SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1999
or
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from ________ to ________
Commission file no. 333-25179
PEOPLE'S COMMUNITY CAPITAL CORPORATION
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(Name of Small Business Issuer in Its Charter)
South Carolina 58-2287073
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
106A Park Avenue, S.W.
Aiken, South Carolina 29801
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(Address of Principal Executive Offices) (Zip Code)
(803) 641-0142
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Issuer's Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's net income for its most recent fiscal year was $343,109.
As of March 15, 2000, 978,262 shares of Common Stock were issued and
outstanding.
The aggregate market value of the Common Stock held by non-affiliates
of the Company on February 29, 2000 is $6,951,549. This calculation is based
upon an estimate of the fair market value of the Common Stock of $9.50 per
share, which was the price of the last trade of which management is aware prior
to this date. There is not an active trading market for the Common Stock and it
is not possible to identify precisely the market value of the Common Stock.
Transitional Small Business Disclosure Format.(Check one): Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
Company's 1999 Annual Report and Proxy Statement for the 2000 Annual
Shareholders Meeting.
"This document [specifically designated portions of this document] constitutes
[constitute] part of a prospectus covering securities that have been registered
under the Securities Act of 1933."
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Item 1. Description of Business
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This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements are based on many
assumptions and estimates and are not guarantees of future performance. Our
actual results may differ materially from those projected in any forward-looking
statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words "may," "would,"
"could," "will," "expect," "anticipate," "believe," "intend," "plan," and
"estimate," as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are
not limited to:
o significant increases in competitive pressure in the banking and
financial services industries;
o changes in the interest rate environment which could reduce anticipated
or actual margins;
o changes in political conditions or the legislative or regulatory
environment;
o general economic conditions, either nationally or regionally and
especially in primary service area, becoming less favorable than
expected resulting in, among other things, a deterioration in
credit quality;
o changes occurring in business conditions and inflation;
o changes in technology;
o changes in monetary and tax policies;
o changes in the securities markets; and
o other risks and uncertainties detailed from time to time in our
filings with the Securities and Exchange Commission.
General
People's Community Capital Corporation was incorporated in South
Carolina on February 26, 1997 for the purpose of operating as a bank holding
company. The company's wholly-owned subsidiary, People's Community Bank of South
Carolina commenced business on September 22, 1997, and is primarily engaged in
the business of accepting savings and demand deposits and providing mortgage,
consumer and commercial loans to the general public. The bank operates two
banking centers located in Aiken and one located in North Augusta, South
Carolina.
The second banking center located in Aiken was opened on September 8,
1998 in leased offices that also are the headquarters of the holding company. A
tract of land has been purchased in downtown Aiken for the construction of a
permanent banking center office. The cost of the land and preliminary
construction costs was approximately $160,000. Construction is expected to begin
in the year 2000.
On December 1, 1999, People's Financial Services, Inc. (the
Subsidiary), a subsidiary of the Bank, commenced operations at the holding
company's headquarters. The Subsidiary is primarily engaged in providing
comprehensive financial planning services in addition to full service brokerage,
including stocks, bonds, mutual funds, and insurance products.
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Location and Service Area
The bank engages in a general commercial and retail banking business,
emphasizing the needs of small- to medium-sized businesses, professional
concerns, and individuals, primarily in Aiken and North Augusta, South Carolina
and the surrounding area. The company and the second Aiken office are located at
106-A Park Avenue, S.W., Aiken, South Carolina 29801. The address of the Aiken
main office is 1715 Whiskey Road, Aiken, South Carolina 29803, and the address
of the North Augusta branch office is 518 Georgia Avenue, North Augusta, South
Carolina. The company's telephone number is (803) 641-0142.
The primary service area of the bank is Aiken County, with primary
focus centering on the county's two largest cities, Aiken and North Augusta.
Aiken County is one of South Carolina's largest counties geographically. It is
located in the midwestern portion of the state with its western border being the
Savannah River. Aiken County is centered between the mountains to the north and
the coast to the south, approximately one hour from Columbia and three hours
from Atlanta.
According to the 1990 census, the population of the county of Aiken was
120,940, with an estimated increase through 2001 of 19.9% to 144,952, according
to National Decision Systems data. It is estimated that over 70% of the total
population of the county is concentrated in and surrounding the cities of North
Augusta and Aiken where the offices of the bank are located.
Over 70 different companies have manufacturing or industrial facilities
in Aiken county, including Savannah River Site, the largest employer in the
county, which is operated by Westinghouse Savannah River Company for the
Department of Energy. The 1996 estimated average household income in the county
was $49,063, with 15.2% of the households having income in excess of $50,000.
Marketing Focus
Most of the banks in the Aiken County area are now local branches of
large regional banks. Although size gives the larger banks certain advantages in
competing for business from large corporations, including higher lending limits
and the ability to offer services in other areas of South Carolina and the Aiken
County area, the company believes that there has been a void in the community
banking market in the Aiken County area and believes that the bank can
successfully fill this void. As a result, the company generally does not attempt
to compete for the banking relationships of large corporations, but concentrates
its efforts on small- to medium-sized businesses and on individuals. The bank
advertises to emphasize the company's local ownership, community bank nature,
and ability to provide more personalized service than its competition.
Deposits
The bank offers a full range of deposit services that are typically
available in most banks and savings and loan associations, including checking
accounts, commercial accounts, NOW accounts, savings accounts, and other time
deposits of various types, ranging from daily money market accounts to
longer-term certificates of deposit. The transaction accounts and time
certificates are tailored to the bank's principal market area at rates
competitive to those offered in the Aiken County area. In addition, the bank
offers certain retirement account services, such as Individual Retirement
Accounts (IRAs). The bank solicits these accounts from individuals, businesses,
associations and organizations, and governmental authorities.
Lending Activities
General. The bank emphasizes a range of lending services, including
real estate, commercial and consumer loans, to individuals and small- to
medium-sized businesses and professional concerns that are located in or conduct
a substantial portion of their business in the bank's market area.
Real Estate Loans. One of the primary components of the bank's loan
portfolio is loans secured by first or second mortgages on real estate. These
loans generally consist of commercial real estate loans, construction and
development loans, and residential real estate loans, including home equity
loans. Loan terms generally are limited to five years or less, although payments
may be structured on a longer amortization basis. Interest rates are fixed or
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adjustable. The bank generally charges an origination fee. Management attempts
to reduce credit risk in the commercial real estate portfolio by emphasizing
loans on owner-occupied office and retail buildings where the loan-to-value
ratio, established by independent appraisals, typically does not exceed 80%. In
addition, the bank typically requires personal guarantees of the principal
owners of the property backed with a review by the bank of the personal
financial statements of the principal owners. The underwriting criteria for home
equity loans and lines of credit is generally the same as applied by the bank
when making a first mortgage loan, as described above, and home equity lines of
credit typically expire ten years or less after origination. The principal
economic risk associated with each category of loans, including real estate
loans, is the creditworthiness of the bank's borrowers. The risks associated
with real estate loans vary with many economic factors, including employment
levels and fluctuations in the value of real estate. The bank competes for real
estate loans with a number of bank competitors which are well established in the
Aiken County area. Most of these competitors have substantially greater
resources and lending limits than the bank. As a result, the bank occasionally
must charge a lower interest rate to attract borrowers. See "Competition." The
bank also originates loans for sale into the secondary market. The bank attempts
to limit interest rate risk and credit risk on these loans by locking the
interest rate for each loan with the secondary investor and receiving the
investor's underwriting approval prior to originating the loan.
Commercial Loans. The bank makes loans for commercial purposes in
various lines of businesses. Equipment loans typically are made for a term of
five years or less at fixed or variable rates, with the loan fully amortized
over the term and secured by the financed equipment and with a loan-to-value
ratio of 80% or less. Working capital loans typically have terms not exceeding
one year and are usually secured by accounts receivable, inventory, and or
personal guarantees of the principals of the business. For loans secured by
accounts receivable or inventory, principal is typically repaid as the assets
securing the loan are converted into cash, and in other cases principal is
typically due at maturity. The principal economic risk associated with each
category of loans, including commercial loans, is the creditworthiness of the
Bank's borrowers. The risks associated with commercial loans vary with many
economic factors, including the economy in the Aiken County area, especially the
tourist economy. The well-established banks in the Aiken County area will make
proportionately more loans to medium- to large-sized businesses than the bank.
Many of the bank's commercial loans are made to small- to medium-sized
businesses which may be less able to withstand competitive, economic, and
financial conditions than larger borrowers.
Consumer Loans. The bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans and lines of credit. These loans typically carry balances of less
than $25,000 and, in the case of non-revolving loans, are amortized over a
period typically not exceeding 60 months. The revolving loans typically bear
interest at a fixed rate and require monthly payments of interest and a portion
of the principal balance. As with the other categories of loans, the principal
economic risk associated with consumer loans is the creditworthiness of the
bank's borrowers, and the principal competitors for consumer loans is the
established banks in the Aiken County area.
Loan Approval and Review. The bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds an individual officer's lending authority, the loan
request is considered and approved by an officer with a higher lending limit.
The bank has established a Board loan committee that must approve any loan over
the Chief Executive Officer's lending limit. The bank does not make any loans to
directors, officers, or employees of the bank unless the loan is approved by the
board of directors of the bank and is made on terms not more favorable to such
person than would be available to a person not affiliated with the bank
(excluding consumer loans less than $20,000 which are available at employee
rates).
Lending Limits. The bank's lending activities are subject to a variety
of lending limits imposed by federal law. While differing limits apply in
certain circumstances based on the type of loan or the nature of the borrower
(including the borrower's relationship to the bank), in general the bank is
subject to a loan-to-one-borrower limit. This limit will increase or decrease as
the bank's capital increases or decreases. Unless the bank is able to sell
participations in its loans to other financial institutions, the bank will not
be able to meet all of the lending needs of loan customers requiring aggregate
extensions of credit above these limits.
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Other Banking Services
Other bank services include safe deposit boxes, travelers checks,
direct deposit of payroll and social security checks, and automatic drafts for
various accounts. The bank is associated with a shared network of automated
teller machines that may be used by bank customers throughout South Carolina and
other regions. The bank also offers credit card services through a correspondent
bank as an agent for the bank. The bank does not plan to exercise trust powers
during its initial years of operation, but has an agreement with the
Southeastern Trust company which provides trust services as an agent for the
bank. In addition, the bank plans to begin offering Internet banking in 2000.
On December 1, 1999, People's Financial Services, Inc. (the
Subsidiary), a subsidiary of the bank, commenced operations at the holding
company's headquarters. The Subsidiary is primarily engaged in providing
comprehensive financial planning services in addition to full service brokerage,
including stocks, bonds, mutual funds, and insurance products.
Competition
The banking business is highly competitive. The bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, and money market mutual funds operating in the
Aiken County area and elsewhere. As of December 31, 1999, there were 7
commercial banks (none of which are headquartered in Aiken County), one savings
banks, and 4 credit unions operating in Aiken County. A number of these
competitors are well established in the Aiken County area. Most of them have
substantially greater resources and lending limits than the Bank and offer
certain services, such as extensive and established branch networks and trust
services, that the Bank does not provide. As a result of these competitive
factors, the Bank may have to pay higher rates of interest to continue to
attract deposits.
Employees
The bank has approximately 23 full-time employees, three part-time
employees, and two part-time couriers. The company does not have any employees
other than its officers.
SUPERVISION AND REGULATION
Both the company and the bank are subject to extensive state and
federal banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight of virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following summary is qualified by
reference to the statutory and regulatory provisions discussed. Changes in
applicable laws or regulations may have a material effect on our business and
prospects. Beginning with the enactment of the Financial Institution Report
Recovery and Enforcement Act in 1989 and following with the FDIC Improvement Act
in 1991, numerous additional regulatory requirements have been placed on the
banking industry in the past several years, and additional changes have been
proposed. Our operations may be affected by legislative changes and the policies
of various regulatory authorities. We cannot predict the effect that fiscal or
monetary policies, economic control, or new federal or state legislation may
have on our business and earnings in the future.
Gramm-Leach-Bliley Act
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton on
November 12, 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily provided list of financial activities, including insurance and
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securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities.
The Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies.
In fact, it is not possible to predict the full effect that the Act will have on
us. From time to time other changes are proposed to laws affecting the Banking
industry, and these changes could have a material effect on our business and
prospects. We cannot predict the nature or the extent of the effect on our
business and earnings of fiscal or monetary policies, economic controls, or new
federal or state legislation.
People's Community Capital Corporation
Because it owns the outstanding capital stock of the bank, the company
is a bank holding company under the federal Bank Holding Company Act of 1956 and
the South Carolina Banking and Branching Efficiency Act.
The Bank Holding Company Act. Under the Bank Holding Company Act, the
company is subject to periodic examination by the Federal Reserve and required
to file periodic reports of its operations and any additional information that
the Federal Reserve may require. Our activities at the bank and holding company
level are limited to:
o banking and managing or controlling banks;
o furnishing services to or performing services for its subsidiaries;
and
o engaging in other activities that the Federal Reserve determines
to be so closely related to banking and managing or controlling
banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting
shares of any bank if after the acquisition it would own or
control more than 5% of the voting shares of such bank (unless it
already owns or controls the majority of such shares); or
o merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act, together with regulations
thereunder, require Federal Reserve approval prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. The
company's common stock is registered under the Securities Exchange Act of 1934.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the Bank Holding Company Act, a bank holding company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
than 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve Board, by order or regulation, has found those
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Federal
Reserve Board has determined by regulation to be proper incidents to the
business of a bank holding company include:
o making or servicing loans and certain types of leases;
o engaging in certain insurance and discount brokerage activities;
o performing certain data processing services;
o acting in certain circumstances as a fiduciary or investment or
financial adviser;
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o owning savings associations; and
o making investments in certain corporations or projects designed
primarily to promote community welfare.
