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United States
Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
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Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002 Commission File No. 000-21383
APPALACHIAN BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2242407
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(State of Incorporation) (I.R.S. Employer Identification Number)
829 Industrial Boulevard
Ellijay, Georgia 30540
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(Address of Principal Executive Offices) (Zip Code)
(706) 276-8000
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value
(Title of Class)
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 preceding 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2): Yes No X
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There is no established trading market for the registrant's capital stock. The
aggregate market value of the stock held by non-affiliates of the registrant at
June 28, 2002 was $34,008,024, based on a per share price of $15.00, which is
the price of the last trade of which management is aware on or before such date.
Although directors and executive officers of the registrant were assumed to be
"affiliates" of the registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
At March 28, 2003, there were 3,245,209 shares of the registrant's Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
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APPALACHIAN BANCSHARES, INC.
2002 Form 10-K Annual Report
TABLE OF CONTENTS
Item Number Page or
in Form 10-K Description Location
PART I
Item 1. Business................................................................... 2
Item 2. Properties................................................................. 8
Item 3. Legal Proceedings.......................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders........................ 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................................ 9
Item 6. Selected Financial Data.................................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 30
Item 8. Financial Statements....................................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 67
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 67
Item 11. Executive Compensation..................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 67
Item 13. Certain Relationships and Related Transactions............................. 67
Item 14. Controls and Procedures.................................................... 67
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 68
Signatures
Certification of Periodic Financial Reports
1
PART I
ITEM 1. BUSINESS
History and Development of the Company
Appalachian Bancshares, Inc. (the "Company" or "Registrant") is a bank
holding company which engages in providing a full range of banking services
through Appalachian Community Bank, its commercial bank subsidiary, which
formerly was two separate subsidiary banks, Gilmer County Bank and Appalachian
Community Bank. During 2001, Appalachian Community Bank was merged with and into
Gilmer County Bank, to become one bank. The surviving bank, Gilmer County Bank,
simultaneously changed its name to Appalachian Community Bank (the "Bank"). The
merger was consummated to facilitate greater cost efficiencies of operations,
centralized management, consistency of regulatory compliance and to provide a
stronger capital base from which to serve the communities in our market areas.
The name change of Gilmer County Bank, from Gilmer County Bank to Appalachian
Community Bank, was desired to more clearly depict the overall geographic region
which the Bank services. For the immediate future, however, those branches of
the Bank that are located in Gilmer County will continue to operate under the
trade name of "Gilmer County Bank."
On November 30, 1998, the Company completed an acquisition of First
National Bank of Union County ("First National") from Century South Banks, Inc.
("Century South"). First National, renamed as "Appalachian Community Bank" in
1999, was a state chartered bank, organized in 1981, with its main banking
office located in Blairsville, Georgia. Pursuant to the terms of the acquisition
agreement, the Company acquired First National, in a cash transaction, for a
purchase price of $6.1 million, with the assumption of certain existing
liabilities and assets of First National by Century South or certain of its
affiliates. The Company funded a portion of the purchase price with the proceeds
of a private placement of 132,500 shares of the Company's common stock to
certain accredited investors. The aggregate gross proceeds of that private
placement were $2.65 million. Purchasers of shares of the Company's common stock
in that private placement are entitled to certain registration rights with
respect to such shares and are subject to certain call rights of the Company.
The Company funded the remainder of the purchase price through a $3.6 million
loan with The Bankers Bank.
The Company was incorporated as a business corporation in May 1996 under
the laws of the State of Georgia for the purpose of acquiring 100% of the issued
and outstanding shares of common stock of Gilmer County Bank. In July 1996, the
Company received approval from the Federal Reserve Bank of Atlanta and the
Georgia Department of Banking and Finance (the "DBF") to become a bank holding
company. In August 1996, the Company and Gilmer County Bank entered into a
reorganization pursuant to which the Company acquired 100% of the outstanding
shares of Gilmer County Bank, and the shareholders of Gilmer County Bank became
the shareholders of the capital stock of the Company.
Currently, the assets of the Company consist primarily of its ownership of
the capital stock of the Bank. The Company's executive office is located at 829
Industrial Boulevard, Ellijay, Georgia, and its telephone number at such
location is (706) 276-8000.
Business of the Company
The Company is authorized to engage in any activity in which a corporation
is permitted, by law, to engage, subject to applicable federal and state
regulatory restrictions on the activities of bank holding companies. The
Company's holding company structure provides it with greater flexibility than
the Bank would otherwise have, to expand and diversify its business activities
through newly formed subsidiaries or through acquisitions.
In 2000, Appalachian Information Management, Inc. ("AIM"), a Georgia
corporation, 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. In August 2002, however, management decided to discontinue
operations of AIM, which operations ceased on November 12, 2002. Accordingly,
the Bank entered into a data processing agreement with Fiserv Solutions, Inc.,
whereby the Bank outsourced those data services previously provided in-house by
AIM. AIM has ceased offering data processing services to other institutions. The
Bank continues to provide limited, administrative services, formerly provided by
AIM, to another bank on a subcontract basis.
2
While management of the Company has no present plans to engage in any other
business activities, management may, from time to time, study the feasibility of
establishing or acquiring subsidiaries to engage in other business activities to
the extent permitted by law.
The Bank
The Bank was organized in 1994 under the laws of the State of Georgia to
conduct a commercial banking business in Gilmer County, Georgia. The Bank was
formed to meet the banking needs of individuals, small-to-medium-sized
businesses, and farmers, especially those engaged in apple and poultry
production. The Bank was organized by a group of individuals from Gilmer County
and the surrounding area and commenced business from its main office location at
829 Industrial Boulevard, Ellijay, Georgia on March 3, 1995.
As discussed previously, the former Appalachian Community Bank was
organized in 1981, as an insured national bank, chartered under the federal
banking laws of the United States of America. In 1999, Appalachian Community
Bank converted from a national bank to a state-chartered bank under the laws of
the State of Georgia, and, in 2001, was merged with and into the Bank.
The Bank conducts business from four locations in three adjacent counties
(Gilmer, Fannin and Union) and has correspondent relationships with several
banks, including The Bankers Bank, Crescent Bank and Trust Company, SunTrust
Bank, SouthTrust Bank and the Federal Home Loan Bank of Atlanta. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation. The Bank's
branches located in Gilmer County currently operate under the trade name "Gilmer
County Bank."
Banking Services and Operations
The Bank performs banking services customary for full service banks of
similar size and character. Such services include the receipt of demand and time
deposit accounts, the extension of personal and commercial loans and the
furnishing of personal and commercial checking accounts. The Bank draws most of
its customer deposits, and conducts most of its lending transactions, from and
within a primary service area encompassing Gilmer County, Fannin County, Union
County, Towns County, northern Pickens County, western Dawson County and
southeastern Murray County, Georgia.
The principal business of the Bank is to attract and accept deposits from
the public and to make loans and other investments. The principal sources of
funds for the Bank's loans and investments are (i) demand, time, savings, and
other deposits (including negotiable order of withdrawal ("NOW") accounts), (ii)
amortization and prepayment of loans granted, (iii) sales to other lenders or
institutions of loans or participation in loans, (iv) fees paid by other lenders
or institutions for servicing loans sold by the Bank to such lenders or
institutions, and (v) borrowings. The principal sources of income for the Bank
are interest and fees collected on loans, including fees received for servicing
loans sold to other lenders or institutions and, to a lesser extent, interest
and dividends collected on other investments. The principal expenses of the Bank
are (a) interest paid on savings and other deposits (including NOW accounts),
(b) interest paid on borrowings by the Bank, (c) employee compensation, (d)
office expenses, and (e) other overhead expenses.
Employees
Except for the officers of the Company, who are also officers of the Bank,
the Company does not have any employees. At December 31, 2002, the Bank had a
total of 111 employees, 94 of which were full-time employees. The Company and
the Bank are not parties to any collective bargaining agreements with employees,
and management believes that employee relations are generally good.
Lending Activities
General. The Bank is authorized to make both secured and unsecured
commercial and consumer loans to individuals, partnerships, corporations and
other entities. The Bank's lending business consists principally of making
secured real estate loans, including residential and commercial construction
loans, and primary and secondary mortgage loans for the acquisition or
improvement of personal residences. In addition, the Bank makes consumer loans
to individuals and commercial loans to small and medium-sized businesses and
professional concerns. Loans to the poultry industry constituted approximately
8.6% of the Bank's total loans at December 31, 2002.
3
The Bank has engaged in secondary-market mortgage activities, obtaining
commitments, through intermediaries, from secondary mortgage purchasers to
purchase mortgage loans originated by the Bank. Based on these commitments, the
Bank originates mortgage loans on terms corresponding to such commitments and
generates fee income to supplement its interest income. No mortgage loans are
held by the Bank for resale nor are any loans held for mortgage servicing.
Real Estate Loans. Loans secured by real estate are the primary component
of the Bank's loan portfolio, constituting approximately $239 million, or 80.1%,
of the Bank's total loans at December 31, 2002. These loans consist of
commercial real estate loans, construction and development loans and residential
real estate loans, but exclude home equity loans, which are classified as
consumer loans.
Commercial Loans. The Bank makes loans for commercial purposes to various
lines of businesses. At December 31, 2002, the Bank held approximately $33
million, or 11.2% of the Bank's total loans, in commercial loans, excluding for
these purposes commercial loans secured by real estate which are included in the
real estate category above.
Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans, home equity loans and lines of credit, and revolving lines of credit
such as credit cards. At December 31, 2002, the Bank held approximately $20
million in consumer loans, representing 6.8% of the Bank's total loans.
Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the aggregate amount of
outstanding loans to a single borrower exceeds that individual officer's lending
authority, the loan request must be considered and approved by an officer with a
higher lending limit or the officers' loan committee. Individual officers'
lending limits range from $15,000 to $150,000, depending on seniority and the
type of loan. The officers' loan committee, which consists of the president,
executive vice president and senior lending officer, has a lending limit of
$200,000 for secured loans. Loans between $200,000 and $500,000 must be approved
by a directors' loan committee, which is made up of the president, the senior
lending officer and three outside directors. Loans above $500,000 require
approval by the majority of the full board of directors.
The Bank has a continuous loan review procedure, involving multiple
officers of the Bank, that is designed to promote early identification of credit
quality problems. All loan officers are charged with the responsibility of
rating their loans and reviewing those loans on a periodic basis, the frequency
of which increases as the quality of the loan decreases. The Bank has employed
an in-house specialist to review all loans in excess of $100,000 and to
periodically sample loans of $100,000 and less.
Deposits
The Bank offers a variety of deposit programs to individuals and to small
to medium-sized businesses and other organizations at interest rates generally
consistent with local market conditions. The Bank is authorized to accept and
pay interest on deposits from individuals, corporations, partnerships and any
other types of legal entities, including fiduciaries (such as private trusts).
Qualified deposits are insured by the FDIC in an amount up to $100,000.
The following table sets forth the mix of depository accounts at the Bank
as a percentage of total deposits at December 31, 2002.
Deposit Mix
December 31, 2002
Non-interest bearing demand.............................................. 6.92%
Interest-bearing demand.................................................. 26.10%
Savings.................................................................. 13.03%
Time Deposits............................................................ 34.81%
Certificates of Deposit of $100,000 or more.............................. 19.14%
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Total.................................................................. 100.00%
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The Bank is a member of the Cirrus ATM network of automated teller
machines, which permits the Bank's customers to perform certain transactions in
numerous cities throughout Georgia and in other states. The Bank's charter
4
provides for trust powers but only upon application to the DBF. To date, the
Bank has not submitted, and has no plans to submit, such an application.
Competition and Market Area
The banking business is highly competitive. The Bank competes with other
commercial banks, thrift institutions, credit unions, and money market mutual
fund providers operating in Ellijay, Gilmer County and Blairsville, Union
County, Georgia and elsewhere. Some banks with which the Bank competes have
significantly greater resources and higher lending limits (by virtue of their
greater capitalization). Credit unions and money market mutual fund providers
with which the Bank competes may have competitive advantages as a result of
being subject to different, and possibly less stringent, regulatory
requirements.
The Bank serves the areas of Gilmer County, southwestern Fannin County,
northern Pickens County, western Dawson County, southeastern Murray County,
Union County, Towns County and Fannin County, Georgia.
As of December 31, 2002, three non-locally-owned banks had offices in
Gilmer County and two locally-owned banks had offices in Blairsville. B B & T, a
bank holding company headquartered in Winston-Salem, North Carolina, operates a
full service branch and a separate drive-thru facility in Gilmer County. Regions
Bank, an Alabama bank holding company, operates one office in Gilmer County.
United Community Bank, a branch of Peoples Bank in Fannin County, maintains a
branch office in Gilmer County. Bank of Blairsville, a branch of Bank of
Hiawassee, operates an office in Blairsville. Union County Bank, headquartered
in Blairsville, operates an office in Blairsville. In addition, many local
businesses and individuals have deposits outside the primary service areas of
the Bank.
Monetary Policies
The results of operations of the Company and the Bank are significantly
affected by the credit policies of monetary authorities, particularly the Board
of Governors of the Federal Reserve System - (the "Federal Reserve"). The
instruments of monetary policy employed by the Federal Reserve include open
market operations in U.S. government securities, changes in discount rates on
member bank borrowings, and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy and in the
money markets, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand, or the
business and earnings of the Bank.
Supervision and Regulation
The following discussion is only intended to provide brief summaries of
significant statutes and regulations that affect the banking industry and
therefore is not complete. Changes in applicable laws or regulations, and in the
policies of regulators, may have a material effect on the Company's business and
prospects. Management cannot accurately predict the nature or extent of the
effects on the Company's business and earnings that fiscal or monetary policies,
or new federal or state laws, may have in the future.
The Company
General. As a bank holding company, the Company is subject to the Bank
Holding Company Act of 1956 (the "Holding Company Act"), which places the
Company under the supervision of the Federal Reserve. The Company must register,
and file annual reports, with the Federal Reserve and must provide it with such
additional information as it may require. In addition, the Federal Reserve
periodically examines the Company.
Bank Holding Company Regulation. In general, the Holding Company Act limits
bank holding company business to that of owning or controlling banks and
engaging in other banking-related activities. Bank holding companies must obtain
the approval of the Federal Reserve before they:
o acquire direct or indirect ownership or control of any voting shares
of any bank that results in total ownership or control, directly or
indirectly, of more than 5% of the voting shares of such bank;
o merge or consolidate with another bank holding company; or
5
o acquire substantially all of the assets of any additional banks.
Subject to certain state laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of both in-state and
out-of-state banks.
Generally, the Holding Company Act prohibits bank holding companies from
acquiring direct or indirect ownership or control of voting shares in any
company that is not a bank or a bank holding company, unless the Federal Reserve
determines that such activities are incidental or closely related to the
business of banking. However, under the Financial Services Modernization Act (as
discussed below under "Financial Services Modernization"), a bank holding
company meeting certain qualifications may apply to the Federal Reserve to
become a "financial holding company," and thereby engage (directly or through a
subsidiary) in certain activities deemed to be financial in nature, such as
securities brokerage and insurance underwriting.
The Change in Bank Control Act of 1978 requires a person (or group of
persons acting in concert) acquiring "control" of a bank holding company to
provide the Federal Reserve Board with 60 days' prior written notice of the
proposed acquisition. Following receipt of this notice, the Federal Reserve
Board has 60 days (or up to 90 days if extended) within which to issue a notice
disapproving the proposed acquisition. In addition, any "company" must obtain
the approval of the Federal Reserve before acquiring 25% (5% if the "company" is
a bank holding company) or more of the outstanding shares of, or otherwise
obtaining control over, the Company.
Financial Services Modernization. The laws and regulations that affect
banks and bank holding companies underwent significant changes, as a result of
the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), which became effective in
2000. Generally, the GLB Act (i) repealed the historical restrictions which
prevented banks from affiliating with securities firms, (ii) provided a uniform
framework for the activities of banks and their holding companies, (iii)
broadened the activities that may be conducted by the banking subsidiaries of
bank holding companies, (iv) provided an enhanced framework for protecting the
privacy of consumers' information and (v) addressed a variety of other legal and
regulatory issues affecting, both, day-to-day operations and long-term
activities of financial institutions.
Bank holding companies that register with the Federal Reserve as a
"financial holding company" may now engage in a wider variety of financial
activities than permitted under previous law, particularly insurance and
securities activities. In addition, in a change from previous law, a bank
holding company may, itself, be owned, controlled or acquired by any company
engaged in financially related activities, as long as such company meets certain
regulatory requirements, including its registration with the Federal Reserve as
a financial holding company. The GLB Act also permits banks, either directly or
through operating subsidiaries, to engage in certain non-banking financial
activities, subject to certain regulatory requirements.
The Company has no present intentions to register as a financial holding
company.
Transactions with Affiliates. The Company and the Bank are deemed to be
affiliates, within the meaning of the Federal Reserve Act, and transactions
between affiliates are subject to certain restrictions. Generally, the Federal
Reserve Act limits the extent to which a financial institution or its
subsidiaries may engage in "covered transactions" with an affiliate. It also
requires all transactions with an affiliate, whether or not "covered
transactions," to be on terms substantially the same, or at least as favorable
to the institution or subsidiary, as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, the
issuance of a guarantee and other similar types of transactions.
Tie-In Arrangements. The Company and the Bank cannot engage in certain
"tie-in" arrangements, in connection with any extension of credit, sale or lease
of property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Bank may condition an extension of credit on a
requirement that the customer obtain additional services provided by either of
the Company or the Bank, or on an agreement by the customer to refrain from
obtaining other services from a competitor. The Federal Reserve Board has
adopted exceptions to its anti-tying rules that allow banks greater flexibility
to package products with their affiliates. These exceptions were designed to
enhance competition in banking and non-banking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers.
State Banking Law Requirements. As a Georgia banking corporation, the
Company is subject to certain requirements under applicable Georgia banking law.
For example, the Company is required to register with the DBF and to file
periodic information with the DBF.
6
The Bank
General. The Bank, as a Georgia state-chartered bank, is subject to
regulation and examination by the DBF, as well as by the Federal Deposit
Insurance Corporation. Georgia laws regulate, among other things, the scope of
the Bank's business, its investments, its payment of dividends to the Company,
its required lending reserves and lending limits, and collateral for loans. The
laws and regulations governing the Bank generally have been promulgated by
Georgia to protect depositors and not to protect shareholders of the Company or
the Bank.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
jurisdiction, the Federal Deposit Insurance Corporation evaluate the record of
the financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe-and-sound operation of those banks. These factors are also considered
in evaluating mergers, acquisitions, and applications to open a branch or
facility.
Insider Credit Transactions. Banks are also subject to certain restrictions
imposed by the Federal Reserve Act of on extensions of credit to executive
officers, directors, principal shareholders, or any related interests of such
persons. Extensions of credit must be made on substantially the same terms,
including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees. Also, such extensions of credit must not involve more than the normal
risk of repayment or present other unfavorable features.
Federal Deposit Insurance Corporation Improvement Act. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991, each federal banking
agency has prescribed, by regulation, noncapital, safety-and-soundness standards
for the financial institutions under its authority. These standards cover, among
others, internal controls, information systems, and internal audit systems, loan
documentation, credit underwriting, interest-rate exposure, asset growth, asset
quality, executive compensation, earnings and such other operational and
managerial standards as the agency determines to be appropriate. Management
believes that the Bank meets all such standards.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") permits nationwide
interstate banking and branching under certain circumstances. This legislation
generally authorizes interstate branching and relaxes federal law restrictions
on interstate banking. Currently, bank holding companies may purchase banks in
any state, and states may not prohibit such purchases. Additionally, banks are
permitted to merge with banks in other states as long as the home state of
neither merging bank has "opted out." The Interstate Act requires regulators to
consult with community organizations before permitting an interstate institution
to close a branch in a low-income area. Under recent Federal Deposit Insurance
Corporation regulations, banks are prohibited from using their interstate
branches primarily for deposit production. The Federal Deposit Insurance
Corporation has accordingly implemented a loan-to-deposit ratio screen to ensure
compliance with this prohibition.
