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 SEPTEMBER 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 November 10, 2002: 3,020,270 Shares
Form 10-Q
APPALACHIAN BANCSHARES, INC.
September 30, 2002
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at September 30, 2002
and December 31, 2001..................................................................... 1
Consolidated Statements of Income For the Three Months and Nine Months
Ended September 30, 2002 and 2001......................................................... 2
Consolidated Statements of Comprehensive Income For the Three Months
and Nine Months Ended September 30, 2002 and 2001......................................... 3
Consolidated Statements of Cash Flows For the Nine Months Ended
September 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.................................. 18
Item 4. Controls and Procedures..................................................................... 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................ 20
Signatures
Certification of Periodic Financial Reports
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2002 (Unaudited) and December 31, 2001
September 30,
2002 December 31,
(Unaudited) 2001
--------------- ----------------
Assets
Cash and due from banks...................................................... $ 9,152,170 $ 3,598,304
Interest bearing deposits with other banks................................... 3,562,534 745,954
Federal funds sold........................................................... 1,151,000 3,214,000
--------------- ----------------
Cash and Cash Equivalents............................................. 13,865,704 7,558,258
Securities available-for-sale................................................ 54,745,335 49,393,717
Loans........................................................................ 293,953,421 250,569,296
Allowance for loan losses.................................................... (3,302,092) (2,995,362)
--------------- ----------------
Net Loans............................................................. 290,651,329 247,573,934
Premises and equipment, net.................................................. 8,422,840 6,845,430
Accrued interest............................................................. 2,330,380 2,498,992
Cash surrender value on life insurance....................................... 2,455,950 2,369,866
Intangibles, net............................................................. 2,101,891 1,991,891
Other assets................................................................. 1,498,701 1,446,923
--------------- ----------------
Total Assets.......................................................... $ 376,072,130 $ 319,679,011
=============== ================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing..................................................... $ 19,197,288 $ 16,833,584
Interest-bearing........................................................ 283,841,962 247,194,423
--------------- ----------------
Total Deposits........................................................ 303,039,250 264,028,007
Short-term borrowings..................................................... 8,039,639 3,664,699
Accrued interest.......................................................... 1,046,365 1,266,946
Long-term debt............................................................ 39,248,809 29,653,571
Other liabilities......................................................... 1,039,856 474,598
--------------- ----------------
Total Liabilities..................................................... 352,413,919 299,087,821
--------------- ----------------
Shareholders' Equity
Common stock, par value $0.01 per share, 20,000,000 shares authorized,
3,248,270 shares issued at September 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......................................................... 9,616,373 7,827,893
Accumulated other comprehensive income (loss): net unrealized
holding gains (losses) on securities available-for-sale, net of
deferred income tax..................................................... 882,562 60,822
Treasury Stock, at cost (253,000 shares at September 30, 2002 and
at December 31, 2001)................................................... (2,255,205) (2,255,205)
--------------- ----------------
Total Shareholders' Equity............................................ 23,658,211 20,591,190
--------------- ----------------
Total Liabilities and Shareholders' Equity............................ $ 376,072,130 $ 319,679,011
=============== ================
See notes to consolidated financial statements
1
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ----------------------------------
2002 2001 2002 2001
------------- ------------- -------------- ----------------
Interest Income
Interest and fees on loans............. $ 5,261,225 $ 5,380,937 $ 14,980,929 $ 15,854,208
Interest on investment securities:
Taxable securities................... 391,758 411,926 1,325,110 1,251,291
Nontaxable securities................ 216,747 128,666 592,353 375,299
Interest on deposit in other banks..... 1,207 12 3,600 4,891
Interest on federal funds sold......... 12,382 72,500 49,603 327,373
------------- ------------- -------------- ----------------
Total Interest Income.............. 5,883,319 5,994,041 16,951,595 17,813,062
Interest Expense
Interest on deposits................... 2,358,675 2,820,755 7,090,744 8,665,371
Interest on federal funds purchased
and securities sold under agreements
to repurchase........................ 20,755 12,902 56,183 88,860
Interest expense on long-term debt..... 447,976 555,779 1,395,640 1,668,907
------------- ------------- -------------- ----------------
Total Interest Expense............. 2,827,406 3,389,436 8,542,567 10,423,138
Net Interest Income....................... 3,055,913 2,604,605 8,409,028 7,389,924
Provision for loan losses................. 306,000 326,000 668,000 818,500
------------- ------------- -------------- ----------------
Net Interest Income After Provision for
Loan Losses............................ 2,749,913 2,278,605 7,741,028 6,571,424
Noninterest Income
Customer service fees.................. 252,568 148,204 798,655 476,756
Insurance commissions.................. 36,215 16,179 79,631 34,067
