<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
0-24135
Commission File Number
PCB HOLDING COMPANY
- -------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter.)
Indiana 35-2040715
- -------------------------------------- ----------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
819 Main Street, Tell City, Indiana 47586
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (812) 547-7094
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
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 the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained, to
the best of the 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. [X]
The issuer's revenues for its most recent fiscal year were $1.9 million.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the issuer was $3,766,000. This figure is based on the
closing price on the OTC Bulletin Board for a share of the issuer's common stock
on March 1, 2000, which was $10.38. For purposes of this calculation, the
Registrant is assuming that directors and executive officers are affiliates.
The Registrant had 408,020 shares of common stock outstanding as of March 1,
2000.
Portions of the Annual Report to Shareholders for the year ended December 31,
1999 are incorporated by reference into Part II of this Form 10-KSB. Also,
portions of the proxy statement for the annual meeting of shareholders to be
held on April 24, 2000 are incorporated by reference into Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format. Yes [ ] No [ X ]
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I
<S> <C> <C>
Page No.
Item 1. Description of Business....................................... 3
Item 2. Description of Property....................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...... 25
Item 6. Management's Discussion and Analysis or Plan of Operation..... 25
Item 7. Financial Statements.......................................... 25
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure........................... 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............. 25
Item 10. Executive Compensation........................................ 26
Item 11. Security Ownership of Certain Beneficial Owners and Management 26
Item 12. Certain Relationships and Related Transactions................ 26
Item 13. Exhibits and Reports on Form 8-K.............................. 26
SIGNATURES
</TABLE>
<PAGE>
Item 1. Description of Business.
- ---------------------------------
BUSINESS OF THE COMPANY
General
PCB Holding Company (the "Company") was organized as an Indiana business
corporation at the direction of Peoples Community Bank (the "Bank") in March
1998 for the purpose of becoming the holding company for the Bank upon
completion of the conversion of the Bank from the mutual to the stock form of
organization.
The Bank's mutual to stock conversion was completed on July 1, 1998 with
the sale by the Company of 396,750 shares of common stock at $10.00 per share.
The Company used 50% of the net proceeds of the offering to purchase the capital
stock of the Bank. The Company's sole business activity is to direct the
operations of the Bank.
The Bank was chartered in 1914 as an Indiana mutual building and loan
association. In February 1998, the Bank adopted a federal mutual charter and in
July 1998, upon the completion of its mutual to stock conversion, became a
federal stock savings bank. The Bank's primary federal regulator is the Office
of Thrift Supervision ("OTS"). The Bank operates as a traditional savings
association, specializing in single-family residential mortgage lending and
savings deposits. The Bank's business consists primarily of attracting retail
deposits from the general public and using those funds to originate real estate
loans. The Bank generally holds its loans for long-term investment purposes.
Market Area and Competition
The Bank conducts operations out of its one office in Tell City, which is
the largest town in Perry County, Indiana. Tell City has a population of
approximately 9,000 persons, and Perry County has a population of approximately
20,000 persons. Most of the Bank's depositors live in Perry County and most of
the Bank's loans are secured by real estate in Perry County. The Bank also
makes loans in Spencer County, Indiana and occasionally in other surrounding
counties. Perry County is a rural county that historically has had higher
unemployment and lower income compared to the rest of Indiana. The economy of
Perry County is dependent on manufacturing, much of which is located across the
Ohio River in Kentucky. Industries present in the region include woodworking,
steel, motors, aluminum and paper.
The Bank faces intense competition in its primary market area for the
attraction of deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for deposits has historically
come from the [three] commercial banks operating in Tell City and, to a lesser
extent, from other financial institutions, such as brokerage firms and insurance
companies. All of the [three] commercial banks in Tell City are affiliated with
large, multi-state bank holding companies and, therefore, have significantly
greater resources than the Bank. Particularly in times of high interest rates,
the Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes primarily from the
commercial banks operating in Tell City. Such competition for deposits and the
origination of loans may limit the Bank's growth in the future.
Lending Activities
General. At December 31, 1999, the Bank's net loans receivable totaled
$24.1 million, or 84.8% of total assets. The Bank has concentrated its lending
activities on one- to four-family mortgage loans, with such loans amounting to
81.8% of loans at December 31, 1999. The Bank also offers multi-family,
commercial real estate, land and residential construction loans, as well as
selected consumer loans. All of the Bank's mortgage loan portfolio is secured
by real estate located in Indiana. The Bank's consumer loans include loans
secured by savings accounts, automobile loans and secured and unsecured consumer
loans.
3
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio at the dates indicated. The Bank had no concentration
of loans exceeding 10% of total loans receivable other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
Amount Percent Amount Percent Amount Percent
--------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..................... $20,219 81.8% $17,892 83.1% $16,893 85.7%
Multi-family............................ 507 2.1 362 1.7 468 2.4
Commercial real estate.................. 598 2.4 901 4.2 864 4.4
Land.................................... 510 2.1 654 3.0 528 2.6
Residential construction................ 1,210 4.9 980 4.6 783 4.0
------- ----- ------- ----- ------- -----
Total mortgage loans................... 23,044 93.3 20,789 96.6 19,536 99.1
Consumer Loans:
Loans secured by savings accounts....... 263 1.0 274 1.3 178 0.9
Other................................... 1,399 5.7 454 2.1 -- --
------- ----- ------- ----- ------- -----
Total consumer loans................... 1,662 6.7 728 3.4 178 0.9
------- ----- ------- ----- ------- -----
Total loans........................... 24,706 100.0% 21,517 100.0% 19,714 100.0%
------- ===== ------- ===== ------- =====
Less:
Undisbursed portion of loans in process. 535 472 295
Deferred loan origination fees, net..... 63 64 72
Allowance for loan losses............... 54 51 51
------- ------- -------
Total loans receivable, net............ $24,054 $20,930 $19,296
======= ======= =======
</TABLE>
The following table sets forth certain information at December 31, 1999
regarding the dollar amount of loans maturing in the Bank's portfolio based on
their contractual terms to maturity, but does not include scheduled payments or
potential prepayments. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as becoming due
within one year. Loan balances do not include undisbursed loan proceeds,
unearned discounts, unearned income and allowance for loans losses.
<TABLE>
<CAPTION>
After After
One Year 5 Years
Within Through Through After
One Year 5 Years 10 Years 10 Years Total
-------- -------- -------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family................ $1,119 $3,737 $4,818 $10,545 $20,219
Multi-family....................... 17 97 128 265 507
Commercial real estate............. 41 180 163 214 598
Land............................... 32 166 165 147 510
Residential construction........... 1,210 -- -- -- 1,210
Consumer Loans:
Loans secured by savings accounts.. 263 -- -- -- 263
Other.............................. 404 589 104 302 1,399
------ ------ ------ ------- -------
Total gross loans............... $3,086 $4,769 $5,378 $11,473 $24,706
====== ====== ====== ======= =======
</TABLE>
4
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 2000, which have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates
------- -----------
(In thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family................ $ 8,373 $10,727
Multi-family....................... 240 250
Commercial real estate............. 328 229
Land............................... 168 310
Residential construction........... -- --
Consumer loans:
Loans secured by savings accounts.. -- --
Other.............................. 995 --
------- -------
Total gross loans................ $10,104 $15,516
======= =======
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual term because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of a mortgage loan tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, tends to decrease when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
One- to Four-Family Real Estate Loans. The Bank's primary lending activity
is the origination of loans secured by one- to four-family residences located in
its market area. The Bank offers both adjustable-rate mortgage ("ARM") loans
and fixed-rate mortgage loans. The Bank's ARM loans provide for an interest
rate that adjusts every year or that is fixed for three years and then adjusts
every year after the initial period. The Bank's ARM loans generally provide for
annual and lifetime interest rate adjustment limits of 1% and 5%, respectively.
When it was a state-chartered savings association, the Bank based its ARM loans
on the Bank's internal cost of funds. When the Bank adopted a federal mutual
charter in February 1998 it began basing its ARM loans on the One Year U.S.
Treasury Note Constant Maturity Rate. The Bank's ARM loans are typically based
on a 30-year amortization schedule. The initial rate on most of the Bank's ARM
loans is 1% to 1.5% below the rate offered for fixed-rate loans that have a term
of ten to 20 years.
The Bank offers fixed-rate, one- to four-family mortgage loans with
maturities of up to 20 years. These loans are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. Generally, they are underwritten and documented in
accordance with guidelines established by Freddie Mac. The Bank's fixed-rate
loans customarily include "due on sale" clauses, which give the Bank the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not paid.
5
<PAGE>
The Bank also offers second mortgage loans. Generally, the Bank makes
second mortgage loans only where it holds the first mortgage, unless the
combined loan to value ratio is less than 50%. Second mortgages are made on the
same terms as first mortgage loans when the combined loan to value ratio is less
than 80%. At December 31, 1999, the Bank had $1,037,000 of second mortgage
loans included in its one- to four-family mortgage loan portfolio.
Borrower demand for ARM loans versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.
The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the borrower. It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased payments required by the borrower. In
addition, although ARM loans allow the Bank to increase the sensitivity of its
asset base to changes in interest rates, the extent of this interest sensitivity
is limited by the annual and lifetime interest rate adjustment limits. Because
of these considerations the Bank has no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds. The Bank
believes these risks, which have not had a material adverse effect on the Bank
to date, generally are less than the risks associated with holding fixed-rate
loans in portfolio during a rising interest rate environment.
The Bank generally requires an acceptable attorney's opinion on the status
of its lien on all loans where real estate is the primary source of security.
The Bank also requires that fire and casualty insurance (and, if appropriate,
flood insurance) be maintained in an amount at least equal to the outstanding
loan balance.
The Bank's one- to four-family residential mortgage loans typically do not
exceed 80% of the appraised value of the security property. Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one- to- four
family residential loan; however, the Bank generally requires private mortgage
insurance on the portion of the principal amount that exceeds 90% of the
appraised value of the security property.
Multi-family and Commercial Real Estate Loans. The Bank occasionally
originates mortgage loans for the acquisition and refinancing of multi-family
and commercial real estate properties. The majority of the Bank's commercial
real estate loans are secured by churches, motels and a country club, all of
which are located in Indiana. At December 31, 1999, the Bank's largest multi-
family or commercial real estate loan was $115,000 and is secured by a motel.
Most of the Bank's commercial real estate loans have adjustable interest
rates and terms of 15 years or less. The Bank requires appraisals of all
properties securing commercial real estate loans. Appraisals are performed by
an independent appraiser designated by the Bank, all of which are reviewed by
management.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties usually are greater in amount and are more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by income
producing properties are often dependent on the successful operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio to 80% and strictly
scrutinizing the financial condition of the borrower, the cash flow of the
project, the quality of the collateral and the management of the property
securing the loan. The Bank also obtains loan guarantees from financially
capable parties based on a review of personal financial statements.
6
<PAGE>
Residential Construction Loans. The Bank originates residential
construction loans to local home builders and to individuals for the
construction and acquisition of their personal residence.
The Bank's construction loans to builders generally have fixed interest
rates and are for a term of one year. Such loans to builders are typically made
with a maximum loan to value ratio of 85%. These loans are usually made on a
speculative (unsold) basis. The maximum amount that any one builder may borrow
from the Bank is $500,000, which is the Bank's internal loan-to-one-borrower
limit. At December 31, 1999, the largest amount of construction loans
outstanding to one builder was $200,000, all of which was for speculative
construction. Construction loans to individuals are made on the same terms as
the Bank's one- to four-family mortgage loans, but provide for the payment of
interest only during the construction phase, which is usually six months. At
the end of the construction phase, the loan converts to a permanent mortgage
loan.
