1
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, 1999
Transition report under Section 13 or 15(d) of the Exchange Act
- --- For the transition period from to
--------------- ----------------
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.)
106-A 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)
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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
998,162 shares of common stock, par value $.01 per share, were issued
and outstanding as of August 1, 1999.
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,
1999 1998
---- ----
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 1,591,178 $ 958,613
Federal funds sold 3,360,000 3,830,000
Securities, available for sale 10,819,057 8,734,879
Loans receivable, net 26,541,747 20,717,698
Properties and equipment, net 1,696,793 1,718,705
Accrued interest receivable 262,973 243,909
Deferred income taxes 196,684 228,557
Other assets 78,082 107,052
------------ ------------
Total assets $ 44,546,514 $ 36,539,413
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 6,405,569 $ 4,973,931
Interest bearing deposits 27,591,457 21,761,653
------------ ------------
Total deposits 33,997,026 26,735,584
Accrued interest payable 47,706 35,686
Accrued expenses and other liabilities 20,065 19,810
Other borrowings 1,000,600 331,783
------------ ------------
Total liabilities 35,065,397 27,122,863
------------ ------------
Stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized 9,982 9,982
Additional paid-in-capital 9,775,508 9,775,508
Retained earnings (deficit) (255,339) (401,429)
Accumulated other comprehensive income (loss) (49,034) 32,489
------------ ------------
Total stockholders' equity 9,481,117 9,416,550
------------ ------------
Total liabilities and stockholders' equity $ 44,546,514 $ 36,539,413
============ ============
See accompanying Notes to Consolidated Financial Statements.
3
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
For the three months For the six months
ended June 30, ended June 30,
-------------- --------------
1999 1998 1999 1998
---------- --------- ---------- ---------
Interest income:
Loans, including fee $ 577,367 $ 241,364 $1,086,150 $ 392,180
Federal funds sold 54,264 51,103 92,774 159,938
Securities and short-term investments 128,071 196,131 255,878 314,346
---------- --------- ---------- ---------
Total interest income 759,702 488,598 1,434,802 866,464
---------- --------- ---------- ---------
Interest expense:
Deposits 251,988 190,395 464,979 332,080
Other borrowings 4,165 -- 7,100 --
---------- --------- ---------- ---------
Total interest expense 256,153 190,395 472,079 332,080
---------- --------- ---------- ---------
Net interest income 503,549 298,203 962,723 534,384
Provision for loan losses 33,706 50,000 65,706 110,000
---------- --------- ---------- ---------
Net interest income after provision
for loan losses 469,843 248,203 897,017 424,384
---------- --------- ---------- ---------
Non-interest income:
Service charges on deposit accounts 49,443 13,470 86,351 22,378
Other income 17,426 18,488 60,282 41,619
---------- --------- ---------- ---------
Total non-interest income 66,869 31,958 146,633 63,997
---------- --------- ---------- ---------
Non-interest expenses:
Salaries and employee benefit 228,498 219,955 465,889 439,272
Occupancy and equipment 47,729 43,629 98,313 89,465
Consulting and professional fee 10,710 9,959 39,351 22,808
Customer related expenses 15,999 21,535 30,167 40,415
General operating expenses 62,547 33,513 119,569 68,670
Other expenses 31,308 34,270 54,079 54,479
---------- --------- ---------- ---------
Total non-interest expense 396,791 362,861 807,368 715,109
Income (loss) before income taxes 139,921 (82,700) 236,282 (226,728)
Income tax provision (benefits) 53,389 (31,764) 90,193 (87,634)
---------- --------- ---------- ---------
Net income (loss) $ 86,532 $ (50,936) $ 146,089 $(139,094)
========== ========= ========== =========
Weighted average common shares outstanding:
Basic 998,162 993,162 998,162 993,162
Diluted 1,039,584 993,162 1,039,876 993,162
Earnings (loss) per share:
Basic $ .09 $ (.05) $ .15 $ (.14)
Diluted $ .08 $ (.05) $ .14 $ (.14)
See accompanying Notes to Consolidated Financial Statements.
