U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number: 000-52453
PIEDMONT COMMUNITY BANK GROUP, INC.
(Exact name of small business issuer as
specified in its charter)
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Georgia
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20-8264706
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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110 Bill Conn Parkway, Gray, Georgia 31032
(Address of principal executive offices)
(478) 986-5900
(Issuer’s telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Check whether the issuer is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
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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
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No
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Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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No
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The issuer’s revenues for its most recent
fiscal year were $13,787,504.
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant on March 21,
2008 was $14,676,606. This calculation is based upon an estimate of the fair market value of the common stock by the registrant’s Board of Directors of $9.00 per share on that date. There is not an active trading market for the Common Stock and
it is not possible to identify precisely the market value of the common stock.
As of March 21, 2008, there were 1,630,734 shares of the issuer’s
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the information required by Part III of this Annual Report are incorporated by reference from the Registrant’s definitive Proxy Statement to be filed with the U.S. Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report (the “2008 Proxy Statement”).
Transitional Small Business Disclosure Format: Yes
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No
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FORWARD LOOKING STATEMENT
This Annual Report on Form 10-KSB includes
“forward-looking statements”
within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are
generally identifiable by the use of forward-looking terminology such as
“anticipate,” “believe,”
,
“continue,” “could,” “would,” “endeavor,” “estimate,”
“expect,” “forecast,” “goal,” “intend,” “may,” “objective,” “potential,” “predict,” “project,” “seek,” “should,” “will”
and
other similar words and expressions of future intent.
Statements made in the Annual Report, other than those concerning historical information, should be
considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to
“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including governmental
monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values, interest rate risk management, the effects of competition in the banking business from other commercial banks, thrifts, mortgage banking
firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market funds and other financial institutions operating in our market area and elsewhere, including institutions operating through the Internet,
changes in governmental regulation relating to the banking industry, including regulations relating to branching and acquisitions, failure of assumptions underlying the establishment of allowance for loan losses, including the value of collateral
underlying delinquent loans and other factors.
The cautionary statements in this Annual Report on Form 10-KSB also identify important factors and possible
events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking
statements contained, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements.
Readers should carefully review all disclosures we file from time to time with the Securities and Exchange Commission (
“SEC”
).
PIEDMONT COMMUNITY BANK GROUP, INC.
2007 Form 10-KSB Annual Report
TABLE OF CONTENTS
PIEDMONT COMMUNITY BANK GROUP, INC.
PART I
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ITEM 1.
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DESCRIPTION OF BUSINESS
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Piedmont Community Bank Group, Inc.
Piedmont Community Bank Group, Inc. was organized in 2006 as a Georgia corporation for the purpose of acquiring all of the common stock of Piedmont
Community Bank, a Georgia bank which opened for business on July 22, 2002. On February 7, 2007 we became the sole shareholder of Piedmont Community Bank by virtue of a merger between Piedmont Community Bank and PCB Interim Corporation, a
wholly-owned subsidiary of ours that was created to facilitate the reorganization of the bank into a holding company structure. We are a bank holding company within the meaning of the Bank Holding Company Act of 1956 and the Georgia Bank Holding
Company Act.
We were organized to facilitate our ability to serve our customers’ requirements for financial services. The holding company structure
provides flexibility for expansion of our banking business through the possible acquisition of other financial institutions and the provision of additional banking-related services which a traditional commercial bank may not provide under present
laws. We have no current plans to acquire any operating subsidiaries other than our existing bank. However, we may make acquisitions in the future if such acquisitions are deemed to be in the best interest of our shareholders. Any acquisitions will
be subject to certain regulatory approvals and requirements.
Piedmont Community Bank
Piedmont Community Bank is a community-oriented full service commercial bank headquartered at 110 Bill Conn Parkway, Gray, Georgia 31032. We seek to be the premier community bank servicing the greater middle Georgia
region. The bank received its Georgia banking charter in 2002 and opened for business on July 22, 2002. It currently has four locations. Its telephone number is (478) 986-5900. In 2006, we opened a full-service branch at 1611 Bass Road,
Macon, Georgia 31210. We opened two additional branches during the second quarter of 2007. These branches are located at 4511 Forsyth Road in Macon, Georgia 31210 and at 1040 Founder’s Row, Suite C, in Greensboro, Georgia 30642. Subject to
regulatory approval, we intend to open a branch in Monroe County during 2008 and a branch in Houston County during 2009. The proposed Monroe County location is 76 E. Johnson Street, Forsyth, Georgia 31029. The proposed Houston County location is 401
S. Houston Lake Rd., Warner Robbins, Georgia 31088.
Our bank is a community oriented, full-service commercial bank that emphasizes its status as a
community owned bank with local decision making responsibilities and a high level of personal service. The bank offers checking, money market, savings, individual retirement and time deposit accounts; issues ATM and debit cards, travelers checks and
official checks; conducts wire transfer services, internet banking and provides safe deposit and telephone banking services. The bank offers a variety of lending services including commercial, construction, real estate, consumer purpose as well as
home equity, overdraft protection and personal lines of credit. The bank operated a mortgage origination office through a limited liability company. Effective November 1, 2006, Piedmont Community Mortgage, LLC discontinued operations. The
mortgage operation is now operated as a division of the bank.
Market Area
Our primary service area consists of various counties generally located in the middle part of Georgia including Baldwin, Bibb, Greene, Houston, Jones, Monroe, and Putnam Counties.
Growth Strategy
It is our vision to be the community bank for middle
Georgia. Through careful planning and research, we have identified growth markets in middle Georgia where we believe that we can introduce our philosophy of excellent customer care and provide a better banking alternative for these markets. In
addition to our main office in Gray, we have opened two branch offices in Macon and one at Lake Oconee just outside of Greensboro. We purchased land in Forsyth and Warner Robins for future branch locations which we intend to open during 2008 and
2009, pending regulatory approval. We have also identified the need for a downtown Macon presence and the possibility of another branch office within middle Georgia, although no specific plans have been developed for these potential branches. If we
are successful in implementing our branch expansion plans, we should have a network of seven to eight offices within the next 18 to 24 months.
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Management
We have
assembled an experienced team of bankers who have all developed their careers in middle Georgia. Our executive management team consists of the following individuals:
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R. Drew Hulsey, our CEO, has over 20 years of banking experience which includes service in Valdosta, Tifton, Savannah and Macon, Georgia. Before joining the Bank as
CEO in 2003, Mr. Hulsey served as Regional Business Banking Manager at BB&T in Macon. He graduated with a BBA in Finance from Georgia Southern University in Statesboro, Georgia. He is also an alumnus of the Graduate School of Banking at
Louisiana State University.
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Mickey Parker, our President, began his banking career in 1973 with Citizens & Southern National Bank in Macon, Georgia. In 1997, Mr. Parker was hired
by the Bank of Eastman as City President of their new branch, Magnolia State Bank of Gray, Georgia. Mr. Parker resigned from Magnolia State Bank in 2001 to organize the Bank. He graduated from Mercer University in Macon, Georgia with degrees in
Political Science and Business Administration.
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Julie Simmons, our CFO, began her banking career in 1983. She has worked in the banking industry in Milledgeville, Macon, and Dawsonville, Georgia. Prior to joining
us in 2001 Ms. Simmons had most recently served as internal audit director for Century South Banks from 1996 to 2001. She graduated from Georgia College in Milledgeville, Georgia.
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Cole Davis, our EVP of Retail Banking, has over 25 years of banking experience which includes service in Forsyth and Macon, Georgia. Prior to joining us in 2005 he
had most recently served as Regional Retail Banking Manager of BB&T in Macon, Georgia since 1997. He graduated with a BBA in Business Management from Georgia College in Milledgeville, Georgia.
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Industry and Competition
We encounter vigorous competition from
other commercial banks, savings and loan associations and other financial institutions and intermediaries in our service areas. Our bank competes with other banks in its primary service area in obtaining new deposits and accounts, making loans,
obtaining branch banking locations and providing other banking services. Our bank also competes with savings and loan associations and credit unions for savings and transaction deposits, time deposits and various types of retail and commercial
loans. Based on statistical data published by the FDIC, there were a total of 71 banking offices in the three counties where we currently have branches. According to these same statistics, we held only 0.08% of the total deposits in the State of
Georgia as of June 30, 2007.
Our bank must also compete with other financial intermediaries, including mortgage banking firms and real estate
investment trusts, small loan and finance companies, insurance companies, credit unions, leasing companies and certain government agencies. Competition exists for time deposits and, to a more limited extent, demand and transaction deposits offered
by a number of other financial intermediaries and investment alternatives, including money market mutual funds, brokerage firms, government and corporate bonds and other securities.
Competition for banking services in the State of Georgia is not limited to institutions headquartered in the State. A number of large interstate banks, bank holding companies and other financial institutions and
intermediaries have established loan production offices, small loan companies and other offices and affiliates in the State of Georgia. Many of the interstate financial organizations that compete in the Georgia market engage in regional, national or
international operations and have substantially greater financial resources than we do.
Our larger competitors offer various services that we do not
provide, including a more extensive and established branch network and trust services. Furthermore, we have a lower legal lending limit than many of our competitors, which precludes us from making large loans. Despite these advantages, we believe
that we can compete effectively with our larger competitors by offering local access, competitive products and services and more responsive customer service. Our rates on loans and deposits are competitive with other financial institutions in our
market. To distinguish ourselves, however, we strive to respond to credit requests more quickly than our competitors based on our personal knowledge of the customer and the collateral. We feel that our larger competitors often lack the consistency
of local leadership and decision-making authority necessary to provide efficient service to individuals and small to medium-sized business customers. While our locally-based competitors may also possess some of these qualities, we believe that we
can effectively compete with these institutions through our experienced banking staff.
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We expect that competition will remain intense in the future due to state and federal laws and regulations, and the entry
of additional bank and non-bank competitors in our markets.
Internet Website
We maintain a website at
www.piedmontcommunitybank.com
. The information contained on that website is not included as part of, or incorporated by reference into, this report.
Types of Loans
Below is a description of the principal categories of
loans we make through our banking subsidiary and the relative risks involved with each category.
Commercial Real Estate
We make loans to borrowers secured by commercial real estate located in our market area. In underwriting these type loans we consider the historic and
projected future cash flows of the real estate. We make an assessment of the physical condition and general location of the property and the effect these factors will have on its future desirability from a tenant standpoint. We will lend up to a
maximum 90% loan to value ratio and require a minimum debt coverage ratio or other compensating factors.
Commercial real estate lending
offers some risks not found in traditional residential real estate lending. Repayment is dependent upon successful management and marketing of properties and on the level of expense necessary to maintain the property. Repayment of these loans may be
adversely affected by conditions in the real estate market or the general economy. Also, commercial real estate loans typically involve relatively large loan balances to single borrowers. To mitigate these risks, we monitor our loan concentration
and loans are audited by a third party auditor. This type loan generally has a shorter maturity than other loan types, which gives us an opportunity to reprice, restructure or decline to renew the credit. As with other loans, all commercial real
estate loans are graded depending upon strength of credit and performance. A lower grade will bring increased scrutiny by management and the board of directors.