The Federal Reserve Board imposes certain capital requirements on the
company under the Bank Holding Company Act, including a minimum leverage ratio
and a minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Regulations." Subject to its
capital requirements and certain other restrictions, the company is able to
borrow money to make a capital contribution to the bank, and these loans may be
repaid from dividends paid from the bank to the company. Our ability to pay
dividends is subject to regulatory restrictions as described below in "People's
Community Bank of South Carolina - Dividends." The company is also able to raise
capital for contribution to the bank by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, the company is expected to act as a source of financial strength
to the bank and to commit resources to support the bank in circumstances in
which the company might not otherwise do so. Under the Bank Holding Company Act,
the Federal Reserve Board may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Board's determination that such
activity or control constitutes a serious risk to the financial soundness or
stability of any subsidiary depository institution of the bank's holding
company. Further, federal bank regulatory authorities have additional discretion
to require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition.
South Carolina State Regulation. As a bank holding company registered
under the South Carolina Banking and Branching Efficiency Act, we are subject to
limitations on sale or merger and to regulation by the South Carolina Board of
Financial Institutions. We must receive the Board's approval prior to engaging
in the acquisition of banking or nonbanking institutions or assets, and we must
file periodic reports with respect to our financial condition and operations,
management, and intercompany relationships between the company and its
subsidiaries.
People's Community Bank of South Carolina
The bank operates as a South Carolina state chartered bank and is
subject to examination by the South Carolina Board of Financial Institutions.
Deposits in the bank are insured by the FDIC up to a maximum amount, which is
generally $100,000 per depositor subject to aggregation rules.
The South Carolina Board of Financial Institutions and the FDIC
regulate or monitor virtually all areas of the bank's operations, including:
o security devices and procedures;
o adequacy of capitalization and loss reserves;
o loans;
o investments;
o borrowings;
o deposits;
o mergers;
o issuances of securities;
o payment of dividends;
o interest rates payable on deposits;
o interest rates or fees chargeable on loans;
o establishment of branches;
o corporate reorganizations;
o maintenance of books and records; and
o adequacy of staff training to carry on safe lending and deposit
gathering practices.
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The South Carolina Board of Financial Institutions requires the bank to
maintain specified capital ratios and imposes limitations on the bank's
aggregate investment in real estate, bank premises, and furniture and fixtures.
The FDIC requires the bank to prepare quarterly reports on the bank's financial
condition and to conduct an annual audit of its financial affairs in compliance
with its minimum standards and procedures.
Under the FDIC Improvement Act, all insured institutions must undergo
regular on site examinations by their appropriate banking agency. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate agency against each institution or affiliate as it
deems necessary or appropriate. Insured institutions are required to submit
annual reports to the FDIC, their federal regulatory agency, and their state
supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop
a method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. The FDIC
Improvement Act also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating, among other things, to the
following:
o internal controls;
o information systems and audit systems;
o loan documentation;
o credit underwriting;
o interest rate risk exposure; and
o asset quality.
Deposit Insurance. The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for deposit insurance. A
separate Bank Insurance Fund and Savings Association Insurance Fund are
maintained for commercial banks and savings associations with insurance premiums
from the industry used to offset losses from insurance payouts when banks and
thrifts fail. In 1993, the FDIC adopted a rule which establishes a risk-based
deposit insurance premium system for all insured depository institutions. Under
this system, until mid-1995 depository institutions paid to Bank Insurance Fund
or Savings Association Insurance Fund from $0.23 to $0.31 per $100 of insured
deposits depending on its capital levels and risk profile, as determined by its
primary federal regulator on a semiannual basis. Once the Bank Insurance Fund
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually eliminating premiums for
well-capitalized banks, with a minimum semiannual assessment of $1,000. However,
in 1996 Congress enacted the Deposit Insurance Funds Act of 1996, which
eliminated even this minimum assessment. It also separated the Financial
Corporation assessment to service the interest on its bond obligations. The
amount assessed on individual institutions by the Financial Corporation
assessment is in addition to the amount paid for deposit insurance according to
the risk-related assessment rate schedule. Increases in deposit insurance
premiums or changes in risk classification will increase the bank's cost of
funds, and we may not be able to pass these costs on to our customers.
Transactions With Affiliates and Insiders. The bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which places limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and, as to all affiliates combined, to 20% of
the bank's capital and surplus. Furthermore, within the foregoing limitations as
to amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the taking
of low quality assets.
The bank is also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibits an institution from
engaging in certain transactions with certain affiliates unless the transactions
are on terms substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies. The bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
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collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Dividends. The bank is subject to regulatory restrictions on the
payment of dividends, including a prohibition of payment of dividends from its
capital. All dividends must be paid out of the undivided profits then on hand,
after deducting expenses, including losses and bad debts. The bank must also
obtain approval from the South Carolina Board of Financial Institutions prior to
the payment of any dividends. In addition, under the FDIC Improvement Act, the
bank may not pay a dividend if, after paying the dividend, the bank would be
undercapitalized. See "Capital Regulations" below.
Branching. Under current South Carolina law, we may open bank branch
offices throughout South Carolina with the prior approval of the South Carolina
Board of Financial Institutions. In addition, with prior regulatory approval,
the bank may acquire existing banking operations in South Carolina. Furthermore,
federal legislation has recently been passed which permits interstate branching.
The new law permits out-of-state acquisitions by bank holding companies,
interstate branching by banks if allowed by state law, interstate merging by
banks, and de novo branching by banks if allowed by state law.
Community Reinvestment Act. The Community Reinvestment Act requires
that, in connection with examinations of financial institutions within their
respective jurisdictions, a financial institution's primary federal regulator
(this is the FDIC for our bank) shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on the bank.
Other Regulations. Interest and other charges collected or contracted
for by the bank are subject to state usury laws and federal laws concerning
interest rates. The bank's loan operations are also subject to federal laws
applicable to credit transactions, such as:
o the federal Truth-In-Lending Act, governing disclosures of credit
terms to consumer borrowers;
o the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and
public officials to determine whether a financial institution is
fulfilling its obligation to help meet the housing needs of the
community it serves;
o the Equal Credit Opportunity Act, prohibiting discrimination on
the basis of race, creed or other prohibited factors in
extending credit;
o the Fair Credit Reporting Act of 1978, governing the use and
provision of information to credit reporting agencies;
o the Fair Debt Collection Act, governing the manner in which
consumer debts may be collected by collection
agencies; and
o the rules and regulations of the various federal agencies
charged with the responsibility of implementing such federal laws.
The deposit operations of the bank also are subject to:
o the Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas
of financial records; and
o the Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve Board to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services.
Capital Regulations. The federal bank regulatory authorities have
adopted risk-based capital guidelines for banks and bank holding companies that
are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies and account
for off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and
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should maintain ratios in excess of the minimums. We have not received any
notice indicating that either the company or the bank is subject to higher
capital requirements. 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
includes common shareholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight applies. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is equal to Tier 1 capital as a percentage of average
total assets less intangibles, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis points.
The FDIC Improvement Act established a new capital-based regulatory
scheme designed to promote early intervention for troubled banks which requires
the FDIC to choose the least expensive resolution of bank failures. The new
capital-based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%, and
the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. Currently, we
qualify as "well capitalized."
Under the FDIC Improvement Act regulations, the applicable agency can
treat an institution as if it were in the next lower category if the agency
determines (after notice and an opportunity for hearing) that the institution is
in an unsafe or unsound condition or is engaging in an unsafe or unsound
practice. The degree of regulatory scrutiny of a financial institution
increases, and the permissible activities of the institution decreases, as it
moves downward through the capital categories. Institutions that fall into one
of the three undercapitalized categories may be required to do some or all of
the following:
o submit a capital restoration plan;
o raise additional capital;
o restrict their growth, deposit interest rates, and other activities;
o improve their management;
o eliminate management fees; or
o divest themselves of all or a part of their operations.
Bank holding companies controlling financial institutions can be called upon to
boost the institutions' capital and to partially guarantee the institutions'
performance under their capital restoration plans.
These capital guidelines can affect us in several ways. If we grow at a
rapid pace, our capital may be depleted too quickly, and a capital infusion from
the holding company may be necessary which could impact our ability to pay
dividends. Our capital levels currently are adequate; however, rapid growth,
poor loan portfolio
10
<PAGE>
performance, poor earnings performance, or a combination of these factors could
change our capital position in a relatively short period of time.
Failure to meet these capital requirements would mean that a bank would
be required to develop and file a plan with its primary federal banking
regulator describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time.
Enforcement Powers. The Financial Institution Report Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs. These practices can include the failure of an institution
to timely file required reports or the filing of false or misleading information
or the submission of inaccurate reports. Civil penalties may be as high as
$1,000,000 a day for such violations. Criminal penalties for some financial
institution crimes have been increased to 20 years. In addition, regulators are
provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, banking agencies'
power to issue cease-and-desist orders were expanded. Such orders may, among
other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected by
domestic economic conditions and the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve Bank's monetary policies
have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The monetary policies of the Federal Reserve Board have major effects
upon the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact
of future changes in monetary and fiscal policies.
Item 2. Description of Property
- --------------------------------
The company's main office is located at 106-A Park Avenue, SW, Aiken,
South Carolina and has approximately 5,160 square feet.
The bank's main office is located at 1715 Whiskey Road, Aiken, South
Carolina and was opened on September 22, 1997. It is a 2,600 square foot
facility with three drive-through banking stations and an automated teller
machine. A branch was opened approximately 15 miles away at 518 Georgia Avenue,
North Augusta, South Carolina on September 24, 1997. The branch has 3,600 square
feet and a 338 square foot drive-through banking facility with two drive-through
stations. The North Augusta location also has an automated teller machine. A
second branch was opened at the company's main office location of 106-A Park
Avenue, SW, Aiken, South Carolina on September 8, 1998. The branch is
approximately five miles from the bank's main office and is located in downtown
Aiken. The branch subleases approximately 3,000 square feet of the company's
office space. There are no drive-through stations and there is not an automated
teller machine at this location.
The bank owns the property at 1715 Whiskey Road in Aiken and the
property in North Augusta. During February 2000, the company renewed the lease
of its space under terms of the contract which now expire in August 2000 with
another 6 month option to renew until February 2001. The bank has purchased
property in downtown Aiken on which it plans to build a permanent office
location to replace the leased premises. A construction date has not yet been
determined.
11
<PAGE>
Item 3. Legal Proceedings.
- --------------------------
Neither the company nor the bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the company or the bank.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Item 5. Market for Common Equity and Related Stockholder Matters.
- -----------------------------------------------------------------
In response to this Item, the information contained on page 43 of the
company's Annual Report to shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis and Financial Statements
- ----------------------------------------------------------------------
In response to this Item, the information contained on pages 4 through
17 of the company's Annual Report to shareholders for the year ended December
31, 1999 is incorporated herein by reference.
Item 7. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None.
Item 8. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ----------------------------------------------------------------------
In response to this Item, the information contained on page 11 of the
company's Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 2000 is incorporated herein by reference.
Item 9. Executive Compensation
- -------------------------------
In response to this Item, the information contained on pages 7 through
9 of the company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 27, 2000 is incorporated herein by reference.
Item 10. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
In response to this Item, the information contained on pages 9 through
10 of the company's Proxy Statement for the Annual Meeting of shareholders to be
held on April 27, 2000 is incorporated herein by reference.
Item 11. Certain Relationships and Related Transactions
- --------------------------------------------------------
In response to this Item, the information contained on pages 10 through
11 of the company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 27, 2000 is incorporated herein by reference.
Item 12. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) The following documents are filed as part of this report:
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Registration Statement on
Form SB-2, File No. 333-25179).
12
<PAGE>
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of the Registration Statement on Form SB-2, File No.
333-25179).
4.1 Provisions in the Company's Articles of Incorporation and
Bylaws defining the rights of holders of the Company's Common
Stock (incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form SB-2, File No. 333-25179).
4.2 Form of Certificate of Common Stock (incorporated by reference
to Exhibit 4.2 of the Registration Statement on Form
SB-2, File No. 333-25179).
10.1 Purchase and Sale Agreement dated March 20, 1997, by and
between NationsBank National Association, as seller, and
People's Community Capital Corporation, as purchaser
(incorporated by reference to Exhibit 10.1 of the Registration
Statement on Form SB-2, File No. 333-25179).
10.2 Employment Agreement dated March 3, 1997, between the Company
and Tommy B. Wessinger (incorporated by reference to
Exhibit 10.2 of the Registration Statement on Form SB-2,
File No. 333-25179).
10.3 Employment Agreement dated March 3, 1997, by and between the
Company and Alan J. George (incorporated by reference to
Exhibit 10.3 of the Registration Statement on Form SB-2, File
No. 333-25179).
10.4 Escrow Agreement dated March 14, 1997, by and between The
Bankers Bank and the Company (incorporated by reference to
Exhibit 10.4 of the Registration Statement on Form SB-2, File
No. 333-25179).