Georgia has "opted in" to the Interstate Act and allows in-state banks to
merge with out-of-state banks subject to certain requirements. Generally,
Georgia banking law authorizes the acquisition of an in-state bank by an
out-of-state bank, by merger with a Georgia financial institution that has been
in existence for at least three (3) years prior to the acquisition. With regard
to interstate bank branching, out-of-state banks that do not already operate a
branch in Georgia may not establish de novo branches in Georgia.
Deposit Insurance. The deposits of the Bank are currently insured to a
maximum of $100,000 per depositor, through a deposit insurance fund administered
by the Federal Deposit Insurance Corporation. All insured banks are required to
pay semi-annual deposit insurance premium assessments to the Federal Deposit
Insurance Corporation.
Capital Adequacy. Federal bank regulatory agencies use capital adequacy
guidelines in the examination and regulation of bank holding companies and
banks. If capital falls below minimum guideline levels, the holding company or
bank may be denied approval to acquire or establish additional banks or nonbank
businesses or to open new facilities.
The Federal Deposit Insurance Corporation and Federal Reserve use
risk-based capital guidelines for banks and bank holding companies. These are
designed to make such capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies, to account for off-balance
sheet exposure and to minimize
7
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier 1 capital
as a percentage of total assets less intangibles, to be used as a supplement to
risk-based guidelines. The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The Federal Reserve requires a minimum leverage ratio of
3%. However, for all but the most highly rated bank holding companies, as well
as for bank holding companies seeking to expand, the Federal Reserve expects an
additional cushion of at least 1% to 2%.
The Federal Deposit Insurance Corporation Improvement Act created a
statutory framework of supervisory actions indexed to the capital level of the
individual institution. Under regulations adopted by the Federal Deposit
Insurance Corporation, an institution is assigned to one of five capital
categories, depending upon its total risk-based capital ratio, Tier 1 risk-based
capital ratio, and leverage ratio, together with certain subjective factors.
Institutions which are deemed to be "undercapitalized," depending upon the
category to which they are assigned, are subject to certain mandatory
supervisory corrective actions.
Recent Significant Changes in Applicable Laws and Regulations
Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act") was adopted, in order to address corporate and
accounting fraud. The Sarbanes-Oxley Act establishes a new accounting oversight
board that will enforce auditing standards and restricts the scope of services
that accounting firms may provide to their public company audit clients. Among
other things, it also (i) requires chief executive officers and chief financial
officers to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission (the "SEC"); (ii) imposes new disclosure
requirements regarding internal controls, off-balance-sheet transactions, and
pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting
of insider transactions and periodic disclosures by certain public companies;
and (iv) requires companies to disclose whether or not they have adopted a code
of ethics for senior financial officers and whether the audit committee includes
at least one "audit committee financial expert."
The Sarbanes-Oxley Act requires the SEC, based on certain enumerated
factors, to regularly and systematically review corporate filings. To deter
wrongdoing, the Sarbanes-Oxley Act, (i) subjects bonuses issued to top
executives to disgorgement if a restatement of a company's financial statements
was due to corporate misconduct; (ii) prohibits an officer or director
misleading or coercing an auditor; (iii) prohibits insider trades during pension
fund "blackout periods"; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and (v) extends the period during which certain securities fraud
lawsuits can be brought against a company or its officers.
ITEM 2. PROPERTIES
The Company's main office is located at 829 Industrial Boulevard, Ellijay,
Georgia, between the business districts of Ellijay and East Ellijay. The 9,780
square foot building is located on approximately 1.22 acres and is owned by the
Bank. The building includes five teller stations, twenty offices, three drive-in
stations and an ATM. This location houses the Company's and the Bank's offices
and storage areas. The Bank branch at this location operates under the trade
name "Gilmer County Bank."
The Bank's branch located on Highway 515 in Blairsville, Georgia has a
drive-in window, five teller stations, eleven offices, and an ATM. The building
is owned by the Bank. The second floor of this location is vacant and may be
used by the Bank for future expansion.
8
The Bank's branch located in East Ellijay, Georgia, which operates under
the trade name "Gilmer County Bank," has three teller stations, a drive-in
window and an ATM. The Bank has a long-term lease for this location and pays
annual rent of $30,600.
The Bank's branch in Blue Ridge, Georgia has a drive-in window, three
teller stations, four offices, and an ATM. The Bank has a 24-month lease (with
an additiona1 24 month renewal option) for the land on which this branch is
located and pays annual rent of $30,000.
The Bank's operations area operates out of a building owned by the Bank
located at 1068 Progress Road, Ellijay, Georgia. This location houses the Bank's
computer center, accounting, bookkeeping and data processing services. In
addition, the building includes an additional 4,600 square feet, which is leased
by the Bank to a third party for $24,000 per year.
Management believes that the physical facilities maintained by the Company
and the Bank are suitable for its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings to which
the Company or the Bank are a party or of which any of their property is
subject, other than ordinary routine legal proceedings incidental to the
business of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
There is no established trading market for the Company's common stock,
$0.01 par value per share (the "Common Stock"), which Common Stock has been
traded inactively in private transactions. Therefore, no reliable information is
available as to trades of the Common Stock or as to the prices at which Common
Stock has traded. In 1998, Wachovia Securities, Inc. was approved as a market
maker for the Company's Common Stock.
In April 2000, the Company effected a two-for-one share split of its Common
Stock (the "Stock Split") in the form of a common stock dividend, payable on or
about April 30, 2000, to shareholders of record as of the close of business on
April 12, 2000. All amounts presented in this Report and in the financial
statements are adjusted to reflect the Stock Split. The net effect of the Stock
Split did not change total shareholders' equity.
[The remainder of this page intentionally left blank]
9
Management has reviewed the limited information available as to the ranges
at which the Common Stock has been sold and is aware of trades that occurred
during 2002. To the best of management's knowledge, the last trade in December,
2002 was executed at a price of $15.00 per share. The per share price data
regarding the Common Stock is provided for information purposes only and should
not be viewed as indicative of the actual or market value of the Common Stock.
Estimated Price
Range Per Share
-------------------------------
High Low
------------- --------------
2002 (Split Adjusted):
First Quarter................................................................. $ 17.00 $ 15.00
Second Quarter................................................................ 16.00 15.00
Third Quarter................................................................. 15.00 15.00
Fourth Quarter................................................................ 15.00 15.00
2001 (Split Adjusted):
First Quarter................................................................. $ 15.00 $ 14.00
Second Quarter................................................................ 15.00 14.00
Third Quarter................................................................. 15.00 14.00
Fourth Quarter................................................................ 15.00 14.00
Holders
At March 19, 2003, the Company had 3,165,141 shares of Common Stock
outstanding held by approximately 1,411 shareholders of record.
Recent Sales of Unregistered Securities
On December 2, 2002, the Company commenced a private placement offering, to
accredited investors only, of up to 200,000 shares of Common Stock, at an
aggregate offering price of $3,000,000 ($15.00 per share) (the "Offering"). The
Company sold 52,447 shares of Common Stock through the Offering, which expired
on March 3, 2003. The Offering was made without the services of an underwriter
and without any advertising or promotion, and sales therein were solicited only
by certain of the Company's executive officers and directors, none of whom
received any commission or remuneration for their efforts. Further, the
securities sold in the Offering were exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act"), based on the
exemption set forth in Rule 506 of Regulation D, promulgated under the
Securities Act, which provides that registration is not required where, among
other things, all of the purchasers in such an offering are "accredited
investors," as that term is defined in Section 2(a)(15) of the Securities Act
and Rule 501 of Regulation D. Purchasers of shares of Common Stock in the
Offering are entitled to certain registration rights with respect to such shares
and are subject to certain call rights of the Company.
Dividends
The Bank is subject to restrictions on the payment of dividends under
Georgia law and the regulations of the DBF. For the years ended December 31,
2002, 2001 and 2000, the Bank paid dividends to the Company of $-0-, $250,000
and $700,000, respectively, which were used by the Company for repayment of debt
and other expenses.
The Company is also subject to limits on payment of dividends by the rules,
regulations and policies of federal banking authorities. The primary source of
funds available for the payment of cash dividends by the Company are dividends
from the Bank. There are various statutory and regulatory limitations on the
payment of dividends by the Bank, as well as by the Company to its shareholders.
No assurance can be given that any dividends will be declared by the Company in
the future, or if declared, what amounts would be declared or whether such
dividends would continue. The Company has not paid any dividends to date.
10
Securities Authorized for Issuance Under Equity Compensation Plans
At a prior Annual Meeting, the Company's shareholders adopted a Stock
Compensation Program (the "Stock Program"). The following table reflects the
number of shares to be issued upon the exercise of options granted under the
Stock Program, the weighted-average exercise price of all such options, and the
total number of shares of Common Stock reserved for the issuance upon the
exercise of authorized, but not-yet-granted options, as of December 31, 2002.
Number of
Equity Securities
Number of Securities Remaining
to be Issued Weighted-average Available for
Upon the Exercise Exercise Price Future Issuance
of Outstanding of Outstanding Under the
Plan Category Options Options Stock Program
- ------------------------------------ ------------------ ----------------- -----------------
Equity Compensation Plans
Approved by Shareholders.................... 458,100 $ 5.64 74,000
Equity Compensation Plans
Not Approved by Shareholders................ -- -- --
------------------ ----------------- -----------------
Total....................................... 458,100 $ 5.64 74,000
================== ================= =================
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11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the years ended December 31, 2002, and the previous four years. All
averages are daily averages.
Years Ended December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- --------- ---------- ----------
(Dollars in thousands except per share data and ratios)
Earnings Summary
Interest income.................................. $ 22,914 $ 24,763 $ 21,970 $ 16,139 $ 11,271
Interest expense................................. 11,425 13,675 13,325 9,139 6,498
Net interest income.............................. 11,489 11,088 8,645 7,001 4,773
Provision for loan losses........................ 1,028 1,294 922 880 300
Non-interest income.............................. 2,915 1,538 1,159 845 529
Non-interest expense............................. 9,702 7,831 6,380 5,561 3,221
Applicable income taxes.......................... 1,006 963 872 139 572
Net income....................................... 2,668 2,538 1,629 1,266 1,208
Per Share Data
(Retroactively adjusted to give effect to stock splits)
Net income - basic............................... $ 0.90 $ 0.89 $ 0.59 $ 0.48 $ 0.52
Net income - diluted............................. 0.84 0.82 0.55 0.44 0.49
Cash dividends declared per common share......... 0.00 0.00 0.00 0.00 0.00
Selected Period End Balances
Total assets..................................... 384,024 319,679 270,943 223,315 189,745
Loans............................................ 298,063 250,569 214,124 169,106 129,831
Securities....................................... 40,375 49,394 32,541 28,536 21,940
Earning assets................................... 354,593 303,923 253,263 207,501 176,789
Deposits......................................... 316,283 264,028 214,169 186,730 163,861
Long-term borrowings............................. 34,736 29,654 34,539 16,964 11,007
Shareholders' equity............................. 25,619 20,591 17,669 12,421 11,480
Shares outstanding............................... 3,127 2,882 2,857 1,345 1,323
Selected Average Balances
Total assets..................................... 354,164 299,167 259,799 203,703 131,079
Loans............................................ 276,733 234,031 204,436 150,691 95,353
Securities....................................... 50,933 40,462 34,393 33,192 23,862
Earning assets................................... 333,777 280,884 243,038 191,540 123,663
Deposits......................................... 290,961 241,933 206,787 175,025 110,745
Long-term borrowings............................. 34,017 33,028 29,024 12,798 6,649
Shareholders' equity............................. 22,454 19,821 15,045 11,950 8,925
Shares outstanding - basic....................... 2,980 2,860 2,755 2,652 2,333
Ratios
Return on average assets......................... 0.75% 0.85% 0.63% 0.62% 0.92%
Return on average equity......................... 11.88 12.80 10.83 10.59 13.50
Net interest spread.............................. 3.32 3.75 3.39 3.52 3.76
Total capital.................................... 8.59 8.32 8.25 7.41 7.88
Tier 1 capital................................... 7.54 7.16 7.22 6.34 6.64
Leverage ratio................................... 6.07 5.87 5.72 5.22 4.99
Average equity to average assets................. 6.34 6.63 5.79 5.87 6.80
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of the following discussion is to address information relating
to the financial condition and results of operations of the Company that may not
be readily apparent from a review of the consolidated financial statements and
notes thereto, which begin on page 31 of this Report. This discussion should be
read in conjunction with information provided in the Company's consolidated
financial statements and notes thereto. Unless otherwise noted, the discussion
of net interest income in this financial review is presented on a taxable
equivalent basis to facilitate performance comparisons among various taxable and
tax-exempt assets.
Forward-Looking Statements
Certain of the statements made in this Report and in documents incorporated
by reference herein, including matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as oral statements made by the Company or its officers, directors or
employees, may constitute forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such forward-looking statements are based on Management's beliefs,
current expectations, estimates and projections about the financial services
industry, the economy and about the Company and the Bank in general. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify such forward-looking statements;
however, this Report also contains other forward-looking statements in addition
to historical information. Such forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company to
differ materially from historical results or from any results expressed or
implied by such forward-looking statements. Such factors include, without
limitation, (i) increased competition with other financial institutions, (ii)
lack of sustained growth in the economy in Gilmer and Union Counties, (iii)
rapid fluctuations in interest rates, (iv) the inability of the Bank (as defined
herein) to maintain regulatory capital standards, and (v) changes in the
legislative and regulatory environment. Many of these factors are beyond the
Company's ability to control or predict, and readers are cautioned not to put
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update or revise any forward-looking statements contained in this
Report, whether as a result of new information, future events or otherwise.
Summary
The Company's net income of $2,668,008 for the year ended December 31, 2002
represents an increase of $129,910 or 5.1%. The Company's net income of
$2,538,098 for the year ended December 31, 2001 represented an increase of
$908,667 or 55.8%. The Company's net income of $1,629,431 for the year ended
December 31, 2000, represented an increase of $363,657 or 28.7%. The increase in
net income for these periods relates to increased loan growth and improved
interest rate management coupled with proper management of expenses.
Earnings per share increased to $0.90 ($0.84 on a diluted basis) in 2002,
compared to $0.89 ($0.82 on a diluted basis) in 2001, $0.59 ($0.55 on a diluted
basis) in 2000, and $0.48 ($0.44 on a diluted basis) per share net income in
1999. Return on average assets, which reflects the Bank's ability to utilize its
assets, was 0.75% in 2002, compared to 0.85% in 2001, 0.63% in 2000, and 0.62%
in 1999. Return on average shareholders' equity decreased to 11.88% in 2002,
compared to 12.80% in 2001, 10.83% in 2000, and 10.59% in 1999. The decline in
this ratio is due in large part to continued growth and expansion in the
Company.
The Company plans to continue its objectives of maintaining asset quality
and providing superior service to its customers. Our strategic plan in the short
run includes controlled growth with a focus on developing banking relationships.
The Company plans to provide the best value in deposit services and loan
products to its customers.
13
Financial Condition
Earning Assets
The Bank's earning assets, which include deposits in other banks, federal
funds sold, securities and loans, averaged $333,777,000, or 94.2% of average
total assets, in 2002, compared to $280,884,000, or 93.9% of average total
assets, in 2001. The mix of average earning assets comprised the following
percentages:
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
Deposits in other banks......................................... 0.30% 0.14% 0.21%
Federal funds sold.............................................. 1.53 2.13 1.52
Investment securities........................................... 15.26 14.41 14.15
Loans........................................................... 82.91 83.32 84.12
The mix of average earning assets reflects management's attempt to maximize
interest income while maintaining acceptable levels of risk.
The management of the Company considers many criteria in managing earning
assets, including creditworthiness, diversification, maturity, and interest rate
sensitivity. The following table sets forth the Company's interest-earning
assets by category at December 31, in each of the last three years.
December 31,
----------------------------------------
2002 2001 2000
----------- ----------- -----------
(In thousands)
Interest-bearing deposits with banks.................................... $ 8,399 $ 746 $ 25
Securities.............................................................. 40,375 49,394 32,541
Federal funds sold...................................................... 7,756 3,214 6,573
Loans:
Real estate.......................................................... 238,768 202,107 158,775
Commercial and other................................................. 59,295 48,462 55,349
----------- ----------- -----------
Total loans........................................................ 298,063 250,569 214,124
----------- ----------- -----------
Interest-earning assets ................................................ $ 354,593 $ 303,923 $ 253,263
=========== =========== ===========
The Bank has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, participating in no nationally syndicated leveraged
buy-out loans. Concurrently, it has avoided exposure to lesser developed country
("LDC") debt, having no LDC loans in its portfolio.
Federal Funds Sold
Management maintains federal funds sold as a tool in managing its daily
cash needs. Federal funds sold at December 31, 2002 and 2001 were $7,756,000 and
$3,214,000, respectively. Average federal funds sold for 2002 was approximately
$5,104,000, or 1.53% of average earning assets, and for 2001, was approximately
$6,004,000, or 2.13% of average earning assets. The increase in year-end federal
funds resulted from the sale of securities as well as an increase in customer
deposits related to the opening of an office in Blue Ridge, Georgia.
Securities Portfolio
In the past, the Bank has classified its securities as either
available-for-sale or held-to-maturity. However, during 2000 the Bank
reclassified all its held-to-maturity securities to the available-for-sale
portfolio. At December 31, 2001, $49,393,717 of the Bank's securities were
classified as available-for-sale, while at December 31, 2002, $40,374,902 of the
Bank's securities were classified as available-for-sale.
14
The composition of the Bank's securities portfolio reflects the Company's
investment strategy of maximizing portfolio yields subject to risk and liquidity
considerations. The primary objectives of the Company's investment strategy are
to maintain an appropriate level of liquidity, and to provide a tool with which
to control the Bank's interest rate position while, at the same time, producing
adequate levels of interest income. Management of the maturity of the portfolio
is necessary to provide liquidity and to control interest rate risk. During
2002, gross sales amounted to $12,597,325 and maturities amounted to
$34,322,603, representing 24.7% and 67.4% of the average portfolio,
respectively. Net gains associated with sales and maturities totaled $285,525 in
2002. Gross unrealized gains in the portfolio amounted to $698,255 at year-end
2002 and unrealized losses amounted to $17,876. During 2001, gross securities
sales were $7,777,064 and maturities were $19,540,135 representing 19.2% and
48.3%, respectively, of the average portfolio for the year. Net gains associated
with sales and maturities totaled $146,976 in 2001. Gross unrealized gains in
the portfolio amounted to $386,780 at year-end 2001 and unrealized losses
amounted to $294,626.
Mortgage-backed securities have varying degrees of risk of impairment of
principal, as opposed to U.S. Treasury and U.S. government agency obligations,
which are considered to contain virtually no default or prepayment risk.
Impairment risk is primarily associated with accelerated prepayments,
particularly with respect to longer maturities purchased at a premium and
interest-only strip securities. The Bank's purchases of mortgage-backed
securities during 2002 and 2001 did not include securities with these
characteristics. The recoverability of the Bank's investments in mortgage-backed
securities is reviewed periodically, and the Company intends to make appropriate
adjustments to income for impaired values.
The following table presents the carrying amounts of the securities
portfolio at December 31, in each of the last three years.
Securities Portfolio
December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
(In thousands)
Securities Available-for-Sale:
U.S. treasury and government agencies........................ $ 8,579 $ 14,691 $ 16,558
Mortgage-backed securities................................... 14,759 19,340 6,149
State and municipal securities............................... 15,314 13,805 8,276
Equity securities............................................ 1,723 1,558 1,558
------------- ------------- --------------
Total...................................................... $ 40,375 $ 49,394 $ 32,541
============= ============= ==============
In 2002, average taxable securities were 68.2% of the portfolio, compared
to 69.7% in 2001 and 77.4% in 2000. The increase in tax exempt securities from
2001 to 2002 reflects the Bank's intent to reduce the effect of federal income
taxation.
The maturities and weighted average yields of the investments in the 2002
portfolio of securities are presented below. The average maturity of the
securities portfolio is 3.8 years with an average yield of 5.59%. Taxable
equivalent adjustments (using a 34 percent tax rate) have been made in
calculating yields on tax-exempt obligations.
