U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2002.
__ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission File No. 333-25179
PEOPLE'S COMMUNITY CAPITAL CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
SOUTH CAROLINA 58-2287073
(State of Incorporation) (I.R.S. Employer Identification No.)
125 PARK AVENUE, S.W., AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Offices)
(803) 641-0142
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,046,193 shares of common
stock, par value $.01 per share outstanding at August 2, 2002.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
People's Community Capital Corporation
Consolidated Balance Sheets
June 30, December 31,
2002 2001
---- ----
(Unaudited) (Audited)
Assets
Cash and due from banks $ 2,359,727 $ 3,043,209
Federal funds sold 6,600,000 6,389,000
Short-term investments 1,486,875 971,889
Securities, available for sale 25,140,457 23,807,381
Loans receivable, net 55,645,669 49,600,794
Properties and equipment, net 3,130,495 3,173,338
Accrued interest receivable 547,535 525,800
Deferred income taxes 158,996 124,204
Other assets 102,841 94,871
----------- -----------
Total assets $95,172,595 $87,730,486
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Non-interest bearing deposits $12,287,965 $10,644,655
Interest bearing deposits 68,268,058 65,523,857
----------- -----------
Total deposits 80,556,023 76,168,512
Accrued interest payable 50,277 64,283
Accrued expenses and other liabilities 240,891 50,472
Other borrowings 3,304,270 1,000,000
----------- -----------
Total liabilities 84,151,461 77,283,267
----------- -----------
Shareholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized,
1,042,988 shares issued at June 30, 2002 and 991,845 at
December 31, 2001 10,430 9,918
Additional paid-in-capital 10,381,546 9,699,178
Retained earnings 513,779 741,097
Accumulated other comprehensive gain (loss) 115,379 (2,974)
----------- -----------
Total shareholders' equity 11,021,134 10,447,219
----------- -----------
Total liabilities and shareholders' equity $95,172,595 $87,730,486
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
2
People's Community Capital Corporation
Consolidated Statements of Income
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Loans, including fees $1,023,223 $1,014,316 $ 2,004,073 $ 1,994,686
Federal funds sold 23,705 68,044 44,297 132,991
Securities, short-term investments, and cash 281,126 174,548 546,918 364,390
----------- ----------- ------------ -----------
Total interest income 1,328,054 1,256,908 2,595,288 2,492,067
----------- ----------- ------------ ------------
Interest expense:
Deposits 398,958 575,092 863,339 1,125,159
Other borrowings 21,154 3,770 23,493 9,110
----------- ------------ ----------- ------------
Total interest expense 420,112 578,862 886,832 1,134,269
----------- ------------ ------------ ------------
Net interest income 907,942 678,046 1,708,456 1,357,798
Provision for loan losses 72,249 21,919 120,497 61,288
----------- ------------ ------------ ------------
Net interest income after provision
for loan losses 835,693 656,127 1,587,959 1,296,510
----------- ------------ ------------ ------------
Non-interest income:
Service charges on deposit accounts 116,375 107,206 252,756 191,603
Realized net gains on sales of securities 11,338 18,437 11,338 18,437
Other 131,206 37,192 221,815 77,130
----------- ---------- ------------ ------------
Total non-interest income 258,919 162,835 485,909 287,170
----------- ---------- ------------ ------------
Non-interest expenses:
Salaries and employee benefits 442,924 339,390 840,438 619,846
Occupancy and equipment 82,902 78,754 156,091 132,898
Consulting and professional fees 24,830 27,722 78,332 65,838
Customer related 26,586 23,907 50,093 44,150
General operating 92,181 94,907 205,829 181,357
Other 47,427 56,858 82,617 80,284
----------- ---------- ------------ ------------
Total non-interest expenses 716,850 621,538 1,413,400 1,124,373
----------- ---------- ------------ ------------
Income before income taxes 377,762 197,424 660,468 459,307
Income tax provision 128,612 74,869 218,025 174,965
----------- ---------- ------------ ------------
Net income $ 249,150 $ 122,555 $ 442,443 $ 284,342
=========== ========== ============ ============
Weighted average common shares outstanding:
Basic 1,042,988 1,047,909 1,042,608 1,032,720
Diluted 1,248,215 1,194,581 1,248,117 1,179,391
Earnings per share:
Basic $ .24 $ .12 $ .42 $ .28
Diluted $ .20 $ .10 $ .35 $ .24
See accompanying Notes to Consolidated Financial Statements.