10.5 Lease Agreement dated February 28, 1997, between the Company,
as lessee, and Margaret Holley-Taylor, as lessor (incorporated
by reference to Exhibit 10.5 of the Registration Statement on
Form SB-2, File No. 333-25179).
10.6 Form of Subscription Agreement (incorporated by reference to
Exhibit 10.6 of the Registration Statement on Form
SB-2, File No. 333-25179).
10.9. Sales Agency Agreement dated July 9, 1997 between the Company
and Interstate/Johnson Lane Corporation (incorporated by
reference to Exhibit 10.9 of the Quarterly Report on Form
10-QSB for the period ended September 30, 1997, File No.
333-25179).
10.10. Second Amendment to Lease Agreement dated August 4, 1998 by
and between the Company and Ms. Margaret C. Holley
(incorporated by reference to Exhibit 10.10 of the Quarterly
Report on Form 10-KSB for the period ended December 31,
1998, File No. 333-25179).
10.11. People's Community Capital Corporation 1998 Stock Incentive
Plan (incorporated by reference to Exhibit 10.11 of the
Quarterly Report on Form 10-KSB for the period ended December
31, 1998, File No. 333-25179).
13 Annual Report for year ended December 31, 1999.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for electronic filing purposes).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1999.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PEOPLE'S COMMUNITY CAPITAL CORPORATION
Date: March 24, 2000 By: /s/ Alan J. George
-------------------------------------
Alan J. George
President and Chief Operating Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Alan J. George, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Raymond D. Brown Director March 24, 2000
----------------------------------
Raymond D. Brown
/s/ Alan J. George Director, President and Chief March 24, 2000
----------------------------------
Alan J. George Operating Officer
/s/ Anthony E. Jones Director March 24, 2000
----------------------------------
Anthony E. Jones
/s/ James D. McNair Director March 24, 2000
----------------------------------
James D. McNair
/s/ Clark D. Moore, M.D. Director March 24, 2000
----------------------------------
Clark D. Moore, M.D.
/s/ Russell D. Phelon Director March 24, 2000
----------------------------------
Russell D. Phelon
/s/ Margaret Holley-Taylor Director March 24, 2000
----------------------------------
Margaret Holley-Taylor
14
<PAGE>
/s/ Donald W. Thompson Director March 24, 2000
----------------------------------
Donald W. Thompson
/s/ John B. Tomarchio, M.D. Director March 24, 2000
----------------------------------
John B. Tomarchio, M.D.
/s/ Tommy B. Wessinger Director; Chairman; Chief Executive March 24, 2000
----------------------------------
Tommy B. Wessinger Officer
/s/ Jean H. Covington Chief Financial Officer March 24, 2000
----------------------------------
Jean H. Covington
</TABLE>
15
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-25179).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2
of the Registration Statement on Form SB-2, File No. 333-25179).
4.1 Provisions in the Company's Articles of Incorporation and Bylaws
defining the rights of holders of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form SB-2, File No. 333-25179).
4.2 Form of Certificate of Common Stock (incorporated by reference to
Exhibit 4.2 of the Registration Statement on Form SB-2, File No.
333-25179).
10.1 Purchase and Sale Agreement dated March 20, 1997, by and between
NationsBank National Association, as seller, and People's
Community Capital Corporation, as purchaser (incorporated by
reference to Exhibit 10.1 of the Registration Statement on Form
SB-2, File No. 333-25179).
10.2 Employment Agreement dated March 3, 1997, between the Company and
Tommy B. Wessinger (incorporated by reference to Exhibit 10.2 of
the Registration Statement on Form SB-2, File No. 333-25179).
10.3 Employment Agreement dated March 3, 1997, by and between the
Company and Alan J. George (incorporated by reference to Exhibit
10.3 of the Registration Statement on Form SB-2, File No.
333-25179).
10.4 Escrow Agreement dated March 14, 1997, by and between The Bankers
Bank and the Company (incorporated by reference to Exhibit 10.4
of the Registration Statement on Form SB-2, File No. 333-25179).
10.5 Lease Agreement dated February 28, 1997, between the Company, as
lessee, and Margaret Holley-Taylor, as lessor (incorporated by
reference to Exhibit 10.5 of the Registration Statement on Form
SB-2, File No. 333-25179).
10.6 Form of Subscription Agreement (incorporated by reference to
Exhibit 10.6 of the Registration Statement on Form SB-2, File No.
333-25179).
10.9 Sales Agency Agreement dated July 9, 1997 between the Company and
Interstate/Johnson Lane Corporation (incorporated by reference to
Exhibit 10.9 of the Quarterly Report on Form 10-QSB for the
period ended September 30, 1997, File No. 333-25179).
10.10 Second Amendment to Lease Agreement dated August 4,
1998 by and between the Company and Ms. Margaret C.
Holley (incorporated by reference to
16
<PAGE>
Exhibit 10.10 of the Quarterly Report on Form 10-KSB for the
period ended December 31, 1998, File No. 333-25179).
10.11 People's Community Capital Corporation 1998 Stock
Incentive Plan (incorporated by reference to Exhibit
10.10 of the Quarterly Report on Form 10-KSB for the
period ended December 31, 1998, File No. 333-25179).
13 Annual Report for the year ended December 31, 1999.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule (for electronic filing purposes).
17
People's Community Capital Corporation
1999 Annual Report
Page
Letter to Shareholders and Customers......................... 2
Selected Financial Data.................................. 3
Management's Discussion and Analysis ........................ 4-17
Report of Independent Certified Public Accountants........... 18
Consolidated Balance Sheets.................................. 19
Consolidated Statements of Income............................ 20
Consolidated Statements of Comprehensive Income.............. 21
Consolidated Statements of Shareholders' Equity.............. 22
Consolidated Statements of Cash Flows...................... 23
Notes to Consolidated Financial Statements................... 24-41
Directors, Officers and Locations............................ 42
Corporate Data............................................... 43
<PAGE>
TO OUR SHAREHOLDERS AND CUSTOMERS
The year 1999 marked our second full year of operations for your
Company. At year end, total assets were $54.8 million, an increase of $18.3
million, or 49% over the 1998 year end. Loans grew by 60% with deposits growing
by 61%. Our customer base doubled to approximately 6,000 customers as we
continue to attract customers who want a high level of service at reasonable
prices. The growth in the Company's assets allowed the Company to operate
profitably in all four quarters of 1999, ending the year with an operating
income of $571,000. This left our net loss since starting the Company in
September 1997 at only $58,000 after just 2 1/4 years of operation.
The Company continues to look for quality in building its loan
portfolio. At December 31, 1999, the Company had no non-performing loans and net
charge-offs totaled $1,383 for the year. The Company set aside an additional
$126,000 as a reserve for loan losses bringing the reserve to $410,000, or 1.22%
of gross loans.
In January 1999, your Board of Directors voted to repurchase up to 10%
of the total outstanding stock of the Company. As of December 31, 1999, the
Company had purchased 15,000 shares of treasury stock at an average cost per
share of $10.50.
On December 1, 1999, People's Financial Services, Inc., a subsidiary of
the Bank, commenced operations. The subsidiary is primarily engaged in providing
comprehensive financial planning services in addition to full service brokerage,
including stocks, bonds, mutual funds, and insurance products. We are excited
about this new service and the customers and income it can provide for your
Company.
Your Company expects to introduce internet banking in the second
quarter of this year as an additional service to our existing customer base and
as a means of attracting new customers.
Finally, the concerns associated with the year 2000 computer problems
are behind us. We are happy to tell you that your Company responded to this
challenge without any problems. Since we are a new Company, the costs associated
with this concern were insignificant, although much time and effort was devoted
to the issues.
We are proud of the success your Company achieved in 1999 and look
forward to our continued success in 2000. We have the best associates in the
banking industry in our market, and we continue to believe our people make the
success of your Company possible.
With your help and support, we are confident that 2000 and beyond will
prove successful for your Company. We welcome your comments and suggestions.
Tommy B. Wessinger Alan J. George
Chairman and Chief Executive Officer President and Chief Operating Officer
2
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data
concerning the Company for the years ended December 31, 1999 and December 31,
1998. The selected financial data has been derived from the consolidated
financial statements that have been audited by Elliott, Davis, & Company, LLP,
independent accountants. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
1999 1998
Balance Sheets:
<S> <C> <C>
Federal funds sold $ 5,550,000 $ 3,830,000
Securities available for sale 10,711,010 8,734,879
Net loans 33,225,197 20,717,698
Properties and equipment, net 1,678,862 1,718,705
Total assets 54,794,787 36,539,413
Non-interest bearing deposits 6,672,434 4,973,931
Interest bearing deposits 36,496,307 21,761,653
Total deposits 43,168,741 26,735,584
Total liabilities 45,338,031 27,122,863
Total stockholders' equity $ 9,456,756 $ 9,416,550
Results of Operations:
Interest income $ 3,218,635 $ 2,051,929
Interest expense 1,101,090 764,956
Net interest income 2,117,545 1,286,973
Provision for loan losses 126,383 225,000
Net interest income after provision 1,991,162 1,061,973
Non-interest income 294,685 183,230
Non-interest expense 1,714,803 1,457,244
Income (loss) from operations 571,044 (212,041)
Income tax expense (benefit) 227,935 (100,207)
Net income (loss) $ 343,109 $ (111,834)
Per Share Data - Basic:
Weighted average common shares
outstanding 995,170 994,052
Net income (loss) per share of common stock $ .34 $ (.11)
Capital and Liquidity Ratios:
Average equity to average assets 21.57% 30.35%
Leverage (4% required minimum) 12.54% 16.74%
Risk-based capital: (Bank only)
Tier 1 16.19% 22.39%
Total 17.34% 23.59%
Average loans to average deposits 77.10% 56.80%
</TABLE>
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of People's
Community Capital Corporation. This commentary should be read in conjunction
with the financial statements and the related notes and other statistical
information in this report.
GENERAL
People's Community Capital Corporation (the Company) was incorporated
in South Carolina on February 26, 1997 for the purpose of operating as a bank
holding company. The Company's wholly-owned subsidiary, People's Community Bank
of South Carolina (the Bank), commenced business on September 22, 1997 and is
primarily engaged in the business of accepting savings and demand deposits and
providing mortgage, consumer and commercial loans to the general public. The
Bank operates two banking centers located in Aiken and one located in North
Augusta, South Carolina.
The second banking center located in Aiken was opened on September 8,
1998 in leased offices that also are the headquarters of the holding company.
The Company has purchased a tract of land in downtown Aiken for the construction
of a permanent banking center office. The cost of the land and preliminary
construction costs through December 31, 1999 was approximately $160,000.
Construction of the office is expected to begin in the year 2000.
On December 1, 1999, People's Financial Services, Inc. (the
Subsidiary), a subsidiary of the Bank, commenced operations at the holding
company's headquarters. The Subsidiary is primarily engaged in providing
comprehensive financial planning services in addition to full service brokerage,
including stocks, bonds, mutual funds, and insurance products.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS REVIEW
People's Community Capital Corporation is a one bank holding company.
Principal banking operations of the Company's only bank subsidiary commenced on
September 22, 1997. The Company's first quarterly profit was recorded in the
fourth quarter of 1998. The Company expected to experience losses until the Bank
grew its assets to a point where the assets generated revenue from operations
that exceeded the Bank's fixed costs.
The Company's net income for the year ended December 31, 1999 was
$343,109 compared to a loss of $111,834 for the year ended December 31, 1998,
the Bank's first full year of operations. Income per share was $.34 for 1999
compared to a loss of $.11 per share for 1998. As mentioned, in the fourth
quarter of 1998, the Company recorded a profit of $42,654, or $.05 per share.
The profit for the same period in 1999 was $94,853, or $.10 per share. The
variance in performance between the two periods is directly attributable to the
growth curve of the Company as it has attracted more deposits and increased its
earning assets. The return on average assets for 1999 and 1998 was 0.78% and
(0.36%), respectively, and return on average equity was 3.63% and (1.20%),
respectively. The Company has not yet paid cash dividends. The following is a
brief discussion of the more significant components of net income.
4
<PAGE>
Net Interest Income
General. The largest component of the Company's net income is its net
interest income, which is the difference between the income earned on assets and
interest paid on deposits and borrowings used to support such assets. Net
interest income is determined by the yields earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
Net interest income totaled $2,117,545 in 1999, compared with $1,286,973 in
1998. Net interest spread, the difference between the yield on earning assets
and the rate paid on interest-bearing liabilities, was 4.11% in 1999 as compared
to 3.15% in 1998. The reason for the increase was primarily due to the
continuing change in mix of the earning asset portfolios. During 1999, loans
represented 66.0% of the average earning assets as compared to 44.7% in 1998.
Loans typically provide a higher yield than other types of earning assets.
Average Balances, Income, Expenses, and Rates. The following presents,
in a tabular form, average balance sheets that highlight the main components of
interest earning assets and interest bearing liabilities, on an annualized
basis, for the years ended December 31, 1999 and 1998. Yields are derived by
dividing income or expense by the average balance of the corresponding assets or
liabilities. Average balances have been derived from daily averages.
