SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 000-21383
APPALACHIAN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2242407
---------------------- -------------------------------
(State of Incorporation) (IRS Employer Identification No.)
829 Industrial Boulevard
Ellijay, Georgia 30540
(Address of principal executive office)
(706) 276-8000
----------------------------------------------
(Issuer's telephone number, including area code)
No Change
------------------------------------------------------------------------------
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act - Rule 12b-2).
Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value Outstanding at July 31, 2003: 3,329,548 Shares
Form 10-Q
APPALACHIAN BANCSHARES, INC.
June 30, 2003
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 2003
and December 31, 2002......................................................................... 1
Consolidated Statements of Income For the Three Months and Six Months
Ended June 30, 2003 and 2002.................................................................. 2
Consolidated Statements of Comprehensive Income For the Three Months
and Six Months Ended June 30, 2003 and 2002................................................... 3
Consolidated Statements of Cash Flows For the Six Months Ended
June 30, 2003 and 2002........................................................................ 4
Notes to Consolidated Financial Statements...................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation...................................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 18
Item 4. Controls and Procedures................................................................... 21
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 24
Item 6. Exhibits and Reports on Form 8-K.......................................................... 27
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
2003 December 31,
(Unaudited) 2002
Assets --------------- ----------------
Cash and due from banks...................................................... $ 10,636,301 $ 14,701,857
Interest bearing deposits with other banks................................... 2,001,742 8,398,840
Federal funds sold........................................................... 6,621,000 7,756,000
--------------- ----------------
Cash and Cash Equivalents............................................. 19,259,043 30,856,697
Securities available-for-sale................................................ 52,479,515 40,374,902
Loans, net of unearned income................................................ 312,187,361 298,063,055
Allowance for loan losses.................................................... (3,346,201) (3,237,898)
--------------- ----------------
Net Loans............................................................. 308,841,160 294,825,157
Premises and equipment, net.................................................. 8,725,275 8,771,352
Accrued interest............................................................. 2,176,423 2,240,920
Cash surrender value on life insurance....................................... 2,537,829 2,483,243
Intangibles, net............................................................. 2,040,016 2,081,264
Other assets................................................................. 2,222,025 2,390,550
--------------- ----------------
Total Assets.......................................................... $ 398,281,286 $ 384,024,085
=============== ================
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing..................................................... $ 22,804,200 $ 21,897,058
Interest-bearing........................................................ 305,213,088 294,385,698
--------------- ----------------
Total Deposits........................................................ 328,017,288 316,282,756
Short-term borrowings..................................................... 5,131,651 5,928,624
Accrued interest.......................................................... 773,590 976,156
Long-term debt............................................................ 33,807,286 34,735,714
Other liabilities......................................................... 1,091,822 481,546
--------------- ----------------
Total Liabilities..................................................... 368,821,637 358,404,796
--------------- ----------------
Shareholders' Equity
Common stock, par value $0.01 per share, 20,000,000 shares authorized,
3,401,860 shares issued at June 30, 2003,
3,327,160 shares issued at December 31, 2002............................ 34,019 33,272
Paid-in capital........................................................... 17,511,611 16,428,767
Retained earnings......................................................... 11,769,332 10,495,901
Accumulated other comprehensive income: net unrealized
holding gains on securities available-for-sale, net of
deferred income tax..................................................... 789,583 449,050
Treasury stock, at cost (72,312 and 200,553 shares at June 30,
2003 and at December 31, 2002, respectively)............................ (644,896) (1,787,701)
--------------- ----------------
Total Shareholders' Equity............................................ 29,459,649 25,619,289
--------------- ----------------
Total Liabilities and Shareholders' Equity............................ $ 398,281,286 $ 384,024,085
=============== ================
See notes to the consoildated financial statements
1
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------------
2003 2002 2003 2002
------------- ------------- -------------- ----------------
Interest Income
Interest and fees on loans............. $ 5,261,118 $ 4,936,181 $ 10,378,816 $ 9,719,704
Interest on investment securities:
Taxable securities................... 217,317 464,526 524,723 933,352
Nontaxable securities................ 177,617 197,451 357,034 375,606
Interest on deposit in other banks..... 4,549 1,447 28,712 2,393
Interest on federal funds sold......... 12,979 13,263 29,123 37,221
------------- ------------- -------------- ----------------
Total Interest Income.............. 5,673,580 5,612,868 11,318,408 11,068,276
Interest Expense
Interest on deposits................... 1,909,119 2,331,235 3,944,003 4,732,069
Interest on federal funds purchased and
securities sold under agreements
to repurchase........................ 18,992 23,010 43,895 35,428
Interest expense on long-term debt..... 306,000 470,842 661,955 947,664
------------- ------------- -------------- ----------------
Total Interest Expense............. 2,234,111 2,825,087 4,649,853 5,715,161
Net Interest Income....................... 3,439,469 2,787,781 6,668,555 5,353,115
Provision for loan losses................. 360,000 216,000 720,000 362,000
Net Interest Income After Provision for
Loan Losses............................ 3,079,469 2,571,781 5,948,555 4,991,115
Noninterest Income
Customer service fees.................. 202,651 325,070 390,758 546,087
Insurance commissions.................. 5,719 24,174 46,712 43,416
Mortgage origination fees.............. 411,321 200,119 701,620 412,190
Other operating income................. 204,598 173,042 406,373 321,956
Investment securities gains (losses)... -- 7,150 (16,978) 27,584
------------- ------------- -------------- ----------------
Total Noninterest Income........... 824,289 729,555 1,528,485 1,351,233
Noninterest Expenses
Salaries and employee benefits......... 1,332,035 1,232,029 2,625,728 2,298,446
