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, 2003 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 30, 2003 was $41,071,200, based on a per share price of $15, 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 19, 2004, there were 3,697,359 shares of the registrant's Common Stock
outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
APPALACHIAN BANCSHARES, INC.
2003 Form 10-K Annual Report
TABLE OF CONTENTS
Item Number Page or
in Form 10-K Description Location
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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................. 35
Item 8. Financial Statements and Supplementary Data................................ 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................... 70
Item 9A. Controls and Procedures.................................................... 70
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 70
Item 11. Executive Compensation..................................................... 70
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 70
Item 13. Certain Relationships and Related Transactions............................. 70
Item 14. Principal Accountant Fees and Services..................................... 70
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 71
Signatures
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.
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
2
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.
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, National Bank of Commerce of Birmingham 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, 2003, the Bank had a
total of 130 employees, 108 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
6.9% of the Bank's total loans at December 31, 2003.
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 $271 million, or 81.6%,
of the Bank's total loans at December 31, 2003. These loans consist of
commercial real estate loans, construction and development loans and residential
real estate loans.
Commercial Loans. The Bank makes loans for commercial purposes to various
lines of businesses. At December 31, 2003, the Bank held approximately $32
million, or 9.7% 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.
3
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, 2003, the Bank held approximately $20.5
million in consumer loans, representing 6.2% 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 $500,000, depending on seniority and the
type of loan. The officers' loan committee, which consists of the president,
executive vice president and senior vice president, has a lending limit of
$1,000,000 secured and up to $100,000 unsecured. Loans exceeding $1,000,000
require the approval of the majority of the directors' loan committee, which is
made up of six of the Bank's 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 contracted
with a specialist for an independent assessment of the loan portfolio. The
specialist reviews loans on a quarterly basis.
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, 2003.
Deposit Mix
December 31, 2003
Non-interest bearing demand.............................................. 7.15%
Interest-bearing demand.................................................. 22.74%
Savings.................................................................. 14.60%
Time Deposits............................................................ 31.86%
Certificates of Deposit of $100,000 or more.............................. 23.65%
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Total.................................................................. 100.00%
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The Bank is a member of the Star 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 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, Georgia (Gilmer County), Blue Ridge,
Georgia (Fannin County), Blairsville, Georgia (Union County) 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, Fannin County, Union County,
Towns County, northern Pickens County, western Dawson County and southeastern
Murray County, Georgia. The Bank encounters competition in its primary service
area and in surrounding areas from other commercial banks. As of December 31,
2003, three non-locally-owned banks had offices in Gilmer County, two
locally-owned banks and one non-locally-owned bank had offices in Blairsville
(Union County), and four non-locally-owned banks had offices in Fannin County.
In addition, many local businesses and individuals have deposits outside the
primary service area 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.
4
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, which places the Company under the supervision of
the Board of Governors of the Federal Reserve. The Company must 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 and the Bank.
Bank Holding Company Regulation. In general, the Bank Holding Company Act
limits bank holding company business to owning or controlling banks and engaging
in other banking-related activities. Bank holding companies must obtain the
Federal Reserve Board's approval 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
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. Under the Gramm-Leach-Bliley Act of 1999, a bank holding
company meeting certain qualifications may apply to the Federal Reserve Board to
become a financial holding company, and thereby engage (directly or through a
subsidiary) in certain activities deemed financial in nature, such as securities
brokerage and insurance underwriting.
With certain exceptions, the Bank 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 Board determines such activities are incidental or closely
related to the business of banking.
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 Federal Reserve Board's approval before acquiring 25% (5% if the "company"
is a bank holding company) or more of the outstanding shares 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 Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act. Generally, the act (i) repealed the historical
restrictions on preventing banks from affiliating with securities firms, (ii)
5
provided a uniform framework for the activities of banks, savings institutions
and their holding companies, (iii) broadened the activities that may be
conducted by national banks and 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 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 be owned, controlled or acquired by any company engaged in
financially related activities, so long as such company meets certain regulatory
requirements. The act also permits national banks (and certain state banks),
either directly or through operating subsidiaries, to engage in certain
non-banking financial activities.
Transactions with Affiliates. The Company and the Bank are deemed
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, 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 either
a requirement that the customer obtain additional services provided by either of
the Company or the Bank, or 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 Law Restrictions. As a Georgia business corporation, the Company may
be subject to certain limitations and restrictions under applicable Georgia
corporate law.
