SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-21383
APPALACHIAN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2242407
(State of Incorporation) (IRS Employer Identification No.)
829 Industrial Boulevard
Ellijay, Georgia 30540
(Address of principal executive office)
(706) 276-8000
(Issuer's telephone number, including area code)
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (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
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value Outstanding at August 13, 2002: 2,995,270 Shares
Form 10-Q
APPALACHIAN BANCSHARES, INC.
June 30, 2002
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30, 2002
and December 31, 2001......................................................................... 1
Consolidated Statements of Income For the Three Months and Six Months
Ended June 30, 2002 and 2001.................................................................. 2
Consolidated Statements of Comprehensive Income For the Three Months
and Six Months Ended June 30, 2002 and 2001................................................... 3
Consolidated Statements of Cash Flows For the Six Months Ended
June 30, 2002 and 2001........................................................................ 4
Notes to Consolidated Financial Statements...................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation............................................................................ 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 16
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders....................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
Certification of Periodic Financial Reports
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
2002 December 31,
(Unaudited) 2001
Assets
Cash and due from banks...................................................... $ 10,406,089 $ 3,598,304
Interest bearing deposits with other banks................................... 291,180 745,954
Federal funds sold........................................................... 727,000 3,214,000
Cash and Cash Equivalents................................................. 11,424,269 7,558,258
Securities available-for-sale................................................ 53,587,361 49,393,717
Loans ...................................................................... 277,162,495 250,569,296
Allowance for loan losses.................................................... (3,099,657) (2,995,362)
Net Loans................................................................. 274,062,838 247,573,934
Premises and equipment, net.................................................. 8,207,252 6,845,430
Accrued interest............................................................. 2,363,162 2,498,992
Cash surrender value on life insurance....................................... 2,428,657 2,369,866
Intangibles, net............................................................. 2,122,516 1,991,891
Other assets................................................................. 1,663,005 1,446,923
Total Assets.......................................................... $ 355,859,060 $ 319,679,011
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing..................................................... $ 19,248,133 $ 16,833,584
Interest-bearing........................................................ 269,782,006 247,194,423
Total Deposits........................................................ 289,030,139 264,028,007
Short-term borrowings..................................................... 6,597,590 3,664,699
Accrued interest.......................................................... 1,034,881 1,266,946
Long-term debt............................................................ 35,832,143 29,653,571
Other liabilities......................................................... 836,012 474,598
Total Liabilities..................................................... 333,330,765 299,087,821
Shareholders' Equity
Common stock, par value $0.01 per share, 20,000,000 shares authorized,
3,248,270 shares issued at June 30, 2002,
3,134,670 shares issued at December 31, 2001............................ 32,483 31,347
Paid-in capital........................................................... 15,381,998 14,926,333
Retained earnings......................................................... 8,940,822 7,827,893
Accumulated other comprehensive income (loss): net unrealized
holding gains (losses) on securities available-for-sale, net of
deferred income tax..................................................... 428,197 60,822
Treasury stock, at cost (253,000 shares at June 30, 2002 and
at December 31, 2001)................................................... (2,255,205) (2,255,205)
Total Shareholders' Equity............................................ 22,528,295 20,591,190
Total Liabilities and Shareholders' Equity............................ $ 355,859,060 $ 319,679,011
See notes to consolidated financial statements
1
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Interest Income
Interest and fees on loans............. $ 5,136,300 $ 5,477,965 $ 10,131,894 $ 10,960,666
Interest on investment securities:
Taxable securities................... 464,526 419,326 933,352 839,365
Nontaxable securities................ 197,451 128,642 375,606 246,633
Interest on deposit in other banks..... 1,447 4,298 2,393 4,879
Interest on federal funds sold......... 13,263 98,198 37,221 254,873
Total Interest Income.............. 5,812,987 6,128,429 11,480,466 12,306,416
Interest Expense
Interest on deposits................... 2,331,235 2,841,365 4,732,069 5,844,616
Interest on federal funds purchased and
securities sold under agreements
to repurchase........................ 23,010 43,147 35,428 75,958
Interest expense on long-term debt..... 470,842 501,379 947,664 1,113,128
Total Interest Expense............. 2,825,087 3,385,891 5,715,161 7,033,702
Net Interest Income....................... 2,987,900 2,742,538 5,765,305 5,272,714
Provision for loan losses................. 216,000 126,000 362,000 492,500