Mortgage origination fees.............. 289,203 264,593 701,393 751,988
Other operating income................. 302,682 67,099 624,638 429,515
Investment securities gains (losses)... 1,082 (19,008) 28,666 99,664
------------- ------------- -------------- ----------------
Total Noninterest Income........... 881,750 477,067 2,232,983 1,791,990
Noninterest Expenses
Salaries and employee benefits......... 1,242,699 931,024 3,541,145 2,668,267
Occupancy expense...................... 147,749 95,146 431,506 373,905
Furniture and equipment expense........ 275,477 214,490 700,100 506,111
Other operating expenses............... 939,389 699,176 2,621,920 2,082,493
------------- ------------- -------------- ----------------
Total Noninterest Expenses......... 2,605,314 1,939,836 7,294,671 5,630,776
Income before income taxes................ 1,026,349 815,836 2,679,340 2,732,638
Income tax expense........................ (350,798) (271,500) (890,860) (825,020)
------------- ------------- -------------- ----------------
Net Income................................ $ 675,551 $ 544,336 $ 1,788,480 $ 1,907,618
============= ============= ============== ================
Earnings Per Common Share
Basic.................................. $ 0.23 $ 0.19 $ 0.60 $ 0.67
Diluted................................ 0.21 0.18 0.56 0.62
Cash Dividends Declared
Per Common Share....................... $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Shares Outstanding
Basic.................................. 2,995,270 2,858,628 2,966,653 2,857,775
Diluted................................ 3,197,687 3,096,607 3,178,314 3,098,359
See notes to consolidated financial statements
2
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ----------------------------------
2002 2001 2002 2001
------------- ------------- -------------- ----------------
Net Income................................ $ 675,551 $ 544,336 $ 1,788,480 $ 1,907,618
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising
during the period.................. 689,515 631,681 1,273,728 968,001
Reclassification adjustments for (gains)
losses included in net income...... (1,082) 19,008 (28,666) (99,664)
------------- ------------- -------------- ----------------
Net unrealized gains............... 688,433 650,689 1,245,062 868,337
Income tax expense related to items of
other comprehensive income........... (234,068) (221,890) (423,322) (299,047)
------------- ------------- -------------- ----------------
Other comprehensive income ............... 454,365 428,799 821,740 569,290
------------- ------------- -------------- ----------------
Comprehensive Income...................... $ 1,129,916 $ 973,135 $ 2,610,220 $ 2,476,908
============= ============= ============== ================
See notes to consolidated financial statements
3
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
Nine Months Ended September 30
---------------------------------
2002 2001
--------------- ----------------
Operating Activities
Net income................................................................ $ 1,788,480 $ 1,907,618
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................................... 668,000 818,500
Net depreciation and amortization....................................... 529,715 498,591
Realized investment security losses (gains)............................. (28,666) (99,664)
Deferred tax benefit.................................................... (82,000) (139,725)
Decrease (increase) in accrued interest receivable...................... 168,612 (21,967)
(Decrease) in accrued interest payable.................................. (220,581) (144,677)
Other, net.............................................................. 557,003 321,667
--------------- ----------------
Net Cash Provided by Operating Activities............................. 3,380,563 3,140,343
--------------- ----------------
Investing Activities
Purchase of securities available-for-sale, net............................ (4,077,890) (11,349,687)
Net increase in loans to customers........................................ (44,696,258) (28,414,486)
Capital expenditures, net................................................. (2,107,127) (699,034)
Proceeds from the disposition of foreclosed real estate................... 369,936 641,454
--------------- ----------------
Net Cash Used in Investing Activities................................. (50,511,339) (39,821,753)
---------------- ----------------
Financing Activities
Net increase in demand deposits, NOW accounts,
and savings accounts.................................................... 33,969,643 6,146,401
Net increase in certificates of deposit................................... 5,041,600 34,008,274
Net (decrease) increase in short-term borrowings.......................... 4,374,940 (1,143,915)
Proceeds from issuance of common stock.................................... 456,801 70,030
(Repayments) proceeds from long-term debt................................. 9,595,238 (1,996,428)
--------------- ----------------
Net Cash Provided by Financing Activities............................. 53,438,222 37,084,362
--------------- ----------------
Net Increase in Cash and Cash Equivalents.................................... 6,307,446 402,952
Cash and Cash Equivalents at Beginning of Period............................. 7,558,258 11,716,966
--------------- ----------------
Cash and Cash Equivalents at End of Period................................... $ 13,865,704 $ 12,119,918
=============== ================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest................................................................ $ 8,763,148 $ 10,567,815
Income taxes............................................................ 925,345 879,981
See notes to consolidated financial statements
4
APPALACHIAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
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 to provide
in-house data services to the Bank and to offer data processing services to
other institutions; however, AIM's operations ceased in October of 2002 (see
Item 1, Note J and Item 2 below). All significant inter-company 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 nine-month period ended September 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 April of 2002.