Commercial real estate loans constituted approximately 56% of our total loan portfolio at December 31, 2007. This percentage is down from approximately 61% at December 31, 2006.
Construction and Development Loans
We make construction and development loans to customers in our market area. Loans are granted for both speculative projects and those being built with end buyers and lessees already secured. We will only lend money to finance speculative
projects when we are confident, based on all of the particular facts and circumstances, that the borrower will be able to repay the loan without relying on the real estate collateral. In other words, while we will take a security interest in the
project in an abundance of caution, we will only extend credit to fund speculative projects if the financial strength of the borrower supports repayment outside of the collateral. Loans for speculative projects, which includes commercial properties
without identified tenants, make up approximately 59.5% of our construction and development loans.
Construction and development loans are
subject primarily to market and general economic risk caused by inventory build-up in periods of economic prosperity. During times of economic stress this type of loan has typically had a greater degree of risk than other loan types. Unlike other
types of loans, these loans are also subject to risks related to construction delays that may be caused by weather or other factors. To mitigate that risk, the board of directors and management reviews the entire portfolio on a monthly basis. The
percentage of our portfolio being built on a speculative basis is tracked very closely. On a quarterly basis the portfolio is segmented by market area to allow analysis of exposure and a comparison to current inventory levels in these areas. Loan
policy also provides for limits on speculative lending by borrower and by real estate project.
Construction and development loans
constituted approximately 21% of our total loan portfolio at December 31, 2007. This percentage is unchanged from approximately 21% at December 31, 2006.
Commercial and Industrial Loans
We make loans to small- and medium-sized businesses in our primary
trade area for purposes such as new or upgrades to plant and equipment, inventory acquisition and various working capital purposes. Commercial loans are granted to borrowers based on cash flow, ability to repay and degree of management expertise.
This type of loan
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may be subject to many different types of risk, which will differ depending on the particular industry a borrower is engaged in. General risks to an
industry, or segment of an industry, are monitored by senior management on an ongoing basis. When warranted, individual borrowers who may be at risk due to an industry condition may be more closely analyzed and reviewed at a loan committee or board
of directors level. On a regular basis, commercial and industrial borrowers are required to submit statements of financial condition relative to their business to us for review. These statements are analyzed for trends and the loan is assigned a
credit grade accordingly. Based on this grade, the loan may receive an increased degree of scrutiny by management up to and including additional loss reserves being required.
Commercial and industrial loans will usually be collateralized. Generally, business assets are used and may consist of general intangibles, inventory,
equipment or real estate. Collateral is subject to risk relative to conversion to a liquid asset if necessary as well as risks associated with degree of specialization, mobility and general collectability in a default situation. To mitigate this
risk, collateral is underwritten to strict standards including valuations and general acceptability based on our ability to monitor its ongoing health and value.
Commercial and industrial loans constituted approximately 11% of our total loan portfolio at December 31, 2007. This percentage is up from approximately 6% at December 31, 2006. As we grow we intend to place
more emphasis on commercial lending in order to diversify our portfolio, although we anticipate that it will continue to constitute a relatively small part of our portfolio over the foreseeable future.
Consumer Loans
We offer a variety of
loans to retail customers in the communities we serve. Consumer loans in general carry a moderate degree of risk compared to other loans. They are generally more risky than traditional residential real estate loans but less risky than commercial
loans. Risk of default is usually determined by the well being of the national and local economies. During times of economic stress there is usually some level of job loss both nationally and locally, which directly affects the ability of the
consumer to repay debt. Risk on consumer loans is generally managed though policy limitations on debt levels consumer borrowers may carry and limitations on loan terms and amounts depending upon collateral type.
Various types of consumer loans include the following:
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home equity loans – open and closed end;
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automobile, RV and boat financing;
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loans secured by deposits;
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overdraft protection lines; and
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secured and unsecured personal loans.
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The various types of consumer loans all carry varying degrees of risk. Loans secured by deposits carry little or no risk and in our experience have had a zero default rate. Home equity lines carry additional risk because of the increased
difficulty of converting real estate to cash in the event of a default. However, underwriting policy provides mitigation to this risk in the form of a maximum loan to value ratio of 90% on a collateral type that has historically appreciated in
value. We also require the customer to carry adequate insurance coverage to pay all mortgage debt in full if the collateral is destroyed. Vehicle financing carries additional risks over loans secured by real estate in that the collateral is
declining in value over the life of the loan and is mobile. Risks inherent in vehicle financing are managed by matching the loan term with the age and remaining useful life of the collateral to ensure the customer has an equity position and is not
“upside down.” Collateral is protected by requiring the customer to carry insurance showing the bank as loss payee. We also have a blanket policy that covers us in the event of a lapse in the borrower’s coverage and also provides
assistance in locating collateral when necessary. Secured personal loans carry additional risks over the previous types in that they are generally smaller and made to borrowers with somewhat limited financial resources and credit histories. These
loans are secured by a variety of collateral with varying degrees of marketability in the event of default. Risk on these types of loans is managed primarily at the underwriting level with strict adherence to debt to income ratio limitations and
conservative collateral valuations. Overdraft protection lines and other unsecured personal loans carry the greatest degree of risk in the consumer portfolio. Without collateral, we are completely dependent on the commitment of the borrower to repay
and the stability of the borrower’s income stream. Again, primary risk management occurs at the underwriting stage with strict adherence to debt to income ratios, time in present job and in industry and policy guidelines relative to loan size
as a percentage of net worth and liquid assets.
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Consumer loans represent only a small portion of our overall loan portfolio. As of December 31, 2007
they constituted only 1% of our total loan portfolio. This percentage is down from approximately 2% of our total loan portfolio at December 31, 2006. We expect that consumer loans will continue to represent an insignificant portion of our loan
portfolio.
Unsecured Loans
The vast majority of our
loans are secured by assets of the borrower. Occasionally, however, we will make commercial or consumer loans on an unsecured basis. These loans may be made when we believe that the financial strength of the borrower supports repayment without the
need to look toward the collateral. As of December 31, 2007, we had approximately $3,444,000 in unsecured loans, which represented 1.9% of our total loan portfolio. As of December 31, 2006, we had approximately $2,761,000 in unsecured
loans, which represented 2.3% of our total loan portfolio.
Loan Participations
We sell loan participations in the ordinary course of business when an originated loan exceeds our legal lending limit as defined by state banking laws. These loan participations are sold to other financial
institutions without recourse. As of December 31, 2007 we had sold a total of $16 million in loan participations for an amount that equaled 9.1% of the total loans on that date.
We also purchase loan participations from time to time from other banks in the ordinary course of business, usually without recourse. Purchased loan participations are underwritten in accordance with our loan policy
and represent a source of loan growth to us. Although the originating financial institution provides much of the initial underwriting documentation, management is responsible for the appropriate underwriting, approval and the on-going evaluation of
the loan. One risk associated with purchasing loan participations is that we often rely on information provided by the selling bank regarding collateral value and the borrower’s capacity to pay. To the extent this information is not accurate,
we may experience a loss on these participations. Otherwise, we believe that the risk related to purchased loan participations is consistent with other similar type loans in the loan portfolio. If a purchased loan participation defaults, we usually
have no recourse against the selling bank but will take other commercially reasonable steps to minimize our loss. As of December 31, 2007, we had purchased $19.2 million in loan participations. The total principal amount of these participations
comprised 10.8% of our total loan portfolio on December 31, 2007.
Management’s Policy for Determining the Loan Loss Allowance
The allowance for loan losses represents management’s assessment of the risk associated with extending credit and its evaluation of the quality of the loan
portfolio. In calculating the adequacy of the loan loss allowance, management evaluates the following factors:
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the asset quality of individual loans;
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changes in the national and local economy and business conditions/development, including underwriting standards, collections, charge off and recovery practices;
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changes in the nature and volume of the loan portfolio;
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changes in the experience, ability and depth of the lending staff and management;
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changes in the trend of the volume and severity of past dues and classified loans; and trends in the volume of non-accrual loans, troubled debt restructurings and
other modifications;
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possible deterioration in collateral segments or other portfolio concentrations;
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historical loss experience used for pools of loans (i.e. collateral types, borrowers, purposes, etc.);
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changes in the quality of our loan review system and the degree of oversight by the bank’s board of directors;
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the effect of external factors such as competition and the legal and regulatory requirement on the level of estimated credit losses in our current loan portfolio;
and
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off-balance sheet credit risks.
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These factors are evaluated at least quarterly and changes in the asset quality of individual loans are evaluated more
frequently and as needed.
After a loan is underwritten and booked, loans are monitored or reviewed by the account officer, management, and external loan
review personnel during the life of the loan. Payment performance is monitored monthly for the entire loan portfolio, account officers contact customers during the course of business and may be able to ascertain if weaknesses are developing with the
borrower, external loan personnel perform an independent review annually, and federal and state banking regulators perform periodic reviews of the loan portfolio. If weaknesses develop in an individual loan relationship and are detected then the
loan is downgraded and higher reserves are assigned based upon management’s assessment of the weaknesses in the loan that may affect full collection of the debt. If a loan does not appear to be fully collectible as to principal and interest
then the loan is recorded as a non-accruing loan and further accrual of interest is discontinued while previously accrued but uncollected interest is reserved against income. If a loan will not be collected in full then the allowance for loan losses
is increased to reflect management’s estimate of potential exposure of loss.
We had no net losses in 2007 or in 2006. Historical performance,
however, is not an indicator of future performance and future results could differ materially. However, management believes that based upon historical performance, known factors, management’s judgment, and regulatory methodologies, that the
current methodology used to determine the adequacy of the allowance for loan losses is reasonable.
Our allowance for loan losses is also subject to
regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer
banks identified by the regulators. During their routine examinations of banks regulatory agencies may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and
allowance for loan loss methodology differ materially from those of management.
While it is our policy to charge off in the current period loans for which
a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management’s judgment
as to the adequacy of the allowance is necessarily approximate and imprecise.
Management’s Policy for Investing in Securities
Funds that are not otherwise needed to meet our loan demand may be invested in accordance with our investment policy. The purpose of the investment policy is to provide a
guideline by which these funds can best be invested to earn the maximum return, yet still maintain sufficient liquidity to meet fluctuations in our loan demand and deposit structure. Our investment policy adheres to the following objectives:
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provide an investment medium for funds which are not needed to meet loan demand, or deposit withdrawal;
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optimize income generated from the investment account consistent with the stated objectives for liquidity and quality standards;
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meet regulatory standards;
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provide collateral which the financial institution is required to pledge against public monies;
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provide an investment medium for funds which may be needed for liquidity purposes; and
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provide an investment medium which will balance market and credit risk for other assets and our liability structure.
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Our investment securities consist primarily of obligations of the United States or its agencies.
