<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 June 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 August 14, 2000
----- ------------------------------
<S> <C>
Common Stock, $0.01 par value 2,829,164
</TABLE>
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
APPALACHIAN BANCSHARES, INC.
JUNE 30, 2000 FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 ......................... 1
Consolidated Statements of Income For the Three Months and Six Months
Ended June 30, 2000 and 1999 ............................................................. 2
Consolidated Statements of Comprehensive Income For the Three Months
and Six Months Ended June 30, 2000 and 1999 .............................................. 3
Consolidated Statement of Cash Flows For the Six Months Ended
June 30, 2000 and 1999 ................................................................... 4
Notes to Consolidated Financial Statements ................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation ................................................................. 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters To A Vote of Security Holders......................................... 13
Item 5. Other Information .......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................................ 14
Signatures ......................................................................................... 15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31,
ASSETS (Unaudited) 1999
------------- -------------
<S> <C> <C>
Cash and due from banks ........................................................ $ 4,914,256 $ 5,739,252
Interest bearing deposits with other banks ..................................... 51,644 217,115
Federal funds sold ............................................................. 2,895,000 3,842,157
Securities available for sale .................................................. 34,718,065 28,536,246
Securities held to maturity .................................................... -- 5,799,963
Loans .......................................................................... 210,567,971 169,105,872
Allowance for loan losses ...................................................... (2,133,100) (1,849,290)
------------- -------------
Net Loans ...................................................................... 208,434,871 167,256,582
Premises and equipment, net .................................................... 6,425,942 3,877,419
Cash surrender value on life insurance ......................................... 2,200,612 2,145,294
Accrued interest ............................................................... 2,253,181 1,741,986
Intangibles, net ............................................................... 2,168,512 2,227,386
Other assets ................................................................... 1,498,731 1,931,141
------------- -------------
TOTAL ASSETS ............................................................ $ 265,560,814 $ 223,314,541
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing ....................................................... $ 10,715,712 $ 10,363,135
Interest-bearing .......................................................... 196,946,402 176,366,521
------------- -------------
TOTAL DEPOSITS .......................................................... 207,662,114 186,729,656
Securities sold under agreements to repurchase/Federal
funds purchased ........................................................... 7,767,263 6,134,007
Accrued interest ............................................................ 915,259 815,988
Long-term debt .............................................................. 32,892,857 16,964,286
Other liabilities ........................................................... 821,251 249,830
------------- -------------
TOTAL LIABILITIES ....................................................... 250,058,744 210,893,767
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($0.01 par value as of June 30, 2000; $5.00 par value as of
December 31, 1999; 20,000,000 shares authorized, 3,075,164 shares issued at
June 30, 2000; 1,389,122 shares issued at December 31, 1999) .............. 30,752 6,945,610
Treasury Stock at cost (253,000 shares at June 30, 2000;
88,000 shares at December 31, 1999) ....................................... (2,255,205) (428,000)
Capital surplus ............................................................. 14,234,848 3,030,196
Retained earnings ........................................................... 4,354,221 3,660,364
Accumulated comprehensive income (loss): unrealized gains
on investment securities available for sale, net of tax ................... (862,546) (787,396)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY .............................................. 15,502,070 12,420,774
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............................. $ 265,560,814 $ 223,314,541
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE> 4
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans ......................... $ 4,684,373 $ 3,431,600 $ 8,857,184 $ 6,517,837
Interest on investment securities:
Taxable securities ............................... 417,436 336,841 824,785 585,061
Nontaxable securities ............................ 112,345 144,609 232,640 339,325
Interest on deposit in other banks ................. 4,114 -- 6,751 --
Interest on federal funds sold ................... 47,200 62,267 86,025 230,822
------------ ------------ ------------ ------------
TOTAL REVENUE FROM EARNING ASSETS .............. 5,265,468 3,975,317 10,007,385 7,673,045
INTEREST EXPENSE:
Interest on deposits ............................... 2,616,932 1,917,815 5,021,760 3,897,684
Interest on federal funds purchased and
securities sold under agreements to repurchase ... 132,934 23,824 202,169 45,212
Interest expense - long term debt .................. 463,762 258,554 824,758 366,101
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE ......................... 3,213,628 2,200,193 6,048,687 4,308,997
NET INTEREST INCOME: .................................. 2,051,840 1,775,124 3,958,698 3,364,048
Provision for loan losses .......................... 350,000 205,000 650,000 355,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES ........................................ 1,701,840 1,570,124 3,308,698 3,009,048
NONINTEREST INCOME:
Service charges on deposits ........................ 113,263 101,321 227,338 197,942
Insurance commissions .............................. 14,167 26,598 25,635 37,626
Other operating income ............................. 117,426 57,222 236,888 175,757