4
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the three months For the six months
ended June 30, ended June 30,
-------------- --------------
1999 1998 1999 1998
-------- -------- --------- ---------
Net income (loss) $ 86,532 $(50,936) $ 146,089 $(139,094)
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on securities
available for sale (54,114) 12,760 (81,523) 13,969
-------- -------- --------- ---------
Total other comprehensive income (loss) (54,114) 12,760 (81,523) 13,969
-------- -------- --------- ---------
Comprehensive income (loss) $ 32,418 $(38,176) $ 64,566 $(125,125)
======== ======== ========= =========
See accompanying Notes to Consolidated Financial Statements.
5
PEOPLE'S COMMUNITY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months
ended June 30,
--------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 146,089 $ (139,094)
Adjustments to reconcile net income (loss) to net cash (used for)
provided by operating activities:
Depreciation and amortization 51,765 50,638
Provision for loan losses 65,706 110,000
Deferred income taxes 31,873 (79,752)
Changes in deferred and accrued amounts:
Other assets and accrued interest receivable 4,177 (197,900)
Accrued expenses and other liabilities 12,280 2,573
----------- ------------
Net cash (used for) provided by operating activities 311,890 (253,535)
----------- ------------
INVESTING ACTIVITIES:
Purchase of securities available for sale (6,500,000) (11,731,302)
Maturities and calls of securities available for sale 4,334,297 3,749,640
Purchases of property and equipment (24,126) (34,798)
Net increase in loans (5,889,755) (8,149,509)
Net decrease in federal funds sold 470,000 7,960,000
----------- ------------
Net cash used for investing activities (7,609,584) (8,205,969)
----------- ------------
FINANCING ACTIVITIES:
Net increase in deposits 7,261,442 8,618,541
Net increase in other borrowings 668,817 --
----------- ------------
Net cash provided by financing activities 7,930,259 8,618,541
----------- ------------
Net increase in cash and due from banks 632,565 159,037
Cash and due from banks at beginning of period 958,613 625,785
----------- ------------
Cash and due from banks at end of period $ 1,591,178 $ 784,822
=========== ============
Supplemental disclosure:
Cash paid during the period for interest $ 460,059 $ 317,999
=========== ============
See accompanying Notes to Consolidated Financial Statements.
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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, 1999, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. For further information, please refer to the consolidated financial
statements and footnotes thereto for the Company's fiscal year ended December
31, 1998, included in the Company's Form 10-KSB for the year ended December 31,
1998.
NOTE 2. SUMMARY OF ORGANIZATION
People's Community Capital Corporation (the "Company") was incorporated
on February 26, 1997, under the laws of the State of South Carolina for the
purpose of operating as a bank holding company pursuant to the Federal Bank
Holding Company Act of 1956, as amended.
The Company is a bank holding company whose subsidiary, People's
Community Bank of South Carolina (the "Bank"), is primarily engaged in the
business of accepting savings and demand deposits insured by the Federal Deposit
Insurance Corporation, and providing mortgage, consumer and commercial loans to
the general public.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of People's
Community Capital Corporation. This commentary should be read in conjunction
with the financial statements and the related notes and other statistical
information in this report.
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 the Company's management, as well as assumptions
made by and information currently available to the Company's management. The
words "expect," "anticipate," and "believe," as well as similar expressions, are
intended to identify forward-looking statements. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements, and the Company's operating performance each quarter is subject to
various risks and uncertainties that are discussed in detail in the Company's
filings with the Securities and Exchange Commission, including the "Risk
Factors" section in the Company's Registration Statement on Form S-1
(Registration Number 333-1546) as filed with and declared effective by the
Securities and Exchange Commission.