The Bank
General. The Bank, as a Georgia state-chartered bank, is subject to
regulation and examination by the State of Georgia Department of Banking and
Finance, as well as the Federal Deposit Insurance Corporation. Georgia state
laws regulate, among other things, the scope of the Bank's business, its
investments, its payment of dividends to the Company, its required legal
reserves and the nature, lending limit, maximum interest charged and amount of
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 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 institutions under its authority. These standards cover internal controls,
6
information systems, and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency
determines to be appropriate, and standards for asset quality, earnings and
stock valuation. Management believes that the Bank meets all such standards.
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 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. Georgia law
generally 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 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 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 FDIC 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
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 FDIC and Federal Reserve also employ 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 or bank
may leverage its equity capital base. A minimum leverage ratio of 3% is required
for the most highly rated bank holding companies and banks. Other bank holding
companies, banks and bank holding companies seeking to expand, however, are
required to maintain minimum leverage ratios of at least 4% to 5%.
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 and the Federal Reserve, an institution is assigned to one
of five capital categories depending on 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 on the
category to which they are assigned are subject to certain mandatory supervisory
corrective actions.
7
Recent Significant Changes in Banking Laws and Regulations
International Money Laundering Abatement and Anti-Terrorist Financing Act
of 2001. On October 26, 2001, the USA PATRIOT Act was enacted. It includes the
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001 and strong measures to prevent, detect and prosecute terrorism and
international money laundering. As required by the IMLAFA, the federal banking
agencies, in cooperation with the U.S. Treasury Department, established rules
that generally apply to insured depository institutions and U.S. branches and
agencies of foreign banks.
Among other things, the new rules require that financial institutions
implement reasonable procedures to (1) verify the identity of any person opening
an account; (2) maintain records of the information used to verify the person's
identity; and (3) determine whether the person appears on any list of known or
suspected terrorists or terrorist organizations. The rules also prohibit banks
from establishing correspondent accounts with foreign shell banks with no
physical presence and encourage cooperation among financial institutions, their
regulators and law enforcement to share information regarding individuals,
entities and organizations engaged in terrorist acts or money laundering
activities. The rules also limit a financial institution's liability for
submitting a report of suspicious activity and for voluntarily disclosing a
possible violation of law to law enforcement.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of
2002 was enacted to address corporate and accounting fraud. The act established
a new accounting oversight board that enforces 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 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 from 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.
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 $31,400.
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 $32,000. The Bank has purchased 2.6 acres in
Blue Ridge to construct a permanent branch location. Construction has begun on a
9,000 square foot branch and a 3,500 square foot community building.
Construction is expected to be completed by June 1, 2004.
8
The Bank's operations area is located in a building owned by the Bank
located at 9 Russell Drive, Ellijay, Georgia. This location houses the Bank's
computer center, accounting, bookkeeping and data processing services. In
addition, the building includes an additional 8,000 approximate square feet,
which is leased by the Bank to two separate third parties for $67,200 per year.
The bank also leases a building directly behind the operations building, which
contains additional operations employees. The bank has a two-year lease for this
space and pays annual rent of $16,800.
Management believes that the physical facilities maintained by the Company
and the Bank are suitable for their 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 to 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 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 July 2003, the Company paid a ten percent stock dividend (the "Stock
Dividend") to shareholders of record as of May 27, 2003. All amounts presented
in this Report and in the financial statements are adjusted to reflect the Stock
Dividend. The Stock Dividend created a small decrease in shareholders' equity
for cash paid in lieu of fractional shares in the amount of $1,931.
[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 2003. To the best of management's knowledge, the last trade in December
2003 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
------------- --------------
2003:
First Quarter................................................................. $ 16.00 $ 15.00
Second Quarter................................................................ 15.00 15.00
Third Quarter................................................................. 15.00 15.00
Fourth Quarter................................................................ 15.00 13.37
2002:
First Quarter................................................................. $ 17.00 $ 15.00
Second Quarter................................................................ 16.00 15.00
Third Quarter................................................................. 15.00 15.00
Fourth Quarter................................................................ 15.00 15.00
Holders
At March 19, 2004, the Company had 3,697,359 shares of Common Stock
outstanding held by approximately 1,408 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 180,687 shares of Common Stock through the Offering, which expired
on June 30, 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. 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 cash dividends to date. The Company paid a 10% stock dividend
on July 1, 2003.
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, 2003.
Number of
Number of Equity Securities
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.................... 433,140 $ 5.65 233,900
Equity Compensation Plans
Not Approved by Shareholders................ -- -- --
------------------ ----------------- -----------------
Total....................................... 433,140 $ 5.65 233,900
================== ================= =================
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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 year ended December 31, 2003, and the previous four years. All
averages are daily averages.