Note B - Income Taxes
The effective tax rates of approximately 33.2 percent and 30.2 percent for
the nine months ended September 30, 2002 and 2001, respectively, 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 September 30, 2002, the Company had net unrealized gains of $1,337,216
in available-for-sale securities which are reflected in the presented assets and
resulted in an increase in shareholders' equity of $882,562, 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
September 30, 2002, was $821,740.
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 September 30, 2002, are
detailed as follows:
As of September 30, 2002
-------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------------- --------------- --------------
Identifiable amortizing assets................................. $ 165,000 $ 55,000 $ 110,000
Nonamortizing goodwill......................................... 2,335,858 343,967 1,991,891
-------------- --------------- --------------
Total acquired intangible asset................................ $ 2,500,858 $ 398,967 $ 2,101,891
============== =============== ==============
Aggregate amortization expense for the nine months ended September 30,
2002, was $55,000. Aggregate annual amortization expense estimated for the years
ending December 31, 2002 and 2003 is $75,627 and $82,500, 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 Nine Months Ended
September 30, September 30,
------------------------------ --------------------------------
2002 2001 2002 2001
------------- -------------- --------------- --------------
Reported net income............................ $ 675,551 $ 544,336 $ 1,788,480 $ 1,907,618
Add back: Goodwill amortization................ -- 29,436 -- 88,310
------------- -------------- --------------- --------------
Adjusted net income............................ $ 675,551 $ 573,772 $ 1,788,480 $ 1,995,928
============= ============== =============== ==============
Basic earnings per share:
Reported net income......................... $ 0.23 $ 0.19 $ 0.60 $ 0.67
Goodwill amortization....................... 0.00 0.01 0.00 0.03
------------- -------------- --------------- --------------
Adjusted net income............................ $ 0.23 $ 0.20 $ 0.60 $ 0.70
============= ============== =============== ==============
Diluted earnings per share:
Reported net income......................... $ 0.21 $ 0.18 $ 0.56 $ 0.62
Goodwill amortization....................... 0.00 0.01 0.00 0.02
------------- -------------- --------------- --------------
Adjusted net income............................ $ 0.21 $ 0.19 $ 0.56 $ 0.64
============= ============== =============== ==============
7
Note H - Stock Options
The Company has issued incentive stock options to certain key employees of
which 443,700 are outstanding at September 30, 2002, at exercise prices ranging
from $6.00 to $15.00 (the fair market values on the grant dates). These options
vest over a five-year time period at 20% on each anniversary of the grant date
and expire ten years from the grant date.
The Company has also issued nonqualified stock options primarily to
directors of the Company of which 81,600 are outstanding at September 30, 2002,
at an exercise price of $4.00 (the fair market value on the grant dates). These
options vest over a five-year time period at 20% on each anniversary of the
grant date and expire ten years from the grant date. On October 10, 2002, 25,000
of these nonqualified stock options were exercised.
Note I - 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, many of which regulations and
requirements have yet to be issued.
Note J - Subsequent Events
In August 2002, management decided to discontinue operations of AIM, which
operations ceased in October of 2002. Accordingly, Appalachian Community Bank
entered into a data processing agreement with Fiserv Solutions, Inc. (see
Exhibit 10.3), whereby the Bank outsourced those data services previously
provided in-house by AIM. AIM has ceased offering data processing services to
other institutions. Management anticipates that the discontinuance of AIM's
operations will not have a material effect on the Company's operations or
financial condition.