People's Community Capital Corporation (the Company) was incorporated
in South Carolina on February 26, 1997 for the purpose of operating as a bank
holding company. The Company's wholly-owned subsidiary, People's Community Bank
of South Carolina (the Bank), commenced business on September 22, 1997 and is
primarily engaged in the business of accepting savings and demand deposits and
providing mortgage, consumer and commercial loans to the general public. The
Bank operates two banking centers located in Aiken and one located in North
Augusta, South Carolina.
The second banking center located in Aiken was opened on September 8,
1998 in leased offices that also are the headquarters of the holding company. A
tract of land has been purchased in downtown Aiken for the construction of a
permanent banking center office. The cost of the land was approximately
$139,000. Construction of the office is expected to begin sometime in 1999.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS REVIEW - Comparison of the three months ended June 30, 1999 to the
three months ended June 30, 1998
The Company's net income for the second quarter of 1999 was $86,532
compared to a loss of $50,936 in the same period last year when the Bank was
still in its first year of operations. The income per share increased to $.09
compared to a loss of $.05 for the same period in 1998. This improvement in
earnings reflects the continued growth in the level of earning assets since the
Bank commenced operations. The level of average earning assets was $38.4 million
for the three months ended June 30, 1999 as compared to $26.1 million for the
three months ended June 30, 1998.
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, yield and rate
data for interest-bearing balance sheet components during
8
the three month periods ended June 30, 1999 and 1998, along with average
balances and the related interest income and interest expense amounts.
Three months ended June 30, 1999 Three months ended June 30, 1998
-------------------------------------- ----------------------------------
Average Interest Yield Average Interest Yield/
Balance Income/Expense /Rate Balance Income/Expense Rate
------- -------------- ----- ------- -------------- ----
ASSETS
Federal funds sold $ 4,567,601 $ 54,264 4.75% $ 3,720,858 $ 51,103 5.49%
Securities 8,366,482 128,071 6.12% 12,500,883 196,131 6.28%
Loans 25,472,464 577,367 9.07% 9,840,128 241,364 9.81%
----------- -------- ---- ----------- -------- ----
Total earning assets 38,406,547 759,702 7.91% 26,061,869 488,598 7.50%
----------- -------- ---- ----------- -------- ----
Cash and due from banks 1,506,411 1,542,289
Premises and equipment 1,700,424 1,603,007
Other assets 812,788 703,281
Allowance for loan losses (333,278) (140,000)
----------- -----------
Total assets $42,092,892 $29,770,446
=========== ===========
LIABILITIES & EQUITY
Interest-bearing deposits $26,013,236 $251,988 3.87% $16,477,911 $190,395 4.62%
Interest-bearing borrowings 355,083 4,165 4.69% 0 0 0.00%
----------- -------- ---- ----------- -------- ----
Total interest-bearing liabilities 26,368,319 256,153 3.89% 16,477,911 190,395 4.62%
----------- -------- ---- ----------- -------- ----
Demand deposits 6,158,261 3,878,453
Other liabilities 102,925 109,886
Shareholders' equity 9,463,387 9,304,196
----------- -----------
Total liabilities &
shareholders equity $42,092,892 $29,770,446
=========== ===========
Net interest spread 4.02% 2.88%
Net interest income/margin $503,549 5.24% $298,203 4.58%
======== ========
Net interest income was $503,549 for the three months ended June 30,
1999 as compared to $298,203 for the three months ended June 30, 1998. The net
interest margin (net interest income divided by average earning assets) was
5.24% for the three months ended June 30, 1999 compared to the net interest
margin of 4.58% for the three months ended June 30, 1998. This improvement in
net interest margin for the quarter is a result of the increase of the level of
earning assets as more earning assets have been applied to the higher yielding
loan portfolio. Additionally, the rates paid on interest-bearing deposits have
decreased since the earlier months of operations when higher rates were paid to
attract initial deposits.