Security Portfolio Maturity Schedule
Maturing
---------------------------------------------------------------------------------------
Within After One But After Five But After
One Year Within Five Years Within Ten Years Ten Years
------------------ ------------------ ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Amounts in thousands, except percentages)
Securities Available-for-Sale
U.S. Government agencies...... $ 4,614 5.39% $ 2,050 4.20% $ 1,915 6.00% $ -- 0.00%
Mortgage-backed............... 4,079 3.04 6,777 4.12 3,903 4.23 -- 0.00
State and municipal........... 104 5.30 1,732 7.10 3,019 7.28 10,459 7.53
Equity securities............. -- 0.00 -- 0.00 -- 0.00 1,723 5.22
-------- -------- -------- --------
Total Securities................. $ 8,797 4.30 $ 10,559 4.62 $ 8,837 5.66 $ 12,182 7.20
======== ======== ======== ========
15
There were no securities held by the Company of which the aggregate value
on December 31, 2002 exceeded ten percent of shareholders' equity at that date.
(Securities which are payable from and secured by the same source of revenue or
taxing authority are considered to be securities of a single issuer. Securities
of the U.S. Government and U.S. Government agencies and corporations are not
included.)
There has been no significant impact on the Company's consolidated
financial statements as a result of the provisions of Statement of Financial
Accounting Standards No. 119, Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments.
Loan Portfolio
Loans made up the largest component of the Bank's earning assets. At
December 31, 2002, the Bank's total loans were $298,063,055, compared to total
loans of $250,569,296 at the end of 2001. In 2002, average net loans represented
82.9% of average earning assets and 78.1% of total average assets, while in 2001
average net loans represented 83.3% of average earning assets and 78.2% of total
average assets. This was the result of continued strong loan demand and the
expansion of the loan production office in Blue Ridge, Georgia. The ratio of
total loans to total deposits was 94.2% in 2002 and 94.9% in 2001.
The following table shows the classification of loans by major category at
December 31, 2002, and for each of the preceding four years.
Loan Portfolio
December 31,
--------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
Commercial, financial
and agricultural........ $ 33,449 11.2% $ 29,092 11.6% $ 36,320 17.0% $ 35,375 20.9% $ 26,883 20.7%
Real estate - construction 73,242 24.6 54,255 21.7 22,057 10.3 13,941 8.2 8,543 6.6
Real estate - other (1)... 165,526 55.5 147,852 59.0 136,718 63.8 103,413 61.2 78,965 60.8
Consumer.................. 20,296 6.8 19,370 7.7 17,254 8.1 15,026 8.9 13,743 10.6
Other loans............... 5,550 1.9 -- 0.0 1,775 0.8 1,351 0.8 1,697 1.3
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
298,063 100.0% 250,569 100.0% 214,124 100.0% 169,106 100.0% 129,831 100.0%
====== ====== ====== ====== ======
Allowance for loan losses (3,238) (2,995) (2,211) (1,849) (1,686)
--------- --------- --------- --------- ---------
Net loans................. $ 294,825 $ 247,574 $ 211,913 $ 167,257 $ 128,145
========= ========= ========= ========= =========
(1) The "real estate - other" category includes multi-family residential, home
equity, commercial real estate and undeveloped agricultural real estate
loans.
The following table shows the maturity distribution of selected loan
classifications at December 31, 2002, and an analysis of these loans maturing in
over one year.
Selected Loan Maturity and Interest Rate Sensitivity
Rate Structure for Loans
Maturity Maturing Over One Year
--------------------------------------------------- -----------------------------
Over One
One Year Over Predetermined Floating or
Year or Through Five Interest Adjustable
Less Five Years Years Total Rate Rate
----------- ----------- ----------- ----------- ------------- --------------
(Amounts in thousands)
Commercial, financial
and agricultural............ $ 17,227 $ 14,293 $ 1,928 $ 33,449 $ 8,196 $ 8,025
Real estate - construction..... 60,120 11,695 1,427 73,242 9,020 4,102
----------- ----------- ----------- ----------- ------------- --------------
Total....................... $ 77,347 $ 25,988 $ 3,355 $ 106,691 $ 17,216 $ 12,127
=========== =========== =========== =========== ============= ==============
For the purposes of this schedule, loans that have reached the fixed
contractual floor rate are treated as having a pre-determined interest rate.
16
Summary of Loan Loss Experience
The provision for loan losses, which is charged to operating results, is
based on the growth of the loan portfolio, the amount of net loan losses
incurred and management's estimation of potential future losses based on an
evaluation of the risk in the loan portfolio. Management believes that the
$3,237,898 in the allowance for loan losses at December 31, 2002, (1.09% of
total net outstanding loans at that date) was adequate to absorb known risks in
the portfolio, based upon the Bank's historical experience. No assurance can be
given, however, that increased loan volume, adverse economic conditions or other
circumstances will not result in increased losses in the Bank's loan portfolio.
The following table sets forth certain information with respect to the
Bank's loans, net of unearned income, and the allowance for loan losses for each
of the last five years:
Analysis of Loan Loss Experience
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Allowance for loan losses at beginning of year $ 2,995 $ 2,211 $ 1,849 $ 1,686 $ 930
Adjustment of business acquisition.......... -- -- -- -- 557
Loans charged off:
Commercial, financial, and agricultural.. 89 240 404 461 32
Real estate-construction................. 50 -- -- -- --
Real estate - other...................... 427 134 49 22 --
Consumer................................. 250 170 138 278 104
----------- ----------- ----------- ----------- -----------
Total loans charged off................ 816 544 591 761 136
----------- ----------- ----------- ----------- -----------
Recoveries on loans previously charged off:
Commercial, financial, and agricultural.. 5 8 9 15 6
Real estate-construction................. -- -- -- -- --
Real estate-other........................ -- 6 -- -- --
Consumer................................. 26 20 22 29 29
----------- ----------- ----------- ----------- -----------
Total recoveries on loans
previously charged off............... 31 34 31 44 35
----------- ----------- ----------- ---------- -----------
Net loans charged off....................... 785 510 560 717 101
----------- ----------- ----------- ----------- -----------
Provision for loan losses................... 1,028 1,294 922 880 300
----------- ----------- ----------- ----------- -----------
Allowance for loan losses, at end of period. $ 3,238 $ 2,995 $ 2,211 $ 1,849 $ 1,686
=========== =========== =========== =========== ===========
Loans, net of unearned income, at end
of period............................... $ 298,063 $ 250,569 $ 214,124 $ 169,106 $ 129,831
=========== =========== =========== ========== ===========
Average loans, net of unearned income,
outstanding for the period.................. $ 276,733 $ 234,031 $ 204,436 $ 150,691 $ 95,353
=========== =========== =========== =========== ===========
Ratios:
Allowance at end of period to loans, net of
unearned income.......................... 1.09% 1.20% 1.03% 1.09% 1.30%
Allowance at end of period to average loans,
net of unearned income................... 1.17 1.28 1.08 1.23 1.77
Net charge-offs to average loans, net of
unearned income.......................... 0.28 0.22 0.27 0.48 0.11
Net charge-offs to allowance at end of period 24.24 17.03 25.33 38.78 5.99
Recoveries to prior year charge-offs........ 5.70 5.75 4.07 32.35 15.42
In assessing adequacy, management relies predominantly on its ongoing
review of the loan portfolio, which is undertaken both to ascertain whether
there are probable losses that must be charged off and to assess the risk
characteristics of the portfolio in the aggregate. This review takes into
consideration the judgments of the responsible lending officers and senior
management, and also those of bank regulatory agencies that review the loan
portfolio as part of the regular bank examination process. In evaluating the
allowance, management also considers the loan loss experience of the Bank, the
amount of past due and nonperforming loans, current and anticipated economic
conditions, lender requirements and other appropriate information.
17
Management allocated the allowance for loan losses to specific loan classes
as follows:
Allocation of Allowance for Loan Losses
December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Domestic Loans (1)
Commercial, financial
and agricultural... $ 1,615 11% $ 807 12% $ 387 17% $ 349 21% $ 421 21%
Real estate -
construction....... 85 25 193 22 199 10 152 8 118 6
Real estate - other 1,044 55 1,760 59 1,381 64 1,120 61 894 61
Consumer............. 168 7 235 7 244 8 228 9 253 11
Other................ 326 2 -- 0 -- 1 -- 1 -- 1
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total........... $ 3,238 100% $ 2,995 100% $ 2,211 100% $ 1,849 100% $ 1,686 100%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
(1) The Bank had no foreign loans.
Nonperforming Assets
Nonperforming assets include nonperforming loans and foreclosed real estate
held for sale. Nonperforming loans include loans classified as nonaccrual or
renegotiated. The Bank's policy is to place a loan on nonaccrual status when it
is contractually past due 90 days or more as to payment of principal or
interest, unless the collateral value is greater than both the principal due and
the accrued interest. At the time a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed and charged against
current earnings. Recognition of any interest after a loan has been placed on
nonaccrual status is accounted for on a cash basis.
The Bank had nonperforming assets at December 31, 2002, 2001, 2000, 1999,
and 1998 of approximately $6,143,000, $1,787,000, $556,000, $368,000, and
$27,000, respectively.
The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 2002, and for each of the preceding four
years.
Nonperforming Assets
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Nonaccruing loans .......................... $ 4,823 $ 1,642 $ 385 $ 344 $ 4
Loans past due 90 days or more.............. 334 12 24 24 23
Restructured loans.......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total nonperforming loans................ 5,157 1,654 409 368 27
Nonaccruing securities...................... -- -- -- -- --
Other real estate........................... 986 133 147 -- --
----------- ----------- ----------- ----------- -----------
Total nonperforming assets............... $ 6,143 $ 1,787 $ 556 $ 368 $ 27
=========== =========== =========== =========== ===========
Ratios:
Loan loss allowance to total
nonperforming assets.................. 0.53 1.68 3.98 5.02 62.44
=========== =========== =========== =========== ===========
Total nonperforming loans to total loans
(net of unearned interest)............. 1.73% 0.66% 0.26% 0.22% 0.02%
=========== =========== =========== =========== ==========
Total nonperforming assets
to total assets....................... 1.60% 0.56% 0.21% 0.16% 0.01%
=========== =========== =========== =========== ==========
18
It is the general policy of the Bank to stop accruing interest income and
place the recognition of interest on a cash basis when any commercial,
industrial or real estate loan is past due as to principal or interest and the
ultimate collection of either is in doubt. Accrual of interest income on
consumer installment loans is suspended when any payment of principal or
interest, or both, is more than ninety days delinquent. When a loan is placed on
a nonaccrual basis, any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest. For
each of the five years in the period ended December 31, 2002, the difference
between gross interest income that would have been recorded in such period, if
the nonaccruing loans had been current in accordance with their original terms,
and the amount of interest income on those loans, that was included in such
period's net income, was negligible.
There has been no significant impact on the Company's consolidated financial
statements as a result of the provisions of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, or
Statement of Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures.
Deposits
The Company's primary source of funds is derived from deposits of the
Bank's customers. Average deposits increased 20.3%, from approximately
$241,933,000 in 2001 to approximately $290,961,000 in 2002. At December 31,
2002, total deposits were $316,282,756, of which $294,385,698 (93.1%) were
interest bearing. At December 31, 2001, total deposits were $264,028,007, of
which $247,194,423 (93.6%) were interest bearing, and, at December 31, 2000,
total deposits were $214,168,823, of which $205,268,008 (95.8%) were interest
bearing. The continued growth of the Bank fueled the growth in the deposit base.
The Company intends to emphasize internal deposit growth in order to expand the
consumer bases of the Bank and to continue to fund asset growth.
The average amounts of, and the average rate paid on, each of the following
categories of deposits, for the years ended December 31, 2002, 2001 and 2000,
are as follows:
Years ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ -------------------------
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Noninterest-bearing demand deposits. $ 19,549 0.00% $ 13,972 0.00% $ 10,715 0.00%
Demand.............................. 62,492 1.93 39,100 2.55 47,011 4.22
Savings............................. 41,359 1.72 35,513 3.03 28,628 4.29
Time deposits....................... 167,561 4.44 153,348 6.02 120,433 6.40
----------- ---------- -----------
Total interest-bearing deposits.. 271,412 3.45 227,961 4.95 196,072 5.57
----------- ---------- -----------
Total average deposits........... $ 290,961 3.21 $ 241,933 4.67 $ 206,787 5.28
=========== ========== ===========
The two categories of lowest cost deposits comprised the following
percentages of average total deposits during 2002: average noninterest-bearing
demand deposits, 6.72 percent; and average savings deposits, 14.21 percent. Of
average time deposits, approximately 32.95 percent were large denomination
certificates of deposit. The maturities of the time certificates of deposit of
$100,000 or more, issued by the Bank at December 31, 2002, are summarized in the
table below.
Maturities of Large Time Deposits
Time
Certificates
of Deposit
--------------
(Amounts in
thousands)
Three months or less..................................................................... $ 10,064
Over three through six months............................................................ 13,493
Over six through twelve months........................................................... 22,482
Over twelve months....................................................................... 14,494
--------------
Total............................................................................... $ 60,533
==============
19
Repurchases
Securities sold under agreements to repurchase amounted to $5,928,624 at
December 31, 2002, compared to $1,732,699 at December 31, 2001, and $2,845,355
at December 31, 2000. The weighted average rates were 1.60%, 3.20% and 3.94% for
2002, 2001 and 2000, respectively. Securities sold under agreements to
repurchase averaged $4,061,294 during 2002, $1,930,051 during 2001 and
$2,522,820 during 2000. The maximum amount outstanding at any month end during
2002 was $5,928,624, during 2001 was $3,144,208, and during 2000 was $3,117,584.
The total of securities sold under agreements to repurchase are associated with
the cash flow needs of the Bank's corporate customers who participate in
repurchase agreements. In addition, the Company had federal funds purchased that
amounted to $-0- at year-end 2002, and $1,932,000 at year-end 2001, compared to
$-0- at year-end 2000.
Long-term Debt
Borrowed funds consist primarily of long-term debt. The Bank had
$16,000,000 in available lines to purchase Federal Funds, on an unsecured basis,
from commercial banks. The Bank was approved to borrow up to approximately
$57,600,000 under various short-term and long-term programs offered by the
Federal Home Loan Bank of Atlanta. These borrowings are secured under a blanket
lien agreement on certain qualifying mortgage instruments in loan and securities
portfolios. The unused portion of these available funds amounted to
approximately $27,400,000 at year-end 2002. Long-term debt consisted of various
commitments with scheduled maturities from one to six years. In addition, the
Company has borrowed $4.6 million from another financial institution (See
"Capital Resources: Term Loan" below).
The following table sets forth the expected debt service for the next five
years based on interest rates and repayment provisions as of December 31, 2002.
Maturities of Long-term Debt
(In thousands)
2003 2004 2005 2006 2007
--------- --------- -------- ---------- -----------
Interest on indebtedness......................... $ 1,597 $ 975 $ 830 $ 568 $ 981
Repayment of principal........................... 17,100 2,900 4,857 1,857 1,357
--------- --------- -------- ---------- -----------
$ 18,697 $ 3,875 $ 5,687 $ 2,425 $ 2,338
========= ========= ======== ========== ===========
Shareholders' Equity
Shareholders' equity increased $5,028,099, from December 31, 2001 to
December 31, 2002, due in part to net earnings of $2,668,008 and the increase in
unrealized gains on securities available-for-sale totaling $388,228, net of
deferred tax liability. The increase was also a result of the issuance of 11,690
shares of the Common Stock to the Company's 401(k) plan (total purchase price
$163,660), the issuance of 180,800 shares of stock through the exercise of stock
options for $1,021,498, and the reissuance of 52,447 shares of stock out of
treasury stock for $786,705.
All amounts presented in this report and in the financial statements are
adjusted to reflect the Stock Split in April 2000. See ITEM 5, "Market
Information."
20
Return on Equity and Assets
The following table summarizes certain financial ratios for the Company for
the years ended December 31, 2002, 2001 and 2000.
Return on Equity and Assets
Year ended December 31,
----------------------------------------------
2002 2001 2000
------------- ------------- --------------
Return on average assets............................. 0.75% 0.85% 0.63%
Return on average equity............................. 11.88 12.80 10.83
Dividend payout ratio................................ 0.00 0.00 0.00
Average equity to average assets ratio............... 6.34 6.63 5.79
Capital Resources
A strong capital position is vital to the continued profitability of the
Company because it promotes depositor and investor confidence and provides a
solid foundation for future growth of the organization. A majority of the
Company's capital requirements have come from proceeds from the Bank's initial
stock offering in 1994, proceeds of $2.65 million from a private placement of
the Common Stock in November 1998, proceeds of $4.4 million from a public
offering in 2000, proceeds of $787 thousand from a private offering and $1.0
million from the exercise of options in 2002, and through the retention of
earnings and the sale of Common Stock to the Company's 401(k) plan.
Term Loan. 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 December 31, 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.
Federal Capital Standards. Regulatory authorities are placing increased
emphasis on the maintenance of adequate capital. In 1990, new risk-based capital
requirements became effective under the Federal Deposit Insurance Corporation
Improvement Act. The guidelines take into consideration risk factors, as defined
by regulators, associated with various categories of assets, both on and off the
balance sheet. Under the guidelines, capital strength is measured in two tiers,
which are used in conjunction with risk-adjusted assets to determine the
risk-based capital ratios. The Company's Tier 1 capital, which consists of
common equity, paid-in capital and retained earnings (less intangible assets),
amounted to $23.1 million at December 31, 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 $26.3 million at year-end
2002. The Company's percentage ratios as calculated under regulatory guidelines
were 7.54% and 8.59% for Tier 1 and Total Capital, respectively, at year-end
2002. The Company's Tier 1 Capital and Total Capital exceeded 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 December 31, 2002, the Company's leverage ratio was 6.07%,
exceeding the regulatory minimum requirement of 4%.
21
The table below illustrates the Company's regulatory capital ratios under
federal guidelines at December 31, 2002, 2001 and 2000:
Capital Adequacy Ratios
Statutory Years ended December 31,
----------------------------------------
Minimum 2002 2001 2000
------------ ----------- ----------- -----------
(Amounts in thousands, except percentages)
Tier 1 Capital.......................................... $ 23,089 $ 18,538 $ 15,563
Tier 2 Capital.......................................... 3,238 2,995 2,211
----------- ----------- -----------
Total Qualifying Capital................................ $ 26,327 $ 21,533 $ 17,774
=========== =========== ===========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)............................ $ 306,405 $ 256,985 $ 215,521
Tier 1 Risk-Based Capital Ratio......................... 4.0% 7.54 7.16% 7.22%
Total Risk-Basked Capital Ratio......................... 8.0 8.59 8.32 8.25
Leverage Ratio.......................................... 4.0 6.07 5.87 5.72
DBF Capital Requirement. In addition to the capital standards imposed by
federal banking regulators, the DBF imposes a 6% primary capital ratio on the
Bank. The DBF's standard is calculated as the ratio of total equity to total
assets, each as adjusted for unrealized gains and losses on securities and
allowances for loan losses. At December 31, 2002, the Bank's capital ratio, as
calculated under the DBF standard, was 7.45%.
In 2001, the Bank paid dividends to the Company of $250,000, which were
used by the Company for the repayment of debt and other expenses. In 2002, the
Bank did not pay a dividend to the Company.
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 abilities to meet the day-to-day cash flow requirements
of its customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform its primary function as
financial intermediary and, therefore, would not be able to meet the production
and growth needs of the communities it serves.
The primary purpose of management of assets and liabilities is not only to
assure adequate liquidity in order for the Bank to meet the needs of its
customers, but also to maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities so that the Company
can also meet the investment requirements of its 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; therefore, both are
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.
Real estate construction and commercial, financial and agricultural loans that
mature in one year or less equaled approximately $77.3 million or 25.8% of the
total loan portfolio at December 31, 2002, and investment securities maturing in
one year or less equaled $8.8 million or 21.8% 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
the end of fiscal 2002, funds were also available through the purchase of
federal funds from correspondent commercial banks from available lines of up to
an aggregate of $16,000,000.