8
APPALACHIAN BANCSHARES, INC.
September 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 April of 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 AIM, which
operations ceased in October of 2002. Accordingly, Appalachian Community Bank
entered into a data processing agreement with Fiserv Solutions, Inc. (see
Exhibit 10.3), whereby the Bank outsourced those data services previously
provided in-house by AIM. AIM has ceased offering data processing services to
other institutions. Management anticipates that the discontinuance of AIM's
operations will not have a material effect on the Company's operations or
financial condition.
FINANCIAL CONDITION
September 30, 2002 compared to December 31, 2001
Loans
Loans comprised the largest single category of the Company's earning assets
at September 30, 2002. Loans, net of unearned income and allowance for loan
losses, were 77.3% of total assets at September 30, 2002. Total net loans were
$290,651,329 at September 30, 2002, representing a 17.4% increase from
$247,573,934 at December 31, 2001. This increase is due to continued strong loan
demand caused by the current interest rate environment.
Investment Securities and Other Earning Assets
Investment securities and federal funds sold increased $3,288,618 or 6.3%
from $52,607,717 at December 31, 2001 to $55,896,335 at September 30, 2002.
Investment securities at September 30, 2002, were $54,745,335 compared with
$49,393,717 at December 31, 2001, reflecting a 10.8% increase of
9
$5,351,618. Federal funds sold were $1,151,000 at September 30, 2002, compared
to the December 31, 2001 total of $3,214,000, a 64.2% 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 Bank. The decrease in federal funds sold resulted from the lack of
available cash due to the continued strong demand for 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 at December 31, 2001 to 0.54 at
September 30, 2002. Total non-performing assets at September 30, 2002, were
$6.058 million, which consisted of $51 thousand in consumer loans, $1.996
million in commercial and industrial loans, $3.303 million in loans secured by
real estate and $708 thousand 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% at December 31, 2001 to 1.61% at September 30,
2002, and the ratio of nonperforming loans to total loans increased from 0.66%
at December 31, 2001 to 1.82% at September 30, 2002. The increase in
nonperforming assets is due to two commercial customers. Management is closely
monitoring these loans.
Deposits
Total deposits at September 30, 2002, were $303,039,250, an increase of
$39,011,243 or 14.8% 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 $2,363,704 or 14.0% from
year-end 2001 to $19,197,288 at September 30, 2002, and interest-bearing
deposits increased $36,647,539 or 14.8% during the same period to $283,841,962.
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase totaled $5,102,639 at
September 30, 2002, a $3,369,940 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 $3,067,021 from $20,591,190 at December 31,
2001 to $23,658,211 at September 30, 2002. This increase was attributable to net
earnings of $1,788,480, net proceeds from the issuance of stock of $456,801 and
additional gains of $821,740 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
its customers, whether they are depositors wishing to withdraw funds or
10
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform its primary function as a
financial intermediary and would, therefore, not be able to meet the production
and growth needs of the communities it serves.
The objective of assets and liabilities management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its 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 $128.0 million or
43.6% of the total loan portfolio at September 30, 2002, and investment
securities maturing in one year or less equaled approximately $105.0 thousand or
0.20% of the portfolio. Other sources of liquidity include short-term
investments such as federal funds sold.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
September 30, 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 million. Liquidity management involves the daily monitoring of
the sources and uses of funds to maintain an acceptable cash position.
To maintain and improve its liquidity position, 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 its 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 $56.4 million as of September 30, 2002. At
September 30, 2002, the outstanding balance of Appalachian Community Bank's
credit line was $34,648,809.
On April 3, 2002, the Company obtained a $4.6 million term loan under a
Loan and Stock Pledge Agreement and a Promissory Note (collectively, the "Term
Loan") with Crescent Bank and Trust Company. The Company used $4.6 million of
the proceeds of the Term Loan to repay that certain loan and stock pledge
agreement, dated April 3, 2000, previously entered into by and between the
Company and Crescent Bank and Trust Company. At September 30, 2002, the balance
on the Term Loan was $4.6 million. Interest on the outstanding amounts under the
Term Loan is payable quarterly, commencing July 1, 2002, at the prime rate (as
defined in the Promissory Note) less twenty-five (25) basis points. The Company
began making interest payments on July 1, 2002. Principal is due in seven equal
annual installments, each in the amount of $657,000, beginning on March 31,
2003. The entire outstanding balance of the Term Loan, together with all accrued
and unpaid interest, is due and payable in a final installment on March 31,
2010. The Term Loan contains certain affirmative and negative covenants,
including, but not limited to, requiring the Company to cause the Bank at all
times to maintain certain minimum capital ratios, and to maintain a minimum
ratio of loan and lease losses to gross loans.