Net Interest Income After Provision for
Loan Losses............................ 2,771,900 2,616,538 5,403,305 4,780,214
Noninterest Income
Customer service fees.................. 325,070 63,781 546,087 328,552
Insurance commissions.................. 24,174 8,057 43,416 17,888
Other operating income................. 173,042 197,736 321,956 362,416
Investment securities gains (losses)... 7,150 24,181 27,584 118,672
Total Noninterest Income........... 529,436 293,755 939,043 827,528
Noninterest Expenses
Salaries and employee benefits......... 1,232,029 875,482 2,298,446 1,737,243
Occupancy expense...................... 143,770 136,126 283,757 278,759
Furniture and equipment expense........ 213,457 65,478 424,623 291,621
Other operating expenses............... 1,004,918 782,257 1,682,531 1,383,317
Total Noninterest Expenses......... 2,594,174 1,859,343 4,689,357 3,690,940
Income before income taxes................ 707,162 1,050,950 1,652,991 1,916,802
Income tax expense........................ 245,062 291,770 540,062 553,520
Net Income................................ $ 462,100 $ 759,180 $ 1,112,929 $ 1,363,282
Earnings Per Common Share
Basic.................................. $ 0.16 $ 0.27 $ 0.38 $ 0.48
Diluted................................ 0.14 0.24 0.35 0.44
Weighted Average Shares Outstanding
Basic.................................. 2,974,962 2,857,435 2,952,253 2,857,342
Diluted................................ 3,187,858 3,108,227 3,202,549 3,108,134
See notes to consolidated financial statements
2
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Net Income.................................. $ 462,100 $ 759,180 $ 1,112,929 $ 1,363,282
Other comprehensive, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period............ 909,868 (89,369) 584,213 336,320
Reclassification adjustments for (gains)
losses included in net income........ (7,150) (24,181) (27,584) (118,672)
Net unrealized gains (losses)........ 902,718 (113,550) 556,629 217,648
Income tax (expense) benefit related to
items of other comprehensive income.... (306,924) 39,447 (189,254) (77,157)
Other comprehensive income (loss)........... 595,794 (74,103) 367,375 140,491
Comprehensive Income........................ $ 1,057,894 $ 685,077 $ 1,480,304 $ 1,503,773
See notes to consolidated financial statements
3
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2002 2001
Operating Activities
Net income................................................................ $ 1,112,929 $ 1,363,282
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................................... 362,000 492,500
Net depreciation and amortization....................................... 344,771 338,391
Realized investment security losses (gains)............................. (27,584) (118,672)
Deferred tax benefit.................................................... (82,000) (139,725)
Decrease (increase) in accrued interest receivable...................... 135,830 79,231
(Decrease) increase in accrued interest payable......................... (232,065) (67,547)
Other................................................................... 197,998 351,531
Net Cash Provided by Operating Activities............................. 1,811,879 2,298,991
Investing Activities
Purchase of securities available-for-sale, net............................ (3,609,431) (6,144,488)
Net increase in loans to customers........................................ (27,217,294) (18,063,558)
Capital expenditures, net................................................. (1,706,593) (332,975)
Net Cash Used in Investing Activities................................. (32,533,318) (24,541,021)
Financing Activities
Net increase in demand deposits, NOW accounts,
and savings accounts.................................................... 24,353,909 6,374,081
Net increase in certificates of deposit................................... 648,223 17,756,130
Net (decrease) increase in short-term borrowings.......................... 2,932,891 (1,568,192)
Proceeds from issuance of common stock.................................... 456,801 4,000
(Repayments) proceeds from long-term debt................................. 6,178,572 (1,363,095)
Net Cash Provided by Financing Activities............................. 34,570,396 21,202,924
Net decrease in cash and cash equivalents.................................... 3,866,011 (1,039,106)
Cash and cash equivalents at beginning of period............................. 7,558,258 11,716,966
Cash and cash equivalents at end of period................................... $ 11,424,269 $ 10,677,860
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest................................................................ $ 5,947,226 $ 7,101,249
Income taxes............................................................ 408,106 304,981
See notes to consolidated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2002
Note A - Basis of Presentation
The consolidated financial statements include the accounts of Appalachian
Bancshares, Inc. (the "Company")(a Georgia corporation) and its wholly-owned
subsidiaries: Appalachian Community Bank and Appalachian Information Management,
Inc. ("AIM") (collectively the "Bank"). During 2001, the two previous bank
subsidiaries, Gilmer County Bank and Appalachian Community Bank (formerly known
as First National Bank of Union County) were merged. The surviving bank of
Gilmer County Bank simultaneously changed its name to Appalachian Community
Bank. AIM was formed as a wholly-owned subsidiary of the Bank. AIM provides
in-house data services to the Bank and offers data processing services to other
institutions. All significant intercompany transactions and balances have been
eliminated in consolidation. Unless otherwise indicated herein, the financial
results of the Company refer to the Company and the Bank on a consolidated
basis. The Bank provides a full range of banking services to individual and
corporate customers in North Georgia and the surrounding areas. 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-Q and Article 10 of Regulation S-X.