Investment securities gains (losses) ............... -- 10,456 (6,680) 10,456
------------ ------------ ------------ ------------
TOTAL NONINTEREST INCOME ....................... 244,856 195,597 483,181 421,781
NONINTEREST EXPENSES:
Salaries and employee benefits ..................... 666,507 600,814 1,372,484 1,144,813
Occupancy expense .................................. 80,028 80,041 138,778 163,068
Furniture and equipment expense .................... 103,987 95,035 187,565 171,640
Other operating expenses ........................... 668,102 579,048 1,205,901 1,126,488
------------ ------------ ------------ ------------
TOTAL NONINTEREST EXPENSES ..................... 1,518,624 1,354,938 2,904,728 2,606,009
Income before income taxes ............................ 428,072 410,783 887,151 824,820
Income tax provision .................................. (45,000) (180,603) (193,294) (320,603)
------------ ------------ ------------ ------------
NET INCOME
$ 383,072 $ 230,180 $ 693,857 $ 504,217
============ ============ ============ ============
EARNINGS PER COMMON SHARE - BASIC AND DILUTED
Basic earnings per common share ................... $ 0.14 $ 0.09 $ 0.25 $ 0.19
Basic weighted average shares outstanding ......... 2,731,322 2,646,376 2,753,654 2,646,376
Diluted earnings per common share ................. $ 0.13 $ 0.08 $ 0.24 $ 0.18
Diluted weighted average shares outstanding ....... 2,952,446 2,831,934 2,938,131 2,831,034
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 5
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET INCOME
Interest and fees on loans ......................... $ 383,072 $ 230,180 $ 693,857 $ 504,217
Other comprehensive, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during the period .............................. 8,644 (337,634) (123,328) (594,297)
Reclassification adjustments for (gains)
losses included in net income .................. -- (10,456) 6,680 (10,456)
------------ ------------ ------------ ------------
Net unrealized gains (losses) .................. 8,644 (348,090) (116,648) (604,753)
Income (tax) benefit related to items of other
comprehensive income ............................. (3,112) 123,377 41,498 213,222
------------ ------------ ------------ ------------
Other comprehensive income (loss) ..................... 5,532 (224,713) (75,150) (391,531)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME .................................. $ 388,604 $ 5,467 $ 618,707 $ 112,686
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 6
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................................. $ 693,857 $ 504,217
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ................................................. 650,000 355,000
Net depreciation and amortization ......................................... 238,508 242,740
Realized investment security losses (gains) ............................... 6,680 (10,456)
Deferred tax benefit ...................................................... (106,706) --
Increase in accrued interest receivable ................................... (511,195) (292,646)
Increase in accrued interest payable ...................................... 99,271 118,201
Other ..................................................................... 1,096,717 309,783
------------- -------------
NET CASH PROVIDED IN OPERATING ACTIVITIES ............................... 2,167,132 1,226,839
------------- -------------
INVESTING ACTIVITIES:
Purchase of securities available for sale, net .............................. (505,184) (5,297,812)
Purchase of securities held to maturity, net ................................ -- (487,994)
Net increase in loans to customers .......................................... (41,828,289) (23,132,157)
Capital (expenditures) sales, net ........................................... (2,728,157) 10,491
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES ................................... (45,061,630) (28,907,472)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts ...................................................... 4,239,365 852,834
Net increase in certificates of deposit ..................................... 16,693,093 10,475,328
Net (decrease) increase in short term borrowings ............................ 1,633,256 2,385,741
Proceeds from issuance of common stock ..................................... 4,289,794 --
Purchase of treasury stock .................................................. (1,827,205) --
Proceeds from long term debt ................................................ 15,928,571 2,528,571
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 40,956,874 16,242,474
------------- -------------
Net decrease in cash and cash equivalents ...................................... (1,937,624) (11,438,159)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................... 9,798,524 24,281,295
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 7,860,900 $ 12,843,136
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................................. $ 5,949,416 $ 4,190,796
Income taxes .............................................................. -- 145,603
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 7
APPALACHIAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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 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, 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 Appalachian Bancshares, Inc. 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.
5
<PAGE> 8
APPALACHIAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
NOTE B - INCOME TAXES
The effective tax rates of approximately 22 percent and 39 percent for
the six months ended June 30, 2000 and 1999 approximate the federal and state
statutory rates less an adjustment for the effect of tax exempt securities. The
effective tax rate of approximately 22 percent for the six months ended June 30,
2000 is less than the applicable statutory rate due primarily to the effects of
tax-exempt income and general business credits. The effective tax rate of
approximately 39 percent for the comparable period of 1999 approximates the
applicable 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, 2000, the Company had net unrealized losses of $1,329,581
in available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in shareholder's equity of $862,546, net of deferred tax
benefit. There were no trading securities. The net decrease in shareholder's
equity as a result of the SFAS 115 adjustment from December 31, 1999 to June 30,
2000 was $75,150.