11
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. The Company and the Bank are subject to federal
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 $20.7 million at September 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 $24.0 million at September 30, 2002. The Company's percentage ratios as
calculated under regulatory guidelines were 6.89% and 8.00% for Tier 1 and Total
Capital, respectively, at September 30, 2002, matching or exceeding the minimum
ratios of 4% and 8%, 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 September 30, 2002, the Company's leverage ratio was 5.71% exceeding the
regulatory minimum requirement of 4%.
DBF Capital Requirement. In addition to the capital standards imposed by
federal banking regulators, the Georgia Department of Banking and Finance (the
"DBF") imposes a 6% primary capital ratio. 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 September 30, 2002, the
capital ratio as calculated under the DBF standard for the Bank was 8.29%.
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
Nine months and three months ended September 30, 2002 and 2001
Summary
Net earnings for the nine months ended September 30, 2002, were $1,788,480
compared to net earnings of $1,907,618 for the same period in 2001. This 6.2%
decrease in net earnings is primarily attributable to the current low interest
rate environment in which the bank currently operates in, the expenses
associated with the start up of the Blue Ridge branch and a rise in salary and
benefits expenses. Net interest income increased $1,169,604 (17.8%) during the
first nine months of 2002 as compared to the same period in 2001; noninterest
expenses increased $1,663,895 (29.6%) during same period, while noninterest
income increased by $440,993 (24.6%). Total interest expense decreased
$1,880,571 (18.0%) during the first nine months of 2002 as compared to the same
period in 2001.
12
Net earnings for the quarter ended September 30, 2002, were $675,551
compared to net earnings of $544,336 for the quarter ended September 30, 2001.
This represents a 24.1% increase as compared to the same period in 2001 and is a
result of the following factors; (1) the low interest rate environment the bank
is currently operating in has caused a sharp decline in interest expense of
deposits, (2) a sharp increase in customer service fees along with increased
gains on the sale of assets, and (3) offset by a rise in salaries and benefits.
Total interest expense decreased by $562,030 as compared to the same period in
2001. Net interest income increased $471,308 during the three months ended
September 30, 2002, as compared to the same period in 2001; noninterest expenses
increased $665,478 during the same period, while noninterest income increased by
$404,683.
Net Interest Income
Net interest income, the difference between interest earned on assets and
the cost of interest-bearing liabilities, is the largest component of the
Company's net income. Revenue from earning assets of the Company during the nine
months ended September 30, 2002, decreased $861,467 (4.8%) from the same period
in 2001. Interest expense for the nine months ended September 30, 2002,
decreased $1,880,571 or (18.0%) compared to the same period in 2001. The overall
increase in net interest income is a result of the current interest rate
environment were rate cuts on deposits has outpaced that of loans.
Net interest income increased $451,308 or 17.3% during the quarter ended
September 30, 2002, as compared to the same period in 2001. A decrease of
$110,722 or 1.8% in revenue from earning assets and the decrease in interest
expense of $562,030 or 16.6% are the reasons for the increase in net interest
income for the quarter.
Provision for Loan Losses
The provision for loan losses represents the charge against current
earnings necessary to maintain the 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.
For the nine months ended September 30, 2002, the provision for loan losses
was $668,000, compared to $818,500 for the same period in 2001. For the three
months ended September 30, 2002, the provision for loan losses was $306,000,
compared to $326,000 for the same period in 2001. The decreased provisions for
loan losses for the nine and three-month periods ended September 30, 2002, as
compared to the same periods of 2001, are attributable to additional provisions
in 2001 anticipated to be necessary which did not reoccur in the comparable 2002
periods.
Charge-offs exceeded recoveries by $361,270 for the nine months ended
September 30, 2002. The allowance for loan losses as a percent of outstanding
loans, net of unearned income, was 1.12% at September 30, 2002, compared to
1.20% at year-end 2001.
Noninterest Income
Noninterest income for the nine months ended September 30, 2002, was
$2,232,983 compared to $1,791,990 for the same period in 2001. This increase was
primarily due to customer service fees generated from the full operation in 2002
of new branch locations.