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, 2002, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
The consolidated statement of financial condition at December 31, 2001, has
been derived from the audited consolidated financial statements at that date,
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements for
Appalachian Bancshares, Inc. for the year ended December 31, 2001, and footnotes
thereto, included in Form 10-KSB, filed with the Securities and Exchange
Commission in March 2002.
Note B - Income Taxes
The effective tax rates of approximately 33 percent and 29 percent for the
six months ended June 30, 2002 and 2001 are less than the applicable statutory
rate due primarily to the effects of tax-exempt income and general business
credits.
Note C - Investment Securities
The Company applies the accounting and reporting requirements of Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. 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 shareholders' equity (net of deferred tax effect).
5
Note C - Investment Securities - Continued
At June 30, 2002, the Company had net unrealized gains of $648,783 in
available-for-sale securities which are reflected in the presented assets and
resulted in an increase in shareholders' equity of $428,197, net of deferred tax
benefit. There were no trading securities. The net increase in shareholders'
equity as a result of the SFAS No. 115 adjustment from December 31, 2001 to June
30, 2002, was $367,375.
Note D - 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.
Note E - Business Combination
Effective August 13, 2001, the Company's wholly-owned bank subsidiaries,
Gilmer County Bank and Appalachian Community Bank were merged together.
Regulatory approval for the merger was received by the Company from the Federal
Deposit Insurance Corporation ("FDIC") and the Georgia Department of Banking and
Finance. Pursuant to the merger, Gilmer County Bank, as the surviving bank in
the merger, changed its legal name from Gilmer County Bank to Appalachian
Community Bank. However, its offices located in Gilmer County continue to
operate under the trade name of "Gilmer County Bank."
Note F - Regulatory Filing Status Change
Effective January 1, 2002, the Company is now required to file under
Regulation S-X instead of Regulation S-B. The Company's public float has
exceeded $25,000,000 for the past two consecutive years therefore necessitating
the change in filing status.
Note G - Goodwill
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. The statement requires that goodwill and other intangible
assets with indefinite useful lives no longer be amortized, but instead an
entity must perform an assessment of whether these assets are impaired as of the
date of adoption and test for impairment at least annually in accordance with
the provisions of the statement. The statement also required that intangible
assets with determinable lives be amortized. The Company adopted statement 142
on January 1, 2002. The initial assessment of the Company's intangible assets as
of January 1, 2002, indicated that no impairment of values existed at that date.
6
Note G - Goodwill - Continued
Acquired goodwill and other intangible assets at June 30, 2002, are
detailed as follows:
As of June 30, 2002
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
Identifiable amortizing assets................................. $ 165,000 $ 34,375 $ 130,625
Nonamortizing goodwill......................................... 2,335,858 343,967 1,991,891
Total acquired intangible asset................................ $ 2,500,858 $ 378,342 $ 2,122,516
Aggregate amortization expense for the period ended June 30, 2002, was
$34,375. Aggregate amortization expense estimated for the years ending December
31, 2002 and 2003 are $75,627 and $89,373, respectively.
The following table presents net income and earnings per share as reported
and adjusted to exclude tax effected amortization of goodwill that is no longer
being amortized.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Reported net income............................ $ 462,100 $ 759,180 $ 1,112,929 $ 1,363,282
Add back: Goodwill amortization................ -- 29,437 -- 58,874
Adjusted net income............................ $ 462,100 $ 788,617 $ 1,112,929 $ 1,422,156
Basic earnings per share:
Reported net income......................... $ 0.16 $ 0.27 $ 0.38 $ 0.48
Goodwill amortization....................... 0.00 0.01 0.00 0.02
Adjusted net income............................ $ 0.16 $ 0.28 $ 0.38 $ 0.5
Diluted earnings per share:
Reported net income......................... $ 0.14 $ 0.24 $ 0.34 $ 0.44
Goodwill amortization....................... 0.00 0.01 0.00 0.02
Adjusted net income............................ $ 0.14 $ 0.25 $ 0.34 $ 0.46
7
Note H - Recently Passed Legislation
On July 30,2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is unprecedented in the last 60 years for its breadth and effect on
corporate disclosure, corporate governance and the public securities markets. It
has far reaching effects on the standards of integrity for corporate management,
boards of directors, and executive management. Additional disclosures,
certifications and possibly procedures will be required of the Company.
