 10,363,135
Interest-bearing 206,816,798 176,366,521
------------- -------------
TOTAL DEPOSITS 218,527,043 186,729,656
Securities sold under agreements to repurchase/Federal funds
purchased 7,427,802 6,134,007
Accrued interest 1,158,981 815,988
Long-term debt 33,142,857 16,964,286
Other liabilities 526,899 249,830
------------- -------------
TOTAL LIABILITIES 260,783,582 210,893,767
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($0.01 par value as of September 30, 2000;$5.00 par 31,074 6,945,610
value as of December 31, 1999; 20,000,000 shares authorized,
3,107,407 shares issued at September 30, 2000;
1,389,122 shares issued at December 31, 1999)
Treasury Stock at cost (253,000 shares at September 30, 2000; (2,255,205) (428,000)
88,000 shares at December 31, 1999)
Capital surplus 14,727,078 3,030,196
Retained earnings 4,937,821 3,660,364
Accumulated comprehensive income (loss): unrealized gains (losses)
on investment securities available for sale, net of tax (566,645) (787,396)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 16,874,123 12,420,774
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 277,657,705 $ 223,314,541
============= =============
</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
----------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $ 5,491,907 $ 3,582,238 $ 14,349,091 $ 10,090,189
Interest on investment securities:
Taxable securities 441,699 432,308 1,266,484 1,017,369
Nontaxable securities 99,684 59,239 332,324 398,564
Interest on deposit in other banks 1,180 3,399 7,931 13,285
Interest on federal funds sold 52,203 85,832 138,228 316,654
----------- ----------- ------------ ------------
TOTAL REVENUE FROM EARNING ASSETS 6,086,673 4,163,016 16,094,058 11,836,061
----------- ----------- ------------ ------------
INTEREST EXPENSE:
Interest on deposits 2,963,464 2,091,422 7,985,224 5,989,106
Interest on federal funds purchased and securities
sold under agreements to repurchase 119,584 49,471 321,753 94,683
Interest expense - long term debt 605,748 205,164 1,430,506 571,265
----------- ----------- ------------ ------------
TOTAL INTEREST EXPENSE 3,688,796 2,346,057 9,737,483 6,655,054
----------- ----------- ------------ ------------
NET INTEREST INCOME: 2,397,877 1,816,959 6,356,575 5,181,007
Provision for loan losses 160,000 285,000 810,000 640,000
----------- ----------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,237,877 1,531,959 5,546,575 4,541,007
NONINTEREST INCOME:
Service charges on deposits 133,771 106,285 361,109 304,227
Insurance commissions 14,673 9,682 40,308 47,308
Other operating income 219,859 115,011 456,747 290,768
Investment securities gains (losses) 513 (2,400) (6,167) 8,056
----------- ----------- ------------ ------------
TOTAL NONINTEREST INCOME 368,816 228,578 851,997 650,359
----------- ----------- ------------ ------------
NONINTEREST EXPENSES:
Salaries and employee benefits 856,555 604,836 2,229,039 1,749,649
Occupancy expense 100,000 78,177 238,778 241,245
Furniture and equipment expense 146,437 81,803 334,002 253,443
Other operating expenses 702,398 565,608 1,908,299 1,692,096
----------- ----------- ------------ ------------
TOTAL NONINTEREST EXPENSES 1,805,390 1,330,424 4,710,118 3,936,433
----------- ----------- ------------ ------------
Income before income taxes 801,303 430,113 1,688,454 1,254,933
Income tax provision (217,704) (83,000) (410,998) (403,603)
----------- ----------- ------------ ------------
NET INCOME $ 583,599 $ 347,113 $ 1,277,456 $ 851,330
=========== =========== ============ ============
EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .21 $ .13 $ .47 $ .32
Basic weighted average shares outstanding 2,831,071 2,647,248 2,721,195 2,646,670
Diluted earnings per common share $ .19 $ .12 $ .44 $ .30
Diluted weighted average shares outstanding 3,082,015 2,851,632 2,924,217 2,838,050
</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
------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income Interest and fees on loans $ 583,599 $ 347,113 $ 1,277,456 $ 851,329
Other comprehensive, net of tax:
Unrealized gains on securities: Unrealized holding
gains (losses) arising during the period
Interest on investment securities: 457,002 (415,426) 333,674 (1,009,723)
Less: reclassification adjustments for (gains) losses
included in net income Taxable securities (513) 2,400 6,167 (8,056)
--------- --------- ----------- -----------
456,489 (413,026) 339,841 (1,017,779)
Income tax benefit related to items of other
comprehensive income (160,588) 143,205 (119,090) 356,427
--------- --------- ----------- -----------
Other comprehensive income (loss) 295,901 (269,821) 220,751 (661,352)
--------- --------- ----------- -----------
COMPREHENSIVE INCOME TOTAL INTEREST EXPENSE $ 879,500 $ 77,292 $ 1,498,207 $ 189,977
========= ========= =========== ===========
</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
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,277,456 $ 851,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 810,000 640,000
Depreciation and amortization 415,594 322,075
Deferred tax benefit (133,412) 0
Realized investment security (gains) losses 6,167 (8,056)
Increase in accrued interest receivable (615,534) (297,761)
Increase in accrued interest payable 342,993 210,733
Other 372,000 443,744