Interest income for the second quarter of 1999 was $759,702 compared to
$488,598 for the same period in 1998. The largest component of interest income
was interest and fees on loans amounting to $577,367 for the three months ended
June 30, 1999 compared to $241,364 for the comparable prior year period. The
overall rate on the loan portfolio decreased from 9.81% for the three months
ended June 30, 1998 to 9.07% for the three-month period ended June 30, 1999.
This was primarily a function of the relatively small size of the portfolio in
1998 when individual loan rates and fees were more apt to skew the portfolio
average in one direction or the other. It also reflects downward market
pressures on loan rates between the periods, including two decreases in the
prime rate.
9
Interest expense increased from $190,395 for the three months ended
June 30, 1998 to $256,153 for the three months ended June 30, 1999 as the size
of interest-bearing liabilities, primarily deposits, increased from $16,477,911
to $26,368,319, an increase of 60%.
Non-interest Income
Non-interest income for the three-month period ended June 30, 1999 was
$66,869 compared to $31,958 for the same period in 1998. Of this total, $49,443
represented service charges on deposit accounts for the three months ended June
30, 1999 compared to $13,470 for the comparable period in 1998. The increase in
income from deposit service charges is due to the increase in deposit customers
during the comparable periods. The remaining $17,426 of non-interest income for
the second quarter of 1999 was income generated from other fees charged such as
brokered mortgage origination fees, lease fees, and commissions on the sale of
checks to customers. The comparable amount for the same quarter last year was
$18,488, which was slightly higher due to more brokered mortgage origination
fees during that particular quarter.
Non-interest Expense
Non-interest expense for the three-month periods ended June 30, 1999
and 1998 were $396,791 and $362,861, respectively, a 9% increase. The largest
component of non-interest expense was salaries and employee benefits of $228,498
and $219,955, respectively. Salaries and employee benefits expense increased 4%
primarily due to the addition of a credit officer in August 1998 and the
addition of a teller position at the Park Avenue branch in September 1998.
General operating expenses increased 87%, or $29,034, between the two reporting
periods primarily due to an increase in contract prices with the Bank's data
processing provider.
EARNINGS REVIEW - Comparison of the six months ended June 30, 1999 to the six
months ended June 30, 1998
Net income for the six months ended June 30, 1999 was $146,089 compared
to a net loss of $139,094 for the six months ended June 30, 1998. This equates
to net income of $.15 per share for the six months ended June 30, 1999 compared
to a loss of $.14 per share for the six months ended June 30, 1998. This
improvement in earnings reflects the continued growth in the level of earning
assets since the Bank commenced operations. The level of average earning assets
was $36.2 million for the six months ended June 30, 1999 as compared to $23.7
million for the six months ended June 30, 1998.
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, 1999 and 1998, along with average balances and the related interest
income and interest expense amounts.
10
Six months ended June 30, 1999 Six months ended June 30, 1998
-------------------------------------- ----------------------------------------
Average Interest Yield Average Interest Yield/
Balance Income/Expense /Rate Balance Income/Expense Rate
----------- -------------- ----- ----------- -------------- ------
ASSETS
Federal funds sold $ 3,949,934 $ 92,774 4.70% $ 5,782,885 $159,938 5.53%
Securities & short term invest 8,327,101 255,878 6.15% 9,988,884 314,346 6.29%
Loans 23,921,815 1,086,150 9.08% 7,928,041 392,180 9.89%
----------- ---------- ---- ----------- -------- ----
Total earning assets 36,198,850 1,434,802 7.93% 23,699,810 866,464 7.31%
----------- ---------- ---- ----------- -------- ----
Cash and due from banks 1,428,512 1,106,383
Premises and equipment 1,704,365 1,608,720
Other assets 912,207 669,124
Allowance for loan losses (319,472) (115,000)
----------- -----------
Total assets $39,924,462 $26,969,037
=========== ===========
LIABILITIES & EQUITY
Interest-bearing deposits $24,145,209 $464,979 3.85% $14,316,271 $332,080 4.64%
Interest-bearing borrowings 313,862 7,100 4.52% 0 0 0.00%
----------- ---------- ---- ----------- -------- ----