3
People's Community Capital Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
For the three months For the six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 249,150 $ 122,555 $ 442,443 $ 284,342
Other comprehensive income, net of tax:
Net change in unrealized gain on
securities available for sale 174,573 49,976 137,174 97,196
Less reclassification adjustment for realized
Gains (7,483) (12,168) (7,483) (12,168)
------------- ------------ ------------- ------------
Total other comprehensive income 167,090 37,808 129,691 85,028
Comprehensive income $ 416,240 $ 160,363 $ 572,134 $ 369,370
============== ============ ============= ============
See accompanying Notes to Consolidated Financial Statements.
4
People's Community Capital Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the six months
ended June 30,
2002 2001
---- ----
Operating activities:
Net income $ 442,443 $ 284,342
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 98,643 74,137
Provision for loan losses 120,497 61,288
Deferred income taxes (34,792) 26,996
Changes in deferred and accrued amounts:
Other assets and accrued interest receivable (38,782) (82,392)
Accrued expenses and other liabilities 176,413 (403,129)
-------------- --------------
Net cash provided by (used for) operating activities 764,422 (38,758)
-------------- --------------
Investing activities:
Purchase of securities available for sale (4,124,688) (14,708,508)
Sale of securities available for sale 505,912 1,000,000
Maturities and calls of securities available for sale 2,404,053 11,616,638
Net (increase) decrease in short-term investments (514,986) 14,528
Purchase of property and equipment (46,723) (1,126,753)
Net increase in loans (6,165,372) (7,687,567)
Net increase in federal funds sold (211,000) (608,000)
-------------- --------------
Net cash used for investing activities (8,152,804) (11,499,662)
-------------- --------------
Financing activities:
Purchase of treasury stock
Issuance of stock - (72,000)
Net increase in deposits 15,999 -
Net increase in other borrowings 4,387,511 11,399,174
Payment of cash dividends in lieu of stock for fractional shares 2,304,270 452,746
(2,880) (263)
-------------- -------------
Net cash provided by financing activities 6,704,900 11,779,657
-------------- -------------
Net (decrease) increase in cash and due from banks (683,482) 241,237
Cash and due from banks at beginning of period 3,043,209 1,603,996
-------------- -------------
Cash and due from banks at end of period $ 2,359,727 $ 1,845,233
============== =============
Supplemental disclosure:
Cash paid during the period for interest $ 900,838 $ 1,135,492
-------------- -------------
Income taxes paid $ 142,962 $ 505,371
-------------- -------------
Unrealized net gain on securities available for sale, net of income tax $ 129,691 $ 85,028
-------------- -------------
See accompanying Notes to Consolidated Financial Statements.
5
People's Community Capital Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B of the Securities and Exchange Commission. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2002, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002. For further information, please refer to the consolidated financial
statements and footnotes thereto for the Company's fiscal year ended December
31, 2001, included in the Company's Form 10-KSB for the year ended December 31,
2001.
Note 2. Summary of organization
People's Community Capital Corporation was incorporated in South
Carolina on February 26, 1997 for the purpose of operating as a bank holding
company. Our wholly-owned subsidiary, People's Community Bank of South Carolina
commenced business on September 22, 1997, and is primarily engaged in the
business of accepting savings and demand deposits and providing mortgage,
consumer and commercial loans to the general public. Our bank operates two
banking centers located in Aiken and one located in North Augusta, South
Carolina.
The second banking center located in Aiken was opened on September 8,
1998 in leased offices that were the headquarters of the holding company. In May
2001, we moved our banking center and holding company headquarters to a newly
constructed building nearby. At this time, the downtown Aiken location of our
bank became the main office.
In December 1999, our bank formed a subsidiary, People's Financial
Services, Inc., for the purpose of providing comprehensive financial planning
services in addition to full service brokerage, including stocks, bonds, mutual
funds, and insurance products.