Years Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---------- --------- --------- ---------- ----------
(Dollars in thousands except per share data and ratios)
Earnings Summary
Interest income.................................. $ 22,996 $ 22,892 $ 23,890 $ 21,970 $ 16,139
Interest expense................................. 8,257 11,425 13,675 13,325 9,139
Net interest income.............................. 14,739 11,467 10,215 8,645 7,000
Provision for loan losses........................ 1,465 1,028 1,294 922 880
Noninterest income............................... 2,797 2,937 2,411 1,159 845
Noninterest expense.............................. 11,732 9,702 7,831 6,381 5,561
Income tax expense............................... 1,253 1,006 963 872 139
Net income....................................... 3,086 2,668 2,538 1,629 1,265
Per Share Data
(Retroactively adjusted to give effect to stock splits/dividends)
Net income - basic............................... $ 0.86 $ 0.81 $ 0.81 $ 0.54 $ 0.44
Net income - diluted............................. 0.81 0.76 0.75 0.50 0.40
Cash dividends declared per common share......... 0.00 0.00 0.00 0.00 0.00
Selected Period End Balances
Total assets..................................... 409,617 384,024 319,679 270,943 223,315
Loans............................................ 332,307 298,063 250,569 214,124 169,106
Securities....................................... 55,363 40,375 49,394 32,541 28,536
Earning assets................................... 388,530 354,593 303,923 253,263 207,501
Deposits......................................... 332,919 316,283 264,028 214,169 186,730
Long-term borrowings............................. 36,879 34,736 29,654 34,539 16,964
Shareholders' equity............................. 31,082 25,619 20,591 17,669 12,421
Shares outstanding............................... 3,659 3,439 3,170 3,143 1,480
Selected Average Balances
Total assets..................................... 393,553 354,164 299,167 259,799 203,703
Loans............................................ 316,605 276,733 234,031 204,436 150,691
Securities....................................... 49,951 50,933 40,462 34,393 33,192
Earning assets................................... 370,654 333,777 280,884 243,038 191,540
Deposits......................................... 320,833 290,961 241,933 206,787 175,025
Long-term borrowings............................. 35,782 34,017 33,028 29,024 12,798
Shareholders' equity............................. 28,447 22,454 19,821 15,045 11,950
Shares outstanding - basic....................... 3,610 3,278 3,146 3,031 2,917
Ratios
Return on average assets......................... 0.78% 0.75% 0.85% 0.63% 0.62%
Return on average equity......................... 10.85 11.88 12.80 10.83 10.59
Net interest spread.............................. 3.90 3.32 3.75 3.39 3.52
Total capital.................................... 11.55 8.59 8.32 8.25 7.41
Tier 1 capital................................... 10.46 7.54 7.16 7.22 6.34
Leverage ratio................................... 8.58 6.07 5.87 5.72 5.22
Average equity to average assets................. 7.23 6.34 6.63 5.79 5.87
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, included in 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. The words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are intended to identify such forward-looking statements. 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, Fannin and Union Counties, (iii) rapid
fluctuations in interest rates, (iv) the inability of the Bank 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 $3,086,580 for the year ended December 31, 2003
represented an increase of $418,572 or 15.7%. 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 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 $0.86 ($0.81 on a diluted basis) in 2003,
up from $0.81 ($0.76 on a diluted basis) in 2002 and $0.81 ($0.75 on a diluted
basis) in 2001. Return on average assets, which reflects the Bank's ability to
utilize its assets, was 0.78% in 2003, compared to 0.75% in 2002, and 0.85% in
2001. Return on average shareholders' equity decreased to 10.85% in 2003 and
decreased to 11.88% in 2002, compared to 12.80% in 2001. The decline in this
ratio is due in large part to continued growth and expansion in the Company.
During 2002 and 2003, the Company sold 180,687 shares of common stock for net
proceeds of $2,710,306 to support future expansion. Options exercised in 2003
and 2002 generated proceeds of $529,330 and $1,021,498, respectively. Also
during 2002, the Company issued and sold 12,859 shares to its 401(k) plan for
$163,660.
The Company plans to continue its objectives of maintaining asset quality
and providing superior service to its customers. The Company's 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. During 2003, the Company placed a strong
focus on improving the net interest margin. Pricing models were put in place to
assist loan officers with structuring loan products to fit our customers' needs,
as well as deposit pricing models to assist with funds management. The Company
is also taking advantage of alternative funding sources when needed. Some of the
alternative sources include the national CD market, brokered CD market, the
Federal Home Loan Bank and repurchase agreements. The results of this effort are
beginning to show in the Company's margin and bottom line.