Total interest-bearing liabilities 24,459,071 472,079 3.86% 14,316,271 332,080 4.64%
----------- ---------- ---- ----------- -------- ----
Demand deposits 5,926,959 3,183,471
Other liabilities 99,684 115,807
Shareholders' equity 9,438,748 9,353,488
----------- -----------
Total liabilities &
shareholders equity $39,924,462 $26,969,037
=========== ===========
Net interest spread 4.07% 2.67%
Net interest income/margin $ 962,723 5.32% $534,384 4.51%
========== ======== ====
Net interest income was $962,723 for the six months ended June 30, 1999
as compared to $534,384 for the six months ended June 30, 1998. The net interest
margin (net interest income divided by average earning assets) was 5.32% for the
six months ended June 30, 1999 compared to the net interest margin of 4.51% for
the six months ended June 30, 1998. As with the current quarter's results, this
improvement in net interest margin for the year-to-date is a result of the
increase of the level of earning assets as more earning assets have been applied
to the higher yielding loan portfolio. Additionally, the rates paid on
interest-bearing deposits have decreased since the earlier months of operations
when higher rates were paid to attract initial deposits.
Interest income for the six months ended June 30, 1999 was $1,434,802
compared to $866,464 for the same period in 1998. The largest component of
interest income for the six months ended June 30, 1999 was interest and fees on
loans amounting to $1,086,150 compared to $392,180 for the comparable prior year
period. For the six months ended June 30, 1998, more interest income was earned
from security investments and federal funds sold than from the loan portfolio.
This was because the average balance of the investments portfolio was greater
than the average balances in the loan portfolio in the early stage of the bank's
operations. The overall rate on the loan portfolio decreased from 9.89% for the
six months ended June 30, 1998 to 9.08% for the six-month period ended June 30,
1999. This was primarily a function of the relatively small size of the
portfolio in 1998 when individual loan rates and fees were more apt to skew the
portfolio average in one direction or the other. It also reflects downward
market pressures on loan rates between the periods, including two decreases in
the prime rate.
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Interest expense increased from $332,080 for the six months ended June
30, 1998 to $472,079 for the six months ended June 30, 1999. Average
interest-bearing liabilities between those periods grew from $14,316,271 to
$24,459,071, or 71%.
Non-Interest Income
Non-interest income for the six months ended June 30, 1999 was $146,633
compared to $63,997 for the same period in 1998. As with the second quarter, the
year-to-date growth is primarily due to the increase in income from service
charges on deposit accounts corresponding to the increase in deposit customers.
Service charges on deposit accounts grew from $22,378 for the six months ended
June 30, 1998 to $86,351 for the six months ended June 30, 1999.
Non-Interest Expense
Non-interest expense for the six months ended June 30, 1999 was
$807,368, an increase of 13% over non-interest expense of $715,109 for the
six-month period ended June 30, 1998. The largest component increase was in
general operating expenses due to the data processing fee increase. Salaries for
the six-month periods increased from $439,272 in 1998 to $465,889 in 1999, a 6%
increase, due primarily to the employees added as addressed in the discussion of
non-interest expense for the change in the two quarters being compared.
Provision for Loan Losses
The provision for loan losses was $33,706 and $50,000, respectively,
for the second quarter of 1999 and 1998, bringing the total reserve balance to
$350,000 and $170,000 at June 30, 1999 and 1998, respectively. This amount
represents 1.30% of gross loans at June 30, 1999, compared to 1.41% at June 30,
1998. It also reflects management's estimates 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, management's
judgment as to the adequacy of the allowance is based upon a number of
assumptions about future events that it believes 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 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. The Company had no
nonperforming loans at June 30, 1999 or 1998. The Bank charged off its first
loan losses in the amount of $706 in the second quarter of 1999. There have been
no previous loan charge-offs.