13
Noninterest income increased by $404,683 or 84.8% in the third quarter of
2002 as compared to the same period in 2001.
Noninterest Expenses
Noninterest expenses for the nine months ended September 30, 2002, were
$7,294,671, reflecting a 29.6% increase over the same period of 2001. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $872,878 for the nine months ended September 30, 2002, 32.7%
higher than in the same period in 2001. Occupancy costs increased by $57,601,
furniture and equipment expense increased by $193,989, and other operating
expenses rose by 25.9% to $2,621,920, for the nine months ended September 30,
2002, as compared to the same period in 2001.
Noninterest expenses increased by $665,478 for the quarter ended September
30, 2002, as compared to the same period in 2001. Salaries and employee benefits
increased by $311,675 for the three months ended September 30, 2002, 33.5%
higher than the same period in 2001. Occupancy costs increased by $52,603,
furniture and equipment expense increased by $60,987, and other operating
expenses increased by $240,213, for the third quarter of 2002, as compared to
the same period in 2001.
Additional personnel, wage increases and internal growth accounted for the
higher expenses.
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 nine months ended
September 30, 2002, was $890,860, an increase of $65,840 compared to the same
period in 2001.
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.
14
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.
The initial analysis performed by management has indicated the adoption of
SFAS No. 141 and SFAS No. 142 is not expected to have a material effect on the
Company's consolidated financial statements. Note G to the consolidated
financial statements included herein provides a quantitative analysis as if the
provisions of SFAS Nos. 141 and 142 were retro-actively applied to the prior
periods presented.
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
15
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 Accounting Standards Executive Committee issued
Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities of
Others. This statement reconciles and conforms the accounting and financial
reporting provisions for similar transactions as applied to different entities
within the financial services industry. It eliminates differences in disclosure
practices where not warranted and should provide greater consistency in
reporting by entities in the financial services industry. This statement is
effective for annual and interim financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SOP 01-6 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.
In June 2002, the Auditing Standards Board issued SAS No. 97, Amendment to
Statement on Auditing Standards No. 50, Reports on the Application of Accounting
Principles. This statement prohibits an accountant from providing a written
report on the application of accounting principles not involving facts and
circumstances of a specific entity.
The impact of SAS No. 95, SAS No. 96 and SAS 97 on the audit of the
Company's consolidated financial statements resulting from the issuance of these
auditing standards is not expected to be material.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. Management is currently evaluating
the impact that SFAS No. 145 will have on the Company's financials, but as a
result of very limited applicability, does not expect the adoption will have a
material effect.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. The statement
addresses financial reporting and accounting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). The
primary difference between SFAS No. 146 and Issue 94-3 relates to the
requirement for recognition of a liability related to the cost of an exit
16
or disposal activity when the liability is incurred. Under 94-3, such liability
would be recognized at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for exit or disposal activities initiated after December
31, 2002, with early application encouraged. Management does not believe the
adoption of SFAS No. 146 will have a material impact on the Company's
financials.
In September 2002, the Auditing Standards Board issued SAS No. 98, Omnibus
Statement on Auditing Standards - 2002. This statement revises and amends
several previously issued Statements on Auditing Standards. The changes required
impose enhanced quality controls and audit considerations on a firm of
independent auditors in the conduct of their audit of a company's financial
statements. The additional requirements primarily relate to more descriptive
guidance on the application of auditing procedures, the auditors report and
related disclosures and supplementary information. Although the impact of this
statement may require additional auditor procedures and documentation in the
conduct of the audit of the Company's consolidated financial statements, it is
not expected to have a material impact on the overall timing, issuance or
content of the Company's consolidated financial statements.
In October 2002, the Financial Accounting Standards Board issued SFAS No.
147, Acquisitions of Certain Financial Institutions, an amendment of SFAS No. 72
and 144 and FASB Interpretation No. 9. Except for transactions between two or
more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of SFAS No. 72 and Interpretation 9 and requires
those transactions be accounted for in accordance with SFAS No. 141 and 142.
SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor and borrower relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. SFAS No. 147 is essentially effective as of October 1,
2002. As a result, the Company adopted SFAS No. 147 on October 1, 2002, with no
material impact on the Company's financials.
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, many of which regulations and
requirements have yet to be issued.
17
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.