6
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following is our discussion and analysis of certain significant
factors that have affected our financial position and operating results and
those of our subsidiary, People's Community Bank of South Carolina, during the
periods included in the accompanying financial statements. This commentary
should be read in conjunction with the financial statements and the related
notes and the other statistical information included in this report.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objectives of management for
future operations, and projections of revenues and other financial items that
are based on the beliefs of management, as well as assumptions made by and
information currently available to management. The words "may," "will,"
"anticipate," "should," "would," "believe," "contemplate," "expect," "estimate,"
"continue," "may," and "intend," as well as other similar words and expressions
of the future, are intended to identify forward-looking statements. Our actual
results may differ materially from the results discussed in the forward-looking
statements, and our operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission, including, without limitation:
o the effects of future economic conditions;
o governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
o changes in interest rates and their effect on the level and
composition of deposits, loan demand, and the values of loan
collateral, securities and other interest-sensitive assets and
liabilities;
o our ability to control costs, expenses, and loan delinquency rates; and
o the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other
mutual funds and other financial institutions operating in our market
area and elsewhere, including institutions operating regionally,
nationally, and internationally, together with such competitors
offering banking products and services by mail, telephone, computer and
the Internet.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
We have adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of our financial statements. The significant accounting policies
of the company are described in the footnotes to the consolidated financial
statements at December 31, 2001 as filed on our 10-KSB for that date.
Certain accounting policies involve significant judgments and
assumptions by management which have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations of our company.
We believe the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of our consolidated financial statements. Refer to the discussion
under Allowance for Loan Losses section of this report for a detailed
description of our estimation process and methodology related to the allowance
for loan losses.
7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
EARNINGS REVIEW - Comparison of the three months ended June 30, 2002 to the
three months ended June 30, 2001
Our net income for the second quarter of 2002 was $249,150 compared to
$122,555 for the same period last year, an increase of 103%. The basic income
per share increased to $.24 compared to $.12 for the same period in 2001.
Weighted shares outstanding have been adjusted for the effect of a 5% stock
dividend paid on January 2, 2002 to shareholders of record as of December 15,
2001. The improvement in earnings reflects the continued growth in the level of
earning assets since the bank commenced operations as well as improvements in
non-interest income. Additionally, the second quarter of 2001 contained one-time
expenses relating to our move to new headquarters during May 2001 as well as the
addition of key personnel during the second quarter of 2001. The level of
average earning assets was $87.4 million for the three months ended June 30,
2002 as compared to $63.4 million for the three months ended June 30, 2001.
Net interest income represents the difference between interest received
or accrued on interest earning assets and interest paid or accrued on interest
bearing liabilities. The following presents, in a tabular form, average balance
sheets that highlight the main components of interest earning assets and
interest bearing liabilities, on an annualized basis, for the three month
periods ended June 30, 2002 and 2001. Yields are derived by dividing income or
expense by the average balance of the corresponding assets or liabilities.
Average balances have been derived from daily averages.
8
Three months ended June 30, 2002 Three months ended June 30, 2001
--------------------------------------- ---------------------------------------
Average Interest Yield Average Interest Yield
Balance Income/Expense /Rate Balance Income/Expense /Rate
------- -------------- ----- ------- -------------- -----
ASSETS
Federal funds sold 5,609,139 $ 23,705 1.69% $6,434,919 $ 68,044 4.23%
Cash & short-term imvestments 1,489,707 13,409 3.60% 988,699 15,206 6.17%
Securities 24,444,375 267,717 4.38% 10,548,808 159,342 6.04%
Loans 55,814,645 1,023,223 7.33% 45,425,781 1,014,316 8.93%
------------ ----------- ------------ ----------
Total earnings assets 87,357,866 1,328,054 6.08% 63,398,207 1,256,908 7.93%
------------ ----------- ------------ ----------
Cash and due from banks 2,271,384 1,802,233
Premises and equipment 3,147,433 2,922,017
Other assets 1,199,328 1,160,316
Allowance for loan losses (708,708) (619,637)
------------ ------------
Total assets 93,267,303 68,663,136
============ ============
LIABILITIES & EQUITY
Interest-bearing deposits:
Transaction accounts 10,737,204 14,638 0.55% 7,117,511 19,750 1.11%
Money market accounts 12,662,391 54,341 1.72% 11,321,826 96,394 3.41%
Savings deposits 13,419,119 63,964 1.91% 2,370,803 24,142 4.07%
Time deposits 31,417,344 266,015 3.39% 28,569,464 434,806 6.09%
------------ -------------- ------------ ----------
Total interest bearing 68,236,058 398,958 2.34% 49,379,604 575,092 4.66%
deposits
Interest-bearing borrowings 2,350,638 21,154 3.60% 386,070 3,770 3.90%
------------ ----------- ------------ ----------
Total interest bearing 70,586,696 420,112 2.38% 49,765,674 578,862 4.65%
liabilities ------------ ----------- ------------ ----------
Demand deposits 11,719,842 8,683,283
Other liabilities 206,457 239,252
Shareholders' equity 10,754,308 9,974,927
------------ ------------
Total liabilities & $ 93,267,303 $ 68,663,136
shareholders' equity ============ ============
Net interest spread 3.70% 3.28%
Net interest income/margin $ 907,942 4.16% $ 678,046 4.28%
=========== ===========
Net interest income was $907,942 for the three months ended June 30,
2002 as compared to $678,046 for the three months ended June 30, 2001,
representing a 34% increase. The net interest margin (net interest income
divided by average earning assets) was 4.16% for the three months ended June 30,
2002 compared to the net interest margin of 4.28% for the three months ended
June 30, 2001. The decline in net interest margin is the result of the lower net
yield realized as the prime rate of interest decreased from 9.00% in early 2001
to a current rate of 4.75%. However, net yields have been increasing again as
rates paid on deposits have continued to decline at a greater pace than have
rates received on earning assets.
