Exhibit 13
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PCB HOLDING COMPANY
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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 000 Xxxx Xxxxxx,
Xxxx Xxxx, Xxxxxxx. The telephone number is (000) 000-0000.
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.
PCB HOLDING COMPANY
000 Xxxx Xxxxxx
Xxxx Xxxx, Xxxxxxx 00000
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,
Xxxx X. Xxxxx
President-Chief Executive Officer
1
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SELECTED FINANCIAL AND OTHER DATA
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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.
FINANCIAL CONDITION DATA: At December 31,
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1999 1998 1997 1996 1995
----------- ---------- ----------- ------------- -----------------
(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
OPERATING DATA: Year Ended December 31,
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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
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Net interest income 853 696 539 583 595
Provision for loan losses 6 - - 8 4
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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
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Income (loss) before income taxes 205 162 98 (25) 76
Income tax expense (credit) 80 53 28 (8) 18
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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
(1) Includes interest bearing deposits in other depository institutions.
(2) Includes one-time SAIF assessment of $135,000 in 1996.
2
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SELECTED FINANCIAL AND OTHER DATA - CONTINUED
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At or For Year Ended December 31,
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1999 1998 1997 1996 1995
----------- ----------- ----------- ------------ --------------
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%
(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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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
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
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AVERAGE BALANCE SHEETS
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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.
Year ended December 31,
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1999 1998
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Average Average
------- -------
Average Yield/ Average Yield/
------------ ------- ------- -------
Balance Interest Cost Balance Interest Cost
------------ -------- ------- ------- -------- -------
(Dollars in Thousands)
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
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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%
========= =======
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(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
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RATE/VOLUME ANALYSIS
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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).
1999 Compared to 1998
Increase (Decrease) Due to
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Rate/
-----
Rate Volume Volume Net
------------- -------------- -------------- --------------
(In thousands)
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
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Total net change in expense
on interest bearing liabilities (41) (16) 43 (14)
------------- -------------- -------------- --------------
Net change in net interest income $(26) $233 $(49) $158
============= ============== ============== ==============
7
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
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.
At December 31, 1999
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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)
------------ ------- --------- -------- ----------------- ----------------
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
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
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
[Monroe Shine Logo Letterhead]
MONROE SHINE
KNOWLEDGE FOR TODAY...VISION FOR TOMORROW
000 XXXX XXXXXX XXXXXX, X.X. XXX 0000, XXX XXXXXX, XX 00000
PHONE: 000.000.0000*FAX: 000.000.0000
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
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
------------- -------------
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
=========== ===========
12
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
Accumulated Unearned
Additional Other Stock
Common Paid-In Retained Comprehensive Compen- Treasury
Stock Capital Earnings Income sation Stock Total
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
======= =========== =========== ============= ========== ========= ==========
See notes to consolidated financial statements.
13
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
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
========== ==========
See notes to consolidated financial statements.
14
PCB HOLDING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
------------ ------------
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
=========== ===========
See notes to consolidated financial statements.
15
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
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
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:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
========== ========== =========== ==========
The amortized cost and fair value of debt securities as of December 31,
1999 by contractual maturity, are shown below.
Securities Available for Sale
Amortized Fair
Cost Value
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
============ ============
18
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:
1999 1998
------------ ------------
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
=========== ===========
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:
Balance, December 31, 1998 $290,301
New loans 101,988
Payments (36,922)
--------
Balance, December 31, 1999 $355,367
========
(4) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
1999 1998
---- ----
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
======== ========
19
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:
Year ending December 31:
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
===========
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:
1999 1998
--------- -----------
Savings and interest bearing demand deposits $131,100 $ 121,671
Time deposits 850,059 913,341
-------- ----------
Totals $981,159 $1,035,012
======== ==========
(6) ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1999, advances from the Federal Home Loan Bank were as
follows:
Rate Amount
Advances maturing:
June 26, 2000 5.88% $ 1,000,000
October 1, 2001 6.36% 1,000,000
-----------
$ 2,000,000
===========
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 XXX Xx. 00 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
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:
Number Weighted Average
of Shares Exercise Price
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
======
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:
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
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)
Pro forma net income $ 87
Pro forma net income per share:
Basic $.22
Diluted $.22
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
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:
1999 1998
--------- ---------
Current $ 91,183 $55,149
Deferred (11,094) (1,995)
-------- --------
Totals $ 80,089 $53,154
======== =======
Significant components of the Bank's deferred tax assets and liabilities as
of December 31, 1999 and 1998 were as follows:
1999 1998
--------- ---------
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
======== ========
The reconciliation of income tax expense with the amount which would have
been provided at the federal statutory rate of 34 percent follows:
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%
======= ========
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
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.
1999 1998
--------- ---------
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
======== ========
(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
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
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.
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
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
=======
25
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(14 - continued)
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
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
=======
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1999 1998
----------- -----------
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 -
26
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(16) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
1999 1998
---------- ---------
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
=========
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:
1999 1998
-------- -------
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
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)
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
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:
Balance Sheets
(In thousands)
1999 1998
------ ------
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
====== ======
28
PCB HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1999 AND 1998
(18 - continued)
Statements of Cash Flows
(In thousands)
1999 1998
------ -------
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
====== =======
29
--------------------------------------------------------------------------------
BOARD OF DIRECTORS/OFFICERS
--------------------------------------------------------------------------------
Directors
Xxxxx X. Xxxxxxx Xxxxxx X. Xxxxxxxx
Retired businessman and investor Co-owner of Xxxxxxxx Bros., Inc.
Xxxxxx X. Xxxxxxxxx Xxxxxx X. Xxxx
Retired businessman Retired president and majority owner of
Xxxxxxxxx Sheet Metal, Inc.
Xxxxx X. Xxxxx Xxxx X. Xxxxx
Practicing attorney in Tell City, President and Chief Executive Officer
Indiana
Executive Officers
Xxxx X. Xxxxx
President and Chief Executive Officer
Xxxxxx X. Xxxxxxxxx
Vice-President and Treasurer
30
-------------------------------------------------------------------------------
CORPORATE INFORMATION
--------------------------------------------------------------------------------
General Counsel Independent Auditors
Xxxxx X. Xxxxx Xxxxxx Shine & Co., Inc.
000 Xxxxxxxxx Xxxxxx 000 Xxxx Xxxxxx Xxxxxx
P. O. Xxx 000 X. X. Xxx 0000
Xxxx Xxxx, Xxxxxxx 00000 Xxx Xxxxxx, Xxxxxxx 00000-0000
Special Counsel Transfer Agent
Xxxxxxx, Xxxxxx & Xxxxxxxx LLP Registrar and Transfer Company
0000 Xxxxxxxxx Xxx., X.X. 00 Xxxxxxxx Xxxxx
Xxxxxxxxxx, XX 00000 Xxxxxxxx, Xxx Xxxxxx 00000
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.
First Second Third Fourth
Market price-end of period $10 $ 10 $9-3/4 $10-1/2
Dividends - .08 - .08
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m., Monday, April 24,
2000, at the Xxxxxxx Xxxxxxx Xxxxxx Xxxx, Xxxxxxx 000, Xxxx Xxxx, Xxxxxxx.
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:
Xxxx X. Xxxxx
President and Chief Financial Officer
PCB Holding Company
000 Xxxx Xxxxxx
Xxxx Xxxx, Xxxxxxx 00000
(000) 000-0000
31