Prior to making a commitment to fund a construction loan, the Bank requires
an appraisal of the property by a staff appraiser. The Bank also reviews and
inspects each project prior to disbursement of funds during the term of the
construction loan. Loan proceeds are disbursed after inspection of the project
based on percentage of completion.
Construction lending affords the Bank the opportunity to earn higher
interest rates with shorter terms to maturity relative to single-family
permanent mortgage lending. Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the payoff
for the loan is dependent on the builder's ability to sell the property prior to
the time that the construction loan is due.
The Bank has attempted to minimize the foregoing risks by, among other
things, limiting its construction lending to residential properties. It is also
the Bank's general policy to obtain regular financial statements from builders
so that it can monitor their financial strength.
Land Loans. The Bank occasionally originates loans secured by unimproved
land. Most of these loans have a term of ten years or less and may have fixed
or adjustable interest rates. The largest land loan at December 31, 1999 was
$98,000.
Savings Account Loans. The Bank offers loans secured by savings deposits.
Generally, such loans are made at an interest rate that is 2% above the account
rate for an amount up to 100% of the amount on deposit at the Bank less six
month's interest.
Other Consumer Loans. The Bank offers automobile loans and other secured
and unsecured consumer loans. The Bank does not anticipate that consumer loans
will constitute a significant portion of its loan portfolio for the foreseeable
future.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
7
<PAGE>
Loans to One Borrower. The maximum amount that the Bank may lend to one
borrower is limited by federal regulations. At December 31, 1999, the Bank's
regulatory limit on loans to one borrower was $629,000. At such date, the
Bank's largest amount of loans to one borrower (including the borrower's related
interests) was $464,000 and consisted of eight single family mortgage loans
(seven of which were secured by non-owner-occupied properties) and one
commercial real estate loan.
Loan Solicitation and Processing. The Bank's lending activities are
subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Bank's Board of Directors and
management. Loan originations come from a number of sources. The customary
sources of loan originations are realtors, referrals and existing customers.
The Bank does not utilize mortgage brokers or other third-party originators.
Single-family residential mortgage loans up to $100,000 may be approved by
unanimous vote of the Bank's Loan Committee, which consists of the President and
three Directors. If the Loan Committee does not unanimously approve a loan, it
is referred to the Board of Directors. All single-family residential mortgage
loans of $100,000 or more and all other mortgage loans must be approved by the
Bank's Board of Directors. Consumer loans must be approved by an authorized
officer and ratified by the Board of Directors.
Loan Originations, Purchases and Sales. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
depends upon relative customer demand for loans.
The Bank generally retains for its portfolio all of the loans that it
originates and does not often purchase loans. Occasionally, the Bank will
participate with other area financial institutions in multi-family or commercial
real estate loans. In 1995, the Bank established an informal relationship with
another financial institution pursuant to which the Bank occasionally sells 90%
participations in single-family mortgage loans and purchases participations in
loans secured by non-owner-occupied, one- to four-family properties. The Bank
retains the servicing rights on the participation loans that it sells. The Bank
does not receive a fee for the loans sold under this arrangement and pays no fee
on the loans it purchases.
Loan Commitments. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and are honored for up to 90 days from
approval. At December 31, 1999, the Bank had loan commitments totaling $887,000
(not including undisbursed portions of loans in process of $535,000).
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.
The Bank charges loan origination fees for fixed-rate loans which are
calculated as a percentage of the amount borrowed. In accordance with
applicable accounting procedures, loan origination fees and discount points in
excess of loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. At December 31, 1999, the Bank had $63,000 of deferred loan fees. The
Bank recognized $17,000 and $24,000 of deferred loan fees during the years ended
December 31, 1999 and 1998, respectively, in connection with loan refinancings,
payoffs, sales and ongoing amortization of outstanding loans.
Nonperforming Assets and Delinquencies. When a borrowers fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. A late notice is mailed 20
days after a payment is due. In most cases, deficiencies are cured promptly.
If a delinquency continues, additional contact is made either through additional
notices or other means and the Bank will attempt to work out a payment schedule.
While the Bank generally prefers to work with borrowers to resolve such
problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
8
<PAGE>
The Bank's Board of Directors is informed monthly of the amounts of loans
delinquent more than 60 days, all loans in foreclosure and all foreclosed and
repossessed property owned by the Bank.
The Bank ceases accruing interest on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The Bank does not accrue interest on
loans past due 90 days or more when the estimated value of collateral and
collection efforts are deemed insufficient to ensure full recovery.
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. The Bank had no restructured loans
within the meaning of SFAS No. 15 at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis............... $ -- $ -- $ --
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans......................................... 104 29 --
Consumer loans......................................... -- -- --
Total................................................. -- 29 --
----- ----- -----
Foreclosed real estate, net............................. -- -- --
----- ----- -----
Total nonperforming assets............................ $ 104 $ 29 $ --
===== ===== =====
Total loans delinquent 90 days or more to net loans..... 0.43% 0.14% 0.00%
Total loans delinquent 90 days or more to total assets.. 0.37% 0.11% 0.00%
Total nonperforming assets to total assets.............. 0.37% 0.11% N/M
</TABLE>
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
until sold. When property is acquired it is recorded at fair market value at
the date of foreclosure. Subsequent to foreclosure, real estate owned is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At December 31, 1999, the Bank had no real estate owned.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss. All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and monitored by the Bank.
9
<PAGE>
The following table sets forth the number and amount of classified loans at
December 31, 1999.
<TABLE>
<CAPTION>
Special
Loss Doubtful Substandard Mention
---------------------- --------------------- --------------------- -----------------------
Number Principal Number Principal Number Principal Number of Principal
of Loans Amount of Loans Amount of Loans Amount Loans Amount
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family....... -- -- -- -- 5 $132 14 $363
Multi-family.............. -- -- -- -- -- -- -- --
Commercial real estate.... -- -- -- -- -- -- -- --
Land...................... -- -- -- -- -- -- -- --
Residential construction.. -- -- -- -- -- -- -- --
Consumer loans............. -- -- -- -- -- -- 4 38
</TABLE>
Allowance for Loan Losses. In originating loans, the Bank recognizes that
losses will be experienced and that the risk of loss will vary with, among other
things, the type of loan being made, the creditworthiness of the borrower over
the term of the loan, general economic conditions and, in the case of a secured
loan, the quality of the security for the loan. The allowance method is used in
providing for loan losses. Accordingly, all loan losses are charged to the
allowance and all recoveries are credited to it. The allowance for loan losses
is established through a provision for loan losses charged to operations. The
provision for loan losses is based on management's evaluation of of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specified impaired
loans, and economic conditions.
Although management believes that it uses the best information available to
establish the allowance for loan losses, future adjustments to the allowance for
loan losses may be necessary and results of operations could be significantly
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations. Furthermore, while the Bank
believes it has established its existing allowance for loan losses in accordance
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
increase significantly its allowance for loan losses. In addition, because
future events affecting borrowers and collateral cannot be predicted with
certainty, there can be no assurance that the existing allowance for loan losses
is adequate or that substantial increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed above.
Any material increase in the allowance for loan losses may adversely affect the
Bank's financial condition and results of operations.
10
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
(In thousands)
Allowance at beginning of period.......... $ 51 $ 51 $ 52
Provision for loan losses................. 6 -- --
Recoveries................................ -- -- --
Charge-offs:
Mortgage loans........................... 3 -- --
Consumer loans........................... -- -- 1
------ ------- -----
Total charge-offs...................... 3 -- 1
------ ------- -----
Net charge-offs........................ 3 -- 1
------ ------- -----
Balance at end of period............... $ 54 $ 51 $ 51
====== ======= =====
Allowance for loan losses as a
percentage of total loans outstanding
at the end of the period................ 0.22% 0.24% 0.26%
Net charge-offs (recoveries) as a
percentage of average loans outstanding
during the period....................... 0.01% 0.00% 0.01%
Allowance for loan losses as a
percentage of nonperforming loans
at end of period........................ 51.92% 175.86% N/M
</TABLE>
11
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses
by loan category at the dates indicated. Management believes that the allowance
can be allocated by category only on an approximate basis. The allocation of
the allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any other
category.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
--------- ------------ -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Mortgage loans:
One- to four-family............... $31 81.8% $33 83.1% $37 85.7%
Multi-family...................... 1 2.0 1 1.7 2 2.4
Commercial real estate............ 3 2.4 5 4.2 7 4.4
Land.............................. 4 2.1 6 3.0 4 2.7
Residential construction.......... 2 4.9 1 4.6 1 4.0
Consumer loans:
Loans secured by savings accounts. -- 1.1 -- 1.3 -- 0.9
Other consumer loans.............. 13 5.7 5 2.1 -- --
Unallocated........................ -- N/A -- N/A -- N/A
--- ----- --- ----- --- -----
Total allowances for loan losses. $54 100.0% $51 100.0% $51 100.0%
=== ===== === ===== === =====
</TABLE>
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Indianapolis, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets.
Applicable accounting guidelines require that investments be categorized as
"held to maturity," "trading securities" or "available for sale," based on
management's intent as to the ultimate disposition of each security. Debt
securities may be classified as "held to maturity" and reported in financial
statements at amortized cost only if the reporting entity has the positive
intent and ability to hold those securities to maturity. Securities that might
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, or other similar factors
cannot be classified as "held to maturity." Debt and equity securities held for
current resale are classified as "trading securities." Such securities are
reported at fair value, and unrealized gains and losses on such securities would
be included in earnings. The Company does not currently use or maintain a
trading account. Debt and equity securities not classified as either "held to
maturity" or "trading securities" are classified as "available for sale." Such
securities are reported at fair value, and unrealized gains and losses on such
securities are excluded from earnings and reported as a net amount in a separate
component of equity.
The Company's investment policies limit investments to U.S. Government and
agency securities, mortgage-backed securities and higher rated corporate
securities. A high credit rating indicates only that the rating agency believes
there is a low risk of default. However, all of the Company's investment
securities, including those that have high credit ratings, are subject to market
risk insofar as increases in market rates of interest may cause a decrease in
their
12
<PAGE>
market value. Corporate securities are also subject to credit risk insofar as
the payment obligations on such securities are dependent on the successful
operation of issuer's business. The Company's investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Company's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Company's credit and interest
rate risk and risk-based capital is also considered.
The Bank purchases investment securities to provide necessary liquidity for
day-to-day operations. The Bank also purchases investment securities when
investable funds exceed loan demand. In recent years, the Bank has preferred to
invest in individual mortgage loans rather than mortgage-backed securities.
Depending on loan demand, the Bank may consider increasing its investment in
mortgage-backed securities.
The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification and by type of security, at
the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
Amortized Amortized Amortized
Cost Fair Value Cost Fair Value Cost Fair Value
----------- ----------- ---------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Government agency obligations.. $1,198 $1,113 $1,447 $1,432 $ 999 $ 970
Corporate notes..................... -- -- 100 100 350 349
------ ---------- ------ ------ ------ ------
Total available for sale........... $1,198 $1,113 1,547 1,532 1,349 1,319
------ ---------- ------ ------ ------ ------
Held to maturity:
Mortgage-backed securities:
Fannie Mae.......................... -- -- -- -- 17 16
Freddie Mac......................... -- -- -- -- 4 5
------ ---------- ------ ------ ------ ------
Total held to maturity............. -- -- -- -- 21 21
------ ---------- ------ ------ ------ ------
Total.............................. $1,198 $1,113 $1,547 $1,532 $1,370 $1,340
====== ========== ====== ====== ====== ======
</TABLE>
13
<PAGE>
The following table sets forth certain information regarding the amortized
cost, weighted average yields and maturities or periods to repricing of the
Company's debt securities at December 31, 1999, all of which are available for
sale.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------------------------------------------------
Less than One to After Five to After
One Year Five Years Ten Years Ten Years Total
------------------- ------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Treasury agency
obligations......... -- -- $500 5.71% $100 6.13% $598 6.38% $1,198 $6.08%
</TABLE>
14
<PAGE>
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. The Bank
may use borrowings from the FHLB-Indianapolis to compensate for reductions in
the availability of funds from other sources. Presently, the Bank has no other
borrowing arrangements.