Interest income for the second quarter of 2002 was $1,328,054 compared
to $1,256,908 for the same period in 2001. The volume of total earnings assets
increased by approximately $24 million between the two periods, however the
average rate earned on assets decreased from 7.93% to 6.08%. The largest
component of interest income was interest and fees on loans amounting to
$1,023,223 for the quarter ended June 30, 2002 compared to $1,014,316 for the
comparable prior year period. The average loan balance increased by $10.4
9
million. The overall rate on the loan portfolio decreased from 8.93% for the
three months ended June 30, 2001 to 7.33% for the three-month period ended June
30, 2002. Interest earned on federal funds sold decreased from $68,044 for the
second quarter of 2001 to $23,705 for the second quarter of 2002. The average
balances of federal funds sold decreased and the yield fell from 4.23% to 1.69%.
The securities portfolio, short-term investments, and interest-earning cash
earned $281,126 for the second quarter of 2002 with a combined yield of 4.34%.
For the second quarter of 2001, these investments earned $174,548 with a
combined yield of 6.05%. The average balance outstanding increased from
$11,537,507 to $25,934,082, an increase of approximately $14 million.
Interest expense decreased from $578,862 for the three months ended
June 30, 2001 to $420,112 for the three months ended June 30, 2002. The decrease
was the direct result of the decrease in rates paid on deposits and other
liabilities, from an average of 4.65% for the second quarter last year to a rate
of 2.38% this year. Actual interest-bearing liabilities, primarily deposits,
increased from $49,765,674 to $70,586,696, an increase of 42%. Other
interest-bearing borrowings increased as we received a loan from the Federal
Home Loan Bank of $2,500,000 in April 2002 at the rate of 3.65%.
Non-interest Income
- -------------------
Non-interest income for the three-month period ended June 30, 2002
was $258,919 compared to $162,835 for the same period in 2001. Of this total,
$116,375 represented service charges on deposit accounts for the three months
ended June 30, 2002 compared to $107,206 for the comparable period in 2001. The
increase in income from deposit service charges is due to the increase in the
number of deposit customers. We had a gain on sale of securities of $11,338 for
the period ended June 30, 2002 compared to a gain of $18,437 in the same period
last year. The $131,206 of other non-interest income for the second quarter of
2002 was income generated from other fees charged, the largest of which was fees
from our financial services' subsidiary. For the same period in 2001, other
income amounted to $37,192. Fees generated by the subsidiary for the second
quarter of 2002 amounted to $75,595 compared to $10,058 in the same quarter of
2001.
Non-interest Expense
- --------------------
Non-interest expense for the quarters ended June 30, 2002 and 2001 were
$716,850 and $621,538, respectively, a difference of $95,312, or 15%. The
increase can be attributed to the increase in salaries and employee benefits
from $339,390 to $442,924, representing an increase of $103,534, or a 31%
increase. This increase is the result of the addition of several new strategic
positions within the bank and its subsidiary, an increase in accrual for
bonuses, enhanced insurance benefits, and general increases in other salaries
and benefits.
EARNINGS REVIEW - Comparison of the six months ended June 30, 2002 to the six
months ended June 30, 2001
Our net income for the six months ended June 30, 2002 was $442,443
compared to $284,342 for the same period last year. The basic income per share
increased to $.42 compared to $.28 for the same period in 2001, as adjusted for
the stock dividend paid in early 2002. This improvement in earnings reflects the
continuing growth in the level of earning assets since the bank commenced
operations and improvements in non-interest income in levels that offset an
increase in non-interest expense. The level of average earning assets was $84.4
million for the six months ended June 30, 2002 as compared to $61.3 million for
the six months ended June 30, 2001.