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.
6
<PAGE> 9
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 Bank 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,
1999 appearing in the Company's Form 10-KSB filed with the Securities and
Exchange Commission on April 14, 2000.
FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO JUNE 30, 2000
LOANS
Loans comprised the largest single category of the Company's earning
assets on June 30, 2000. Loans, net of unearned income and reserve for loan
losses, were 78.49% of total assets at June 30, 2000. Total net loans were
$208,434,871 at June 30, 2000, representing a 24.62% 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 decreased $565,301 or 1.48
percent from December 31, 1999 to June 30, 2000. Investment securities at June
30, 2000 were $34,718,065 compared with $34,336,209 at December 31, 1999,
reflecting a 1.11 percent increase of $381,856. Federal funds sold were
$2,895,000 at June 30, 2000 compared to the December 31, 1999 total of
$3,842,157, a 24.65 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.
7
<PAGE> 10
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 to 4.73. Total non-performing assets at June
30, 2000 were $450,518, which consisted of $240,588 secured by real estate,
$156,070 in commercial loans, and $53,860 in consumer loans primarily consisting
of automobile loans. Nonperforming assets at December 31, 1999 were $368,000.
The ratio of total nonperforming assets to total assets remained the same at
0.16% and the ratio of nonperforming loans to total loans decreased from 0.22%
to 0.21% 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
Total deposits of $207,662,114 at June 30, 2000 increased $20,932,458
or 11.21% 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 $352,577 or 3.40% from year-end 1999 to
June 30, 2000, and interest-bearing deposits increased $20,579,881 or 11.67%
during the same period. Time deposits of $100,000 or more increased $2,551,063
or 6.66%.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $2,194,781 at
June 30, 2000, a $3,939,226 decrease from the December 31, 1999 total of
$6,134,007. Federal funds purchased totaled $5,583,585 at June 30, 2000. There
were no fed funds purchased at year-end 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 $3,081,287 from December 31, 1999 to
June 30, 2000. This increase was attributable to net earnings of $693,857, net
proceeds from the sale of stock of $4,211,246 and capital of $78,547 recognized
due to the issuance of compensatory stock options as reduced by $1,827,205 due
to the purchase of treasury stock and additional losses of $75,158 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
8
<PAGE> 11
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 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 $78.6
million or 37.3% of the total loan portfolio at June 30, 2000, and investment
securities maturing in one year or less equaled approximately $2,133,000 or
6.14% 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
June 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 June 30, 2000. At June
30, 2000, the outstanding balance of Gilmer County Bank's credit line was
$17,892,857.13. 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 June 30, 2000, Appalachian Community Bank's outstanding credit line balance
was $8,300,000.
9
<PAGE> 12
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
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. 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 June
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. In 1990, new risk-based capital
requirements became effective under FDICIA. The guidelines take into
consideration risk factors, as defined by regulators, associated with various
categories of assets, both on and off the balance sheet. Under the guidelines,
capital strength is measured in two tiers, which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier 1 capital, which consists of common equity, paid-in capital and retained
earnings (less intangible assets), amounted to $14.2 million at June 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 the Tier 2 capital components is referred to as Total Capital and
was $16.2 million at June 30, 2000. The Company's percentage ratios as
calculated under regulatory guidelines were 6.57% and 7.49% for Tier 1 and Total
Capital, respectively, at June 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 June
30, 2000 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
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<PAGE> 13
permissible activities of the Company or 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, 2000, the Company's leverage ratio was 5.80% 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, 2000, the capital ratio as calculated under the DBF standard for Gilmer
County Bank was 7.13%. At June 30, 2000, the capital ratio as calculated under
the DBF standard for Appalachian Community Bank was 11.56%.
In April 2000, the Banks' paid a $700,000 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, 2000
SUMMARY
Net earnings for the six months ended June 30, 2000 were $693,857
compared to net earnings of $504,217 for the same period in 1999. This 37.61%
increase in net earnings is partially attributable to a significant increase in
total revenue from earning assets. Net interest income increased $594,650
(17.68%) during the first six months of 2000 as compared to the same period in
1999; non-interest expenses increased $298,719 (11.46%) during same period,
while noninterest income increased by $61,400 (14.56%). Total interest expense
increased $1,739,690 (40.37%) during the first six months of 2000 as compared to
the same period in 1999.