Deposit Accounts. Nearly all of the Bank's depositors reside in Indiana.
The Bank's deposit products include checking accounts, money market accounts,
passbook accounts, and term certificate accounts. Deposit account terms vary
with the principal difference being the minimum balance deposit, early
withdrawal penalties and the interest rate. The Bank reviews its deposit mix and
pricing weekly. The Bank does not utilize brokered deposits, nor has it
aggressively sought jumbo certificates of deposit.
The Bank believes it is competitive in the interest rates it offers on its
deposit products. The Bank determines the rates paid based on a number of
factors, including rates paid by competitors, the Bank's need for funds and cost
of funds, borrowing costs and movements of market interest rates.
The following table indicates the amount of the Bank's jumbo certificate
accounts by time remaining until maturity as of December 31, 1999. Jumbo
certificate accounts have principal balances of $100,000 or more.
<TABLE>
<CAPTION>
Certificate
Maturity Period Accounts
--------------- -----------
(In thousands)
<S> <C>
Three months or less........... $ 484
Over three through six months.. 277
Over six through 12 months..... 793
Over 12 months................. 1,358
------
Total....................... $2,912
======
</TABLE>
15
<PAGE>
The following table sets forth the balances (inclusive of interest
credited) and changes in dollar amounts of deposits in the various types of
accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ---------------------------- ---------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
--------- -------- ---------- ------- ------- ----------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand accounts.. $ 174 0.8% $ 160 $ 14 1.0% $ 14 $ -- --%
Interest-bearing demand accounts..... 138 0.7 72 66 0.3 66 -- --
Regular savings accounts............. 1,041 5.1 (203) 1,244 6.4 (57) 1,301 6.6
Money market deposit accounts........ 2,570 12.6 (126) 2,696 13.8 567 2,129 10.7
Fixed-rate certificates which mature:
Within 1 year..................... 8,083 39.5 83 8,000 41.0 (809) 8,809 44.4
After 1 year, but within 2 years.. 3,472 17.0 (1,198) 4,670 23.9 32 4,638 23.4
After 2 years, but within 4 years. 4,140 20.2 2,227 1,913 9.8 (447) 2,360 11.9
After 4 years, but within 6 years. 847 4.1 (67) 914 4.7 305 609 3.1
------- ----- ------- ------- ----- ----- ------- -----
Total......................... $20,465 100.0% $ 948 $19,517 100.0% $ 329 $19,846 100.0%
======= ===== ======= ======= ===== ===== ======= =====
</TABLE>
The following table sets forth the amount of time deposits in the Bank
categorized by maturities at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------- Percentage
One to Two to Three to After to Total
Less Than Two Three Four Four Time
One Year Years Years Years Years Total Deposits
----------- ------ ------ -------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Below 4.99%... $2,422 $ 507 $ -- $ -- $ -- $ 2,929 17.7%
5.00 - 5.49%.. 3,032 1,896 367 485 233 6,013 36.4
5.50 - 5.99%.. 1,066 535 139 814 514 3,068 18.5
6.00 - 6.49%.. 681 242 1,184 267 100 2,474 15.0
6.50 - 6.99%.. 882 292 393 491 -- 2,058 12.4
7.00 - 7.49%.. -- -- -- -- -- -- --
------ ------ ------ ------ ---- ------- -----
Totals... $8,083 $3,472 $2,083 $2,057 $847 $16,542 100.0%
====== ====== ====== ====== ==== ======= =====
</TABLE>
Borrowings. The Bank has the ability to use advances from the FHLB-
Indianapolis to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB-Indianapolis functions as a central reserve
bank providing credit for savings associations and certain other member
financial institutions. As a member of the FHLB-Indianapolis, the Bank is
required to own capital stock in the FHLB-Indianapolis and is authorized to
apply for advances on the security of such stock and certain of its mortgage
loans and other assets (principally securities that are obligations of, or
guaranteed by, the U.S. Government or agencies thereof) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.
16
<PAGE>
The following table sets forth certain information regarding the Bank's use
of FHLB advances during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
(In thousands)
Maximum balance at any month end.............. $2,000 $ -- $ 500
Average balance............................... 769 -- 254
Year end balance.............................. 2,000 -- --
Weighted average interest rate:
At end of year............................. 6.12% -- --
During the year............................ 5.42% -- 5.91%
</TABLE>
Subsidiary Activities
The Company's only direct subsidiary is the Bank. Under OTS regulations,
the Bank generally may invest up to 3% of its assets in service corporations,
provided that at least one-half of investment in excess of 1% is used primarily
for community, inner-city and community development projects. In 1989 the Bank
formed Peoples Building and Loan Association Service Corporation for the purpose
of selling annuities and mutual funds to customers of the Bank. The Bank's
service corporation is currently inactive.
Personnel
As of December 31, 1999, the Company had seven full-time employees and four
part-time employee, none of whom is represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer.
The Bank is a member of the Federal Home Loan Bank System and, with respect to
deposit insurance, the Savings Association Insurance Fund ("SAIF") managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Bank and its operations. Certain of the regulatory
requirements applicable to the Bank are referred to below or elsewhere herein.
The description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-KSB does not
purport to be a complete description of such statutes and regulations and their
effects on the Bank.
17
<PAGE>
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS financial institution rating system) and an 8% risk-based capital
ratio. In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest rating on the rating system)
and, together with the risk-based capital standard itself, a 4% Tier 1 risk-
based capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At December 31, 1999, the Bank met
each of its capital requirements.
The following table presents the Bank's capital position at December 31,
1999.
<TABLE>
<CAPTION>
Capital
Excess -----------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
--------- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Tangible................ $4,191 $ 426 $3,765 14.74% 1.50%
Core (Leverage)......... $4,191 $1,137 $3,054 14.74% 4.00%
Risk-based.............. $4,245 $1,353 $2,892 25.09% 8.00%
</TABLE>
18
<PAGE>
Prompt Corrective Regulatory Action. The OTS is required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk
weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-
weighted assets of less than 4% or a ratio of core capital to total assets of
less than 4% (3% or less for institutions with the highest examination rating)
is considered to be "undercapitalized." A savings institution that has a total
risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or
a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized. In addition, numerous mandatory supervisory
actions become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points. By law, there is equal
sharing of FICO payments between SAIF and BIF members beginning January 1, 2000.
The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At December
31, 1999, the Bank's limit on loans to one borrower was $1.0 million, and the
Bank's largest aggregate outstanding balance of loans to one borrower was
$464,000.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
19
<PAGE>
A savings institution that fails the qualified thrift lender test is subject
to certain operating restrictions and may be required to convert to a bank
charter. As of December 31, 1999, the Bank maintained 84.5% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified thrift
lending test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under current regulations, an
application to and the prior approval of the OTS is required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with OTS. If an application
is not required, the institution must still provide prior notice to OTS of the
capital distribution under certain circumstances. In the event the Bank's
capital fell below its regulatory requirements or the OTS notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank's
liquidity ratio for December 31, 1999 was 10.7%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1999 totaled $12,000.
Transactions with Related Parties. The Bank's authority to extend credit to
executive officers, directors and 10% shareholders ("insiders"), as well as
entities such persons control, is governed by Sections 22(g) and 22(h) of the
Federal Reserve Act. Among other things, such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and to
not involve more than the normal risk of repayment. Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
20
<PAGE>
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of
12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a
member of the Federal Home Loan Bank, is required to acquire and hold shares of
capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank
was in compliance with this requirement with an investment in Federal Home Loan
Bank stock at December 31, 1999, of $196,000. Federal Home Loan Bank advances
must be secured by specified types of collateral.
The Federal Home Loan Banks are required to provide funds for the resolution
of insolvent thrifts in the late 1980s and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the Federal Home Loan Banks pay to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to their
members. If dividends were reduced, or interest on future Federal Home Loan
Bank advances increased, The Bank's net interest income would likely also be
reduced. Recent legislation has changed the structure of the Federal Home Loan
Banks funding obligations for insolvent thrifts, revised the capital structure
of the Federal Home Loan Banks and implemented entirely voluntary membership for
Federal Home Loan Banks. Management cannot predict the effect that these
changes may have with respect to its Federal Home Loan Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $44.3 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $44.3
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
21
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank has not been audited by the IRS
since 1995, which covered the tax year 1994. For its 1999 taxable year, the Bank
is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the percentage of taxable income
method or (ii) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
The reserve method of accounting for bad debts has been repealed for tax
years beginning after 1995 and requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500 million) are required to use only the specific charge-off method.
The percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.
Distributions. If the Bank makes "non-dividend distributions" to the
Company, such distributions will be considered to have been made from the Bank's
unrecaptured tax bad debt reserves (including the balance of its reserves as of
December 31, 1987) to the extent thereof, and then from the Bank's supplemental
reserve for losses on loans, to the extent thereof, and an amount based on the
amount distributed (but not in excess of the amount of such reserves) will be
included in the Bank's income. Non-dividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits, as
calculated for federal income tax purposes, distributions in redemption of
stock, and distributions in partial or complete liquidation. Dividends paid out
of the Bank's current or accumulated earnings and profits will not be so
included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
Indiana Taxation
Indiana imposes an 8.5% franchise tax based on a financial institution's
adjusted gross income as defined by statute. In computing adjusted gross
income, deductions for municipal interest, U.S. Government interest, the bad
debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. The Bank's state franchise tax returns have not been
audited for the past five years.
22
<PAGE>
Item 2. Description of Property.
- -------------------------------
The Bank owns its one office. At December 31, 1999, the net book value of
the Bank's properties (including land and buildings), fixtures, furniture and
equipment was $228,000.
Item 3. Legal Proceedings.
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. Neither the Company nor the Bank is a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- -----------------------------------------------------------
None.
23
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
Information relating to the market for the Company's common equity and
related stockholder matters is disclosed in the Company's 1999 Annual Report to
Shareholders on page 31 and is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation.
- -----------------------------------------------------------------
This information is disclosed in the Company's 1999 Annual Report to
Shareholders at pages 4 through 10 and is incorporated herein by reference.
Item 7. Financial Statements.
- ----------------------------
The consolidated financial statements of the Company and its subsidiary,
together with the report thereon by Monroe Shine & Co., Inc. for the year ended
December 31, 1999 are included in the Company's 1999 Annual Report to
Shareholders at pages 11 through 29 and are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosures.
---------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
- --------------------------------------------------------------
Persons; Compliance with Section 16(a) of the Exchange Act.
----------------------------------------------------------
Information regarding directors of the Company is incorporated herein by
reference to the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 24, 2000, at pages 4 through 5.
The following table sets forth certain information regarding the executive
officers of the Company and the Bank.
<TABLE>
<CAPTION>
Name Age Position
----- --- ----------
<S> <C> <C>
Carl D. Smith............ 53 President and Chief Executive Officer of the
Company and the Bank
Clarke A. Blackford...... 52 Vice President, Treasurer and Secretary of the
Company and the Bank
</TABLE>
Carl D. Smith has served as President and Chief Executive Officer of the
Bank since 1976 and as President and Chief Executive Officer of the Company
since its formation in 1998.
Clarke A. Blackford has served as Vice President of the Bank since 1993 and
as Treasurer and Secretary since 1980. He has served as Vice President,
Treasurer and Secretary of the Company since its formation in 1998.
24
<PAGE>
Item 10. Executive Compensation.