Occupancy expense...................... 158,334 143,770 314,609 283,757
Furniture and equipment expense........ 237,337 213,457 487,933 424,623
Other operating expenses............... 1,238,557 1,004,918 2,228,640 1,682,531
------------- ------------- -------------- ----------------
Total Noninterest Expenses......... 2,966,263 2,594,174 5,656,910 4,689,357
Income before income taxes................ 937,495 707,162 1,820,130 1,652,991
Income tax expense........................ 291,000 245,062 547,000 540,062
------------- ------------- -------------- ----------------
Net Income................................ $ 646,495 $ 462,100 $ 1,273,130 $ 1,112,929
============= ============= ============== ================
Earnings Per Common Share
Basic.................................. $ 0.20 $ 0.16 $ 0.39 $ 0.38
Diluted................................ 0.19 0.14 0.37 0.35
Weighted Average Shares Outstanding
Basic.................................. 3,302,113 2,974,962 3,235,501 2,952,253
Diluted................................ 3,468,764 3,187,858 3,411,976 3,202,549
See notes to the consoildated financial statements
2
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------------
2003 2002 2003 2002
------------- ------------- -------------- ----------------
Net Income.................................. $ 646,495 $ 462,100 $ 1,273,130 $ 1,112,929
Other comprehensive, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains arising
during the period.................... 717,951 909,868 498,981 584,213
Reclassification adjustments for (gains)
losses included in net income........ -- (7,150) 16,978 (27,584)
------------- ------------- -------------- ----------------
Net unrealized gains................. 717,951 902,718 515,959 556,629
Income tax expense related to
items of other comprehensive income.... (244,103) (306,924) (175,426) (189,254)
------------- ------------- -------------- ----------------
Other comprehensive income.................. 473,848 595,794 340,533 367,375
------------- ------------- -------------- ----------------
Comprehensive Income........................ $ 1,120,343 $ 1,057,894 $ 1,613,663 $ 1,480,304
============= ============= ============== ================
See notes to the consoildated financial statements
3
APPALACHIAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2003 2002
--------------- ----------------
Operating Activities
Net income................................................................ $ 1,273,130 $ 1,112,929
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................................... 720,000 362,000
Net depreciation and amortization....................................... 429,448 344,771
Realized investment security (gains) losses............................. 16,978 (27,584)
Deferred tax benefit.................................................... -- (82,000)
Decrease in accrued interest receivable................................. 64,497 135,830
Increase in cash surrender value of life insurance...................... (54,586) (65,605)
Decrease in accrued interest payable.................................... (202,566) (232,065)
Other................................................................... 836,674 280,657
--------------- ----------------
Net Cash Provided by Operating Activities............................. 3,083,575 1,828,933
--------------- ----------------
Investing Activities
Net increase of securities available-for-sale............................. (11,605,631) (3,609,431)
Net increase in loans to customers........................................ (15,344,003) (27,217,294)
Capital expenditures, net................................................. (342,121) (1,706,593)
Proceeds from the disposition of foreclosed real estate................... 375,000 --
--------------- ----------------
Net Cash Used in Investing Activities................................. (26,916,755) (32,533,318)
--------------- ----------------
Financing Activities
Net increase in demand deposits, NOW accounts,
and savings accounts.................................................... 6,494,412 24,353,909
Net increase in certificates of deposit................................... 5,240,120 648,223
Net increase (decrease) in short-term borrowings.......................... (796,973) 2,932,891
Proceeds from issuance of common stock.................................... 302,800 456,801
Proceeds (repayments)from long-term debt.................................. (928,428) 6,178,572
Proceeds from the sale of treasury stock.................................. 1,923,595 --
--------------- ----------------
Net Cash Provided by Financing Activities............................. 12,235,526 34,570,396
--------------- ----------------
Net Increase (decrease) in Cash and Cash Equivalents......................... (11,597,654) 3,866,011
Cash and Cash Equivalents at Beginning of Period............................. 30,856,697 7,558,258
--------------- ----------------
Cash and Cash Equivalents at End of Period................................... $ 19,259,043 $ 11,424,269
=============== ================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest................................................................ $ 4,852,419 $ 5,947,226
Income taxes............................................................ 50,000 408,106
See notes to the consoildated financial statements
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Note A - Basis of Presentation
The consolidated financial statements include the accounts of Appalachian
Bancshares, Inc. (the "Company")(a Georgia corporation) and its wholly-owned
subsidiaries: Appalachian Community Bank and Appalachian Information Management,
Inc. ("AIM") (collectively the "Bank"). During 2001, the two previous bank
subsidiaries, Gilmer County Bank and Appalachian Community Bank (formerly known
as First National Bank of Union County) were merged. The surviving bank of
Gilmer County Bank simultaneously changed its name to Appalachian Community
Bank. AIM was formed as a wholly-owned subsidiary of the Bank to provide
in-house data services to the Bank and to offer data processing services to
other institutions; however, AIM's operations ceased on November 12, 2002. All
significant inter-company transactions and balances have been eliminated in
consolidation. Unless otherwise indicated herein, the financial results of the
Company refer to the Company and the Bank on a consolidated basis. The Bank
provides a full range of banking services to individual and corporate customers
in North Georgia and the surrounding areas. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
The consolidated statement of financial condition at December 31, 2002, has
been derived from the audited consolidated financial statements at that date,
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements for
Appalachian Bancshares, Inc. for the year ended December 31, 2002, and footnotes
thereto, included in the Company's Form 10-K, filed with the Securities and
Exchange Commission on March 31, 2003.
Note B - Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted 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
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Note B - Critical Accounting Policies - Continued
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.
Note C - Income Taxes
The effective tax rates of approximately 30 percent and 33 percent for the
six months ended June 30, 2003 and 2002 are less than the applicable statutory
rate due primarily to the effects of tax-exempt income and general business
credits.