Deposit Services
We seek to establish and maintain solid core deposits, including checking accounts, money market
accounts, a variety of certificates of deposit and IRA accounts. To attract deposits, we employ a comprehensive marketing plan for our market, and feature a broad product line and competitive services. The primary sources of deposits are residents
of, and businesses and their employees located within our market. We obtain these deposits primarily through personal solicitation by our officers and directors, direct mail solicitations, and limited advertisements published in the local media. We
generate deposits by offering a broad array of competitively priced deposit services, including demand deposits, regular savings accounts, money market deposits, certificates of deposit, retirement accounts and other legally permitted deposit or
funds transfer services that may be offered to remain competitive in the market.
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Other Banking Services
We provide traveler’s checks, direct deposit of payroll and social security checks, and automatic transfers
for various accounts. We are also associated with a shared network of automated teller machines that our customers are able to use throughout Georgia and other regions. We offer MasterCard
®
and VISA
®
credit card services through a correspondent bank.
Marketing and Advertising
Our target customers are the residents and the small businesses and their employees located within our market area. We emphasize our local ownership and
management in providing banking services to these customers. We use a comprehensive marketing approach including logo, brochures, advertising in various media such as newspapers, and a website. Additionally, we sponsor community activities on an
active, ongoing basis.
Employees
As of
December 31, 2007, we had 41 total employees including 38 full-time equivalent employees. We are not a party to any collective bargaining agreement.
Supervision and Regulation
Both Piedmont Community Bank Group, Inc. and Piedmont Community Bank are subject to extensive state and federal
banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws generally are intended to protect depositors and not shareholders. The following discussions describes the material elements
of the regulatory framework that applies to us.
Piedmont Community Bank Group, Inc.
Since we own all of the capital stock of the Piedmont Community Bank, we are a bank holding company under the federal Bank Holding Company Act of 1956 (the “BHC Act”). As a result, we are primarily subject
to the supervision, examination, and reporting requirements of the BHC Act and the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company located in Georgia, the Georgia
Department of Banking and Finance (the “GDBF”) also regulates and monitors all significant aspects of our operations.
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval
before:
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acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly
own or control more than 5% of the bank’s voting shares;
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acquiring all or substantially all of the assets of any bank; or
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merging or consolidating with any other bank holding company.
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Additionally, the BHC Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a
restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources generally
focuses on capital adequacy, which is discussed below.
Under the BHC Act, if adequately capitalized and adequately managed, we or any other
bank holding company located in Georgia may purchase a bank located outside of Georgia. Conversely, an adequately capitalized and adequately managed bank holding company located outside of Georgia may purchase a bank located inside Georgia. In each
case, however, restrictions may be placed on the acquisition of a bank that has only been in existence for a
11
limited amount of time or will result in specified concentrations of deposits. Currently, Georgia law prohibits acquisitions of banks that have been
chartered for less than three years. Because the bank has been chartered for more than three years, this limitation would not limit our ability to sell.
Change in Bank Control
Subject to various exceptions, the BHC Act and the Change in Bank Control
Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Control is presumed to exist if an individual or company acquires 10% or more of any
class of voting securities and either:
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the bank holding company has registered securities under Section 12 of the Exchange Act; or
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no other person owns a greater percentage of that class of voting securities immediately after the transaction.
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Our common stock is registered under Section 12 of the Exchange Act. The regulations also provide a procedure for challenging the rebuttable
presumption of control.
Permitted Activities
A bank holding company is generally permitted under the BHC Act to engage in or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:
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banking or managing or controlling banks; and
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any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.
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Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the
business of banking includes:
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factoring accounts receivable;
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making, acquiring, brokering or servicing loans and usual related activities;
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leasing personal or real property;
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operating a non-bank depository institution, such as a savings association;
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trust company functions;
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financial and investment advisory activities;
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conducting discount securities brokerage activities;
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underwriting and dealing in government obligations and money market instruments;
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providing specified management consulting and counseling activities;
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performing selected data processing services and support services;
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acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
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performing selected insurance underwriting activities.
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Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable
cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.
12
In addition to the permissible bank holding company activities listed above, a bank holding company may
qualify and elect to become a financial holding company, permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity. The BHC Act expressly lists the following
activities as financial in nature:
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lending, trust and other banking activities;
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insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in
any state;
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providing financial, investment, or advisory services;
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issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
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underwriting, dealing in or making a market in securities;
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other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing
or controlling banks;
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foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;
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merchant banking through securities or insurance affiliates; and
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insurance company portfolio investments.
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To qualify to become a financial holding company, our bank and any other depository institution subsidiary of ours must be well capitalized and well managed and must have a Community Reinvestment Act rating of at least
“satisfactory.” Additionally, we must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve within 30 days’ written notice prior to engaging in a permitted financial
activity. While we meet the qualification standards applicable to financial holding companies, we have not elected to become a financial holding company at this time, although we may do so in the future.
Support of Subsidiary Institutions
Under Federal Reserve policy, we are expected to act as a source of financial strength for our bank and to commit resources to support the bank. This support may be required at times when, without this Federal Reserve policy, we might not
be inclined to provide it. In addition, any capital loans made by us to our bank will be repaid in full. In the unlikely event of our bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of the bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Piedmont Community Bank
Piedmont Community Bank is subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory
oversight of our operations. These laws are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.
Since the bank is a commercial bank chartered under the laws of the State of Georgia, it is primarily subject to the supervision, examination and
reporting requirements of the FDIC and the GDBF. The FDIC and the GDBF regularly examine the bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory
agencies have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, the bank’s deposits are insured by the FDIC to the maximum extent provided by law. The bank is
also subject to numerous state and federal statutes and regulations that affect its business, activities and operations.
13
Branching
Under current Georgia law, the bank may open branch offices throughout Georgia with the prior approval of the GDBF. In addition, with prior regulatory approval, the bank may acquire branches of existing banks located
in Georgia. The bank and any other national or state-chartered bank generally may branch across state lines by merging with banks in other states if allowed by the laws of the applicable state (the foreign state). Georgia law, with limited
exceptions, currently permits branching across state lines through interstate mergers.
Under the Federal Deposit Insurance Act, states may
“opt-in” and allow out-of-state banks to branch into their state by establishing a new start-up branch in the state. Currently, Georgia has not opted-in to this provision. Therefore, interstate merger is the only method through which a
bank located outside of Georgia may branch into Georgia. This provides a limited barrier of entry into the Georgia banking market, which protects us from an important segment of potential competition. However, because Georgia has elected not to
opt-in, our ability to establish a new start-up branch in another state may be limited. Many states that have elected to opt-in have done so on a reciprocal basis, meaning that an out-of-state bank may establish a new start-up branch only if their
home state has also elected to opt-in. Consequently, unless Georgia changes its election, the only way we will be able to branch into states that have elected to opt-in on a reciprocal basis will be through interstate merger.
Prompt Corrective Action
The FDIC
Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. The federal banking agencies have also specified by regulation the relevant capital levels
for each of the other categories. At December 31, 2007, our bank qualified for the well-capitalized category.
Federal banking
regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital
category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable
capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding
company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with
FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
FDIC Insurance Assessments
The FDIC merged the Bank Insurance Fund and the Savings Association
Insurance Fund to form the Deposit Insurance Fund on March 31, 2006. The Bank is a member of the Deposit Insurance Fund and therefore pays deposit insurance assessments to the Deposit Insurance Fund.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act, the FDIC established a system for setting deposit insurance premiums based upon the
risks a particular bank or savings association posed to its deposit insurance fund. Effective January 1, 2007, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured
depository institutions. Under the assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two sub-categories based on the institution’s most recent supervisory and capital evaluations,
designed to measure risk. Assessment rates currently range from 0.05% of deposits for an institution in the highest sub-category of the highest category to 0.43% of deposits for an institution in the lowest category. The FDIC is authorized to raise
the assessment rates as necessary to maintain the required reserve ratio of 1.25%.
In addition, all FDIC-insured institutions are required
to pay assessments to the FDIC at an annual rate of approximately 0.0124% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to
the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019.
14
Under the Federal Deposit Insurance Act, the FDIC may terminate the insurance of an institution’s
deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment Act
The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve or the FDIC will evaluate the record of each financial institution in meeting
the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria
could impose additional requirements and limitations on the bank. Since our aggregate assets are not more than $250 million, under the Gramm-Leach-Bliley Act, we are generally subject to a Community Reinvestment Act examination only once every 60
months if we receive an “outstanding” rating, once every 48 months if we receive a “satisfactory” rating and as needed if our rating is “less than satisfactory”. Additionally, we must publicly disclose the terms of
various Community Reinvestment Act-related agreements.
Other Regulations
Interest and other charges collected or contracted for by our bank are subject to state usury laws, and federal laws concerning interest rates. For
example, under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally prohibited from charging an annual interest rate in excess of 6% on any obligation for which the borrower is a person on active duty with the United
States military.
Our bank’s loan operations are also subject to federal laws applicable to credit transactions, such as the:
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Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act of 1978, governing the use and provisions of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Soldiers’ and Sailors’ Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in
military service; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
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In addition to the federal and state laws noted above, the Georgia Fair Lending Act (“GAFLA”) imposes restrictions and procedural requirements
on most mortgage loans made in Georgia, including home equity loans and lines of credit. On August 5, 2003, the Office of the Comptroller of the Currency (the “OCC”) issued a formal opinion stating that the entirety of GAFLA is
preempted by federal law for national banks and their operating subsidiaries. GAFLA contains a provision that preempts GAFLA as to state banks in the event that the OCC preempts GAFLA as to national banks. Therefore, the bank is exempt from the
requirements of GAFLA.
The deposit operations of our bank are subject to:
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the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records; and
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15
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the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
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Capital Adequacy
We and our bank are required to comply with the capital adequacy standards established by the
Federal Reserve (in the case of the holding company) and the FDIC (in the case of the bank). The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. Since our consolidated total assets
are less than $500 million, under the Federal Reserve’s capital guidelines, our capital adequacy is measured on a bank-only basis, as opposed to a consolidated basis. Our bank is also subject to risk-based and leverage capital requirements
adopted by the FDIC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.
The risk-based capital standards
are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets
and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted
assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two
components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying
cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2007 the Bank’s ratio of total capital to risk-weighted assets was 10.10% and the ratio of Tier 1 Capital to
risk-weighted assets was 9.17%.
In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These
guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified criteria, including having the highest regulatory rating and
implementing the Federal Reserve’s risk-based capital measure for market risk. All other banking holding companies generally are required to maintain a leverage ratio of at least 4%. At December 31, 2007, the Bank’s leverage ratio was
9.17%. The guidelines also provide that the bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without reliance on
intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.
Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a
prohibition on accepting brokered deposits, and certain other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital
requirements.