BALANCE SHEET REVIEW
Total consolidated assets grew by $8.0 million from $36,539,413 at
December 31, 1998 to $44,546,514 at June 30, 1999. The increase was generated
primarily through a $7.3 million increase in deposits. Federal funds sold
decreased by $470,000, and the funds generated from the decrease in Federal
funds sold and the increase in deposits were used to increase net loans by $5.8
million and the available-for-sale investment portfolio by $2.1 million. Cash
and due from banks increased by $632,565.
12
Loans
Net outstanding loans represent the largest component of earning assets
as of June 30, 1999 at $26,541,747, or 65.2% of total earning assets. Net loans
increased $5,824,049, or 28.1%, since December 31, 1998.
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 yield on the Company's loans as of June 30, 1999 was 9.08% as compared to a
yield of 9.68% at December 31, 1998. The decrease in yield is primarily due to
the mix of loans and competitive pressures on rates.
Allowance for Loan Losses
The allowance for loan losses at June 30, 1999 was $350,000, or 1.30%
of loans outstanding, compared to an allowance of $285,000, or 1.36%, at
December 31, 1998. The allowance for loan losses is based upon management's
continuing evaluation of the collectibility of loans based somewhat on
historical loan loss experience, but mostly, because of the lack of historical
data available in a new company, based 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. As of June 30, 1999, there were no non-performing loans.
The Bank's first loan charge-offs of $706 were taken against the loan loss
allowance in the second quarter of 1999.
Securities
Investment securities represented 26.6% of earning assets at June 30,
1999 with a total of $10,819,057, an increase of $2,084,178 from the December
31, 1998 balance of $8,734,879. The yield on investment securities was 6.15% at
June 30, 1999 compared to 6.25% at December 31, 1998. Included in
available-for-sale securities is $101,400 of stock purchased in the Federal Home
Loan Bank of Atlanta. This purchase was a requirement from the FHLB in order to
secure borrowings from them in the future.
Deposits
The Company's primary source of funds for loans and investments is its
deposits. Deposits grew $7,261,442, or 27.2%, since year-end 1998 for a total of
$33,997,026 at June 30, 1999. The average rates paid on interest-bearing
deposits were 3.85% and 4.47% at June 30, 1999 and December 31, 1998,
respectively. In pricing deposits, the Company considers its liquidity needs,
the direction and levels of interest rates, and local market conditions. The
Bank paid higher rates initially to attract deposits but has subsequently
decreased the rates based on the factors above.
Liquidity and Sources of Capital
At June 30, 1999, the Company's liquid assets, consisting of cash and
due from banks and Federal funds sold, amounted to $4,951,178, representing
11.1% of total assets. Investment
13
securities amounted to $10,819,057, representing 24.3% of total assets; these
securities provide a secondary source of liquidity since they can be converted
into cash in a timely manner. The Company's ability to maintain and expand its
deposit base and borrowing capabilities also serves as a source of liquidity.
For the six-month period ended June 30, 1999, total deposits increased by $7.3
million representing an increase of 27.2%, or 54.3% on an annualized basis.
However, the Company does not expect that it will necessarily maintain this
growth rate. The Company's management closely monitors and seeks 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.
The Company plans to meet its future cash needs through the liquidation
of temporary investments, maturities of loans and investment securities, and
generation of deposits. In addition, the Bank maintains a line of credit from
its correspondent bank in the amount of $1,800,000, and is a member of the
Federal Home Loan Bank, from which application may be made for borrowing
capabilities, if needed. Also, during the second quarter of 1999, an arrangement
was made with another bank for a Federal Funds Line of Credit in the amount of
$1,800,000 and application was also made with the Federal Reserve Bank for
receiving advances at the discount window.
The Bank currently maintains a level of capitalization well in excess
of the minimum capital requirements set by the regulatory agencies. Despite
anticipated asset growth, management expects its 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 the Company's capital
position in a relatively short period of time. The Company has no commitments or
immediate plans for significant capital expenditures or dividends at this time.