Note D - Investment Securities
The Company applies the accounting and reporting requirements of Statement
of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This pronouncement requires that all
investments in debt securities be classified as either "held-to-maturity"
securities, which are reported at amortized cost; "trading" securities, which
are reported at fair value, with unrealized gains and losses included in
earnings; or "available-for-sale" securities, which are reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity (net of deferred tax effect).
At June 30, 2003, the Company had net unrealized gains of $1,196,338 in
available-for-sale securities, which are reflected in the presented assets and
resulted in an increase in shareholders' equity of $789,583, net of deferred tax
benefit. There were no trading securities. The net increase in shareholders'
equity as a result of the SFAS No. 115 adjustment from December 31, 2002 to June
30, 2003, was $340,553.
Note E - 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 financial statements and related footnotes
provide details related to segment reporting.
Note F - Goodwill
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. The statement requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead an entity must
perform an assessment of whether these assets are impaired as of the date of
adoption and test for impairment at least annually in accordance with the
provisions of the
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Note F - Goodwill - continued
statement. The statement also required that intangible assets with determinable
lives be amortized. The Company adopted SFAS No. 142 on January 1, 2002. The
initial assessment of the Company's intangible assets as of January 1, 2002,
indicated that no impairment of values existed at that date.
Acquired goodwill and other intangible assets at June 30, 2003, are
detailed as follows:
As of June 30, 2003
-------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------------- --------------- --------------
Identifiable amortizing assets................................. $ 165,000 $ 116,875 $ 48,125
Nonamortizing goodwill......................................... 2,335,858 343,967 1,991,891
-------------- --------------- --------------
Total acquired intangible asset................................ $ 2,500,858 $ 460,842 $ 2,040,016
============== =============== ==============
Aggregate amortization expense for the six months ended June 30, 2003, was
$41,250. Aggregate annual amortization expense estimated for the years ending
December 31, 2003 and 2004 is $82,500 and $6,875, respectively.
Note G - Stock Options
The Company has long-term incentive stock option plans and an employee
stock purchase plan. The Company accounts for those plans under the recognition
and measurement principles of APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations using the intrinsic value based method,
as permitted by SFAS No. 123, Accounting for Stock-based Compensation. 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. No stock-based employee compensation cost is
reflected in net income for these plans.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Note G - Stock Options - Continued
Pro forma information regarding net income and earnings per share is
presented as if the Company had accounted for its employee stock options under
the fair value method, as prescribed by SFAS No. 123. The fair value for these
options was estimated at the dates of grant using the Black-Scholes
option-pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
The Company has issued incentive stock options to certain key employees, of
which options 132,000 are outstanding at June 30, 2003, at exercise prices
ranging from $4.00 to $15.00 (the fair market values on the grant dates). These
options vest over a five-year time period at 20% on each anniversary of the
grant date and expire ten years from the grant date.
The Company has also issued nonqualified stock options primarily to
directors of the Company, of which options 250,400 are outstanding at June 30,
2003, at an exercise price of $4.00 to $6.00 (the fair market value on the grant
dates). These options vest over a five-year time period at 20% on each
anniversary of the grant date and expire ten years from the grant date.
The Company's actual and pro forma information follows:
Six Months Ended June 30, Three Months Ended June 30,
------------------------------------- --------------------------------------
2003 2002 2003 2002
----------------- ----------------- ------------------- -----------------
Net Income
As Reported......................... $ 1,273,130 $ 1,112,929 $ 646,495 $ 462,100
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax............ (26,450) (70,726) (7,241) $ (34,240)
----------------- ----------------- ------------------- -----------------
Pro forma net income................ $ 1,246,680 $ 1,042,203 $ 639,254 $ 391,860
================= ================= =================== =================
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Note G - Stock Options - Continued
Six Months Ended June 30, Three Months Ended June 30,
------------------------------------- --------------------------------------
2003 2002 2003 2002
----------------- ----------------- ------------------- ------------------
Basic earnings per share:
As Reported......................... $ 0.39 $ 0.38 $ 0.20 $ 0.16
================ ================ =================== =================
Pro forma........................... $ 0.39 $ 0.35 $ 0.19 $ 0.13
================ ================ =================== =================
Diluted earnings per share:
As Reported......................... $ 0.37 $ 0.35 $ 0.19 $ 0.14
================ ================ =================== =================
Pro forma........................... $ 0.37 $ 0.33 $ 0.18 $ 0.12
================ ================ =================== =================
Note H - Recently Passed Legislation
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.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Note I - Subsequent Events
A 10% stock dividend was declared by the Board of Directors on May 14,
2003, which dividend was distributed on July 1, 2003, to shareholders of record
as of the close of business on May 27, 2003. Furthermore, in lieu of
distributing fractional shares of common stock, created as a result of the stock
dividend, the Company paid to shareholders of record the cash equivalent of such
fractional shares, based on the fair market value of the common stock.
The Company has recently received approval from the Federal Reserve to
issue trust-preferred securities. The Company expects to issue $6 million in
floating rate securities before September 30, 2003. The issuance of the
securities will make the Company "well capitalized" according to regulatory
guidelines.
Note J - Commitments and Contingencies
Standby letters of credit are commitments issued by the Company to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions, and expire in
decreasing amounts with terms ranging from one to four years. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The following represents the Company's commitments to extend credit and
standby letters of credit as of June 30, 2003 and December 31, 2002:
Period Ended
-----------------------------------
June 30, December 31,
2003 2002
---------------- -----------------
Commitments to extend credit................................................. $ 48,337,000 $ 35,890,000
Standby and commercial letters of credit..................................... 1,326,000 1,320,000
---------------- -----------------
Total commitments and contingencies.......................................... $ 49,663,000 $ 37,210,000
================ =================
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10
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Certain of the statements made in this Report, 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.