In an effort to maintain and improve the liquidity position of the Bank,
management made application for membership with 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
22
loans. The Bank's credit line stands at $57,583,823 as of December 31, 2002.
This line is subject to collateral availability. At December 31, 2002, the
outstanding balance of the Bank's credit line was $30,135,714. See Note 12 to
the Notes to Consolidated Financial Statements herein.
Interest Rate Sensitivity Management
Interest rate sensitivity is a function of the repricing characteristics of
the Bank's portfolios of assets and liabilities. These repricing characteristics
are the time frames within which the interest-bearing assets and liabilities are
subject to changes in interest rates, either at replacement or maturity during
the life of the instruments. Sensitivity is measured as the difference between
the volume of assets and liabilities in the Bank's current portfolio that is
subject to repricing in future time periods. The differences are known as
interest rate sensitivity gaps and are usually calculated separately for
segments of time, ranging from zero to thirty days, thirty-one to ninety days,
ninety-one days to one year, one to five years, over five years and on a
cumulative basis.
The following tables show interest rate sensitivity gaps for these
different intervals as of December 31, 2002.
Interest Rate Sensitivity Analysis
0-30 31-90 90-365 1-5 Over 5
Days Days Days Years Years Total
----------- ----------- ----------- ----------- ----------- -----------
(In thousands, except ratios)
Interest-earning assets (1)
Loans............................ $ 18,574 $ 24,524 $ 101,548 $ 129,561 $ 19,033 $ 293,240
Securities:
Taxable........................ -- 2,127 6,566 8,827 7,541 25,061
Tax-exempt..................... -- -- 104 1,732 13,478 15,314
Time deposits in other banks..... 8,399 -- -- -- -- 8,399
Federal funds sold............... 7,756 -- -- -- -- 7,756
----------- ----------- ----------- ----------- ----------- -----------
34,729 26,651 108,218 140,120 40,052 349,770
----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities (2)
Demand deposits (3).............. 27,513 27,512 27,512 -- -- 82,537
Savings deposits (3)............. 13,741 13,740 13,740 -- -- 41,221
Time deposits.................... 11,570 23,321 99,494 36,243 -- 170,628
Other short-term borrowings...... 5,929 -- -- -- -- 5,929
Long-term debt................... 2,100 7,150 11,793 8,343 5,350 34,736
----------- ----------- ----------- ----------- ----------- -----------
60,853 71,723 152,539 44,586 5,350 335,051
----------- ----------- ----------- ------------------------ -----------
Interest sensitivity gap............ $ (26,124) $ (45,072) $ (44,321) $ 95,534 $ 34,702 $ 14,719
=========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity gap. $ (26,124) $ (71,196) $ (115,517) $ (19,983) $ 14,719
=========== =========== =========== =========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities..... 0.57 0.37 0.71 3.14 7.49
=========== =========== ============ ============ ============
Cumulative ratio.................... 0.57 0.46 0.59 0.94 1.04
=========== =========== ============ ============ ============
Ratio of cumulative gap to total
interest-earning assets.......... (0.07) (0.20) (0.33) (0.06) 0.04
=========== =========== ============ ============ ============
(1) Excludes nonaccrual loans and securities.
(2) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(3) Demand and savings deposits are assumed to be subject to movement into
other deposit instruments in equal amounts during the 0-30 day period, the
31-90 day period, and the 91-365 day period.
The above table indicates that, in a rising interest rate environment, the
Company's earnings may be adversely affected in the 0-365 day periods where
liabilities will reprice faster than assets. As seen in the preceding table, for
the first 30 days of repricing opportunity, there is an excess of earning
liabilities over interest-bearing assets of approximately $26 million. For the
first 365 days, interest-bearing liabilities exceed earning assets by
approximately
23
$116 million. During this one-year time frame, 85.1% of all interest-bearing
liabilities will reprice compared to 39.6% of all interest-earning assets.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remain the same, thus impacting net interest
income. It should be noted, therefore, that a matched interest-sensitive
position by itself would not ensure maximum net interest income.
Management continually evaluates the condition of the economy, the pattern
of market interest rates and other economic data to determine the types of
investments that should be made and at what maturities. Using this analysis,
management from time to time assumes calculated interest rate sensitivity gap
positions to maximize net interest income based upon anticipated movements in
the general level of interest rates.
Results of Operations
Comparison of Years Ended December 31, 2002 and 2001
Net Interest Income
Net interest income is the principal source of the Bank's earnings stream
and represents the difference, or spread, between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities materially impact net
interest income. Net interest income increased $531,334 or 4.7% to $11,956,632
at December 31, 2002, compared to $11,424,991 at December 31, 2001. This
increase was caused by growth in the Bank's loan portfolio, as well as the
payoff of several Federal Home Loan Bank advances.
Interest and fees earned on loans decreased 7.8% to $20,442,148 in 2002,
compared to $22,168,850 in 2001. The decrease in 2002 was primarily attributable
to the Federal Reserve's decision to lower interest rates during 2002.
Interest earned on taxable securities decreased 5.6% to $1,646,592 in
2002 from $1,743,440 in 2001, while interest earned on non-taxable securities
increased from $815,767 to $1,200,993 during the same period. The variance in
the income figures reflects a reallocation in the portfolio to maximize the
earning capacity of the portfolio.
During 2002, interest on federal funds sold decreased $287,929 or 78.5%
from 2001. This decrease in income is the result of the Bank managing its
funding needs to take advantage of the low interest rate environment. Interest
on deposits with other banks increased to $13,039 in 2002, from $4,891 in 2001.
The trend in net interest income is also evaluated in terms of average
rates using the net interest margin and the interest rate spread. The net
interest margin, or the net yield on earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield returned on average
earning assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The net
interest margin for 2002 was 3.58% compared to a net interest rate margin of
4.07% in 2001.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest-bearing sources of
funds. The interest rate spread calculation provides a more direct perspective
on the effect of market interest rate movements. The net interest spread was
3.32% in 2002, compared to 3.75% in 2001.
[The remainder of this page intentionally left blank]
24
The table below shows, for the periods indicated, the daily average
balances outstanding for the major categories of interest-bearing assets and
interest-bearing liabilities, and the average interest rate earned or paid
thereon. Such yields are calculated by dividing income or expense by the average
balance of the corresponding assets or liabilities.
Average Balances, Interest Income/Expense and Yields/Rates
Taxable Equivalent Basis
Years Ended December 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Assets
Earning assets:
Loans, net of unearned
income (1)....... $ 276,733 $ 20,442 7.39% $ 234,031 $ 22,168 9.47% $ 204,436 $ 19,633 9.60%
Securities:
Taxable.......... 34,718 1,647 4.74 28,212 1,743 6.18 26,632 1,703 6.39
Tax-exempt....... 16,215 1,201 7.41 12,250 816 6.66 7,761 649 8.36
--------- -------- --------- --------- --------- ---------
Total securities... 50,933 2,848 5.59 40,462 2,559 6.32 34,393 2,352 6.84
Interest-bearing
deposits......... 1,007 13 1.29 387 5 1.29 515 30 5.83
Federal funds sold. 5,104 79 1.55 6,004 367 6.11 3,694 208 5.63
--------- -------- --------- --------- --------- ---------
Total interest-
earning assets (2) 333,777 23,382 7.01 280,884 25,099 8.94 243,038 22,223 9.14
Non interest-earning assets:
Cash and due from banks 6,909 5,190 3,849
Premises and equipment 7,835 6,791 5,783
Accrued interest and
other assets..... 8,790 8,889 9,274
Allowance for
loan losses...... (3,147) (2,587) (2,145)
--------- --------- ---------
Total assets............ $ 354,164 $ 299,167 $ 259,799
========= ========= =========
Liabilities and
Shareholders' Equity
Interest-bearing liabilities:
Demand deposits.... $ 62,492 1,209 1.93% $ 39,100 996 2.55% $ 47,011 1,983 4.22%
Savings deposits... 41,359 712 1.72 35,513 1,075 3.03 28,628 1,227 4.29
Time deposits...... 167,561 7,432 4.44 153,348 9,224 6.02 120,433 7,710 6.40
--------- -------- --------- --------- --------- ---------
Total deposits... 271,412 9,353 3.45 227,961 11,295 4.95 196,072 10,920 5.57
Other short-term
borrowings......... 4,667 77 1.65 2,278 100 4.39 6,860 389 5.67
Long-term debt....... 34,017 1,995 5.86 33,028 2,280 6.90 29,024 2,017 6.95
--------- -------- --------- --------- --------- ---------
Total interest-
bearing
liabilities.... 310,096 11,425 3.68 263,267 13,675 5.19 231,956 13,326 5.75
--------- -------- --------- --------- --------- --------- ---------
Noninterest-bearing liabilities:
Demand deposits.... 19,549 13,972 10,715
Accrued interest and
other liabilities 2,065 2,107 2,083
Shareholders' equity 22,454 19,821 15,045
--------- --------- ---------
Total liabilities and
shareholders' equity. $ 354,164 $ 299,167 $ 259,799
========= ========= =========
Net interest income/net
interest spread...... 11,957 3.32% 11,424 3.75% 8,897 3.39%
======== ======== ========= =========
Net yield on earning assets 3.58% 4.07% 3.67%
======== ========= =========
Taxable equivalent adjustment:
Loans................ 57 57 30
Investment securities 411 279 222
-------- --------- ---------
Total taxable
equivalent adjustment 468 336 252
-------- --------- ---------
Net interest income..... $ 11,489 $ 11,088 $ 8,645
======== ========= =========
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments have been based on an assumed tax rate of 34
percent, and do not give effect to the disallowance for federal income tax
purpose of interest expense related to certain tax-exempt earning assets.
25
The following tables set forth, for the years ended December 31, 2002, 2001
and 2000, a summary of the changes in interest income and interest expense
resulting from changes in interest rates and in changes in the volume of earning
assets and interest-bearing liabilities, segregated by category. The change due
to volume is calculated by multiplying the change in volume by the prior year's
rate. The change due to rate is calculated by multiplying the change in rate by
the prior year's volume. The change attributable to both volume and rate is
calculated by multiplying the change in volume by the change in rate. Figures
are presented on a taxable equivalent basis.
Rate/Volume Variance Analysis
Taxable Equivalent Basis
Average Volume Change in Volume Average Rate
---------------------------------- -------------------------- ----------------------------
2002 2001 2000 2002-2001 2001-2000 2002 2001 2000
---------- ---------- ---------- ----------- ----------- -------- -------- --------
Earning assets: (Dollars in thousands)
Loans, net of
unearned income (1)..... $ 276,733 $ 234,031 $ 204,436 $ 42,702 $ 29,595 7.39% 9.47% 9.60%
Investment Securities:
Taxable................. 34,718 28,212 26,632 6,506 1,580 4.74 6.18 6.39
Tax exempt.............. 16,215 12,250 7,761 3,965 4,489 7.41 6.66 8.36
---------- ---------- ---------- ----------- -----------
Total investment
securities.......... 50,933 40,462 34,393 10,471 6,069 5.59 6.32 6.84
---------- ---------- ---------- ----------- -----------
Interest-bearing deposits
with other banks........ 1,007 387 515 620 (128) 1.29 1.29 5.83
Federal funds sold......... 5,104 6,004 3,694 (900) 2,310 1.55 6.11 5.63
---------- ---------- ---------- ----------- -----------
Total earning assets.. $ 333,777 $ 280,884 $ 243,038 $ 52,893 $ 37,846 7.01 8.94 9.14
========== ========== ========== =========== ===========
Interest-bearing liabilities:
Deposits:
Demand.................. $ 62,492 $ 39,100 $ 47,011 $ 23,392 $ (7,911) 1.93 2.55 4.22
Savings................. 41,359 35,513 28,628 5,846 6,885 1.72 3.03 4.29
Time.................... 167,561 153,348 120,433 14,213 32,915 4.44 6.02 6.40
---------- ---------- ---------- ----------- -----------
Total deposits........ 271,412 227,961 196,072 43,451 31,889 3.45 4.95 5.57
Other short-term
borrowings.............. 4,667 2,278 6,860 2,389 (4,582) 1.65 4.39 5.67
Long-term debt............. 34,017 33,028 29,024 989 4,004 5.86 6.90 6.95
---------- ---------- ---------- ----------- -----------
Total interest-bearing
liabilities......... $ 310,096 $ 263,267 $ 231,956 $ 46,829 $ 31,311 3.68 5.19 5.75
========== ========== ========== =========== ===========
Net interest income/net interest spread 3.32 3.75 3.39
Net yield on earning assets 3.58 4.07 3.67
Net cost of funds.......... 3.42 4.87 5.48
Interest Variance Attributed to (1)
--------------------------------------
Income/Expense Variance 2002 2001
---------------------------- ------------------------ ------------------ ------------------
2002 2001 2000 2002-2001 2001-2000 Volume Rate Volume Rate
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
(Dollars in thousands)
Earning assets:
Loans, net of
unearned income....... $ 20,442 $ 22,168 $ 19,633 $ (1,726) $ 2,535 $ 3,627 $ (5,353) $ 2,804 $ (269)
Investment Securities:
Taxable................ 1,647 1,743 1,703 (96) 40 357 (453) 98 (58)
Tax exempt............. 1,201 816 649 385 167 285 100 319 (152)
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Total investment
securities.......... 2,848 2,559 2,352 289 207 642 (353) 417 (210)
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Interest-bearing deposits
with other banks....... 13 5 30 8 (25) 8 -- (6) (19)
Federal funds sold....... 79 367 208 (288) 159 (48) (240) 140 19
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Total earning assets.. 23,382 25,099 22,223 (1,717) 2,876 4,229 (5,946) 3,355 (479)
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:................
Demand................. 1,209 996 1,983 213 (987) 495 (282) (294) (698)
Savings................ 712 1,075 1,227 (363) (152) 157 (520) 256 (408)
Time................... 7,432 9,224 7,710 (1,792) 1,514 804 (2,596) 1,996 (482)
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Total deposits........ 9,353 11,295 10,920 (1,942) 375 1,456 (3,398) 1,958 (1,588)
Other short-term
borrowings............ 77 100 389 (23) (289) 64 (87) (216) (73)
Long-term debt........... 1,995 2,280 2,017 (285) 263 66 (351) 278 (15)
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Total interest-
bearing liabilities. 11,425 13,675 13,326 (2,250) 349 1,586 (3,836) 2,020 (1,676)
-------- -------- -------- ----------- ----------- -------- -------- -------- --------
Net interest income/
net interest spread... $ 11,957 $ 11,424 $ 8,897 $ 533 $ 2,527 $ 2,643 $ (2,110) $ 1,335 $ 1,197
======== ======== ======== =========== =========== ======== ======== ======== ========
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
26
Interest Expense
Total interest expense decreased $2,249,439 or 16.4% to $11,425,388 in
2002, from $13,674,827 in 2001. This decrease was the combined effect of the
Federal Reserve's decision to lower interest rates as well as management's
decision to reduce its cost of funds by prepaying Federal Home Loan Bank
advances. The average rate paid on interest-bearing deposits in 2002 and 2001
was 3.45% and 4.95%, respectively. The effect of these changes was to decrease
the interest expense on interest-bearing deposits to $9,352,768 in 2002, from
$11,294,581 in 2001, a decrease of $1,941,813 or 17.2%.
Noninterest Income
Noninterest income for 2002 and 2001 totaled $2,915,035 and $1,538,001,
respectively. These amounts are primarily from customer service fees, insurance
commissions and fees on services to customers. Other operating income increased
from $668,645 in 2001 to $1,493,225 in 2002, primarily due to a high volume of
mortgage refinancings due to historically low interest rates.
Noninterest Expenses
Noninterest expenses totaled $9,702,148 in 2002, $7,831,363 in 2001 and
$6,380,487 in 2000. Salaries and benefits increased $1,012,033 or 27.0% to
$4,755,882 in 2002, due to the Company's decision to strengthen its management
in anticipation of future growth as well as the opening of a branch in Blue
Ridge, Georgia. Occupancy expenses totaled $615,826, an increase of $104,016 or
20.3% over the 2001 total of $511,810. Furniture and equipment expenses
increased $464,265 or 101.5% in 2002, due to the opening of the branch in Blue
Ridge, Georgia. Other operating expenses increased $290,471 or 9.3% to
$3,408,869 in 2002, due mainly to the opening of the branch in Blue Ridge,
Georgia as well as the Company's decision to exit the service bureau business
and cease operations of AIM.
The table below sets forth the Company's noninterest expenses for the
periods indicated.
Years ended December 31,
--------------------------
2002 2001
----------- -----------
(Amounts in thousands)
Salaries and employee benefits.................................................... $ 4,756 $ 3,744
Furniture and equipment expense................................................... 922 457
Professional and regulatory fees.................................................. 676 469
Occupancy expense................................................................. 616 512
Advertising....................................................................... 567 441
Director and committee fees....................................................... 405 412
Supplies.......................................................................... 308 264
Postage........................................................................... 164 127
Taxes and licenses................................................................ 157 132
Insurance......................................................................... 119 144
Data processing................................................................... 84 395
Correspondent bank charges........................................................ 78 84
Amortization expense.............................................................. 76 118
Checking account expense.......................................................... 60 57
Other............................................................................. 714 475
----------- -----------
Total.......................................................................... $ 9,702 $ 7,831
=========== ===========
Income Taxes
Net operating income of $3,673,948 in 2002 resulted in $1,005,940 of income
tax expense, which represents an income tax rate of 27.4%. The Company's net
operating income of $3,500,686 in 2001 resulted in $962,588 of income tax
expense, which represented an income tax rate of 27.5%.
27
Comparison of Years Ended December 31, 2001 and 2000
Net Interest Income
Net interest income is the principal source of the Bank's earnings stream
and represents the difference, or spread, between interest and fee income
generated from earning assets and the interest expense paid on deposits and
borrowed funds. Fluctuations in interest rates as well as volume and mix changes
in earning assets and interest-bearing liabilities materially impact net
interest income. Net interest income increased $2,528,349 or 28.4% to
$11,424,991 at December 31, 2001, compared to $8,896,642 at December 31, 2000.
This increase was caused by continued increase in loan demand.
Interest and fees earned on loans increased 12.9% to $22,168,850 in 2001,
from $19,633,417 in 2000. The increase was primarily due to the increase in
volume of average loans, from approximately $204,436,000 in 2000 to
approximately $234,031,000 in 2001.
Interest earned on taxable securities increased 2.4% to $1,743,440 in 2001,
from $1,702,529 in 2000, while interest earned on non-taxable securities
increased from $648,461 to $815,767 during the same period. The variance in the
income figures reflects better management of earnings.
The trend in net interest income is also evaluated in terms of average
rates, using the net interest margin and the interest rate spread. The net
interest margin, or the net yield on earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield returned on average
earning assets and the average rate paid for funds used to support those earning
assets, including both interest-bearing and noninterest-bearing sources. The net
interest margin for 2001 was 4.07% compared to a net interest rate margin of
3.67% in 2000.
The interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest-bearing sources of
funds. The interest rate spread calculation provides a more direct perspective
on the effect of market interest rate movements. The net interest spread was
3.75% in 2001, compared to 3.39% in 2000.
During 2001, interest on federal funds sold increased $159,745 or 77.1%,
from 2000. This increase in income is the result of significantly larger average
balances maintained throughout 2001, compared to 2000. Interest on deposits with
other banks decreased to $4,891 in 2001, from $30,363 in 2000.
Interest Expense
Total interest expense increased $349,574 or 2.62% to $13,674,827 in 2001,
from $13,325,253 in 2000. This increase was the combined effect of continued
growth of the Company. The average rate paid on interest-bearing deposits in
2001 and 2000 was 4.95% and 5.57%, respectively. The effect of these changes
increased the interest expense on interest-bearing deposits to $11,294,581 in
2001, from $10,919,158 in 2000, an increase of $375,423 or 3.44%.