10
The following presents, in a tabular form, yield and rate data for
interest-bearing balance sheet components during the six month periods ended
June 30, 2002 and 2001, along with average balances and the related interest
income and interest expense amounts.
Six months ended June 30, 2002 Six months ended June 30, 2001
--------------------------------------- ------------------------------------
Average Interest Yield Average Interest Yield/
Balance Income/Expense /Rate Balance Income/Expense Rate
------- -------------- ----- ------- -------------- ------
ASSETS
Federal funds sold $ 5,272,258 $ 44,297 1.68% $ 5,548,493 $ 132,991 4.79%
Cash and short-term investments 1,407,442 26,937 3.83% 995,783 31,760 6.38%
Securities 23,779,400 519,981 4.37% 10,804,387 332,630 6.16%
Loans 53,949,837 2,004,073 7.43% 43,951,752 1,994,686 9.08%
------------ ---------- ----------- ----------
Total earning assets 84,408,937 2,595,288 6.15% 61,300,415 2,492,067 8.13%
Cash and due from banks 2,250,011 1,812,749
Premises and equipment 3,157,546 2,607,216
Other assets 1,226,717 1,086,655
Allowance for loan losses (679,695) (605,010)
------------ -----------
Total assets 90,363,516 66,202,025
============ ===========
LIABILITIES & EQUITY
Interest-bearing deposits:
Transaction accounts 9,908,700 26,978 0.54% 6,872,861 40,203 1.17%
Money market accounts 12,293,073 111,354 1.81% 11,048,528 205,575 3.72%
Savings deposits 13,269,278 141,509 2.13% 1,658,333 29,703 3.58%
Time deposits 31,522,548 583,498 3.70% 27,618,178 849,678 6.15%
------------ ---------- ----------- ----------
Total interest bearing deposits 66,993,599 863,339 2.58% 47,197,900 1,125,159 4.77%
Interest-bearing borrowings 1,521,026 23,493 3.09% 401,769 9,110 4.53%
------------ ---------- ----------- ----------
Total interest-bearing liabilities 68,514,625 886,832 2.59% 47,599,669 1,134,269 4.77%
Demand deposits 10,989,752 8,358,338
Other liabilities 197,529 321,530
Shareholders' equity 10,661,610 9,922,488
------------ ------------
Total liabilities &
shareholders equity $ 90,363,516 $66,202,025
============ ===========
Net interest spread 3.56% 3.36%
Net interest income/margin $1,708,456 4.05% $1,357,798 4.43%
========== ==========
Net interest income was $1,708,456 for the six months ended June 30,
2002 as compared to $1,357,798 for the six months ended June 30, 2001. The net
interest margin (net interest income divided by average earning assets) was
4.05% for the six months ended June 30, 2002 compared to the net interest margin
of 4.43% for the six months ended June 30, 2001.
Interest income for the first six months of 2002 was $2,595,288
compared to $2,492,067 for the same period in 2001. The volume of total earning
assets increased from $61.3 million at June 30, 2001 to $84.4 million at June
30, 2002. The largest component of interest income was interest and fees on
loans amounting to $2,004,073 for the six months ended June 30, 2002 compared to
$1,994,686 for the comparable prior year period. The overall rate on the loan
portfolio decreased from 9.08% for the six months ended June 30, 2001 to 7.43%
for the six month period ended June 30, 2002 as we encountered a period of
near-record low interest rates. The primary reason for a decrease in the
interest earned on federal funds sold was a decrease in rates from
11
4.79% to 1.68%. In addition, the average federal funds sold balance was slightly
lower for the six months ended June 30, 2002 than for the comparable period in
2001. Interest income on securities increased between the two periods as the
average balances were significantly higher by about $13 million, but the yield
fell from 6.16% to 4.37%.
Interest expense decreased from $1,134,269 for the six months ended
June 30, 2001 to $886,832 for the six months ended June 30, 2002 due to a
decrease in average rates paid on liabilities from 4.77% to 2.59%. This decrease
occurred even though the size of interest-bearing liabilities, primarily
deposits, increased from $47.6 million to $68.5 million, an increase of 44%.
Other interest-bearing borrowings increased due to a $2,500,000 loan from the
Federal Home Loan Bank in April 2002 at the rate of 3.65%.