Below is a table that reflects the leverage and risk-based regulatory capital
ratios of the Bank at June 30, 1999:
Well-Capitalized Minimum
Ratio Requirement Requirement
----- ----------- -----------
Tier 1 capital 19.15% 6.00% 4.0%
Total capital 20.37% 10.00% 8.0%
Tier 1 leverage ratio 14.25% 5.00% 4.0%
YEAR 2000 ISSUES
Definition. Some computers, software, and other equipment include
programming codes in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches and are commonly referred to as the "Year
2000 Problem."
Assessment. The Year 2000 Problem could affect computers, software, and other
equipment that the Company uses. In June 1996, the Federal Financial
Institutions Examination Council alerted the banking industry that serious
challenges could be encountered with Year 2000 issues. In addition, the FDIC has
issued guidelines to require compliance with Year 2000 issues. In accordance
with these guidelines, we have developed and are executing a plan to ensure that
our computer and
14
telecommunication systems do not have these Year 2000 problems. We rely on third
party vendors to supply our computer and telecommunication systems and other
office equipment, and to process our data and account information. Our
technology and processing vendors work with many other financial institutions,
all of whom, like us, are required by their bank regulators to be Year 2000
compliant. Because our systems are substantially similar to those used in many
other banks, we believe that the scrutiny imposed by our regulators and the
banking industry in general have significantly reduced the Year 2000 related
risks we might otherwise have faced. Nonetheless, there is a risk that the Year
2000 issues could negatively affect our business.
Internal Infrastructure. The Company utilizes an outsourced data
processing system, The Intercept Group, for most of its accounting functions.
The Intercept Group is a well-established company and provides computer systems
and data processing for numerous financial institutions. The Intercept Group has
tested its systems with software and hardware similar to the Company's. The
Company has reviewed these test results and is relying on them as a proxy for a
test of its own systems with the Intercept Group. Banking regulators have
approved this type of testing as a valid means of testing. Based on this review,
the Company does not believe that the data processing system has any material
Year 2000 issues. In addition, the Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption of
its business. The Company has completed upgrading or testing of the mission
critical systems with results confirming Year 2000 compliant readiness. Costs
spent to date on the Year 2000 Problem have been negligible, and management
believes that total project costs will not exceed $10,000 by the time Year 2000
concerns are over. The Company does not believe that the cost related to these
efforts will be material to its business, financial condition, or operating
results.
Systems Other Than Information Technology Systems. In addition to
computers and related systems, the operation of the Company's office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, and other devices, may be affected by the Year 2000 Problem.
The Company has completed its assessment of the potential effect of, and the
costs of remediating, the Year 2000 Problem on this equipment. The Company
estimates that its total cost of completing any required modifications,
upgrades, or replacements of these internal systems will not have a material
effect on its business, financial condition, or operating results.
Suppliers and Other Third Parties. The Company continues to gather
information from and has initiated communications with its suppliers and other
third parties to identify and, to the extent possible, resolve issues involving
the Year 2000 Problem. The Company believes that the information systems and
software it uses, and the network connections it maintains, are programmed to
comply with Year 2000 requirements.
Customers. The Company believes that the largest Year 2000 Problem
exposure to most banks is the preparedness of the customers of the banks.
Management is addressing with its customers the possible consequences of not
being prepared for Year 2000. Should large borrowers not sufficiently address
this issue, the Company may experience an increase in loan defaults. The amount
of potential loss from this issue it not quantifiable. Management is attempting
to reduce this exposure by educating its customers. The Company prepares a "Year
2000 Customer Risk Assessment" on significant commercial loan customers to
determine the degree to which the
15
customer is preparing for Year 2000. The degree of risk assessed is incorporated
into the Company's loan risk grade system that determines the amount of loan
loss reserves required.