13
Critical Accounting Policies
The Company has established various accounting policies which govern the
application of generally accepted accounting principles in the preparation of
the financial statements. Certain accounting policies involve significant
judgments and assumptions by management that have a material impact on the
carrying value of certain assets and liabilities. Management considers such
accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the circumstances. Because of
the nature of the judgments and assumptions made by management, actual results
could differ from these judgments and estimates that could have a material
impact on the carrying values of assets and liabilities and the results of
operations of the Company. The Company believes the allowance for loan losses is
a critical accounting policy that requires the most significant judgments and
estimate used in the preparation of the Consolidated Financial Statements. Refer
to Note 1 to the Consolidated Financial Statements, Summary of Significant
Accounting Policies, and the allowance for loan loss discussions in Note 7 and
Item 7 for a description of the estimation processes and methodology related to
the allowance for loan losses.
Financial Condition
Earning Assets
The Bank's earning assets, which include deposits in other banks, federal
funds sold, securities and loans, averaged $370,654,000, or 94.2% of average
total assets in 2003, $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,
----------------------------------------
2003 2002 2001
----------- ----------- -----------
Deposits in other banks................................................ 0.21% 0.30% 0.14%
Federal funds sold..................................................... 0.89 1.53 2.13
Investment securities.................................................. 13.48 15.26 14.41
Loans.................................................................. 85.42 82.91 83.32
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,
----------------------------------------
2003 2002 2001
----------- ----------- -----------
(In thousands)
Interest-bearing deposits with banks.................................... $ 274 $ 8,399 $ 746
Securities.............................................................. 55,363 40,375 49,394
Federal funds sold...................................................... 586 7,756 3,214
Loans:
Real estate.......................................................... 271,217 238,768 202,107
Commercial and other................................................. 61,090 59,295 48,462
----------- ----------- -----------
Total loans........................................................ 332,307 298,063 250,569
----------- ----------- -----------
Interest-earning assets ................................................ $ 388,530 $ 354,593 $ 303,923
=========== =========== ===========
The Bank has intentionally avoided the growing national market in loans to
finance leveraged buy-outs, and has participated in no nationally syndicated
leveraged buy-out loans. It has also avoided exposure to lesser developed
country ("LDC") debt, and has no LDC loans in its portfolio.
Federal Funds Sold
Management maintains federal funds sold as a tool in managing the Bank's
daily cash needs. Federal funds sold at December 31, 2003 and 2002 were $586,000
and $7,756,000, respectively. Average federal funds sold for 2003 was
approximately $3,314,000, or 0.89% of average earning assets, and for 2002 was
approximately $5,104,000, or 1.53% of average earning assets. The decrease in
year-end federal funds resulted from the Bank's focus on improving the
net-interest margin. The Bank worked towards minimizing federal funds sold in
this low rate environment to maximize its use of earning assets.
14
Securities Portfolio
At December 31, 2002, $40,374,902 of the Bank's securities were classified
as available-for-sale, while at December 31, 2003, $55,363,327 of the Bank's
securities were classified as available-for-sale.
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
2003, gross securities sales were $5,368,830 and maturities were $23,121,518,
representing 10.75% and 46.29%, respectively, of the average portfolio for the
year. Net losses associated with sales and maturities totaled $16,978 in 2003.
Gross unrealized gains in the portfolio amounted to $966,919 at year-end 2003
and unrealized losses amounted to $316,263. 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.
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 2003, 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,
----------------------------------------------
2003 2002 2001
------------- ------------- --------------
(In thousands)
Securities Available-for-Sale:
U.S. treasury and government agencies........................ $ 20,074 $ 8,579 $ 14,691
Mortgage-backed securities................................... 19,205 14,759 19,340
State and municipal securities............................... 14,355 15,314 13,805
Equity securities............................................ 1,729 1,723 1,558
------------- ------------- --------------
Total...................................................... $ 55,363 $ 40,375 $ 49,394
============= ============= ==============
In 2003, average taxable securities were 69.9% of the portfolio, compared
to 68.2% in 2002 and 69.7% in 2001.
15
The maturities and weighted average yields of the investments in the 2003
portfolio of securities are presented below. The average maturity of the
securities portfolio is 7.27 years with an average yield of 5.28%. 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...... $ -- 0.00% $ 16,072 2.95% $ 4,002 3.30% $ -- 0.00%
Mortgage-backed............... 7,362 2.67 7,580 3.82 537 5.34 3,726 4.90
State and municipal........... -- 0.00 276 6.12 2,214 28.60 11,865 7.42
Equity securities............. -- 0.00 -- 0.00 -- 0.00 1,729 3.50
-------- --------- -------- --------
Total Securities................. $ 7,362 $ 23,928 $ 6,753 $ 17,320
======== ========= ======== ========
There were no securities held by the Company of which the aggregate value
on December 31, 2003 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 make up the largest component of the Bank's earning assets. At
December 31, 2003, the Bank's total loans were $332,306,446, compared to total
loans of $298,063,055 at the end of 2002. In 2003, average net loans represented
85.4% of average earning assets and 80.4% of total average assets, while in 2002
average net loans represented 82.9% of average earning assets and 78.1% of total
average assets. This was the result of continued strong loan demand and the
expansion of the Bank's branch in Blue Ridge, Georgia. The ratio of total loans
to total deposits was 99.8% in 2003 and 94.2% in 2002.