Non-interest Income
- -------------------
Non-interest income for the six month period ended June 30, 2002 was
$485,909 compared to $287,170 for the same period in 2001. Of this total,
$252,756 represented service charges on deposit accounts for the six months
ended June 30, 2002 compared to $191,603 for the comparable period in 2001. The
increase in income from deposit service charges is due to the increase in the
number of deposit customers. We had a gain on sale of securities of $11,338 this
year compared to a gain of $18,437 during the same period last year. The
remaining $221,815 of other non-interest income for the first half of 2002
consisted of income generated from other fees charged such as brokered mortgage
origination fees, check cashing fees, internet fees, commissions on sale of
checks to customers, and fees from our financial services subsidiary. The
comparable amount for last year was $77,130. The leading cause of increase
between the two periods is the income from our financial services subsidiary
which was $110,246 for the six months ended June 30, 2002 compared to $15,402
for the same period in 2001. In addition, brokered mortgage origination fees
increased from $19,090 for the first half of 2001 to $56,035 for the first half
of 2002.
Non-interest Expense
- --------------------
Non-interest expense for the six month periods ended June 30, 2002 and
2001 were $1,413,400 and $1,124,373, respectively, a 26% increase. The largest
component of non-interest expense for the six month periods ended June 30, 2002
and 2001 was salaries and employee benefits of $840,438 and $619,846,
respectively. Salaries and employee benefits expense increased 36% due to the
addition of several executive and other key employees, general merit increases,
an increase in the bonus accrual, and the addition of staff associated with the
move to a new banking facility that occurred in the second quarter of 2001.
Occupancy and equipment expense increased from $132,898 to $156,091, or 17%,
primarily due to additional depreciation associated with the new office
building. General operating expenses increased from $181,357 to $205,829 due
mainly to increases in data processing, telephone, and postage.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $120,497 and $61,288, respectively,
for the first six months of 2002 and 2001, bringing the total reserve balance to
$755,000 and $631,300 at June 30, 2002 and 2001, respectively. This amount
represents 1.34% of gross loans at June 30, 2002, compared to 1.31% at June 30,
2001. It also reflects our estimate of the amounts necessary to maintain the
allowance for loan losses at a level believed to be adequate in relation to the
current size, mix and quality of the loan portfolio. See the description of the
allowance for loan losses below. However, our judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events that we
believe to be reasonable, but which may or may not be accurate. Because of the
inherent uncertainty of assumptions made during the evaluation process, there
can be
12
no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the loan loss allowance will not
be required. We had $511,707 in loans that were classified as non-accrual at
June 30, 2002 compared to $189,690 in non-accrual loans at June 30, 2001. The
non-accrual balance at June 30, 2002 consisted primarily of loans that are
either secured by real estate or guaranteed by a governmental agency. We have
examined these loans and do not believe that our loss exposure would be material
due to the collateral and guarantee involved. There were net charge-offs of
$2,497 for the six months ended June 30, 2002 and $1,988 for the six months
ended June 30, 2001.
BALANCE SHEET REVIEW
Total consolidated assets grew by $7.4 million from $87,730,486 at
December 31, 2001 to $95,172,595 at June 30, 2002. The increase was generated
primarily through an increase of $4.4 million in deposits and $2.5 million in
borrowings from the Federal Home Loan Bank (FHLB). This increase in funds
allowed for the growth in net loans of $6.0 million and the growth in the
securities portfolio of $1.3 million.
Loans
- -----
Outstanding loans represent the largest component of earning assets as
of June 30, 2002 at $55,645,669, or approximately 63% of total earning assets.
Net loans increased $6,044,875, or 12%, since December 31, 2001.
The interest rates charged on loans vary with the degree of risk,
maturity and amount of the loan. Competitive pressures, money market rates,
availability of funds, and government regulations also influence interest rates.
The average yield on our loans for the six months ended June 30, 2002 was 7.43%
as compared to a yield of 8.77% for the year ended December 31, 2001.
The principal components of our loan portfolio at June 30, 2002 and
December 31, 2001, consisted of real estate loans comprising approximately 87.5%
and 85.7% of total loans, respectively. Real estate loan means any loan secured
by real estate, regardless of the purpose of the loan. It is common practice for
financial institutions in our market area to obtain a security interest in real
estate whenever possible, in addition to any other available collateral. This
collateral is taken to reinforce the likelihood of the ultimate repayment of the
loan and tends to increase the magnitude of the real estate portfolio component.
The following table shows the composition of the loan portfolio by category.