Payment of Dividends
We are a legal
entity separate and distinct from our bank subsidiary. The principal sources of our cash flow, including cash flow to pay dividends to its shareholders, are dividends that our bank pays to us. Statutory and regulatory limitations apply to our
bank’s payment of dividends. If, in the opinion of the federal banking regulator, the bank were engaged in or about to engage in an unsafe or unsound practice, the federal banking regulator could require, after notice and a hearing, that it
stop or refrain from engaging in the questioned practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the FDIC Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy
statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
The GDBF also
regulates our bank’s dividend payments and must approve dividend payments that would exceed 50% of our bank’s net income for the prior year. Our payment of dividends may also be affected or limited by other factors, such as the requirement
to maintain adequate capital above regulatory guidelines.
At December 31, 2007, our bank could pay cash dividends of approximately $346,000 without
prior regulatory approval.
16
Restrictions on Transactions with Affiliates
We are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:
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a bank’s loans or extensions of credit to affiliates;
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a bank’s investment in affiliates;
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assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
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loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates; and
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a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate.
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The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined,
to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. Our bank must also comply with other provisions designed
to avoid the taking of low-quality assets.
We are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things,
prohibit an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.
Our bank is also subject to restrictions on extensions of credit for use by its executive officers,
directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with third parties and (2) must not involve more than the normal risk of repayment or present other unfavorable features.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly
sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other
marketing to consumers.
Consumer Credit Reporting
On
December 4, 2003, President Bush signed the Fair and Accurate Credit Transactions Act, amending the federal Fair Credit Reporting Act. These amendments to the Fair Credit Reporting Act (the “FCRA Amendments”) became effective in 2004.
The FCRA Amendments include, among other things:
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requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud
alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud.
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for entities that furnish information to consumer reporting agencies (which would include our bank), requirements to implement procedures and policies regarding the
accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and
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a requirement for mortgage lenders to disclose credit scores to consumers.
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17
The FCRA Amendments also prohibit a business that receives consumer information from an affiliate from using that
information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the “opt-out”), subject to certain exceptions. We do not
share consumer information among our affiliated companies for marketing purposes, except as allowed under exceptions to the notice and opt-out requirements. Because no affiliate of ours is currently sharing consumer information with any other
affiliate for marketing purposes, the limitations on sharing of information for marketing purposes do not have a significant impact on us.
Anti-Terrorism and Money Laundering Legislation
Our bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act (the “USA PATRIOT Act”), the Bank Secrecy Act, and rules and regulations of the Office of Foreign Assets Control. These statutes and related rules and regulations impose requirements and
limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism financing. The bank has established a customer identification program pursuant to Section 326 of the USA PATRIOT
Act and the Bank Secrecy Act, and otherwise has implemented policies and procedures to comply with the foregoing rules.
Proposed Legislation and
Regulatory Action
New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and
competitive relationships of financial institutions operating or doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by
any new regulation or statute.
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ITEM 2.
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DESCRIPTION OF PROPERTY
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The table and text below provides certain
information about the properties that we own or lease.
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Property Description
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Property Location
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Own or Lease
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Mortgage or Liens
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Date Built
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Main Office
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110 Bill Conn Parkway
Gray, Georgia 31032
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Own
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None
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2003
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Branch Office
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1611 Bass Road
Macon, Georgia 31210
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Own
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None
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2006
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Branch Office
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4511 Forsyth Road
Macon, Georgia 31210
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Own
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None
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2006
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Branch Office
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1040 Founder’s Row, Suite C
Greensboro, Georgia 30642
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Lease
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None
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N/A
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Land for Branch Office
(branch opening subject to regulatory approval)
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76 E. Johnson Street
Forsyth, Georgia 31029
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Own
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None
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Pending
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Land for Branch Office
(branch opening subject to regulatory approval)
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401 S. Houston Lake Road
Warner Robins, Georgia 31088
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Own
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None
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Pending
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Our main office, located at 110 Bill Conn Parkway, Gray, Georgia 31032, was built in 2003, has approximately 9,000
square feet of interior space and three drive-thru lanes, and presently houses the administrative functions of both the holding company and our bank subsidiary. We own the furniture, fixtures and equipment located at this location.
Our branch office, located at 1611 Bass Road, Macon, Georgia 31210, was built in 2006, has approximately 3,600 square feet of interior space and three drive-thru lanes.
We own the furniture, fixtures and equipment located at this location.
We acquired the building and real estate for a branch office located at 4511
Forsyth Road, Macon, Georgia 31210 in 2006. It has approximately 2,900 square feet of interior space and opened in the second quarter of 2007.
18
We lease office space for our branch office at 1040 Founder’s Row, Suite C, Greensboro, Greene County, Georgia
30642. We opened this branch in the second quarter of 2007. It has approximately 1,400 square feet of interior space.
We have purchased real estate in
Monroe and Houston Counties with a view toward constructing branches on these properties. The Monroe County property is located at 76 E. Johnson Street, Forsyth, Georgia 31029. The Houston County property is located at 401 S. Houston Lake Rd.,
Warner Robbins, Georgia 31088. We intend to open our proposed Monroe County branch in 2008 and our proposed Houston County branch in 2009. Our opening of these additional branches, however, is subject to regulatory approval.
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ITEM 3.
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LEGAL PROCEEDINGS
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We are from time to time involved in various
legal actions arising from normal business activities. Management believes that the liability, if any arising from such actions will not have a material adverse effect on our financial condition. As of December 31, 2007, we are not a party to
any proceeding to which any director, officer or affiliate of the issuer, any owner of more than five percent (5%) of its voting securities is a party adverse to us.
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ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters
were submitted to a vote of security holders during the fourth quarter of 2007.
PART II
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ITEM 5.
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MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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Market
Information
In March 2006, Samco Capital Markets became the market maker for Piedmont Community Bank listing it on the OTC Bulletin Board under the
symbol “PCBN.” From March 2006 through February 6, 2007, the market prices disclosed below reflect the prices of the common stock of Piedmont Community Bank. On February 7, 2007 Piedmont Community Bank Group, Inc. became the sole
shareholder of Piedmont Community Bank by virtue of a merger to facilitate the reorganization of Piedmont Community Bank into a holding company structure. Beginning on February 7, 2007, the market prices disclosed reflect the prices of the
common stock of Piedmont Community Bank Group, Inc.
Prior to March 2006 there was no established public trading market for the common stock of Piedmont
Community Bank. Therefore, management was furnished with only limited information concerning trades of Piedmont Community Bank’s stock.
The following
table sets forth the number of shares traded and the high and low per share sales prices for each quarter during 2007 and 2006, to the extent that this information is known to management. Since quotation on the OTC Bulletin Board in March 2006, the
high and low per share sales prices reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. Because of the thin trading, the following data regarding our common stock is provided for
information purposes only and should not be viewed as indicative of the actual or market value of the common stock. All figures in the table, as well as all other per share data in this report, have been adjusted to reflect a 1.2-for-one stock split
paid on May 10, 2007.
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Number of
shares traded
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High Selling
Price
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Low Selling
Price
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2007
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First Quarter
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30,126
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$
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15.63
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$
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15.13
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Second Quarter
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22,062
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$
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15.50
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$
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15.01
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Third Quarter
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14,823
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$
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15.00
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$
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12.00
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Fourth Quarter
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81,877
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$
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12.15
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$
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9.00
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2006
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First Quarter
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—
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—
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—
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Second Quarter
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26,230
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|
$
|
13.33
|
|
$
|
11.67
|
|
Third Quarter
|
|
38,909
|
|
$
|
13.75
|
|
$
|
13.33
|
|
Fourth Quarter
|
|
8,754
|
|
$
|
15.83
|
|
$
|
13.75
|
19
At March 21, 2008, we had 1,630,734 shares of common stock outstanding held by approximately 760 shareholders of
record (not including the number of persons or entities holding stock in nominee or street name through various brokerage houses). We also had outstanding options to purchase 380,705 shares of common stock at a weighted average exercise price of
$11.68.
Dividends
We have never declared or paid cash
dividends and cannot assure that we will be able to pay dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our board of directors and will depend on, among other things, our results of operations,
capital requirements, general business conditions, regulatory restrictions on the payment of dividends and other factors our board of directors deems relevant. As a Georgia state bank, Piedmont Community Bank is subject to Georgia banking laws and
regulations that limit or otherwise restrict the ability of the bank to pay cash dividends. For example, the approval of the Georgia Department of Banking and Finance must be obtained before the bank can pay cash dividends out of retained earnings
if (i) the total classified assets at the most recent examination of the bank exceeded 80% of the equity capital, (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net
profits, after tax but before dividends for the previous calendar year, or (iii) the ratio of equity capital to adjusted assets is less than 6%. In addition, under Federal Reserve policy, we are required to maintain adequate regulatory capital
and are expected to act as a source of financial strength to our bank subsidiary and to commit resources to support this subsidiary in circumstances where we might not otherwise do so.
|
ITEM 6.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
|
The following is a discussion of our financial condition at December 31, 2007 and 2006 and the results of operations for the years then ended. The purpose of this discussion is to focus on information about our financial condition and
results of operations that is not otherwise apparent from the financial statements.
Like most community banks, we derive most of our income from interest
we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the
difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing liabilities.
In the following sections we have included a number of tables to assist
in our description of these measures. For example, the “Average Balances” table shows the average balances during 2007 and 2006 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect
to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan
portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various categories of
assets and liabilities to changes in interest rates, and we have included a tabular illustration of our asset/liability management to help explain this. Finally, we have included a number of tables that provide detail about our investment
securities, our loans, and our deposits.
Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable
losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process,
as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.
In addition
to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following
discussion.
The following discussion and analysis also identifies significant factors that have affected our financial position and operating results
during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in
this report.
20
Critical Accounting Policies
We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are
described in Note 1 of the December 31, 2007 consolidated financial statements.
Certain accounting policies involve significant judgments and
assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience
and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates, which could have a material impact on our
carrying values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in the preparation of our financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for
determining our allowance for loan losses.
Overview
Our 2007 results were highlighted by continued growth in our primary market areas of Jones, Baldwin, Bibb, Monroe, Putnam, Houston and Greene counties. From December 31, 2006 to December 31, 2007 our total assets grew by
approximately 51%. At December 31, 2007 we had total assets of approximately $213 million and total loans of approximately $176 million (net of allowance for loan losses). As of December 31, 2007, we were cumulatively profitable with
undivided profits of $1,073,576. We expect that loan and deposit growth will continue to be significant into 2008 with continued growth of the three new branches that we have opened since July 2006. Our growth, however, may be tempered somewhat if
the economic slowdown that has affected certain larger metropolitan areas such as Atlanta spreads to our markets. So far, the real estate market in the communities that we serve has shown only moderate signs of weakness. Real estate prices in our
market areas have remained steady, although sales volumes and new housing starts have slowed. We believe that the relative stability of real estate prices in our markets is largely attributable to the fact that our markets did not experience the
large amount of over-building that plagued some other markets such as the Metropolitan Atlanta market. While we expect some softening during 2008, we believe that our growing franchise will continue to support loan and deposit growth for our bank
during 2008.
