<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 March 31, 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 May 12, 2000
----- ---------------------------
<S> <C>
Common Stock, $0.01 par value 2,526,910
</TABLE>
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
<PAGE> 2
APPALACHIAN BANCSHARES, INC.
March 31, 2000 Form 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999..................................................................... 1
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999......................................................... 2
Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2000 and 1999.................................................. 3
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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............................................................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................................................. 13
</TABLE>
See Notes to Financial Statements
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31,
ASSETS (Unaudited) 1999
------------- -------------
<S> <C> <C>
Cash and due from banks $ 4,323,165 $ 5,739,252
Interest bearing deposits with other banks 124,237 217,115
Federal funds sold 910,000 3,842,157
Securities available for sale 34,472,296 28,536,246
Securities held to maturity 0 5,799,963
Loans 190,054,729 169,105,872
Allowance for loan losses (1,978,428) (1,849,290)
------------- -------------
Net Loans 188,076,301 167,256,582
Premises and equipment, net 4,876,513 3,877,419
Cash surrender value on life insurance 2,173,373 2,145,294
Accrued interest 2,076,932 1,741,986
Intangibles, net 2,197,949 2,227,386
Other assets 1,591,675 1,931,141
------------- -------------
TOTAL ASSETS $ 240,822,441 $ 223,314,541
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing $ 10,506,063 $ 10,363,135
Interest-bearing 189,193,835 176,366,521
------------- -------------
TOTAL DEPOSITS 199,699,898 186,729,656
Securities sold under agreements to repurchase/Federal funds
purchased 5,301,398 6,134,007
Accrued interest 1,057,323 815,988
Long-term debt 21,714,286 16,964,286
Other liabilities 320,111 249,830
------------- -------------
TOTAL LIABILITIES 228,093,016 210,893,767
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock ($0.01 par value as of March 31; $5.00 par value as of
December 31,1999; 20,000,000 shares authorized, 27,799 6,945,610
2,779,910 shares issued at March 31, 2000; 1,389,122 shares issued at
December 31, 1999)
Treasury Stock (88,000 shares at cost), split adjusted (428,000) (428,000)
Capital surplus 10,026,554 3,030,196
Retained earnings 3,971,150 3,660,364
Accumulated comprehensive income (loss): unrealized gains (losses)
on investment securities available for sale, net of tax (868,078) (787,396)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 12,729,425 12,420,774
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 240,822,441 $ 223,314,541
============= =============
</TABLE>
See Notes to Financial Statements
1
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APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE FROM EARNING ASSETS:
Interest and fees on loans $ 4,172,811 $ 3,080,056
Interest on investment securities:
Taxable securities 407,349 248,220
Nontaxable securities 120,295 194,716
Interest on deposit in other banks 2,637 6,181
Interest on federal funds sold 38,825 168,555
----------- -----------
TOTAL REVENUE FROM EARNING ASSETS 4,741,917 3,697,728
----------- -----------
INTEREST EXPENSE:
Interest on deposits 2,404,828 1,979,869
Interest on federal funds purchased and
securities sold under agreements to repurchase 360,996 21,388
Interest expense - long term debt 69,235 107,547
----------- -----------
TOTAL INTEREST EXPENSE 2,835,059 2,108,804
----------- -----------
NET INTEREST INCOME: 1,906,858 1,588,924
Provision for loan losses 300,000 150,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,606,858 1,438,924
NONINTEREST INCOME:
Service charges on deposits 114,075 96,621
Insurance commissions 11,468 11,028
Other operating income 119,462 118,535
Investment securities gains (losses) (6,680) 0
----------- -----------
TOTAL NONINTEREST INCOME 238,325 226,184
----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits 705,977 543,999
Occupancy expense 58,750 83,027
Furniture and equipment expense 83,578 76,605
Other operating expenses 537,799 547,440
----------- -----------
TOTAL NONINTEREST EXPENSES 1,386,104 1,251,071
----------- -----------
Income before income taxes 459,079 414,037
Income tax provision (148,294) (140,000)
----------- -----------
NET INCOME $ 310,785 $ 274,037
=========== ===========
EARNINGS PER COMMON SHARE -BASIC AND DILUTED
Basic earnings per common share $ .12 $ .10
Basic weighted average shares outstanding, split adjusted 2,691,910 2,646,376
Diluted earnings per common share $ .11 $ .10
Diluted weighted average shares outstanding, split adjusted 2,865,423 2,744,289
</TABLE>
See Notes to Financial Statements
2
<PAGE> 5
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net Income $ 310,785 $ 274,037
Other comprehensive, net of tax:
Unrealized gains on securities: Unrealized holding
gains (losses) arising during the period (131,972) (256,663)
Less: reclassification adjustments for (gains)
losses included in net income 6,680 0