Discussion
This discussion is intended to assist in an understanding of the Company's
financial condition and results of operations. This analysis should be read in
conjunction with the financial statements and related notes appearing in Item 1
of this Report on Form 10-Q and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
2002, appearing in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 2003.
The Company's operations are primarily conducted through the Bank.
Management continuously monitors the financial condition of the Bank in order to
protect depositors, increase retained earnings and protect current and future
earnings. Significant items affecting the Company's financial condition and
results of operations are discussed in detail below.
In August 2002, management decided to discontinue operations of AIM, which
operations ceased 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. Management
anticipates that the discontinuance of AIM's operations will not have a material
effect on the Company's operations or financial condition.
11
APPALACHIAN BANCSHARES, INC.
June 30, 2003
FINANCIAL CONDITION
June 30, 2003 compared to December 31, 2002
Loans
Loans comprised the largest single category of the Company's earning assets
on June 30, 2002. Loans, net of unearned income and allowance for loan losses,
were 77.5 percent of total assets at June 30, 2003. Total net loans were
$308,841,160 at June 30, 2003, representing a 4.75% increase from $294,825,157
at December 31, 2002. This increase reflects the continued increase in loan
demand for the Bank's respective market areas coupled with an increase in the
Bank's market share for their respective areas.
Investment Securities and Other Earning Assets
Investment securities at June 30, 2003, were $52,479,515 compared with
$40,374,902 at December 31, 2002, reflecting a 29.98% increase of $12,104,613.
Federal funds sold were $6,621,000 at June 30, 2003, compared to the December
31, 2002 total of $7,756,000, a 14.6% decrease. The investment securities
portfolio is used to make various term investments, to provide a source of
liquidity and to serve as collateral to secure certain government deposits.
Federal funds sold are maintained, as a tool in managing the daily cash needs of
the Bank.
Asset Quality
Asset quality is measured by three key ratios. The ratio of the allowance
for loan losses to total nonperforming assets (defined as nonaccrual loans,
loans past due 90 days or greater, restructured loans, nonaccruing securities,
and other real estate) increased from 0.53% at December 31, 2002 to 1.07% at
June 30, 2003. Total non-performing assets at June 30, 2003, were $3.1 million,
which consisted of $157 thousand in consumer loans, $218 thousand in commercial
and industrial loans, $1.5 million in loans secured by real estate and $1.2
million of foreclosed real estate. Nonperforming assets at December 31, 2002,
were $6.143 million. The ratio of total nonperforming assets to total assets
decreased from 1.60% at December 31, 2002 to 0.79% at June 30, 2003, and the
ratio of nonperforming loans to total loans decreased from 1.73% at December 31,
2002 to 0.60% at June 30, 2003. The decrease in nonperforming assets is due to
two commercial customers that were identified during 2002 and were handled by
management. Management is closely monitoring the loan portfolio to identify any
potential loan quality issues.
Deposits
Total deposits at June 30, 2003, were $328,017,288, an increase of
$11,734,532 or 3.7 % over total deposits of $316,282,756 at year-end 2002.
Deposits are the Company's primary source of funds with which to support its
earning assets. Noninterest-bearing deposits increased $907,142 or 4.14% from
year-end 2002 to $22,804,200 at June 30, 2003, and interest-bearing deposits
increased $10,827,390 or 3.7% during the same period to $305,213,088.
12
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase totaled $5,131,651 at June
30, 2003, a $796,973 decrease from the December 31, 2002 total of $5,928,624.
The total of securities sold under agreements to repurchase is associated with
the cash flow needs of the Bank's corporate customers that participate in
repurchase agreements.
Shareholders' Equity
Shareholders' equity increased $3,840,360 from $25,619,289 at December 31,
2002 to $29,459,649 at June 30, 2003. This increase was mainly attributable to
net income of $1,273,130 and the sale of 128,241 shares of treasury stock for a
total of $1,923,595.
Liquidity Management
Liquidity is defined as the ability of a company to convert assets into
cash or cash equivalents without significant loss. Liquidity management involves
maintaining the Bank's ability to meet the day-to-day cash flow requirements of
its customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, the Bank would not be able to perform its primary function as a
financial intermediary and would, therefore, not be able to meet the production
and growth needs of the communities it serves.
The objective of assets and liabilities management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its customer base,
but also to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Bank can meet the investment
objectives of the Company's shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets
both requirements. In the banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments or sales of investment and trading account securities.
Loans that mature in one year or less equaled approximately $195 million or
62.4% of the total loan portfolio at June 30, 2003, and investment securities
maturing in one year or less equaled approximately $1 thousand of the portfolio.
Other sources of liquidity include short-term investments such as federal funds
sold.
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
June 30, 2003, funds were also available through the purchase of federal funds
from correspondent commercial banks from available lines of up to an aggregate
of $16 million. Liquidity management involves the daily monitoring of the
sources and uses of funds to maintain an acceptable cash position.
To maintain and improve its liquidity position, the Bank is a member of the
Federal Home Loan Bank of Atlanta. As a member of the Federal Home Loan Bank,
the Bank is able to improve its ability to manage liquidity and reduce interest
rate risk by having a funding source to match longer-term loans. The Bank's
credit line was approximately $59 million as of June 30, 2003. At June 30, 2003,
the outstanding balance of Appalachian Community Bank's credit line was
$29,864,286.
13
APPALACHIAN BANCSHARES, INC.
June 30, 2003
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.