<TABLE>
<CAPTION>
AVERAGE BALANCES, INCOME, EXPENSES AND RATES
1999 1999 1999 1998 1998 1998
Average Income/ Yield/ Average Income/ Yield/
Assets Balance Expense Rate Balance Expense Rate
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 3,885,172 $ 194,278 5.00% $ 4,913,723 $ 264,832 5.39%
Short-term investments - - - 168,364 10,359 6.15%
Securities 9,695,789 598,982 6.18% 9,778,410 611,234 6.25%
Loans 26,402,721 2,425,375 9.19% 12,036,978 1,165,504 9.68%
------------ ---------- ----------- ----------
Total earning assets 39,983,682 3,218,635 8.05% 26,897,475 2,051,929 7.63%
Cash and due from banks 1,526,447 1,611,138
Premises and equipment 1,694,986 1,633,448
Other assets 910,399 823,440
Allowance for loan losses (343,427) (172,500)
------------ -----------
Total assets $43,772,087 $30,793,001
============ ===========
Liabilities & equity
Interest-bearing deposits:
Transaction accounts $4,929,384 55,875 1.13% 2,687,264 45,746 1.70%
Money market accounts 9,204,213 349,423 3.80% 6,489,132 290,956 4.48%
Savings deposits 590,426 14,295 2.42% 234,853 5,846 2.49%
Time deposits 12,866,048 665,713 5.17% 7,533,643 415,333 5.51%
---------- ----------- ----------- ----------
Total int-bearing deposits 27,590,071 1,085,306 3.93% 16,944,892 757,881 4.47%
Interest-bearing borrowings 332,703 15,784 4.74% 138,828 7,075 5.10%
------------ ----------- ----------- ----------
Total int-bearing
liabilities 27,922,774 1,101,090 3.94% 17,083,720 764,956 4.48%
Demand deposits 6,320,760 4,246,640
Other liabilities 88,246 115,969
Shareholders' equity 9,440,307 9,346,672
------------ -----------
Total liabilities and share-
holders' equity $43,772,087 $30,793,001
============ ===========
Net interest spread 4.11% 3.15%
Net interest income/margin $2,117,545 5.30% $1,286,973 4.78%
=========== ==========
</TABLE>
5
<PAGE>
All loans and deposits are domestic. The effect of loans in non-accrual
status at any point in the periods presented is not significant to the
computations.
Analysis of Changes in Net Interest Income. The following table sets
forth the effect which the varying levels of earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
from 1998 to 1999 and from 1997 to 1998.
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
--------------------------- ---------------------------
Variance Due to Variance Due to
Volume Rate Net Volume Rate Net
------ --------------- --- ------ ----------- ---
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Loans $1,389,244 $ (129,373) $1,259,871 $1,232,361 $(119,166) $1,113,195
Securities (5,465) (6,787) (12,252) 566,713 8,801 575,514
Federal funds sold (55,402) (15,152) (70,554) 38,880 (12,776) 26,104
Other short-term investments (10,359) 0 (10,359) 10,359 0 10,359
------------ ---------- ---------- ----------- --------- ----------
Total earning assets 1,318,018 (151,312) 1,1,66,706 1,848,313 (123,141) 1,725,172
------------ ---------- ---------- ----------- --------- ----------
Interest-bearing liabilities
Transaction accounts 38,226 (28,097) 10,129 44,901 (6,181) 38,720
Money market accounts 121,056 (62,589) 58,467 305,270 (55,806) 249,464
Savings deposits 8,862 (413) 8,449 5,338 164 5,502
Time deposits 294,125 (43,745) 250,380 405,981 (22,601) 383,380
Other short-term borrowings 9,907 (1,198) 8,709 7,075 0 7,075
------------ ---------- ---------- ----------- --------- ----------
Total interest-bearing
liabilities 472,176 (136,042) 336,134 768,565 (84,424) 684,141
------------ ---------- ----------- ----------- --------- ----------
Net interest income $ 845,842 $ ( 15,270) $ 830,572 $1,079,748 $ (38,717) $1,041,031
============ ========== =========== =========== ========= ==========
</TABLE>
Liquidity and Interest Rate Sensitivity. Asset/liability management
is the process by which the Company monitors and controls the mix and maturities
of its assets and liabilities. The essential purposes of asset/liability
management are to ensure adequate liquidity and to maintain an appropriate
balance between interest sensitive assets and liabilities to minimize
potentially adverse impacts on earnings from changes in market interest rates.
Primary sources of liquidity for the Company are a stable base of
deposits, scheduled repayments on the Company's loans, and interest and
maturities on its investments. All securities of the Company have been
classified as available for sale. If necessary, the Company might sell a portion
of its investment securities in connection with the management of its interest
sensitivity gap or to manage liquidity. The Company may also utilize its cash
and due from banks and federal funds sold to meet liquidity needs. Additionally,
the Company has unsecured lines of credit with two banks in the amount of
$1,800,000 each, on which no borrowings have been drawn, that can be utilized if
needed. Also, the Bank is a member of the Federal Home Loan Bank where credit
facilities may be accessed. The Company believes that its liquidity and ability
to manage assets will be sufficient to meet its cash requirements over the near
future.
One monitoring technique employed by the Company is the measurement
of the Company's interest sensitivity "gap", which is the positive or negative
dollar difference between assets and liabilities that are subject to interest
rate repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities available for
sale, replacing an asset or liability at maturity, or adjusting the interest
rate during the life of an asset or liability. Managing the amount of assets and
liabilities repricing in this same time interval helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.
The Company generally would benefit from
6
<PAGE>
increasing market rates of interest when it has an asset-sensitive gap position
and generally would benefit from decreasing market rates of interest when it is
liability-sensitive.
At December 31, 1999, the Company was liability-sensitive over the
three month and twelve month time frames and asset-sensitive after one year.
However, the Company's gap analysis is not a precise indicator of its interest
sensitivity position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities equally. For
example, rates paid on a substantial portion of core deposits may change
contractually within a relatively short time frame, but those rates are viewed
by management as significantly less interest-sensitive than market-based rates
such as those paid on non-core deposits. Net interest income may be impacted by
other significant factors in a given interest rate environment, including
changes in the volume and mix of earning assets and interest-bearing
liabilities.
The following table presents the Company's rate sensitivity at each
of the time intervals indicated as of December 31, 1999. The table may not be
indicative of the Company's rate sensitivity position at other points in time.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
Within After three but After one but After
Three within twelve within five five
Months months years years Total
------ ------ ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 5,550 $ ---- $ ---- $ ---- $ 5,550
Investment securities 101 497 9,147 966 10,711
Loans 9,338 2,518 18,759 3,020 33,635
---------- --------- -------- --------- --------
Total interest-earning assets 14,989 3,015 27,906 3,986 49,896
Interest-bearing liabilities:
Transaction accounts 6,174 ---- ---- ---- 6,174
Money market accounts 10,642 ---- ---- ---- 10,642
Savings deposits 700 ---- ---- ---- 700
Time deposits 3,916 10,007 5,057 ---- 18,980
---------- ---------- --------- --------- ---------
Total interest-bearing deposits 21,432 10,007 5,057 ---- 36,496
Other borrowings 2,006 ---- ---- ---- 2,006
---------- ---------- --------- --------- ---------
Total interest-bearing liabilities $ 23,438 $ 10,007 $ 5,057 $ ---- $ 38,502
Period gap $ (8,449) $ (6,992) $ 22,849 $ 3,986 $ 11,394
Cumulative gap $ (8,449) $ (15,441) $ 7,408 $ 11,394 $ 11,394
Ratio of cumulative gap to total
earning assets (16.93)% (30.95)% 14.85% 22.84%
</TABLE>
Provision and Allowance for Loan Losses
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential credit problems. Management's judgment about the adequacy of the
allowance is based on a number of assumptions about future events which it
believes to be reasonable, but which may or may not be accurate. Thus, there can
be no assurance that
7
<PAGE>
charge-offs in future periods will not exceed the allowance for loan losses as
estimated at any point in time.
Additions to the allowance for loan losses, which are expenses to the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. The Company
does not allocate the allowance for loan losses to specific categories of loans
but evaluates the adequacy on an overall portfolio basis utilizing a risk
grading system.
At December 31, 1999 and 1998, the allowance for loan losses was
$410,000 and $285,000, respectively. This represents 1.22% and 1.36% of
outstanding loans at December 31, 1999 and 1998, respectively. The Bank charged
off $1,383 of loans, net of recoveries, during 1999. There have been no other
loan charge-offs since commencing operations. There were no non-accrual or
non-performing loans at December 31, 1999 or 1998, nor any loans delinquent more
than 90 days. The provision for loan losses was made based on management's
assessment of general loan loss risk and asset quality. Below is an analysis of
the Allowance for Loan Losses for 1999 and 1998.
ALLOWANCE FOR LOAN LOSSES
Year Ended December 31
----------------------
1999 1998
---- ----
Average loans outstanding (all domestic) $26,402,721 $12,036,978
Allowance, beginning of year $285,000 $ 60,000
Charge-offs 1,403 ----
Recoveries 20 ----
Net charge-offs 1,383 ----
Provision for loan losses 126,383 225,000
Allowance, end of year $410,000 $285,000
Net charge-offs to average loans 0.00% ----
Allowance as percent of total loans 1.22% 1.36%
Non-performing loans as percent of total loans ---- ----
Allowance as percent of non-performing loans ---- ----
Accrual of interest is discontinued on loans when management
believes, after considering economic and business conditions and collection
efforts, that a borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan is generally placed in non-accrual
status when it becomes 90 days or more past due. At the time the loan is placed
in non-accrual status, all interest which has been accrued on the loan but
remains unpaid is reserved and deducted from earnings as a reduction of reported
net income. No additional interest is accrued on the loan balance until the
collection of both principal and interest becomes reasonably certain. There were
no loans in non-accrual status at December 31, 1999 or 1998.
8
<PAGE>
Non-interest Income
Non-interest income for the year ended December 31, 1999 was $294,685
compared to $183,230 for 1998. Of this total, $200,025 represented service
charges on deposit accounts compared to $85,089 in 1998. The increase in service
charge income was primarily the result of substantial growth in deposit accounts
and related deposit account fees. The remaining $94,660 of non-interest income
was primarily income generated from other fees charged, the largest of which was
brokered mortgage origination fee income of $42,221.
Non-interest Expense
Non-interest expense increased from $1,457,244 for the period ended
December 31, 1998 to $1,714,803 for the year ended December 31, 1999. The
majority of the expense in 1999 and 1998 was salaries and benefits of $1,000,056
and $878,391, respectively. The increase of $121,665 is primarily due to normal
merit increases, the addition of two full-time equivalents in August 1998, and
incentive bonuses accrued in 1999 for reaching earnings and performance goals.
General operating expenses increased $122,162, from $151,470 in 1998 to $273,632
in 1999 primarily due to cost increases from our data processing vendor. The
price increases reflected the elimination of start-up pricing concessions as
well as volume increases. Other general price increases were also realized as a
result of increased volume such as Federal Reserve processing fees,
correspondent bank fees, postage, and office supplies. Refer to the Statements
of Income for the primary components of non-interest expense for the years ended
December 31, 1999 and 1998.
BALANCE SHEET REVIEW
Total consolidated assets grew to $54,794,787 at December 31, 1999 from
$36,539,413 at December 31, 1998, an increase of $18,255,374. The increase was
generated primarily through a corresponding $16,433,157 increase in deposits.
Earning Assets
Loans. Loans typically provide higher yields than the other types of
earning assets, and as such should normally comprise the largest portion of
earning assets. Outstanding loans did represent the largest component of earning
assets as of December 31, 1999 at $33,225,197, or 67.1% of total earning assets.
As of December 31, 1998, loans were $20,717,698, accounting for 62.2% of earning
assets. Net loans increased $12,507,499 from December 31, 1998 to December 31,
1999, which was a decrease compared to the loan growth for the previous year of
$16,828,535. Loan growth is not typically expected to grow in a start-up bank at
the same rates experienced in the initial year or two of operations. Average
loans were $26,402,721 in 1999 and $12,036,978 in 1998.
The principal components of the Company's loan portfolio, at year end
1999 and 1998, were real estate loans comprising a combined 80.64% and 78.35% of
total loans, respectively. The following table shows the composition of the loan
portfolio by category.
9
<PAGE>
<TABLE>
<CAPTION>
LOANS
December 31, 1999 December 31, 1998
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 3,878,990 11.53% $ 3,123,919 14.87%
Real estate:
Mortgage - residential 10,985,575 32.66% 6,457,298 30.75%
Mortgage - commercial 15,112,891 44.93% 8,960,654 42.66%
Other 1,026,358 3.05% 1,038,449 4.94%
Consumer 2,454,135 7.30% 1,410,480 6.72%
Other 177,248 .53% 11,898 .06%
------------- --------- ------------- ---------
Total loans 33,635,197 100.00% 21,002,698 100.00%
Allowance for loan losses (410,000) (285,000)
------------- -------------
Total net loans $33,225,197 $20,717,698
============= =============
</TABLE>
In the context of this discussion, a "real estate loan" is defined as
any loan secured by real estate, regardless of the purpose of the loan. It is
common practice for financial institutions in the Company's market area to
obtain a security interest in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to reinforce the likelihood
of the ultimate repayment of the loan and tends to increase the magnitude of the
real estate loan portfolio component. Also, due to the short term the loan
portfolio has existed, the current portfolio may not be indicative of the
ongoing portfolio mix.
The repayment of loans in the loan portfolio as they mature is also a
source of liquidity for the Company. The following table sets forth the
Company's loans maturing within specified intervals at December 31, 1999.