June 30, 2002 December 31, 2001
------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and industrial $ 5,125,097 9.1% $ 4,911,737 9.8%
Real estate
Mortgage - residential 15,811,200 28.0% 13,650,406 27.1%
Mortgage - commercial 23,419,152 41.4% 19,859,456 39.5%
Mortgage - construction & other 10,202,842 18.1% 9,640,534 19.1%
Consumer and other 1,917,807 3.4% 2,238,469 4.5%
------------- -------- ------------- --------
Total loans 56,476,098 100.0% 50,300,602 100.0%
Allowance for loan losses (755,000) (637,000)
Unearned fees (75,429) (62,808)
------------- -------------
Total net loans $55,645,669 $49,600,794
============= =============
13
Allowance for Loan Losses
- -------------------------
The allowance for loan losses at June 30, 2002 was $755,000, or 1.34%
of loans outstanding, compared to an allowance of $637,000, or 1.27% of loans
outstanding, at December 31, 2001. The allowance for loan losses is based upon
our continuing evaluation of the collectibility of loans based somewhat on
historical loan loss experience, but primarily on current economic conditions
affecting the ability of borrowers to repay, the volume of loans, the quality of
collateral securing non-performing and problem loans, and other factors
deserving recognition. The bank's policy has been to review the allowance for
loan losses using a reserve factor for each type of loan since there have been
few delinquencies and little charge-off activity since the bank's inception. The
overall objective is to apply percentages to the loans based on the relative
inherent risk for that loan type and grade. Reserve factors are based on peer
group data, information from regulatory agencies, and on the experience of our
bank's lenders. The reserve factors will change depending on trends in national
and local economic conditions, the depth of experience of our bank's lenders,
delinquency trends, and other factors. The bank's general strategy is to
maintain a minimum coverage of a certain percentage of gross loans until it has
sufficient historical data and trends available.
Short-Term Investments and Securities
- -------------------------------------
Short-term investments and securities represented 30% of earning assets
at June 30, 2002, or $26,627,332. This represented an increase of $1.8 million
from the December 31, 2001 balance of $24,779,270. The combined yield on
short-term investments and securities was 4.34% for the six months ended June
30, 2002 compared to 5.44% for the year ended December 31, 2001. Short-term
investments at June 30, 2002 and at December 31, 2001 consisted of commercial
paper in another financial institution with balances of $1,486,875 and $971,889,
respectively. Included in available-for-sale securities is $196,300 of stock
purchased in the Federal Home Loan Bank of Atlanta, of which $59,200 was
purchased in the first quarter of 2002. This purchase was a requirement from the
FHLB in order to secure borrowings from them in the future.
Deposits and Other Borrowings
- -----------------------------
Our primary source of funds for loans and investments is deposits.
Deposits grew $4,387,511, or 6%, since year-end 2001 for a total of $80,556,023
at June 30, 2002. The average rates paid on interest-bearing deposits were 2.58%
and 4.89% at June 30, 2002 and December 31, 2001, respectively. In pricing
deposits, we consider our liquidity needs, the direction and levels of interest
rates, and local market conditions. We have seen a decrease in the price of our
deposits due to declining rates in the general economy and in the local market.
In April 2002, we took advantage of lower interest rates to secure an
advance of $2,500,000 with the Federal Home Loan Bank (FHLB) at a rate of 3.65%.
The loan has a five year maturity with an early conversion option as of April
2004 and each quarter thereafter. If the FHLB exercises its conversion option,
the advance will be converted to a floating rate or can be repaid without
penalty. If the FHLB does not exercise its option, the advance will continue at
the original rate.
Shareholders' Equity
- --------------------
On November 20, 2001, the Board of Directors declared a 5% stock
dividend which was paid on January 2, 2002 to shareholders of record on December
15, 2001. The number of shares issued was 49,379 with a market value of $13.50
for a total decrease in retained earnings of $666,616. Cash paid in lieu of
stock for fractional shares totaled $2,880.
14
In the first quarter, an employee exercised stock options for which
1,764 shares of stock were issued. Since the end of the second quarter, another
employee has exercised stock options for which 3,205 shares of stock were
issued.
Liquidity and Sources of Capital
- --------------------------------
At June 30, 2002, our liquid assets, consisting of cash and due from
banks and Federal funds sold, amounted to $8,959,727, representing 9.4% of total
assets. Short-term investments and securities equaled $26,627,332, or 28.0% of
total assets. These securities provide a secondary source of liquidity because
they can be converted into cash in a timely manner. Our ability to maintain and
expand our deposit base and borrowing capabilities also serves as a source of
liquidity. For the six-month period ended June 30, 2002, total deposits
increased by $4,387,511 representing an increase of 6%, or 12% on an annualized
basis. Growth for the first half of the year is not necessarily indicative of
expected growth for the remainder of the year. We closely monitor and seek to
maintain appropriate levels of interest-earning assets and interest-bearing
liabilities so that maturities of assets are such that adequate funds are
provided to meet customer withdrawals and loan demand. At June 30, 2002, the
Company had $12,215,000 in commitments to extend credit and $576,000 in letters
of credit issued.