Management does not expect any material adverse effect on the Company as a
result of the passage of this legislation; however, the full scope of the Act
has not been determined. The Act provides for additional regulations and
requirements of publicly-traded companies which regulations and requirements
have yet to be issued.
Note I - Subsequent Events
In August 2002, management decided to discontinue operations of Appalachian
Information Management. Operations are planned to cease in October 2002.
Management has determined that this will not have a material effect on
operations or the financial condition of the Company.
8
APPALACHIAN BANCSHARES, INC.
June 30, 2002
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 Bank 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 Company and the Bank to maintain minimum regulatory capital standards,
and (v) changes in the legislative and regulatory environment.
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-Q and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
2001, appearing in the Company's Form 10-KSB filed with the Securities and
Exchange Commission in March 2002.
The Company's operations are conducted through the Bank. Management
continuously monitors the financial condition of the Bank in order to protect
depositors, increase retained earnings and protect current and future earnings.
Further discussion of significant items affecting the Company's financial
condition and results of operations are discussed in detail below.
In August 2002, management decided to discontinue operations of Appalachian
Information Management. Operations are planned to cease in October 2002.
Management has determined that this will not have a material effect on
operations or the financial condition of the Company.
FINANCIAL CONDITION
June 30, 2002 compared to December 31, 2001
Loans
Loans comprised the largest single category of the Company's earning assets
on June 30, 2002. Loans, net of unearned income and allowance for loan losses,
were 77.0 percent of total assets at June 30, 2002. Total net loans were
$274,062,838 at June 30, 2002, representing a 10.7 percent increase from
$247,573,934 at December 31, 2001. This increase reflects the continued increase
in loan demand for the Bank's respective market areas coupled with an increase
in the Bank's market share for their respective areas.
Investment Securities and Other Earning Assets
Investment securities and federal funds sold increased $1,706,644 or 3.2
percent from $52,607,717 at December 31, 2001 to $54,314,361 at June 30, 2002.
Investment securities at June 30, 2002, were $53,587,361 compared with
$49,393,717 at December 31, 2001, reflecting an 8.5 percent increase of
$4,193,644. Federal funds sold were $727,000 at June 30, 2002, compared to the
December 31, 2001, total of $3,214,000, a 77.4 percent decrease. The investment
securities portfolio 1s
9
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 management's decision to shift
short-term funds into higher rate longer-term securities and loans.
Asset Quality
Asset quality is measured by three key ratios. The ratio of the allowance
for loan losses 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 1.68 to 0.64. Total non-performing assets
at June 30, 2002, were $4.806 million, which consisted of $113,000 in consumer
loans, $4.095 million in commercial loans, $99,000 in loans secured by real
estate and $499,000 of foreclosed real estate. Nonperforming assets at December
31, 2001, were $1.787 million. The ratio of total nonperforming assets to total
assets rose from 0.56 percent at December 31, 2001, to 1.35 percent at June 30,
2002, and the ratio of nonperforming loans to total loans increased from 0.66
percent at December 31, 2001 to 1.57 percent at June 30, 2002. The increase in
nonperforming assets is due to two commercial customers. Management is closely
monitoring these loans.
Deposits
Total deposits at June 30, 2002, were $289,030,139, an increase of
$25,002,132 or 9.5 percent over total deposits of $264,028,007 at year-end 2001.
Deposits are the Company's primary source of funds with which to support its
earning assets. Noninterest-bearing deposits increased $2,414,549 or 14.3
percent from year-end 2001 to $19,248,133 at June 30, 2002, and interest-bearing
deposits increased $22,587,583 or 9.1 percent during the same period to
$269,782,006.
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase totaled $3,641,590 at June
30, 2002, a $1,908,891 increase from the December 31, 2001, total of $1,732,699.
The total of securities sold under agreements to repurchase is associated with
the cash flow needs of the Bank's corporate customers that participate in
repurchase agreements.
Shareholders' Equity
Shareholders' equity increased $1,937,105 from $20,591,190 at December 31,
2001 to $22,528,295 at June 30, 2002. This increase was attributable to net
earnings of $1,112,929, net proceeds from the issuance of stock of $456,801 and
additional gains of $367,375 resulting from the rise in the market value of
securities available-for-sale, net of deferred taxes.
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
their customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform their primary function as
financial intermediaries and would, therefore, not be able to meet the
production and growth needs of the communities they serve.