Most Likely Consequences of Year 2000 Problems. The Company expects to
identify and resolve all Year 2000 Problems that could materially adversely
affect its business, financial condition, or operating results. However, the
Company believes that it is not possible to determine with complete certainty
that all Year 2000 Problems affecting it have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, the Company cannot accurately
predict how many failures related to the Year 2000 Problem will occur with its
suppliers, customers, or other third parties or the severity, duration, or
financial consequences of such failures. As a result, the Company expects that
it could possibly suffer the following consequences:
- A number of operational inconveniences and inefficiencies for the
Company, its service providers, or its customers that may divert
the Company's time and attention and financial and human resources
from its ordinary business activities:
- System malfunctions that may require significant efforts by the
Company or its service providers or customers to prevent or
alleviate material business disruptions.
Additionally, there may be a higher than usual demand for liquidity
immediately prior to the century change due to deposit withdrawals by customers
concerned about Year 2000 issues. To address this possible demand, the Company
plans to have a higher percentage of its investment portfolio in readily
accessible funds during this time frame.
Contingency Plans. The Company has completed its contingency plans as
part of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. The company's contingency plan was completed, approved by the
Board of Directors, and forwarded to the FDIC on schedule before the end of the
second quarter of 1999. Depending on the systems affected, these plans include:
(a) alternative considerations, approaches and methods, (b) short term use of
backup equipment and software; (c) increased work hours for the Company's
personnel or use of contract personnel to correct on an accelerated schedule any
Year 2000 Problems which arise; and (d) other similar approaches. If the Company
is required to implement any of these contingency plans, these plans could have
a material adverse effect on its business, financial condition, or operating
results.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instrument and Hedging Activities". All derivatives are to be measured at fair
value and recognized in the balance sheets as assets or liabilities. The
statement is effective for fiscal years and quarters beginning after June 15,
1999. Because the Company has limited use of derivative transactions at this
time, management does not expect that this standard would have a significant
effect on the Company.
In October 1998, the FASB issued SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". The new statement establishes
accounting and reporting standards for certain activities
16
of mortgage banking enterprises. The statement is effective for the first
quarter beginning after December 15, 1998. The statement did not have an impact
on the financial statements of the Company.
In April 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities"(SOP 98-5), which provided guidance on the financial reporting of
start-up costs and organization costs. SOP 98-5 requires start-up costs and
organization costs to be expensed as incurred and initial application should be
reported as the cumulative effect of a change in accounting principle. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998, with early adoption encouraged. The adoption of SOP 98-5 did not have
a material effect on the financial statements of the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
One matter was voted upon at the Annual Meeting of Shareholders held on April
29, 1999.
1. The Company's Bylaws provides 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. (W. Cothran Campbell, previously
a Class II director, resigned from the Board in January 1999 due to
time constraints with his other business interests.) The current Class
III directors are James D. McNair, Russell D. Phelon, and Tommy B.
Wessinger. The current terms of the Class III directors expired at the
Annual Meeting. Each of the three current Class III directors was
nominated for reelection and stood for election at the Annual Meeting
on April 29, 1999 for a three year term. The number of votes for the
election of the Class III directors was as follows: For Mr. McNair -
793,032; for Mr. Phelon - 792,922; for Mr. Wessinger - 793,532;
withhold authority for Mr. McNair - 500; withhold authority for Mr.
Phelon - 610; withhold authority for Mr. Wessinger - 0. The terms of
the Class I directors will
17
expire at the 2000 Annual Meeting of Shareholders, and the terms of the
Class II directors will expire at the 2001 Annual Meeting of
Shareholders.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibit - 27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
quarter ended June 30, 1999.
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 4, 1999 By: /s/ Tommy B. Wessinger
-------------------------------------------------
Tommy B. Wessinger
Chief Executive Officer
By: /s/ Jean Covington
-------------------------------------------------
Jean Covington
Principal Accounting and Chief Financial Officer