The following table shows the classification of loans by major category at
December 31, 2003, and for each of the preceding four years.
Loan Portfolio
December 31,
-------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ----------------- ------------------ ---------------- ----------------
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 $ 34,613 10.4% $ 33,449 11.2% $ 29,092 11.6% $ 36,320 17.0% $ 35,375 20.9%
Real estate - construction 104,619 31.5 73,242 24.6 54,255 21.7 22,057 10.3 13,941 8.2
Real estate - other (1) 166,598 50.1 165,526 55.5 147,852 59.0 136,718 63.8 103,413 61.2
Consumer......... 20,535 6.2 20,296 6.8 19,370 7.7 17,254 8.1 15,026 8.9
Other loans...... 5,942 1.8 5,550 1.9 -- 0.0 1,775 0.8 1,351 0.8
------- ------- ------- ------ ------- ------- ------- ------ ------- ------
332,307 100.0% 298,063 100.0% 250,569 100.0% 214,124 100.0% 169,106 100.0%
======= ====== ======= ======= ======
Allowance for loan losses (3,610) (3,238) (2,995) (2,211) (1,849)
------- ------- ------- ------- -------
Net loans........ $328,697 $294,825 $247,574 $211,913 $167,257
======== ======== ======= ======= =======
(1) The "real estate - other" category includes multi-family residential, home equity, commercial real estate and undeveloped
agricultural real estate loans.
16
The following table shows the maturity distribution of selected loan
classifications at December 31, 2003, 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............ $ 27,942 $ 6,088 $ 583 $ 34,613 $ 4,650 $ 2,021
Real estate - construction..... 89,926 14,608 85 104,619 10,337 4,356
----------- ----------- ----------- ----------- ------------- --------------
Total....................... $ 117,868 $ 20,696 $ 668 $ 139,232 $ 14,987 $ 6,377
=========== =========== =========== =========== ============= ==============
For the purposes of this schedule, loans that have reached the fixed
contractual floor rate are treated as having a pre-determined interest rate.
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
$3,609,794 in the allowance for loan losses at December 31, 2003, (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 remainder of this page intentionally left blank]
17
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 2003
as well as each of the preceding four years:
Analysis of Loan Loss Experience
Year ended December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Allowance for loan losses at beginning of year $ 3,238 $ 2,995 $ 2,211 $ 1,849 $ 1,686
Loans charged off:
Commercial, financial, and agricultural.. 277 89 240 404 461
Real estate-construction................. 28 50 -- -- --
Real estate - other...................... 638 427 134 49 22
Consumer................................. 265 250 170 138 278
----------- ----------- ----------- ----------- -----------
Total loans charged off................ 1,208 816 544 591 761
----------- ----------- ----------- ----------- -----------
Recoveries on loans previously charged off:
Commercial, financial, and agricultural.. 25 5 8 9 15
Real estate-construction................. 3 -- -- -- --
Real estate-other........................ 50 -- 6 -- --
Consumer................................. 37 26 20 22 29
----------- ----------- ----------- ----------- -----------
Total recoveries on loans previously
charged off 115 31 34 31 44
----------- ----------- ----------- ----------- -----------
Net loans charged off....................... 1,093 785 510 560 717
----------- ----------- ----------- ----------- -----------
Provision for loan losses................... 1,465 1,028 1,294 922 880
----------- ----------- ----------- ----------- -----------
Allowance for loan losses, at end of period. $ 3,610 $ 3,238 $ 2,995 $ 2,211 $ 1,849
=========== =========== =========== =========== ===========
Loans, net of unearned income, at end of period$ 332,307 $ 298,063 $ 250,569 $ 214,124 $ 169,106
=========== =========== =========== =========== ===========
Average loans, net of unearned income,
outstanding for the period.................. $ 316,605 $ 276,733 $ 234,031 $ 204,436 $ 150,691
=========== =========== =========== =========== ===========
Ratios:
Allowance at end of period to loans, net of
unearned income.......................... 1.09% 1.09% 1.20% 1.03% 1.09%
Allowance at end of period to average loans,
net of unearned income................... 1.14 1.17 1.28 1.08 1.23
Net charge-offs to average loans, net of
unearned income.......................... 0.35 0.28 0.22 0.27 0.48
Net charge-offs to allowance at end of period 30.28 24.24 17.03 25.33 38.78
Recoveries to prior year charge-offs........ 14.09 5.70 5.75 4.07 32.35
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.