Financial condition at December 31, 2007 and 2006
The following is a summary of our balance sheets as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
Cash and due from banks
|
|
$
|
1,570
|
|
$
|
1,660
|
|
Interest-bearing deposits in banks
|
|
|
2,764
|
|
|
1,584
|
|
Federal funds sold
|
|
|
6,113
|
|
|
3,762
|
|
Securities available for sale
|
|
|
9,283
|
|
|
6,163
|
|
Securities held to maturity
|
|
|
2,000
|
|
|
645
|
|
Restricted equity securities
|
|
|
1,116
|
|
|
767
|
|
Loans, net
|
|
|
176,186
|
|
|
117,693
|
|
Accrued interest receivable
|
|
|
1,921
|
|
|
1,376
|
|
Premises and equipment
|
|
|
7,541
|
|
|
6,832
|
|
Other real estate owned
|
|
|
242
|
|
|
—
|
|
Bank owned life insurance
|
|
|
3,512
|
|
|
—
|
|
Other assets
|
|
|
793
|
|
|
562
|
|
|
|
|
|
|
|
|
|
|
|
$
|
213,041
|
|
$
|
141,044
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
180,436
|
|
$
|
112,085
|
|
Other borrowings
|
|
|
14,100
|
|
|
9,100
|
|
Accrued interest payable
|
|
|
948
|
|
|
941
|
|
Other liabilities
|
|
|
387
|
|
|
790
|
|
Federal funds purchased
|
|
|
—
|
|
|
1,977
|
|
Shareholders’ equity
|
|
|
17,170
|
|
|
16,151
|
|
|
|
|
|
|
|
|
|
|
|
$
|
213,041
|
|
$
|
141,044
|
|
|
|
|
|
|
|
|
21
As of December 31, 2007, we had total assets of $213 million. Growth of deposits and other borrowings of $68.4
million and $5 million, respectively, were primarily used to fund net loan growth of $58.5 million. The remaining funds were used to increase securities by $4.8 million and purchase bank owned life insurance totaling $3.5 million. Three municipal
bonds in our portfolio are classified as held to maturity. All other securities are classified as available for sale for liquidity purposes to support our expected loan growth.
We have 88% of our loan portfolio collateralized by real estate. Our real estate mortgage and construction portfolio consists of loans collateralized by one-to-four-family residential properties (12%), construction
loans to build on-to-four-family residential properties (20%) and nonresidential properties consisting primarily of small business commercial properties (68%). We generally require that loans collateralized by real estate not exceed the
collateral values by the following percentages for each type of real estate loan:
|
|
|
|
|
|
One-to-four-family residential properties
|
|
90
|
%
|
|
Construction loans on one-to-four-family residential properties
|
|
85
|
%
|
|
Nonresidential property
|
|
80
|
%
|
The remaining 12% of the loan portfolio consists of commercial, consumer and other loans.
We require collateral commensurate with the repayment ability and creditworthiness of the borrower. The specific economic and credit risks associated with our loan
portfolio, especially the real estate portfolio, include, but are not limited to, a general downturn in the economy which could affect unemployment rates in our market area, general real estate market deterioration, interest rate fluctuations,
deteriorated or non-existing collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of banking protection laws. Construction lending can also present other specific risks to the lender such
as whether developers can find builders to buy lots for home construction, whether the builders can obtain financing for the construction, whether the builders can sell the home to a buyer, and whether the buyer can obtain permanent financing.
We attempt to reduce these economic and credit risks not only by adhering to loan to value guidelines, but also by investigating the creditworthiness of
the borrower and monitoring the borrower’s financial position. Also, we establish and periodically review our lending policies and procedures. Georgia banking regulations limit exposure by prohibiting loan relationships that exceed 25% of the
Bank’s statutory capital, as defined by the state law. Our legal lending limit, as of December 31, 2007 was approximately $4,272,000.
Liquidity and Capital Resources
Liquidity management involves the matching of the cash flow requirements of customers, who may be either
depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and our ability to meet those needs. We strive to maintain an adequate liquidity position by managing the
balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance we have in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, we
maintain relationships with correspondent banks, which could provide funds to the Bank on short notice, if needed.
Our liquidity and capital resources are
monitored daily by management and on a periodic basis by state and federal regulatory authorities. As determined under guidelines established by these regulatory authorities, our liquidity ratio at December 31, 2007 was considered satisfactory.
At that date, our short-term investments and available Federal Funding were adequate to cover any reasonably anticipated immediate need for funds. At December 31, 2007, we had unused available Federal Fund lines of $12,500,000 and unused
Federal Home Loan Bank borrowing capacity of approximately $1,850,000.
As of December 31, 2007 we had a decreased liquidity position as total cash
and due from banks amounted to $1.6 million, representing 0.74% of total assets as compared to 1.18% as of December 31, 2006. Investment securities available-for-sale amounted to $9.3 million and interest-bearing deposits in banks amounted to
$2.8 million, representing 4.36% and 1.30% of total assets, respectively. These securities provide a secondary source of liquidity since they can be converted into cash in a timely manner.
Our ability to maintain and expand our deposit base and borrowing capabilities is a source of liquidity. For the year ended December 31, 2007, total deposits
increased from $112.1 million at December 31, 2006 to $180.4 million at December 31, 2007. Of this total, however, approximately $102.1 million, or 56.6%, represent time deposits that are scheduled to mature within one year. Furthermore,
we intend to continue to rely heavily on short-term time deposits as a primary source of funding for the foreseeable future. If we are unable to offer a competitive rate as these deposits mature, we could lose a
22
substantial amount of deposits within a short period of time, which would strain our liquidity. While we consider this scenario to be unlikely, our net
interest income and profitability would be negatively affected if we have to increase rates to maintain deposits.
Management is committed to maintaining
capital at a level sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements. Our capital ratios have declined over the last couple of years largely because of our rapid growth. We have filed
a registration statement with the Securities and Exchange Commission for the sale of $3 million in common stock and anticipate that this offering will commence during the second quarter of 2008. We expect that our capital ratios will improve as
proceeds from this offering are collected and will then decline as these proceeds are invested in loans or used to expand our branch network. If we are successful in implementing our expansion program, we expect our profitability to increase, which
would improve our capital position. The table below illustrates our bank’s regulatory capital ratios at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Piedmont
Community
Bank
|
|
|
Regulatory
Minimum
Requirements
(Well
Capitalized)
|
|
|
Leverage capital ratios
|
|
9.17
|
%
|
|
5.00
|
%
|
|
Risk-based capital ratios:
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
9.17
|
|
|
6.00
|
|
|
Total capital
|
|
10.10
|
|
|
10.00
|
|
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and
standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of
those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. A summary of our commitments is as follows:
|
|
|
|
|
|
|
|
December 31
2007
|
|
Commitments to extend credit
|
|
$
|
33,158,000
|
|
Letters of credit
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
$33,178,000
|
|
|
|
|
|
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. 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 amount of collateral obtained, if deemed
necessary by us upon extension of credit, is based on our credit evaluation of the customer.
Standby letters of credit are conditional commitments issued
by us to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral is required in instances which we deem necessary.
Contractual Obligations
We have various contractual obligations that we must fund as part of our normal operations. The following table shows aggregate information about our contractual
obligations and the periods in which payments are due. The amounts and time periods are measured from December 31, 2007.
23
Payments due by period (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
Other borrowings
|
|
$
|
14,100
|
|
$
|
1,000
|
|
$
|
—
|
|
$
|
4,000
|
|
$
|
9,100
|
|
Operating lease obligations
|
|
|
39
|
|
|
29
|
|
|
10
|
|
|
—
|
|
|
—
|
|
Time deposits
|
|
|
116,546
|
|
|
102,147
|
|
|
12,107
|
|
|
2,193
|
|
|
99
|
|
Construction commitments
|
|
|
1,700
|
|
|
1,700
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,385
|
|
$
|
104,876
|
|
$
|
12,117
|
|
$
|
6,193
|
|
$
|
9,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of Inflation
The impact of inflation on banks differs from its impact on non-financial institutions. Banks, as financial intermediaries, have assets that are primarily monetary in nature and that tend to fluctuate in concert with inflation. A bank can
reduce the impact of inflation if it can manage its rate sensitivity gap. This gap represents the difference between rate sensitive assets and rate sensitive liabilities. We, through our Asset/Liability Committee, attempt to structure the assets and
liabilities and manage the rate sensitivity gap, thereby seeking to minimize the potential effects of inflation. For information on the management of our interest rate sensitive assets and liabilities, see “Asset/Liability Management.”
Results of Operations For The Years Ended December 31, 2007 and 2006
The following is a summary of our operations for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
|
Interest and dividend income
|
|
$
|
13,458
|
|
|
$
|
8,385
|
|
|
Interest expense
|
|
|
(7,825
|
)
|
|
|
(4,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
5,633
|
|
|
|
4,065
|
|
|
Provision for loan losses
|
|
|
(614
|
)
|
|
|
(356
|
)
|
|
Other income
|
|
|
330
|
|
|
|
405
|
|
|
Other expenses
|
|
|
(4,195
|
)
|
|
|
(2,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
|
1,154
|
|
|
|
1,146
|
|
|
Income tax expense
|
|
|
(485
|
)
|
|
|
(410
|
)
|
|
Minority interest
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
669
|
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
Our results of operations are determined by our ability to manage interest income and expense effectively, to minimize loan and investment losses, to generate non-interest income, and to control operating expenses. Because interest rates
are determined by market forces and economic conditions beyond our control, our ability to generate net interest income is dependent upon our ability to obtain an adequate net interest spread between the rate we pay on interest-bearing liabilities
and the rate we earn on interest-earning assets.
During 2007, average loans were $148.9 million, average securities were $11.3 million and average Federal
funds sold were $2.8 million. Average interest-bearing liabilities total $152.4 million. The rate earned on average interest-earning assets was 8.08%. The rate paid on average interest-bearing liabilities was 5.13% which resulted in a net interest
spread of 2.95%. The net interest margin, which is net interest income divided by average interest-earning assets, was 3.38%.
During 2006, average loans
were $96.4 million, average securities were $8.1 million and average Federal funds sold were $1.0 million. Average interest-bearing liabilities total $90.6 million. The rate earned on average interest-earning assets was 7.91%. The rate paid on
average interest-bearing liabilities was 4.77% which resulted in a net interest spread of 3.14%. The net interest margin was 3.83%.
The decrease in our
net yield on average interest earning assets is primarily the result of the higher costs of funding which increased 36 basis points in 2007. The increases in yield on average interest-earning assets and rate paid on average interest-bearing
liabilities is directly related to the increase in rates over the past year as the actual impact in yields lags behind the actual changes in rates.