<TABLE>
<CAPTION>
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN
INTEREST RATES AT DECEMBER 31, 1999
Over One Year
One Year Through Over
or Less Five Years Five Years Total
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 966,129 $ 2,772,099 $ 140,762 $ 3,878,990
Real estate 3,474,688 15,562,557 8,087,579 27,124,824
Consumer and other 688,766 1,830,709 111,908 2,631,383
----------- ------------ ----------- ------------
$5,129,583 $20,165,365 $8,340,249 $33,635,197
=========== ============ =========== ============
Loans maturing after one year with:
Fixed interest rates $24,039,594
Floating interest rates 4,466,020
------------
$28,505,614
============
</TABLE>
10
<PAGE>
The information presented in the above table is based on the
contractual maturities of the individual loans, including loans that may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity.
Investment Securities. At December 31, 1999, the investment securities
portfolio of the Company represented 21.6% of earning assets with a total of
$10,711,010, compared to the balance at December 31, 1998 of $8,734,879 when
investment securities were 26.2% of earning assets. All securities were
designated as available for sale and were recorded at estimated fair value. The
Company primarily invests in U.S. Government agencies with maturities up to five
years and also owns stock in the Federal Home Loan Bank. Contractual maturities
and yields on the Company's investments at December 31, 1999 are shown on the
following table. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Investment Securities Maturity Distribution and Yields
After one
No Within but within Over
Maturity one year Yield five years Yield five years Yield
-------- -------- ----- ---------- ----- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies --- $496,875 5.29% $9,147,485 6.26% $965,250 6.03%
======== ===== ========== ===== ======== =====
FHLB Stock $101,400
========
</TABLE>
Other Investments. Other investments, which consist primarily of
federal funds sold and securities purchased under agreements to resell, averaged
$3,885,172 in 1999 compared to $4,913,723 in 1998. At December 31, 1999, other
investments totaled $5,550,000 in federal funds sold. This typically represents
a major source of the Company's liquidity and is generally invested on an
overnight basis. Other investments earned an average yield of 5.00% for the
year.
Deposits and Other Interest-Bearing Liabilities
Deposits. The Company's primary source of funds for loans and
investments is its deposits. Average total deposits were $33,910,831 in 1999,
compared to $21,191,532 during 1998. Average interest-bearing deposits were
$27,590,071 in 1999, compared to $16,944,892 in 1998. The average rate paid on
interest-bearing deposits in 1999 was 3.93% compared to 4.47% in 1998. In
pricing deposits, the Company considers its liquidity needs, the direction and
levels of interest rates, and local market conditions. As such, higher rates
were paid initially to attract deposits but decreased on the average for 1999
based on the factors above.
The following table sets forth the deposits of the Company by category
at December 31, 1999 and 1998.
11
<PAGE>
<TABLE>
<CAPTION>
DEPOSITS BY CATEGORY
December 31, 1999 December 31, 1998
------------------- ------------------
Percent Percent
Amount of Total Amount of Total
------ --------- ----------- ----------
<S> <C> <C> <C> <C>
Demand deposit accounts $ 6,672,434 15.46% $ 4,973,931 18.60%
NOW accounts 6,174,378 14.30% 4,378,876 16.38%
Money market accounts 10,642,301 24.65% 7,811,649 29.22%
Savings accounts 700,075 1.62% 416,269 1.55%
Time deposits less than $100,000 12,125,219 28.09% 5,402,240 20.21%
Time deposits of $100,000 or over 6,854,334 15.88% 3,752,619 14.04%
------------ -------- ------------- --------
Total deposits $43,168,741 100.00% $26,735,584 100.00%
============ ======== ============= ========
</TABLE>
Core deposits, which exclude time deposits of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits were $36,314,407 and
$22,982,965 at December 31, 1999 and 1998, respectively. The maturity
distribution of the Company's time deposits of $100,000 or more at December 31,
1999 is shown in the following table.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 1999
Three months or less $1,982,261
Over three through six months 1,150,893
Over six through twelve months 2,039,993
Over twelve months 1,681,187
-----------
Total $6,854,334
===========
Large time deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. Some financial institutions
partially fund their balance sheets using large certificates of deposit obtained
through brokers. These brokered deposits are generally expensive and are
unreliable as long-term funding sources. Accordingly, the Company does not
currently accept brokered deposits.
Borrowed funds. Borrowed funds consisted primarily of short-term
borrowings provided through a U.S. Treasury demand note associated with a
treasury tax and loan account. These borrowings averaged $329,963 for 1999 at an
average rate of 4.74%. The balance outstanding at December 31, 1999 was
$1,006,427. In addition, on the last day of the year, the Company borrowed
$1,000,000 at a rate of 5.64% from its correspondent bank through a security
sale with agreement to repurchase. This borrowing was for Y2K liquidity purposes
and was repaid in the first week of January 2000. There were no other borrowings
during the year.
The Company has an unsecured line of credit available on a one to
fourteen day basis with a bank for $1,800,000. In addition, the Company also has
an unsecured fed funds line available from another bank for $1,800,000. Credit
is also available through the Bank's membership with the Federal Home Loan Bank
of Atlanta. No borrowings have been made from any of these sources as of
December 31, 1999.
12
<PAGE>
Capital
The Federal Reserve Board and bank regulatory agencies require bank
holding companies and financial institutions to maintain capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. The Federal Reserve guidelines also
contain an exemption from the capital requirements for bank holding companies
with less than $150 million in consolidated assets. Because the Company has less
than $150 million in assets, it is not currently subject to these guidelines.
However, the Bank falls under these rules as set per bank regulatory agencies.
Under the capital adequacy guidelines, capital is classified into two
tiers. Tier 1 capital consists of common stockholders' equity, excluding the
unrealized gain or loss on securities available for sale, minus certain
intangible assets. Tier 2 capital consists of the general reserve for loan
losses subject to certain limitations. The qualifying capital base for purposes
of the risk-based capital ratio consists of the sum of its Tier 1 and Tier 2
capital. The Bank is also required to maintain capital at a minimum level based
on total average assets, which is known as the Tier 1 leverage ratio.
The Bank exceeded the minimum capital requirements set by the
regulatory agencies at December 31, 1999 and 1998. Below is a table that
reflects the leverage and risk-based regulatory capital ratios of the Bank at
December 31, 1999 and 1998.
ANALYSIS OF CAPITAL
Required Actual
Amount Percent Amount Percent
--------- ------- ------ -------
At December 31, 1999
Tier 1 capital $1,422,000 4.0% $5,757,000 16.19%
Total capital $2,845,000 8.0% $6,167,000 17.34%
Tier 1 leverage ratio $1,836,000 4.0% $5,757,000 12.54%
At December 31, 1998
Tier 1 capital $ 953,500 4.0% $5,338,000 22.39%
Total capital $1,907,000 8.0% $5,623,000 23.59%
Tier 1 leverage ratio $1,275,800 4.0% $5,338,000 16.74%
The Company believes that capital is sufficient to fund the
activities of the Bank's normal operations in the near future, and that the Bank
will generate sufficient income from operations to fund its activities on an
on-going basis. The Company still retains capital to fund activities which may
from time to time be considered appropriate investments of capital at some point
in the future.
As of December 31, 1999, there were no significant firm commitments
outstanding for capital expenditures. However, it is the intention of the
Company to begin construction sometime in 2000 on a corporate office and main
branch building in the downtown Aiken area. It is expected that the total cost
of the project will be around $1,400,000.
13
<PAGE>
LIQUIDITY MANAGEMENT
Liquidity management involves monitoring the Company's sources and
uses of funds in order to meet its day-to-day cash flow requirements while
maximizing profits. Liquidity represents the ability of a company to convert
assets into cash or cash equivalents without significant loss and to raise
additional funds by increasing liabilities. Liquidity management is made more
complicated because different balance sheet components are subject to varying
degrees of management control. For example, the timing of maturities of the
investment portfolio is fairly predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit inflows
and outflows are far less predictable and are not subject to nearly the same
degree of control.
At December 31, 1999, the Company's liquid assets, consisting of cash
and due from banks and federal funds sold, amounted to $8,626,294, representing
15.7% of total assets. Investment securities amounted to $10,711,010,
representing 19.5% of total assets; these securities provide a secondary source
of liquidity since they can be converted into cash in a timely manner. The
Company's ability to maintain and expand its deposit base and borrowing
capabilities also serves as a source of liquidity.
The Company plans to meet its future cash needs through the liquidation
of temporary investments, maturities of loans and investment securities, and
generation of deposits. In addition, the Bank maintains a line of credit from
its correspondent bank in the amount of $1,800,000 and a fed funds bank from
another bank in the amount of $1,800,000. The Bank is also a member of the
Federal Home Loan Bank from which application for borrowings can be made for
leverage purposes, if so desired. Management believes that its existing stable
base of core deposits along with continued growth in this deposit base will
enable the Company to successfully meet its long term liquidity needs.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company and the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and changing prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those which may result from
inflation.
INDUSTRY DEVELOPMENTS
In February 1998, the Supreme Court ruled that federal credit unions
must limit their membership to employees of the companies that sponsor the
credit union. Banking leaders throughout the country have argued that credit
unions have an unfair competitive advantage because they do not pay income taxes
and are not subject to the same level of regulatory oversight. The Supreme Court
ruling applies only to federal credit unions. State-chartered credit unions were
not directly affected by the ruling. The lower courts will determine whether
current members who are not employed by the credit union sponsor will be forced
to close their accounts. Management does not expect the ruling to have an
immediate effect on the financial position or results of operations of the
Company. The effects on future periods have not yet been determined.
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was
14
<PAGE>
signed into law by President Clinton on November 12, 1999. Among other things,
the Act repeals the restrictions on banks affiliating with securities firms
contained in sections 20 and 32 of the Glass-Steagall Act. The Act also permits
bank holding companies to engage in a statutorily provided list of financial
activities, including insurance and securities underwriting and agency
activities, merchant banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are "complementary" to
financial activities.
The Act is intended to grant to community banks certain powers as a
matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies.
In fact, it is not possible to predict the full effect that the Act will have on
us.
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. The Company cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would affect
the Company.
YEAR 2000 ISSUES
Like many financial institutions, we rely on computers to conduct our
business and information systems processing. Industry experts were concerned
that on January 1, 2000, some computers would not be able to interpret the new
year properly, causing computer malfunctions. Although this did not happen, some
experts remain concerned that computer malfunctions may occur on other key dates
during 2000, such as October 10, 2000.
In accordance with bank regulatory guidelines, we developed and
executed a plan to ensure that our computer and telecommunication systems do not
have these Year 2000 problems. We rely on third party vendors to supply our
computer and telecommunication systems and other office equipment, and to
process our data and account information. Because we commenced operations in
1997, we had the ability to choose vendors which we believed to be ready for the
Year 2000. Our Year 2000 plan extends to all of our vendors, including our
vendors for core data processing system, ATM hardware, account origination
software, telephone systems, and suppliers of office equipment, such as copy and
fax machines. Under our plan, we reviewed the test results, assurances, and
warranties of all of these vendors, and we believe that all these systems are
Year 2000 compliant. Our technology and processing vendors work with many other
financial institutions, all of which, like us, are required by their bank
regulators to be Year 2000 compliant. Because our systems are substantially
similar to those used in many other banks, we believe that the scrutiny imposed
by our regulatory and the banking industry in general have significantly reduced
the Year 2000 related risks we might otherwise have faced.
We incurred approximately $2,000 in expenses in 1999 to implement our
Year 2000 plan. Under our plan, we will continue to monitor the situation
throughout 2000. We are executing this plan under the supervision of a Year 2000
Committee, with oversight from our board of directors.
Our agreements with each of our primary vendors include contractual
assurances and warranties regarding Year 2000 compliance. Some of these
warranties are limited by disclaimers of liability which specifically exclude
special, incidental, indirect, and consequential damages. These limitations
could limit our ability to obtain recourse against a vendor who is not Year 2000
compliant by excluding damages for things such as lost profits and customer
lawsuits.
15
<PAGE>
We have also evaluated our worst case scenario and developed
contingency plans in case Year 2000 issues do arise. In the worst case, our
systems would be down for a period of time and we would be required to complete
all transactions and keep all records manually. We will have all required forms
and procedures in place for manual processing, and believe we can do this for at
least a week without serious disruption of our business. We do not believe we
will encounter any issues that cannot be resolved within this period. Any
affected systems which cannot be fixed will be replaced with alternatives,
although this is unlikely to be necessary.
The Year 2000 issue may also negatively affect the business of our
customers, but to date we are not aware of any material Year 2000 issues
affecting them. We include Year 2000 readiness in our lending criteria to
minimize risk. However, this will not eliminate the issue, and any financial
difficulties our customers' experience caused by Year 2000 issues could impair
their ability to repay loans to the bank.
We did not have any significant Year 2000 problems on January 1, 2000,
and we do not expect to experience any significant Year 2000 problems. We also
believe that we will be able to continue to operate the business if one or more
of our vendors experience unanticipated Year 2000 problems.
FORWARD-LOOKING INFORMATION
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include all statements that are not
historical statements of fact regarding the intent, belief, or current
expectations of the Company or its directors or its officers with respect to,
among other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; and (iii) the Company's
growth and operating strategies. Words such as "may," "would," "could," "will,"
"expect," "estimate," "anticipate," "believe," "intend," and "plans" are
intended to identify forward-looking statements. Investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, many of which are beyond the Company's control.
Actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among the key risks, assumptions, and
factors that may affect operating results, performance, and financial condition
are the Company's ability to continue and manage its growth, fluctuations in its
quarterly results, Year 2000 risks and concerns, competition, and other factors
discussed herein and in the Company's filings with the Securities and Exchange
Commission, including the "Risk Factors" section of the Company's Registration
Statement on Form S-1 (Registration Number 333-25179).