We plan to meet future cash needs through the liquidation of temporary
investments, maturities of loans and investment securities, and generation of
deposits. In addition, the bank maintains two unsecured lines of credit from
correspondent banks in the amount of $1,800,000 each, and is a member of the
Federal Home Loan Bank (FHLB), from which additional applications may be made
for borrowing capabilities, if needed.
The bank currently maintains a level of capitalization in excess of the
minimum capital requirements set by the regulatory agencies. Despite anticipated
asset growth, we expect capital ratios to continue to be adequate for the next
two to three years. However, no assurances can be given in this regard, as rapid
growth, deterioration in loan quality, and operating losses, or a combination of
these factors, could change our capital position in a relatively short period of
time.
Below is a table that reflects the leverage and risk-based regulatory
capital ratios of the bank at June 30, 2002:
Well-Capitalized Minimum
Ratio Requirement Requirement
----- ------------ -----------
Tier 1 capital 10.96% 6.00% 4.0%
Total capital 12.11% 10.00% 8.0%
Tier 1 leverage ratio 8.06% 5.00% 4.0%
Off-Balance Sheet Risk
- ----------------------
Through the operations of our bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At June 30, 2002,
we had issued commitments to extend credit of $12,215,000 through various types
of commercial lending arrangements and we had $576,000 in letters of credit
issued. We evaluate each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by us upon extension of
credit, is based on our credit evaluation of the borrower. Collateral varies but
may include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate. We manage the credit risk on these
commitments by subjecting them to normal underwriting and risk management
processes.
15
Recently Issued Accounting Standards
- ------------------------------------
Accounting standards that have been issued or proposed by the Financial
Accounting Standards Board that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
16
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- -------------------------
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The annual meeting of shareholders was held on April 25, 2002 for which there
was only one matter submitted to a vote of security holders.
Our bylaws provide that the board of directors shall be divided into
three classes with each class to be nearly equal in number as possible.
The bylaws also provide that the three classes of directors are to have
staggered terms, so that the terms of only approximately one-third of
the board members will expire at each annual meeting of shareholders.
The current Class I directors are Margaret Holley-Taylor, Clark D.
Moore, M.D., Donald W. Thompson, and John B. Tomarchio, M.D. The
current Class II directors are Raymond D. Brown, Alan J. George, and
Anthony E. Jones. The current Class III directors are Thomas H. Lyles,
James D. McNair, Russell D. Phelon, and Tommy B. Wessinger. The current
terms of the Class III directors expired at this year's annual meeting
held April 25, 2002 therefore leaving the Class III directors up for
reelection for a three year term. The number of votes for the election
of the Class III directors was as follows: There were 829,044 votes for
the election of Thomas H. Lyles, 0 votes withheld, and 0 votes against
Mr. Lyles's election. There were 829,044 votes for the reelection of
James D. McNair, 0 votes withheld, and 0 votes against Mr. McNair's
reelection. There were 828,493 votes for Russell D. Phelon, 551 votes
withheld, and 0 votes against Mr. Phelon's reelection. There were
827,994 votes for Tommy B. Wessinger, 1,050 votes withheld, and 0 votes
against Mr. Wessinger's reelection. The terms of the Class I directors
will expire at the 2003 annual meeting of shareholders, and the terms
of the Class II directors will expire at the 2004 annual meeting of
shareholders.
A majority vote was attained for the above matter and therefore
approved and recorded in the company's minute book from the annual
meeting of shareholders. There were no other matters voted on by the
company's shareholders at our annual meeting held on April 25, 2002.
Item 5. Other Information
- -------------------------
None.
Item 6. Exhibits and Report on Form 8-K
- ---------------------------------------
(a) Exhibits - None.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter
ended June 30, 2002.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
People's Community Capital Corporation
--------------------------------------
(Registrant)
Date: August 8, 2002 By: /s/ Tommy B. Wessinger
-----------------------------------------
Tommy B. Wessinger
Chief Executive Officer
By: /s/ Jean H. Covington
-----------------------------------------
Jean H. Covington
Principal Accounting and Chief
Financial Officer
18