- --------------------------------
Information regarding the compensation of directors and executive officers
of the Company is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 24, 2000,
at pages 6 through 8.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on April 24,
2000, at page 3.
Item 12. Certain Relationships and Related Transactions.
- -------------------------------------------------------
Information regarding certain relationships and related transactions is
incorporated herein by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on April 24, 2000, at page 8.
Item 13. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) The following exhibits are filed as a part of this report:
3.1 Articles of Incorporation of PCB Holding Company (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
on Form SB-2 (File No. 333-48191))
3.2 Bylaws of PCB Holding Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2
(File No. 333-48191))
4.0 Stock Certificate of PCB Holding Company (incorporated by
reference to Exhibit 4.0 to the Company's Registration Statement
on Form SB-2 (File No. 333-48191))
10.1 Employment Agreement with Carl D. Smith (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-KSB for the
year ended December 31, 1998)
10.2 PCB Holding Company 1999 Stock Option Plan (incorporated by
reference to the Company's Registration Statement on Form S-8,
File No. 333-85883)
10.3 PCB Holding Company Management Recognition and Development Plan
(incorporated by reference to the Company's Registration
Statement on Form S-8, File No. 333-85883)
13.0 Portions of Annual Report to Stockholders
21.0 Subsidiaries of Registrant
23.0 Consent of Independent Auditors
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
None.
25
<PAGE>
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PCB HOLDING COMPANY
By: /s/ Carl D. Smith
-------------------------------
Carl D. Smith
President and Chief Executive Officer
DATED: March 22, 2000
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Carl D. Smith President, Chief Executive Officer March 22, 2000
- ------------------------------- and Director
Carl D. Smith (Principal Executive Officer)
/s/ Clarke A. Blackford Treasurer and Corporate Secretary March 22, 2000
- ------------------------------- (Principal Accounting and Financial Officer)
Clarke A. Blackford
/s/ James L. Wittmer Chairman of the Board March 22, 2000
- -------------------------------
James L. Wittmer
/s/ Howard L. Traphagen Director March 22, 2000
- -------------------------------
Howard L. Traphagen
/s/ James G. Tyler Director March 22, 2000
- -------------------------------
James G. Tyler
/s/ Daniel P. Lutgring Director March 22, 2000
- -------------------------------
Daniel P. Lutgring
/s/ Marion L. Ress Director March 22, 2000
- -------------------------------
Marion L. Ress
</TABLE>
26
<PAGE>
Exhibit 13
- --------------------------------------------------------------------------------
PCB HOLDING COMPANY
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
Letter to Stockholders................................. 1
Selected Financial and Other Data...................... 2-3
Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 4-10
Independent Auditor's Report........................... 11
Consolidated Financial Statements...................... 12-15
Notes to Consolidated Financial Statements............. 16-29
Board of Directors..................................... 30
Corporate Information.................................. 31
BUSINESS OF THE COMPANY
PCB HOLDING COMPANY (the Company) is the holding company of Peoples
Community Bank (the Bank).
The Bank's savings accounts are insured up to applicable legal limits
by the Federal Deposit Insurance Corporation through the Savings Association
Insurance Fund. The Bank is a member of the Federal Home Loan Bank System. The
Bank conducts its operations through its main office located at 819 Main Street,
Tell City, Indiana. The telephone number is (812) 547-7094.
The Bank is a community-oriented financial institution offering
traditional financial services primarily to residents of Perry County, Indiana,
and, to a lesser extent, contiguous counties. The Bank's primary business is
attracting deposits from the general public and using those funds to originate
one-to-four family residential mortgage loans. The Bank also purchases
participation interests in multi-family and commercial real estate loans
originated by other financial institutions and secured by properties located
throughout Indiana. To a lesser extent, the Bank originates multi-family loans,
commercial real estate loans, residential construction loans and consumer loans.
The Bank invests excess liquidity primarily in U.S. government and agency
securities, corporate notes and, to a lesser extent, mortgage-backed securities.
<PAGE>
PCB HOLDING COMPANY
819 Main Street
Tell City, Indiana 47586
TO OUR SHAREHOLDERS
Fellow Shareholders of PCB Holding Company,
I am pleased to present to you the second Annual Report of PCB Holding Company.
We have completed our first full year after our conversion. Although much of
the year was spent upgrading all systems for Y2K, we have been committed to
continuing expanding our services. Our new ATM is in place and should be fully
operational within a few weeks. We have expanded our lending services by
offering a wider variety of consumer loans and are in the process of installing
new software, which will give us access to the technological advances of the new
millennium.
During this year we intend to investigate the possibility of branching as well
as the installation of off site ATMs. As a community-oriented financial
institution, we are dedicated to serving the financial service needs of
consumers in our market area with the highest quality customer service. With
this mission in mind, we will continue to expand our services and improve those
services we now offer.
The enclosed Annual Report indicates an increase in profits from 1998. We hope
to continue this trend as we grow and expand.
We thank you for your support and interest.
Sincerely,
Carl D. Smith
President-Chief Executive Officer
1
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
The financial data presented below is qualified in its entirety by the more
detailed financial data appearing elsewhere herein, including the Company's
audited financial statements. The following tables set forth certain information
concerning the financial position and results of operations of the Company at
the dates indicated.
<TABLE>
<CAPTION>
FINANCIAL CONDITION DATA: At December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Total assets $28,374 $25,439 $21,989 $22,247 $24,115
Loans receivable, net 24,054 20,930 19,296 19,837 19,987
Mortgage-backed securities, held to maturity - - 20 27 34
Mortgage-backed securities, available for sale - - - - 475
Other debt securities available for sale 1,113 1,532 1,319 812 701
Cash and interest bearing deposits (1) 2,539 2,366 752 977 2,298
Deposits 20,464 19,517 19,846 20,194 20,648
Advances from Federal Home Loan Bank 2,000 - - - 1,400
Stockholders' equity, substantially restricted 5,834 5,850 2,092 2,018 2,036
<CAPTION>
OPERATING DATA: Year Ended December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
Interest income $ 1,876 $ 1,731 $ 1,646 $ 1,726 $ 1,756
Interest expense 1,023 1,035 1,107 1,143 1,161
------------------------------------------------------------------------
Net interest income 853 696 539 583 595
Provision for loan losses 6 - - 8 4
------------------------------------------------------------------------
Net interest income after provision
for loan losses 847 696 539 575 591
Non-interest income 29 8 7 12 12
Non-interest expense (2) 671 542 448 612 527
------------------------------------------------------------------------
Income (loss) before income taxes 205 162 98 (25) 76
Income tax expense (credit) 80 53 28 (8) 18
------------------------------------------------------------------------
Net Income (Loss) $ 125 $ 109 $ 70 $ (17) $ 58
========================================================================
PER SHARE DATA:
Net income - basic $0.32 $0.27 N/A N/A N/A
Net income - diluted 0.31 N/A N/A N/A N/A
Dividends 0.16 0.05 N/A N/A N/A
</TABLE>
(1) Includes interest bearing deposits in other depository institutions.
(2) Includes one-time SAIF assessment of $135,000 in 1996.
2
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or For Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1) 0.47% 0.45% 0.31% -0.07% 0.24%
Return on average equity (2) 2.13% 2.70% 3.23% -0.78% 2.73%
Dividend payout ratio 51.46% 18.20% - - -
Average equity as a percent of average assets 21.95% 16.80% 9.46% 9.36% 8.78%
Interest rate spread (3) 2.11% 2.13% 1.97% 2.14% 2.14%
Net interest margin (4) 3.24% 2.95% 2.43% 2.59% 2.54%
Average interest-earning assets to
average interest-bearing liabilities 129.00% 118.86% 109.19% 108.83% 108.08%
Non-interest expense as a
percent of average total assets 2.39% 2.26% 1.95% 2.63% 2.18%
Capital Ratios:
Tangible 14.70% 15.90% 9.59% 9.16% 8.64%
Core 14.70% 15.90% 9.59% 9.16% 8.64%
Risk-based 25.09% 30.43% 18.16% 17.63% 14.89%
Asset Quality Ratios:
Nonperforming loans as a percent
of loans receivable, net (5) 0.43% 0.14% - 0.42% 0.22%
Nonperforming assets as a
percent of total assets (6) 0.37% 0.11% - 0.37% 0.19%
Allowance for loan losses as a percent
of gross loans receivable 0.22% 0.24% 0.26% 0.26% 0.22%
Allowance for loan losses as a
percent of nonperforming loans 51.92% 175.86% N/M 62.65% 97.76%
Net charge-offs as a percent of
average outstanding loans 0.01% - 0.01% - 0.06%
</TABLE>
(1) Net income divided by average total assets.
(2) Net income divided by average total retained earnings.
(3) Difference between weighted average yield on interest-earnings assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Nonperforming loans consist of loans accounted for on a nonaccrual basis
and accruing loans 90 days or more past due.
(6) Nonperforming assets consist of nonperforming loans and real estate
acquired in settlement of loans, but exclude restructured loans.
3
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
PCB HOLDING COMPANY (the Company) is the parent to its wholly owned
subsidiary, Peoples Community Bank (the Bank). The Bank is a community-oriented
financial institution that offers traditional financial services primarily to
residents of Perry County, Indiana, and, to a lesser extent, contiguous
counties. The Bank's primary business is attracting deposits from the general
public and using those funds to originate one-to-four family residential
mortgage loans. The Bank's lending activity also includes multi-family
residential loans, commercial real estate loans and consumer loans. The Bank
invests excess liquidity primarily in U.S. government and agency securities,
corporate notes and, to a lesser extent, mortgage-backed securities.
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company and the Bank. The information contained in
this section should be read in conjunction with the consolidated financial
statements and the accompanying notes to consolidated financial statements
included elsewhere in this report.
Operating Strategy
The Bank's results of operations depend primarily on net interest income,
which is the difference between the income earned on its interest-earning
assets, such as loans and investments, and the cost of its interest-bearing
liabilities, consisting of deposits and, if utilized, borrowings from the
Federal Home Loan Bank of Indianapolis. The Bank's net income is also affected
by, among other things, fee income, provisions for loan losses, operating
expenses and income tax provisions. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the intended actions of the regulatory authorities.
The Bank's current business strategy is to operate as a well capitalized,
locally owned community bank. This strategy has been implemented in recent
years by controlling growth, emphasizing the origination of residential mortgage
loans in the Bank's primary market area, improving asset quality, controlling
operating expenses, and expanding customer services.
Comparison of Financial Condition at December 31, 1999 and 1998
Total assets increased 11.5% from $25.4 million at December 31, 1998 to
$28.4 million at December 31, 1999, primarily as a result of an increase in
loans receivable, net, which was funded by growth in deposits and advances from
the Federal Home Loan Bank.
Loans receivable, net, were $24.1 million at December 31, 1999, compared to
$20.9 million at December 31, 1998, a 14.9% increase. This increase resulted
primarily from increases in residential real estate mortgage loans of $2.3
million and consumer loans of $900,000.
Other debt securities available for sale, which are primarily U.S.
government agency obligations, decreased 27.3% from $1.5 million at December 31,
1998 to $1.1 million at December 31, 1999. During 1999, the Bank had maturities
of other debt securities of $350,000 and purchases of $250,000. The Bank also
had sales of other debt securities with a carrying value of $250,000.
Cash and interest bearing deposits with banks increased from $2.4 million
at December 31, 1998 to $2.5 million at December 31, 1999. The Bank increased
the levels of working cash in connection with contingency planning for the Year
2000 date change.
4
<PAGE>
Total deposits increased from $19.5 million at December 31, 1998 to $20.5
million at December 31, 1999 primarily as a result of the growth in demand and
time deposit accounts. The Bank began offering several types of demand deposit
accounts in the fourth quarter of 1998.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Net income. Net income was $125,000 for 1999, compared to $109,000 for
1998. The increase in net income for 1999 compared to 1998 resulted primarily
from an increase in net interest income, offset by an increase in non-interest
expense.