10
The primary function of assets and liabilities management is not only to
assure adequate liquidity in order for the Bank to meet the needs of their
customer base, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Bank
can meet the investment objectives 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 $123.8 million or
44.7 percent of the total loan portfolio at June 30, 2002, and investment
securities maturing in one year or less equaled approximately $105 thousand or
0.2 percent 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, 2002, funds were also available through the purchase of federal funds
from correspondent commercial banks from available lines of up to an aggregate
of $15,000,000. Liquidity management involves the daily monitoring of the
sources and uses of funds to maintain an acceptable cash position.
To maintain and improve their liquidity positions, the Bank is a member of
the Federal Home Loan Bank of Atlanta. As a member of the Federal Home Loan
Bank, the Bank is able to improve their ability to manage liquidity and reduce
interest rate risk by having a funding source to match longer-term loans. The
Bank's credit line was approximately $35,600,000 as of June 30, 2002. At June
30, 2002, the outstanding balance of Appalachian Community Bank was
approximately $31,000,000.
Capital Resources
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization.
Federal Capital Standards. Regulatory authorities are placing increased
emphasis on the maintenance of adequate capital. The Company and the Bank are
subject to guidelines mandating minimum risk-based capital requirements. The
guidelines take into consideration risk factors 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 $20.4 million at June 30, 2002.
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 $23.5 million at June 30, 2002. The Company's percentage ratios as
calculated under regulatory guidelines were 7.07 percent and 8.16 percent for
Tier 1 and Total Capital, respectively, at June 30, 2002, exceeding the minimum
ratios of 4.00 percent and 8.00 percent, respectively.
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, 2002, the Company's leverage ratio was 5.88 percent exceeding the
regulatory minimum requirement of 4 percent.
11
DBF Capital Requirement. In addition to the capital standards imposed by
federal banking regulators, the Georgia Department of Banking and Finance (the
"DBF") imposed an 6 percent primary capital ratio on the Bank. This standard 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. At June
30, 2002, the capital ratio as calculated under the DBF standard for the Bank
was 7.14 percent.
In 2001, the Bank paid a $250,000 dividend to the Company, which was used
by the Company for repayment of debt and other expenses. There have been no
dividends during 2002 paid by the Bank to the Company.
RESULTS OF OPERATIONS
Six months and three months ended June 30, 2002 and 2001
Summary
Net earnings for the six months ended June 30, 2002, were $1,112,929
compared to net earnings of $1,363,282 for the same period in 2001. This 18.3
percent decrease in net earnings is primarily attributable to expenses related
to the opening of a full service facility in Blue Ridge, Georgia. Net interest
income increased $492,591 (9.3 percent) during the first six months of 2002 as
compared to the same period in 2001; noninterest expenses increased $998,417
(27.1 percent) during same period, while noninterest income increased by
$111,515 (13.5 percent). Total interest expense decreased $1,318,541 (18.7
percent) during the first six months of 2002 as compared to the same period in
2001.
Net earnings for the quarter ended June 30, 2002, were $462,100 compared to
net earnings of $759,180 for the quarter ended June 30, 2001. This represents a
39.1 percent decrease as compared to the same period in 2001 and is a result of
the same causes noted for the six months ended June 30, 2002 and 2001. Total
interest expense decreased by $560,804 as compared to the same period in 2001.
Net interest income increased $245,362 during the three months ended June 30,
2002, as compared to the same period in 2001; noninterest expenses increased
$734,831 during the same period, while noninterest income increased by $235,681.
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, 2002, decreased $825,950 (6.7 percent) from the same
period in 2001. Interest expense for the six months ended June 30, 2001,
decreased $1,318,541 or (18.7 percent) compared to the same period in 2001.
These overall decreases in interest income and expenses are a result of a
falling interest rate environment.
Net interest income increased $245,362 or 8.9 percent during the quarter
ended June 30, 2002, as compared to the same period in 2001. A decrease of
$315,442 or 51 percent in revenue from earning assets coupled with a decrease in
total interest expense of $560,804 or 16.6 percent are the principal reasons for
the increase in net interest income for the quarter.
12
Provision for Loan Losses
The provision for loan losses represents the charge against current
earnings necessary to maintain the allowance 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 $362,000 for the six months ended June 30, 2002, compared to
$492,500 for the same period of 2001. Charge-offs exceeded recoveries by
$257,705 for the six months ended June 30, 2002. The allowance for loan losses
as a percent of outstanding loans, net of unearned income, was 1.12 percent at
June 30, 2002, compared to 1.20 percent at year-end 2001.