--------- ---------
Taxable securities
(125,292) (256,663)
Income tax benefit related to items of other
comprehensive income 44,610 89,845
--------- ---------
Other comprehensive income (loss) (80,682) (166,818)
--------- ---------
COMPREHENSIVE INCOME $ 230,103 $ 107,219
========= =========
TOTAL INTEREST EXPENSE
</TABLE>
See Notes to Financial Statements
3
<PAGE> 6
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 310,785 $ 274,037
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 150,000
Provision for depreciation, amortization, and accretion 108,686 118,952
Realized investment security (losses) 6,680 0
Increase in accrued interest receivable (334,946) (217,986)
Increase in Cash Surrender Value of Life Insurance (28,079) (7,069)
Increase in accrued interest payable 241,335 8,176
Other 454,358 396,350
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,058,819 722,460
INVESTING ACTIVITIES:
Proceeds from maturity of securities available for sale 0 3,265,920
Purchase of securities available for sale, net (268,059) (11,956,872)
Proceeds from sale of premises and equipment 0 154,196
Net increase in loans to customers (21,119,719) (11,168,012)
Capital (expenditures) sales, net (1,078,343) (85,615)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (22,466,121) (19,790,383)
FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
and savings accounts 5,195,649 2,798,569
Net increase in certificates of deposit 7,774,593 999,141
Net decrease in short term borrowings (832,609) (500,877)
Proceeds from issuance of common stock 78,547 0
Net increase in FHLB borrowings 4,750,000 900,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,966,180 4,196,833
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,441,122) (14,871,090)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,798,524 24,281,295
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,357,402 $ 9,410,205
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 2,593,724 $ 2,100,628
Income taxes 0 0
</TABLE>
See Notes to Financial Statements
4
<PAGE> 7
APPALACHIAN BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
March 31, 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 (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 three month period ended March 31, 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 were entitled to certain registration rights with respect to such
shares and were 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 and 34 percent for
the three months ended March 31, 2000 and March 31, 1999 approximates the
federal and state statutory rates less an adjustment for the effect of tax
exempt securities.
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 March 31, 2000, the Company had net unrealized losses of $1,338,225
in available-for-sale securities which are reflected in the presented assets and
resulted in a decrease in Shareholder's equity of $868,078, net of deferred tax
liability. The net decrease in Shareholder's Equity as a result of the SFAS 115
adjustment from December 31, 1999 to March 31, 2000 was $80,682.
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.
NOTE E - SUBSEQUENT EVENTS
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 as of March 31, 2000
and for the three months ended March 31, 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 as of March 31, 2000.
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 stocks at a
price of $15.00 per share. The registration statement was declared effective on
May 12, 2000 and the Company intends to promptly commence such offering.
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 from 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.
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.
6
<PAGE> 9
FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO MARCH 31, 2000
LOANS
Loans comprised the largest single category of the Company's earning
assets on March 31, 2000. Loans, net of unearned income and reserve for loan
losses, were 78.1% of total assets at March 31, 2000. Total net loans were
$188,076,301 at March 31, 2000, representing a 12.4% 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 $2,796,070 or
7.3% from December 31, 1999 to March 31, 2000. Investment securities at March
31, 2000 were $34,472,296 compared with $34,336,209 at December 31, 1999,
reflecting a 0.4% increase of 136,087. Federal funds sold were $910,000 at March
31, 2000 compared to the December 31, 1999 total of $3,842,157, a 76.3%
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 5.02 at December 31, 1999 to 4.00 at March 31, 2000.
Total nonperforming assets at March 31, 2000 were $494,909 which primarily
consisted of a 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, 1999 were $368,000. The ratio of
total nonperforming assets to total assets increased from 0.16% to 0.21% and the
ratio of nonperforming loans to total loans increased from 0.22% to 0.26% as
compared to December 31, 1999.
DEPOSITS
Total deposits of $199,699,898 at March 31, 2000 increased $12,970,242
or 6.9% 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 $142,928 or 1.4% from year-end 1999 to
March 31, 2000, and interest-bearing deposits increased $12,827,314 or 7.3%
during the same period. Time deposits of $100,000 or more increased
$3,649,343 or 9.5% during the same period.