Net interest income. Net interest income increased 23% from $696,000 in
1998 to $853,000 for 1999 as a result of an increase in total interest income
and a decrease in interest expense. The average yield on interest-earning
assets decreased from 7.34% for 1998 to 7.10% for 1999 as a result of a lower
yields on the loan and securities portfolios. The average balance of total
interest-earning assets was $23.6 million for 1998 compared to $26.4 million for
1999. The higher average balance in 1999 reflects the completion of the
Company's stock offering in July 1998 and the growth in the loan portfolio. The
average cost of interest-bearing liabilities decreased from 5.21% for 1998 to
4.97% for 1999 as a result of a general decline in market interest rates. The
average balance of total interest-bearing liabilities increased from $19.9
million for 1998 to $20.5 million for 1999 primarily as a result of borrowing
from the Federal Home Loan Bank. The interest rate spread for 1998 was 2.13%
compared to 2.11% for 1999. For further information see "Average Balance
Sheets" below. The changes in interest income and interest expense resulting
from changes in volume and changes in rates for 1999 and 1998 are shown in the
schedule captioned "Rate/Volume Analysis" included herein.
Provision for loan losses. The provision for loan losses was $6,000 for
the year ended December 31, 1999. The Bank made no provision for loan losses in
1998. Provisions for loan losses are charges to earnings to bring the total
allowance for loan losses to a level considered adequate by management to
provide for probably known and inherent loan losses based on management's
evaluation of the collectibility of the loan portfolio, including the nature of
the portfolio, credit concentrations, trends in historical loss experience,
specific impaired loans, and economic conditions. In determining the adequacy
of the allowance for loan losses, the Bank reviews all loans quarterly, and
loans are assigned a risk weighting based on asset classification. The
provision for loan losses for 1999 resulted from the growth in the loan
portfolio and net charge-offs of $3,000. The allowance for loan losses was
$54,000 and $51,000 at December 31, 1999 and 1998, respectively. Management has
deemed this amount as adequate on those dates based on its best estimate of
probable known and inherent loan losses. At December 31, 1999, non-performing
loans totaled $104,000 or .37% of total assets.
Non-interest income. Non-interest income was $29,000 for the year ended
December 31, 1999 and $8,000 for the year ended December 31, 1998. The increase
is primarily the result of the introduction of service charges on deposit
accounts in late 1998.
Non-interest expense. Non-interest expense totaled $671,000 for the year
ended December 31, 1999 compared to $542,000 for 1998. The increase for 1999
compared to 1998 resulted primarily from increases in compensation and benefits
of $52,000 and an increase in other non-interest expenses of $59,000. During
the quarter ended December 31, 1999, the Bank sold an available for sale debt
security and realized a loss of $25,000. Other non-interest expenses increased
in 1999 as compared to 1998 primarily as a result of increases in advertising
costs, data processing fees, professional fees and other expenses of operating
as a public company.
Income tax expense. Income tax expense increased from $53,000 for 1998 to
$80,000 for 1999 as a result of higher income before income taxes. The
effective tax rate for 1999 was 39.0% compared to 32.8% for 1998 due to the
effect of the graduated federal tax rates.
5
<PAGE>
- --------------------------------------------------------------------------------
AVERAGE BALANCE SHEETS
- --------------------------------------------------------------------------------
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest earning assets and interest
expense on average interest bearing liabilites and average yields and costs.
Such yields and costs for the periods indicated are derived by dividing income
or expense by the average balances of assets or liabilities, respectively, for
the periods presented.
Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
Average Average
------- -------
Average Yield/ Average Yield/
------------ ------- ------- -------
Balance Interest Cost Balance Interest Cost
------------ -------- ------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable, net (1) $22,702 $1,690 7.44% $19,769 $1,518 7.68%
Investment securities (2) 1,379 72 5.20% 1,602 94 5.85%
Federal Home Loan Bank stock 196 16 8.16% 196 16 8.16%
Interest bearing deposits with banks 2,116 97 4.58% 2,031 103 5.07%
--------- ------ ----- ------ ------ -----
Total interest earning assets 26,393 1,875 7.10% 23,598 1,731 7.34%
--------- ------ ------ ------
Non-interest earning assets 408 414
--------- ------
Total assets $26,801 $24,012
========= =======
Interest bearing liabilities:
Savings and interest bearing demand
deposits $ 4,069 129 3.17% $ 3,781 122 3.23%
Time deposits 15,634 850 5.44% 16,073 913 5.68%
--------- ------ ----- ------- ------ -----
Total deposits 19,703 979 4.97% 19,854 1,035 5.21%
--------- ------ ----- ------- ------ -----
FHLB advances 756 42 5.56% - - -
--------- ------ ----- ------- ------ -----
Total interest bearing liabilities 20,459 1,021 4.99% 19,854 1,035 5.21%
--------- ------ ------- ------
Non-interest bearing liabilities 459 124
--------- -------
Total liabilities 20,918 19,978
Stockholders' equity 5,883 4,034
--------- -------
Total liabilities and stockholders' equity $26,801 $24,012
========= =======
Net interest income $ 854 $ 696
========= =======
Interest rate spread 2.11% 2.13%
========= =======
Net interest margin 3.24% 2.95%
========= =======
Ratio of average interest earning assets
to average interest bearing liabilities 129.00% 118.86%
========= =======
</TABLE>
- ----------------------------------------------------------
(1) Average loans receivable includes non-performing loans. Interest income does
not include interest on loans 90 days or more past due.
(2) Includes debt securities classified as available for sale and mortgage-
backed securities classified as held to maturity.
6
<PAGE>
- --------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
- --------------------------------------------------------------------------------
The following table sets forth the effects of changing rates and volumes on
interest income and interest expense. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (changes in
volume multiplied by prior rate); (ii) effects attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) effects attributable to
changes in rate and volume (change in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
1999 Compared to 1998
Increase (Decrease) Due to
--------------------------------------------------------------------
Rate/
-----
Rate Volume Volume Net
------------- -------------- -------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
Interest earning assets:
Loans receivable, net $ (47) $226 $ (7) $172
Investment securities (10) (13) 1 (22)
Federal Home Loan Bank stock - - - -
Interest bearing deposits with banks (10) 4 - (6)
------------- -------------- -------------- --------------
Total net change in income
on interest earning assets (67) 217 (6) 144
------------- -------------- -------------- --------------
Interest bearing liabilities:
Savings and interest bearing
demand deposits (2) 9 - 7
Time deposits (39) (25) 1 (63)
FHLB advances - - 42 42
------------- -------------- -------------- --------------
Total net change in expense
on interest bearing liabilities (41) (16) 43 (14)
------------- -------------- -------------- --------------
Net change in net interest income $(26) $233 $(49) $158
============= ============== ============== ==============
</TABLE>
7
<PAGE>
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits and proceeds from loan
repayments and prepayments, and from the sale and maturity of securities. The
Bank may also borrow from the Federal Home Loan Bank of Indianapolis. While
loan repayments and maturities and sales of securities are predictable sources
of funds, deposit flows and mortgage prepayments are greatly influenced by
market interest rates, general economic conditions and competition. At December
31, 1999, the Bank had cash and interest-bearing deposits with banks of $2.5
million and securities available for sale with a fair value of $1.1 million.
At December 31, 1999, the Bank also had an available, but undrawn, credit line
of $1.9 million from the Federal Home Loan Bank of Indianapolis.
The Bank's primary investing activity is the origination of one-to-four
family mortgage loans and, to a lesser extent, consumer, multi-family,
commercial real estate and residential construction loans. The Bank also
invests in U.S. government and agency securities, corporate notes and, to a
lesser extent, mortgage-backed securities.
The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. At December 31, 1999, the Bank had total commitments to extend
credit of $887,000. See Note 11 of Notes to Consolidated Financial Statements.
At December 31, 1999, the Bank had certificates of deposit scheduled to mature
within one year of $8.1 million. Historically, the Bank has been able to retain
a significant amount of its deposits as they mature.
Current Office of Thrift Supervision (OTS) regulations require the Bank to
maintain an average daily balance of liquid assets (cash and eligible
investments) equal to at least 4.0% of the average daily balance of its net
withdrawable deposits and short-term borrowings. Historically, the Bank has
maintained liquidity levels in excess of regulatory requirements.
The Bank is required to maintain specific amounts of capital pursuant to
OTS requirements. As of December 31, 1999, the Bank was in compliance with all
regulatory capital requirements in effect as of such date with tangible, core
and risk-based capital ratios of 14.7%, 14.7% and 25.1%, respectively.
Effect of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars, without considering the changes in relative
purchasing power of money over time due to inflation. The primary impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, virtually all the assets and liabilities of the Bank
are monetary in nature. As a result, interest rates generally have a more
significant impact on the Bank's performance than do general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
Market Risk Analysis
Qualitative Aspects of Market Risk. The Bank's principal financial
objective is to achieve long-term profitability while reducing its exposure to
fluctuating market interest rates. The Bank has sought to reduce the exposure
of its earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. In order to
reduce the exposure to interest rate fluctuations, the Bank has developed
strategies to manage its liquidity, shorten its effective maturities of certain
interest-earning assets and increase the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
increasing the origination of short-term consumer loans, all of which are
retained by the Bank for its portfolio. The Bank relies on retail deposits as
its primary source of funds. Management believes retail deposits, compared to
brokered deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds.
8
<PAGE>
Quantitative Aspects of Market Risk. The Bank does not maintain a trading
account for any class of financial instrument nor does the Bank engage in
hedging activities or purchase high-risk derivative instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk.
The Bank uses interest rate sensitivity analysis to measure its interest
rate risk by computing changes in NPV (net portfolio value) of its cash flows
from assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained 100 to 400 basis point increase or decrease in
market interest rates with no effect given to any steps that management might
take to counter the effect of that interest rate movement. Using data compiled
by the OTS, the Bank receives a report which measures interest rate risk by
modeling the change in NPV over a variety of interest rate scenarios. This
procedure for measuring interest rate risk was developed by the OTS to replace
the "gap" analysis (the difference between interest-earning assets and interest-
bearing liabilities that mature or reprice within a specific time period).
The following table is provided by the OTS and sets forth the change in the
Bank's NPV at December 31, 1999, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
<TABLE>
<CAPTION>
At December 31, 1999
- --------------------------------------------------------------------------------
Net Portfolio Value
---------------------------- Net Portfolio Value as a
Change Dollar Dollar Percent Percent of Present Value of Assets
In Rates Amount Change Change NPV Ratio Change (bp)
- ------------ ------- --------- -------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
300bp $2,428 $(1,480) (37)% 9.59% (453)
200bp 3,007 (954) (24) 11.29 (283)
100bp 3,514 (447) (11) 12.84 (128)
static 3,961 - - 14.12 -
(100)bp 4,270 309 8 14.92 80
(200)bp 4,473 512 13 15.38 126
(300)bp 4,653 691 17 15.75 164
</TABLE>
The above table indicates that in the event of a sudden and sustained
increase in prevailing market interest rates, the Bank's NPV would be expected
to decrease, and that in the event of a sudden and sustained decrease in
prevailing market interest rates, the Bank's NPV would be expected to increase.
Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within the Bank's region were utilized in preparing the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
9
<PAGE>
Year 2000 Issues
The year 2000 issue exists because many computer systems and
applications use two-digit date fields to designate a year. Date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the year 2000 may cause erroneous results, ranging
from system malfunctions to incorrect or incomplete processing. As a user of
computers, computer software and equipment utilizing embedded microprocessors,
failure to resolve year 2000 issues could cause substantial disruption of the
Bank's business and could have a material adverse effect on the Bank's business,
financial condition or results of operations.