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, FASB, issued
SFAS 133, "Accounting for Derivative Instrument and Hedging Activities". All
derivatives are to be measured at fair value and recognized in the balance sheet
as assets or liabilities. The statement is now effective for fiscal years and
quarters beginning after June 15, 2000 (delayed through the issuance of SFAS
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 - An Amendment of FASB Statement
No. 133"). Because the Corporation does not use derivative transactions at this
time, management does not expect that this standard will have a significant
effect on the Corporation.
16
<PAGE>
In October 1998, the FASB issued SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." The new statement establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises. The statement is effective for the first quarter beginning after
December 15, 1998. The statement did not have an impact on the financial
statements of the Company.
In February 1999, the FASB issued SFAS 135, "Rescission of FASB
Statement No. 75 and Technical Corrections." The SFAS provides technical
corrections for previously issued statements and rescinds SFAS 75, which
provides guidance related to pension plans of state and local governmental
units. SFAS 135 is effective for fiscal years ending after February 15, 1999.
This statement will not have a material effect on the financial statements of
the Company.
17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Directors
People's Community Capital Corporation
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of
People's Community Capital Corporation as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of People's Community Capital Corporation as of December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Elliot Davis & Co., L.L.P.
- ------------------------------
January 12, 2000
18
<PAGE>
<TABLE>
<CAPTION>
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS $ 3,076,294 $ 958,613
FEDERAL FUNDS SOLD 5,550,000 3,830,000
SECURITIES - Available for sale 10,711,010 8,734,879
LOANS RECEIVABLE - Net 33,225,197 20,717,698
PROPERTIES AND EQUIPMENT - Net 1,678,862 1,718,705
ACCRUED INTEREST RECEIVABLE 325,904 243,909
OTHER ASSETS 227,520 335,609
------------- ------------
Total assets $ 54,794,787 $ 36,539,413
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Noninterest bearing $ 6,672,434 $ 4,973,931
Interest bearing 36,496,307 21,761,653
----------- -----------
Total deposits 43,168,741 26,735,584
ACCRUED INTEREST PAYABLE 62,383 35,686
FEDERAL FUNDS PURCHASED 1,000,000 -
OTHER BORROWINGS 1,006,427 331,783
ACCRUED EXPENSES AND OTHER LIABILITIES 100,480 19,810
----------- -----------
Total liabilities 45,338,031 27,122,863
----------- -----------
COMMITMENTS AND CONTINGENCIES - Notes 13 and 14
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 10,000,000 shares authorized,
998,262 and 998,162 shares issued at December 31, 1999
and 1998, respectively 9,983 9,982
Additional paid-in capital 9,776,507 9,775,508
Retained earnings (deficit) (58,320) (401,429)
Accumulated other comprehensive income (113,914) 32,489
------------- ------------
9,614,256 9,416,550
Treasury stock, 15,000 shares at cost (157,500) -
------------- ------------
Total shareholders' equity 9,456,756 9,416,550
------------- ------------
Total liabilities and shareholders' equity $ 54,794,787 $ 36,539,413
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 2,425,375 $ 1,165,504
Securities and short term investments 598,982 621,593
Federal funds sold and securities purchased under agreement to resell 194,278 264,832
----------- -----------
Total interest income 3,218,635 2,051,929
----------- -----------
INTEREST EXPENSE
Deposits 1,085,306 757,881
Other borrowings 15,784 7,075
----------- -----------
Total interest expense 1,101,090 764,956
----------- -----------
Net interest income 2,117,545 1,286,973
PROVISION FOR LOAN LOSSES 126,383 225,000
----------- -----------
Net interest income after provision for loan losses 1,991,162 1,061,973
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 200,025 85,089
Other income 94,660 98,141
----------- -----------
Total noninterest income 294,685 183,230
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 1,000,056 878,391
Occupancy and equipment expense 206,380 206,566
Consulting and professional fees 68,315 37,364
Customer related expenses 64,610 67,651
General operating expenses 273,632 151,470
Other expense 101,810 115,802
----------- -----------
Total noninterest expenses 1,714,803 1,457,244
----------- -----------
Income (loss) before income taxes 571,044 (212,041)
INCOME TAX PROVISION (BENEFIT) 227,935 (100,207)
----------- -----------
NET INCOME (LOSS) $ 343,109 $ (111,834)
=========== ===========
EARNINGS PER SHARE
Basic $ 0.34 $ (0.11)
Diluted $ 0.33 $ (0.11)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 995,170 994,052
Diluted 1,037,561 994,052
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
NET INCOME (LOSS) $ 343,109 $ (111,834)
OTHER COMPREHENSIVE INCOME
Net change in unrealized gain (loss) on securities available for
sale, net of reclassification adjustment and tax effects of
$97,602 in 1999 and $20,186 in 1998 (146,403) 30,278
---------- ----------
Total other comprehensive income (loss) (146,403) 30,278
---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 196,706 $ (81,556)
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional other Retained Total
Common paid-in comprehensive earnings Treasury shareholders'
Shares stock capital income (deficit) stock equity
---------- --------- ------------ ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 993,162 $ 9,932 $9,738,058 $ 2,211 $(289,595) $ - $9,460,606
Common stock issued 5,000 50 37,450 - - - 37,500
Net loss - - - - (111,834) - (111,834)
Net change in unrealized appreciation
on securities available for sale -
Net of income taxes - - - 30,278 - - 30,278
--------- ------- --------------------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1998 998,162 9,982 9,775,508 32,489 (401,429) - 9,416,550
Common stock issued pursuant to
stock option plan 100 1 999 - - - 1,000
Net income - - - - 343,109 343,109
Purchase of 15,000 shares of treasury stock - - - - - (157,500) (157,500)
Net change in unrealized appreciation on
securities available for sale - Net of
reclassification adjustment and tax effects - - - (146,403) - - (146,403)
--------- ------- ---------- ----------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 1999 998,262 $ 9,983 $9,776,507 $ (113,914) $ (58,320) $(157,500) $9,456,756
========= ======= ========== =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 343,109 $ (111,834)
Adjustments to reconcile net income (loss) to net cash used for
operating activities
Depreciation and amortization 101,392 102,060
Realized gain on sales of securities - Net - (547)
Provision for loan losses 126,383 225,000
Deferred income tax provision (benefit) 189,857 (100,207)
Changes in deferred and accrued amounts
Other assets and accrued interest receivable (171,549) (212,390)
Accrued expenses, accrued interest payable and other liabilities 107,367 (49,244)
----------- -----------
Net cash provided by (used for) operating activities 696,559 (147,162)
----------- -----------
INVESTING ACTIVITIES
Activity in securities
Sales - 1,000,547
Purchases (7,500,000) (11,700,903)
Maturities and calls 5,377,466 7,626,140
Purchases of properties and equipment (53,763) (201,504)
Loan originations and principal collections - Net (12,633,882) (17,053,535)
Net (increase) decrease in federal funds sold and securities purchased
under agreement to resell (1,720,000) 5,410,000
----------- -----------
Net cash used for investing activities (16,530,179) (14,919,255)
----------- -----------
FINANCING ACTIVITIES
Net increase in deposits 16,433,157 15,029,962
Proceeds from issuance of common stock - Net of costs 1,000 37,500
Net proceeds from borrowings 674,644 331,783
Net increase in federal funds purchased 1,000,000 -
Purchase of treasury stock (157,500) -
----------- -----------
Net cash provided by financing activities 17,951,301 15,399,245
----------- -----------
Net increase in cash and cash equivalents 2,117,681 332,828
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 958,613 625,785
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,076,294 $ 958,613
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid on deposits and borrowed funds $ 1,074,393 $ 750,632
============ ===========
Income taxes paid $ 32,300 $ 1,413
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
PEOPLE'S COMMUNITY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business activity and organization
People's Community Capital Corporation (the "Corporation"), was
incorporated on February 26, 1997, under the laws of the State of South
Carolina for the purpose of operating as a bank holding company pursuant
to the Federal Bank Holding Company Act of 1956, as amended, with respect
to a then proposed de novo bank, People's Community Bank of South
Carolina (the "Bank"). The Company offered its common stock for sale to
the public under an initial public offering price of $10 per share.
During 1997, the Bank obtained regulatory approval to operate and opened
for business on September 22, 1997, with a total capitalization of
$6,000,000. The Bank provides full commercial banking services to
customers and is subject to regulation of the Federal Deposit Insurance
Corporation and the State of South Carolina Board of Financial
Institutions. The Company is subject to regulation by the Federal Reserve
Board.
In August 1999, the Bank incorporated a wholly owned subsidiary, People's
Financial Services, Inc. This subsidiary, which began operations December
1, 1999, is primarily engaged in the business of offering stocks, bonds,
mutual funds, annuities, and insurance products.
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All significant
intercompany balances and transactions have been eliminated in
consolidation. The accounting and reporting policies of the Corporation
conform to generally accepted accounting principles and to general
practices in the banking industry. The Corporation uses the accrual basis
of accounting.
Concentrations of credit risk
The Corporation, through its subsidiary, makes loans to individuals and
small businesses located primarily in Aiken County, South Carolina for
various personal and commercial purposes. The subsidiary has a
diversified loan portfolio and the borrowers' ability to repay their
loans is not dependent upon any specific economic sector.
Statement of cash flows
For the purposes of reporting cash flows, the Corporation considers all
liquid nonequity investments with an original maturity of three months or
less to be cash equivalents. For the purpose of the statements of cash
flows, cash and cash equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks".
(Continued)
24
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of
the consolidated financial statements and the reported amount of income
and expenses during the reporting periods. Actual results could differ
from those estimates.
Securities
Securities that may be sold prior to maturity for asset/liability
management purposes, are classified as securities available for sale and
carried at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income. Declines in the fair
value of individual held to maturity and available for sale securities
below their cost that are other than temporary are included in earnings
as realized losses. Debt securities that management has both the positive
intent and ability to hold to maturity are classified as securities held
to maturity and are carried at cost, adjusted for amortization of premium
or accretion of discount using the interest method. There were no held to
maturity securities at December 31, 1999 and 1998.
Interest on securities, including the amortization of premiums and the
accretion of discounts, are reported as interest income using the
interest method over the terms of the securities. Gains and losses on the
sale of securities are recorded on the trade date and are calculated
using the specific identification method.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are stated at
their outstanding unpaid principal balances net of any deferred fees or
costs on originated loans. Interest income is accrued on the unpaid
principal balance. Points on real estate loans are taken into income to
the extent they represent the direct cost of initiating a loan.
The accrual of interest is discontinued on impaired loans when management
anticipates that a borrower may be unable to meet the obligations of the
note. Accrued interest through the date the interest is discontinued is
reversed. Subsequent interest earned is recognized only to the point that
cash payments are received. All payments will be applied to principal if
the ultimate amount of principal is not expected to be collected.
Nonaccrual loans
Commercial loans are placed on nonaccrual at the time the loan is 90 days
delinquent unless the credit is well secured and in process of
collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Other unsecured
personal credit lines and certain consumer finance loans are typically
charged-off no later than 180 days delinquent. Other consumer loans are
charged-off at 120 days delinquent. In all cases, loans must be placed on
nonaccrual or charged-off at an earlier date if collection of principal
or interest is considered doubtful.
(Continued)
25
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The
interest on these loans is accounted for on the cash basis or cost
recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are reasonably assured of repayment within a reasonable
time frame and when the borrower has demonstrated payment performance of
cash or cash equivalents for a minimum of six months.
Allowance for loan losses
The allowance for loan losses is established through a provision for loan
losses charged to earnings. Loan losses are charged against the allowance
when management believes the collectibility of the loan balance is
unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective, as it requires estimates that
are susceptible to significant change. Ultimately, losses may vary from
current estimates and future additions to the allowance may be necessary.
The Bank accounts for impaired loans in accordance with Statement of
Financial Accounting Standards (SFAS No. 114), "Accounting by Creditors
for Impairment of a Loan". This standard requires that all creditors
value loans at the loan's fair value if it is probable that the creditor
will be unable to collect all amounts due according to the terms of the
loan agreement. Fair value may be determined based upon the present value
of expected cash flows, market price of the loan, if available, or value
of the underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate. SFAS No. 114 was
amended by SFAS No. 118 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest income on
an impaired loan.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis by either the present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
(Continued)
26
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosures.
Properties and equipment
Land is carried at cost. Properties and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed over the estimated useful lives of the assets using
primarily the straight-line method. Additions to property and major
replacements or improvements are capitalized at cost. Maintenance,
repairs and minor replacements are expensed when incurred. Gains and
losses on routine dispositions are included in other income.
Income taxes
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the
differences between the book and tax bases of the various balance sheet
assets and liabilities and gives current recognition to changes in tax
rates and laws.
The Corporation files a consolidated federal income tax return. Separate
state income tax returns are filed.
Earnings per share
Earnings per share is computed by dividing net income or loss by the
weighted average number of shares of common stock outstanding in
accordance with SFAS No. 128, "Earnings per Share". The Treasury Stock
Method is used to compute the effect of stock options on the weighted
average number of common shares outstanding for the Diluted Method. No
dilution occurs under the Treasury Stock Method as the exercise price of
stock options equal or exceeds the market value of the stock.
Stock compensation plans
Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for Stock-Based Compensation", encourages all entities to
adopt a fair value based method of accounting for employee stock
compensation plans, whereby compensation cost is measured at the grant
date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion no.