Noninterest Income
Noninterest income for 2001 and 2000 totaled $1,538,001 and $1,158,834,
respectively. These amounts were primarily from customer service fees, insurance
commissions and fees on services to customers. Noninterest income increased
primarily due to the continued growth in the Bank's deposit base. Other
operating income increased from $619,911 in 2000 to $668,645 in 2001, primarily
due to continued growth of the Company.
Noninterest Expenses
Noninterest expenses totaled $7,831,363 in 2001, $6,380,486 in 2000, and
$5,560,969 in 1999. Salaries and benefits increased $852,919 or 29.5% to
$3,743,849 in 2001, due to the Company's continued growth and expansion.
Occupancy expenses totaled $511,810, an increase of $180,478 or 54.5% from
$331,332 in 2000. Furniture and equipment expenses increased $81,633 or 21.7% in
2001, due to continued growth and expansion. Other operating expenses increased
$335,847 or 12.1% to $3,118,398 in 2001, due mainly to continued growth.
28
The table below sets forth the Company's noninterest expenses for the
periods indicated.
Years ended December 31,
--------------------------
2001 2000
----------- -----------
(Amounts in thousands)
Salaries and employee benefits.................................................... $ 3,744 $ 2,890
Occupancy expense................................................................. 512 331
Professional and regulatory fees.................................................. 469 427
Furniture and equipment expense................................................... 457 376
Advertising....................................................................... 441 418
Director and committee fees....................................................... 412 380
Data processing................................................................... 395 219
Supplies.......................................................................... 264 262
Insurance......................................................................... 144 124
Taxes and licenses................................................................ 132 50
Postage........................................................................... 127 132
Amortization expense.............................................................. 118 118
Correspondent bank charges........................................................ 84 59
Checking account expense.......................................................... 57 67
Other............................................................................. 475 527
----------- -----------
Total.......................................................................... $ 7,831 $ 6,380
=========== ===========
Income Taxes
The Company's net operating income of $3,500,686 in 2001 resulted in
$962,588 of income tax expense, which represents an income tax rate of 27.5%.
Net operating income of $2,501,209 in 2000 resulted in $871,778 of income tax
expense, which represented an income tax rate of 34.9%.
Impact of Inflation and Changing Prices
A bank's asset and liability structure is substantially different from that
of an industrial company in that virtually all assets and liabilities of a bank
are monetary in nature. Management believes the impact of inflation on financial
results depends upon the ability of the Bank to react to changes in interest
rates and by such reaction to reduce the inflationary impact on performance.
Interest rates do not necessarily move in the same direction, or at the same
magnitude, as the prices of other goods and services. As discussed previously,
management seeks to manage the relationship between interest-sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Various information shown elsewhere in this Report will assist the Company
in the understanding of how well the Bank is positioned to react to changing
interest rates and inflationary trends. In particular, the summary of net
interest income, the maturity distributions, the composition of the loan and
security portfolios and the data on the interest sensitivity of loans and
deposits should be considered.
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 is interest rate risk.
The primary objective of Asset/Liability Management of 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 the
proper balance of rate sensitive earning assets and rate sensitive liabilities.
The relationship of rate sensitive earning assets to rate sensitive liabilities
is the principal factor in projecting the effect that fluctuating interest rates
will have on future net interest income. Rate sensitive earning assets and
interest-bearing liabilities are those that can be repriced to current market
rates within a relatively short time period. Management monitors the rate
sensitivity of earning assets and interest-bearing liabilities over the entire
life of these instruments, but places particular emphasis on the first year and
through three years.
29
The Company has not experienced a high level of volatility in net interest
income primarily because of the relatively large base of core deposits that do
not reprice on a contractual basis. These deposit products include regular
savings, interest-bearing transaction accounts and money market savings
accounts. Balances for these accounts are reported based on historical repricing
experienced at each bank. However, the rates paid are typically not directly
related to market interest rates, since management has some discretion in
adjusting these rates as market rates change.
The Company uses additional tools to monitor and manage interest rate
sensitivity. One of the primary tools is simulation analysis. Simulation
analysis is the primary method of estimating earnings at risk and capital at
risk under varying interest rate conditions. Simulation analysis is used to test
the sensitivity of the Company's net interest income and shareholders' equity to
both the level of interest rates and the slope of the yield curve. Simulation
analysis accounts for the expected timing and magnitude of assets and liability
cash flows, as well as the expected timing and magnitude of deposits that do not
reprice 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, repricing behavior and ultimately net interest
income. The estimated impact on the Company's net interest income before
provision for loan loss sensitivity over a one-year time horizon is shown below.
Such analysis assumes a sustained parallel shift in interest rates and the
Company's estimate of how interest-bearing transaction accounts will reprice in
each scenario. Actual results will differ from simulated results due to timing,
magnitude and frequency of interest rate changes and changes in market
conditions and management's strategies, among other factors.
Percentage Increase
(Decrease) in Interest
Income/Expense Given
Interest Rate Shifts
------------------------------
Down 200 Up 200
Basis Points Basis Points
-------------- --------------
For the Twelve Months After December 31, 2002
Projected change in:
Interest income.................................................................. (11.43)% 11.57%
Interest expense................................................................. (12.18) 13.21
------------- --------------
Net interest income.............................................................. (11.04)% 10.70%
============= ==============
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item 7A is incorporated by reference from
the following sections of Item 7 of this report: "Interest Rate Sensitivity
Management" and "Market Risk".
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required by
Regulation S-X and by Item 302 of Regulation S-K are set forth in the pages
below.
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Page(s)
Independent Auditors' Report................................................................................ 32
Consolidated Statements of Financial Condition as of December 31, 2002 and 2001............................. 33
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000.......................................................................... 34
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000.......................................................................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.......................................................................... 36
Notes to Consolidated Financial Statements.................................................................. 37
Quarterly Results (Unaudited)............................................................................... 66
31
Schauer Taylor Cox Vise Morgan & Fowler, P.C.
Certified Public Accountants and Consultants
150 Olde Towne Road
Birmingham, Alabama 35216
Douglas B. Schauer, CPA Donald G. Vise, CPA Dale E. Fowler, CPA
Edward R. Taylor, CPA Phillip D. Morgan, CPA David A. Bowers, CPA
W. Ernest Cox, CPA Steven W. Brown, CPA
________________ * * * ________________
M. Bryant King, CPA Telephone - 205.822.3488 Russell D. Payne, CPA
Steven D. Miller, CPA Wats - 800.466.3488 Stewart T. Wilson, CPA
Donald Pagan, CPA Fax - 205.822.3541
Email - Firm@schauertaylor.com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Appalachian Bancshares, Inc. and Subsidiaries
Ellijay, Georgia
We have audited the accompanying consolidated statements of financial condition
of Appalachian Bancshares, Inc. (a Georgia corporation) and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Appalachian Bancshares, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 1, these consolidated financial statements have been
revised to include the transitional disclosures required by Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of January 1, 2002.
Birmingham, Alabama
February 11, 2003
/s/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.
Member of American Institute of Certified Public Accountants,
SEC Practice Section and Alabama Society of Certified Public Accountants
32
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and 2001
2002 2001
--------------- ---------------
Assets
Cash and due from banks...................................................... $ 14,701,857 $ 3,598,304
Interest-bearing deposits with other banks................................... 8,398,840 745,954
Federal funds sold........................................................... 7,756,000 3,214,000
--------------- ---------------
Cash and Cash Equivalents................................................ 30,856,697 7,558,258
Securities available-for-sale................................................ 40,374,902 49,393,717
Loans, net of unearned income................................................ 298,063,055 250,569,296
Allowance for loan losses.................................................... (3,237,898) (2,995,362)
---------------- ---------------
Net Loans................................................................ 294,825,157 247,573,934
Premises and equipment, net.................................................. 8,771,352 6,845,430
Accrued interest............................................................. 2,240,920 2,498,992
Cash surrender value on life insurance....................................... 2,483,243 2,369,866
Intangibles, net............................................................. 2,081,264 1,991,891
Other assets................................................................. 2,390,550 1,446,923
--------------- ---------------
Total Assets............................................................. $ 384,024,085 $ 319,679,011
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing........................................................ $ 21,897,058 $ 16,833,584
Interest-bearing........................................................... 294,385,698 247,194,423
--------------- ---------------
Total Deposits........................................................... 316,282,756 264,028,007
Short-term borrowings........................................................ 5,928,624 3,664,699
Accrued interest............................................................. 976,156 1,266,946
Long-term debt............................................................... 34,735,714 29,653,571
Other liabilities............................................................ 481,546 474,598
--------------- ---------------
Total Liabilities........................................................ 358,404,796 299,087,821
--------------- ---------------
Shareholders' Equity
Common stock, par value $0.01 per share, 20,000,000 shares authorized,
3,327,160 shares issued in 2002 and 3,134,670 shares issued in 2001........ 33,272 31,347
Paid-in capital.............................................................. 16,428,767 14,926,333
Retained earnings............................................................ 10,495,901 7,827,893
Accumulated other comprehensive income (loss): net unrealized holding
gains (losses) on securities available-for-sale,
net of deferred income tax................................................. 449,050 60,822
Treasury stock, 200,553 and 253,000 shares at cost........................... (1,787,701) (2,255,205)
---------------- ---------------
Total Shareholders' Equity............................................... 25,619,289 20,591,190
--------------- ---------------
Total Liabilities and Shareholders' Equity...................................... $ 384,024,085 $ 319,679,011
=============== ===============
See notes to consolidated financial statements
33
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- --------------- ---------------
Interest Income
Interest and fees on loans................................. $ 20,385,750 $ 22,111,485 $ 19,603,418
Interest on investment securities:
Taxable securities....................................... 1,646,592 1,743,440 1,702,529
Nontaxable securities.................................... 790,127 536,689 426,619
Interest on deposits in other banks........................ 13,039 4,891 30,363
Interest on federal funds sold............................. 78,941 366,870 207,125
---------------- --------------- ---------------
Total Interest Income.................................. 22,914,449 24,763,375 21,970,054
---------------- --------------- ---------------
Interest Expense
Interest on deposits....................................... 9,352,768 11,294,581 10,919,158
Interest on federal funds purchased and securities sold
under agreements to repurchase........................... 76,968 100,124 389,080
Interest on long-term debt................................. 1,995,652 2,280,122 2,017,015
---------------- --------------- ---------------
Total Interest Expense................................. 11,425,388 13,674,827 13,325,253
---------------- --------------- ---------------
Net Interest Income........................................... 11,489,061 11,088,548 8,644,801
Provision for loan losses.................................. 1,028,000 1,294,500 921,940
---------------- --------------- ---------------
Net Interest Income After Provision For Loan Losses........... 10,461,061 9,794,048 7,722,861
Noninterest Income
Customer service fees...................................... 1,058,298 661,715 504,131
Insurance commissions...................................... 77,987 60,665 45,566
Other operating income..................................... 1,493,225 668,645 619,911
Investment securities gains (losses)....................... 285,525 146,976 (10,774)
---------------- --------------- ---------------
Total Noninterest Income............................... 2,915,035 1,538,001 1,158,834
---------------- --------------- ---------------
Noninterest Expenses
Salaries and employee benefits............................. 4,755,882 3,743,849 2,890,930
Occupancy expense.......................................... 615,826 511,810 331,332
Furniture and equipment expense............................ 921,571 457,306 375,673
Other operating expenses................................... 3,408,869 3,118,398 2,782,551
---------------- --------------- ---------------
Total Noninterest Expenses............................. 9,702,148 7,831,363 6,380,486
---------------- --------------- ---------------
Income before income taxes.................................... 3,673,948 3,500,686 2,501,209
Income tax expense............................................ 1,005,940 962,588 871,778
---------------- --------------- ---------------
Net Income.................................................... $ 2,668,008 $ 2,538,098 $ 1,629,431
================ =============== ===============
Earnings Per Common Share
Basic..................................................... $ 0.90 $ 0.89 $ 0.59
Diluted................................................... 0.84 0.82 0.55
Cash Dividends Declared Per Common Share..................... 0.00 0.00 0.00
Weighted Average Shares Outstanding
Basic..................................................... 2,979,806 2,859,683 2,755,255
Diluted................................................... 3,189,108 3,081,276 2,968,926
See notes to consolidated financial statements
34
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Other
Compre-
hensive
Common Paid-in Retained Income Treasury
Stock Capital Earnings (Loss) Stock Total
----------- ------------ ------------ ---------- ----------- ------------
Balance at December 31, 1999........ $ 6,945,610 $ 3,030,196 $ 3,660,364 $ (787,396) $ (428,000) $ 12,420,774
Net income 2000..................... -- -- 1,629,431 -- -- 1,629,431
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment,
net of tax of $425,490........... -- -- -- 784,302 -- 784,302
------------
Comprehensive income................ -- -- -- -- -- 2,413,733
------------
Purchase of Treasury Stock.......... -- -- -- -- (1,827,205) (1,827,205)
Change of par value from $5.00
to $0.01......................... (6,917,828) 6,917,828 -- -- -- --
Public offering sale of stock, net
of issuance costs................ 3,066 4,359,081 -- -- -- 4,362,147
Proceeds from sale of common
stock to 401(k) plan............. 242 292,596 -- -- -- 292,838
Proceeds from exercise of options... 12 7,188 -- -- -- 7,200
----------- ------------ ------------ ---------- ----------- ------------
Balance at December 31, 2000........ 31,102 14,606,889 5,289,795 (3,094) (2,255,205) 17,669,487
Net income 2001..................... -- -- 2,538,098 -- -- 2,538,098
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment,
net of tax of $31,379............ -- -- -- 63,916 -- 63,916
------------
Comprehensive income................ -- -- -- -- -- 2,602,014
------------
Proceeds from sale of common
stock to 401(k) plan............. 206 287,102 -- -- -- 287,308
Proceeds from exercise of options... 39 32,342 -- -- -- 32,381
----------- ------------ ------------ ---------- ----------- ------------
Balance at December 31, 2001........ 31,347 14,926,333 7,827,893 60,822 (2,255,205) 20,591,190
Net income 2002..................... -- -- 2,668,008 -- -- 2,668,008
Unrealized gains on available-
for-sale securities, net of
reclassification adjustment,
net of tax of $199,997........... -- -- -- 388,228 -- 388,228
------------
Comprehensive income................ -- -- -- -- -- 3,056,236
------------
Proceeds from sale of common
stock to 401(k) plan............. 117 163,543 -- -- -- 163,660
Proceeds from exercise of options... 1,808 1,019,690 -- -- -- 1,021,498
Proceeds from issuance of
treasury stock................... -- 319,201 -- -- 467,504 786,705
----------- ------------ ------------ ---------- ----------- ------------
Balance at December 31, 2002........ $ 33,272 $ 16,428,767 $ 10,495,901 $ 449,050 $(1,787,701) $ 25,619,289
=========== ============ ============ ========== =========== ============
See notes to consolidated financial statements
35
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- --------------- ---------------
Operating Activities
Net income................................................. $ 2,668,008 $ 2,538,098 $ 1,629,431
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization, and accretion, net........... 1,171,023 861,950 556,373
Provision for loan losses................................ 1,028,000 1,294,500 921,940
Deferred tax (benefit) expense........................... (49,000) (181,725) 110,343
Realized security (gains) losses, net.................... (285,525) (146,976) 10,774
Loss on disposition of other real estate................. 40,757 47,124 --
Increase in cash surrender value on life insurance....... (113,377) (114,510) (110,062)
(Increase) decrease in accrued interest receivable....... 258,072 (44,913) (712,093)
(Decrease) increase in accrued interest payable.......... (290,790) (94,950) 545,908
Other, net............................................... (51,421) 183,274 334,278
---------------- --------------- --------------
Net Cash Provided By Operating Activities.............. 4,375,747 4,341,872 3,286,892
---------------- --------------- --------------
Investing Activities
Proceeds from sales of securities available-for-sale....... 12,597,325 7,777,064 10,282,289
Proceeds from maturity, calls and paydown of
securities available-for-sale............................ 34,322,603 19,540,135 1,151,386
Purchase of securities available-for-sale.................. (37,442,014) (44,027,017) (8,405,098)
Net increase in loans to customers......................... (49,462,737) (37,068,598) (45,726,054)
Capital expenditures, net.................................. (2,605,882) (878,572) (3,230,277)
Proceeds from disposition of foreclosed real estate........ 236,615 42,715 --
---------------- --------------- --------------
Net Cash Used In Investing Activities.................. (42,354,090) (54,614,273) (45,927,754)
---------------- --------------- --------------
Financing Activities
Net increase in demand deposits, NOW accounts,
and savings accounts..................................... 45,209,010 17,041,106 1,670,288
Net increase in certificates of deposit.................... 7,045,739 32,818,078 25,768,879
Net increase (decrease) in short-term borrowings........... 2,263,925 819,344 (3,288,652)
Issuance of long-term debt................................. 23,000,000 -- 38,600,000
Repayment of long-term debt................................ (17,917,857) (4,884,524) (21,026,191)
Issuance of common stock................................... 889,260 319,689 4,662,185
Sale of treasury stock..................................... 786,705 -- --
Purchase of treasury stock................................. -- -- (1,827,205)
---------------- --------------- --------------
Net Cash Provided By Financing Activities.............. 61,276,782 46,113,693 44,559,304
---------------- --------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents.......... 23,298,439 (4,158,708) 1,918,442
Cash and Cash Equivalents at Beginning of Year................ 7,558,258 11,716,966 9,798,524
---------------- --------------- --------------
Cash and Cash Equivalents at End of Year...................... $ 30,856,697 $ 7,558,258 $ 11,716,966
================ =============== ==============
See notes to consolidated financial statements
36
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of
Appalachian Bancshares, Inc. (the "Company")(a Georgia corporation) and its
wholly-owned subsidiaries: Appalachian Community Bank (the "Bank") and
Appalachian Information Management, Inc. ("AIM"). 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 provided
in-house data services to the Bank and offered data processing services to other
institutions (see Note 3). 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 Company operates predominantly in the domestic commercial banking industry.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles in the United States of America and to general
practice within the banking industry. The following summarizes the most
significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral. While management uses available information to recognize
losses on loans, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the estimated losses on loans. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in the near
term. However, the amount of the change that is reasonably possible cannot be
estimated.
Securities
Securities are classified as either held-to-maturity, available-for-sale or
trading.
Held-to-maturity securities are securities for which management has the ability
and intent to hold until maturity. These securities are carried at amortized
cost, adjusted for amortization of premiums and accretion of discount, to the
earlier of the maturity or call date.
Securities available-for-sale represent those securities intended to be held for
an indefinite period of time, including securities that management intends to
use as part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase
regulatory capital, or other similar factors. Securities available-for-sale are
recorded at market value with unrealized gains and losses net of any tax effect,
added or deducted directly from shareholders' equity.
37
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
Securities carried in trading accounts are carried at market value with
unrealized gains and losses reflected in income.
Realized and unrealized gains and losses are based on the specific
identification method.
Declines in the fair value of individual held-to maturity and available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
The Company has no trading or held-to-maturity securities.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses, net deferred loan fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain origination costs, when
material, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method.
Allowance for Possible Loan Losses
A loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. Smaller balance
homogeneous loans which consist of residential mortgages and consumer loans are
evaluated collectively and reserves are established based on historical loss
experience.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable. When a loan or portion of a loan is determined
to be uncollectable, the portion deemed uncollectable is charged against the
allowance and subsequent recoveries, if any, are credited to the allowance.
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and an analysis of current economic
conditions. While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken into
account the views of its regulators and the current economic environment; there
can be no assurance that in the future the Bank's regulators or its economic
environment will not require further increases in the allowance.
38
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well collateralized and in the process
of collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectability of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan has been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge offs have been fully recovered. Interest income recognized on a
cash basis was immaterial for the years ended December 31, 2002, 2001 and 2000.
Premises and Equipment
Land is carried at cost. Other premises and equipment are carried at cost net of
accumulated depreciation. Depreciation is provided generally by straight-line
methods based principally on the estimated useful lives of the respective
assets. Maintenance and repairs are expensed as incurred while major additions
and improvements are capitalized. Gains and losses on dispositions are included
in current operations.
Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower of
the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at date of
acquisition are charged to the allowance for loan losses. After foreclosure,
these assets are carried at the lower of their new cost basis or fair value less
cost to sell.
Costs incurred in maintaining foreclosed real estate and subsequent adjustments
to the carrying amount of the property are included in income (loss) on
foreclosed real estate.
Advertising Costs
The Company's policy is to expense advertising costs as incurred. Advertising
expense for the years ended December 31, 2002, 2001 and 2000 amounted to
approximately $567,000, $441,000 and $418,000, respectively.
39
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, estimated losses on foreclosed real
estate, and accumulated depreciation for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. The Company files consolidated income
tax returns with its subsidiaries.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation; which defines a fair value based method of accounting for an
employee stock option plan. This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and stock-based
non-employee compensation. Under the fair value based method, compensation is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, SFAS No.
123 allows an entity to continue to measure compensation costs for those plans
using the intrinsic value based method of accounting prescribed by APB Opinion
No, 25, Accounting for Stock Issued to Employees. The Company has elected to
continue its reporting of stock-based compensation in accordance with the
provisions of APB Opinion No. 25.
Employee Benefit Plan
The Company has a 401(k) profit-sharing plan covering substantially all of its
employees. Eligible participating employees may elect to contribute tax-deferred
contributions. Company contributions to the plan are determined by the board of
directors.
Intangibles
Intangibles consist primarily of goodwill and noncompete agreements. The
goodwill intangible represents a premium paid on the purchase of assets and
deposit liabilities. The asset is stated at cost, net of accumulated
amortization, which was provided using the straight-line method over the
estimated useful life of 20 years, until the FASB issued Statement No. 142,
Goodwill and Other Intangible Assets, in June 2001. The noncompete intangible
represents an amount paid to a former employee who agrees to certain
stipulations concerning future employment spelled out in a noncompete agreement.
The asset is stated at cost, net of accumulated amortization, which is provided
using the straight-line method over the estimated useful life of 2 years.
As discussed later in this footnote, the adoption of new accounting standards
effective January 1, 2002, mandate the discontinuance of periodic amortization
and require the Company to measure the recorded goodwill for impairment as of
January 1, 2002, and at least annually thereafter. The initial assessment of the
Company's intangible asset (Goodwill) as of January 1, 2002, and the annual
assessment as of December 31, 2002, indicate that no impairment of values
existed at those dates.
Off Balance Sheet Financial Instruments
In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
40
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
The Company also has available as a source of short-term financing the purchase
of federal funds from other commercial banks from an available line of up to $16
million and a line of credit with the Federal Home Loan Bank of up to
approximately $57,600,000 of which $27,400,000 is available and unused, subject
to proper collateralization.
Segment Information
All of the Company'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 consolidated financial statements and related
footnotes provide details related to segment reporting.
Reclassifications
Certain amounts in 2001 and 2000 have been reclassified to conform with the 2002
presentation.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative is to be determined based upon the intended use of the derivative.
For certain hedge designations (cash flow and foreign currency exposure) the
derivative's gain or loss is reported as a component of other comprehensive
income. Other designations require the gain or loss to be recognized in earnings
in the period of change. This statement, amended as to effective date by SFAS
No. 137, is effective for financial statements for periods beginning after June
15, 2000. In June 2000, the FASB also issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
SFAS No. 133. The adoption of SFAS No. 133, as amended by SFAS No. 138 did not
have a material impact on the Company's consolidated financial statements.
In September 2000, the FASB issued 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 was not material.
41
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
In June 2001, the FASB issued SFAS No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Board ("APB") Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of SFAS No. 141
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 produce different financial statement
results. The single-method approach used in SFAS No. 141 reflects the conclusion
that virtually all business combinations are acquisitions and therefore should
be accounted for in the same manner as other asset acquisitions based on the
values exchanged. This statement provides expanded and revised guidance related
to the allocation of the purchase price to goodwill and other intangibles
arising from the business combination. The provisions of SFAS No. 141 apply to
all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. SFAS No. 142 provides new standards for accounting relating to
intangible assets after initial recognition in the financial statements. This
statement proscribes the accounting practice of amortizing or expensing
intangibles ratably over a prescribed period of time and imposes new guidance
requiring that goodwill and certain other intangibles be tested for impairment
at least annually by comparing fair values of those assets with their recorded
amounts. Additional disclosure requirements also are provided. The provisions of
SFAS No. 142 are required to be applied in fiscal years beginning after December
15, 2001.
The adoption of SFAS No. 141 and SFAS No. 142 did not have a material effect on
the Company's consolidated financial statements.
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 did not have a material effect
on the Company's consolidated financial statements.
42
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
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 did not 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. The impact on
the audit of the Company's consolidated financial statements resulting from the
issuance of this auditing standard was not material.
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 on the audit of the
Company's consolidated financial statements resulting from the issuance of this
auditing standard was not 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. SFAS No. 145 addresses accounting and financial
reporting for extinguishments of debt, intangible assets of motor carriers and
leases. SFAS No. 145 is effective for fiscal years beginning after and
transactions occurring after May 15, 2002. The adoption of this statement is not
expected to have a material effect on the Company's consolidated financial
statements.
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 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. The adoption of this statement is
not expected to have a material impact on the Company's consolidated financial
statements.
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. This SAS is effective for written reports
issued or oral advice provided on or after June 30, 2002. 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.
43
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
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. This SAS No. 98 was effective
upon issuance except for the amendment to SAS No. 70, which is effective for
reports issued on or after January 1, 2003. The impact on the audit of the
Company's consolidated financial statements resulting from the issuance of this
auditing standard was not material.
In October 2002, the FASB 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. The provisions of SFAS No. 72
requiring the intangible recognition and subsequent amortization of any excess
fair value of net liabilities assumed in an acquisition will no longer apply.
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 consolidated financial statements.
In October 2002, the Auditing Standards Board issued SAS No. 99, Consideration
of Fraud in a Financial Statement Audit. This statement supersedes SAS No. 82
and amends SAS No. 1 and SAS No. 85. SAS No. 99 describes fraud and its
characteristics; discusses the need for auditors to exercise professional
skepticism; requires (as part of planning the audit) that there be a discussion
among the audit team members regarding the risks of material misstatement due to
fraud; and requires auditors to gather information necessary to identify risks
of material misstatement due to fraud. This SAS is effective for audits of
financial statements for periods beginning on or after December 15, 2002. 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 November 2002, the Auditing Standards Board issued SAS No. 100, Interim
Financial Information. This statement supersedes SAS No. 71 and establishes
standards on the nature, timing and extent of the procedures to be performed by
an independent accountant when conducting a review of interim financial
information. This SAS is effective for interim periods within fiscal years
beginning after December 15. 2002. 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 November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation changes the current practice of
accounting for, and the disclosures related to guarantees. Interpretation No. 45
requires certain guarantees to be recorded at fair value, which is a change from
the current practice of generally only recording a liability when a loss is
probable and reasonably estimable. The interpretation also requires a guarantor
to make new disclosures, even when the likelihood of making any payments under
the guarantee is remote, which is another change from current practice. The
disclosure requirements of this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
interpretation's initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The guarantor's previous accounting for
44
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
guarantees issued prior to the date of Interpretation No. 45 are not to be
revised or restated to reflect the interpretation's provisions. The adoption of
the disclosure requirements of Interpretation No. 45 did not have a material
impact on the Company's consolidated financial statements. The adoption of the
initial recognition and initial measurement provisions of Interpretation No. 45
is not expected to have a material impact on the Company's consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. It amends the disclosure provisions of that Statement to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
This Statement also amends APB Opinion No. 28 to require disclosure about those
effects in interim financial information. This Statement is effective for
financial statements for fiscal years ending after December 15, 2002 and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a
material impact on the Company's consolidated financial statements.
In January 2003, the Auditing Standards Board Issued SAS No. 101, Auditing Fair
Value Measurements and Disclosures. This statement establishes standards on
auditing the measurement and disclosure of assets, liabilities, and specific
components of equity presented or disclosed at fair value in financial
statements. This SAS is effective for audits of financial statements for periods
beginning on or after June 15, 2003. 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 January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements, to
certain entities (called variable interest entities) in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The disclosure
requirements of this Interpretation are effective for all financial statements
issued after January 31, 2003. The consolidation requirements apply to all
variable interest entities created after January 31, 2003. In addition, public
companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003.
Management is currently assessing the impact of FIN 46, and does not expect this
Interpretation to have a material impact to the Consolidated Financial
Statements.
Earnings per Common Share
Basic earnings per common share are computed by dividing earnings available to
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock,
as prescribed by SFAS No. 128, Earnings per Share. All per share amounts
included in these financial statements have been retroactively adjusted to
reflect the effects of the 2-for-1 stock split which occurred during 2000. The
following reconciles the weighted average number of shares outstanding:
2002 2001 2000
------------- -------------- ------------
Weighted average of common shares outstanding............................ 2,979,806 2,859,683 2,755,255
Effect of dilutive options............................................... 209,302 221,593 213,671
------------- -------------- ------------
Weighted average of common shares outstanding effected for dilution...... 3,189,108 3,081,276 2,968,926
============= ============== ============
45
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
In April 2000, the Company issued a 2-for-1 stock split. All per share amounts
included in these consolidated financial statements have been retroactively
adjusted to give effect to this split.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, on December 31, 1998. This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The statement
requires that an enterprise classify items of other comprehensive income by
their nature in the financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional paid
in capital in the equity section of a statement of financial condition.
Comprehensive income is generally defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. Items that are to be recognized under accounting standards as
components of comprehensive income are displayed in statements of shareholders'
equity.
In the calculation of comprehensive income, certain reclassification adjustments
are made to avoid double counting items that are displayed as part of net income
for a period that also had been displayed as part of other comprehensive income
in that period or earlier periods. The disclosure of the reclassification
amounts and other details of other comprehensive income are as follows:
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------- -------------- ------------
Unrealized gains (losses) on securities
Unrealized holding gains arising during period........................ $ 873,750 $ 242,271 $ 1,199,018
Reclassification adjustments for (gains) losses
included in net income.............................................. (285,525) (146,976) 10,774
------------- -------------- ------------
Net unrealized gains.................................................. 588,225 95,295 1,209,792
Income tax related to items of other comprehensive income............. (199,997) (31,379) (425,490)
------------- -------------- ------------
Other comprehensive income .............................................. $ 388,228 $ 63,916 $ 784,302
============= ============== ============
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46
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 - Summary of Significant Accounting Policies - Continued
Statements of Cash Flows
The Company includes cash, due from banks, and short-term investments as cash
equivalents in preparing the consolidated statements of cash flows. The
following is supplemental disclosure to the statements of cash flows for the
three years ended December 31, 2002.
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------- -------------- ------------
Cash paid during the year for interest................................ $ 11,716,178 $ 13,769,777 $ 12,779,345
Cash paid during the year for income taxes............................ 1,050,345 1,061,461 603,000
Non-cash Disclosures:
--------------------
Loans transferred to foreclose real estate............................ 1,477,804 732,882 147,423
Net increase in unrealized gains and
losses on securities available-for-sale............................. 588,225 95,295 1,209,792
Proceeds from sales of foreclosed real estate
financed through loans.............................................. 294,290 619,445 --
Securities transferred from held-to-maturity
portfolio to available-for-sale portfolio........................... -- -- 5,799,682
Change in par value from $5.00 per share to $0.01 per share........... -- -- 6,917,828
Transfer of stock to 401(k)........................................... -- -- 4,165
Note 2 - 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 3 - Discontinued Operations
In August 2002, the Company announced its intentions to close down the
operations of its subsidiary, Appalachian Information Management, Inc. ("AIM").
The operations of AIM ceased as related to the Company on November 12, 2002. AIM
continues to provide services to another bank on a subcontract basis.
Disposition of the assets of the discontinued operations began in September
2002. At December 31, 2002, the remaining assets (primarily fixed assets and
prepaid expenses) net of related reserves and other liabilities are included in
premises and equipment and other assets in the accompanying consolidated
statement of financial condition and continue to be held for productive use.
47
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 3 - Discontinued Operations - Continued
An impairment loss of approximately $43,000 was recognized by the Company in the
year 2002 related to this discontinued function.
In light of the Company discontinuing the operations of AIM, its data processing
provider, the Company signed a 5 year contract with Fiserv Solutions, Inc. to
provide the Company with data processing services vacated by the closure of AIM.
The contract contains a 3-year renewable option along with a detailed fee
schedule for the different services it is likely to perform.
Note 4 - Restrictions On Cash and Due From Bank Accounts
The Company is required to maintain average reserve balances either in vault
cash or on deposit with the Federal Reserve Bank. At December 31, 2002 and 2001,
the average amount of the required reserves was $5,742,000 and $2,161,000,
respectively.
Note 5 - Securities
The carrying amounts of securities as shown in the consolidated statement of
financial condition of the Company and their approximate fair values at December
31, 2002 and 2001 are presented below.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- --------------
Securities Available-for-Sale
December 31, 2002:
U.S. Government and agency securities............... $ 8,481,531 $ 97,643 $ -- $ 8,579,174
State and municipal securities...................... 14,847,957 466,696 861 15,313,792
Mortgage-backed securities.......................... 14,642,135 133,916 17,015 14,759,036
Equity securities................................... 1,722,900 -- -- 1,722,900
------------- ------------- ------------- --------------
$ 39,694,523 $ 698,255 $ 17,876 $ 40,374,902
============= ============= ============= ==============
December 31, 2001:
U.S. Government and agency securities............... $ 14,514,408 $ 187,480 $ 10,721 $ 14,691,167
State and municipal securities...................... 13,994,179 68,297 257,536 13,804,940
Mortgage-backed securities.......................... 19,235,376 131,003 26,369 19,340,010
Equity securities................................... 1,557,600 -- -- 1,557,600
------------- ------------- ------------- --------------
$ 49,301,563 $ 386,780 $ 294,626 $ 49,393,717
============= ============= ============= ==============
At December 31, 2002, the Company's available-for-sale securities reflected net
unrealized gains of $680,379, which resulted in an increase in stockholders'
equity of $449,050, net of deferred tax liability. At December 31, 2001, the
Company's available-for-sale securities reflected net unrealized gains of
$92,154, which resulted in an increase in stockholders equity of $60,822 net of
deferred tax liability.
48
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 5 - Securities - Continued
The contractual maturities of securities available-for-sale at December 31,
2002, are shown as follows. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
--------------- ---------------
Securities Available-for-Sale
Due in one year or less...................................................... $ 8,730,357 $ 8,797,962
Due after one year through five years........................................ 10,423,091 10,558,162
Due after five years through ten years....................................... 8,696,899 8,837,354
Due after ten years.......................................................... 10,121,276 10,458,524
Equity securities............................................................ 1,722,900 1,722,900
--------------- ---------------
$ 39,694,523 $ 40,374,902
=============== ===============
Mortgage-backed securities have been included in the maturity tables based upon
guaranteed payoff date of each security.
Gross realized gains and losses on the sale of securities available-for-sale for
each of the three years in the period ended December 31, 2002, were as follows:
2002 2001 2000
------------- -------------- ------------
Gross realized gains..................................................... $ 290,227 $ 174,983 $ 10,519
Gross realized losses.................................................... 4,702 28,007 21,293
Equity securities include a restricted investment in Federal Home Loan Bank
stock, which must be maintained to secure the available line of credit. The
amount of investment in this stock amounted to $1,722,900 and $1,557,600 at
December 31, 2002 and 2001, respectively.
The carrying value of investment securities pledged to secure public funds on
deposit, securities sold under agreements to repurchase, and for other purposes
as required by law amounted to approximately $9,092,000 and $9,413,000 at
December 31, 2002 and 2001, respectively.
Note 6 - Loans
The Company grants loans to customers primarily in the North Georgia area. The
major classifications of loans as of December 31 were as follows:
2002 2001
--------------- ---------------
Commercial, financial and agricultural.......................................... $ 33,448,866 $ 29,091,838
Real estate - construction...................................................... 73,242,467 54,255,536
Real estate - mortgage.......................................................... 165,525,831 147,851,890
Consumer........................................................................ 20,295,311 19,370,032
Other loans..................................................................... 5,550,580 --
--------------- ---------------
298,063,055 250,569,296
Allowance for loan losses....................................................... (3,237,898) (2,995,362)
--------------- ---------------
Net loans....................................................................... $ 294,825,157 $ 247,573,934
=============== ===============
49
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 6 - Loans - Continued
Total loans, which the Company considered to be impaired at December 31, 2002
and 2001, were $4,823,000 and $1,642,000, respectively. All of these loans were
on nonaccrual status and had related allowances of $723,450 and $246,300,
respectively. Impaired loans consisted primarily of commercial loans as of
December 31, 2002 and 2001. The average recorded investment in impaired loans
for the years ended December 31, 2002 and 2001 was approximately $3,232,500 and
$1,013,500, respectively. No material amount of interest income was recognized
on impaired loans for the years ended December 31, 2002 and 2001. For the year
ended December 31, 2002, the difference between gross interest income that would
have been recorded in such period if the nonaccruing loans had been current in
accordance with their original terms and the amount of interest income on those
loans that was included in such period's net income was approximately $425,000.
In the year ended December 31, 2001, the amount was negligible.
The Company has no commitments to loan additional funds to the borrowers of
nonaccrual loans.
Note 7 - Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years ended
December 31 are as follows:
2002 2001 2000
-------------- --------------- ---------------
Balance at beginning of year.................................. $ 2,995,362 $ 2,210,603 $ 1,849,290
Charge-offs................................................... (816,701) (543,800) (591,410)
Recoveries.................................................... 31,237 34,059 30,783
--------------- --------------- ---------------
Net charge-offs............................................ (785,464) (509,741) (560,627)
Provision for loan losses..................................... 1,028,000 1,294,500 921,940
--------------- --------------- ---------------
Balance at end of year........................................ $ 3,237,898 $ 2,995,362 $ 2,210,603
=============== =============== ===============
Note 8 - Premises and Equipment
Premises and equipment were as follows:
2002 2001
--------------- ---------------
Land ........................................................................... $ 2,080,417 $ 846,558
Buildings and improvements...................................................... 4,757,454 4,050,520
Furniture and equipment......................................................... 3,498,374 2,765,158
Computer equipment and software................................................. 1,188,018 1,371,283
Automobiles..................................................................... 140,982 174,935
Construction in progress........................................................ 43,713 40,000
--------------- ---------------
11,708,958 9,248,454
Allowance for depreciation...................................................... (2,937,606) (2,403,024)
--------------- ---------------
$ 8,771,352 $ 6,845,430
=============== ===============
The provision for depreciation charged to occupancy and furniture and equipment
expense for the years ended December 31, 2002, 2001 and 2000, was $679,960,
$640,220 and $472,609, respectively.
50
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9 - Intangibles
Acquired goodwill and other intangible assets as of December 31, 2002 and 2001,
are detailed as follows:
2002
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------------- --------------- ----------------
Identifiable amortizing assets............................... $ 165,000 $ 75,627 $ 89,373
Nonamortizing goodwill....................................... 2,335,858 343,967 1,991,891
---------------- --------------- ----------------
Total acquired intangible assets............................. $ 2,500,858 $ 419,594 $ 2,081,264
================ =============== ================
2001
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------------- --------------- ----------------
Nonamortizing goodwill....................................... $ 2,335,858 $ 343,967 $ 1,991,891
---------------- --------------- ----------------
Total acquired intangible assets............................. $ 2,335,858 $ 343,967 $ 1,991,891
================ =============== ================
Aggregate amortization expense for the year ended December 31, 2002, was
$75,627. Aggregate annual amortization expense estimated for the years ending
December 31, 2003 and 2004 is $82,500 and $6,893, 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.