The Bank established a year 2000 committee in 1997. The committee
developed and implemented a comprehensive plan to make all information and non-
information technology assets year 2000 compliant. The committee provides
periodic reports to the Board of Directors in order to assist the directors in
their year 2000 readiness oversight role.
While there can be no assurances that the Bank's year 2000 plan has
effectively addressed the year 2000 issue, the Bank has not been notified, and
is unaware of, any vendor or service provider problems related to year 2000 and
all systems have performed properly since January 1, 2000. Likewise, the Bank
is unaware of any year 2000 issues that have impaired the ability of the Bank's
borrowers to repay their debt.
10
<PAGE>
[Monroe Shine Logo Letterhead]
MONROE SHINE
KNOWLEDGE FOR TODAY...VISION FOR TOMORROW
222 EAST MARKET STREET, P.O. BOX 1407, NEW ALBANY, IN 47150
PHONE: 812.945.2311*FAX: 812.945.2603
Independent Auditor's Report
The Board of Directors
PCB Holding Company
Tell City, Indiana
We have audited the accompanying consolidated balance sheets of PCB Holding
Company and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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
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 financial position of PCB Holding Company
and Subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Monroe Shine
- ---------------------------
Monroe Shine
January 18, 2000
11
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 229,761 $ 43,327
Interest bearing deposits with banks 2,308,724 2,322,875
Securities available for sale, at fair value 1,113,197 1,531,994
Loans, net 24,054,245 20,929,684
Federal Home Loan Bank stock, at cost 196,100 196,100
Premises and equipment 227,765 218,271
Accrued interest receivable:
Loans 128,675 111,323
Securities and other 26,475 36,463
Other assets 89,355 49,066
----------- -----------
Total Assets $28,374,297 $25,439,103
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 173,348 $ 13,844
Savings and interest bearing demand deposits 3,748,590 4,005,692
Time deposits 16,542,278 15,497,155
----------- -----------
Total deposits 20,464,216 19,516,691
Advances from Federal Home Loan Bank 2,000,000 -
Accrued interest payable on deposits 6,151 5,990
Accrued expenses and other liabilities 69,986 66,480
----------- -----------
Total Liabilities 22,540,353 19,589,161
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.01 par value per share
Authorized 1,000,000 shares; none issued - -
Common stock of $.01 par value per share
Authorized 4,000,000 shares; issued 412,620 shares
(396,750 shares in 1998) 4,126 3,967
Additional paid-in capital 3,814,458 3,655,917
Retained earnings-substantially restricted 2,259,595 2,198,860
Accumulated other comprehensive income-
net unrealized loss on securities available for sale (51,495) (8,802)
Unearned stock compensation (144,152) -
Treasury stock, at cost - 4,600 shares (48,588) -
----------- -----------
Total Stockholders' Equity 5,833,944 5,849,942
----------- -----------
Total Liabilities and Stockholders' Equity $28,374,297 $25,439,103
=========== ===========
</TABLE>
12
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated Unearned
Additional Other Stock
Common Paid-In Retained Comprehensive Compen- Treasury
Stock Capital Earnings Income sation Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1999 $ - $ - $2,109,721 $(18,202) $ - $ - $2,091,519
COMPREHENSIVE INCOME
Net income - - 108,976 - - - 108,976
Other comprehensive income:
Change in unrealized loss on
securities available for sale,
net of deferred income tax
expense of $6,166 - - - 9,400 - - 9,400
Less: reclassification
adjustment -
----------
Total comprehensive
income 118,376
----------
Issuance of common stock 3,967 3,655,917 - - - - 3,659,884
Cash dividends ($.05 per
share) - - (19,837) - - - (19,837)
------- ----------- ----------- ------------- ---------- --------- ----------
Balances at December 31, 1998 3,967 3,655,917 2,198,860 (8,802) - - 5,849,942
COMPREHENSIVE INCOME
Net income - - 125,177 - - - 125,117
Other comprehensive income:
Change in unrealized loss on
securities available for sale,
net of deferred income tax
benefit of $37,905 - - - (57,791) - - (57,791)
Less: reclassification
adjustment, net of deferred
tax expense of $9,902 - - - 15,098 - - 15,098
----------
Total comprehensive
income 82,424
----------
Cash dividends ($.16 per
share) - - (64,382) - - - (64,382)
Purchase of treasury stock
(4,600 shares) - - - - - (48,588) (48,588)
Issuance of 15,870 shares
for stock compensation plan 159 158,541 - - (158,700) - -
Stock compensation expense - - - - 14,548 - 14,548
------- ----------- ----------- ------------- ---------- --------- ----------
Balances at December 31, 1999 $4,126 $3,814,458 $2,259,595 $(51,495) $(144,152) $(48,588) $5,833,944
======= =========== =========== ============= ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans:
Real estate mortgage loans $1,587,175 $1,490,756
Other loans 103,160 27,177
Mortgage-backed securities - 813
Other debt securities 72,266 93,354
Federal Home Loan Bank dividends 15,688 15,703
Interest bearing deposits with banks 97,268 102,700
---------- ----------
Total interest income 1,875,557 1,730,503
INTEREST EXPENSE
Deposits 981,159 1,035,012
Advances from Federal Home Loan Bank 41,683 -
---------- ----------
Total interest expense 1,022,842 1,035,012
---------- ----------
Net interest income 852,715 695,491
Provision for loan losses 6,000 -
---------- ----------
Net interest income after provision for loan losses 846,715 695,491
NON-INTEREST INCOME
Service charges on deposit accounts 16,622 220
Other income 12,630 7,989
---------- ----------
Total non-interest income 29,252 8,209
---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits 370,856 319,123
Occupancy and equipment 41,886 47,910
Deposit insurance premiums 12,539 13,126
Net realized loss on sale of securities 25,000 -
Other operating expenses 220,480 161,411
---------- ----------
Total non-interest expenses 670,761 541,570
---------- ----------
Income before income taxes 205,206 162,130
Income tax expense 80,089 53,154
---------- ----------
Net income $ 125,117 $ 108,976
========== ==========
Net income per common share, basic $ .32 $ .27
========== ==========
Net income per common share, diluted $ .31 $ N/A
========== ==========
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 125,117 $ 108,976
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of premiums and accretion of discounts
on securities, net (1,899) 3,981
Net realized loss on sale of securities 25,000 -
Depreciation expense 17,702 17,524
Stock compensation expense 14,548 -
Deferred income taxes (credit) (11,094) (1,995)
Provision for loan losses 6,000 -
Increase in accrued interest receivable (7,364) (15,772)
Increase (decrease) in accrued interest payable 161 (184)
Net change in other assets/liabilities 2,314 43,866
----------- -----------
Net Cash Provided By Operating Activities 170,485 156,396
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits with banks 14,151 (1,589,155)
Proceeds from maturity of securities available for sale 350,000 1,735,022
Purchases of securities available for sale (250,000) (1,935,832)
Proceeds from sale of securities available for sale 225,000 -
Principal collected on mortgage-backed securities - 20,162
Net increase in loans receivable (3,130,561) (1,634,160)
Purchase of premises and equipment (27,196) (37,755)
----------- -----------
Net Cash Used By Investing Activities (2,818,606) (3,441,718)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits (97,598) 589,444
Net increase (decrease) in time deposits 1,045,123 (918,870)
Advances from Federal Home Loan Bank 2,000,000 -
Proceeds from issuance of common stock - 3,659,884
Purchase of treasury stock (48,588) -
Cash dividends paid (64,382) (19,837)
----------- -----------
Net Cash Provided By Financing Activities 2,834,555 3,310,621
Net Increase in Cash and Due From Banks 186,434 25,299
Cash and due from banks at beginning of year 43,327 18,028
----------- -----------
Cash and Due From Banks at End Of Year $ 229,761 $ 43,327
=========== ===========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
PCB Holding Company (the Company) was incorporated by Peoples Building and
Loan Association (now known as Peoples Community Bank) (the Bank) in
connection with a conversion from a federally chartered mutual savings and
loan association to a federally chartered stock savings bank. Upon
consummation of the conversion and reorganization on July 1, 1998, the
Company became the holding company for the Bank.
The Bank provides a variety of banking services to customers through its
office in Tell City, Indiana. The Bank's primary source of revenue is
single-family residential loans.
Consolidation
The consolidated financial statements include the accounts of the Company,
the Bank and its wholly-owned subsidiary, Peoples Building and Loan
Service Corp., which was inactive in 1999 and 1998. All material
intercompany balances and transactions have been eliminated in
consolidation.
Statements of Cash Flows
For purposes of the statements of cash flows, the Company has defined cash
and cash equivalents as those amounts included in the balance sheet caption
"Cash and due from banks."
Use of 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
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of foreclosed real estate. In connection with the determination
of estimated losses on loan and foreclosed real estate, management obtains
appraisals for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, further reductions in the carrying amounts of
loans and foreclosed assets may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the estimated losses on
loans and foreclosed real estate. Such agencies may require the Bank to
recognize additional losses based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible the estimated losses on loans and
foreclosed real estate may change materially in the near term. However,
the amount of the change that is reasonably possible cannot be estimated.
Securities Available for Sale
Securities available for sale consist of debt securities not classified as
held to maturity and are stated at fair value. Amortization of premium and
accretion of discount are recognized in interest income using the interest
method. Unrealized gains and losses, net of tax, on securities available
for sale are reported as a separate component of retained earnings until
realized. Gains and losses on the sale of securities available for sale
are determined using the specific identification method.
Securities Held to Maturity
Debt securities, including mortgage-backed securities, for which the Bank
has the positive intent and ability to hold to maturity are carried at
cost, adjusted for amortization of premium and accretion of discount using
the interest method over the remaining period to maturity, adjusted for
anticipated prepayments. Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans
originated and serviced by issuers of the securities.
16
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(1 - continued)
Loans
Loans are stated at unpaid principal balances, less net deferred loan fees
and the allowance for loan losses. The Bank's real estate loan portfolio
consists primarily of long-term loans collateralized by first mortgages on
single-family residences and multi-family residential property located in
the southern Indiana area and commercial real estate loans. In addition to
real estate loans, the Bank makes consumer loans and loans secured by
savings accounts.
Loan origination fees and certain direct costs of underwriting and closing
loans are deferred and the net fee or cost is recognized as an adjustment
to interest income over the contractual life of the loans using the
interest method.
The accrual of interest is discontinued on a loan when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. The Bank does not accrue interest
on loans past due 90 days or more except when the estimated value of
collateral and collection efforts are deemed sufficient to ensure full
recovery. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income.
Subsequent receipts on nonaccrual loans, including specific impaired loans,
are recorded as a reduction of principal, and interest income is only
recorded once principal recovery is reasonably assured.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specified impaired loans, and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the related
allowance may change in the near term.
Foreclosed Real Estate
Foreclosed real estate is carried at the lower of fair value minus
estimated costs to sell or cost. Costs of holding foreclosed real estate
are charged to expense in the current period, except for significant
property improvements, which are capitalized. Valuations are periodically
performed by management and an allowance is established by a charge to non-
interest expense if the carrying value exceeds the fair value minus
estimated costs to sell. The net expense from operations of foreclosed
real estate held for sale is reported in non-interest expense.
Premises and Equipment
The Bank uses the straight line and accelerated methods of computing
depreciation at rates adequate to amortize the cost of the applicable
assets over their useful lives. Items capitalized as part of premises and
equipment are valued at cost. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of assets sold, or
otherwise disposed of, are removed from the related accounts and any gain
or loss is included in earnings.
17
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(1 - continued)
Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
available for sale securities, allowance for loan losses, accumulated
depreciation, and accrued income and expenses for financial and income tax
reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled.
Advertising Costs
Advertising costs are charged to operations when incurred.