25, "Accounting for Stock Issued to Employees", whereby compensation cost
is the excess, if any, of the quoted market price of the stock at the
grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. Stock options issued under the Corporation's
stock option plan have no intrinsic value at the grant date, and under
Opinion No. 25, no compensation cost is recognized for them. The
Corporation has elected to continue with the accounting methodology in
Opinion No. 25 and, as a result, has provided proforma disclosures of net
income and earnings per share and other disclosures, as if the fair value
based method of accounting had been applied.
(Continued)
27
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Advertising expense
Advertising, promotional and other business development costs are
generally expensed as incurred. External costs incurred in producing
media advertising are expensed the first time the advertising takes
place. External costs relating to direct mailing costs are expensed in
the period in which the direct mailings are sent.
Comprehensive income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income",
as of January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported as a
separate component of the equity section of the balance sheet, such items
along with net income, are components of comprehensive income. The
adoption of SFAS No. 130 had no effect on the Corporation's net income or
shareholders' equity.
Risk and uncertainties
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market
risk. The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is the
risk of default on the Company's loan portfolio that results from
borrowers' inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral
underlying loans receivable, the valuation of real estate held by the
Company, and the valuation of loans held for sale and mortgage-backed
securities available for sale.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period.
The Company also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances, and operating
restrictions resulting from the regulators' judgements based on
information available to them at the time of their examination.
Recently issued accounting standards
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instrument and Hedging Activities". All derivatives are to be measured at
fair value and recognized in the balance sheet as assets or liabilities.
The statement is now effective for fiscal years and quarters beginning
after June 15, 2000 (delayed through the issuance of SFAS 137,
"Accounting For Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 - An Amendment of FASB
Statement No. 133"). Because the Company does not use derivative
transactions at this time, management does not expect that this standard
will have a significant effect on the Company.
(Continued)
28
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
In October 1998, the FASB issued SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The new statement
establishes accounting and reporting standards for certain activities of
mortgage banking enterprises. The statement is effective for the first
quarter beginning after December 15, 1998. The statement did not have an
impact on the financial statements of the Company.
In February 1999, the FASB issued SFAS 135, "Rescission of FASB Statement
No. 75 and Technical Corrections." The SFAS provides technical
corrections for previously issued statements and rescinds SFAS 75, which
provides guidance related to pension plans of state and local
governmental units. SFAS 135 is effective for fiscal years ending after
February 15, 1999. This statement will not have a material effect on the
financial statements of the Company.
Reclassifications
Certain previously reported amounts have been reclassified to conform to
current year presentation. Such changes had no effect on previously
reported net income or shareholders' equity.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances either
at the Bank or on deposit with the Federal Reserve Bank. At December 31, 1999,
these required reserves were met by vault cash.
NOTE 3 - SECURITIES
Available for sale - The amortized cost, gross unrealized holding
gains and losses and fair values of securities available for sale consist of the
following:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------
Amortized Gross unrealized
cost Gains Losses Fair value
------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Securities
U. S. Government and Federal Agency obligations $ 10,799,466 $ - $ 189,856 $ 10,609,610
Federal Home Loan Bank stock - Restricted 101,400 - - 101,400
------------- -------- ----------- -------------
$ 10,900,866 $ - $ 189,856 $ 10,711,010
============= ======== =========== =============
December 31, 1998
-----------------------------------------------------------
Amortized Gross unrealized
cost Gains Losses Fair value
------------- --------- ----------- -------------
Securities
U. S. Government and Federal Agency obligations $ 8,599,028 $ 54,151 $ - $ 8,653,179
Federal Home Loan Bank stock - Restricted 81,700 - - 81,700
------------- --------- ----------- -------------
$ 8,680,728 $ 54,151 $ - $ 8,734,879
============= ========= =========== =============
</TABLE>
(Continued)
29
<PAGE>
NOTE 3 - SECURITIES, Continued
The amortized cost and fair value of securities at December 31,
1999, by contractual maturity, follow:
Amortized
cost Fair value
Securities
Due in less than one year $ 500,000 $ 496,875
Due after one year through five years 9,299,466 9,147,485
Due after five years through ten years 1,000,000 965,250
Federal Home Loan Bank stock (no maturity) 101,400 101,400
------------ ------------
$ 10,900,866 $ 10,711,010
============ ============
During 1999, securities called in the amount of $5,300,000 yielded
no net gains or losses. During 1998, sales of $1,000,000 yielded net gains of
$547.
At December 31, 1999 and 1998, securities with an amortized cost
of $6,300,000 and $1,200,000, respectively and a fair value of $6,188,059 and
$1,212,932, respectively were pledged as collateral for certain other borrowings
and to secure certain public deposits.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
The Corporation's loan portfolio is summarized below:
December 31,
-----------------------------------
1999 1998
---- ----
Loans other than mortgage
Commercial $ 3,878,990 $ 3,123,919
Consumer 2,454,135 1,410,480
Other 177,248 11,898
Mortgage
Commercial 15,112,891 8,960,654
Residential 10,985,575 6,457,298
Other 1,026,358 1,038,449
--------------- ----------------
Gross loans 33,635,197 21,002,698
Less allowance for loan losses 410,000 285,000
--------------- ----------------
Net loans $ 33,225,197 $ 20,717,698
=============== ================
(Continued)
30
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, Continued
Changes in the allowance for loan losses were as follows:
December 31,
----------------------------
1999 1998
Balance, beginning of period $ 285,000 $ 60,000
Provision charged to operations 126,383 225,000
Loans charged off (1,403) -
Recoveries on loans previously charged off 20 -
----------- -------------
Balance, end of period $ 410,000 $ 285,000
=========== =============
Approximately $7,119,035 and $6,987,100 of the loans were variable
interest rate loans at December 31, 1999 and 1998, respectively. The remaining
portfolio was fixed interest rate loans. There were no non-accrual loans or
impaired loans at December 31, 1999 and 1998.
NOTE 5 - PROPERTIES AND EQUIPMENT
Properties and equipment included in the consolidated balance
sheets are summarized as follows:
December 31,
----------------------
1999 1998
---- ----
Land and buildings $ 1,294,884 $ 1,293,467
Furniture, fixtures and equipment 563,857 531,748
Construction in progress 20,237 -
------------ ------------
1,878,978 1,825,215
Less accumulated depreciation (200,116) (106,510)
------------ ------------
$ 1,678,862 $ 1,718,705
============ ============
Depreciation expense for the years ended December 31, 1999 and
1998 amounted to $93,606 and $87,356, respectively.
Type of asset Life in years Depreciation method
- ---------------------------------- --------------- ----------------------
Software 3 Straight-line
Furniture, fixtures and equipment 3 to 15 Straight-line
Buildings and improvements 40 Straight-line
31
<PAGE>
NOTE 6 - OTHER ASSETS
Other assets include the following:
December 31,
-----------------------------
1999 1998
----- ----
Other $ 90,571 $ 106,405
Deferred tax asset - Net 136,949 229,204
------------ -------------
$ 227,520 $ 335,609
============ =============
NOTE 7 - DEPOSITS
Deposits are summarized as follows:
December 31,
------------------------------
1999 1998
---- ----
Demand (non-interest bearing) $ 6,672,434 $ 4,973,931
Demand (interest bearing) and savings 17,516,754 12,606,794
Time
$100,000 and over 6,854,334 3,752,619
Under $100,000 12,125,219 5,402,240
------------- -------------
Total $ 43,168,741 $ 26,735,584
============= =============
Interest expense on time deposits in excess of $100,000 for the
years ended December 31, 1999 and 1998 were approximately $206,000 and $176,100,
respectively. Scheduled maturities of time deposits are as follows:
December 31,
------------------------------
1999 1998
---- ----
One year or less $ 13,922,440 $ 7,200,178
From one year to three years 4,622,807 1,134,008
After three years 434,306 820,673
------------- -------------
$ 18,979,553 $ 9,154,859
============= =============
NOTE 8 - UNUSED LINES OF CREDIT
At December 31, 1999, the Bank had two $1,800,000 lines of credit
available under an unsecured line of credit with The Banker's Bank and Columbus
Bank & Trust that expires September 1, 2000 and May 6, 2000, respectively. These
lines of credit are federal fund lines and are available on a one to fourteen
day basis for general corporate purposes.
(Continued)
32
<PAGE>
NOTE 8 - UNUSED LINES OF CREDIT, Continued
At December 31, 1999, the Bank had a borrowing agreement with the
Federal Reserve Bank secured by a pledge of $3,375,000 from the bond portfolio
of the Bank. This agreement was in place for year 2000 liquidity purposes.
In addition, the Bank has a $5,200,000 credit availability with
the Federal Home Loan Bank of Atlanta.
NOTE 9 - INCOME TAXES
The significant components of the income tax provision (benefit)
are as follows:
For the years ended
December 31,
---------------------------
1999 1998
---- ----
Currently payable $ 38,078 $ -
Deferred income tax provision (benefit) 189,857 (100,207)
---------- ------------
Income tax provision (benefit) $ 227,935 $ (100,207)
========== ============
The significant components of deferred income tax assets and
liabilities consist of the following and are presented in other assets:
Deferred tax asset (liability)
December 31,
------------------------------
1999 1998
---- ----
Depreciation $ (78,393) $ (57,398)
Net operating loss - 211,362
Loan loss provisions 139,400 96,900
Net unrealized gain on securities available for sale 75,942 (21,660)
----------- -----------
136,949 229,204
Valuation allowance - -
----------- -----------
$ 136,949 $ 229,204
=========== ===========
Income tax expenses are allocated to members of the group under
the contribution to consolidated taxable income method.
33
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY
In September 1997, the Corporation issued 993,162 common shares
through a public offering, resulting in net proceeds (after deducting issuance
cost) of $9,747,990. Gross proceeds were $9,931,620 and issuance costs totaled
$183,630.
During the year ended December 31, 1998, the Corporation issued
5,000 shares of common stock. Additional information is provided in Note 12.
During the year ended December 31, 1999, an additional 100 shares
of common stock were issued through the exercise of stock options that were
previously granted.
NOTE 11 - RETIREMENT PLAN
The Bank established a defined contribution employee benefit plan
(401(k) plan) covering eligible employees (as defined in the Plan), whereby
employees can defer a portion of their earnings. The matching contributions of
the Bank are determined by the Board on an annual basis. For the year ended
December 31, 1999, matching Bank contributions totaled $4,386. For the year
ended December 31, 1998, there were no matching Bank contributions.
NOTE 12 - STOCK BASED COMPENSATION AND STOCK OPTION PLAN
In lieu of salary for 1997, the Corporation issued 5,000 shares of
common stock in 1998 to the Chief Executive Officer for no additional
consideration. Compensation expense was recognized in 1997, based on an
estimated fair market value of common stock on the date of the grant. An
adjustment to fair market value on the date of issuance was made in 1998.
As of December 31, 1997, the Corporation had employment agreements
with two officers, the Chief Executive Officer and the Chief Operating Officer.
The officers were granted options to purchase an amount equal to 5% of the
shares sold in the initial offering (approximately 50,000 shares each) at $10.00
per share. The options vest at the rate of one-fifth per year, subject to the
officers being employed by the Corporation on such dates and meeting certain
performance criteria. During 1998, the Corporation adopted a stock option plan
and incorporated these agreements within the stock option plan.
Also, the Corporation is obligated in its employment agreement to
grant additional options to the Chief Executive Officer for the future purchase
of 10,000 shares of common stock at $10.00 per share. These options were granted
in July 1999. In 1999, 2,000 shares vested and each year thereafter 2,000 shares
will vest.
(Continued)
34
<PAGE>
NOTE 12 - STOCK BASED COMPENSATION AND STOCK OPTION PLAN, Continued
On April 29, 1998, the Corporation adopted a stock option plan for
the benefit of the directors, officers and employees. The Board may grant up to
250,000 options at an option price per share not less than the fair market value
on the date of grant. The Directors were granted 5,000 options each. All options
granted vest 20% each year for five years based on certain performance criteria
and expire ten years from the grant date. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation". Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost been
determined based on the fair value at the grant date for the above stock option
awards consistent with the provisions of SFAS 123, the Company's net loss and
net loss per common share would have been adjusted to the proforma amounts
indicated below:
For the years ended
December 31,
--------------------------
1999 1998
---- ----
Net income (loss) - As reported $ 343,109 $ (111,834)
Net income (loss) - Proforma 311,887 (127,445)
Earnings per share - As reported .34 (.11)
Earnings per share - Proforma .31 (.13)
Earnings per share - Assuming dilution - As reported .33 (.11)
Earnings per share - Assuming dilution - Proforma .30 (.13)
The fair value of the option grant is estimated on the date of
grant using the Black-Scholes option pricing model and the minimum value method
allowed by SFAS 123. The risk free interest rate used was 4.77%, the expected
option life was ten years, the assumed dividend rate was zero and the expected
volatility was 8.0%.