18
Management allocated the allowance for loan losses to specific loan classes
as follows:
Allocation of Allowance for Loan Losses
December 31,
-----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------- ----------------- --------------- ---------------- ----------------
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 $ 1,257 10% $ 1,615 11% $ 807 12% $ 387 17% $ 349 21%
Real estate -
construction.... 184 32 85 25 193 22 199 10 152 8
Real estate - other 1,277 50 1,044 55 1,760 59 1,381 64 1,120 61
Consumer.......... 267 6 168 7 235 7 244 8 228 9
Other............. 625 2 326 2 -- 0 -- 1 -- 1
--------- ------- ------- ------- ------- ------- ------ ------- ------- -------
Total........... $ 3,610 100% 3,238 100% $ 2,995 100% $2,211 100% $ 1,849 100%
========= ======= ======= ======= ======= ======= ====== ======= ======= =======
(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, 2003, 2002, 2001, 2000,
and 1999 of approximately $2,385,000, $6,143,000, $1,787,000, $556,000 and
$368,000, respectively.
The following table presents information concerning outstanding balances of
nonperforming assets at December 31, 2003, and for each of the preceding four
years.
Nonperforming Assets
December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except ratios)
Nonaccruing loans .......................... $ 1,127 $ 4,823 $ 1,642 $ 385 $ 344
Loans past due 90 days or more.............. 521 334 12 24 24
Restructured loans.......................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total nonperforming loans................ 1,648 5,157 1,654 409 368
Nonaccruing securities...................... -- -- -- -- --
Other real estate........................... 737 986 133 147 --
----------- ----------- ----------- ----------- -----------
Total nonperforming assets............... $ 2,385 $ 6,143 $ 1,787 $ 556 $ 368
=========== =========== =========== =========== ===========
Ratios:
Loan loss allowance to total
nonperforming assets 1.51 0.53 1.68 3.98 5.02
=========== =========== =========== =========== ===========
Total nonperforming loans to total loans
(net of unearned interest)............. 0.50% 1.73% 0.66% 0.26% 0.22%
=========== =========== =========== =========== ===========
Total nonperforming assets to total assets 0.58% 1.60% 0.56% 0.21% 0.16%
=========== ========= =========== ============ ===========
19
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, 2003, 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 10.3%, from approximately
$290,961,000 in 2002 to approximately $320,833,000 in 2003. At December 31,
2003, total deposits were $332,918,948, of which $309,123,161 (92.9%) were
interest bearing, at December 31, 2002, total deposits were $316,282,756, of
which $294,385,698 (93.1%) were interest bearing, and at December 31, 2001,
total deposits were $264,028,007, of which $247,194,423 (93.6%) 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 when
appropriate. Alternative funding sources such as national CDs and brokered
deposits were used to supplement funding sources. Brokered deposits were
$10,000,000 at December 31, 2003.
The average amounts of, and the average rate paid on, each of the following
categories of deposits, for the years ended December 31, 2003, 2002 and 2001,
are as follows:
Years ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001
------------------------ ------------------------ -------------------------
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Noninterest-bearing demand deposits. $ 22,056 0.00% $ 19,549 0.00% $ 13,972 0.00%
Demand.............................. 83,040 1.42 62,492 1.93 39,100 2.55
Savings............................. 45,318 0.92 41,359 1.72 35,513 3.03
Time deposits....................... 170,419 3.15 167,561 4.44 153,348 6.02
----------- ---------- -----------
Total interest-bearing deposits.. 298,777 2.33 271,412 3.45 227,961 4.95
----------- ---------- -----------
Total average deposits........... $ 320,833 2.17 $ 290,961 3.21 $ 241,933 4.67
=========== ========== ===========
The two categories of lowest cost deposits comprised the following
percentages of average total deposits during 2003: average noninterest-bearing
demand deposits, 6.87 percent; and average savings deposits, 14.13 percent. Of
average time deposits, approximately 38.89 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, 2003, are summarized in the
table below.
Maturities of Large Time Deposits
Time
Certificates
of Deposit
--------------
(Amounts in thousands)
Three months or less..................................................................... $ 15,818
Over three through six months............................................................ 16,957
Over six through twelve months........................................................... 29,836
Over twelve months....................................................................... 23,945
--------------
Total............................................................................... $ 86,556
==============
20
Short-term Borrowings
Securities sold under agreements to repurchase amounted to $4,085,992 at
December 31, 2003, compared to $5,928,624 at December 31, 2002, and $1,732,699
at December 31, 2001. The weighted average rates were 1.23%, 1.60% and 3.20% for
2003, 2002 and 2001, respectively. Securities sold under agreements to
repurchase averaged $5,488,443 during 2003, $4,061,294 during 2002, and
$1,930,051 during 2001. The maximum amount outstanding at any month end during
2003 was $8,211,269, during 2002 was $5,928,624, and during 2001 was $3,144,208.