Stock-Based Compensation
Under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company will measure and recognize compensation cost
related to stock-based compensation plans using the intrinsic value method
and disclose the pro forma effect of applying the fair value method
contained in SFAS No. 123. Accordingly, no compensation cost will be
charged against earnings for stock options granted under the Company's
stock-based compensation plans.
(2) DEBT SECURITIES
Debt and equity securities have been classified in the balance sheets
according to management's intent.
The Bank's investment in debt securities at December 31, 1999 and 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1999:
Securities available for sale:
U.S. government agency $1,198,468 $ - $ (85,271) $1,113,197
========== ========== =========== ==========
December 31, 1998:
Securities available for sale:
U.S. government agency $1,446,953 $ 6,396 $ 20,855 $1,432,494
Corporate notes 99,616 - 116 99,500
---------- ---------- ----------- ----------
$1,546,569 $ 6,396 $ 20,971 $1,531,994
========== ========== =========== ==========
</TABLE>
The amortized cost and fair value of debt securities as of December 31,
1999 by contractual maturity, are shown below.
<TABLE>
<CAPTION>
Securities Available for Sale
Amortized Fair
Cost Value
<S> <C> <C>
Due after one year through five years $ 500,000 $ 492,467
Due after five years through ten years 100,000 92,394
Due after ten years 598,468 528,336
------------ ------------
$1,198,468 $1,113,197
============ ============
</TABLE>
18
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(3) LOANS RECEIVABLE
Loans receivable at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Real estate mortgage loans:
One to four family residential $20,218,584 $17,891,615
Multi-family residential 506,568 361,699
Commercial real estate 597,731 900,758
Land 510,116 654,006
Residential construction 1,210,494 980,000
Loan secured by savings accounts 263,437 274,559
Consumer loans 1,399,111 453,884
----------- -----------
24,706,041 21,516,521
----------- -----------
Less:
Deferred loan origination fees, net 63,089 63,939
Undisbursed portion of loans in process 535,072 472,096
Allowance for loan losses 53,635 50,802
----------- -----------
651,796 586,837
----------- -----------
Loans receivable, net $24,054,245 $20,929,684
=========== ===========
An analysis of the allowance for loan losses is as follows:
Beginning balances $ 50,802 $ 50,802
Recoveries 243 -
Loans charged-off (3,410) -
Provision for loan losses 6,000 -
----------- -----------
Ending balances $ 53,635 $ 50,802
=========== ===========
</TABLE>
The Bank had no loans specifically classified as impaired at December 31,
1999 and 1998.
The bank has entered into loan transactions with certain directors, officers
and their affiliates (related parties). In the opinion of management, such
indebtedness was incurred in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than normal risk
of collectibility or present other unfavorable features.
The following represents the aggregate activity for related party loans
which exceeded $60,000 in total:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1998 $290,301
New loans 101,988
Payments (36,922)
--------
Balance, December 31, 1999 $355,367
========
</TABLE>
(4) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and land improvements $ 36,000 $ 36,000
Office building 378,705 373,194
Furniture, fixtures and equipment 161,826 140,141
-------- --------
Less accumulated depreciation 348,766 331,064
-------- --------
Totals $227,765 $218,271
======== ========
</TABLE>
19
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(5) DEPOSITS
The aggregate amount of time deposit accounts with balances of $100,000 or
more was approximately $2,912,000 at December 31, 1999.
At December 31, 1999, scheduled maturities of time deposits were as
follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
2000 $ 8,083,329
2001 3,471,676
2002 2,082,742
2003 2,058,105
2004 and thereafter 846,426
-----------
Total $16,542,278
===========
</TABLE>
The Bank held deposits of approximately $548,000 and $552,000 for related
parties at December 31, 1999 and 1998, respectively.
Deposit account balances in excess of $100,000 are not federally insured.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Savings and interest bearing demand deposits $131,100 $ 121,671
Time deposits 850,059 913,341
-------- ----------
Totals $981,159 $1,035,012
======== ==========
</TABLE>
(6) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1999, advances from the Federal Home Loan Bank were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Rate Amount
Advances maturing:
June 26, 2000 5.88% $ 1,000,000
October 1, 2001 6.36% 1,000,000
-----------
$ 2,000,000
===========
</TABLE>
The advances from the Federal Home Loan Bank of Indianapolis are secured
under a blanket collateral agreement. At December 31, 1999, eligible
collateral included residential mortgage loans with a carrying value of
$15,449,110, which were pledged as security under the agreement.
(7) STOCK-BASED COMPENSATION PLANS
The Company applies APB No. 25 and related interpretations in accounting
for its stock-based compensation plans. In accordance with SFAS No. 123,
the Company elected to continue to apply the provisions of APB No. 25.
However, pro forma disclosures as if the Company adopted the compensation
cost recognition provisions of SFAS No. 123, are presented along with a
summary of the plans and awards.
Stock Options
The Company's stock option plan provides for the granting of incentive and
nonqualified stock options at exercise prices not less than the fair market
value of the common stock on the date of grant. All options granted under
the plan shall become vested and exercisable at the rate determined by the
Board of Directors at the date of grant. Options granted under the plan
expire not more than ten years after the date of grant. Payment of the
option price may be in cash or shares of common stock at fair market value
on the exercise date. Non-employee directors are eligible to receive only
nonqualified stock options.
20
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(7 - continued)
The following is a summary of the stock options as of December 31, 1999 and
the changes for the year then ended:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding at beginning of year - -
Granted 31,734 $10.00
Exercised - -
Forfeited - -
------
Outstanding at end of year 31,734 10.00
======
Exercisable at end of year 21,816 10.00
======
</TABLE>
For options outstanding at December 31, 1999, the weighted average
remaining contractual life of the options was 9.5 years.
For purposes of providing the pro forma disclosures required under SFAS No.
123, the fair value of stock options granted for the year ended December
31, 1999 was estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option pricing model was originally
developed for use in estimating the fair value of traded options which have
different characteristics from the Company's employee stock options and
require the use of highly subjective assumptions which can materially
affect the fair value estimate. As a result, management believes the
Black-Scholes model may not necessarily provide a reliable measure of the
fair value of employee stock options.
The following assumptions were used for grants during the year ended
December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Expected dividend yield 1.59%
Risk-free interest rate 5.70%
Expected volatility 4.22%
Expected life options 10 years
Weighted average fair value at grant date $ 2.88
</TABLE>
Had compensation cost for the stock-based compensation plan been determined
in accordance with the fair value based accounting method provided by SFAS
No. 123, the net income and net income per common share for the year ended
December 31, 1999 would have been as follows:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C>
Pro forma net income $ 87
Pro forma net income per share:
Basic $.22
Diluted $.22
</TABLE>
Restricted Stock Compensation Plan
The Company established a restricted stock compensation plan as an
encouragement for directors, officers and key employees to remain in the
employment or service of the Company. The shares granted under the plan
are in the form of restricted stock vesting over a five-year period
beginning with the date of grant of the award. Since the stock issued is
held in escrow by the Company before some or all of the services are
performed, unearned compensation is recorded as a reduction of
stockholder's equity. Compensation expense is recognized pro rata over the
period during which the shares are earned. The maximum number of common
shares available for issuance under the plan is 15,870 shares, all of which
were awarded in 1999. The terms of the restricted stock compensation plan
included a provision whereby all unearned shares become fully vested upon a
change in control. Compensation expense recognized for the year ended
December 31, 1999 was $14,548.
21
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(8) INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Current $ 91,183 $55,149
Deferred (11,094) (1,995)
-------- --------
Totals $ 80,089 $53,154
======== =======
</TABLE>
Significant components of the Bank's deferred tax assets and liabilities as
of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities):
Deferred loan fees and costs $ 19,877 $ 20,528
Allowance for loan losses 21,246 20,123
Unrealized loss on securities available for sale 33,776 5,773
Stock compensation plan 5,762 -
Cumulative effect of change to the accrual basis
of accounting for tax reporting (18,407) (27,611)
Depreciation (15,062) (10,718)
--------
Net deferred tax asset $ 47,192 $ 8,095
======== ========
</TABLE>
The reconciliation of income tax expense with the amount which would have
been provided at the federal statutory rate of 34 percent follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Provision at federal statutory tax rate $69,770 $ 55,124
State income tax-net of federal tax benefit 14,269 9,445
Effect of federal graduated rates (5,137) (11,750)
Other 1,187 335
------- --------
Totals $80,089 $ 53,154
======= ========
Effective tax rate 39.0% 32.8%
======= ========
</TABLE>
Prior to January 1, 1996, the Bank was permitted by the Internal Revenue
Code to deduct from taxable income an annual addition to a statutory bad
debt reserve subject to certain limitations. Retained earnings at December
31, 1999 include approximately $695,000 of cumulative deductions for which
no deferred federal income tax liability has been recorded. Reduction of
these reserves for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for tax
purposes subject to the then current corporate income tax rate. The
unrecorded deferred liability on these amounts was approximately $236,000
at December 31, 1999.
Federal legislation repealed the reserve method of accounting for bad debts
by qualified thrift institutions for tax years beginning after December 31,
1995. As a result, the Bank will no longer be able to calculate the annual
addition to the statutory bad debt reserve using the percentage-of-taxable-
income. Instead, the Bank will be required to compute its federal tax bad
debt deduction based on actual loss experience over a period of years. The
legislation requires the Bank to recapture into taxable income over a six-
year period its post-1987 additions to the statutory bad debt reserve,
thereby generating additional tax liability. The recapture may be
suspended for up to two years, if during those years the Bank satisfies a
residential loan requirement. The Bank has no post-1987 reserves subject
to recapture.
The legislation also provided that the Bank will not be required to
recapture its pre-1988 statutory bad debt reserves if it ceases to meet the
qualifying thrift definitional tests and if the Bank continues to qualify
as a "bank" under existing provisions of the Internal Revenue Code.
22
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(9) EMPLOYEE BENEFIT PLANS
The Bank has a qualified contributory defined benefit plan that allows
participating employees to make tax-deferred contributions under Internal
Revenue Code Section 401(k).
The Bank also has a qualified defined contribution money-purchase plan
available to all eligible employees. Contributions to the plan are based
on a formula set forth in the plan documents.
The Bank made contributions to these plans of $31,337 and $26,612 for 1999
and 1998, respectively.
(10) CONCENTRATIONS OF CREDIT RISK
At December 31, 1999, the Bank had concentrations of credit risk with a
correspondence bank representing interest bearing deposits with banks in
excess of federal deposit insurance limits of $442,000.
(11) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as commitments to extend credit and legal
claims, which are not reflected in the financial statements.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Mortgage loans:
Variable rate $324,000 $179,000
Fixed rate 28,000 54,400
Undisbursed home improvement loans in process 87,340 22,240
Undisbursed portion of construction loans in process 447,741 449,866
-------- --------
Total commitments to extend credit $887,081 $705,506
======== ========
</TABLE>
(12) 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 and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments (see Note 11). 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 to a customer 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 creditworthiness on a case-by-case basis. The
amount and type of collateral obtained, if deemed necessary by the Bank
upon extension of credit, varies and is based on management's credit
evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters
of credit generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank's policy for obtaining
collateral, and the nature of such collateral, is essentially the same as
that involved in making commitments to extend credit.
The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either 1999 or 1998.
23
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(13) STOCKHOLDERS' EQUITY
Capital Stock
As part of the conversion completed on July 1, 1998, the Bank became a
wholly-owned subsidiary of the Company which offered common stock to
certain current and former deposit and borrower customers of the Bank in a
subscription offering. The Company issued 396,750 shares of common stock
with gross proceeds of $3,967,500 as a result of the offering. Total
expenses in connection with the conversion and offering amounted to
$307,616 and were charged against the proceeds from the offering.