24
Provisions for Loan Losses
Our management assesses the adequacy of the allowance for loan losses quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The allowance for loan loss
consists of two components: (1) a specific amount representative of identified credit exposures that are readily predictable by the current performance of the borrower and underlying collateral; and (2) a general amount based upon
historical losses that is then adjusted for various stress factors representative of various economic factors and characteristics of the loan portfolio. Even though the allowance for loan losses is composed of two components, the entire allowance is
available to absorb any credit losses.
We establish the specific amount by examining impaired loans which are defined as containing one or more of the
following characteristics: collectability of principal and interest from the borrower is in questions, the loan is on non-accrual or the loan has been restructured. Under generally accepted accounting principles, we may measure the loss either by
(1) the observable market price of the loan; or (2) the present value of expected future cash flows discounted at the loan’s effective interest rate; or (3) the fair value of the collateral if the loan is collateral dependent.
Because the majority of our impaired loans are collateral dependent, nearly all of our specific allowances are calculated based on the fair value of the collateral. As of December 31, 2007, we had $105,000 in specific loss allocations against
specific loans in our evaluation of the allowance for loan losses.
We establish the general amount by taking the remaining loan portfolio (excluding those
loans discussed above) with allocations based on historical losses in the total portfolio. The calculation of the general amount is then subjected to stress factors that are particularly subjective. The amount due to stress testing takes into
consideration factors such as (1) the current economic condition and its impact on the industry; (2) the depth or experience in the lending staff; (3) any concentrations of credit (such as commercial real estate) in any particular
industry group; (4) new banking laws or regulations; (5) past due trends; and (6) changes in lending policy or the quality of loan review. Risk ratings are applied to these factors to determine the amount of loan loss reserve
necessary to adequately cover the potential losses which the bank could incur. The calculation is then reviewed and evaluated by management, who will use their best judgment to ensure the appropriateness of the reserve.
In assessing the adequacy of the allowance for loan losses, we also rely on an ongoing independent credit administration review process. We undertake this process both
to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our credit administration review process includes the
judgment of management, the input of our internal loan review function, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process.
Our provision for loan losses was $614,000 and $356,000 in 2007 and 2006, respectively. The amounts provided were due primarily to increased growth of the loan portfolio and to our assessment of the inherent risk in
the portfolio. There were no net charge-offs in either 2007 or 2006. We had $570,000 in nonperforming loans (nonaccrual loans and loans past due 90 days or more) and other real estate owned at December 31, 2007. We did not have any
nonperforming loans or other real estate owned at December 31, 2006. Based upon our evaluation of the loan portfolio, we believe our allowance for loan losses is adequate to meet any potential losses in the loan portfolio.
Non-interest Income
Non-interest income consists of service charges
on deposit accounts, mortgage origination income and other miscellaneous income. We have a mortgage origination unit that generates fee income from the origination and processing of conventional residential mortgages. These loans are funded by
investors in the secondary market and therefore are never recorded on our books. We record fee income on an accrual basis in the month in which the income is earned.
Non-interest income decreased $75,000 to $330,000 in 2007 as compared to $405,000 in 2006. The decrease is primarily due to a decrease of $124,000 in mortgage origination income from $281,000 in 2006 to $157,000 in
2007. This decrease was due to an overall decline in market conditions and a decrease in the number of applicants.
Non-interest Expense
Non-interest expenses for 2007 and 2006 consist of salaries and employee benefits of $2,252,000 and $1,677,000, equipment and occupancy expenses of $441,000 and
$362,000, and other operating expenses of $1,502,000 and $929,000, respectively.
25
The increase in salaries and employee benefits of $575,000 over 2006 is primarily due to the addition of ten full time employees. The increase in equipment
and occupancy expenses of $79,000 over 2006 is due primarily to increased depreciation of $99,000, decreased service contract expense of $14,000, and increased utilities expense of $20,000. The increase in other operating expenses of $573,000 over
2006 is due primarily to increased data processing expense of $14,000, increased postage and courier services of $35,000, increase in network support expense of $35,000, increased director committee expense of $43,000, increased shareholder
communications of $35,000, increased accounting and auditing expenses of $123,000, increase in regulatory fees of $53,000 and increased phone service of $37,000. The increase in non-interest expenses is directly related to our overall growth and the
opening of two additional branch offices during 2007.
Income Tax
Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred
income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. See Note 7 to the Notes to Consolidated Financial Statements for
additional detail.
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses,
for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet.
We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment
is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent we establish a valuation allowance or adjust this allowance in
a period, we must include an expense or benefit within the tax provision in the consolidated statement of income.
We have recorded on our consolidated
balance sheet net deferred tax assets of $635,000. We believe there will be sufficient taxable income in the future to allow us to recover these deferred tax assets.
For the years ended December 31, 2007 and 2006, we recorded a provision for income tax expense of $485,000 and $411,000, respectively. This represented 42.0 % and 35.8% of our income before provision for
income taxes 2007 and 2006, respectively. The increase in the effective tax rate and provision for income taxes in 2007 includes an adjustment of $33,000 related to the prior year.
Asset/Liability Management
The following table sets forth the distribution of the repricing of our interest-earning
assets and interest-bearing liabilities as of December 31, 2007, the interest rate-sensitivity gap, the cumulative interest rate-sensitivity gap, the interest rate-sensitivity gap ratio and the cumulative interest rate-sensitivity gap ratio.
The table also sets forth the periods in which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general
interest rate movements on the net interest margin as the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of our customers. In addition, various assets and liabilities indicated as
repricing within the same period may in fact reprice at different times within this period and at different rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
Three
Months
|
|
After
Three
Months
but
Within
One year
|
|
|
After
One
Year but
Within
Five
Years
|
|
After
Five
Years
|
|
Total
|
|
|
|
(Dollars in Thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
6,113
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,113
|
|
Interest bearing deposits in banks
|
|
|
1,086
|
|
|
490
|
|
|
|
1,188
|
|
|
—
|
|
|
2,764
|
|
Securities
|
|
|
—
|
|
|
997
|
|
|
|
3,531
|
|
|
6,653
|
|
|
13,399
|
|
Loans
|
|
|
135,326
|
|
|
16,116
|
|
|
|
24,868
|
|
|
1,743
|
|
|
178,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,525
|
|
|
17,603
|
|
|
|
29,587
|
|
|
9,614
|
|
|
199,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand and savings
|
|
|
58,226
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
58,226
|
|
Time deposits
|
|
|
15,088
|
|
|
84,975
|
|
|
|
16,384
|
|
|
99
|
|
|
116,546
|
|
Other borrowings
|
|
|
1,000
|
|
|
—
|
|
|
|
4,000
|
|
|
9,100
|
|
|
14,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,314
|
|
|
84,975
|
|
|
|
20,384
|
|
|
9,199
|
|
|
188,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap
|
|
$
|
68,211
|
|
$
|
(67,372
|
)
|
|
$
|
9,203
|
|
$
|
415
|
|
$
|
10,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap
|
|
$
|
68,211
|
|
$
|
839
|
|
|
$
|
10,042
|
|
$
|
10,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap ratio
|
|
|
1.92
|
|
|
0.21
|
|
|
|
1.45
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap ratio
|
|
|
1.92
|
|
|
1.01
|
|
|
|
1.06
|
|
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
SELECTED FINANCIAL INFORMATION AND STATISTICAL DATA
The tables and schedules on the following pages set forth certain significant financial information and statistical data with respect to the distribution of assets,
liabilities and shareholders’ equity, the interest rates we experienced; our investment portfolio; our loan portfolio, including types of loans, maturities, and sensitivities of loans to changes in interest rates and information on
nonperforming loans; summary of the loan loss experience and allowance for loan losses; types of deposits and the return on equity and assets.
DISTRIBUTION OF ASSETS, LIABILITIES, AND
STOCKHOLDERS’ EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIALS
Average
Balance Sheet:
The condensed average balance sheet for the years indicated is presented below in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
Cash and due from banks
|
|
$
|
1,273
|
|
|
$
|
1,086
|
|
|
Interest-bearing deposits in banks
|
|
|
3,359
|
|
|
|
1,584
|
|
|
Securities
|
|
|
10,487
|
|
|
|
6,508
|
|
|
Securities valuation account
|
|
|
(110
|
)
|
|
|
(174
|
)
|
|
Federal funds sold
|
|
|
2,820
|
|
|
|
967
|
|
|
Restricted equity securities
|
|
|
960
|
|
|
|
612
|
|
|
Loans (1)
|
|
|
148,881
|
|
|
|
96,390
|
|
|
Allowance for loan losses
|
|
|
(1,520
|
)
|
|
|
(1,042
|
)
|
|
Other assets
|
|
|
9,913
|
|
|
|
6,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
176,063
|
|
|
$
|
112,031
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
166,507
|
|
|
$
|
106,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand
|
|
$
|
5,700
|
|
|
$
|
4,889
|
|
|
Interest-bearing demand and savings
|
|
|
50,294
|
|
|
|
12,407
|
|
|
Time deposits
|
|
|
89,619
|
|
|
|
69,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,613
|
|
|
|
86,768
|
|
|
Other borrowings
|
|
|
12,499
|
|
|
|
8,744
|
|
|
Other liabilities
|
|
|
1,281
|
|
|
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,392
|
|
|
|
96,316
|
|
|
Shareholders’ equity
|
|
|
16,670
|
|
|
|
15,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
176,063
|
|
|
$
|
112,031
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
152,412
|
|
|
$
|
90,623
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans included in average loans were $29,000 and $0 in 2007 and 2006, respectively.
|
27
Interest Income and Interest Expense
The following tables set forth the amount of our interest income and interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Interest
|
|
Average
Rate
|
|
|
Interest
|
|
Average
Rate
|
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans (1)
|
|
$
|
12,617
|
|
8.47
|
%
|
|
$
|
7,959
|
|
8.26
|
%
|
|
Interest on taxable securities
|
|
|
492
|
|
4.69
|
%
|
|
|
270
|
|
4.15
|
%
|
|
Interest on federal funds sold
|
|
|
141
|
|
5.00
|
%
|
|
|
48
|
|
4.96
|
%
|
|
Interest on deposits in banks
|
|
|
160
|
|
4.76
|
%
|
|
|
77
|
|
4.86
|
%
|
|
Interest on other securities
|
|
|
48
|
|
5.00
|
%
|
|
|
31
|
|
5.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
13,458
|
|
8.08
|
%
|
|
|
8,385
|
|
7.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on interest-bearing demand and savings
|
|
|
2,456
|
|
4.88
|
%
|
|
|
529
|
|
4.26
|
%
|
|
Interest on time deposits
|
|
|
4,823
|
|
5.38
|
%
|
|
|
3,355
|
|
4.83
|
|
|
Interest on other borrowings
|
|
|
546
|
|
4.37
|
%
|
|
|
436
|
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
7,825
|
|
5.13
|
%
|
|
|
4,320
|
|
4.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
|
|
$
|
5,633
|
|
|
|
|
$
|
4,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
2.95
|
%
|
|
|
|
|
3.14
|
%
|
|
Net yield on average interest-earning assets
|
|
|
|
|
3.38
|
%
|
|
|
|
|
3.83
|
%
|
|
(1)
|
Interest and fees on loans include $330,000 and $227,000 of loan fee income for the year ended December 31, 2007 and 2006, respectively. Interest income recognized on
nonaccrual loans during 2007 and 2006 was insignificant.