Year Ended December 31
---------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
Reported Net income.......................................... $ 2,668,008 $ 2,538,098 $ 1,629,431
Add back Goodwill amortization, net of tax................... -- 117,747 117,747
---------------- --------------- ----------------
Adjusted net income.......................................... $ 2,668,008 $ 2,655,845 $ 1,747,178
================ =============== ================
Basic earnings per share:
Reported net income..................................... $ 0.90 $ 0.89 $ 0.59
Goodwill amortization................................... 0.00 0.03 0.04
---------------- --------------- ----------------
Adjusted net income..................................... $ 0.90 $ 0.92 $ 0.63
================ =============== ================
Diluted earnings per share:
Reported net income..................................... $ 0.84 $ 0.82 $ 0.55
Goodwill amortization................................... 0.00 0.02 0.04
---------------- --------------- ----------------
Adjusted net income..................................... $ 0.84 $ 0.84 $ 0.59
================ =============== ================
51
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 10 - Deposits
The aggregate amounts of time deposits of $100,000 or more, including
certificates of deposit of $100,000 or more at December 31, 2002 and 2001 were
$60,533,038 and $48,189,453, respectively. Time deposits of less than $100,000
totaled $110,095,352 and $115,393,198 at December 31, 2002 and 2001,
respectively. Demand deposits reclassified as loan balances as of December 31,
2002 and 2001 amounted to $60,286 and $71,809, respectively.
The maturities of time certificates of deposit and other time deposits issued by
the Company at December 31, 2002, are as follows:
Time
Certificates
of Deposit
---------------
Years ending December 31,
2003......................................................................... $ 134,385,461
2004......................................................................... 26,316,011
2005......................................................................... 6,078,132
2006......................................................................... 3,360,923
2007......................................................................... 487,863
---------------
$ 170,628,390
===============
Note 11 - Short-term Borrowings
Short-term borrowings at December 31, 2002 and 2001 consist of the following:
2002 2001
--------------- ---------------
Federal funds purchased......................................................... $ -- $ 1,932,000
Securities sold under agreements to repurchase.................................. 5,928,624 1,732,699
--------------- ---------------
$ 5,928,624 $ 3,664,699
=============== ===============
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. Information concerning
securities sold under agreements to repurchase is summarized as follows:
2002 2001
--------------- ---------------
Average balance during the year................................................. $ 4,061,294 $ 1,930,051
Average interest rate during the year........................................... 1.60% 3.20%
Maximum month-end balance during the year....................................... $ 5,928,624 $ 3,144,208
U.S. Agency, municipal and mortgage-backed securities underlying
the agreements at year end:
Carrying value.................................................................. $ 6,106,585 $ 2,466,745
Estimated fair value............................................................ 6,106,585 2,466,745
52
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 12 - Long-term Debt
At December 31, 2002 and 2001, the Company had notes payable totaling
$34,735,714 and $29,653,571, respectively.
Long-term debt consists of the following at December 31:
2002 2001
--------------- ---------------
Notes payable on line of credit at FHLB, with
varying maturities; from April 2002 through
October 2008, interest rate varies from 1.96%
to 7.32%, secured by residential mortgages................................... $ 30,135,714 $ 25,053,571
Note payable to another financial institution,
interest at prime less 0.25%; interest paid
quarterly with principal payments of $657,000
to be made annually, secured by 100% of the
outstanding shares of Appalachian Community
Bank......................................................................... 4,600,000 4,600,000
--------------- ---------------
$ 34,735,714 $ 29,653,571
=============== ===============
Maturities of long-term debt following December 31, 2002, are as follows:
Years ending December 31,
2003......................................................................... $ 17,099,857
2004......................................................................... 2,899,857
2005......................................................................... 4,857,000
2006......................................................................... 1,857,000
2007......................................................................... 1,357,000
Thereafter................................................................... 6,665,000
---------------
$ 34,735,714
===============
Note 13 - Shareholders' Equity
At December 31, 2002 and 2001 Shareholders' Equity of the Company consisted of
the following:
Common Stock: At December 31, 2002, 20,000,000 shares authorized, 3,327,160
shares issued and 3,126,607 outstanding with a par value of $0.01 per share.
Voting rights equal to one vote per share. At December 31, 2001 20,000,000
shares authorized, 3,134,670 shares issued and 2,881,670 outstanding with a par
value of $0.01 per share.
Paid-in Capital: Represents the funds received in excess of par value upon the
issuance of stock, net of issuance costs and the tax benefits of non-statutory
stock options.
Retained Earnings: Represents the accumulated net earnings of the Company.
Accumulated Other Comprehensive Income: Represents the change in equity during
each period from the effects of unrealized holding gains and losses on
securities available-for-sale, net of tax.
53
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 13 - Shareholders' Equity - Continued
Treasury Stock: Represents 200,553 and 253,000 shares of common stock at
December 31, 2002 and 2001, at cost.
In 2002, the Company issued 11,690 shares of stock to its 401(k) Plan for
$163,660. Of this amount, $117 was allocated to common stock and $163,543 to
paid-in-capital. The Company also sold 52,447 shares of its treasury stock for
$786,705 allocated as such; $467,504 to treasury stock and $319,201 to
paid-in-capital. In addition, 180,800 options were exercised for an amount
equaling $1,021,498, including tax benefit, of which $1,808 was allocated to
common stock and $1,019,690 to paid-in capital.
In 2001, the Company sold 20,522 shares of stock to its 401(k) plan for
$287,308. Of this amount, $205 was allocated to common stock and $287,103 to
paid-in capital. In addition, 3,900 options were exercised for an amount
equaling $32,381, including tax benefit, of which $39 was allocated to common
stock and $32,342 to paid-in capital.
In 2000, the Company issued 24,192 shares of stock to its 401(k) plan for
$292,838. Of this amount $242 was allocated to common stock and $292,596 to
paid-in capital. The Company also purchased 165,000 shares of common stock for
$1,827,705, which is reflected as treasury stock, at cost, in shareholders'
equity. During 2000, the Company sold 306,612 shares of stock in a public
offering for $4,599,190, net of issuance costs, of which $3,066 was allocated to
common stock and $4,596,124 to paid-in capital. In addition, 1,200 options were
exercised for an amount equaling $7,200, including tax benefit, of which $12 was
allocated to common stock and $7,188 to paid-in capital.
The Company is also required to maintain minimum amounts of capital to total
"risk weighted" assets, as defined by the banking regulators. The Company's
ratios as of December 31, 2002 and 2001 are disclosed in Note 19 following.
The board of directors of any state-chartered bank in Georgia may declare and
pay cash dividends on its outstanding capital stock without any request for
approval of the Bank's regulatory agency if the following conditions are met:
1. Total classified assets at the most recent examination of the Bank do not
exceed 80% of equity capital.
2. The aggregate amount of dividends declared in the calendar year does not
exceed 50% of the prior year's net income.
3. The ratio of equity capital to adjusted assets shall not be less than 6%.
As of December 31, 2002, the Bank could declare dividends of approximately
$1,614,000 without regulatory consent, subject to the Bank's compliance with
regulatory capital restrictions. It is anticipated that any such dividends will
be used for the payment of long-term debt service.
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54
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 14 - Other Operating Expenses
Other operating expenses consist of the following:
2002 2001 2000
---------------- --------------- ---------------
Professional fees............................................. $ 675,728 $ 469,267 $ 426,710
Advertising................................................... 566,684 440,651 418,125
Director and committee fees................................... 405,305 411,804 379,542
Stationery and supplies....................................... 307,937 264,271 262,175
Postage....................................................... 163,746 126,668 132,150
Taxes and licenses............................................ 157,459 132,472 50,080
Insurance..................................................... 118,670 144,286 123,827
Education..................................................... 95,107 37,386 24,760
Data processing............................................... 83,572 395,270 218,669
Correspondent bank charges.................................... 77,829 84,294 58,592
Amortization.................................................. 75,624 117,747 117,747
Checking account expense...................................... 60,286 56,805 66,769
Dues and subscriptions........................................ 45,594 39,546 29,374
Other......................................................... 575,328 397,931 474,031
---------------- --------------- ---------------
Total other operating expenses............................. $ 3,408,869 $ 3,118,398 $ 2,782,551
================ =============== ===============
Note 15 - Income Taxes
Federal and state income taxes receivable (payable) as of December 31, 2002 and
2001 included in other assets and other liabilities were as follows:
2002 2001
--------------- ---------------
Current
Federal...................................................................... $ 328,516 $ 106,753
State........................................................................ (34,120) (103,660)
The components of the net deferred income tax asset included in other assets are
as follows:
2002 2001
--------------- ---------------
Deferred tax asset:
Federal...................................................................... $ 895,595 $ 770,925
State........................................................................ 79,347 68,317
--------------- ---------------
Total deferred income tax asset............................................ 974,942 839,242
--------------- ---------------
Deferred tax liability:
Federal...................................................................... (476,096) (213,572)
State........................................................................ (43,175) (19,003)
--------------- ---------------
Total deferred income tax liability........................................ (519,271) (232,575)
--------------- ---------------
Net deferred tax asset.......................................................... $ 455,671 $ 606,667
=============== ===============
55
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 15 - Income Taxes - Continued
The tax effects of each type of income and expense item that gave rise to
deferred taxes are:
2002 2001
--------------- ---------------
Net unrealized gains on securities available-for-sale........................... $ (231,329) $ (31,333)
Depreciation.................................................................... (287,942) (201,242)
Allowance for loan losses....................................................... 913,888 782,956
Deferred compensation........................................................... 60,578 55,098
Other........................................................................... 476 1,188
--------------- ---------------
$ 455,671 $ 606,667
=============== ===============
The components of income tax expense (benefit) for the years 2002, 2001 and 2000
are as follows:
2002 2001 2000
---------------- --------------- ---------------
Current
Federal.................................................... $ 960,471 $ 1,038,142 $ 741,910
State...................................................... 94,469 106,171 19,525
Deferred
Federal.................................................... (45,000) (179,725) 97,137
State...................................................... (4,000) (2,000) 13,206
---------------- --------------- ---------------
$ 1,005,940 $ 962,588 $ 871,778
================ =============== ===============
Tax effects of securities transactions resulted in an increase (decrease) in
income taxes for 2002, 2001 and 2000 of approximately $97,079, $49,972 and
$(3,663), respectively.
The principal reasons for the difference in the effective tax rate and the
federal statutory rate are as follows for the years ended December 31, 2002,
2001 and 2000.
2002 2001 2000
---------------- --------------- ---------------
Statutory federal income tax rate............................. 34.0% 34.0% 34.0%
Effect on rate of:
Tax-exempt securities...................................... (7.3) (5.2) (5.8)
Tax-exempt loans........................................... (1.0) (1.1) (0.8)
Interest expense disallowance.............................. 0.9 0.6 1.1
State income tax, net of federal tax....................... 1.6 1.9 1.0
Other...................................................... (0.8) (2.7) 5.4
---------------- --------------- ---------------
Effective income tax rate..................................... 27.4% 27.5% 34.9%
================ =============== ===============
56
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 16 - Commitments and Contingencies
In the normal course of business, the Company offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements. Commitments to extend credit, credit card arrangements, commercial
letters of credit, and standby letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The Company's credit
policies and procedures for credit commitments and financial guarantees are the
same as those for extension of credit that are recorded on the statement of
financial condition. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Company. Management conducts
regular reviews of these instruments on an individual customer basis, and the
results are considered in assessing the adequacy of the Company's allowance for
loan losses. Management does not anticipate any material losses as a result of
these commitments.
Following is a discussion of these commitments:
Standby Letters of Credit: These agreements are used by the Company's customers
as a means of improving their credit standings in their dealings with others.
Under these agreements, the Company agrees to honor certain financial
commitments in the event that its customers are unable to do so. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount. As of December 31, 2002 and 2001, the
Company has issued standby letters of credit of approximately $1,320,000 and
$1,311,000.
Loan Commitments: As of December 31, 2002 and 2001, the Company had commitments
outstanding to extend credit totaling approximately $35,890,000 and $34,084,000,
respectively. These commitments generally require the customers to maintain
certain credit standards. Management does not anticipate any material losses as
a result of these commitments.
Litigation: The Company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims are not
material to the financial statements.
Note 17 - Concentrations of Credit
All of the Company's loans, commitments and standby letters of credit have been
granted to customers in the Company's market area. Substantially all such
customers are depositors of the Company. The concentrations of credit by type of
loan are set forth in Note 6. The commitments to extend credit relate primarily
to unused real estate draw lines. Commercial and standby letters of credit were
granted primarily to commercial borrowers.
The Company maintains its cash accounts at various commercial banks in Georgia.
The total cash balances are insured by the FDIC up to $100,000. Total uninsured
balances held at other commercial banks amounted to $11,490,407 at December 31,
2002. There were no uninsured balances at 2001.
Note 18 - Stock Option Plans
The Company has adopted its 1997 Employee Stock Incentive Plan and its 1997
Directors' Non-qualified Stock Option Plan under which it has granted statutory
and nonstatutory stock options to certain directors and employees. The options
granted provide for these directors and employees to purchase shares of the
Company's $0.01 par value common stock at the market value at the dates of
grant. The options granted may be exercised within ten years from the dates of
grant subject to vesting requirements.
57
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 18 - Stock Option Plans - Continued
The following sets forth certain information regarding stock options for the
years ended December 31, 2002, 2001, and 2000. Stock option shares and prices
have been adjusted to reflect the effects of the 2-for-1 stock split in 2000.
Fixed Options
2002 2001 2000
---------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ----------- ----------- ---------- ----------
Outstanding at beginning of year........ 638,900 $ 5.18 599,400 $ 4.52 587,600 $ 4.29
Granted................................. -- -- 50,000 14.00 13,000 15.00
Exercised............................... (180,800) 4.01 (3,900) 4.21 (1,200) 6.00
Forfeited............................... -- -- (6,600) 12.82 -- --
---------- ----------- ----------
Outstanding at end of year.............. 458,100 5.64 638,900 5.18 599,400 4.52
========== =========== ==========
Exercisable at end of year.............. 379,700 4.61 417,700 4.20 306,000 4.22
========== =========== ==========
Weighted average fair value
of options granted................... $ -- $ 4.18 $ 5.02
========== =========== ==========
Information pertaining to options outstanding at December 31, 2002, is as
follows:
Outstanding Expiration Options
Number Date Exercisable
---------------- --------------- ---------------
Options with an Exercise Price of $4.00....................... 318,500 6/01/07 318,500
Options with an Exercise Price of $6.00....................... 81,600 6/22/09 48,000
Options with an Exercise Price of $15.00...................... 8,000 6/30/10 3,200
Options with an Exercise Price of $14.00...................... 50,000 7/10/11 10,000
The Company's options outstanding have a weighted average contractual life of
5.28 years.
If the Company had elected to recognize compensation cost for options granted in
2002, 2001 and 2000, based on the fair value of the options as permitted by SFAS
No. 123, net income and earnings per share would have reduced to the pro forma
amounts indicated below:
Years Ended December 31,
-----------------------------------------------------
2002 2001 2000
---------------- --------------- ---------------
Net Income
As reported................................................ $ 2,668,008 $ 2,538,098 $ 1,629,431
Pro forma.................................................. 2,561,641 2,415,583 1,483,296
Basic Earnings Per Share
As reported................................................ $ 0.90 $ 0.89 $ 0.59
Pro forma.................................................. 0.86 0.84 0.54
Diluted Earnings Per Share
As reported................................................ $ 0.84 $ 0.82 $ 0.55
Pro forma.................................................. 0.80 0.78 0.50
58
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 18 - Stock Option Plans - Continued
All options are assumed to be exercised in the calculation of diluted average
common shares outstanding, causing the equivalent number of shares outstanding
on a diluted basis to be greater than that used to calculate basic earnings per
share for 2002 by 209,302, 221,593 greater than that used to calculate basic
earnings per share for 2001 and 213,671 greater than that used to calculate
basic earnings per share for 2000. The dilutive effects on earnings per share
for the years ended December 31, 2002, 2001 and 2000 were $0.06, $0.07, and
$0.04, respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2002 2001 2000
---------------- --------------- ---------------
Expected dividend yield....................................... -- 1.90% 1.90%
Expected stock price volatility............................... -- 24.20 25.70
Risk-free interest rate....................................... -- 4.95 6.00
Expected life of options...................................... -- 7.50 years 7.50 years
The effects of applying SFAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported earnings for future
years, nor are the dividend estimates representative of commitments on the part
of the Company's Board.
Note 19 - Regulatory Matters
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company and its subsidiary bank and the
consolidated financial statements. Under capital adequacy guidelines and the
regulatory framework from prompt corrective action, the Company and its
subsidiary bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 Capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2002, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2002, the most recent notification from the applicable
regulatory agencies categorized Appalachian Community Bank, the subsidiary bank,
as adequately capitalized under the regulatory framework for prompt corrective
action. To become well capitalized the Company and its subsidiary bank must
maintain minimum Total Capital, Tier I Capital and Tier I Leverage ratios as set
forth in the table below. There have been conditions and/or events since the
most recent notification that management believes has changed the Bank's prompt
corrective action categories.
59
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 19 - Regulatory Matters - Continued
The Company's and Bank's actual capital amounts and ratios are also presented in
the table.
To Be Well Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------- -------- -------------- ---------
(in Thousands)
As of December 31, 2002:
Total Capital
Consolidated $ 26,327 8.59% $ 24,512 8.00% $ 30,641 10.00%
Appalachian Community Bank 30,537 10.00 24,425 8.00 30,532 10.00
Tier 1 Capital
Consolidated 23,089 7.54 12,256 4.00 18,384 6.00
Appalachian Community Bank 27,299 8.94 12,213 4.00 18,319 6.00
Tier 1 Leverage
Consolidated 23,089 6.07 15,225 4.00 19,032 5.00
Appalachian Community Bank 27,299 7.17 15,225 4.00 19,032 5.00
As of December 31, 2001:
Total Capital
Consolidated $ 21,533 8.32% $ 20,700 8.00% $ 25,875 10.00%
Appalachian Community Bank 26,120 10.09 20,718 8.00 25,897 10.00
Tier 1 Capital
Consolidated 18,538 7.16 10,350 4.00 15,525 6.00
Appalachian Community Bank 23,125 8.93 10,359 4.00 15,538 6.00
Tier 1 Leverage
Consolidated 18,538 5.87 12,642 4.00 15,802 5.00
Appalachian Community Bank 23,125 7.32 12,642 4.00 15,802 5.00
Note 20 - Employee Benefit Plan
The Company adopted a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code. Employer and employee contributions may be
made in the form of cash or Company stock. The Company's contribution to the
plan is determined by the board of directors. The Company made discretionary
cash contributions to the plan of approximately $215,353 in 2002, $223,678 in
2001 and $219,940 in 2000.
60
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 21 - Leases
The Company has a number of operating lease agreements, involving land,
buildings and equipment. These leases are noncancellable and expire on various
dates through the year 2028. The leases provide for renewal options and
generally require the Company to pay maintenance, insurance and property taxes.
For the years ended December 31, 2002, 2001 and 2000, rental expense for
operating leases was approximately $68,412, $50,600 and $29,000, respectively.
Future minimum lease payments under noncancellable operating leases at December
31, 2002, are as follows:
Years Ending December 31,
2003........................................................................... $ 43,754
2004........................................................................... 34,381
2005........................................................................... 35,020
2006........................................................................... 33,373
2007........................................................................... 33,938
Thereafter..................................................................... 837,869
---------------
Total minimum lease payments................................................... $ 1,018,335
===============
Note 22 - Related Party Transactions
Loans: Certain directors, executive officers and principal shareholders,
including their immediate families and associates were loan customers of the
Company during 2002 and 2001. Such loans are made in the ordinary course of
business at normal credit terms, including interest rates and collateral and do
not represent more than a normal risk of collection. A summary of activity and
amounts outstanding are as follows:
2002 2001
--------------- ---------------
Balance at Beginning of Year.................................................... $ 8,431,432 $ 6,646,716
New loans....................................................................... 2,373,027 2,037,909
Repayments...................................................................... (2,330,592) (253,193)
Participated sold............................................................... (572,269) --
Change in related parties....................................................... (111,546) --
--------------- ---------------
Balance at End of Year.......................................................... $ 7,790,052 $ 8,431,432
=============== ===============
Deposits: Deposits held from related parties were $1,344,094 and $1,589,713 at
December 31, 2002 and 2001, respectively.