Liquidation Account
Upon completion of the conversion, the Bank established a liquidation
account in an amount equal to its retained earnings at December 31, 1997
totaling $2,091,519. The liquidation account will be maintained for the
benefit of depositors as of December 31, 1996 eligibility record date (or
the March 31, 1998 supplemental eligibility record date) who maintain their
deposits in the Bank after conversion.
In the event of complete liquidation, and only in such an event, each
eligible depositor will be entitled to receive a liquidation distribution
from the liquidation account in the proportionate amount of the then
current adjusted balance for deposits held, before any liquidation
distribution may be made with respect to the stockholders. Except for the
repurchase of stock and payment of dividends by the Bank, the existence of
the liquidation account does not restrict the use or application of
retained earnings of the Bank.
Dividends
The payment of dividends by the Bank is subject to regulation by The Office
of Thrift Supervision (OTS). The Bank may not declare or pay a cash
dividend or repurchase any of its capital stock if the effect thereof would
cause the retained earnings of the Bank to be reduced below regulatory
capital requirements imposed by the OTS.
(14) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the OTS. 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 quantitative judgments 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 tangible capital to adjusted total assets (as defined),
Tier I (core) capital (as defined) to adjusted total assets, Tier I capital
to risk-weighted assets (as defined), and of total risk-based capital (as
defined) to risk-weighted assets. Management believes, as of December 31,
1999, the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table below. There are no conditions
or events since that notification that management believes have changed the
Bank's categories.
24
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(14 - continued)
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk in
either year.
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Actions Provisions:
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total equity capital and
ratio to total assets $ 4,140 14.6%
Adjustments to equity
capital 51
-------
Tangible capital and ratio
to adjusted total assets $ 4,191 14.7% $ 426 1.5%
======= ======
Tier I (core) capital and
ratio to adjusted total
assets $ 4,191 14.7% $1,137 4.0% $1,421 5.0%
======= ====== ======
Tier I capital and ratio
to risk-weighted assets $ 4,191 24.8% $1,015 6.0%
======
Allowance for loan losses 54
-------
Total risk-based capital
and ratio to risk-weighted
assets $ 4,245 25.1% $1,353 8.0% $1,692 10.0%
======= ====== ======
Total assets $28,369
=======
Adjusted total assets $28,420
=======
Risk-weighted assets $16,916
=======
</TABLE>
25
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(14 - continued)
<TABLE>
<CAPTION>
Minimum To Be Well
Capitalized Under
Minimum For Capital Prompt Corrective
Actual Adequacy Purposes: Actions Provisions:
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total equity capital and
ratio to total assets $ 4,037 15.9%
Adjustments to equity
capital 9
-------
Tangible capital and ratio
to adjusted total assets $ 4,046 15.9% $ 382 1.5%
======= ======
Tier I (core) capital and
ratio to adjusted total
assets $ 4,046 15.9% $1,018 4.0% $1,272 5.0%
======= ====== ======
Tier I capital and ratio
to risk-weighted assets $ 4,046 30.1% $ 809 6.0%
======
Allowance for loan losses 51
-------
Total risk-based capital
and ratio to risk-weighted
assets $ 4,097 30.4% $1,077 8.0% $1,346 10.0%
======= ====== ======
Total assets $25,439
=======
Adjusted total assets $25,448
=======
Risk-weighted assets $13,464
=======
</TABLE>
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash payments for:
Interest $1,022,681 $1,035,196
Taxes 92,752 39,763
Noncash investing activity:
Proceeds from sale of foreclosed real estate
financing through loans - 21,233
Noncash financing activity:
Issuance of common stock for stock
compensation plan 158,700 -
</TABLE>
26
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(16) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Basic:
Net income $ 125,117 $108,976
========= =========
Shares:
Weighted average common shares outstanding 396,750 396,750
========= =========
Net income per common share, basic $ 0.32 $ 0.27
========= =========
Diluted:
Net income $ 125,117
=========
Shares:
Weighted average common shares outstanding 396,750
Add: Dilutive effect of restricted share awards 686
---------
Weighted average common shares
outstanding, as adjusted 397,436
=========
Net income per common share, diluted $ 0.31
=========
</TABLE>
The Company had no potential dilutive common shares in 1998.
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 230 $ 230 $ 43 $ 43
Interest bearing deposits with banks 2,309 2,309 2,323 2,323
Securities available for sale 1,113 1,113 1,532 1,532
Loans, net 24,054 23,768 20,930 21,498
Federal Home Loan Bank stock 196 196 196 196
Financial liabilities:
Deposits (20,464) (20,328) (19,517) (19,705)
Advances from Federal Home Loan
Bank (2,000) (1,991) - -
Unrecognized financial instruments:
Commitments to extend credit - (13) - (3)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Short-Term Investments
For cash and short-term investments, including cash and due from banks and
interest bearing deposits with banks, the carrying value is a reasonable
estimate of fair value.
27
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(17 - continued)
Debt and Equity Securities
For debt securities, including mortgage-backed securities, the fair values
are based on quoted market prices. For restricted equity securities held
for investment, the carrying amount is a reasonable estimate of fair value.
Loans
The fair value of loans is estimated by discounting the estimated future
cash flows using the current rates at which loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
The fair value of savings and demand deposits is the amount payable on
demand at the balance sheet date. The fair value of fixed-maturity
certificates of deposits is estimated by discounting the future cash flows
using the rates currently offered for deposits of similar remaining
maturities.
Commitments to Extend Credit
The majority of commitments to extend credit would result in loans with a
market rate of interest if funded. The value of these commitments are the
fees that would be charged to customers to enter into similar agreements.
For fixed rate loan commitments, the fair value also considers the
difference between current levels of interest rates and the committed
rates.
(18) PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information for PCB Holding Company (parent company
only) for the years ended December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Balance Sheets
(In thousands)
1999 1998
------ ------
<S> <C> <C>
Assets:
Cash and interest bearing deposits $1,683 $1,817
Investment in bank subsidiary 4,140 4,037
Other assets 11 -
------ ------
$5,834 $5,854
====== ======
Liabilities and Stockholders' Equity:
Other liabilities $ - 4
Stockholders' equity 5,834 5,850
------ ------
$5,834 $5,854
====== ======
Statements of Income
(In thousands)
Interest income $ 36 $ 20
Other operating expenses 69 15
------ ------
Income (loss) before income taxes and equity in
undistributed net income of subsidiary (33) 5
Income tax expense (benefit) (13) 2
------ ------
Income (loss) before equity in undistributed net
income of subsidiary (20) 3
Equity in undistributed net income of subsidiary 145 106
------ -----
Net income $ 125 $ 109
====== ======
</TABLE>
28
<PAGE>
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(18 - continued)
<TABLE>
<CAPTION>
Statements of Cash Flows
(In thousands)
1999 1998
------ -------
<S> <C> <C>
Net income $ 125 $ 109
Adjustments to reconcile net income to cash
provided by operating activities:
Stock compensation expense 14 -
Equity in undistributed net income of subsidiary (145) (106)
Increase in other (used) assets/liabilities, net (15) 4
------ -------
Net cash provided (used) by operating activities (21) 7
------ -------
Investing Activities:
Investment in bank subsidiary - (1,830)
Financing Activities:
Proceeds from issuance of common stock - 3,660
Purchase of treasury stock (49) -
Cash dividends paid (64) (20)
------ -------
Net cash provided (used) by financing activities (113) 3,640
------ -------
Net cash increase (decrease) in cash (134) 1,817
Cash at beginning of year 1,817 -
------ -------
Cash at end of year $1,683 $ 1,817
====== =======
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS
- --------------------------------------------------------------------------------
Directors
James L. Wittmer Daniel P. Lutgring
Retired businessman and investor Co-owner of Lutgring Bros., Inc.
Howard L. Traphagen Marion L. Ress
Retired businessman Retired president and majority owner of
Frederick Sheet Metal, Inc.
James G. Tyler Carl D. Smith
Practicing attorney in Tell City, President and Chief Executive Officer
Indiana
Executive Officers
Carl D. Smith
President and Chief Executive Officer
Clarke A. Blackford
Vice-President and Treasurer
30
<PAGE>
- -------------------------------------------------------------------------------
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
General Counsel Independent Auditors
James G. Tyler Monroe Shine & Co., Inc.
717 Jefferson Street 222 East Market Street
P. O. Box 456 P. O. Box 1407
Tell City, Indiana 47586 New Albany, Indiana 47151-1407
Special Counsel Transfer Agent
Muldoon, Murphy & Faucette LLP Registrar and Transfer Company
5101 Wisconsin Ave., N.W. 10 Commerce Drive
Washington, DC 20016 Crawford, New Jersey 07016
Common Shares
The common shares of the Company are traded on the over-the-counter market
through the OTC-Bulletin Board under the symbol "PCBH." As of December 31,
1999, the Company has 253 stockholders of record and 408,020 common shares
outstanding. This does not reflect the number of persons whose shares are in
nominee or "street" name accounts through brokers.
Quarterly market price and dividend information per common share for 1999 is
provided below.
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
Market price-end of period $10 $ 10 $9-3/4 $10-1/2
Dividends - .08 - .08
</TABLE>
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m., Monday, April 24,
2000, at the Hoosier Heights County Club, Highway 237, Tell City, Indiana.
General Inquiries and Reports
The Company is required to file an Annual Report on Form 10-KSB for its fiscal
year ended December 31, 1999 with the Securities and Exchange Commission.
Copies of this annual report and the Company's quarterly reports on Form 10-QSB
may be obtained without charge by contacting:
Carl D. Smith
President and Chief Financial Officer
PCB Holding Company
819 Main Street
Tell City, Indiana 47586
(812) 547-7094
31
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Parent
- ------
PCB Holding Company
<TABLE>
<CAPTION>
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
<S> <C> <C>
Peoples Community Bank....................... 100% United States
Peoples Building and Loan Association
Service Corporation(b)...................... 100% Indiana
</TABLE>
- --------------
(a) The operations of the Company's subsidiaries are included in the Company's
consolidated financial statements.
(b) This is an inactive company owned directly by Peoples Community Bank.
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
We consent to the incorporation by reference in PCB Holding Company's
Registration Statement No. 333-85883 on Form S-8 of our report dated January 18,
2000 appearing in this Form 10-KSB of PCB Holding Company for the year ended
December 31, 1999.
/s/ Monroe Shine & Co., Inc.
- -----------------------------------
Monroe Shine & Co., Inc.
New Albany, Indiana
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of PCB Holding Company for the year ended December 31, 1999
and is qualified in its entirety by reference to such financial statements.
(Dollars in thousands except per share data.)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 230
<INT-BEARING-DEPOSITS> 2,309
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,113
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 24,108
<ALLOWANCE> 54
<TOTAL-ASSETS> 28,374
<DEPOSITS> 20,464
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 76
<LONG-TERM> 1,000
0
0
<COMMON> 3,819
<OTHER-SE> 2,015
<TOTAL-LIABILITIES-AND-EQUITY> 28,374
<INTEREST-LOAN> 1,690
<INTEREST-INVEST> 88
<INTEREST-OTHER> 98
<INTEREST-TOTAL> 1,876
<INTEREST-DEPOSIT> 1,017
<INTEREST-EXPENSE> 1,023
<INTEREST-INCOME-NET> 853
<LOAN-LOSSES> 6
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 671
<INCOME-PRETAX> 205
<INCOME-PRE-EXTRAORDINARY> 205
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125
<EPS-BASIC> .32
<EPS-DILUTED> .31
<YIELD-ACTUAL> 7.10
<LOANS-NON> 0
<LOANS-PAST> 104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 51
<CHARGE-OFFS> 3
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 54
<ALLOWANCE-DOMESTIC> 54
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