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 June 30, 2003, the balance on
the Term Loan was $3,943,000. 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 April 1, 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. The Company and the Bank are
subject to guidelines mandating minimum risk-based capital requirements. The
guidelines take into consideration risk factors associated with various
categories of assets, both on and off the balance sheet. Under the guidelines,
capital strength is measured in two tiers, which are used in conjunction with
risk-adjusted assets to determine the risk-based capital ratios. The Company's
Tier 1 capital, which consists of common equity, paid-in capital and retained
earnings (less intangible assets), amounted to $26.6 million at June 30, 2003.
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 $30.0 million at June 30, 2003. The Company's percentage ratios as
calculated under regulatory guidelines were 8.41% and 9.47% for Tier 1 and Total
Capital, respectively, at June 30, 2003, exceeding the minimum ratios of 4.0%
and 8.0%, respectively.
Another important indicator of capital adequacy in the banking industry is
the leverage ratio. The leverage ratio is defined as the ratio which
shareholders' equity, minus intangibles bears to total assets minus intangibles.
At June 30, 2003, the Company's leverage ratio was 6.87% exceeding the
regulatory minimum requirement of 4 percent.
DBF Capital Requirement. In addition to the capital standards imposed by
federal banking regulators, the Georgia Department of Banking and Finance (the
"DBF") imposes a 6 percent primary capital ratio. This standard is calculated as
the ratio of total equity to total assets, each as adjusted for unrealized gains
and losses on securities and allowance for loan losses. At June 30, 2003, the
capital ratio as calculated under the DBF standard for the Bank was 8.97%.
There have been no dividends during 2002 or 2003 paid by the Bank to the
Company.
The Company has recently received approval from the Federal Reserve to
issue trust-preferred securities. The Company expects to issue $6 million in
floating rate securities before September 30, 2003. The issuance of the
securities will make the Company "well capitalized" according to regulatory
guidelines.
14
APPALACHIAN BANCSHARES, INC.
June 30, 2003
RESULTS OF OPERATIONS
Six months and three months ended June 30, 2003 and 2002
Summary
Net earnings for the six months ended June 30, 2003, were $1,273,130
compared to net earnings of $1,112,929 for the same period in 2002. This 14.4%
increase in net earnings is primarily attributable to the re-pricing of
longer-term high cost certificates of deposit and a focus on reducing the
Company's cost of funds. Net interest income increased $1,315,440 (24.6%) during
the first six months of 2003 as compared to the same period in 2002; noninterest
expenses increased $967,553 (20.6%) during same period, while noninterest income
increased by $177,252 (13.1%). Total interest expense decreased $1,065,308
(18.6%) during the first six months of 2003 as compared to the same period in
2002.
Net earnings for the quarter ended June 30, 2003, were $646,495 compared to
net earnings of $462,100 for the quarter ended June 30, 2002. This represents a
39.9% increase as compared to the same period in 2002 and is a result of the
same causes noted for the six months ended June 30, 2003 and 2002. Total
interest expense decreased by $590,967 compared to the same period in 2002. Net
interest income increased $651,688 during the three months ended June 30, 2003,
as compared to the same period in 2002; noninterest expenses increased $372,089
during the same period, while noninterest income increased by $94,734.
Net Interest Income
Net interest income, the difference between interest earned on assets and
the cost of interest-bearing liabilities, is the largest component of the
Company's net income. Revenue from earning assets of the Company during the six
months ended June 30, 2003, increased $250,132 (2.26%) from the same period in
2002. Interest expense for the six months ended June 30, 2002, decreased
$1,065,308 or (18.6%) compared to the same period in 2002. The overall increase
in net interest income is a result of the Company's focus on reducing its cost
of funding.
Net interest income increased $651,688 or 23.4% during the quarter ended
June 30, 2003, as compared to the same period in 2002. An increase of $60,712 or
1.08% in revenue from earning assets coupled with a decrease in total interest
expense of $590,976 or 20.9% are the principal reasons for the increase in net
interest income for the quarter.
Provision for Loan Losses
The provision for loan losses represents the charge against current
earnings necessary to maintain the allowance for loan losses at a level which
management considers appropriate. This level is determined based upon
management's assessment of current economic conditions, the composition of the
loan portfolio and the levels of nonaccruing and past due loans. The provision
for loan losses was $720,000 for the six months ended June 30, 2003, compared to
$362,000 for the same period of 2002. Charge-offs exceeded recoveries by
$611,697 for the six months ended June 30, 2003. The allowance for loan losses
as a percent of outstanding loans, net of unearned income, was 1.08% at June 30,
2003, compared to 1.09 percent at year-end 2002.
The provision for loan losses was $360,000 for the three months ended June
30, 2003, compared to $216,000 for the same period in 2002.
15
APPALACHIAN BANCSHARES, INC.
June 30, 2003
The increased provisions for the three and six-month periods ended June 30,
2003, as compared to the same periods of 2002, are directly attributable to
anticipated problems that may arise from the slowing economy.
Noninterest Income
Noninterest income for the six months ended June 30, 2003, was $1,528,485
compared to $1,351,233 for the same period in 2002. This increase was primarily
due to an increase in mortgage origination fees of $289,430 in the first six
months of 2003 as compared to the same period in 2002, and increases in other
operating income of $26.2%.
Noninterest income increased by $94,734 or 13.0% in the three months ended
June 30, 2003, as compared to the same period in 2002.
Noninterest Expenses
Noninterest expenses for the six months ended June 30, 2003, were
$5,656,910, reflecting a 20.6% increase over the same period of 2002. The
primary components of noninterest expenses are salaries and employee benefits,
which increased to $2,625,728 for the six months ended June 30, 2003, 14.24%
percent higher than in the same period in 2002. Occupancy costs increased
$30,852 and furniture and equipment expenses increased by $63,310. Other
operating expenses rose by 32.5% to $2,228,640.