Lease: The Bank leases a facility from a partnership which includes directors of
the Company. The lease commenced in May 2001 and has an initial term of 24
months. Annual lease expense is set at $30,000. The Bank has an option to renew
at the end of the term for an additional 24 months at annual lease expense of
$33,000.
Note 23 - Litigation
While the Company and its subsidiaries are party to various legal proceedings
arising from the ordinary course of business, management believes after
consultation with legal counsel that there are no proceedings threatened or
pending against the Company that will, individually or in the aggregate, have a
material adverse effect on the business or financial condition of the Company.
61
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 24 - Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities: For securities and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans: For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Accrued Interest Receivable: The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposit of similar remaining maturities.
Accrued Interest Payable: The carrying amount of accrued interest payable
approximates its fair value.
Short-term Borrowings: The fair value of short-term borrowings, including
securities sold under agreements to repurchase, is estimated to be approximately
the same as the carrying amount.
Long-term Debt: Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of existing debt.
Commitments to Extend Credit, Letters of Credit, and Financial Guarantees
Written: The fair value of commitments and letters of credit is estimated to be
approximately the same as the notional amount of the related commitment.
[The remainder of this page intentionally left blank]
62
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 24 - Fair Value of Financial Instruments - Continued
The estimated fair values of the Company's financial instruments as of December
31 are as follows:
2002 2001
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Financial assets
Cash and short-term investments.................. $ 30,857 $ 30,857 $ 7,558 $ 7,558
Securities....................................... 40,375 40,375 49,394 49,394
Loans............................................ 298,063 299,334 250,569 250,556
Accrued interest receivable...................... 2,241 2,241 2,499 2,499
------------ ------------ ------------ ------------
Total Financial Assets........................ $ 371,536 $ 372,807 $ 310,020 $ 310,007
============ ============ ============ ============
Financial Liabilities
Deposits......................................... $ 316,283 $ 319,075 $ 264,028 $ 267,934
Short-term borrowings............................ 5,929 5,929 3,665 3,665
Accrued interest payable......................... 976 976 1,267 1,267
Long-term debt................................... 34,736 36,782 29,654 29,985
------------ ------------ ------------ ------------
Total Financial Liabilities................... $ 357,924 $ 362,762 $ 298,614 $ 302,851
============ ============ ============ ============
Unrecognized financial instruments
Commitments to extend credit..................... $ 35,890 $ 35,890 $ 34,084 $ 34,084
Standby letters of credit........................ 1,320 1,320 1,311 1,311
------------ ------------ ------------ ------------
Total Unrecognized Financial
Instruments................................. $ 37,210 $ 37,210 $ 35,395 $ 35,395
============ ============ ============ ============
[The remainder of this page intentionally left blank]
63
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 25 - Condensed Parent Information
Statements of Financial Condition
December 31,
----------------------------------
2002 2001
--------------- ---------------
Assets
Cash and due from banks...................................................... $ 5,343 $ 196,123
Investment in Subsidiaries (equity method) eliminated upon consolidation..... 29,828,837 25,177,931
Other assets................................................................. 385,109 65,677
--------------- ---------------
Total Assets............................................................... $ 30,219,289 $ 25,439,731
=============== ===============
Liabilities and Shareholders' Equity
Note payable................................................................. $ 4,600,000 $ 4,600,000
Other liabilities............................................................ -- 248,541
--------------- ---------------
Total Liabilities.......................................................... 4,600,000 4,848,541
Total Shareholders' Equity................................................. 25,619,289 20,591,190
--------------- ---------------
Total Liabilities and Shareholders' Equity................................. $ 30,219,289 $ 25,439,731
=============== ===============
Statements of Income
Years ended December 31,
----------------------------------------------------
2002 2001 2000
---------------- -------------- --------------
Income
Interest................................................... $ -- $ -- $ 4,496
Dividends from subsidiaries - eliminated upon consolidation -- 250,000 700,000
---------------- -------------- --------------
-- 250,000 704,496
Expenses
Interest................................................... 205,218 319,067 397,866
Other expenses............................................. 496,725 490,156 417,772
---------------- -------------- --------------
701,943 809,223 815,638
---------------- -------------- --------------
Loss before income taxes and equity in undistributed
earnings of subsidiaries................................... (701,943) (559,223) (111,142)
Income tax benefits........................................... 257,277 307,196 244,364
---------------- -------------- --------------
Earnings (loss) before equity in undistributed earnings
of subsidiaries............................................ (444,666) (252,027) 133,222
Equity in undistributed earnings of subsidiaries.............. 3,112,674 2,790,125 1,496,209
---------------- -------------- --------------
Net Income............................................... $ 2,668,008 $ 2,538,098 $ 1,629,431
================ ============== ==============
64
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 25 - Condensed Parent Information - Continued
Statements of Cash Flow
Years ended December 31,
----------------------------------------------------
2002 2001 2000
---------------- -------------- --------------
Operating Activities
Net Income................................................. $ 2,668,008 $ 2,538,098 $ 1,629,431
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income of subsidiaries........... (3,112,674) (2,790,125) (1,496,209)
Deferred tax expense (benefit)........................... -- -- 76,618
Increase (decrease) in accrued interest payable.......... -- (108,739) 108,739
Other.................................................... (272,079) 224,262 179,993
---------------- -------------- --------------
Net Cash Provided By (Used In) Operating Activities.... (716,745) (136,504) 498,572
---------------- -------------- --------------
Investing Activities
Capital injection in subsidiaries.......................... (1,150,000) -- (4,400,000)
---------------- -------------- --------------
Net Cash Used In Investing Activities.................. (1,150,000) -- (4,400,000)
---------------- -------------- --------------
Financing Activities
Proceeds from issuance of long-term debt................... -- -- 4,600,000
Repayment of long-term debt................................ -- -- (3,600,000)
Proceeds from issuance of common stock..................... 889,260 319,689 4,662,185
Purchases of treasury stock................................ -- -- (1,827,205)
Proceeds from issuance of treasury stock................... 786,705 -- --
---------------- -------------- --------------
Net Cash Provided By Financing Activities.............. 1,675,965 319,689 3,834,980
---------------- -------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents.......... (190,780) 183,185 (66,448)
Cash and Cash Equivalents at Beginning of Year................ 196,123 12,938 79,386
---------------- -------------- --------------
Cash and Cash Equivalents at End of Year...................... $ 5,343 $ 196,123 $ 12,938
================ ============== ==============
Cash paid during the year for:
Interest................................................... $ 205,218 $ 427,806 $ 289,127
65
APPALACHIAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 26 - Quarterly Results of Operations (Unaudited)
Selected quarterly results of operations for the four quarters ended December 31
are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------- ------------- ------------- ------------- ----------------
(In Thousands Except Per Share Data)
2002:
Total interest income.............. $ 5,455 $ 5,614 $ 5,883 $ 5,962 $ 22,914
Total interest expense............. 2,890 2,825 2,827 2,883 11,425
Provision for loan losses.......... 146 216 306 360 1,028
Net interest income after
provision for loan losses....... 2,419 2,573 2,750 2,719 10,461
Securities gains (losses).......... 20 7 1 258 286
Total noninterest income........... 602 721 881 425 2,629
Total noninterest expense.......... 2,095 2,594 2,605 2,408 9,702
Income tax expense................. 295 245 351 115 1,006
Net income......................... 651 462 676 879 2,668
Per Common Share:
Basic earnings.................. 0.22 0.16 0.23 0.29 0.90
Diluted earnings................ 0.20 0.14 0.21 0.29 0.84
2001:
Total interest income.............. $ 6,178 $ 6,128 $ 6,258 $ 6,199 $ 24,763
Total interest expense............. 3,648 3,386 3,389 3,252 13,675
Provision for loan losses.......... 366 126 326 476 1,294
Net interest income after
provision for loan losses....... 2,164 2,616 2,543 2,471 9,794
Securities gains (losses).......... 94 24 (19) 48 147
Total noninterest income........... 440 270 231 450 1,391
Total noninterest expense.......... 1,832 1,859 1,940 2,200 7,831
Income tax expense................. 262 292 271 138 963
Net income......................... 604 759 544 631 2,538
Per Common Share:
Basic earnings.................. 0.21 0.27 0.19 0.22 0.89
Diluted earnings................ 0.19 0.24 0.18 0.21 0.82
2000:
Total interest income.............. $ 4,742 $ 5,266 $ 6,087 $ 5,875 21,970
Total interest expense............. 2,835 3,214 3,689 3,587 13,325
Provision for loan losses.......... 300 350 160 112 922
Net interest income after
provision for loan losses....... 1,607 1,702 2,238 2,176 7,723
Securities gains (losses).......... (7) -- 1 (5) (11)
Total noninterest income........... 245 245 368 312 1,170
Total noninterest expense.......... 1,386 1,519 1,805 1,671 6,381
Income tax expense................. 148 45 218 461 872
Net income......................... 311 383 584 351 1,629
Per Common Share:
Basic earnings.................. 0.12 0.14 0.21 0.12 0.59
Diluted earnings................ 0.11 0.13 0.19 0.12 0.55
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the heading "Election of Directors" and the
subheadings "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement (the "2003 Proxy Statement"),
relating to the annual meeting of shareholders of the Company, scheduled to be
held on May 20, 2003, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the heading "Compensation of Executive
Officers and Directors" in the 2003 Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the heading "Outstanding Voting Securities
of the Company and Principal Holders Thereof" in the 2003 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Relationships and
Transactions" in the 2003 Proxy Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company has evaluated the effectiveness of its disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. The evaluation
was performed under the supervision and with the participation of
management, including the chief executive officer and the chief
financial officer, within 90 days prior to the date of the filing of
this annual report. Based on this evaluation, the chief executive
officer and chief financial officer have concluded that the disclosure
controls and procedures are effective in ensuring that all material
information required to be disclosed in this annual report has been
communicated to them in a manner appropriate to allow timely decisions
regarding required disclosure.
(b) Changes in internal controls.
Subsequent to the date of the chief executive officer's and the chief
financial officer's evaluation, there were no significant changes in
internal controls or other factors that could significantly affect
internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
67
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following consolidated financial statements are located in ITEM 8 of
this Report:
Independent Auditors' Report
Consolidated Statements of Financial Conditionas of December 31, 2002 and
2001
Consolidated Statements of Income for the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
Quarterly Results (Unaudited)
2. Financial Statement Schedules.
Schedules to the consolidated financial statements are omitted, as the
required information is not applicable.
3. Exhibits.
The following exhibits are filed with this Report:
Exhibit Number Description of Exhibit Page
3.1 Articles of Incorporation of the Company (included as Exhibit 3.1 to the
Company's Registration Statement on Form 8-A, dated September 16, 1996
(File No. 000-21383), previously filed with the Commission and incorporated
herein by reference).
3.2 Bylaws of the Company (included as Exhibit 3.2 to the Company's
Registration Statement on Form 8-A, dated September 16, 1996 (File No.
000-21383), previously filed with the Commission and incorporated herein by
reference).
10.1 1997 Directors' Non-Qualified Stock Option Plan (included as Exhibit 10.1
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996 (File No. 000-21383) and incorporated herein by
reference).*
10.2 1997 Employee Incentive Stock Incentive Plan (included as Exhibit 10.2 to
the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 (File No. 000-21383) and incorporated herein by reference).*
10.3 Adoption Agreement for the Appalachian Bancshares, Inc. Employees' Savings
& Profit Sharing Plan (the "Plan") (filed as Exhibit 10.1 to the Plan's
Annual Report on Form 11-K for the fiscal year ended December 31, 2001
(File No. 001-15571) and incorporated herein by reference).
10.4 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. (filed as Exhibit 10.2 to the Plan's
Annual Report on Form 11-K for the fiscal year ended December 31, 2001
(File No. 001-15571) and incorporated herin by reference).
68
10.5 Form of Deferred Fee Agreement between Gilmer County Bank and certain
directors and executive officers, with addendum (filed as Exhibit 10.6 to
the Company's Quarterly Report on Form 10-QSB for the period ended June 30,
1997 (File No. 000-21383) and incorporated herein by reference).
10.6 Loan and Stock Pledge Agreement, dated as of April 3, 2002, between the
Company and Crescent Bank and Trust Company (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the period ended September
30, 2002 (File No. 001-15571) and incorporated herein by reference).
10.7 Promissory Note, dated April 3, 2002, issued by the Company to Crescent
Bank and Trust Company (filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB for the period ended September 30, 2002 (File No.
001-15571) and incorporated herein by reference).
10.8 Form of Data Processing Agreement by and between Appalachian Community Bank
and Fiserv Solutions, Inc., effective as of July 26, 2002 (filed as Exhibit
10.3 to the Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 2002 (File No. 001-15571) and incorporated herein by
reference).
11 Statement re: Computation of Per Share Earnings 73
12 Statement re: Computation of Ratios 73
21 Subsidiaries of the Registrant 74
23 Consent of Schauer, Taylor, Cox, Vise, Morgan & Fowler, P.C. 75
24 Power of Attorney 76
99.1 Chief Executive Officer and Chief Financial Officer - Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 77
* The referenced exhibit is a compensatory contract, plan or arrangement.
(b) There were no reports on Form 8-K filed by the Company during the fourth
quarter of 2002.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March, 2003.
APPALACHIAN BANCSHARES, INC.
By: /s/ Tracy R. Newton
--------------------------------------
Tracy R. Newton
President and Chief Executive Officer
By: /s/ Alan R. May
--------------------------------------
Alan R. May
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Tracy R. Newton Date: March 28, 2003
- --------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director
/s/ Alan S. Dover Date: March 28, 2003
- --------------------------------------------
Alan S. Dover, Director
/s/ Charles A. Edmondson Date: March 28, 2003
- --------------------------------------------
Charles A. Edmondson, Director
/s/ Roger E. Futch Date: March 28, 2003
- --------------------------------------------
Roger E. Futch, Director
/s/ Joseph C. Hensley Date: March 28, 2003
- --------------------------------------------
Joseph C. Hensley, Director
/s/ Frank E. Jones Date: March 28, 2003
- --------------------------------------------
Frank E. Jones, Director
/s/ J. Ronald Knight Date: March 28, 2003
- --------------------------------------------
J. Ronald Knight, Director
/s/ P. Joe Sisson Date: March 28, 2003
- --------------------------------------------
P. Joe Sisson, Director
/s/ Kenneth D. Warren Date: March 28, 2003
- --------------------------------------------
Kenneth D. Warren, Director
70
CERTIFICATIONS
I, Tracy R. Newton, certify that:
1. I have reviewed this annual report on Form 10-K of Appalachian Bancshares,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 28, 2003
/s/ Tracy R. Newton
- -------------------------------
Tracy R. Newton
Chief Executive Officer
71
CERTIFICATIONS
I, Alan R. May, certify that:
1. I have reviewed this annual report on Form 10-K of Appalachian Bancshares,
Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 28, 2003
/s/ Alan R. May
- -------------------------------
Alan R. May
Chief Financial Officer
72
EXHIBIT 11 - STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
Appalachian Bancshares, Inc.
Computation of Net Income Per Common Share
The following tabulation presents the calculation of basic and diluted
earnings per common share for the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
---------------- --------------- ---------------
Basic Earnings Per Share:
Net income................................................ $ 2,668,008 $ 2,538,098 $ 1,629,431
================ =============== ===============
Earnings on common shares................................. $ 2,668,008 $ 2,538,098 $ 1,629,431
================ =============== ===============
Weighted average common shares outstanding - basic........ 2,979,806 2,859,693 2,755,255
================ =============== ===============
Basic earnings per common share........................... $ 0.90 $ 0.89 $ 0.59
=============== =============== ===============
Diluted Earnings Per Share:
Net income................................................ $ 2,668,008 $ 2,538,098 $ 1,629,431
================ =============== ===============
Weighted average common shares
outstanding............................................. 2,979,806 2,859,693 2,755,255
Net effect of the assumed exercise of stock
options - based on the treasury stock method
using average market price for the year................. 209,302 221,593 213,671
---------------- --------------- ---------------
Weighted average common shares outstanding -
diluted................................................. 3,189,108 3,081,276 2,968,926
================ =============== ===============
Diluted earnings per common share......................... $ 0.84 $ 0.82 $ 0.55
=============== =============== ===============
Exhibit 12 - Statements Re: Computation of Ratios
Appalachian Bancshares, Inc.
Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
(Dollars in thousands)
Pretax income................................................. $ 3,674 $ 3,501 $ 2,501
Add fixed charges:
Interest on deposits....................................... 9,353 11,295 10,919
Interest on borrowings..................................... 2,073 2,380 2,406
Portion of rental expense representing interest expense.... 23 17 10
-------------- ------------- --------------
Total fixed charges...................................... 11,449 13,692 13,335
-------------- ------------- --------------
Income before fixed charges................................... $ 15,123 $ 17,193 $ 15,836
============== ============= ==============
Pretax income................................................. $ 3,674 $ 3,501 $ 2,501
Add fixed charges (excluding interest on deposits):
Interest on borrowings..................................... 2,073 2,380 2,406
Portion of rental expense representing interest expense.... 23 17 10
-------------- ------------- --------------
Total fixed charges...................................... 2,096 2,397 2,416
-------------- ------------- --------------
Income before fixed charges (excluding interest on
deposits).................................................. $ 5,770 $ 5,898 $ 4,917
============== ============= ==============
Ratio of Earnings to Fixed Charges
Including interest on deposits............................. 1.32 1.26 1.29
Excluding interest on deposits............................. 2.75 2.46 2.04
73
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries - Direct/wholly-owned State of Incorporation
- ---------------------------------- ---------------------------
Appalachian Community Bank Georgia
Also doing business under the registered trade name "Gilmer County Bank"
Subsidiaries - Indirect/wholly-owned by Appalachian Community Bank
- ------------------------------------------------------------------
Appalachian Information Management, Inc. Georgia
74
EXHIBIT 23 - CONSENT OF SCHAUER TAYLOR COX VISE MORGAN & FOWLER, P.C.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8.
/S/ Schauer Taylor Cox Vise Morgan & Fowler, P.C.
SCHAUER TAYLOR COX VISE MORGAN & FOWLER, P.C.
Birmingham, Alabama
March 28, 2003
75
Exhibit 24 - POWER OF ATTORNEY
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tracy R. Newton, his true and lawful
attorney-in-fact, as agent with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacity, to sign any
or all amendments to this Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents in full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as they might or could be in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, and their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Directors Date
- ---------------------------------------- -----------------------------------
/s/ Tracy R. Newton Date: March 28, 2003
- --------------------------------------------
Tracy R. Newton, President, Chief
Executive Officer and Director
[Principal Executive Officer]
/s/ Alan S. Dover Date: March 28, 2003
- --------------------------------------------
Alan S. Dover, Director
/s/ Charles A. Edmondson Date: March 28, 2003
- --------------------------------------------
Charles A. Edmondson, Director
/s/ Roger E. Futch Date: March 28, 2003
- --------------------------------------------
Roger E. Futch, Director
/s/ Joseph C. Hensley Date: March 28, 2003
- --------------------------------------------
Joseph C. Hensley, Director
/s/ Frank E. Jones Date: March 28, 2003
- --------------------------------------------
Frank E. Jones, Director
/s/ J. Ronald Knight Date: March 28, 2003
- --------------------------------------------
J. Ronald Knight, Director
/s/ P. Joe Sisson Date: March 28, 2003
- --------------------------------------------
P. Joe Sisson, Director
/s/ Kenneth D. Warren Date: March 28, 2003
- --------------------------------------------
Kenneth D. Warren, Director
76
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 Annual Report of Appalachian Bancshares, Inc. (the
"Company") on Form 10-K, for the year-ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Tracy R. Newton, Chief Executive Officer of the Company, and Alan
R, May, Chief Financial Officer of the Company, 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.
By: /s/ Tracy R. Newton
-----------------------------
Tracy R. Newton
Chief Executive Officer
By: /s/ Alan R. May
-----------------------------
Alan R. May
Chief Financial Officer
Date: March 28, 2003
77