The provision for loan losses was $216,000 for the three months ended June
30, 2002, compared to $126,000 for the same period in 2001.
The increased provisions for the three and six-month periods ended June 30,
2002, as compared to the same periods of 2001 are directly attributable to
anticipated problems that may arise from the slowing economy.
Noninterest Income
Noninterest income for the six months ended June 30, 2002, was $939,043
compared to $827,528 for the same period in 2001. This increase was primarily
due to an increase in customer service fees of $217,535 in the first six months
of 2002 as compared to the same period in 2001, and decreases in other operating
income of $40,460 and investment gains year-to-date of $91,088.
Noninterest income increased by $235,681 or 80.2 percent in the three
months ended June 30, 2002, as compared to the same period in 2001.
Noninterest Expenses
Noninterest expenses for the six months ended June 30, 2002, were $468,935,
reflecting a 27.1 percent increase over the same period of 2001. The primary
components of noninterest expenses are salaries and employee benefits, which
increased to $2,298,446 for the six months ended June 30, 2002, 32.3 percent
higher than in the same period in 2001. Occupancy costs increased $4,998 and
furniture and equipment expenses increased by $133,002. Other operating expenses
rose by 21.6 percent to $1,682,531.
Noninterest expenses increased by $734,831 for the quarter ended June 30,
2002, as compared to the same period in 2001. Salaries and employee benefits
increased by $356,547 for the three months ended June 30, 2002, 40.7 percent
higher than the same period in 2001. Occupancy costs increased by $7,644 and
other operating expenses increased by $222,661 for the second quarter of 2002 as
compared with the same period in 2001.
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 for the six months ended
June 30, 2002, was $540,062, a decrease of $13,458 compared to the same period
in 2001 due to decreased earnings.
13
Recently Issued Accounting Standards
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a replacement of FASB Statement No. 125. While SFAS No. 140 carries over most of
the provisions of SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, it provides new standards
for reporting financial assets transferred as collateral and new standards for
the derecognition of financial assets, in particular transactions involving the
use of special purpose entities. SFAS No. 140 also prescribes additional
disclosures for collateral transactions and for securitization transactions
accounted for as sales. The new collateral standards and disclosure requirements
are effective for fiscal years ending after December 15, 2000, while the new
standards for the derecognition of financial assets are effective for transfers
made after March 31, 2001. The adoption of this statement did not have a
material effect on the Company's consolidated financial statements.
In May 2001, the Auditing Standards Board issued Statement on Auditing
Standards ("SAS") No. 94, The Effect of Information Technology on the Auditor's
Consideration of Internal Control in a Financial Statement Audit. This statement
amends SAS No. 55, Consideration of Internal Control in a Financial Statement
Audit, by providing additional guidance related to the understanding by the
auditor of an entity's use of information technology relevant to the audit. This
auditing standard is effective for audits of financial statements for periods
beginning on or after June 1, 2001. The impact on the audit of the Company's
consolidated financial statements resulting from the issuance of this auditing
standard is not expected to be material.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, Business Combinations, and SFAS No. 38,
Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of this statement are to be accounted for
using one method, the purchase method. Prior to the issuance of this statement,
subject to certain criteria, business combinations were accounted for using one
of two methods, the pooling-of-interests method or the purchase method. The two
methods produced dramatically different financial statement results. The
single-method approach used in this statement reflects the conclusion that
virtually all business combinations are acquisitions and, thus, all business
combinations should be accounted for in the same way that other asset
acquisitions are accounted for based on the values exchanged. Expanded and
revised guidance is provided related to the allocation of the purchase price to
goodwill and other intangibles arising from the business combination. The
provisions of this statement apply to all business combinations initiated after
June 30, 2001.
Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. This statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It also provides new standards for how these intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The major changes required by this Statement relate to the
discontinuance of the accounting practice of amortizing or expensing intangibles
ratably over a prescribed time period. The new guidance requires that goodwill
and certain other intangibles be tested for impairment at least annually by
comparing the fair values of those assets with their recorded amounts.
Additional disclosure requirements are also provided. The provisions of this
statement are required to be applied starting with fiscal years beginning after
December 15, 2001.
14
Due to their recent issuance, the outcome of adopting SFAS No. 141 and SFAS
No. 142 has not been fully analyzed or quantified by management, therefore, the
future impact on the Company's consolidated financial statements cannot
presently be projected.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The adoption of this statement
is not expected to have a material effect on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that opinion).