Noninterest expenses increased by $372,089 for the quarter ended June 30,
2003, as compared to the same period in 2002. Salaries and employee benefits
increased by $100,006 for the three months ended June 30, 2003, which was 8.1%
higher than the same period in 2002. Occupancy costs increased by $14,564 and
other operating expenses increased by $233,639 for the second quarter of 2003 as
compared with the same period in 2002.
Income Taxes
The Company attempts to maximize its net income through active tax
planning. Management is attempting to reduce its tax burden by purchasing
tax-exempt securities. The provision for income taxes for the six months ended
June 30, 2003, was $547,000, an increase of $6,938 compared to the same period
in 2002 due to increased net income.
Recently Issued Accounting Standards
In November 2002, the Auditing Standards Board issued Statement on Auditing
Standards ("SAS") No. 100, Interim Financial Information. This statement
supersedes SAS No. 71 and establishes revised standards and guidance 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 interim consolidated financial statements of the
Company resulting from the issuance of this auditing standard is not expected to
be material.
16
APPALACHIAN BANCSHARES, INC.
June 30, 2003
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 Financial Accounting Standards Board ("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.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, Amendment of Statement 133 on Derivative instruments and
Hedging Activities. The provisions of this Statement are effective for contracts
entered into or modified after June 20, 2003 and hedging relationships
designated after June 30, 2003, and generally require that contracts with
comparable characteristics be accounted for similarly. Except for the provisions
related to FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, all provisions of this Statement should be applied
prospectively. The provisions of the Statement related to Statement 133
Implementation Issues that have been effective for fiscal quarters that begin
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. We do not expect the adoption of the provisions of
this Statement to have a material effect on the Company's operating results or
financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires liability treatment for certain financial instruments which had
previously been recognized as equity. The provisions of this Statement are
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise are effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in accounting principle for financial instruments
created before May 15, 2003 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. We do not expect the adoption
of the provisions of this Statement to have a material effect on the Company's
operating results or financial position.
17
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Recently Passed Legislation
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 3. Quantitative and Qualitative Disclosures About Market Risk
At June 30, 2003, there have been no material changes in information that
would be provided under this Item 3, from the quantitative and qualitative
disclosures about market risk provided in Company's Annual Report on Form 10-K
for the year ended December 31, 2002. Consequently, the information provided in
this Item 3 is the same as that provided in Items 7 and 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
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.
18
APPALACHIAN BANCSHARES, INC.
June 30, 2003
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 $116 million. During this one-year time frame, 85.1% of all
interest-bearing liabilities will reprice compared to 48.5% 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.
19
APPALACHIAN BANCSHARES, INC.
June 30, 2003
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.
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.
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.
20
APPALACHIAN BANCSHARES, INC.
June 30, 2003
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 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, the Company
has evaluated the effectiveness of its disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. This evaluation was performed under the
supervision and with the participation of management, including the chief
executive officer and the chief financial officer. 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 quarterly report has been
communicated to them in a manner appropriate to allow timely decisions regarding
required disclosure.
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.
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21
APPALACHIAN BANCSHARES, INC.
June 30, 2003
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Authorization to Issue Preferred Stock
On May 27, 2003, at the Company's annual meeting of shareholders, the
holders of a majority of the issued and outstanding shares of the common stock
of the Company (the "Common Stock") approved, among other things, an amendment
to the Company's articles of incorporation that authorizes the Company to issue
20,000,000 shares of preferred stock, in such series, and containing such
preferences, limitations and relative rights, as shall be determined by the
Board of Directors (the "Preferred Stock") (see Article IV of the Company's
Articles of Incorporation as Amended, as such articles are set forth in Exhibit
3.1 to this quarterly report). Because of the ability of the Board of Directors
to determine the terms of such preferred stock, without further shareholder
approval, this type of preferred stock is sometimes referred to as "blank check"
preferred stock.
The authorization to issue the Preferred Stock provides anti-takeover
protection for the Company, by permitting the Board of Directors to quickly
issue, in one or more series, shares of the Preferred Stock, with such rights,
preferences, limitations, etc., as it shall determine (without having to obtain
additional shareholder approval, hence, a "blank check"). Therefore, because of
this quick-issue, "blank-check" ability, it becomes more difficult for a hostile
acquirer to effect a change of control of the Company through the acquisition of
a large block of Common Stock.
Issuance of the Preferred Stock by the Company could, under certain
circumstances, discourage or make more difficult an attempt by a person or
organization to gain control of the Company by tender offer or proxy contest, or
to consummate a merger or consolidation with the Company after acquiring
control, and to remove incumbent management, even if such transactions were
favorable to the Company's stockholders. Thus, it could benefit present
management by helping them to retain their positions. Shares of the Preferred
Stock could possess voting or conversion rights which would have that effect,
especially if the shares were issued in a private placement to a party or
parties sympathetic to management and opposed to any attempt to gain control of
the company. Also, opportunities may arise that require prompt action, such as
properties or businesses becoming available for acquisition or favorable market
conditions existing for the sale of a particular type of preferred stock. The
Preferred Stock eliminates the delay and expense of seeking stockholder approval
at the time of the issuance of such stock, thereby enabling the company and its
stockholders to effectively benefit from such an opportunity.
In addition to the foregoing benefits, Preferred Stock also provides the
Company with the flexibility necessary for possible future financing
transactions, acquisitions, employee benefit plans, and other corporate
purposes; the Preferred Stock is particularly useful since the Board of
Directors will be able to choose the exact terms of the class or series of
preferred stock at the time of issuance to respond to investor preferences,
developments in types of preferred stock, market conditions, as well as the
nature of the specific transaction, without requiring additional shareholder
approval. In addition, it may be advantageous in some cases to pay to certain
investors dividends on equity instead of interest on debt. The Preferred Stock
allows the Company to offer equity that is potentially far less dilutive of the
relative equity value of the holders of Common Stock than would be the case if
additional shares of Common Stock were issued, and the Preferred Stock can be
subject to redemption, which also limits dilution.