Net earnings for the quarter ended June 30, 2000, were $383,072
compared to net earnings of $230,180 for the second quarter of 1999. This
represents a 66.42% increase as compared to the same period in 1999. This
increase is primarily attributable to a significant increase in total revenue
from earning assets. Total interest expense increased by $1,013,435 as compared
to the same period in 1999. Net interest income increased $276,716 during the
three months ended June 30, 2000 as compared to the same period in 1999;
non-interest expenses increased $163,686 during the same period, while
noninterest income increased by $49,259. The amounts for the three months ended
June 30,1999, reflects amounts for both Gilmer County Bank and Appalachian
Community Bank combined.
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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, 2000, increased $594,650 (17.68%) from the same period in
1999. This increase is attributable to the continued increase in the demand for
loans. Interest expense for the six months ended June 30, 2000, increased
$1,739,690 or (40.37%) compared to the same period of 1999. This increase was
primarily due to an increase of $1,124,076 in interest expense accrued on
deposit accounts. The remaining increase is attributed to interest expense on
loans from the Federal Home Loan Bank, The Bankers Bank and Crescent Bank.
Net interest income increased $276,716 or 15.59% during the quarter
ended June 30, 2000, as compared to the same period in 1999. An increase of
$1,290,151 or 32.45% 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 conditions, the composition of the
loan portfolio and the levels of nonaccruing and past due loans. The provision
for loan losses was $650,000 for the six months ended June 30, 2000 compared to
$355,000 for the same period of 1999. Charge-offs exceeded recoveries by
$366,190 for the six months ended June 30, 2000. The reserve for loan losses as
a percent of outstanding loans, net of unearned income, was 1.01 percent at June
30, 2000 compared to 1.09 percent at year-end 1999.
The provision for loan losses was $350,000 for the three months ended
June 30, 2000 compared to $205,000 for the same period in 1999.
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 2000, was $483,181
compared to $421,781 for the same period of 1999. This increase was primarily
due to an increase in service charges on deposit accounts of $29,396 in the
first six months of 2000 as compared to the same period of 1999, and increases
in other operating income of $61,131. Significant components of noninterest
income changed as follows: Service charges on deposits increased $29,396
(14.85%), insurance commissions decreased $11,991 (31.87%), and other operating
income increased $61,131 (34.78%).
Non-interest income increased by $49,259 or 25.18% in the second
quarter of 2000 as compared to the same period in 1999. Service charges on
deposits increased by $11,942 or 11.79%. These increases are attributable to the
continued growth of the Banks.
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<PAGE> 15
NONINTEREST EXPENSES
Noninterest expenses for the six months ended June 30, 2000 were
$2,904,728, reflecting a 11.46% increase over the same period of 1999. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $1,372,484 for the six months ended June 30, 2000, 19.89%
higher than in the same period of 1999. These increases are attributable to the
continued growth of the Banks. Occupancy costs decreased $24,290 (14.90%), and
furniture and equipment expenses increased by $15,925. Other operating expenses
rose by 7.05% to $1,205,901.
Non-interest expenses increased by $163,686 for the quarter ended June
30, 2000 as compared to the same period in 1999. The primary components of
noninterest expense are salaries and employee benefits, which increased by
$65,693 for the three months ended June 30, 2000, 10.93% higher than the same
period of 1999. Occupancy costs decreased by $13 and other operating expenses
increased by $89,054 for the second quarter of 2000 as compared with the same
period in 1999. These increases are attributable to the continued growth of the
Banks.
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 $193,294 for the six
months ended June 30, 2000 decreased $127,309 compared to the same period of
1999 due to the effects of tax exempt income and general business credits.
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
23, 2000 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 1,828,490 votes for and 0 votes against. In addition,
the director nominees listed in the following table, each of whom served as a
director of the Company prior to the annual meeting 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 1,828,490 0
Charles A. Edmondson 1,828,490 0
Roger E. Futch 1,828,490 0
Joseph C. Hensley 1,827,990 500
Frank E. Jones 1,828,490 0
J. Ronald Knight 1,828,490 0
Tracy R. Newton 1,828,490 0
P. Joe Sisson 1,828,490 0
Kenneth D. Warren 1,828,490 0
Kent W. Sanford 1,828,490 0
</TABLE>
ITEM 5. OTHER INFORMATION
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<PAGE> 16
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 six months
ended June 30, 2000 and 1999; and for the three months ended June 30, 2000 and
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
June 30, 2000, the Company had sold 295,254 shares of common stock in this
offering.
On April 3, 2000 the Company purchased 82,500 shares of its common stock issued
in a previous private placement.
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) Form 8-K
During the quarter ended June 30, 2000, no reports were filed
for Appalachian Bancshares, Inc. on Form 8-K
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<PAGE> 17
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 11, 2000
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)
15