This statement also amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The major changes
resulting from this statement relate to the establishment of a single method for
the recognition of impairment losses on long-lived assets to be held and used
whether from discontinuance of a business segment or otherwise. This statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
In December 2001, the Auditing Standards Board issued SAS No. 95, Generally
Accepted Auditing Standards. This statement supersedes Generally Accepted
Auditing Standards of SAS No. 1 and generally provides additional guidance to
the independent auditor in the conduct of an audit engagement, primarily by
addressing authoritative and nonauthoritative publications for audit
consideration and guidance. This SAS is effective for audits of financial
statements for periods beginning on or after December 15, 2001.
In January 2002, the Auditing Standards Board issued SAS No. 96, Audit
Documentation. This statement supersedes SAS No. 41, Working Papers and amends
SAS No. 47, Audit Risk and Materiality in Conducting an Audit, SAS No. 56,
Analytical Procedures and SAS No. 59, The Auditor's Consideration of an Entity's
Ability to Continue as a Going Concern. This statement provides revised guidance
to the independent auditor as to the type, purpose and requirements of audit
documentation. This SAS is effective for audits of financial statements for
periods beginning on or after May 15, 2002.
The impact of SAS No. 95 and SAS No. 96 on the audit of the Company's
consolidated financial statements resulting from the issuance of these auditing
standards is not expected to be material.
15
Recently Passed Legislation
On July 30,2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts. This
legislation is unprecedented in the last 60 years for its breadth and effect on
corporate disclosure, corporate governance and the public securities markets. It
has far reaching effects on the standards of integrity for corporate management,
boards of directors, and executive management. Additional disclosures,
certifications and possibly procedures will be required of the Company.
Management does not expect any material adverse effect on the Company as a
result of the passage of this legislation; however, the full scope of the Act
has not been determined. The Act provides for additional regulations and
requirements of publicly-traded companies which regulations and requirements
have yet to be issued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk arising from adverse changes in the fair value of
financial instruments due to a change in interest rates, exchange rates and
equity prices. The Company's primary market risk arises from the possibility
that interest rates may change significantly and affect the fair value of the
Company's financial instruments (also known as interest rate risk).
The primary objective of asset/liability management at the Company is to
manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining a
balance between the repricing of rate sensitive earning assets and rate
sensitive interest-bearing liabilities. The amount invested in rate sensitive
earning assets compared to the amount of rate sensitive liabilities issued are
the principal factors in projecting the effect that fluctuating interest rates
will have on future net interest income and the fair value of financial
instruments. Rate sensitive earning assets and interest-bearing liabilities are
those that can be re-priced to current market rates within a given time period.
Management monitors the rate sensitivity of all interest earning assets and
interest bearing liabilities, but places particular emphasis on the upcoming
year. The Company's asset/liability management policy requires risk assessment
relative to interest pricing and related terms and places limits on the risk to
be assumed by the Company.
The Company uses several tools to monitor and manage interest rate
sensitivity. One of the primary tools is simulation analysis. Simulation
analysis is a method of estimating the fair value of financial instruments, the
earnings at risk, and capital at risk under varying interest rate conditions.
Simulation analysis is used to estimate the sensitivity of the Company's net
interest income and stockholders' equity to changes in interest rates.
Simulation analysis accounts for the expected timing and magnitude of assets and
liability cash flows as interest rates change, as well as the expected timing
and magnitude of deposit flows and rate changes whether or not these deposits
re-price on a contractual basis. In addition, simulation analysis includes
adjustments for the lag between movements in market interest rates on loans and
interest-bearing deposits. These adjustments are made to reflect more accurately
possible future cash flows, re-pricing behavior and ultimately net interest
income.
16
As of June 30, 2002, the Company's simulation analysis indicated that the
Company is at greatest risk in an increasing interest rate environment. The
table that follows depicts the results of the simulation assuming one and two
percent decreases and increases in market interest rates.