A summary of the status of the Plan and changes during the year
ended on that date is presented below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Weighted average Weighted average
Shares exercise price Shares exercise price
--------- ------------------- ---------- -------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 212,394 $ 10.00 - $ -
Granted 10,000 10.00 217,894 10.00
Forfeited or expired (6,400) 10.00 (5,500) 10.00
Exercised (100) 10.00 - -
--------- ----------
Outstanding at year end 215,894 10.00 212,394 10.00
========= ==========
Options exercisable at year end 43,175 -
Weighted-average fair value of options
granted during the year $ 10.00 $ 10.00
Shares available for grant under the plan 34,106 37,606
</TABLE>
35
<PAGE>
NOTE 13 - RELATED PARTY TRANSACTIONS
Directors and officers of the Bank are customers of and had
transactions with the Bank in the ordinary course of business. Additional
transactions may be expected to take place in the future. Included in such
transactions are outstanding loans and commitments, all of which were made on
comparable terms, including interest rate and collateral, as those prevailing at
the time for other customers of the Bank, and did not involve more than normal
risk of collectibility or present other unfavorable features. Total loans
outstanding to all officers and directors, including immediate family and
business interests, at December 31, 1999 and 1998 were $1,006,481 and
$1,376,226, respectively. During 1999 and 1998, new loans and advances on
existing loans of $216,859 and $1,944,325 were made to this group and repayments
of $586,604 and $1,589,888 were received, respectively.
The Corporation leases office space under an operating lease from
a board member. The lease currently expires in August 2000 and includes an
option for one six-month extension. The minimum future lease payments required
under this lease are $16,000.
NOTE 14 - LEGAL CONTINGENCIES
From time to time, the Bank may be a party to various litigation
and claims, both as plaintiff and as defendant, arising from its normal
operations. At December 31, 1999, the Bank was not involved with any litigation
matters.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit, commercial and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The contract
amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties. Commitments to extend credit, including unused lines of credit,
amounted to approximately $9,497,000 and $5,695,000 at December 31, 1999 and
1998, respectively.
36
(Continued)
<PAGE>
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, Continued
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support the financing needs of the Bank's
commercial customers, and are short-term in nature. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Commitments under standby letters of credit
amounted to $587,500 and $173,713 at December 31, 1999 and 1998, respectively,
which were granted primarily to commercial borrowers.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Corporation's
financial instruments as of December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ------------ -------------
Financial assets
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,076,294 $ 3,076,294 $ 958,613 $ 958,613
Federal funds sold 5,550,000 5,550,000 3,830,000 3,830,000
Securities available for sale 10,711,010 10,711,010 8,734,879 8,734,879
Loans receivable - Net 33,225,197 33,980,848 20,717,698 21,130,751
Financial liabilities
Demand deposit, interest-bearing transaction
and savings accounts 24,189,188 24,189,188 17,580,725 17,580,725
Certificates of deposit 18,979,553 19,078,808 9,154,859 9,217,160
U.S. Treasury demand notes 1,006,427 1,006,427 331,783 331,783
Federal funds purchased 1,000,000 1,000,000 - -
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit 9,497,000 9,497,000 5,695,000 5,695,000
Standby letters of credit 587,500 587,500 173,713 173,713
</TABLE>
The fair value of a financial instrument is the amount at which
the asset or obligation could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. Fair value
estimates are made at a specific point in time based on relevant market
information and information about the financial statements. Because no market
value exists for a significant portion of the financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors.
The following methods and assumptions were used to estimate the
fair value of significant financial instruments:
Cash and due from banks - The carrying amount is a reasonable estimate of fair
value.
Federal funds sold - Federal funds sold are for a term of one day and the
carrying amount approximates the fair value.
(Continued)
37
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
Securities - The fair values of marketable securities held-to-maturity are based
on quoted market prices or dealer quotes. For securities available-for-sale,
fair value equals the carrying amount, which is the quoted market price. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable securities.
Loans receivable - For certain categories of loans, such as variable rate loans
which are repriced frequently and have no significant change in credit risk,
fair values are based on the carrying amounts. The fair value of other types of
loans is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to the borrowers with similar credit
ratings and for the same remaining maturities.
Deposits - The fair value of demand deposits, savings, and money market accounts
is the amount payable on demand at the reporting date. The fair values of
certificates of deposit are estimated using a discounted cash flow calculation
that applies current interest rates to a schedule of aggregated expected
maturities.
Federal funds purchased, securities sold under agreements to repurchase and
short-term borrowings - The carrying amount is a reasonable estimate of fair
value because these instruments typically have terms of one day.
Off-balance sheet financial instruments - The fair value of commitments to
extend credit and standby letters of credit is estimated using the fees
currently charged to enter into similar agreements taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The contractual amount is a reasonable estimate of fair value
for the instruments because commitments to extend credit and standby letters of
credit are issued on a short-term or floating rate basis.
NOTE 17 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS
The ability of the Corporation to pay cash dividends to
stockholders is dependent upon receiving cash in the form of dividends from its
banking subsidiary. However, certain restrictions exist regarding the ability of
the subsidiary to transfer funds in the form of cash dividends, loans or
advances to the Corporation. State law requires prior approval of the Board of
Financial Institutions. Dividends are payable only from the undivided profits of
the banking subsidiary.
38
<PAGE>
NOTE 18 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of December 31, 1999 and 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
To be categorized as well capitalized, they must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the following tables. The Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998 are also presented in the tables.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --------- ------------- ------- ------------- ---------
AS OF DECEMBER 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $ 6,167,000 17.3% > $ 2,844,700 >8.0% > $ 3,555,900 >10.0%
- - - -
Tier I capital
(to risk-weighted assets) 5,757,000 16.2 > 1,422,400 >4.0 > 2,133,500 >6.0
- - - -
Tier I capital
(to average assets) 5,757,000 12.5 > 1,835,700 >4.0 > 2,294,700 >5.0
- - - -
AS OF DECEMBER 31, 1998
Total capital
(to risk-weighted assets)$ 5,623,000 23.6% > $ 1,907,000 >8.0% > $ 2,383,800 >10.0%
Tier I capital
(to risk-weighted assets) 5,338,000 22.4 > 953,500 >4.0 > 1,430,300 >6.0
Tier I capital
(to average assets) 5,338,000 16.7 > 1,275,800 >4.0 > 1,594,800 >5.0
</TABLE>
39
<PAGE>
NOTE 19 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of People's Community
Capital Corporation (parent company only):
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
ASSETS
December 31,
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash and due from banks $ 20,962 $ 1,026,247
Federal funds sold 1,030,000 80,000
Investments available for sale 2,452,636 2,510,195
Investment in bank subsidiary 5,752,846 5,626,039
Other assets 210,721 183,253
--------------- ----------------
$ 9,467,165 $ 9,425,734
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 10,409 $ 9,184
Shareholders' equity 9,456,756 9,416,550
--------------- ----------------
$ 9,467,165 $ 9,425,734
=============== ================
CONDENSED STATEMENTS OF INCOME
For the years ended
December 31,
---------------------------
1999 1998
---- ----
INTEREST INCOME ON INVESTMENTS $ 201,435 $ 176,547
MISCELLANEOUS INCOME - 12,500
--------------- ----------------
Total income 201,435 189,047
OPERATING EXPENSES 63,811 154,108
--------------- ----------------
Income before income taxes and equity in undistributed
net income (loss) of Bank 137,624 34,939
PROVISION (BENEFIT) FOR INCOME TAXES 33,032 (5,121)
--------------- ----------------
104,592 40,060
EQUITY IN UNDISTRIBUTED NET INCOME (LOSS)
OF BANK SUBSIDIARY 238,517 (151,894)
--------------- ----------------
NET INCOME (LOSS) $ 343,109 $ (111,834)
=============== ================
</TABLE>
(Continued)
40
<PAGE>
NOTE 19 - CONDENSED FINANCIAL INFORMATION, Continued
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 343,109 $ (111,834)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities
Equity in undistributed net (income) loss of the bank subsidiary (238,517) 151,894
Depreciation and amortization 3,672 6,917
Increase in other assets (10,903) (29,973)
(Decrease) increase in other liabilities 1,225 (45,983)
------------- -------------
Net cash provided by (used for) operating activities 98,586 (28,979)
------------- -------------
INVESTING ACTIVITIES
Maturities and calls of securities 1,522,866 -
Net (increase) decrease in federal funds sold (950,000) 2,930,000
Purchase of securities available for sale (1,500,000) (2,503,930)
Sale of short-term investments - 716,609
Purchase of property and equipment (20,237) (139,500)
------------- -------------
Net cash provided by (used by) investing activities (947,371) 1,003,179
------------- -------------
FINANCING ACTIVITIES
Proceeds from sale of stock - Net 1,000 37,500
Purchase of treasury stock (157,500) -
------------- -------------
Net cash provided by (used for) financing activities (156,500) 37,500
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,005,285) 1,011,700
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,026,247 14,547
------------- -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 20,962 $ 1,026,247
============= =============
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
<S> <C> <C>
People's Community People's Community People's Financial
Capital Corporation Bank of S.C. Services, Inc.
Raymond D. Brown Raymond D. Brown Alan J. George
Alan J. George Alan J. George Anthony E. Jones
Margaret Holley-Taylor Margaret Holley-Taylor Tommy B.Wessinger, Chairman
Anthony E. Jones Anthony E. Jones
James D. McNair James D. McNair
Clark D. Moore, M.D. Clark D. Moore, M.D.
Russell D. Phelon Russell D. Phelon
Donald W. Thompson Donald W. Thompson
John B. Tomarchio, M.D. John B. Tomarchio, M.D.
Tommy B. Wessinger, Chairman Tommy B. Wessinger, Chairman
OFFICERS
EXECUTIVE OFFICERS EXECUTIVE OFFICERS
People's Community Capital Corporation People's Community Bank of S.C.
Tommy B. Wessinger, Chm & CEO Tommy B. Wessinger, Chm & CEO
James D. McNair, Vice Chairman James D. McNair, Vice Chairman
Alan J. George, President & COO Alan J. George, President & COO
Jean H. Covington, CFO & Controller Jean H. Covington, CFO & Controller
Charles E. Harmon, EVP - Credit
L.Stephen Lineberry, SVP Operations
EXECUTIVE OFFICERS OFFICERS
People's Financial Services, Inc. People's Community Bank of S.C.
Tommy B. Wessinger, Chm, Pres & CEO H. Stanley Price, Vice President
Jean H. Covington, CFO Dale G. Slack, Vice President
Harriett H. Wood, Vice President
Marie McKinnon, Operations Officer
Wendy Fitzgerald, Loan Officer
LOCATIONS
Aiken Main Banking Center North Augusta Banking Center
1715 Whiskey Road 518 Georgia Avenue
Aiken, South Carolina 29803 North Augusta, South Carolina 29841
(803) 641-BANK (2265) (803) 819-3030
Aiken Downtown Banking Center / Operations Center People's Community Capital Corp.
106A Park Avenue SW 106A Park Avenue SW
Aiken, South Carolina 29801 Aiken, South Carolina 29801
(803) 641-0142 (803) 641-0142
</TABLE>
42
<PAGE>
CORPORATE DATA
ANNUAL MEETING
The Annual Meeting of the Shareholders of People's Community Capital Corporation
will be held at 11:00 a.m. on Thursday, April 27, 2000 at the North Augusta
Community Center located at 495 Brookside Avenue, North Augusta, South Carolina.
CORPORATE OFFICE: GENERAL COUNSEL:
106A Park Avenue SW Nelson, Mullins, Riley & Scarborough, LLP
Aiken, South Carolina 29801 First Union Plaza
(803) 641-0142 999 Peachtree Street, Suite 1400
(803) 641-7555 Fax Atlanta, Georgia 30309
STOCK TRANSFER AGENT: INDEPENDENT AUDITORS:
First Citizens Bank Elliott, Davis & Company, LLP
P.O. Box 29 P.O. Box 429
Columbia, South Carolina 29202 Greenwood, South Carolina 29648
STOCK INFORMATION:
The Company's stock trades under the symbol "PPLM" on the Nasdaq
Over-the-Counter Market. Trading and quotations of the common stock have been
limited and sporadic. Management is not aware of the prices at which all shares
of stock have been traded. The ranges of prices known to management are $8.75 to
$11.50. As of December 31, 1999, there were approximately 661 record certificate
holders. The market makers in the Company's stock are Edgar M. Norris & Company,
Inc. and IJL -Wachovia, Inc.
The ability of People's Community Capital Corporation to pay cash dividends is
dependent upon receiving cash in the form of dividends from People's Community
Bank of South Carolina. However, certain restrictions exist regarding the
ability of the Bank to transfer funds to the Company in the form of cash
dividends. All of the Bank's dividends are subject to prior approval by the
South Carolina State Board of Financial Institutions and are payable only from
the undivided profits of the Bank.
FORM 10-K:
The Company will furnish upon request, free of charge, copies of the Annual
Report and the Company's Report to the Securities and Exchange Commission (Form
10-KSB) by contacting Jean H. Covington, Chief Financial Officer, People's
Community Capital Corporation, P.O. Box 313, Aiken, South Carolina 29801.
This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT furnished
pursuant to Part 350 of the Federal Deposit Insurance Corporation Rules and
Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR ACCURACY OR
RELEVANCE BY THE FDIC.
43
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
People's Community Bank of South Carolina
People's Financial Services, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 1037249
<NAME> People's Community Capital Corporation
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> DEC-31-1999
<CASH> 3,076,294
<INT-BEARING-DEPOSITS> 36,496,307
<FED-FUNDS-SOLD> 5,550,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,711,010
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 33,225,197
<ALLOWANCE> 410,000
<TOTAL-ASSETS> 54,794,787
<DEPOSITS> 43,168,741
<SHORT-TERM> 2,006,427
<LIABILITIES-OTHER> 162,863
<LONG-TERM> 0
0
0
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<EPS-BASIC> .34
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</TABLE>