22
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Certain fundamental corporate matters requiring shareholder approval (such
as mergers, consolidations, sales of assets and future amendments to the
Company's articles of incorporation) may require the separate approval of each
class of the Company's capital stock, including the additional class (or in some
cases each series of that class) of the Preferred Stock before any action can be
taken by the Company. In addition, the existence of the the Preferred Stock does
not, by itself, have any effect on the rights of holders of the Common Stock.
However, the issuance of one or more series of Preferred Stock in the future
could affect the holders of Common Stock in a number of respects, including the
following: (i) the issuance of the Preferred Stock will probably subordinate the
Common Stock to the Preferred Stock in terms of dividend and liquidation rights,
since preferred stock typically entitles its holder to satisfaction in full of
specified dividend and liquidation rights before any payment of dividends or
distribution of assets on liquidation is made on common stock; (ii) if voting or
conversion rights are granted to the holders of the Preferred Stock, the voting
power of the Common Stock (including stock held by any persons who may be
seeking to obtain control of the Company) will be diluted; and (iii) the
issuance of the Preferred Stock may result in a dilution of earnings per share
of the Common Stock.
As of the date of filing of this quarterly report, the Company has not
issued any shares of the Preferred Stock.
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").
Based on the number of shares initially sold in the Offering, the Company
extended its original termination date from March 3, 2003 to June 2, 2003. In
the Offering, including the additional period from March 3, 2003 to June 2,
2003, the Company sold 124,906 shares of Common Stock at an aggregate sales
price of $1,873,590.
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 has or will
receive any commission or remuneration for their efforts. Further, the
securities sold in the Offering are 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.
23
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 27,
2003 (the "Annual Meeting"), for the purposes of electing the Board of Directors
of the Company, amending the Company's articles of incorporation, and approving
a stock option plan.
Each of the director nominees served as a director of the Company prior to
the Annual Meeting, and each was re-elected at the Annual Meeting. Further, at
the Annual Meeting, shareholders approved an amendment to the Company's articles
of incorporation, whereby the directors of the Company were divided into three
classes, each class to serve a staggered term of three (3) years. Because the
election of the directors by class is to be staggered (one class, or
approximately 1/3 of the directors, to be elected each year), the directors'
initial terms, as approved at the Annual Meeting, vary from one to three years,
depending on the class in which each director was re-elected to serve. The
following table provides the specific class in which each director shall serve,
his term of office, and the breakdown of votes cast, with respect to each
director, at the Annual Meeting:
Director Class Term of Office For Withheld
- ----------------------------- -------------- -------------------- -------------------- --------------------
Alan S. Dover ............... I One Year 2,352,528 120
Charles A. Edmondson......... I One Year 2,352,528 120
Roger E. Futch............... I One Year 2,352,548 --
Joseph C. Hensley............ II Two Years 2,352,528 120
Frank E. Jones............... II Two Years 2,347,318 5,330
J. Ronald Knight............. II Two Years 2,352,528 120
Tracy R. Newton.............. III Three Years 2,352,648 --
P. Joe Sisson ............... III Three Years 2,352,448 200
Kenneth D. Warren............ III Three Years 2,348,518 4,130
In addition to the election of directors, at the Annual Meeting,
shareholders voted on several proposed amendments to the Company's articles of
incorporation, including the amendment referred to above, whereby the Board of
Directors was divided into three, staggered classes. A brief description of all
of the proposed amendments, each of which was approved at the Annual Meeting,
follows:
Preferred Stock. Shareholders approved an amendment to the Company's
articles of incorporation, by adding thereto, as a new provision, an article
which authorizes the Company to issue up to 20,000,000 shares of preferred
stock, in such series, and containing such preferences, limitations and relative
rights, as shall be determined by the Board of Directors of the Company. This
new provision is contained in Article IV of the Company's articles of
incorporation, as restated, a copy of which articles is attached hereto as
Exhibit 3.1 (the "Restated Articles");
Staggered Board. Shareholders approved an amendment to the Company's
articles of incorporation, by adding thereto, as a new provision, an article
which provides for the directors of the Company to be divided into three
classes, with the classes to serve staggered terms of three (3) years each. This
new provision is contained in Article V of the Restated Articles.
24
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Removal of Directors. Shareholders approved an amendment to the Company's
articles of incorporation, by adding thereto, as a new provision, an article
which provides that directors of the Company can be removed only for cause, by
the affirmative vote of the holders of two-thirds (2/3) of the issued and
outstanding shares entitled to vote thereon or, if the bylaws of the Company so
provide, by two-thirds (2/3) of the Board of Directors for certain enumerated
actions. This new provision is contained in Article VI of the Restated Articles.
Constituencies. Shareholders approved an amendment to the Company's
articles of incorporation, by adding thereto, as a new provision, an article
which authorizes the Board of Directors to consider "constituencies" of the
Company and other factors, when evaluating a business combination proposal. This
new provision is contained in Article VII of the Restated Articles.
Amendment of Articles and Bylaws. Shareholders approved an amendment to the
Company's articles of incorporation, by adding thereto, as a new provision, an
article which requires the affirmative vote of the holders of two-thirds (2/3)
of the issued and outstanding shares entitled to vote thereon, to amend certain
of the Company's articles or bylaws, and providing, also, that the bylaws may be
amended by the affirmative vote of two-thirds (2/3) of the directors of the
Company. This new provision is contained in Article VIII of the Restated
Articles; and
Transactions With Interested Shareholders. Shareholders approved an
amendment to the Company's articles of incorporation, by adding thereto, as a
new provision, an article which requires prior approval of three-fourths (3/4)
of the Board of Directors, or, alternatively, (1) a 75% vote of all shares and
(2) a 75% vote of disinterested shares, for a business combination with an
interested shareholder. This new provision is contained in Article IX of the
Restated Articles.