7
<PAGE> 10
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase totaled $5,301,398 at
March 31, 2000, a $832,609 decrease from the December 31, 1999 total of
$6,134,007. 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 $308,651 from December 31, 1999 to March
31, 2000, due to net earnings of $310,785 and capital of 78,548 recognized due
to the issuance of compensatory stock options offset by an $80,682 decrease as a
result of unrealized losses on 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 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
8
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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 $82.8
million or 44.0% of the total loan portfolio at March 31, 2000 and investment
securities maturing in one year or less equaled $2,020,000 or 5.6% 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
March 31, 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 $23,800,000 at May 12, 2000. At March 31, 2000, the
outstanding balance of Gilmer County Bank's credit line was $14,314,286.
Appalachian Community Bank also has a credit line with the Federal Home Loan
Bank, which provides for a credit line of up to $6,000,000. At March 31, 2000,
Appalachian Community Bank's outstanding credit line balance was $3,800,000.
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
former line of credit with Hardwick Bank and Trust Company (described below),
through a $3.6 million loan from The Bankers Bank, 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 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 March 31, 2000,
the balance on the Term Loan was $3.6 million. This loan was refinanced
subsequent to the end of the fiscal year. See "Other Information." Interest on
the outstanding amounts under the Term Loan was 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 was 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, was due and payable in a final installment on November 30,
2008. The Term Loan contained certain affirmative and negative covenants,
including, but not limited to, requiring the Company
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<PAGE> 12
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 $11.4 million at March 31, 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 $13.4
million at March 31, 2000. The Company's percentage ratios as calculated under
regulatory guidelines were 5.94% and 6.97% for Tier 1 and Total Capital,
respectively, at March 31, 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 March
31, 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. (A SB-2 registration statement has been filed with the SEC for the
purpose of selling up to 400,000 shares of the Company's common stock See "
Other Information.") There can be no assurances, however, that such steps will
be successful or that the Company will be able to meet its minimum capital
ratios. The failure of the Company to meet its minimum capital ratios could
result in, among other things, increased scrutiny from applicable regulatory
authorities, a reduction in the permissible activities of the Company or a
default under the Company's credit facilities. Any of these events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Another important indicator of capital adequacy in the banking industry
is the leverage ratio. The leverage ratio is defined as the ratio which
shareholders' equity, minus intangibles bears to total assets minus intangibles.
At March 31, 2000, 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
March 31, 2000 the capital ratio as calculated under the DBF standard for Gilmer
County Bank was 6.84%. At March 31, 2000 the capital ratio as calculated under
the DBF standard for Appalachian Community Bank was 10.03%.
In April 2000, the Gilmer County Bank paid a $700,000 dividend to the
Company, which was used by the Company for repayment of debt and other expenses.
10
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
SUMMARY
Net earnings for the three months ended March 31, 2000 were $310,785
compared to net earnings of $274,037 for the same period in 1999. This
represents a 13.4% increase in net earnings. Net interest income increased
$317,934 (20.0%) during the first three months of 2000 as compared to the same
period in 1999; noninterest expenses increased $135,033 (10.8%) during same
period, while noninterest income increased by $12,141 (5.37%). Total interest
expense increased $726,255 (34.4%) during the first three months of 2000 as
compared to the same period in 1999.
NET INTEREST INCOME
Net interest income, the difference between interest earned on assets
and the cost of interest-bearing liabilities, is the largest component of the
Company's net income. Revenue from earning assets of the Company during the
three months ended March 31, 2000 increased $1,044,189 (28.2%) as compared to
the same period in 1999. This increase is attributable to the continued strong
loan demand. Interest expense for the three months ended March 31, 2000
increased $726,255 (34.4%) compared to the same period of 1999. This increase
was primarily due to an increase of $424,959 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.
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 $300,000 for the three months ended March 31, 2000, compared
to $150,000 for the same period of 1999. Charge-offs exceeded recoveries by
$171,000 for the three months ended March 31, 2000. The reserve for loan losses
as a percent of outstanding loans, net of unearned income, was 1.0 percent at
March 31, 2000 compared to 1.1 percent at year-end 1999.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 2000 was
$238,325 compared to $226,184 for the same period of 1999. This increase was
primarily due to an increase in service charges on deposit accounts of $17,454
in the first three months of 2000 as compared to the same period of 1999, and
increases in other operating income of $927. Significant components of
noninterest income changed as follows: Service charges on deposits increased
$17,454 (18.1%), insurance commissions increased $440 (4.0%), and other
operating income increased $927.