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,475,264 2,162,064
INVESTING ACTIVITIES:
Net increase in securities available for sale (232,968) (6,884,207)
Net decrease (increase) in securities held to maturity 0 417,544
Net increase in loans to customers (50,955,804) (30,307,934)
Capital expenditures, net (2,924,753) (68,118)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (54,113,525) (36,842,715)
FINANCING ACTIVITIES:
Net increase(decrease) in demand deposits, NOW accounts,
and savings accounts 8,291,506 (554,044)
Net increase in certificates of deposit 23,505,881 16,582,064
Net (decrease) increase in short term borrowing 1,293,795 (1,479,746)
Proceeds from issuance of common stock 4,782,346 200,720
Purchase of treasury stock (1,827,205) 0
Proceeds from long term debt 16,178,571 2,328,571
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,224,894 17,077,565
------------ ------------
Net increase (decrease) in cash and cash equivalents 586,633 (17,603,086)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,798,524 24,281,295
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,385,157 $ 6,678,209
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 9,394,490 $ 6,444,321
Income taxes 295,125 270,603
</TABLE>
4
See Notes to Financial Statements
<PAGE> 7
APPALACHIAN BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
September 30, 2000
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, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. For further information,
refer to the financial statements for the Company for the year ended December
31, 1999, and footnotes thereto, included in Form 10-KSB, filed with the
Securities and Exchange Commission on April 14, 2000.
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 rates of approximately 24 percent and 32 percent for
the nine months ended September 30, 2000 and 1999 approximates the federal and
state statutory rates less adjustments for the effects of tax exempt securities
and general business credits.
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, 2000, the Company had net unrealized losses of
$873,092 in available-for-sale securities which are reflected in the presented
assets and resulted in a decrease in Shareholder's equity of $566,645, net of
deferred tax liability. There were no trading of securities. The net increase in
Shareholder's Equity as a result of the SFAS 115 adjustment from December 31,
1999 to September 30, 2000 was $220,751.
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. On June 30, 2000 the Company issued
13,000 options on its shares of common stock to staff members at an exercise
price of $15.00 per share. These options also vest over a period of five years.
NOTE E - SEGMENT INFORMATION
All of the Bank's offices offer similar products and services, are
located in the same geographic region, and serve the same customer segments of
the market. As a result, management considers all units as one operating segment
and therefore feels that the basic financial statements and related footnotes
provide details related to segment reporting.
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
6
<PAGE> 9
environment, and (vi) potential adverse effects on the economy in general and
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, 1999 appearing in the Company's Form 10-KSB filed with
the Securities and Exchange Commission on April 14, 2000.
FINANCIAL CONDITION
SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999
LOANS
Loans comprised the largest single category of the Company's earning
assets on September 30, 2000. Loans, net of unearned income and reserve for loan
losses, were 78.3% of total assets at September 30, 2000. Total net loans were
$217,402,386 at September 30, 2000, representing a 30.0% increase from the
December 31, 1999 total of $167,256,582. 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 increased $2,217,485 or
5.8 percent from December 31, 1999 to September 30, 2000. Investment securities
at September 30, 2000 were $34,902,851 compared with $34,336,209 at December 31,
1999, reflecting a 1.7 percent increase of 566,642. Federal funds sold were
$5,493,000 at September 30, 2000 compared to the December 31, 1999 total of
$3,842,157, a 43.0 percent increase. The investment securities portfolio is used
to make various term investments, to provide a source of liquidity and to serve
as collateral to secure certain government deposits. Federal funds sold are
maintained as a tool in managing the daily cash needs of the Company.
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 5.02 at December 31, 1999 to 4.54 at September 30,
2000. Total nonperforming assets at September 30, 2000 were $490,000, which
consisted of $227,000 secured by real estate, $101,000 in commercial loans, and
$162,000 in installment loans. Nonperforming assets at December 31, 1999 were
$368,000. The ratio of total nonperforming assets to total assets increased from
0.16 to 0.18 and the ratio of nonperforming loans to total loans increased from
0.22% to 0.23% as compared to December 31, 1999. 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
7
<PAGE> 10
Total deposits of $218,527,043 at September 30, 2000 increased
$31,797,387 or 17.0% over total deposits of $186,729,656 at year-end 1999.