Finally, at the Annual Meeting, shareholders voted on, and approved, the
Company's 2003 Stock Option Plan (the "Plan"). The Plan, which was originally
approved and adopted by the Board of Directors on April 1, 2003, provides to
select key employees and directors of the Company (and its subsidiaries and
affiliates) the opportunity to acquire shares of Common Stock, and to
participate in the equity of the Company, through the grant of incentive and
nonqualified stock options, as well as stock appreciation rights. A copy of the
Plan and a corresponding form of stock option agreement are attached hereto as
Exhibits 10.1 and 10.2.
[The remainder of this page intentionally left blank]
25
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Thorough descriptions of, and discussions regarding, each of the amendments
to the Company's articles of incorporation, as well as the Plan, as approved by
shareholders at the Annual Meeting, are contained in the Company's Definitive
Proxy Statement, as filed on Schedule 14A with the Securities and Exchange
Commission, on April 30, 2003. Further, the following table provides a breakdown
of votes cast at the Annual Meeting, with respect to each such amendment to the
Company's articles of incorporation, and with respect to the Plan:
Number of Votes:
Amendment / Plan For Against Abstentions
- ------------------------------------------------------- --------------- --------------- ----------------
Preferred Stock........................................ 2,213,171 107,143 --
Staggered Board........................................ 2,290,664 58,805 --
Removal of Directors................................... 2,271,376 77,463 --
Constituencies......................................... 2,289,666 57,726 --
Amendment of Articles and Bylaws....................... 2,290,892 59,806 --
Transactions with Interested Shareholders.............. 2,261,582 87,416 --
The Plan............................................... 2,245,461 105,387 --
[The remainder of this page intentionally left blank]
26
APPALACHIAN BANCSHARES, INC.
June 30, 2003
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed with this report:
Exhibit No. Exhibit Page
----------- --------------------------------------------------------------------------- -----------
3.1 Articles of Incorporation of the Appalachian Bancshares, Inc. as Restated
3.2 Bylaws of the Company as Restated
10.1 Appalachian Bancshares, Inc. 2003 Stock Option Plan
10.2 Form of Appalachian Bancshares, Inc. Stock Option Agreement under the
Appalachian Bancshares, Inc. 2003 Stock Option Plan.
11 Computation of Earnings Per Share 28
31.1 Rule 13a-14(a) Certification by the President and Chief Executive Officer 30
31.2 Rule 13a-14(a) Certification by the Chief Financial Officer 31
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 32
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the quarter for which
this report is filed.
27
Exhibit 11
APPALACHIAN BANCSHARES, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
The following tabulation presents the calculation of basic and diluted earnings
per common share for the three-month and six-month periods ended June 30, 2003
and 2002.
Six Months
Ended June 30, Ended June 30,
------------------------------ -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- --------------
Basic Earnings Per Share:
Net Income.................................... $ 646,495 $ 462,100 $ 1,273,130 $ 1,112,929
============= ============= ============= ==============
Earnings on common shares..................... 646,495 462,100 1,273,130 1,112,929
============= ============= ============= ==============
Weighted average common shares
outstanding - basic......................... 3,302,113 2,974,962 3,235,501 2,952,253
============= ============= ============= ==============
Basic earnings per common share............... $ 0.20 $ 0.16 $ 0.39 $ 0.38
============= ============= ============= ==============
Diluted Earnings Per Share:
Net Income.................................... $ 646,495 $ 462,100 $ 1,273,130 $ 1,112,929
============= ============= ============= ==============
Weighted average common shares
outstanding - diluted....................... 3,468,764 3,187,858 3,411,976 3,202,549
============= ============= ============= ==============
Diluted earnings per common share............. $ 0.19 $ 0.14 $ 0.37 $ 0.35
============= ============= ============= ==============
28
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Company has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 14, 2003
APPALACHIAN BANCSHARES, INC.
/s/ Tracy R. Newton
---------------------------------------
Tracy R. Newton
President and CEO
(Duly authorized officer)
/s/ Darren M. Cantlay
----------------------------------------
Darren M. Cantlay
Chief Financial Officer
(Principal financial officer)
29
EXHIBIT 31.1
CERTIFICATION
I, Tracy R. Newton, certify that:
I have reviewed this quarterly report on Form 10-Q of Appalachian
Bancshares, Inc.;
Based on my knowledge, this 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 report;
Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
/s/ Tracy R. Newton
- -------------------------------------
Tracy R. Newton
President and Chief Executive Officer
30
EXHIBIT 31.2
CERTIFICATION
I, Darren C. Cantlay, certify that:
I have reviewed this quarterly report on Form 10-Q of Appalachian
Bancshares, Inc.;
Based on my knowledge, this 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 report;
Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
controls over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
/s/ Darren M. Cantlay
- -------------------------------------
Darren M. Cantlay
Chief Financial Officer
31
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Appalachian Bancshares, Inc. (the
"Company") on Form 10-Q for the quarterly period ended June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned, Tracy R. Newton, President and Chief Executive Officer of the
Company, and Darren C. Cantlay, Chief Financial Officer, do hereby certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of our knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: August 14, 2003 By: /s/ Tracy R. Newton
-------------------------------------
Tracy R. Newton
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ Darren M. Cantlay
-------------------------------------
Darren M. Cantlay
Chief Financial Officer
32