|
Rate and Volume Analysis
The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have
affected our interest income and expense during the year indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume
multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The changes in interest income and interest expense attributable to both volume and rate
have been allocated proportionately on a consistent basis to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 vs. 2006
Changes Due to:
|
|
|
|
Rate
|
|
|
Volume
|
|
Net
|
|
|
|
(Dollars in Thousands)
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
Income from interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
207
|
|
|
$
|
4,451
|
|
$
|
4,658
|
|
Interest on taxable securities
|
|
|
39
|
|
|
|
183
|
|
|
222
|
|
Interest on federal funds sold
|
|
|
—
|
|
|
|
93
|
|
|
93
|
|
Interest on deposits in banks and other
|
|
|
(2
|
)
|
|
|
85
|
|
|
83
|
|
Interest on other securities
|
|
|
—
|
|
|
|
17
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
244
|
|
|
|
4,829
|
|
|
5,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest on interest-bearing demand and Savings
|
|
|
88
|
|
|
|
1,839
|
|
|
1,927
|
|
Interest on time deposits
|
|
|
414
|
|
|
|
1,054
|
|
|
1,468
|
|
Interest on other borrowing
|
|
|
(59
|
)
|
|
|
169
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
443
|
|
|
|
3,062
|
|
|
3,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(199
|
)
|
|
$
|
1,767
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
28
INVESTMENT PORTFOLIO
Types of Investments
The carrying amounts of securities held to maturity at December 31, 2007 and 2006 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
State and county municipal bonds
|
|
$
|
2,000
|
|
$
|
645
|
The carrying amounts of securities available for sale at December 31, 2007 and 2006 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
Government sponsored agencies
|
|
$
|
7,425
|
|
$
|
4,486
|
|
Mortgage-backed securities
|
|
|
1,858
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,283
|
|
$
|
6,163
|
|
|
|
|
|
|
|
|
Maturities
The amounts of debt securities, including the weighted average yield in each category as of December 31, 2007, are shown in the following table according to contractual maturity classifications (1) one year or less, (2) after
one through five years, (3) after five through ten years and (4) after ten years. Restricted equity securities are not included in the table because they have no contractual maturity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
|
After one year
through five years
|
|
|
After five years
through ten years
|
|
|
|
|
Amount
|
|
Yield(1)
|
|
|
Amount
|
|
Yield(1)
|
|
|
Amount
|
|
Yield(1)
|
|
|
Government sponsored agencies
|
|
$
|
997
|
|
3.85
|
%
|
|
$
|
3,058
|
|
4.94
|
%
|
|
$
|
1,359
|
|
5.28
|
%
|
|
State and county municipal
|
|
|
—
|
|
—
|
|
|
|
173
|
|
3.38
|
%
|
|
|
201
|
|
4.00
|
%
|
|
Mortgage-backed securities
|
|
|
—
|
|
—
|
|
|
|
300
|
|
4.50
|
%
|
|
|
185
|
|
4.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
997
|
|
|
|
|
$
|
3,531
|
|
|
|
|
$
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After ten years
|
|
|
Total
|
|
|
|
|
Amount
|
|
Yield(1)
|
|
|
Amount
|
|
Yield(1)
|
|
|
Government sponsored agencies
|
|
$
|
2,011
|
|
6.00
|
%
|
|
$
|
7,425
|
|
5.14
|
%
|
|
State and county municipal
|
|
|
1,625
|
|
4.48
|
%
|
|
|
1,999
|
|
4.34
|
%
|
|
Mortgage-backed securities
|
|
|
1,374
|
|
5.02
|
%
|
|
|
1,859
|
|
4.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,010
|
|
|
|
|
$
|
11,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The weighted average yield were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of
each security.
|
29
LOAN PORTFOLIO
Types of Loans
The amount of loans outstanding at December 31, 2007 and 2006 is shown in the following table
according to the type of loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Commercial
|
|
$
|
19,032
|
|
|
$
|
6,946
|
|
|
Real estate-construction
|
|
|
37,310
|
|
|
|
25,002
|
|
|
Real estate-mortgage
|
|
|
19,213
|
|
|
|
12,847
|
|
|
Real estate-commercial
|
|
|
100,505
|
|
|
|
72,088
|
|
|
Consumer installment and other
|
|
|
1,993
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,053
|
|
|
|
118,992
|
|
|
Deferred loan fees
|
|
|
(18
|
)
|
|
|
(65
|
)
|
|
Allowance for loan losses
|
|
|
(1,849
|
)
|
|
|
(1,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
176,186
|
|
|
$
|
117,692
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and Sensitivities of Loans to Changes in Interest Rates
Total loans as of December 31, 2007 are shown in the following table according to contractual maturity classification one year or less, after one year through five
years, and after five years.
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Revolving, Open-end 1-4 family
|
|
|
|
|
One year or less
|
|
$
|
2,448
|
|
After one year through five years
|
|
|
292
|
|
After five years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
2,740
|
|
|
|
|
|
|
Closed-end 1-4 family
|
|
|
|
|
One year or less
|
|
|
10,363
|
|
After one year through five years
|
|
|
7,691
|
|
After five years
|
|
|
7,054
|
|
|
|
|
|
|
|
|
|
25,108
|
|
|
|
|
|
|
Construction and Land Development
|
|
|
|
|
One year or less
|
|
|
87,046
|
|
After one year through five years
|
|
|
21,494
|
|
After five years
|
|
|
27
|
|
|
|
|
|
|
|
|
|
108,567
|
|
|
|
|
|
|
Nonfarm, Nonresidential
|
|
|
|
|
One year or less
|
|
|
9,568
|
|
After one year through five years
|
|
|
20,273
|
|
After five years
|
|
|
2,868
|
|
|
|
|
|
|
|
|
|
32,709
|
|
|
|
|
|
|
Commercial and Industrial
|
|
|
|
|
One year or less
|
|
|
4,453
|
|
After one year through five years
|
|
|
2,945
|
|
After five years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
7,398
|
|
|
|
|
|
|
Other
|
|
|
|
|
One year or less
|
|
|
908
|
|
After one year through five years
|
|
|
605
|
|
After five years
|
|
|
—
|
|
|
|
|
|
|
|
|
|
1,513
|
|
|
|
|
|
|
|
|
$
|
178,035
|
|
|
|
|
|
The following table summarizes loans at December 31, 2007 with due dates after one year that have
predetermined and floating or adjustable interest rates.
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
(Dollars in Thousands)
|
|
Predetermined interest rates
|
|
$
|
27,705
|
|
Floating or adjustable interest rates
|
|
|
35,544
|
|
|
|
|
|
|
|
|
$
|
63,249
|
|
|
|
|
|
30
Risk Elements
Information with respect to nonaccrual, past due, and restructured loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollars in Thousands)
|
|
Nonaccrual loans
|
|
$
|
128
|
|
$
|
—
|
|
Loans contractually past due ninety days or more as to interest or principal payments and still accruing
|
|
|
200
|
|
|
—
|
|
Restructured loans
|
|
|
—
|
|
|
—
|
|
Potential problem loans
|
|
|
3,306
|
|
|
—
|
|
Interest income that would have been recorded on nonaccrual and restructured loans under original terms
|
|
|
5
|
|
|
—
|
|
Interest income that was recorded on nonaccrual and restructured loans
|
|
|
1
|
|
|
—
|
Potential problem loans are defined as loans about which we have serious doubts as to the ability of the borrower
to comply with the present loan repayment terms and which may cause the loan to be placed on nonaccrual status, to become past due more than ninety days, or to be restructured. The increase in potential problem loans at December 31, 2007 as
compared to 2006 consists of 7 loan relationship of which we have determined that a specific allowance of approximately $105,000 is required at December 31, 2007.
It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of interest becomes doubtful. The collection of interest becomes doubtful when there is a significant
deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected unless the loan is both well-secured and in the process of collection.
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result
from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources. These classified loans do not represent material credits about which we are aware of any information
that causes us to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
SUMMARY OF LOAN LOSS
EXPERIENCE
The following table summarizes average loan balances for the year determined using the daily average balances during the year; changes in
the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off; additions to the allowance which have been charged to operating expense and the ratio of net charge-offs during the year to average loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Average amount of loans outstanding
|
|
$
|
148,881
|
|
|
$
|
96,390
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for loan losses at beginning of year
|
|
$
|
1,235
|
|
|
$
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
|
|
|
|
|
|
|
Installment loans
|
|
|
—
|
|
|
|
(2
|
)
|
|
Loans recovered
|
|
|
|
|
|
|
|
|
|
Installment loans
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to allowance charged to operating expense during year
|
|
|
614
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for loan losses at end of year
|
|
$
|
1,849
|
|
|
$
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net loans charged off during the year to average loans outstanding
|
|
|
.00
|
%
|
|
|
.00
|
%
|
|
|
|
|
|
|
|
|
|
|
The allowance for loan losses is maintained at a level that is deemed appropriate by management to adequately
cover all known and inherent risks in the loan portfolio. Our evaluation of the loan portfolio includes a periodic review of loan loss experience, current economic conditions that may affect the borrower’s ability to pay and the underlying
collateral value of the loans. In making this evaluation we rely to some extent on information provided to us by selling banks with respect to loan participations that we purchase. As of December 31, 2007 we had purchased a total of $19.2
million in loan participations, which constituted approximately 10.8% of our total loan portfolio. While we generally apply the same
31
underwriting standards to loan participations as we do to loans we originate, we may experience a loss if we are unable to detect inaccuracies in the
information provided by the selling bank. Please see a further discussion of our evaluation of the allowance for loan losses under the caption “Provision for Loan Losses” included in this discussion. Management considers the allowance for
loan losses adequate to cover possible loan losses on the loans outstanding.