Deposits are the Company's primary source of funds with which to support its
earning assets. Noninterest-bearing deposits increased $1,347,110 or 13.0% from
year-end 1999 to September 30, 2000, and interest-bearing deposits increased
$30,450,277 or 17.3% during the same period. Time deposits of $100,000 or more
increased $2,914,838 or 7.6%.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $2,745,323 at
September 30, 2000, a $3,388,684 decrease from the December 31, 1999 total of
$6,134,007. Federal funds purchased totaled $4,682,479 at September 30, 2000.
There were no federal funds purchased at December 31, 1999. 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 $4,453,349 from December 31, 1999 to
September 30, 2000, due to net earnings of $1,277,456, net proceeds from the
sale of stock of $4,703,800 and capital of $78,547 recognized due to the
issuance of compensatory stock options as reduced by $1,827,205 due to purchase
of treasury stock and additional losses of $220,751 resulting from the decline
in market value of securities available for sale.
YEAR 2000
Until recently, many software programs and processing systems,
including some of those used by the Banks in their operations, were not designed
to accommodate entries beyond the year 1999 in the date fields. Failure to
address the anticipated consequences of this design deficiency could have had
material adverse effects on the business and operations of any business,
including the Banks that relies on computers and associated technologies.
The Banks aggressively addressed the challenges that Year 2000
presented to its operations. The transition into Year 2000 went according to
plan. We have not experienced any systems failures or material disruptions to
critical business activities in connection with the transition to Year 2000, nor
are we aware of any third parties with which we have material relationships who
have experienced material Year 2000 disruptions or failures. Year 2000
validation, however, has many elements and potential consequences, some of which
may not be foreseeable or realized until future periods. Consequently, no
assurances can be given that unforeseen failures might not be identified in the
future, or that we may not identify information systems, computers or other
equipment which may not be Year 2000 compliant.
The Banks incurred approximately $154,000 in expenditures on the Year
2000 project, $86,000 during 1999, and $68,000 in 1998.
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
8
<PAGE> 11
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 $104.2
million or 47.5% of the total loan portfolio at September 30, 2000 and
investment securities maturing in one year or less equaled $1,437,000 or 4.1% 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, 2000, 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 approximately $25,950,000 as of September 30, 2000. At
September 30, 2000, the outstanding balance of Gilmer County Bank's credit line
was $20,342,857. Appalachian Community Bank also has a credit line with the
Federal Home Loan Bank, which provides for a credit line of up to $11,000,000.
At September 30, 2000, Appalachian Community Bank's outstanding credit line
balance was $8,200,000.
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
9
<PAGE> 12
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. On April 3, 2000 the Company paid off the term loan with
Bankers Bank and obtained a $4.6 million term loan under a Loan and Stock Pledge
Agreement and a Promissory Note (collectively, the "Term Loan") with Crescent
Bank and Trust Company. At September 30, 2000, the balance on the Term Loan was
$4.6 million. Interest on the outstanding amounts under the Term Loan is payable
quarterly, commencing July 1, 2000, at the prime rate (as defined in the
Promissory Note) less 1/2 of a percentage point. The Company began making
interest payments on July 1, 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 March 31, 2002. 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 $15.3 million at September 30,
2000. 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 $17.5
million at September 30, 2000. The Company's percentage ratios as calculated
under regulatory guidelines were 6.97% and 7.98% for Tier 1 and Total Capital,
respectively, at September 30, 2000. 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, 2000 was primarily attributable to the amount of goodwill
resulting from the Company's acquisition of Appalachian Community Bank. 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, 2000, the Company's leverage ratio was 5.71% 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
10
<PAGE> 13
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, 2000 the capital ratio as calculated under the DBF standard for
Gilmer County Bank was 7.38%. At September 30, 2000 the capital ratio as
calculated under the DBF standard for Appalachian Community Bank was 11.64%.
In April 2000, the Banks' paid a $700,000 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, 2000
SUMMARY
Net earnings for the nine months ended September 30, 2000 were
$1,277,456 compared to net earnings of $851,330 for the same period in 1999.
This represents a 50.1% increase in net earnings. Net interest income increased
$1,175,568 (22.7%) during the first nine months of 2000 as compared to the same
period in 1999; noninterest expenses increased $773,685 (19.7%) during same
period, while noninterest income increased by $201,638 (31.0%). Total interest
expense increased $3,082,429 (46.3%) during the first nine months of 2000 as
compared to the same period in 1999.
Net earnings for the quarter ended September 30, 2000 were $583,599
compared to net earnings of $347,113 for the third quarter of 1999. This
represents a 68.1% increase as compared to the same period in 1999. Total
interest expense increased by $1,342,739 as compared to the same period in 1999.