The total amount 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 $3,000,000 at year-end 2003, and $-0- at year-end
2002, compared to $1,932,000 at year-end 2001.
Long-term Debt
Borrowed funds consist primarily of long-term debt. The Bank had
$21,000,000 in available lines to purchase Federal Funds, on an unsecured basis,
from commercial banks. The Bank was approved to borrow up to approximately
$61,360,000 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 $30,600,000 at year-end 2003. Long-term debt consisted of various
commitments with scheduled maturities from one to six years. In addition, during
2002 the Company borrowed $4.6 million from another financial institution (See
"Capital Resources: Term Loan" below). This loan was repaid during 2003.
On August 28, 2003, Appalachian Capital Trust I ("the Trust"), a Delaware
statutory trust established by the Company, received $6,000,000 principal amount
of the Trust's floating rate cumulative trust preferred securities (the "Trust
Preferred Securities") in a trust preferred private placement. The proceeds of
that transaction were then used by the Trust to purchase an equal amount of
floating rate-subordinated debentures (the "Subordinated Debentures") of the
Company. The Company has fully and unconditionally guaranteed all obligations of
the Trust on a subordinated basis with respect to the Trust Preferred
Securities. In accordance with the provisions of Financial Interpretation No.
46, the Company accounts for the Trust Preferred Securities as a long-term debt
liability to the Trust in the amount of $6,186,000. Subject to certain
limitations, the Trust Preferred Securities qualify as Tier 1 capital.
The sole asset of the Trust is the Subordinated Debentures issued by the
Company. Both the Trust Preferred Securities and the Subordinated Debentures
have approximately 30-year lives. However, both the Company and the Trust have
options to call their respective securities after five years, subject to
regulatory capital requirements. Interest that the bank plans to pay on the
trust preferred securities debt is included in the table of maturities 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, 2003.
Maturities of Long-term Debt
(In thousands)
2004 2005 2006 2007 2008
--------- --------- -------- -------- -----------
Interest on indebtedness......................... $ 830 $ 869 $ 614 $ 500 $ 466
Repayment of principal........................... 7,243 6,200 6,200 700 5,350
--------- --------- -------- ---------- -----------
$ 8,073 $ 7,069 $ 6,814 $ 1,200 $ 5,816
========= ========= ======== ========== ===========
Shareholders' Equity
Shareholders' equity increased $5,463,064, from December 31, 2002 to
December 31, 2003, due in part to net earnings of $3,086,580. The increase was
also a result of the issuance of 82,170 shares of stock through the exercise of
options for $529,330 and the reissuance of 128,240 shares out of treasury stock
for $1,923,601.
All amounts presented in this report and in the financial statements are
adjusted to reflect the 10% stock dividend effected in July 2003, as well as the
2-for-1 stock split effected in April 2000. See ITEM 5, "Market Information."
Return on Equity and Assets
21
The following table summarizes certain financial ratios for the Company for
the years ended December 31, 2003, 2002 and 2001.
Return on Equity and Assets
Year ended December 31,
----------------------------------------------
2003 2002 2001
------------- ------------- --------------
Return on average assets............................. 0.78% 0.75% 0.85%
Return on average equity............................. 10.85 11.88 12.80
Dividend payout ratio................................ 0.00 0.00 0.00
Average equity to average assets ratio............... 7.23 6.34 6.63
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
Common Stock in November 1998, proceeds of $4.4 million from a public offering
in 2000, proceeds of $787,000 from a private offering of Common Stock and $1.0
million from the exercise of options in 2002, through the retention of earnings
and the sale of Common Stock to the Company's 401(k) plan in 2002, proceeds of
$1.9 million from a private offering of Common Stock and $529,000 from the
exercise of options in 2003.
On August 28, 2003, Appalachian Capital Trust I ("the Trust"), a Delaware
statutory trust established by the Company, received $6,000,000 principal amount
of the Trust's floating rate cumulative trust preferred securities (the "Trust
Preferred Securities") in a trust preferred private placement. The proceeds of
that transaction were used by the Trust to purchase an equal amount of floating
rate-subordinated debentures (the "Subordinated Debentures") of the Company. The
Company has fully and unconditionally guaranteed all obligations of the Trust on
a subordinated basis with respect to the Trust Preferred Securities. The Company
accounts for the Trust Preferred Securities as a minority interest of $186,000
and as a long-term debt liability in the amount of $6,186,000. Subject to
certain limitations, the Trust Preferred Securities qualify as Tier 1 capital
and are presented in the consolidated statements of financial condition as
"Guaranteed preferred beneficial interest in the Company's subordinated
debentures."