11
<PAGE> 14
NONINTEREST EXPENSES
Noninterest expenses for the three months ended March 31, 2000 were
$1,386,104, reflecting a 10.8% increase over the same period of 1999. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $705,977 for the three months ended March 31, 2000, 29.8%
higher than in the same period of 1999. Occupancy costs decreased $24,277, and
furniture and equipment expenses increased by $6,973. Other operating expenses
decreased by 1.8% to $537,799.
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 $148,294 for the three
months ended March 31, 2000 increased $8,294 compared to the same period of 1999
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 is expected to be completed by May 31,
2000.
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.
Subsequent to March 31, 2000, we entered into a Loan and Stock Pledge
Agreement with Crescent Bank and Trust Company pursuant to which the Company
borrowed $4.6 million. The proceeds of this loan were being used in part to
repay the Term Loan of $3.6 million described above under "Capital Resources."
The remainder of the proceeds from this new loan was used to partially fund the
$1,827,205 redemption of 82,500 shares of common stock as to which the Company
had redemption rights. The new loan bears interest at a rate equal to the prime
rate as published in the Wall Street Journal, less 25 basis points.
Subsequent to December 31, 1999, we received a written report from the
FDIC's first examination of Appalachian Community Bank since its acquisition by
the Company. The FDIC indicated that it feels it is necessary to continue
Appalachian Community Bank's status of being considered in a "troubled
condition" as a result of certain destabilizing factors affecting the Bank's
operating performance, including unsatisfactory earnings and declining capital.
The FDIC and the Board of Directors of Appalachian Community Bank entered into a
Memorandum of Understanding under which Appalachian Community Bank agreed to
implement a program of corrective action to remedy the weaknesses identified by
the FDIC.
On April 12, 2000 the Board of Directors of the Company authorized a
two-for-one share split of its Common Stock to be effected in the form of a
common stock dividend. The share split
12
<PAGE> 15
will be completed by distributing one additional share of stock for each share
held on the record date. The dividend will be payable on or about May 15, 2000
to shareholders of record as of the close of business on April 12, 2000. The
number of shares outstanding after the split will be 2,526,910. The amounts
pertaining to share data in this 10Q reflect this two-for-one split.
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.
In May, 2000 the Company filed Form SB-2 registration statement on 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 stocks at a price of $15.00 per share. The officers and directors
of the Company will offer and sell the shares without the assistance of an
underwriter and for no additional compensation.
The Registration Statement was declared effective on May 12, 2000 and
the Company intends to promptly commence such offering.
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.
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: May 15, 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
<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 March 31, 2000
and 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
BASIC EARNINGS PER SHARE:
Net Income $ 310,785 $ 274,037
Earnings on common shares 310,785 274,037
Taxable securities
Weighted average common shares 2,691,910 2,646,376
outstanding - basic
Basic earnings per common shares $ .12 $ .10
========== ==========
DILUTED EARNINGS PER SHARE:
Net Income $ 310,785 $ 274,037
Weighted average common shares 2,865,423 2,744,289
outstanding - diluted
Diluted earnings per common shares $ .11 $ .10
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM APPALACHIAN
BANCSHARES, INC. FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 4,323,165
<INT-BEARING-DEPOSITS> 124,237
<FED-FUNDS-SOLD> 7,516,986
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,472,296
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 190,054,729
<ALLOWANCE> 1,978,428
<TOTAL-ASSETS> 240,822,441
<DEPOSITS> 199,699,898
<SHORT-TERM> 5,301,398
<LIABILITIES-OTHER> 1,377,434
<LONG-TERM> 21,714,286
0
0
<COMMON> 27,799
<OTHER-SE> 13,569,704
<TOTAL-LIABILITIES-AND-EQUITY> 240,822,441
<INTEREST-LOAN> 4,172,811
<INTEREST-INVEST> 530,281
<INTEREST-OTHER> 38,825
<INTEREST-TOTAL> 4,741,917
<INTEREST-DEPOSIT> 2,404,828
<INTEREST-EXPENSE> 2,835,059
<INTEREST-INCOME-NET> 1,906,858
<LOAN-LOSSES> 300,000
<SECURITIES-GAINS> (6,680)
<EXPENSE-OTHER> 1,386,104
<INCOME-PRETAX> 459,079
<INCOME-PRE-EXTRAORDINARY> 459,079
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310,785
<EPS-BASIC> .12
<EPS-DILUTED> .11
<YIELD-ACTUAL> 3.01
<LOANS-NON> 494,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,849,428
<CHARGE-OFFS> 183,000
<RECOVERIES> 12,000
<ALLOWANCE-CLOSE> 1,978,428
<ALLOWANCE-DOMESTIC> 1,978,428
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