Net interest income increased $580,918 during the three months ended September
30, 2000 as compared to the same period in 1999; noninterest expenses increased
$474,966 during the same period, while noninterest income increased by $140,238.
The amounts for the three months ended September 30, 2000 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 nine
months ended September 30, 2000 increased $1,175,568 (22.7%) from the same
period in 1999. This increase is attributable primarily to the growth in loans
resulting in increased interest and fees on loans. Interest expense for the nine
months ended September 30, 2000 increased $3,082,429 or (46.3%) compared to the
same period of 1999. This increase was primarily due to an increase of
$1,996,118 in interest expense accrued on deposit accounts. The remaining
increase is attributed to interest expense on loans from the Federal Home Loan
Bank and Crescent Bank.
Net interest income increased $580,918 or 32.0% during the quarter
ended September 30, 2000 as compared to the same period in 1999. An increase of
$1,923,657 or 46.2% 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
11
<PAGE> 14
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 $810,000
for the nine months ended September 30, 2000 compared to $640,000 for the same
period of 1999. Charge-offs exceeded recoveries by $433,000 for the nine months
ended September 30, 2000. The reserve for loan losses as a percent of
outstanding loans, net of unearned income, was 1.02 percent at September 30,
2000 compared to 1.09 percent at year-end 1999. The increase in the loan loss
reserve is due to continued loan growth.
The provision for loan losses was $160,000 for the three months ended
September 30, 2000 compared to $285,000 for the same period in 1999.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 2000 was
$851,997 compared to $650,359 for the same period of 1999. This increase was
primarily due to an increase in service charges on deposit accounts of $56,882
in the first nine months of 2000 as compared to the same period of 1999, and
increases in other operating income of $165,979. Significant components of
noninterest income changed as follows: Service charges on deposits increased
$56,882 (18.7%) and other operating income increased $165,979 (57.1%). Earnings
on cash surrender value of life insurance policies provided $65,701 of the
increase to other operating income and visa/mastercard income provided $50,521.
Noninterest income increased by $140,238 or 61.4% in the third quarter
of 2000 as compared to the same period in 1999. Service charges on deposits
increased by $27,486 or 25.9%. Other operating income increased $104,848 or
91.2%. These increases are primarily attributable to fee income on
visa/mastercard and cash surrender value on life insurance.
NONINTEREST EXPENSES
Noninterest expenses for the nine months ended September 30, 2000 were
$4,710,118, reflecting a 19.7% increase over the same period of 1999. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $2,229,039 for the nine months ended September 30, 2000,
27.4% higher than in the same period of 1999. Occupancy costs decreased $2,467,
and furniture and equipment expenses increased by $80,559. Other operating
expenses rose by 12.8% to $1,908,299.
Noninterest expenses increased by $474,966 for the quarter ended
September 30, 2000 as compared to the same period in 1999. The primary
components of noninterest expense are salaries and employee benefits, which
increased by $251,719 for the three months ended September 30, 2000, 41.6%
higher than the same period of 1999. Occupancy costs increased by $21,823 and
other operating expenses increased by $136,790 for the third quarter of 2000 as
compared with the same period in 1999.
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 $410,998 for the nine
months ended September 30, 2000 increased $7,395 compared to the same period of
1999 due to increased profit levels.
12
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 12, 2000 the Board of Directors of the Company authorized a
two-for-one share split to be effected in the form of a common stock dividend.
We have reflected the effects of this split retroactively for the nine months
ended September 30, 1999; and for the three months ended September 30, 1999.
On May 10, 2000 the Board of Directors of the Company voted to change the par
value of its common stock from $5.00 per share to $0.01 per share. We have given
effect to this change in the numbers presented.
In May, 2000 the Company filed Form SB-2 with the Securities and Exchange
Commission for the purpose of offering for sale to the public a minimum of
200,000 shares and a maximum of 400,000 shares of its common stock at a price of
$15.00 per share. The registration statement was declared effective on May 12,
2000 and the Company promptly commenced with the sale of the offering. As of
September 30, 2000, the Company had sold 306,612 shares of common stock in this
offering. This offering was closed in July 2000.
On April 3, 2000 the Company purchased 82,500 shares of its common stock issued
in a previous private placement.
Appalachian Information Management, Inc., a corporation formed in January 2000,
is operating as a wholly owned subsidiary of Gilmer County Bank. Appalachian
Information Management, Inc. performs data processing services for Gilmer
County Bank, Appalachian Community Bank, and plans to provide service to other
financial institutions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net Income Per Share
27 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed by the Company during the
period covered by this Report.
13
<PAGE> 16
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: November 13, 2000
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)
14