Estimated Fair Value of Financial Instruments
Down Up Down Up
1 Percent 1 Percent 2 Percent 2 Percent
Dollars in Thousands
Interest-earning Assets:
Loans......................................... $ 280,097 $ 274,439 $ 282,786 $ 271,735
Deposits in banks............................. 291 291 291 291
Federal funds sold............................ 727 727 727 727
Securities.................................... 65,815 52,029 59,526 44,420
Total Interest-earning Assets............... 346,930 327,486 343,330 317,173
Interest-bearing Liabilities
Deposits - Savings and demand................. 106,348 104,756 107,144 103,960
Deposits - Time............................... 165,956 162,504 167,681 160,779
Other borrowings.............................. 38,313 37,346 38,797 36,863
Total Interest-bearing Liabilities.......... 310,617 304,606 313,622 301,602
Net Difference in Fair Value..................... $ 36,313 $ 22,280 $ 29,708 $ 15,571
Change in Net Interest Income.................... $ (53) $ (75) $ (145) $ (162)
17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 21,
2002, 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, Vise and Morgan, P.C. as the Company's
independent auditors was ratified with 2,219,063 votes for, 2,500 votes against
and 5,995 votes abstained. 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 re-elected to serve as directors of the Company for a term
of one year and until their successors have been elected and qualified or their
earlier resignation, removal from office, or death.
Directors Elected at Annual Meeting of Shareholders
VOTES FOR VOTES WITHHELD
Alan S. Dover 2,060,458 0
Charles A. Edmondson 2,060,458 0
Roger E. Futch 2,060,458 0
Joseph C. Hensley 2,060,458 0
Frank E. Jones 2,060,378 80
J. Ronald Knight 2,060,378 80
Tracy R. Newton 2,060,378 80
P. Joe Sisson 2,060,378 80
Kenneth D. Warren 2,060,338 120
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings Per Share
5.1 Undertaking to submit the Plan to the Internal Revenue Service
(included as Exhibit 5.2 to the Company's Form 11-K for the year
ended December 31, 2001 filed on July 17, 2002 and incorporated
herein by reference).
10.1 Adoption Agreement for the Appalachian Bancshares, Inc.
Employees' Savings & Profit Sharing Plan (included as Exhibit
10.1 to the Company's Form 11-K for the year ended December 31,
2001 filed on July 17, 2002 and incorporated herein by
reference).
10.2 Pentegra Services, Inc. Employees' Savings & Profit Sharing Plan
Basic Plan Document, and the following related documents: Trust
Agreement by and between Appalachian Bancshares, Inc. and the
Bank of New York; Custody Agreement by and between Tracy R.
Newton, Kent W. Sanford and Joseph Hensley, as Trustee on behalf
of the Appalachian Bancshares, Inc. Employees' Savings & Profit
Sharing Plan, and the Bank of New York (with Letter Notification
to the Bank of New York providing an updated list of members of
the Administrative Committee); and the Internal Revenue Service
Favorable Approval Letter of the Pentegra Services, Inc.
Prototype Non-Standardized Profit Sharing Plan (included as
Exhibit 10.2 to the Company's Form 11-K for the year ended
December 31, 2001 filed on July 17, 2002 and incorporated herein
by reference).
(b) Reports on Form 8-K
On June 18, 2002, the Company filed a report on Form 8-K, under
Item 4 (Changes in Registrant's Certifying Accountant), to report
a change, effective June 10, 2002, in the Company's certifying
accountant with respect to the Company's Employees' Savings and
Profit Sharing Plan and Trust.
19
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Appalachian Bancshares, Inc. (the
"Company") on Form 10-Q for the quarterly period ended June 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, Tracy R. Newton, President and Chief Executive Officer of the
Company, and Alan R. May, Chief Financial Officer, do hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 13, 2002 By: /s/ Tracy R. Newton
Tracy R. Newton
President and Chief Executive Officer
Date: August 13, 2002 By: /s/ Alan R. May
Alan R. May
Chief Financial Officer
20
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: August 13, 2002
APPALACHIAN BANCSHARES, INC.
/s/ Tracy R. Newton
----------------------------
Tracy R. Newton
President and CEO
(Duly authorized officer)
/s/ Alan R. May
----------------------------
Alan R. May
Chief Financial Officer
(Principal financial officer)
21
Exhibit 11
APPALACHIAN BANCSHARES, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the three-month and six-month periods ended June 30, 2002
and 2001.
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
Basic Earnings Per Share:
Net Income........................... $ 462,100 $ 759,180 $ 1,112,929 $ 1,363,282
Earnings on common shares............ 462,100 759,180 1,112,929 1,363,282
Weighted average common shares
outstanding - basic................ 2,974,962 2,857,435 2,952,253 2,857,342
Basic earnings per common share...... $ 0.16 $ 0.27 $ 0.38 $ 0.48
Diluted Earnings Per Share:
Net Income........................... $ 462,100 $ 759,180 $ 1,112,929 $ 1,363,282
Weighted average common shares
outstanding - diluted.............. 3,187,858 3,108,227 3,202,549 3,108,134
Diluted earnings per common share.... $ 0.14 $ 0.24 $ 0.35 $ 0.44
22