[The remainder of this page intentionally left blank]
18
As of September 30, 2002, the Company's simulation analysis indicated that the
Company is at greatest risk in an increasing interest rate environment due to
the fair values of net earning assets decreasing in value more significantly
than the improvement in net interest income. 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......................................... $ 296,662 $ 291,302 $ 299,162 $ 288,742
Deposits in banks............................. 3,563 3,563 3,563 3,563
Federal funds sold............................ 1,151 1,151 1,151 1,151
Securities.................................... 58,504 50,968 62,170 47,181
------------ ------------- ------------- --------------
Total Interest-earning Assets............... 359,880 346,984 366,046 340,637
------------ ------------- ------------- --------------
Interest-bearing Liabilities
Deposits - Savings and demand................. 115,229 114,205 117,241 113,193
Deposits - Time............................... 170,064 167,186 171,504 165,746
Other borrowings.............................. 47,926 46,652 48,563 46,015
------------ ------------- ------------- --------------
Total Interest-bearing Liabilities.......... 333,219 328,043 337,308 324,954
------------ ------------- ------------- --------------
Net Difference in Fair Value..................... $ 26,661 $ 18,941 $ 28,738 $ 15,683
============ ============= ============= ==============
Change in Net Interest Income.................... $ (243) $ 143 $ (527) $ 283
============ ============= ============= ==============
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this quarterly report, pursuant
to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule13a-14(c) of the Exchange Act). Based on their
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information, relating to the Company and the
Company's consolidated subsidiaries, required to be included in periodic
reports, including this quarterly report, filed by the Company with the
Securities and Exchange Commission.
There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the Chief Executive Officer's and Chief Financial
Officer's evaluation.
19
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Page
- ----------- --------------------------------------------------------------------------- -----------
10.1 Loan and Stock Pledge Agreement, dated as of April 3, 2002, between the
Company and Crescent Bank and Trust Company.
10.2 Promissory Note, dated April 3, issued by the Company to Crescent Bank and
Trust Company.
10.3 Form of Data Processing Agreement by and between Appalachian Community Bank
and Fiserv Solutions, Inc., effective as of July 26, 2002.
11 Computation of Earnings Per Share 21
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 22
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended September 30, 2002
20
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 periods ended September 30,
2002 and 2001.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ----------------------------------
2002 2001 2002 2001
------------- ------------- -------------- ----------------
Basic Earnings Per Share:
Net Income........................... $ 675,551 $ 544,336 $ 1,788,480 $ 1,907,618
============= ============= ============== ================
Earnings on common shares............ 675,551 544,336 1,788,480 1,907,618
============= ============= ============== ================
Weighted average common shares
outstanding - basic................ 2,995,270 2,858,628 2,996,653 2,857,775
============= ============= ============== ================
Basic earnings per common share...... $ 0.23 $ 0.19 $ 0.60 $ 0.67
============ ============= ============== ================
Diluted Earnings Per Share:
Net Income........................... $ 675,551 $ 544,336 $ 1,788,480 $ 1,907,618
============= ============= ============== ================
Weighted average common shares
outstanding - diluted.............. 3,197,687 3,096,607 3,178,314 3,098,359
============= ============= ============== ================
Diluted earnings per common share.... $ 0.21 $ 0.18 $ 0.56 $ 0.62
============ ============= ============== ===============
21
APPALACHIAN BANCSHARES, INC.
September 30, 2002
Exhibit 99.1
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 September 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: November 19, 2002 By: /s/ Tracy R. Newton
------------------- --------------------------------------
Tracy R. Newton
President and Chief Executive Officer
Date: November 19, 2002 By: /s/ Alan R.May
------------------- -------------------------------------
Alan R. May
Chief Financial Officer
22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 19, 2002
--------------------
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
-----------------------------------------------
Tracy R. Newton
President and CEO
(Duly authorized officer)
By: /s/ Alan R. May
------------------------------------------------
Alan R. May
Chief Financial Officer
(Principal financial officer)
23
CERTIFICATION
I, Tracy R. Newton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Appalachian
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
-----------------------------------
By: /s/ Tracy R. Newton
-------------------------------------
Tracy R. Newton
President and Chief Executive Officer
24
CERTIFICATION
I, Alan R. May, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Appalachian
Bancshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
-------------------------------
By: /s/ Alan R. May
---------------------------------
Alan R. May
Chief Financial Officer
25