The sole asset of the Trust is the Subordinated Debentures issued by the
Company. Both the Trust Preferred securities and the Subordinated Debentures
have approximately 30-year lives. However, both the Company and the Trust have
options to call their respective securities after five years, subject to
regulatory capital requirements.
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. Interest on the outstanding amounts
under the Term Loan was 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 was 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, would have been due and payable in a final
installment on March 31, 2010. The Term Loan contained 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. In September
2003, the Company paid off this entire balance with part of the proceeds from
the trust preferred issuance.
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
22
risk-based capital ratios. The Company's Tier 1 capital, which consists of
common equity, paid-in capital, retained earnings and qualifying trust preferred
securities (less intangible assets and treasury stock), amounted to $34.7
million at December 31, 2003. Tier 2 capital components include supplemental
capital components such as qualifying allowance for loan losses and trust
preferred securities not qualified for Tier 1 capital. Tier 1 capital, plus the
Tier 2 capital components, is referred to as Total Capital and was $38.3 million
at year-end 2003. The Company's percentage ratios as calculated under regulatory
guidelines were 10.46% and 11.55% for Tier 1 and Total Capital, respectively, at
year-end 2003. 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, 2003, the Company's leverage ratio was 8.58%,
exceeding the regulatory minimum requirement of 4%.
The table below illustrates the Company's regulatory capital ratios under
federal guidelines at December 31, 2003, 2002 and 2001:
Capital Adequacy Ratios
Years ended December 31,
Statutory ----------------------------------------
Minimum 2003 2002 2001
------------ ----------- ----------- -----------
(Amounts in thousands, except percentages)
Tier 1 Capital.......................................... $ 34,681 $ 23,089 $ 18,538
Tier 2 Capital.......................................... 3,610 3,238 2,995
----------- ----------- -----------
Total Qualifying Capital................................ $ 38,291 $ 26,327 $ 21,533
=========== =========== ===========
Risk Adjusted Total Assets (including
off-balance-sheet exposures)............................ $ 331,638 $ 306,405 $ 256,985
Tier 1 Risk-Based Capital Ratio......................... 4.0% 10.46% 7.54% 7.16%
Total Risk-Basked Capital Ratio......................... 8.0 11.55 8.59 8.32
Leverage Ratio.......................................... 4.0 8.58 6.07 5.87
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 2003 and
2002, the Bank did not pay dividends 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 $117.9 million or 35.5% of the
total loan portfolio at December 31, 2003, and investment securities maturing in
one year or less equaled $7.4 million or 13.3% of the portfolio. Other sources
of liquidity include short-term investments such as federal funds sold.
23
The liability portion of the balance sheet provides liquidity through
various customers' interest-bearing and noninterest-bearing deposit accounts. At
the end of fiscal 2003, funds were also available through the purchase of
federal funds from correspondent commercial banks from available lines of up to
an aggregate of $21,000,000.
In an effort to maintain and improve the liquidity position of the Bank,
management applied 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 loans. The Bank's credit line stands at approximately
$61,360,000 as of December 31, 2003. This line is subject to collateral
availability. At December 31, 2003, the outstanding balance of the Bank's credit
line was $30,692,858. See Note 12 to the Notes to Consolidated Financial
Statements herein.
Off-Balance Sheet Arrangements
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 Bank's
customers as a means of improving their credit standings in their dealings with
others. Under these agreements, the Bank 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, 2003 and 2002, the
Bank has issued standby letters of credit of approximately $1,111,000 and
$1,320,000. The Bank records a liability for the estimated fair value of these
standby letters of credit based on the fees charged for these arrangements.
Loan Commitments: As of December 31, 2003 and 2002, the Bank had
commitments outstanding to extend credit totaling approximately $43,436,000 and
$35,890,000, 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.
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24
Contractual Obligations
The Company and the Bank have various contractual obligations that they
must fund as part of their normal operations. The following table shows
aggregate information about their contractual obligations, including interest,
and the periods in which payments are due. The amounts and time periods are
measured from December 31, 2003.
Payments due by period (in thousands)
-----------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
-------------- ------------ ----------- ----------- -----------
Long-Term Debt........................ $ 40,414 $ 8,073 $ 13,883 $ 7,016 $ 11,442
Capital Lease Obligations............. -- -- -- -- --
Operating Lease Obligations........... 1,021 64 83 71 803
Other Long-Term Liabilities