As of December 31, 2007 and 2006, our allocation of the allowance for
loan losses does not specifically correspond to the categories of loans listed below. Based on our best estimate, the allocation for loan losses to type of loans, as of the indicated dates, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
Amount
|
|
Percent of
loans in
each category
to total loans
|
|
|
Amount
|
|
Percent of
loans in
each category
to total loans
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Commercial
|
|
$
|
203
|
|
11
|
%
|
|
$
|
74
|
|
6
|
%
|
|
Real estate – construction
|
|
|
388
|
|
21
|
|
|
|
259
|
|
21
|
|
|
Real estate – mortgage
|
|
|
203
|
|
11
|
|
|
|
136
|
|
11
|
|
|
Real estate – commercial
|
|
|
1,036
|
|
56
|
|
|
|
741
|
|
60
|
|
|
Consumer installment
|
|
|
19
|
|
1
|
|
|
|
25
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,849
|
|
100
|
%
|
|
$
|
1,235
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSITS
The average amount of deposits and average rates paid thereon, classified as to noninterest-bearing demand deposits, interest-bearing demand deposits and savings deposits, and time deposits, for the period of
operations is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2007 (1)
|
|
|
2006 (1)
|
|
|
|
|
Amount
|
|
Rate
|
|
|
Amount
|
|
Rate
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Noninterest-bearing demand deposits
|
|
$
|
5,700
|
|
—
|
%
|
|
$
|
4,889
|
|
—
|
%
|
|
Interest-bearing demand deposits and savings
|
|
|
50,294
|
|
4.88
|
|
|
|
12,407
|
|
4.26
|
|
|
Time deposits
|
|
|
89,619
|
|
5.38
|
|
|
|
69,472
|
|
4.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,613
|
|
|
|
|
$
|
86,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average balances were determined using the daily average balances during the year.
|
The aggregate amount of time deposits issued in denominations of $100,000 or more as of December 31, 2007 are shown below by category, which is based on time remaining until maturity of (1) three months or
less, (2) over three through six months, (3) over six through twelve months, and (4) over twelve months.
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
Three months or less
|
|
$
|
3,089
|
|
Over three months through six months
|
|
|
8,229
|
|
Over six months through twelve months
|
|
|
22,344
|
|
Over twelve months
|
|
|
7,121
|
|
|
|
|
|
|
Total
|
|
$
|
40,783
|
|
|
|
|
|
We had brokered deposits of $16,495,000 and $9,354,000 at December 31, 2007 and 2006, respectively.
32
RETURN ON ASSETS AND SHAREHOLDERS’ EQUITY
The following rate of return information for the year indicated is presented below.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in Thousands)
|
|
|
Return on assets (1)
|
|
0.37
|
%
|
|
0.65
|
%
|
|
Return on equity (2)
|
|
4.01
|
%
|
|
4.66
|
%
|
|
Dividend payout ratio (3)
|
|
—
|
%
|
|
—
|
%
|
|
Equity to assets ratio (4)
|
|
9.47
|
%
|
|
14.03
|
%
|
|
(1)
|
Net income divided by average total assets.
|
|
(2)
|
Net income divided by average equity.
|
|
(3)
|
Dividends declared per share of common stock divided by net income per share.
|
|
(4)
|
Average equity divided by average total assets.
|
|
ITEM 7.
|
FINANCIAL STATEMENTS
|
The following consolidated financial
statement are included on Exhibit 13.1 of this Annual Report on Form 10-KSB:
Consolidated Balance Sheets – December 31, 2007 and
2006
Consolidated Statements of Income and Other Comprehensive Income – December 31, 2007 and 2006
Consolidated Statements of Changes in Shareholders’ Equity – Years Ended December 31, 2007 and 2006
Consolidated Statements of Cash Flows – Years Ended December 31, 2007 and 2006
Notes to Consolidated Financial Statements
|
ITEM 8.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None
|
ITEM 8A.
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
Our principal executive and principal financial officers believe that our disclosure controls and procedures, as defined in Securities Exchange Act Rules
13a-15(e) or 15(d)-15(e), are effective. This conclusion was based on an evaluation of these controls and procedures as of the end of the fourth quarter of 2007.
Changes in Internal Controls
There have been no changes over financial reporting in our internal control over financial reporting that
occurred during the fourth quarter of 2007 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control system has been designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of our published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. To make this assessment, we
used the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we believe
that, as of December 31, 2007, our internal controls over financial reporting were effective.
This annual report does not include an attestation
report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this annual report.
33
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of our disclosure controls and procedures.
Based on this evaluation, our Chief Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures are effective.
|
ITEM 8B.
|
OTHER INFORMATION
|
None.
PART III
|
ITEM 9.
|
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|
Code of Ethics
We have adopted a code of ethics that applies to our
officers and employees. Although the code does not satisfy all of the criteria set forth in Item 406(b) of the Securities and Exchange Commission’s Regulation S-B, we believe that it is reasonably designed to promote ethical conduct and
prevent conflicts of interest. Because the existing code accomplishes these objectives, we did not believe that it was necessary to adopt an additional code of ethics that complies with the SEC’s definition at this time, although we may do so
in the future. Upon written request, a copy of our Code of Ethics will be furnished to shareholders without charge. Please direct your written request to Julie Simmons, Piedmont Community Bank, P.O. Box 1669, Gray, Georgia 31032.
The remaining information required by this Item is incorporated by reference to the information under the headings “Directors and Executive Officers”,
“Compliance with Section 16(a) of the Securities Exchange Act of 1934”, and “Meetings and Committees of the Board of Directors” in the 2008 Proxy Statement.
|
ITEM 10.
|
EXECUTIVE COMPENSATION
|
The information required by this Item is
incorporated by reference to the information under the heading “Executive Compensation” in the 2008 Proxy Statement.
|
ITEM 11.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information relating to the
Company’s equity compensation plans as of December 31, 2007:
Equity compensation Plan Information
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and
rights.
(a)
|
|
Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights.
(b)
|
|
Number of
securities
remaining
for future
issuance
under
equity
compensation
plan
(excluding
securities
reflected in
column (a)
(c)
|
|
Equity compensation plans approved by security holders
|
|
380,705
|
|
$
|
11.68
|
|
2,797
|
|
Equity compensation plans not approved by security holders
|
|
—
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
380,705
|
|
$
|
11.68
|
|
2,797
|
34
The remaining information required by this item is incorporated by reference to the information under the heading
“Common Stock Ownership” in the 2008 Proxy Statement
|
ITEM 12.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE
|
The information required by this item is incorporated by reference to the information under the headings “Directors and Executive Officers” and “Certain Relationships and Related Transactions” in the 2008 Proxy
Statement.
A list of the exhibits required by Item 601 of
Regulation S-B is shown on the “Index to Exhibits” that follows the signature page to this report.
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by
this item is incorporated by reference to the information under the heading “Independent Public Accountant” in the 2008 Proxy Statement.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
|
|
|
PIEDMONT COMMUNITY BANK GROUP, INC.
|
|
|
|
|
Date:
|
|
March 31, 2008
|
|
|
|
|
BY:
|
|
/s/ ROBERT D. HULSEY, JR.
|
|
|
|
ROBERT D. HULSEY, JR.
|
|
|
|
Chief Executive Officer
|
In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 2008.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Franklin J. Davis
|
|
Director
|
|
Franklin J. Davis
|
|
|
|
|
|
|
/s/ Robert D. Hulsey, Jr.
|
|
Director, Chief Executive Office
|
|
Robert D. Hulsey, Jr.
|
|
|
|
|
|
|
/s/ Christine A. Daniels
|
|
Director, Secretary
|
|
Christine A. Daniels
|
|
|
|
|
|
|
/s/ James R. Hawkins
|
|
Director
|
|
James R. Hawkins
|
|
|
|
|
|
|
/s/ Arthur Goolsby
|
|
Director
|
|
Arthur Goolsby
|
|
|
|
|
|
|
/s/ Mickey Parker
|
|
Director, President
|
|
Mickey Parker
|
|
|
|
|
|
|
/s/ Julie Simmons
|
|
Chief Financial Officer and Accounting Officer
|
|
Julie Simmons
|
|
|
|
|
|
|
/s/ Dr. John A. Hudson
|
|
Director, Chairman
|
|
Dr. John A. Hudson
|
|
|
35
|
|
|
|
|
|
|
|
/s/ Angela M. Tribble
|
|
Director
|
|
Angela M. Tribble
|
|
|
|
|
|
|
/s/ Zelma A. Redding
|
|
Director
|
|
Zelma A. Redding
|
|
|
|
|
|
|
/s/ Terrell L. Fulford
|
|
Director, Vice Chairman
|
|
Terrell L. Fulford
|
|
|
|
|
|
|
/s/ Robert C. McMahan
|
|
Director
|
|
Robert C. McMahan
|
|
|
|
|
|
|
/s/ Joseph S. Dumas
|
|
Director
|
|
Joseph S. Dumas
|
|
|
|
|
|
|
/s/ Roy H. Fickling
|
|
Director
|
|
Roy H. Fickling
|
|
|
36
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Merger Agreement and Plan of Reorganization dated April 26, 2006 by and among the Registrant, Piedmont Community Bank and PCB Interim Corporation (incorporated by reference to Exhibit 2.1 to the
Registrant’s Form 8-K12G3 filed with the SEC on February 8, 2007 – File No. 000-52453).
|
|
|
|
|
3.1
|
|
Articles of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K12G3 filed with the SEC on February 8, 2007 – File No.
000-52453).
|
|
|
|
|
3.2
|
|
Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K12G3 filed with the SEC on February 8, 2007 – File No. 000-52453).
|
|
|
|
|
4.1
|
|
Instruments Defining Rights of Security Holders (see articles of incorporation at exhibit 3.1 hereto and bylaws at Exhibit 3.2 hereto).
|
|
|
|
|
4.2
|
|
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007 – File No.
333-146206).
|
|
|
|
|
10.1
|
|
Piedmont Community Bank Group 2006 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007 – File No.
333-146206). *
|
|
|
|
|
10.2
|
|
Employment agreement with R. Drew Hulsey, Jr. dated February 16, 2005 (incorporated by reference to Exhibit 10.2 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007
– File No. 333-146206). *
|
|
|
|
|
10.3
|
|
Employment agreement with Mickey Parker dated February 16, 2005 (incorporated by reference to Exhibit 10.3 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007 – File
No. 333-146206). *
|
|
|
|
|
10.4
|
|
Employment agreement with M. Cole Davis dated June 13, 2005 (incorporated by reference to Exhibit 10.4 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007 – File No.
333-146206). *
|
|
|
|
|
10.5
|
|
Employment Agreement with Julie Simmons dated February 16, 2005 (incorporated by reference to Exhibit 10.5 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007 – File
No. 333-146206). *
|
|
|
|
|
10.6
|
|
Form of Sales Agency Agreement between Piedmont Community Bank Group, Inc. and SAMCO Capital Markets (incorporated by reference to Exhibit 10.6 to the Registrant’s Form SB-2 filed with the
SEC on September 20, 2007 – File No. 333-146206).
|
|
|
|
|
13.1
|
|
Consolidated Financial Statements
|
|
|
|
|
21
|
|
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Registrant’s Form SB-2 filed with the SEC on September 20, 2007 – File No. 333-146206).
|
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification by Registrant’s Principal Executive Officer
|
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification by Registrant’s Principal Financial and Accounting Officer
|
|
|
|
|
32.1
|
|
Rule 13a-14(b) Certification by Registrant’s Principal Executive Officer and Principal Financial Officer
|
|
*
|
Denotes management contract or compensatory plan or arrangement.
|
37
Piedmont Community Bank (CE) (USOTC:PCBN)
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Piedmont Community Bank (CE) (USOTC:PCBN)
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